Taxation of the Sale of a Share in a Limited Liability Company

Why is the taxation of selling an SRO share critical for your assets?

If you are selling a share as a natural person and it is not included in your business assets, the Czech Income Tax Act (ITA) offers a tax exemption under certain conditions. However, without timely legal assistance, you can easily overlook critical details regarding the fulfillment of the conditions for this exemption.

ARROWS' lawyers therefore analyze the entire transaction in advance and prepare legal opinions that protect against fines and audits, ensuring maximum tax efficiency. 

The conditions for exemption have changed twice in the last two years. We describe the current tax rules from 2026 and their impact on sale planning in a separate text.

The role of ARROWS in the initial transaction analysis

Every M&A transaction is unique and must be assessed individually. In the initial phase of the transaction, it is absolutely essential to assess whether the share in question meets the criteria for tax exemption. Timely and precise assessment has a direct impact on both the negotiated purchase price and the overall structure of the sale.

Especially in large transactions where the value of the share exceeds tens or hundreds of millions of Czech crowns, the initial analysis is paramount. The experience of our lawyers from providing long-term services to our clients, with a portfolio of over 250 SROs and 150 joint-stock companies, allows us to quickly identify potential tax risks.

Tax exemption: The key role of the five-year time test

The main and fundamental tool for exempting income from the sale of a share by a natural person is meeting the so-called time test. This test is met if the period between the acquisition of the share and its sale exceeds five years. If this period is observed, the income from the sale of the share is theoretically exempt from income tax.

An expert view on time calculation is crucial in this area. For a partner in a limited liability company, the day of acquisition of the share is typically calculated from the day the company was established, i.e., the day of its entry in the Czech Commercial Register.

The tax outcome depends on how the transfer was carried out and when it became effective. We discuss the step-by-step transfer of a business share—from the form of the contract to the entry in the register—separately.

Nuances that affect the running of the time test

The time test is not just a simple date on the calendar; its running can be complicated by various corporate events or the manner of acquiring the share. The legal complexity lies in the fact that a seemingly simple rule can be disrupted by specific situations.

• Inheritance cases: In the case of acquiring a share through inheritance, while the acquisition itself is tax-exempt (§ 4a(a) of the ITA), the time test still applies to the subsequent sale of the share and must be met.

• Transformations and mergers: For owners of holding and complex structures, it is crucial that during restructuring operations, such as an exchange of shares (under § 23b of the ITA) or mergers or demergers of business corporations (under § 23c of the ITA), the time test for exemption is not interrupted. 

• Share in business assets: If the share was acquired from the taxpayer's business assets, the five-year time test is calculated only from the moment of termination of the activity in which the share was included in the assets.

Do you need to verify the correctness of the time test calculation for exemption, or are you preparing for a pre-sale restructuring? Get legal opinions from our specialists who regularly handle this issue. Contact us at consultation@arws.cz. 

The new tax reality from 2025: The CZK 40 million limit

Until the end of 2024, meeting the five-year time test meant a full exemption from income tax, regardless of the total transaction amount. However, from 1 January 2025, a significant legislative change comes into effect that alters this certainty.

The introduction of the CZK 40 million limit transforms tax optimization for owners of large companies. Whereas previously the tax strategy focused on meeting the time test to achieve full exemption, it is now necessary to also focus on optimizing expenses and structuring payments, as the exemption is limited.

• New regime: Income of natural persons from the sale of shares or securities will be exempt only up to a total amount of CZK 40 million per tax period.

• Impact on the sale: The portion of income that exceeds this statutory limit will be subject to standard taxation at the personal income tax rates of 15% or 23%.

Practical impacts and the need for installment planning

The change has a huge practical impact. If a taxpayer sells an SRO in 2025 for, say, CZK 100 million and has met the time test, CZK 40 million will be exempt, but the remaining CZK 60 million will be subject to taxation.

For this reason, strategic planning of sales contracts is necessary. A crucial tool is spreading the income over multiple tax periods, ideally in the form of installments. This way, it is possible to use the CZK 40 million limit repeatedly (e.g., CZK 40 million in 2025, CZK 40 million in 2026, etc.), thereby effectively increasing the total exempt amount and minimizing the taxable base. 

Our lawyers are ready to help you with the preparation or revision of contracts and the optimization of your sales strategy, including the detailed setup of payment terms. Write to consultation@arws.cz. 

How to minimize the tax base: Strategic application of costs

If your sales income exceeds the CZK 40 million limit, the tax liability applies only to the profit, which is calculated as the difference between the income and tax-deductible expenses. The key to minimizing income tax is therefore the correct determination and application of these expenses.

Correct determination of the share's acquisition price

According to § 24(7) of the ITA, the main tax expense deductible against taxable income from a sale is the acquisition price of the share. This typically equals the purchase price, i.e., the price paid when acquiring the share by purchase. An expense equal to the price paid upon inheritance or donation can also be claimed if the legal conditions are met.

For older companies that were established many years ago, the original founding or purchase price (e.g., CZK 100,000) is often minimal compared to today's sale price (e.g., CZK 100,000,000). In such a case, the original acquisition price is almost worthless for tax purposes. This is where the key option of alternative valuation comes in, which can fundamentally change the amount of tax liability.

Alternative valuation: Using the market value as of 31 December 2024

For shares acquired before 1 January 2025, the law offers a unique and exceptionally powerful tax optimization tool: the taxpayer can claim an alternative valuation of the share at its market value determined at the end of 2024 as a tax expense.

