You want to withdraw money from the company, but not sell your share –

What a leveraged capital withdrawal solves and what it does not

This operation is a response to a situation familiar to most owners of established companies: undistributed profit has been sitting in the accounts for years, the company has stable operations, but the owner cannot access the money because it is tied up in working capital and assets. They do not want to sell the company because they want to continue managing it. The solution is to leverage the company against its own future cash flows and use the loan proceeds to make a distribution to the owner. The owner gains liquidity that they would otherwise only receive upon a sale.

However, this operation does not solve a lack of profit. If the business is not profitable, no structure can create money; it only shifts the risk to the creditor and ultimately to the statutory body. It also does not resolve conflicts between shareholders, as profit distribution typically requires a decision by the supreme body passed by the necessary majority. The typical reason owners consider it is for a generational or investment decision. The owner wants to buy real estate, settle a divorce, or finance succession, but does not want to relinquish control or bring in an investor.

The second reason is often to prepare for a later sale. A leveraged withdrawal allows a portion of the value to be extracted earlier, and a smaller amount is negotiated during the actual sale, which simplifies negotiations with the buyer in some structures. The English term "dividend recapitalisation" is also used in banking practice for an operation where a loan finances a distribution to the owner without changing the ownership structure. The insolvency test is a check to ensure that the corporation does not cause its own bankruptcy by making the payment.

Three ways for capital to reach the owner

The first way is a regular distribution from own resources, without a loan. It is the simplest but is limited by the amount of free cash the company has. Our article on profit distribution and payment in LLCs and JSCs describes it in detail. The second way is a loan. The bank provides it against cash flows and security, the company makes the distribution to the owner, and repays the debt from its operations. The owner retains their share and, in a later sale, sells a company that has already paid out part of its value.

The third way is a partial sale of a share to an investor. The owner receives money from a third party, the company does not take on debt, but the owner loses some control and gains a partner in decision-making. The choice between them is not a matter of taxes, but of risk. With the loan-based approach, the risk is borne by the company and its creditors. With a partial sale, the risk is borne by the owner, who shares in future growth. This is a decision for the owner, not for the accountant.

In practice, the second and third ways are often combined. The owner first withdraws an amount via a loan that the company can safely handle, and addresses the rest by bringing in an investor or through a sale a few years later. The order of these two steps affects both the economics and the terms of the subsequent transaction, as debt changes the valuation, and the entry of an investor retroactively changes the credit capacity and the cost of financing. Both the buyer and the investor are evaluating the same company, just at a different point in its indebtedness.

Four tests the company must pass

The following tests describe the typical procedure for an established manufacturing or trading company; their order and weight vary depending on whether the company already has bank financing and whether it is part of a group. That is why the lawyers at ARROWS law firm assess them for each company individually. The first test is the source test. In a capital company, the amount to be distributed may not exceed the sum of the profit/loss from the last completed period, retained earnings from previous years, and other funds that can be used at discretion, reduced by mandatory allocations under Section 34 of the Business Corporations Act.

The second test is the balance sheet test and has two levels. After the distribution, equity must not fall below the amount of the subscribed share capital plus any funds that cannot be distributed. Furthermore, if the balance sheet shows development costs in assets, the amount available for distribution is reduced by their yet unamortised portion. A decision made in violation of either of these conditions has no legal effect. Companies with capitalised development often encounter the second condition only when preparing documents for the bank.

The third test is the insolvency test, and the entire operation is based on it. A corporation may not pay out a share of profit or other own resources if it would thereby cause its own bankruptcy; the same applies to an advance payment under Section 40 of the Business Corporations Act. This prohibition protects creditors and therefore cannot be circumvented by an agreement with a shareholder or a resolution of the supreme body.

The fourth test is an operational test and is not prescribed by law. It is about whether the company can bear the loan repayments even in a worse year. The bank will always perform it; the management should do it before the bank does. The difference from the previous three is that its result is not a prohibition, but a business decision about a safe level of debt, which no one else will make for the management.

