Tax Implications of Mergers and Demergers in the Czech Republic

Transfer of tax losses

A common motive for mergers is taking over the tax loss of the dissolving company to reduce the tax base of the successor company. However, the law (Section 38na of the Income Taxes Act) guards against purpose-driven transactions. The use of the transferred loss is therefore strictly conditional on the successor company continuing to carry on the same business activity from which the loss originally arose.

After a merger, a tax loss may be used only against a tax base derived from the same or similar activity as that carried out by the company that generated the loss.

The second filter is economic justification. As noted above, if the purpose of the merger is merely to purchase a loss, it cannot be used. In such cases, the tax authority compares the revenue structure before and after the transformation.

A merger does not extend the time limit for using a loss, so if the loss arose in 2021, it can be used for the last time for the year 2026.

In practice, a thorough analysis is necessary. The attorneys and tax advisors at ARROWS, a Prague-based law firm, will carry out a pre-transaction review of whether these losses can be utilised, so the client is not buying a pig in a poke.

Effective date and accounting implications

From a tax and accounting perspective, the key moment is the so-called effective date of the merger. From this date, the actions of the dissolving company are, for accounting purposes, considered actions carried out on the account of the successor company.

The dissolving company prepares final financial statements and files a tax return for the period ending on the day preceding the effective date.

The period from the effective date until the date the merger is registered in the Czech Commercial Register is already part of the accounting and tax period of the successor company. This means that although, legally, the dissolving company exists until registration in the register, for tax and accounting purposes from the effective date it is treated as if it were already part of the successor.

The successor company continues depreciation started by the original owner and cannot revalue the assets and start depreciating again from a higher value.

VAT and real estate tax

Mergers and demergers are not regarded as a supply of goods or provision of services where they involve the transfer of an undertaking (business) or part of it. However, the successor company becomes the legal successor and assumes all tax obligations under Czech law, including automatic VAT registration if the dissolving company was a VAT payer.

If the successor changes the purpose for which the assets are used, it must repay part of the previously claimed VAT deduction that the dissolved company had claimed.

In a merger, ownership of real estate transfers at the moment the merger is registered in the Commercial Register in the Czech Republic, not only upon registration in the Cadastral Register. In this case, the entry in the Cadastral Register is merely declaratory.

The successor company must file a real estate tax return with the competent Czech tax office by 31 January of the year following the year in which the merger was registered in the Commercial Register.

Cross-border mergers and EU directives

Cross-border transformations are more complex and are governed by the Czech Act on Transformations, which transposes the relevant EU directives, in particular the so-called Mobility Directive. From a tax perspective, the aim is to allow neutrality across borders, but the rules on reporting cross-border arrangements (DAC 6) apply.

In cross-border mergers, exit taxation (exit tax) is also addressed if, as a result of the merger, assets would be transferred abroad and the Czech Republic would lose the right to tax those assets in the future. In such a case, hidden reserves would have to be taxed before the transfer.

Practical risks and most common mistakes

Although a merger involves universal succession, for registration in the Cadastral Register and for legal certainty it is essential to specify the real estate precisely in the transformation project. Errors in plot numbers lead to rejection of the application for registration in the Cadastral Register.

The successor company becomes a VAT payer by operation of law on the date the merger is registered, but the registration application is often forgotten within the statutory deadline.

Many agreements with banks and suppliers include an obligation to notify a change of control or a merger in advance, and a breach may result in loans becoming immediately due and payable. It is necessary to review so-called change of control clauses.

Under the 2024 amendment to the Act, companies select the expert from the list of experts, which speeds up the process, but responsibility for the correctness of the valuation remains.

Legislative framework and updates

The legal regulation is based on the consolidated wording of the Act on Transformations of Commercial Companies and Cooperatives (Act No. 125/2008 Coll.), which was substantially amended in 2024. This amendment introduced the concept of a spin-off (vyčlenění), where the demerged company does not cease to exist but separates part of its assets into a new or existing company in exchange for shares.

This form is very attractive from a tax perspective for holding restructurings, as it allows divisions to be separated into subsidiaries without the need to sell the business, while maintaining neutrality provided the statutory conditions are met under Czech law.

Final summary

The tax implications of mergers and spin-offs require a precise approach. It is not only about whether the transaction is registered in the register, but whether it will withstand a potential tax audit in three or five years. Tax neutrality is the standard, but it is not an unconditional right, and it requires demonstrable economic rationale and compliance with formal procedures under Czech legislation.

If you do not want to risk additional tax assessments and penalties, entrust the preparation of the transaction to professionals. The attorneys at ARROWS advokátní kancelář specialise in corporate transformations and their tax aspects under Czech law and will guide you safely through the entire process. Contact us at consultation@arws.cz.

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