SPV pro development

What is an SPV and why is it essential for modern development

The essence of an SPV lies in isolating financial and legal risks. If you are developing a residential complex directly through your existing company, any problem—from budget overruns to disputes with suppliers or lawsuits with neighbours—threatens your entire business. An SPV acts as a legal barrier that isolates the risks of one project from the rest of your business.

In the Czech Republic, the most common legal form chosen for development SPVs is the limited liability company (s.r.o.). This form offers an optimal combination of relatively low establishment costs, simple management, and sufficient legal separation. The minimum share capital is just one Czech crown, which allows for the quick and flexible establishment of a project company.

The lawyers at ARROWS regularly establish SPVs for development projects and can assist you with the complete legal preparation, including the founding documents.

How an SPV protects against financial and legal risks in development

The fundamental principle of an SPV is the limitation of liability under Section 132 et seq. of the Act on Business Corporations. A shareholder is liable for the company's obligations only up to the amount of their unpaid contribution. This means that if a developer contributes land worth CZK 20 million to an SPV for a specific project, their maximum risk is limited to precisely this amount.

In practice, this works so that if the project runs into trouble—for example, the construction company goes bankrupt, apartment sales stall, or a court awards high damages to neighbours—creditors can only satisfy their claims from the SPV's assets. The parent company and the developer's other projects remain untouched.

However, this protection is not absolute. In some cases, Czech courts apply the doctrine of "piercing the corporate veil." This occurs mainly when a shareholder abuses the legal form of the SPV for fraudulent purposes or when the SPV serves merely as a formal structure without real autonomy.

Conditions for maintaining protection against creditors

For the protection through an SPV to be truly effective, you must adhere to strict corporate governance rules:

De facto separation: The SPV must have its own bank account, its own accounting, and separate management. If the parent company freely moves funds between the SPV and its own accounts, courts can pierce this shield.

Duty of due managerial care: The SPV's executive director is liable with their entire personal assets for any damage caused by a breach of the duty of due managerial care under Section 159 of the Civil Code. In its decision ref. no. 25 Cdo 1319/2022, the Supreme Court confirmed that an executive director can be held directly liable for damage caused to a third party, jointly and severally with the company.

Timely filing of an insolvency petition: If the SPV becomes insolvent, the executive director must file an insolvency petition within 30 days. Neglecting this duty leads to the executive's personal liability for the damage incurred by creditors as a result of the delay.

The ARROWS law firm is insured for damages up to CZK 500,000,000, which means maximum security for the client when securing legal services. We provide comprehensive legal advice on SPV management, including preventive measures against the risk of personal liability. For an immediate solution to your situation, contact our experts.

Project financing through an SPV: How to negotiate with banks

Project financing is a specific form of lending where the bank relies primarily on the cash flow and assets of a particular project, not on the creditworthiness of the entire development group. The SPV plays a key role here, as it ensures that the project's financing is separate from the parent company's other activities.

Banks in the Czech Republic, including Raiffeisenbank and Komerční banka, typically require 20–40% of own equity, depending on the project type and risk profile. The more of your own funds you invest, the better terms you can negotiate. The key indicators are LTC (Loan-to-Cost, the ratio of the loan to total costs) and LTV (Loan-to-Value, the ratio of the loan to the property's value).

If you are building an apartment building with total costs of CZK 100 million and the bank offers an LTC of 70%, it means they will lend you a maximum of CZK 70 million, and you must contribute the remaining CZK 30 million from your own resources. At the same time, the bank ensures that the LTV does not exceed a set limit—usually 60–70% for commercial projects.

Documentation required by banks

The process of obtaining project financing begins with the preparation of extensive documentation. Banks will not lend for the speculative purchase of land without a building permit, as they consider it too risky. The standard required documents include:

• A business plan with detailed financial projections

• Title deeds to the land and legal due diligence

• A final building permit or zoning decision

• A work contract with the general contractor

• Concluded pre-sale agreements (often 20–30% of the project's value)

• Proof of own equity invested in the project

The bank verifies whether the project complies with the current zoning plan and whether there are risks of existing permits being revoked. The ARROWS law firm handles the preparation of complete documentation for negotiations with banks, including legal due diligence of land and building permits.

Limited recourse vs. non-recourse financing

In the context of SPV financing, it is crucial to understand the difference between recourse and non-recourse loans. Non-recourse financing means that in the event of default, the creditor can only satisfy their claim from the assets of the project company (SPV), not from the assets of the parent company or its owners.