In addition to the tests under the Business Corporations Act, there is one more condition that is often forgotten during preparation. If the ultimate beneficial owner is not registered in the register of beneficial owners, the corporation may not pay them a share of profit or other own resources; the same applies to a recipient who themselves has no registered beneficial owner. Moreover, the right to such an unpaid share expires at the end of the accounting period in which the payment was decided upon (Section 53 of the Act on the Registration of Beneficial Owners).

Crucially, these tests are not all assessed at the same point in time. The source and balance sheet tests limit the very decision to distribute; the law formulates them as a prohibition on distributing profit or other own resources. The insolvency test, on the other hand, is a test of payment: the company must not pay out the share if it would cause its own bankruptcy. There are often weeks between the decision and the payment, and the company's condition can change during that time.

For payments in tranches, it is therefore necessary to repeat the insolvency and operational assessment before each individual payment and to record its result. This is an organisational conclusion that companies most often underestimate, as they assign the test to the accounting department and consider it done once the general meeting has made its decision. The resolution of the general meeting alone is therefore not sufficient proof that the conditions were also met on the day the money was sent.

The line that the Business Corporations Act will not let you cross

The statutory body is not merely an executor in this operation. It decides on the payment, and if the distribution is contrary to the law, the shares are not paid out. It is presumed that the members of the statutory body who consented to such a payment did not act with the due managerial care. This is the core of the liability risk. The general meeting can decide on the distribution, but the statutory body that carries out the payment despite a failed test bears the consequences itself.

The second line is financial assistance, i.e., the provision of an advance, loan, credit, or security by the corporation itself for the purpose of acquiring its shares. The rule prohibiting causing one's own bankruptcy applies to it as well, as per Section 41 of the Business Corporations Act. The decisive factor is that the financing or security is provided by the affected company itself. A standard acquisition loan that a buyer takes from a bank is not financial assistance, unless the target company itself secures or otherwise finances it.

Financial assistance has its own approval regime, and it is not a formality. For a limited liability company, the law requires fair conditions, a written report from the executive director with a substantive justification, approval by the general meeting, and filing of the report in the collection of deeds. For a joint-stock company, the articles of association must also permit assistance, the board of directors must investigate the financial capacity of the recipient, the general meeting decides by a two-thirds majority, and the company creates a special reserve fund in the amount of the assistance provided.

The third line is the prohibition of gratuitous payments to a shareholder, from which the law allows only narrow exceptions, such as a reasonable occasional gift. An operation that appears in the documentation as something other than a distribution to the owner runs into this issue, and it does not help that the parties intended something else.

The last line is time-related. The right to a share that was not paid out due to the threat of bankruptcy expires at the end of the accounting period. Deferring the payment to better times is therefore not possible. In addition, there is a deadline for the distribution itself. Based on ordinary or extraordinary financial statements, profit and other own resources can be distributed until the end of the accounting period following the period for which the statements were prepared. An operation based on older financial statements will therefore not pass.

The tax layer: when interest ceases to be an expense

A loan only makes sense if the interest is tax-deductible. Case law has already resolved the fundamental question in favour of companies. The Supreme Administrative Court, in its judgment Ref. No. 5 Afs 25/2009 of 25 March 2010, concluded that interest and other reasonably incurred costs for financing the payment of profit shares to shareholders are an expense incurred to achieve, secure, and maintain taxable income, provided that the payment was decided upon in accordance with the law.

The condition in the cited sentence is commercially important. The legality of the decision to pay and its execution is a significant prerequisite for defending the tax deductibility of the financing. A flawed payment will therefore not only cause a corporate problem but will also jeopardise the tax effect of the entire operation. Whether the interest will stand up to scrutiny depends, among other things, on who the creditor is and how the rate is set — that is why the lawyers at ARROWS law firm assess the structure from both a corporate and tax perspective at the same time.

