Owner-to-Company Loans in the Czech Republic

Legal framework: Loan for use, credit facility, and what the Czech tax authority thinks

The first question is: what exactly are you lending? The Czech Civil Code distinguishes between a loan for use (providing money with an obligation to return it) and a credit facility (where the borrower undertakes to repay the funds with interest). In practice, between an owner and their company, it is most often a loan for use.

For tax purposes, however, the terminology matters less. What is crucial is always the agreed interest. The owner and their company are automatically related parties under the Czech Income Taxes Act (ZDP). They must therefore respect the arm’s length principle.

In an audit, the Czech tax authority asks only one thing: Does the interest correspond to what two completely independent entities would agree? If it cannot find a logical justification, it will itself adjust the interest to the usual level and ruthlessly assess tax on the difference.

Many owners think they can dictate any terms within their own company. The reality, however, is that for tax deductibility of costs you must be able to safely prove the market logic of the interest; otherwise, very significant tax consequences may follow. In practice, it pays to have your interest settings, documentation, and arguments prepared in advance also from the perspective of tax law.

When parties are related and what it means for tax purposes

A shareholder and their s.r.o. or a.s. are automatically considered related parties under Section 23(7) of the Czech Income Taxes Act (ZDP). This is not a matter of opinion or agreement; it is a fixed legal fact. Their financial transactions are therefore subject to much stricter rules than ordinary business dealings. In some situations, it is also appropriate to address the broader set-up of relationships between the shareholder and the company within corporate law, holdings, and structures.

If interest rates were agreed differently from the market norm, the tax administrator is entitled, and even obliged, to adjust the tax base. If the company provides the owner with a loan at 0.5% when the market requires 5%, the authority will impute the interest and assess tax on a fictitious profit of 4.5% for the company.

However, the law contains one fundamental exception. If an individual (an owner – a non-business person) lends to their own company, the price may be agreed in a range from zero up to the market level. An interest-free loan from the owner is therefore completely safe for the company. But it does not work the other way around.

Interest-free loan from a shareholder: When it is safe and when it is not

A loan for use from the owner to the company without entitlement to interest is, from a tax perspective, the simplest solution. The owner does not tax any income and the company faces no upward adjustment of the tax base. This is a fully legal and common way to ease the company’s finances.

The condition, however, is that it must not be a disguised benefit of another kind (for example, a hidden contribution) that would replace taxable remuneration for work. The boundary between performance for a shareholder and remuneration of statutory officers is often a topic of audits, which is also discussed in more detail in the article concurrent roles and remuneration of statutory officers. In ordinary practice, however, temporary assistance to a company in difficulty is fully accepted.

But beware of the opposite direction. If the owner takes money from their company without interest, it is a fatal mistake. The Czech tax authority will additionally assess the company for lost profit and will tax the owner on the acquired benefit, usually as employment income or other income.

Interest rate from the owner to the company: When “zero or more” applies and when it does not

Thanks to the exception, the owner (an individual) may freely choose the interest rate as long as it does not exceed the market ceiling. They can lend for free, at a symbolic 0.1%, or charge a standard market interest rate (e.g., 5%). All of these options are safe in terms of tax base adjustments.

A problem arises only if the owner agrees an interest rate that significantly exceeds market reality. For example, 15% at a time when the standard rate is 5%. The tax authority will assess this excess as artificial profit shifting and will ruthlessly disallow it from the company’s tax-deductible expenses.

Tax deductibility for individuals also comes with a fundamental timing condition. Interest paid to the owner becomes a tax-deductible expense for the company only in the taxable period in which it is actually paid in cash (§ 24(2)(zi) of the Income Taxes Act). Paper entries without a real payment do not reduce tax.

When the company lends to the owner: this is no longer “0 to market price”

The situation changes dramatically once the company provides a loan to the owner. The exception for zero interest no longer applies. Interest must always be agreed at a market-standard level under § 23(7) of the Income Taxes Act to prevent untaxed cash extraction.

If an s.r.o. lends a shareholder one million CZK interest-free for a car, the tax authority will look at the banking average (e.g., 6%). The company will then be assessed for the foregone profit, and it will pay standard corporate income tax on this notional amount.

In addition, the owner will face a tax liability on non-monetary income. It even applies that if you correctly agree interest in the contract but the owner does not pay it to the company, the company must still pay tax on it at the moment it becomes due for accounting purposes.

Transfer pricing and the arm’s length principle in practice

If you want to be able to defend the interest rate with certainty, you must rely on transfer pricing rules. This is a methodology demonstrating that the relationship is set purely on market terms. The basic question is: What rate would an unrelated bank offer in the same situation?