Limited recourse represents a compromise where liability is limited to specific events or amounts. For example, a bank may require personal guarantees from the shareholders only up to a certain amount or only for specific risks, such as budget overruns.

Non-recourse loans are more advantageous for the developer but are harder to obtain. Banks provide them only when strict conditions are met: a strong project with clear cash flow, an experienced developer, a high share of own equity (often 30–40%), and high-quality collateral. Interest rates on non-recourse loans are typically higher than on standard full-recourse loans.

Legal framework for establishing an SPV in the Czech Republic: Choosing the legal form: s.r.o. versus a.s.

The decision between a limited liability company and a joint-stock company is not just a tactical choice based on establishment costs. It is a strategic decision that defines future flexibility, financing options, and the ease of selling the entire project.

A limited liability company (s.r.o.) is the most common choice for development SPVs. The advantages include:

• Low establishment costs (share capital can be as little as CZK 1)

• Simpler administration and lower administrative burden

• Faster establishment (typically 2–4 weeks)

• Sufficient flexibility for most projects

A joint-stock company (a.s.) is chosen for larger projects with international investors. The advantages of an a.s. include:

• Easier entry for a larger number of investors

• The ability to issue different classes of shares with different rights

• Greater prestige with some banks and investors

• Better readiness for a potential public offering

The disadvantages of an a.s. are higher establishment costs (minimum share capital of CZK 2,000,000 for a private a.s.) and stricter regulation, including the mandatory establishment of a supervisory board.

The ARROWS law firm has a portfolio of more than 150 joint-stock companies and 250 s.r.o.s; we pride ourselves on the speed and high quality of establishing and managing business companies. Get in touch with us and receive a tailor-made legal solution.

Steps for establishing an SPV for a development project

Establishing an SPV seems simple at first glance: you prepare the founding agreement, deposit the capital, and register in the Commercial Register. However, the practice is much more complex. Each step has hidden exceptions, procedural details, and connections to other regulations that a layperson often overlooks.

The process of establishing an SPV can be divided into five main phases:

1. Preparation of founding documents
The memorandum of association or articles of association are the documents where the future of the entire project is decided. The key elements are:

• Decision-making mechanisms among shareholders

• Rules for project financing (so-called cash call provisions)

• Exit strategies and protection of minority shareholders

• Profit distribution after project completion

2. Obtaining a trade license
The SPV must have the appropriate trade license for its activities. For development projects, this typically involves free trades such as property management and maintenance or property rental. The responsible representative must meet the qualification requirements.

3. Opening a bank account and paying up the contribution
Before registration in the Commercial Register, at least 30% of the share capital must be paid up. The bank will issue a confirmation of the deposit, which is necessary for the company's registration.

4. Registration in the Commercial Register
The application for registration is submitted to the locally competent registration court. The application must be accompanied by all legally required documents with officially certified signatures. The process usually takes 5–10 business days.

5. Registration with the tax authority
After registration in the Commercial Register, an application for registration with the tax authority must be submitted within 15 days. This involves registration for corporate income tax and, if applicable, for VAT.

Tax specifics of SPVs and related-party transactions

The relationship between a parent company and its SPV is a textbook example of a relationship between "related parties" under Section 23(7) of the Income Tax Act from the perspective of tax laws. This carries significant tax implications that, if set up incorrectly, can lead to tax reassessments and hefty penalties.

All transactions between these entities—whether it's providing a loan, selling assets, leasing, or charging for services—must be carried out at an "arm's length price." This is the price that independent entities would agree upon under the same conditions in an open market.

If the tax authority discovers during an audit that the price was set differently (e.g., the parent company sold land to the SPV below market price to reduce its profit), it has the right to adjust the tax base and reassess the tax, including a high penalty and interest on late payment. The Supreme Administrative Court has long addressed this issue and has clearly defined in its case law how the arm's length price should be determined and documented.

Another tax risk is the so-called hidden contribution. If an asset is transferred to the SPV at a price lower than its market value, the difference may be assessed as taxable gratuitous income for the SPV. The ARROWS law firm provides comprehensive tax advice on asset transfers between related parties, including the preparation of expert opinions. Do not hesitate to contact our firm.

Establishment and management of an SPV

Share deal versus asset deal: Tax and legal aspects of selling a project

Selling a stake in an SPV (a share deal) instead of selling the property itself (an asset deal) is an increasingly popular strategy in development. The transaction is administratively simpler because the owner in the land registry does not change—the SPV remains the owner.

Main advantages of a share deal:

Tax efficiency: The transfer of a share is generally not subject to VAT and, if time tests are met, may also be exempt from income tax. As of July 1, 2025, new rules for VAT on real estate apply—the sale of real estate is primarily subject to VAT only on the first sale after final building approval or after a substantial change within a 23-month period.

