Odměňování statutárních orgánů a výplata dividend

Why is the correct setup of remuneration and dividends crucial for your company?

On the contrary, careful compliance with legal regulations strengthens investor confidence and ensures the smooth operation of the company. Given the constantly evolving legal framework, especially in the Business Corporations Act (ZOK) and tax regulations, navigating this area is very challenging for entrepreneurs without specialized legal assistance.

Investing in quality legal advice therefore pays off many times over, as it prevents costly mistakes and disputes. The primary added value for a business is not just solving existing problems, but above all, preventing them. The consequences of incorrect procedures, such as a lawsuit to supplement liabilities in the event of a company's insolvency, additional tax assessments and penalties from tax authorities, or the need to return unlawfully paid amounts, pose an existential threat to the business and its management. 

Proactive legal support is an investment in business continuity and the personal protection of managers and owners.

Remuneration of Statutory Bodies: How to Do It Legally and Effectively?

The remuneration of a member of a statutory body, such as an executive director of a limited liability company (s.r.o.) or a member of the board of directors of a joint-stock company (a.s.), is a key motivational element. This remuneration can take various forms, both monetary and non-monetary.

The fundamental document governing the rights and obligations of a body member and their remuneration is the executive service agreement. According to the amendment to the ZOK, effective from 1 January 2021, an executive service agreement will not become effective without its approval by the supreme body of the business corporation, i.e., the General Meeting. Without this approval, the performance of the function is unpaid, and any remuneration paid may be reclaimed by the company as unjust enrichment.

The company's articles of association or memorandum of association can also detail the rules for remuneration and profit distribution, including tantièmes, which are profit shares designated for members of company bodies. Increased formalization in this area is evident. The legal regulation has shifted from informal agreements to explicit, formally approved arrangements. The goal is to protect the company and its owners from unauthorized payments and to ensure transparency.

Companies that have historically operated with less formal structures must now carefully review and formalize their remuneration procedures to avoid significant legal and financial problems. This underscores the need for proactive legal audits.

What are the tax and insurance implications of remuneration?

Remuneration of members of statutory bodies is, according to Act No. 586/1992, considered income from dependent activities from a tax perspective. This remuneration is subject to health insurance contributions regardless of its amount, and to social security contributions if the monthly remuneration reaches at least CZK 2,500.  For the company, the executive's remuneration has been a tax-deductible expense since 2012.

Specific benefits, such as travel allowances, meal vouchers, company vehicles for private use, or paid time off, have their own tax regime. It is crucial to correctly define, for example, the place of work performance and the regular workplace for the purpose of travel allowances, so that the allowances are tax-exempt. For the meal voucher lump sum to be exempt, it is necessary to define and record the shift of the statutory body member.

A seemingly simple benefit can have complex tax consequences. Strict rules and the need for formal agreements for various benefits mean that any attempt at tax optimization must be carefully structured in accordance with the law to avoid subsequent tax penalties. This makes remuneration a high-risk area for non-compliance if not handled by experts. Tax optimization in this context does not mean tax evasion, but structuring remuneration within legal limits.

Risks of Improper Remuneration: What Are the Threats and How to Defend Against Them?

Incorrectly setting up or paying remuneration to statutory bodies can have serious legal and financial consequences. The following table summarizes the main risks and shows how the ARROWS law firm can help eliminate them.

Remuneration of Statutory Bodies

ARROWS' lawyers routinely handle these issues and can help you set up extraordinary bonuses as well as long-term systems to be legally sound and motivate key people. In addition, they assist with the preparation of General Meeting resolutions, including securing a notarial deed for greater legal certainty in significant decisions. The advice also includes justifying the remuneration in the General Meeting resolution to prevent disputes and to demonstrate that the action was taken in the company's interest.

Dividend Payouts: How to Distribute Profit Safely and in Accordance with the Law?

A share of the profit can only be paid out based on regular or extraordinary financial statements, which must be approved by the company's supreme body – the General Meeting. Without the approval of the financial statements, it is not possible to dispose of the financial result.

The General Meeting has the authority to decide on the distribution of profit – how much profit will be distributed, to whom, and in what form. Subsequently, it is the task of the statutory body (the executive director in an s.r.o., the board of directors or administrative board in an a.s.) to decide on the actual implementation of the payout and to ensure the payment of the approved shares. The statutory body prepares the documents for the General Meeting, including the financial statements and the proposal for profit distribution.

The approved profit share is payable within 3 months from the date of the General Meeting's decision, unless the memorandum of association or the General Meeting specifies otherwise. There is a dual control and responsibility in this process. While the General Meeting decides on the profit distribution, the statutory body is responsible for conducting an insolvency test at the time of payment and for refusing payment if the legal conditions are not met, even if the General Meeting has approved the payout. 

This setup creates a dual layer of control and places significant personal responsibility on the management to prevent situations where owners might vote to distribute profits in a way that would jeopardize the company's solvency. This places the ultimate burden of financial prudence on the executive management.

Key Tests Before Profit Payout: What Must Your Company Meet?

The Business Corporations Act sets out four key tests that must be met for profit to be distributed and paid out:

1. Balance Sheet Test (test of the maximum amount for distribution): This rule determines the maximum total amount for distribution, which must not exceed the sum of the financial result of the last completed accounting period, the financial results of previous years, and other capital funds that the company can freely dispose of. Any mandatory allocations to reserve or other funds are deducted from this sum.

2. Equity Test: A capital company may not distribute profit or other own resources if, as of the end of the last accounting period, the equity resulting from the financial statements or the equity after this distribution would fall below the amount of the subscribed share capital increased by funds that cannot be distributed.

3. Development Costs Test: If development costs are reported in the balance sheet assets, a capital company or cooperative may not distribute profit or other own resources unless the amount for distribution is at least equal to the unamortized portion of the development costs.