The Income Tax Act further limits deductibility: the financial result is increased by the positive difference between excessive borrowing costs and a limit, which is the higher of 30% of tax EBITDA (earnings before interest, taxes, depreciation, and amortisation), or CZK 80,000,000, under Section 23e of the Income Tax Act. The amount disallowed in one period is not lost; under conditions set by law, it can be used to reduce the tax base in subsequent periods.

For most medium-sized companies, the second threshold is decisive, and the limit is in practice only reachable with very high levels of debt. However, for companies within a group, intra-group interest is added to the bank loan, and the picture changes. An exception to this regime can be used mainly by a stand-alone company that at the same time has no associated person or permanent establishment, is not subject to consolidation, and is not a consolidating entity.

In addition, the thin capitalisation rule for loans from related parties and the arm's length principle, which applies to the interest rate, are also in effect. A loan channelled through one's own holding company is therefore significantly riskier from a tax perspective than a loan from a bank to the operating company. The final layer is the taxation of the distribution on the owner's side; the context is described in our text on progressive tax and its impacts on managers, investors, and dividends.

What happens if the company ends up in insolvency after the payment

This is the scenario for which these operations are documented more carefully than others. The insolvency administrator may, depending on the circumstances, examine the fulfilment of three legal bases, and the article would be incomplete if it mentioned only one of them. The first is a legal act without adequate consideration, the second and most common in practice for profit distribution is a preferential legal act. For both, under Sections 240 and 241 of the Insolvency Act, an act made in the last three years before the initiation of insolvency proceedings in favour of a related person or a person forming a concern with the debtor can be challenged, and within one year in favour of another person.

The third way is an intentionally detrimental legal act, for which the decisive period is five years. The three-year horizon that companies count on is therefore not the final limit. For payments made to a related person or a person within the concern, it is also presumed that the debtor made them at a time when they were bankrupt, and the burden of proof shifts to the recipient of the payment. For other recipients, this presumption does not apply, and the insolvency administrator must prove bankruptcy at the time of payment.

Case law shows that both the decision and the payment can be challenged. In a case assessed under the Commercial Code effective until 31 December 2013, the Supreme Court, in its judgment Ref. No. 29 ICdo 6/2012 of 31 March 2014, concluded that a decision of the general meeting or a sole shareholder acting in its capacity regarding profit distribution can also be challenged by an avoidance action. For today's corporate regulations, this is strong guidance, but not a direct precedent.

The second decision targets the payments themselves. In its resolution Ref. No. 29 ICdo 35/2017 of 24 October 2018, the Supreme Court classified profit share payments to a sole shareholder as a preferential legal act and confirmed the obligation to surrender the acquired benefit to the insolvency estate. These were payments made at a time when the debtor had not been paying its debts for more than three months past their due date.

The evidence that the company was not bankrupt at the time of payment is created at the moment of payment, not three years later. It includes interim financial statements, a list of due liabilities as of the payment date, a certificate of no debts to public creditors, and a financial model with a repayment schedule. None of these alone disproves bankruptcy, as that is assessed according to the legal signs of insolvency and over-indebtedness. Together, however, they are the strongest material that will stand up to scrutiny years later.

Whether the payment will withstand later scrutiny depends on the company's condition on the date of payment and whether the recipient is a related person or a person within the concern. The same file also serves a second purpose: the statutory body uses it to prove that it acted with due managerial care when deciding on the payment, regardless of the company's fate.

Five mistakes that will make the operation more expensive or stop it

Mistakes in these operations do not arise from the decision of whether to proceed, but in the execution. All five below are repeated regardless of the size of the company, and each has a quantifiable cost. Which one threatens a specific company depends on whether it is in a group and how long it has had bank financing — that is why the lawyers at ARROWS law firm review this at the beginning, not when the loan is being drawn down.