Administration: There is no need for an entry in the land registry, to obtain third-party consents for the transfer of contracts, or to change permits and licenses. All rights and obligations remain with the SPV; only its owner changes.

Speed: A share deal can be completed significantly faster than an asset deal, which is crucial in the dynamic real estate market.

Preservation of relationships: All contractual relationships (lease agreements, contracts with suppliers, bank loans) remain unchanged. There is no need to obtain the consent of contractual parties.

Risks of a share deal and their mitigation

However, a share deal also has its risks. The buyer acquires the entire company, including its complete history and any hidden risks. Therefore, thorough legal, tax, and accounting due diligence is crucial.

Main risks of a share deal:

Hidden liabilities: The buyer assumes all of the SPV's liabilities, including those not disclosed at the time of sale. These can be tax arrears, creditor claims, fines from authorities, or liability from guarantees.

Liabilities to authorities: The SPV may have undetected liabilities to the tax authority, social security administration, or health insurance companies. These liabilities are automatically transferred to the buyer.

Corporate history: The buyer takes over the entire history of the company, including its accounting practices, tax optimizations, and contractual relationships.

The ARROWS law firm conducts comprehensive legal due diligence for development projects, including identifying all risks and preparing contractual documentation with mechanisms to address them. As part of the due diligence, we identify risky contractual clauses and negotiate the necessary third-party consents before the transaction is completed.

The international dimension of SPVs: Cross-border structures and tax optimization

The Czech development market attracts foreign investors who often require the establishment of an international holding structure. In such cases, it may be advantageous to place the Czech SPV under a foreign holding company, for example, in the Netherlands, Luxembourg, or Cyprus.

This arrangement offers advantages in the future sale of the project, as the transfer of a share in the foreign holding company is not subject to Czech real estate transfer tax. At the same time, the benefits of double taxation treaties can be utilized.

Key jurisdictions for holding companies:

Netherlands: A traditional jurisdiction for European holding structures with an extensive network of double taxation treaties. It offers a so-called participation exemption for dividends and capital gains from shares.

Luxembourg: Preferred for large institutional investors and funds. The effective tax rate is approximately 24.94%, including the solidarity tax.

Cyprus: Lower tax burden (12.5%) and simpler administration. A popular jurisdiction for investors from Eastern Europe.

Economic substance requirements

The use of international structures must meet the economic substance requirements according to OECD BEPS rules. This means that the foreign holding company must demonstrate real economic activity, not just a formal existence.

Economic substance requirements include:

• Local directors with a real decision-making process

• A physical office of the company in the given jurisdiction

• Local employees or outsourced services

• Documentation of business decisions made in the jurisdiction

• A bank account in the local jurisdiction

Failure to comply with these requirements may lead tax authorities to challenge the tax residency of the holding company and shift the tax liability to the Czech Republic.

The ARROWS law firm has an extensive ARROWS International network, which we have been building for over ten years. We handle cases with an international element on a virtually daily basis and can provide comprehensive legal services, including international structures.

Special uses of SPVs: Joint ventures and syndicated projects

Development projects are extremely resource-intensive. Few entities have everything needed: a lucrative plot of land, tens or hundreds of millions of crowns in capital, and the expert know-how to manage permitting processes, construction, and sales.

This is precisely why the joint venture (JV) model is so common in development—a purpose-built alliance of several partners to realize one specific project. Typically, a "holy trinity" of partners comes together in a project:

• The landowner: Brings the key asset—the "canvas" for the entire project

• The investor: Provides capital, whether their own or by securing bank financing thanks to their creditworthiness

• The developer: Possesses specific know-how, manages permitting processes, construction, and sales

The standard for development joint ventures is the establishment of a special purpose vehicle, known as an SPV. Each partner receives a share in the SPV corresponding to their contribution—be it land, capital, or know-how.

Shareholders' Agreement as the key document

The memorandum of association (or articles of association) of the SPV alone is not enough. It is a public document that only addresses the basic legal framework. The real rules of the game, often going beyond the scope of the law, must be defined in a key document: the Shareholders' Agreement (SHA).

Key areas the SHA must address:

Division of roles and responsibilities: The agreement must define who is responsible for what. The developer handles project documentation and building permits, the investor releases financing at clearly defined milestones, and the landowner provides cooperation in dealings with authorities.

Project financing (Cash Call): A mechanism for how shareholders will contribute additional capital during the project. It must be defined what happens if a shareholder refuses to provide further funds.