This has great practical significance: If a client held a share for a long time and its acquisition price was low, but its market value as of 31 December 2024 had already reached CZK 90 million, they can use this high value as a tax-deductible expense against the sale price (e.g., CZK 100 million). This significantly reduces the taxable base to just CZK 10 million, minimizing the tax burden.

• Necessary documentation: To claim the market value as of 31 December 2024, an expert opinion is required by law.

• Coordination: Ensuring the correct legal documentation and coordinating the expert valuation is essential for the successful application of this expense.

For the correct application of expenses and minimization of the tax base, our lawyers will prepare the complete documentation required by law. We are also ready to coordinate the expert valuation. Contact us at consultation@arws.cz. 

Risks and consequences of neglect: Progressive rate and notification duties

The strategic sale of a company share requires managing administrative and financial risks. Two main areas where entrepreneurs often make mistakes are progressive taxation and overlooking the so-called non-monetary obligation.

Progressive Tax Rate

If the income from the sale of a share is taxable (exceeds the CZK 40 million limit), it is subject to progressive taxation for natural persons. While the basic rate is 15%, the part of the taxable base that exceeds 36 times the average wage (for 2025, this is CZK 1,676,052) is taxed at a rate of 23%.

Given that income from the sale of a share above CZK 40 million is in the vast majority of cases included in the taxpayer's total tax base, owners of large companies and investors almost automatically pay a 23% income tax on the amount exceeding the limit. This fact emphasizes the importance of maximizing the acquisition price and structuring installments.

Penalty for omitting a non-monetary obligation

One of the most common and often overlooked risks is the obligation to notify the tax authority of exempt income (§ 38v of the ITA). This is a so-called non-monetary obligation, which is independent of the tax liability itself.

• The rule: If a natural person receives tax-exempt income (for example, from the sale of a share in an SRO) exceeding the limit of CZK 5 million, they must report this income to their tax authority. The obligation applies even if the income was fully exempt, for example, by meeting the time test and not exceeding the CZK 40 million limit.

• Penalty for non-notification: Non-notification is a serious violation and carries a penalty of up to 15% of the unreported exempt income. This penalty can be in the millions of crowns, even if the transaction itself was tax-neutral.

ARROWS lawyers minimize your risk by ensuring all notification duties are met and representing you before registers and regulators. Do not hesitate to contact our office – consultation@arws.cz. 

The foreign element: International taxation of shares and ARROWS International

For company owners and investors with international capital or a registered office abroad, the transaction of selling a share becomes significantly more complex. International tax law and Double Taxation Treaties (DTTs) come into play here.

The Land-Rich Company rule

While the Czech time test may provide a domestic tax exemption, international rules, especially in the context of selling real estate companies, can override this exemption. An analysis of international risk is essential for transactions involving foreign entities.

Most DTTs (which are based on the OECD Model Tax Convention) contain a special provision (typically Article 13, para. 4) concerning the taxation of gains from the sale of shares in companies whose value is derived more than 50% directly or indirectly from immovable property located in the given contracting state.

This concept, known as a Land-Rich Company, means that the gain from the sale of a share may also be taxed by the state where the property is located, regardless of the seller's tax residency. This can lead to an obligation to pay tax abroad, even if the transaction meets the time test in the Czech Republic and would otherwise be exempt. In such cases, it is necessary to assess the specific DTT and apply the method for the elimination of double taxation.

The ARROWS International network

Handling international transactions requires deep knowledge of bilateral treaties and practices in foreign jurisdictions. ARROWS lawyers are well-versed in these complex rules. Thanks to the ARROWS International network, built over ten years, ARROWS lawyers deal with issues with an international element on a daily basis, whether it's determining tax residency or applying the land-rich company rule.

We provide legal advice in obtaining permits and licenses as well as comprehensive analysis of cross-border tax implications. Do you need legal assistance with taxation abroad? Contact us at consultation@arws.cz. 

Connecting business: Opportunities for our clients

We understand that our clients are leading players in the market and often seek new investment opportunities after a successful company sale. We are aware of interesting investment and business opportunities within our extensive client network and can connect our clients with each other. We are also happy to listen to your interesting business or entrepreneurial ideas and help them find the right partner for growth or financing.

Your step towards a safe share sale

The taxation of selling a business share in an SRO is an area that requires timely and precise planning, especially with regard to the key legislative changes in the form of the CZK 40 million limit effective from 2025. The correct application of the five-year time test and the strategic use of the share's acquisition price, possibly in the form of an alternative valuation at the market value as of 31 December 2024 – are crucial for minimizing your tax burden.

We summarize the current legislative changes effective from 2025 that affect this taxation in the article news on the taxation of income from the transfer of a share in an s.r.o. and from the sale of securities from 2025. The tax aspect often determines the final amount in your bank account more than the negotiated price. The connections between the transaction structure, the time test, and tax efficiency are discussed in the book How to Sell a Company with Real Estate.

An error in structuring the sales contract, omitting the non-monetary obligation to report exempt income, or a poor assessment of international impacts can have catastrophic financial consequences in the form of million-crown fines and tax assessments. These consequences are much more serious for business owners than for the average taxpayer, which is why the role of legal prevention is critical.

ARROWS lawyers regularly handle this issue and have long-term experience with transactions for our clients, including complex restructurings and sales with an international element, thanks to the ARROWS International network. Whether you need the preparation or revision of contracts, legal opinions, or representation before administrative authorities, you can rely on our experience.

Now is the time to act and ensure you get the most from the sale of your life's work. Connect with us at consultation@arws.cz and get a tailor-made legal solution that will ensure a safe and tax-efficient sale of your business share.