Taxation of the Sale of a Share in a Limited Liability Company
How to Strategically Use the Holding Period Test and Minimize Income Tax for Business Owners
For a natural person, the sale of a business share in a limited liability company is exempt from income tax if more than five years pass between acquisition and sale and the share was not part of business assets. From 1 January 2026, the exemption for shares is no longer capped by the CZK 40 million limit, which applied only for 2025. However, exempt income exceeding CZK 5 million must be reported to the tax office. This article explains how to correctly calculate the holding period test, when the income is taxed at 15% or 23%, and how to avoid penalties.
Key takeaways
- The tax exemption for the sale of a share depends on a five-year holding period test. If you are selling a share as a natural person, have held it for more than five years from the date of acquisition and the share is not part of your business assets, the income from the sale is exempt from income tax. From 2026, the exemption applies regardless of the amount of the purchase price, as the CZK 40 million limit applied to shares only for 2025.
- For a founder, the date of acquisition of a share is calculated from the company's formation date. For a founding member of a limited liability company, the date of acquisition is typically determined by the date the company is registered in the Commercial Register, which is crucial for correctly meeting the holding period test.
- A timely analysis of the transaction affects the purchase price and the sale structure. Especially for large transactions in the tens or hundreds of millions of Czech crowns, it is essential to assess the criteria for tax exemption at the initial stage.
- The conditions for exemption have changed twice in the last two years. Without timely legal assistance, you can easily overlook critical details that may lead to penalties and inspections by the tax authorities.
Facing a similar situation?
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. Current tax rules from 2026 and their impact on sale planning are described 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 exempt from income tax, provided that the share is not and has not been part of business assets. From 1 January 2026, the exemption applies in full regardless of the purchase price.
An expert view on time calculation is crucial in this area. For a founding 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. If you inherited the share from a relative in the direct line or from your spouse, the five-year period is reduced by the time during which the deceased owned the share.
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 exemption does not apply until 5 years have passed since the termination of the activity generating income from self-employment.
Non-monetary contribution and purchase of an additional share: The portion of income corresponding to an increase in the acquisition price of the share through a non-monetary contribution to the company's equity, or through the purchase of an additional share from another shareholder, is not exempt if the sale takes place within 5 years of that contribution or acquisition.
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 CZK 40 million limit applied only for 2025; from 2026 it is abolished for shares
For the 2025 tax period, income of natural persons from the sale of shares, securities and crypto-assets exempt under the time test was exempt only up to a total of CZK 40 million per year. The portion above this threshold was taxed proportionally. The amendment to the Income Tax Act (Act No. 360/2025 Coll.) abolished this limit for shares and securities as of 1 January 2026. Today, the CZK 40 million limit applies only to crypto-assets.
Sale in 2026 or later: if the five-year time test is met and the share is not and has not been part of business assets, the income from the sale of a share in an SRO is exempt in full, regardless of the purchase price.
Sale with income in 2025: the limit applies. Income above CZK 40 million (in aggregate with exempt income from securities and crypto-assets) is taxed proportionally for 2025 at the rate of 15% or 23%. The tax return for 2025 is governed by the wording of the Act effective until 31 December 2025.
The notification obligation remains: exempt income above CZK 5 million must be reported to the tax office (see details below).
What the change means for planning a sale
The recommendation to spread the purchase price over several years in order to use the CZK 40 million limit repeatedly has lost its tax rationale for shares from 2026. Installments, deferred purchase price or earn-out still have their place, but for commercial reasons, for example to secure the buyer or to link the price to the company's future results.
If you sold the share in 2025 and part of the purchase price is paid to you only in 2026 or later, it is necessary to assess which tax period the individual installments belong to. The Act provides that income from installments is included in the period in which it was earned, and for each tax period the wording of the Act effective for that period applies. For large transactions, this is a question worth millions of crowns.
Our lawyers are ready to help you with the preparation or revision of contracts and with the assessment of the tax treatment of individual payments, including the detailed setup of payment terms. Write to consultation@arws.cz.
Risks and Penalties | How ARROWS helps |
Incorrect assessment of the time test, leading to unjustified income exemption and subsequent tax assessment. | Legal opinions on the assessment of meeting the time test and the legal conditions for exemption |
Sale before the time test has elapsed or incorrect taxation of a 2025 sale (CZK 40 million limit), leading to additional tax assessment or unnecessarily high taxation. | Preparation or revision of contracts and assessment of the timing of the transfer and of purchase price payments in relation to the time test and the 2025 regime |
Application of the 23% progressive rate due to a high taxable base in the given year. | Legal consultations that protect against the unnecessary risk of high taxation |
Penalties for incorrect consideration of expenses for the acquisition of the share. | Preparation of documentation that will protect against fines and penalties (e.g., expert opinions for valuation) |
How to minimize the tax base: Strategic application of costs
If the income from the sale of a share is not exempt, only the difference between the income and the expenses is taxed. Typically, this is the case when the five-year time test has not been met, the share is or has been part of business assets, or it is a 2025 sale above the CZK 40 million limit. Correctly determining and documenting expenses is therefore decisive for the amount of tax.
Correct determination of the share's acquisition price
Under § 10(6) of the ITA, for an individual who does not hold the share as part of their business assets, the expense deductible against taxable income from a sale is the acquisition price of the share. What counts as the acquisition price is set out in § 24(7) of the ITA. It typically equals the purchase price, i.e., the price paid when acquiring the share by purchase, and for a founder, the value of the paid-up contribution including other contributions to equity, such as additional capital contributions. For a share acquired free of charge, i.e., by inheritance or donation, the acquisition price is the price determined under the Property Valuation Act as of the date of acquisition.