Protection of minority shareholders: Important decisions (selling the project, additional financing, changing the project) should require the consent of all or a qualified majority of shareholders.

Exit strategy: Clear rules on how and when shareholders can exit the project. This typically includes a right of first refusal, a drag-along right (obligation to sell together), and a tag-along right (right to sell together).

Deadlock resolution: What happens when shareholders cannot agree on a crucial decision. This could be a buy-out clause, arbitration, or another mechanism.

The ARROWS law firm regularly prepares Shareholders' Agreements for joint venture projects with an emphasis on protecting all parties and preventing future disputes. In addition to legal services, we also offer consultations for investors and entrepreneurs looking for suitable partners or opportunities for acquisitions.

Joint ventures and syndicated projects

Special tax regimes and their impact on SPVs

From 2024, the corporate income tax rate increased from 19% to 21%. This change will be reflected in tax returns filed in 2025 for the 2024 tax period. For development SPVs, this means a 2 percentage point higher tax burden on profits.

A comparison of rates in Europe shows that the Czech Republic, with its 21% rate, is around the European average:

• Hungary: 9% (the lowest in the EU)

• Ireland and Cyprus: 12.5%

• Bulgaria: 10%

• Poland: 19%

• Germany: 29.83% (the highest in the EU)

A special rate of 5% applies to basic investment funds, and 0% for pension company funds. However, these special rates cannot be applied to standard development SPVs.

VAT on real estate from July 2025

Significant changes were introduced by the amendment to the VAT Act, effective from July 1, 2025. Now, VAT is primarily applied only to the first sale of a property after its final building approval or after a substantial change has been made. Any subsequent sale of the same property is exempt from VAT, provided no further substantial change has occurred in the meantime.

Key changes for developers:

Shortened time test: The original 5-year period has been shortened to 23 months from the final building approval. This means that a developer who sells a new apartment six months after approval will apply VAT at a rate of 21% or 15% (for social housing).

Subsequent sales: If the buyer (e.g., an investment fund) sells this apartment a year later without significant modifications, this second sale will be exempt from VAT, even though it occurs within the original 23-month period.

Substantial change: It is now clearly defined what constitutes a substantial change. The first condition is that the modifications lead to a change in the property's use or substantially alter its living conditions. The second condition is that the cost of this change (excluding VAT) exceeds 30% of the tax base upon its subsequent sale.

Unfinished buildings: The sale of an unfinished immovable property, i.e., a building before final approval, will always be subject to VAT, regardless of any time tests.

The ARROWS law firm provides comprehensive tax advice on the application of the new VAT rules for real estate, including transaction structuring and the preparation of contractual documentation. To assess your situation, do not hesitate to contact us at consultation@arws.cz.

Securing bank financing: Liens and their enforcement

Since the bank relies on the project's assets, it requires a comprehensive package of security instruments. This is not just about a lien on the property, but a sophisticated system of liens that gives the bank control over every valuable aspect of the project in case of problems.

A typical security package includes:

Lien on the property: The basic form of security, where the property (land, building under construction, or completed building) is pledged in favor of the bank. The registration of the lien in the land registry gives the bank a preferential right to satisfy its claim from the proceeds of the property's sale.

Pledge of business shares: The bank has the shareholders' shares in the SPV pledged to it. If the project fails, the bank can gain control over the entire SPV and either complete the project itself or sell it.

Pledge of receivables: Securing all future receivables of the SPV from the sale of apartments or from rent. Buyers of apartments pay directly to the bank's account or to the SPV's account with a pledge in favor of the bank.

Pledge of bank accounts: All of the SPV's accounts are under the bank's control. The developer cannot freely dispose of funds without the bank's consent.

Assignment of insurance proceeds: If an insured event occurs (fire, flood), the insurance payment goes to the bank, not the SPV.

Gradual release of assets and release mechanisms

When negotiating, focus on the possibility of gradually releasing assets from the security. The right to release assets is not automatic and must be precisely negotiated and enshrined in the contract from the very beginning. This gives you a free hand for key business operations—for example, selling completed residential units without having to repay the entire loan prematurely.

A release mechanism typically works so that after a residential unit is sold and the purchase price is paid, the developer repays a proportional part of the loan to the bank (e.g., 70% of the purchase price). The developer keeps the remaining 30% as profit. After the conditions are met, the bank will release the lien on the specific residential unit, and the buyer will receive a clean title.