The simplest approach is to make a comparison. Find out bank interest rates for business loans of the same size and maturity. If your company’s interest rate falls within this usual commercial range, a tax audit will most likely accept it without argument.

Do not forget to take creditworthiness and security into account. An established company will always get a better rate on the market than a newly formed start-up. If the owner’s loan is additionally secured by assets, it is justified to reduce the interest rate. Conversely, a long maturity without guarantees should increase the rate.

In practice, it is necessary to carry out a thorough analysis of market conditions. The attorneys and tax advisors at ARROWS advokátní kancelář will arrange a transfer pricing review before the transaction so that your interest rate stands up to scrutiny with confidence during an audit.

Thin capitalization: a hidden limit on the tax deductibility of interest

Many owners are surprised by a hidden obstacle called thin capitalization. Czech law states that interest on loans from related parties is tax-deductible for the company only up to the level of loans corresponding to a maximum of four times its equity.

If the company has equity of one million and the owner lends it ten million, the limit is four million. Interest on the remaining six million is so-called overcapitalization and becomes a non-deductible expense on which the company will pay the full 21% corporate income tax.

Protection against this rule lies in careful planning. Instead of a direct large loan, the owner can strengthen the company’s equity (e.g., by an additional contribution outside registered capital). This increases the capitalization limit and keeps the interest fully tax-usable for the company.

How to set safe interest rates: practical reference indicators

Where exactly should you look for a starting point for a market rate? An excellent source is the two-week repo rate of the Czech National Bank (ČNB). Banks typically add their margin to it. The repo rate plus a risk margin of a few percentage points (e.g., 2–4%) is very defensible.

Bank offers can also help, where commercial business loans often range between 5–12% depending on risk. If you are part of a larger holding, internal rates at which other group companies borrow can serve as a shield.

In practice, a zero rate into the company is risk-free. A rate between 3–5% is common, and 5–8% can be defended very well. However, interest above 10% p.a. already requires a specific explanation of extreme risk. Zero interest from the company to the owner is then a sure sign of a tax problem.

Documentation: contractual and tax

In a tax audit, excuses that you explained everything over lunch will not stand. Without written documentation, you are in a very weak position. A proper agreement must precisely define the parties, the loan amount, purpose, interest rate, maturity, and any penalties.

We strongly recommend having both parties’ signatures on the agreement officially certified. This gives you an indisputable time stamp for public authorities of when the document was actually created. You will avoid the common suspicion that you printed the agreement only last night because of an audit.

An excellent shield is also a short accompanying memorandum. In it, you rationally summarize the financial situation, the reasons for choosing the given rate, and refer to the market analysis. This demonstrates professionalism to the official and cuts off most doubts at the outset.

If you do not want to risk additional tax assessments and penalties, entrust the preparation of the agreements to professionals. The lawyers at ARROWS advokátní kancelář specialize in intra-group financing and its tax aspects and will guide you safely through the entire process. Contact us at consultation@arws.cz.

Withholding tax: an important detail when working with interest

When the owner has interest paid out from the company, they must then tax it. In the Czech Republic, interest on a loan to a shareholder is not subject to withholding tax at source (unlike, for example, profit distributions). The company therefore sends the money in the full gross amount.

The taxation rests entirely on the owner (a non-business individual). They must report the received interest in their spring tax return in the section for income from capital assets (§ 8 of the Income Taxes Act) and pay the standard 15% tax on it.

If the creditor is a legal entity, the interest flows into its ordinary profit or loss and is taxed at the standard corporate tax rate. Since errors in accounting and taxation have severe consequences, consulting an expert before the first transfer is essential.

Conclusion

Loans between a company and its owner are a powerful tool for rapid cash flow management, but they are also an easy target for the Czech tax administration. To be tax-efficient and safe, they must rest on solid foundations: compliance with the arm’s length principle and impeccable paperwork. The excuse that it is essentially “one and the same wallet” will never stand up in a tax audit.

A statutory exemption allows owners to support the company interest-free, which is a huge advantage in a crisis. However, if the owner borrows money from the company, or if the amounts are substantial, it is always necessary to take thin capitalization limits into account. If you leave the preparation of the documentation to tax and legal professionals, you will pay only a fraction of the amount compared to penalties for challenged interest.

Our attorneys in Prague at ARROWS have extensive experience with transactions and can structure intragroup loans so that they are tax-optimal and legally watertight. Contact us for an initial consultation at consultation@arws.cz.

Read also:

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