Tichý společník vs. zápůjčka společníka

Key Differences: What you need to clarify right at the start

Before you start comparing tax benefits, you must understand that a silent partnership and a shareholder loan are two completely different transactions from a legal perspective. They are regulated by different provisions under Czech legislation, and their legal effects in practice differ substantially.

What is a silent partnership?

A silent partnership under Section 2747 et seq. of the Civil Code is not a legal entity. It is a contractual relationship between an entrepreneur and a silent partner, where the silent partner undertakes to provide a contribution and thereby participates in the entrepreneur's business results. In return, the entrepreneur undertakes to pay the silent partner an agreed share of the profit.

Key characteristics of a silent partnership:

• Unlike a classic loan, your income depends on the actual business results.

• The silent partner bears the risk of loss, and their contribution is reduced by their share of the loss.

• The silent partner has no right to directly decide on the operation of the business, but has a statutory right to inspect business documents.

A silent partnership agreement does not require a written form under penalty of invalidity, unless it concerns real estate. In business practice, however, a written form is an absolute necessity for legal certainty. When setting up relations between a partner and a company (including links to the memorandum of association and internal rules), corporate law, holdings and structures typically also apply.

What is a shareholder loan?

A loan is regulated in Section 2390 et seq. of the Civil Code. It is a relationship where a shareholder provides money to the company with the understanding that the company will return it after some time, possibly with interest.

Key characteristics of a loan:

• The loan is recorded as a liability of the company towards the shareholder.

• You have clearly agreed how much the company owes, and the obligation to repay the principal does not depend on the company's profit.

• The shareholder, as a creditor, does not participate in the company's operating loss.

• For a monetary loan, interest can be agreed, but it can also be zero.

A loan agreement should be in writing to be provable to the tax authority and for potential disputes. If you are dealing with setting up contractual documentation, interest, or enforcement of performance between a shareholder and a company, it may be useful to link to the area of commercial and litigation disputes.

Tax Aspects: Where they really differ

Now to the matter that every entrepreneur and manager should know. This is where the differences in tax consequences manifest most dramatically.

Silent partnership and taxation of profit share

When a company in which you are a silent partner generates a profit and an entitlement to its distribution arises, this is considered income from capital assets. Under Czech legislation, this income is subject to a 15% withholding tax under the Income Taxes Act.

What does this mean in practice?

Let's say you are a silent partner with an entitlement to a profit share of CZK 100,000. The company, as the tax payer, withholds the tax, so you receive the net amount already reduced by the withholding.

The entrepreneur remits this withholding tax to the tax authority. For the silent partner, the tax liability is thereby settled, and the income is not reported in the tax return.

On the company's side, the profit share paid to the silent partner is a non-tax-deductible expense. The company first pays corporate income tax on this profit and only pays the share to the silent partner from the net profit.

Shareholder loan and tax solutions

Here, the situation is more variable. The shareholder and their company are so-called related parties, which brings specific rules, especially regarding interest. If you are dealing with setting up interest, withholding tax, or the impacts of rules for related parties, it is advisable to rely on tax law.

1. Interest-free loan from a shareholder

This is a very common model in practice, where a shareholder puts money into the company and does not want interest. The good news is that the company's property benefit, consisting in not having to pay interest, is exempt from income tax.

This means:

• The company does not have to "tax" the fictitious interest it saved.

• The shareholder has no income, so they pay no tax.

• It is the tax-wise simplest way to get money into the company.

2. Interest-bearing loan from a shareholder

If a shareholder wants to obtain a yield from the money put into the company, they must watch out for two limits. The first is the arm's length price.

If a shareholder lends to the company, the interest should not be higher than the arm's length rate. If the shareholder agrees on an interest rate significantly higher than the arm's length rate, the tax authority would assess the difference as a disguised profit distribution.

The second limit is thin capitalization. Interest on credit financial instruments from related parties is a tax-deductible expense for the company only up to a certain amount. The limit is set by a debt-to-equity ratio of 4:1. The connection between shareholder financing and tax rules (including situations involving changes in company structure) is also discussed in the article Tax Impacts of Mergers and Demergers: How to Comply with Tax Neutrality Rules in Reorganizing Corporate Structures.

An example would be a company with equity of CZK 1 million. Interest on the amount exceeding four times the equity will be a non-tax-deductible expense for the company.

3. Paid vs. Accrued Interest

For interest on loans from related parties, the rule is that they are tax-deductible on the company's side only if they were actually paid in the given tax period. It is therefore not enough to just record them as "accrued".

Legal Risks: What happens in case of a wrong choice

Silent Partnership: Liability

If the silent partner participates in the business in such a way that their name is included in the business name of the entrepreneur, or if they declare to a third party that they are doing business jointly, they are liable for debts without limitation.

Clarify whether such potential liability is an obstacle for you. The Czech legal team at ARROWS can design alternative structures for you.

Loan: Risk when a company lends to a shareholder

Be very careful about the opposite situation, where a shareholder borrows money from their own company. Here, the exemption for interest-free loans does not apply as it does the other way around.

If a shareholder borrows from their s.r.o. interest-free, they generate taxable income in the amount of the arm's length interest they saved. They must tax this income in their tax return, and at the same time, the company must comply with conflict of interest rules.

When to choose a silent partner and when a standard loan

A silent partnership pays off when:

• You want to motivate an investor with a share in the success and unlimited yield potential.

• You do not want to burden cash flow with fixed installments, as you only pay the share from profit.

A loan pays off when:

• You want simplicity and tax efficiency, especially with the interest-free option.

• You want to return the money tax-free, as the return of the principal is not subject to tax.

• The investor does not want to bear business risk and prefers an entitlement to have the money returned.

Most Common Mistakes and How to Avoid Them

Mistake No. 1: Verbal agreement and missing documentation

Relying on the idea that you do not need paper because it is your company is a common mistake. The tax authority requires proof during an audit. If you do not have a loan agreement, the tax administrator may consider the money as unclear income.

Always have a written agreement with a date and signatures to prevent issues during a tax audit.

Mistake No. 2: Ignoring arm's length interest rates

If you agree on an interest-bearing loan, the interest rate must correspond to market conditions at the given time and place. An excessively high interest rate paid to a shareholder will be reclassified as a disguised dividend and tax-disallowed.

Before setting the interest rate, conduct market rate research or consult a tax advisor. The lawyers at ARROWS will help you set the interest rate so that it is defensible before the authorities.

Table: Main risks and how to defend against them

Shareholder's interest in sharing losses

In a silent partnership, the silent partner must by law participate in the loss. Any contractual provision that would completely exclude a share in the loss is disregarded.

How the share of loss is calculated

The silent partner participates in the loss in the same proportion as they participate in the profit. In practice, the silent partner's contribution is reduced by their share of the loss.

What happens when the contribution is exhausted

If the share of the loss reaches the amount of the silent partner's contribution, their participation in the silent partnership terminates, unless they replenish the contribution. However, the silent partner is not obliged to replenish the contribution beyond the scope of the original agreement, nor do they participate in the loss with their other personal assets.

Final Summary

Deciding between a silent partnership and a shareholder loan is a matter of priorities. A silent partnership is suitable for investors willing to share risk, while a loan offers flexibility and tax efficiency.

If you want to avoid mistakes and ensure that your financing is legally and tax-wise secure, contact the lawyers at ARROWS law firm.

Our corporate and tax law specialists will help you choose the right model and prepare secure agreements. We will also set interest rates and conditions in compliance with the law.

Write to us at consultation@arws.cz or request a consultation.