Conditions for release may include:

• Meeting a minimum pre-sale share (e.g., 30%)

• Reaching a certain construction phase

• Repaying a minimum amount of the loan

• Maintaining a certain LTV ratio

The complexity of development projects: Why general knowledge is not enough

Throughout this article, we have discussed the various aspects of SPVs, project financing, tax rules, and liens. Each of these steps seems relatively straightforward at first glance. The reality, however, is that individual steps that appear simple have hidden exceptions, procedural details, connections to other regulations, and risks that a layperson often overlooks.

Examples of hidden risks and complexities:

Transfer of land to an SPV: A seemingly simple transaction can lead to tax problems if the price is not set at an arm's length price. The tax authority can reassess the tax with a penalty of up to 20%. At the same time, a hidden contribution may arise, which needs to be taxed.

Building permit: Obtaining a building permit is not just about submitting an application. It is necessary to secure opinions from a number of affected authorities (fire department, public health, heritage conservation, transport). A final building permit typically takes 6–12 months and is a condition for obtaining bank financing.

Zoning decision: It has a limited validity, typically two years. If the developer does not obtain a building permit within this period, the zoning decision expires, and the entire process must start over. This creates time pressure that developers often underestimate.

Bank financing: A loan agreement in project financing is not just a document stating the interest rate and repayment schedule. It is a detailed manual that governs the entire life cycle of the project from the bank's perspective. A legal review of this documentation is an investment that prevents future disputes and potentially ruinous consequences.

Due diligence of the land: Checking the title deed is not enough. It is necessary to check the history of the land (was it originally in the irreversible use of a church or municipality?), archaeological interests, soil contamination, protection zones of utility networks, and dozens of other aspects.

The ARROWS law firm deals with development projects daily and can significantly shorten the time and minimize the risk of errors for the client. Our lawyers have experience from providing long-term services to our clients. Our portfolio includes more than 150 joint-stock companies, 250 s.r.o.s, and 50 municipalities and regions. We pride ourselves on speed and high quality.

Alternative transaction structures and their use: Purchase and sale of development projects

The ARROWS law firm not only provides legal support for some projects but also carries them out itself, including the possibility of their purchase or arranging their sale. In addition to legal services, we also offer consultations for investors and entrepreneurs looking for suitable partners or opportunities for acquisitions or exits.

If a client is looking for financing or a business partner for a purchase or sale in the development sector, we can connect clients with each other if they have interesting investment or business opportunities. We are also happy to listen to interesting entrepreneurial or business ideas.

We carry out some of these activities with our partners – the company SHARE DEAL Office, which focuses on supporting transactions and connecting investors. The lawyers at ARROWS have experience not only with the legal framework of these transactions but also with their practical implementation – thanks to this, they can advise clients on issues of economic feasibility and negotiating terms.

Operation and termination of an SPV

Conclusion: Comprehensive legal support as the key to a successful project

Establishing and managing an SPV for a development project is not an administrative formality but a complex legal process with implications for tax burden, personal liability, and the future saleability of the project. A single mistake in the founding agreement, poor timing of a land transfer, or inadequate protection for a minority shareholder can delay a project by years and cause losses in the millions.

In this article, we have shown that the reality of development projects is much more complex than it first appears. Individual steps that seem simple have hidden exceptions, procedural details, connections to other regulations, and risks that a layperson often overlooks. This is precisely why professional legal support is essential.

The ARROWS law firm deals with development projects and SPV structures daily. 

We provide comprehensive legal services, which include:

• Establishing an SPV and preparing founding documents optimized for your specific project

• Legal due diligence of land and projects with identification of all risks

• Negotiating project financing terms with banks, including the preparation of loan documentation

• Preparing Shareholders' Agreements for joint venture projects

• Tax structuring of transactions, including international holding structures

• Representation in zoning and building permit proceedings

• Preparing purchase agreements for share deal or asset deal transactions

• Ongoing legal advice during project implementation

Thanks to our experience from providing long-term services to our clients (with a portfolio of more than 150 joint-stock companies, 250 s.r.o.s, and 50 municipalities and regions), we can effectively connect the legal, tax, and business aspects of your project. We pride ourselves on speed and high quality.

For international projects, we use the ARROWS International network, which we have been building for over ten years. We handle cases with an international element on a virtually daily basis and can provide legal services abroad.

The ARROWS law firm is insured for damages up to CZK 500,000,000, which means maximum security for the client. We also regularly partner with in-house counsel to resolve special matters.

If you do not want to risk mistakes, damages, or fines, you can safely entrust the entire matter to ARROWS. Simply contact our office and get a tailor-made legal solution that will protect your assets and ensure the successful implementation of your development project.