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. For sales in 2025, when the CZK 40 million cap applied, the market value of the share as of 31 December 2024 could be used instead of the acquisition price (see below). This option ceased to exist from 2026.
Market value as of 31 December 2024: only for sales in 2025
For the 2025 tax period, the law allowed a taxpayer with a share acquired by 31 December 2024 to claim the market value of the share as of 31 December 2024 as an expense instead of the acquisition price. The condition was that the income was included in the tax base only in part, precisely because of the CZK 40 million cap. Expenses are claimed only in the proportion in which the income is not exempt.
Example: a share sold in 2025 for CZK 100 million with the holding period test met. CZK 40 million is exempt and 60% of the income, i.e., CZK 60 million, is taxable. If the market value of the share as of 31 December 2024 was CZK 90 million, 60% of it, i.e., CZK 54 million, can be claimed. The tax base is thus CZK 6 million.
Act No. 360/2025 Coll. abolished this rule, together with the cap, with effect from 1 January 2026. It does not apply to sales from 2026 onwards: if the holding period test is met, the income is exempt in full, and if the test is not met, the expense is the acquisition price.
Valuation: the market value is determined under the Property Valuation Act. In practice, you will support it with an expert opinion that will withstand a tax audit.
Coordination: For the 2025 tax return and any supplementary returns, the valuation, the calculation of the proportional part and the notification of exempt income need to be aligned.
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.
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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, it is subject to progressive taxation for natural persons. Typically, this concerns a sale where the time test has not been met, a share held as business assets, or a sale in 2025 above the CZK 40 million limit. While the basic rate is 15%, the part of the taxable base that exceeds 36 times the average wage (CZK 1,676,052 for 2025 and CZK 1,762,812 for 2026) is taxed at a rate of 23%.
Taxable income from the sale of a share is included in the taxpayer's total tax base together with their other income. In a taxable sale at a higher price, the seller will therefore almost always exceed the threshold for the 23% rate. This makes it all the more important to monitor the time test and, in a taxable sale, to properly document the acquisition price.
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 CZK 5 million, they must report this income to their tax authority by the deadline for filing the tax return for the year in which the income was received. The obligation applies even if the income was fully exempt, for example, by meeting the time test. Since from 2026 the entire income from the sale of a share is exempt once the test is met, the notification duty will apply to practically every such sale exceeding CZK 5 million.
Penalty for non-notification: Non-notification carries a penalty of 0.1% of the unreported income if you subsequently fulfil the obligation on your own without being requested to do so, 10% if you fulfil it only within the substitute deadline after a request from the tax administrator, and 15% if you fail to fulfil it even within the substitute deadline. 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.
Risks and Penalties | How ARROWS helps |
Penalty for failing to report exempt income over CZK 5 million to the tax authority (§ 38v of the ITA). | Representation before registers and regulators, including fulfilling the notification duty |
Tax assessment and penalties and late payment interest in case of unjustified application of exemption or expenses. | Legal consultations that protect against fines and audits, and, if necessary, representation before administrative authorities |
Inability to prove the market value as of 31 Dec 2024 for a 2025 sale above the CZK 40 million limit, typically due to a missing expert opinion, with the risk of a tax assessment. | Preparation of documentation that protects against fines and penalties (coordination of an expert opinion and provision of legal documentation) |
Inappropriate argumentation during a tax audit, leading to failure in defending the exemption. | Representation before courts and administrative authorities in tax disputes |
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.
Risks and Penalties | How ARROWS helps |
Incomplete documentation of the acquisition price in cases where the share was acquired by inheritance or donation and the necessary documents for valuation as of the date of acquisition are missing. | Preparation of documents required by law to prove the acquisition price |
Taxation abroad as a result of incorrect application of a Double Taxation Treaty (DTT) or the land-rich company rule. | Legal advice on international transactions and resolving double taxation issues within ARROWS International |
Tax risk associated with employee benefits (ESOP, options) if they are part of an SRO sale or M&A. From 2026, the time test exemption does not apply to a share acquired by exercising a qualified employee option. | Preparation of internal directives and expert training for management to minimize the risk of penalties. |
Financial penalties due to the failure to apply the acquisition price to the exceeding taxable portion of the income. | Preparation of documentation that will protect against fines and penalties and ensure the correct application of expenses |
Your step towards a safe share sale
The taxation of selling a business share in an SRO requires timely and precise planning. The CZK 40 million limit applied to shares only for 2025, and from 2026 the entire income is exempt if the five-year time test is met. This makes it all the more important to calculate the time test correctly, not to overlook business assets, and to report exempt income exceeding CZK 5 million. For sales made in 2025, the market value as of 31 December 2024 must also be applied correctly.
We summarize the current rules following the abolition of the limit in the article how the taxation of income from the transfer of a share in an s.r.o. and the sale of shares is changing again from 2026, and the changes for 2025 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.
About the author
Disclaimer:
The information contained in this article is for general informational purposes only and serves as a basic guide to the issue as of 2026. Although we strive for maximum accuracy, laws and their interpretation evolve over time. We are ARROWS Law Firm, a member of the Czech Bar Association (our supervisory authority), and for the maximum security of our clients, we are insured for professional liability with a limit of CZK 350,000,000. To verify the current wording of the regulations and their application to your specific situation, it is necessary to contact ARROWS Law Firm directly (consultation@arws.cz). We are not liable for any damages arising from the independent use of the information in this article without prior individual legal consultation.