4. Insolvency Test: A business corporation may not pay out a share of profit or other own resources if doing so would cause its insolvency (inability to pay debts or over-indebtedness). This test is performed by the statutory body just before the payout.

A General Meeting resolution that contradicts these tests has no legal effect, meaning the statutory body must not make the payment.

Taxation of Dividends: Domestic and International Aspects.

Dividends paid by Czech companies to natural persons are subject to a 15% withholding tax, which is paid by the company. The recipient thus receives a net amount and does not have to declare it in their tax return.

The situation is more complex for foreign dividends. Although the foreign company withholds the tax, the recipient is obliged to declare this income in their Czech tax return and tax it at a rate of 15%. Double taxation treaties serve to prevent double taxation. In practice, Appendix No. 3 of the tax return is filled out, stating the amount of tax withheld abroad, which is credited against the Czech tax. For dividends from the USA, it is often necessary to fill out the W-8BEN form to reduce the withholding tax to 15%.

Since 2021, a separate tax base has been reintroduced for natural persons, allowing selected foreign income (e.g., foreign dividends) to be taxed at a 15% rate, thus avoiding the higher 23% rate for income above a certain limit. This complexity of international taxation represents a critical area for expert services. 

The existence of different withholding tax rates, the need for double taxation treaties, specific forms, and the option of a separate tax base mean that navigating this area without professional help is highly prone to errors, leading to double taxation or missed optimization opportunities.

Risks of Improper Dividend Payouts: Avoid Fines and Disputes!

Improper dividend payouts can have serious consequences for the company and its management. The following table details the main risks and shows what solutions the ARROWS law firm provides.

Dividend Payouts

ARROWS' lawyers will help you with the entire process of profit distribution and payout, from preparing documents for the General Meeting to ensuring compliance with tax regulations. Services include legal consultations on compliance with all statutory tests, preparation of documentation for the General Meeting, and ensuring correct registration in the register of beneficial owners.

Thanks to the ARROWS International network, built over ten years, and practical experience with international elements, the law firm can effectively resolve complex issues of foreign dividend taxation and minimize the risk of double taxation.

Conflict of Interest of Statutory Bodies: How to Avoid Clashes and Protect the Company?

A conflict of interest occurs when the interests of a member of a business corporation's body (or a person close to, controlled by, or influenced by them) conflict with the interests of the company itself. It can be a one-off situation, such as an interest in the same contract or the purchase of a property that the company is also interested in. A conflict of interest can also be of a long-term nature, for example, in connection with a non-compete clause.

Notification Duty: Who Must Inform Whom and When?

A member of an elected body has a notification duty if they find themselves in a conflict of interest. They must inform the other members of the body they are part of, and also the supervisory body (supervisory board), if one is established, without undue delay. If no supervisory body is established, they inform the supreme body, i.e., the General Meeting.

Consequences of Breaching Conflict of Interest Rules.

Breaching the notification duty can have serious consequences, including the invalidity of the legal act (for example, a concluded contract) if the third party was aware of the conflict of interest. It can also lead to the liability of the body member for damages caused to the company.

How ARROWS Helps Prevent and Resolve Conflicts of Interest?

ARROWS will help you establish internal policies and processes that minimize the risks of conflicts of interest and ensure transparent conduct by management. This includes creating clear rules for reporting and discussing potential conflicts, thereby protecting both the company and its management.

Robust internal processes for managing conflicts of interest go beyond mere legal compliance; they foster a culture of transparency and trust, which is invaluable for attracting and retaining investors and partners. The ARROWS law firm acts as a partner in building strong corporate governance frameworks.

Optimization and Long-Term Strategy: How to Effectively Manage Remuneration and Profit?

In addition to standard forms of remuneration and dividend payouts, there are also optimization possibilities. An example is the scrip dividend, which gives shareholders the choice between a cash dividend or a stock dividend. This can be advantageous for the company (capital retention) and for shareholders (potential tax benefits, reinvestment). Long-term planning of dividend policy and remuneration structure is key to maintaining financial stability and management motivation.

The Importance of Long-Term Planning and Regular Legal Audits.

Regular legal audits and reviews of internal policies and executive service agreements ensure that the setup of remuneration and dividends remains in compliance with current legislation and best practices. For clients, experience in providing long-term services plays a key role. ARROWS' portfolio includes more than 150 joint-stock companies, 250 limited liability companies, and 51 municipalities and regions. This extensive practice allows us to anticipate problems and propose tailor-made solutions.

The emphasis on long-term services and an impressive client portfolio shows that ARROWS functions as a continuous legal partner. The concept of regular legal audits shifts legal services from reactive problem-solving to proactive risk management and strategic optimization.

This positions ARROWS as a strategic business partner, not just a provider of legal services, capable of supporting long-term growth and stability through continuous legal oversight and strategic advice.

With ARROWS, you have certainty and peace of mind in your business.

The correct setup of remuneration for statutory bodies and dividend payouts is essential for the legal certainty and financial health of your company. With the ARROWS law firm, you get comprehensive legal advice that minimizes risks and ensures compliance with Czech and international regulations.

ARROWS prides itself on the speed and high quality of its services. A team of experienced lawyers with over 15 years of practice is ready to respond to your needs with maximum efficiency.

If you have interesting investment or business opportunities, ARROWS can connect clients with each other within its wide network. Representatives of the firm's management are happy to listen to interesting entrepreneurial or business ideas. This added value goes beyond ordinary legal services and actively supports the growth and development of clients.

Leave nothing to chance and contact the lawyers at ARROWS. They will be happy to provide you with a legal consultation and help you set up your remuneration and dividend policy so that your company can prosper without unnecessary risks.