The first is payment without a separate insolvency test on the date of payment. The general meeting decides, the money is sent out the same week, and no one re-verifies whether the company still meets the condition on the day of payment. The law does not prohibit executing the decision and payment on the same day; the mistake is that the test on the date of payment is not performed and no record of it is kept. The statutory body thereby loses the strongest evidence it would have at its disposal.

The second mistake is using outdated financial statements. The company bases the entire operation on figures that can no longer serve as a basis for distribution and discovers this when the bank asks for proof of the source of the payment. The third mistake is financing through a holding company without a tax assessment: the loan is taken out by the parent company, which then lends to the subsidiary, and the interest rate is set arbitrarily. The tax administrator then assesses the arm's length nature of the rate and the deductibility limit, and makes a retroactive assessment for the entire period, including penalties.

Related to the third mistake is a separate tax trap that most owners are unaware of. Interest on a loan received by a parent company within six months before acquiring a share in a subsidiary is considered an expense related to holding that share, unless the taxpayer proves that the loan is not related to the shareholding, under Section 25 of the Income Tax Act. This rule does not apply to a subsidiary that takes out a loan itself to pay its parent.

The fourth mistake is signing covenants based on an optimistic model. The company commits to maintaining a debt ratio that it can only sustain with planned growth, and a breach occurs in the first weaker year. The price is not just a penalty, but the loss of negotiating power with the bank at a time when the company is most vulnerable. The fifth mistake is a lack of solvency documentation: the supporting documents from the date of payment are very difficult to find years later, and for a recipient who is a related person or part of a concern, the burden of proof lies with them.

Risks of a leveraged capital withdrawal for the company and its management

Three numbers that management must calculate in advance

The first number is the available amount according to the source and balance sheet tests. This is not the undistributed profit from the balance sheet, but the value that passes both legal limits simultaneously. This number is the ceiling for the entire operation, and a loan does not increase it. The second number is the annual debt service in a pessimistic scenario. If the company cannot handle the repayments with a 20% drop in revenue, a structure set up for an optimistic model is not financing, but a postponement of the problem.

The third number is the net return for the owner after taxes. Without it, it is impossible to compare the loan-based approach with a partial sale of a share, and that is precisely the decision the owner should make first. All three numbers are generated before negotiating with the bank, because the bank will not calculate them for the management. Our text on profit distribution in 2026 for the year 2025 summarises the context regarding timing.

Final summary

A leveraged capital withdrawal is a tool for an owner to extract part of their company's value without selling a share or relinquishing control. The article has shown that the maximum amount is determined by the legal limits for the distribution of profit and other own resources, while a loan provides the liquidity for their payment, and its safe amount is determined by the operational capacity to repay. The source and balance sheet tests limit the distribution decision itself, while the insolvency test applies to the moment of each individual payment.

The second half of the decision is tax and insolvency-related. According to administrative case law, interest on a loan for profit distribution is, in principle, a deductible expense, but only if the distribution decision is lawful and within the limits for excessive borrowing costs. Furthermore, a distribution to an owner can be retroactively challenged if the company runs into trouble, within a horizon of up to five years. Both issues are addressed at the time of payment, not later.

For owners and executive directors, this is a decision with two horizons. In the short term, it is about liquidity without loss of control; in the long term, it is about the company carrying a debt that a buyer will factor into the price in a later sale. Postponing the decision is a legitimate choice; carrying out the entire operation without calculating both horizons is not.

The cost of a mistake can fall on both the company and personally on the members of the statutory body. The company loses assets that may not be returned, and the members of the statutory body face a legal presumption that they did not act with due managerial care. The most effective defence is documentation created at the right time.

The lawyers at ARROWS law firm prepare corporate documentation for these operations, assess the structure from a legal and tax perspective, negotiate terms with the financing bank, and represent clients during audits and in incidental disputes. The firm also connects clients who are looking for an investor, buyer, or business partner. If you want to verify how much debt your company can handle and how to document the operation, write to us at consultation@arws.cz or browse our practice in corporate law, holdings, and structures.