How to set up a holding company correctly: so that it protects assets and does not complicate the management of the company

Are you considering a holding structure but unsure if it is suitable for your company or what steps to take? In this article, you will find specific answers on how a holding structure effectively protects your assets under Czech law, enables legal tax optimization, and simplifies the management of the entire group. We will guide you through key models, highlight legal risks, and show you how to avoid complications that could jeopardize your entire business in the Czech Republic.

Do you need advice on this topic? Contact our Prague-based law firm ARROWS at office@arws.cz or by phone at +420 245 007 740. Your inquiry will be handled by "JUDr. Jakub Dohnal, Ph.D.,LL.M.", an expert on the Czech legal system and holding structures.

What is a holding structure and why should you be interested?

Simply put, a holding structure is an organizational arrangement where one parent company owns equity stakes in one or more subsidiary companies. This creates a group of legally independent firms that are linked by capital and often strategically. It is important to realize that a holding is not a specific legal form, but a way of organizing your business in the Czech Republic.

Although the Czech legal system does not directly define the term "holding", its operation is regulated in detail in the Business Corporations Act (BCA), specifically in the provisions on related parties, starting from Section 71. Here we come to a key distinction you must know – the difference between a holding and a concern (group).

A holding is primarily an economic concept describing an ownership structure. In contrast, a "concern" is a legal term defined in Section 79 of the BCA, which arises if companies are subject to unified management. This difference is not merely academic. Many entrepreneurs unknowingly fulfill the characteristics of a concern through their management style without formally declaring it. By doing so, they expose themselves to stricter liability rules for potential harm caused to a subsidiary, without being able to utilize the legal protection mechanisms that a declared concern offers under Czech law.

Correct setup and understanding of these rules is essential for minimizing the personal liability of management. Our experts in Corporate & Holding services in the Czech Republic can assist you in establishing these management processes correctly. At ARROWS, our Prague-based attorneys will help you safely identify this boundary and set up management processes to avoid unwanted legal consequences. Do you need legal assistance? Contact us at office@arws.cz.

FAQ – Legal tips on holding basics

• Does a holding need to be specially registered?
  No, a holding as such is not registered. It is a structure made up of standard registered business companies. However, professional legal assistance is key to correctly setting up the relationships between them, which our Czech legal team will be happy to provide. Write to us at office@arws.cz.
• Is a holding suitable for a smaller company?
  Yes, holding models can be effectively adapted for small and medium-sized enterprises. Especially if you own valuable assets, plan to grow, or are preparing the company for an investor's entry or sale. Need to assess suitability for your firm? Connect with our Prague-based law firm at office@arws.cz and get a tailored legal solution.

Strategic goals: When does a holding become a necessity?

Creating a holding is not just an administrative change, but a strategic decision that addresses several key needs of a growing business. Find details on the fiscal aspects of these transitions in our article on Tax Implications of Closing a Company in the Czech Republic. The most common reasons our clients choose this path are asset protection, tax efficiency, and preparing for the future.

Maximum asset protection

This is the most frequent and important motivation. A holding allows for the strict separation of valuable assets (real estate, patents, trademarks, machinery) from operational risks. In this area, ARROWS provides Real Estate Law expertise to help secure your property assets within the structure. Assets are held safely by the parent company, while risky business activities, such as new projects or contracts, take place in separate subsidiary firms. In the event of failure or insolvency of one subsidiary, creditors cannot reach the assets of the parent or other sister companies under Czech insolvency law. For more information on maintaining regulatory standards, see our Holding Structures and Beneficial Ownership in the Czech Republic: Compliance Checklist.

Tax efficiency in practice

A correctly configured structure brings significant and entirely legal tax advantages. Profits can be reinvested within the group more efficiently and without unnecessary tax burden. Key benefits include the exemption of dividends paid by a subsidiary to the parent (when holding at lea You might be interested to know that ARROWS offers comprehensive Tax Consultancy services to optimize these financial flows.st a 10% stake for 12 months) and also the exemption of income from the sale of a stake in a subsidiary. This is crucial for flexible financing, as well as for the future sale of the company.

Preparing for the future

A holding structure prepares your company for key life cycles. It simplifies the entry of an investor, who can choose whether to invest in the entire group or just one specific subsidiary. It also significantly facilitates the sale of part of the business – instead of a complex demerger, you simply sell the entire subsidiary. For family businesses, it is also an ideal tool for intergenerational transfer and protecting assets from unwanted division.

Simplification of management and synergies

In the so-called operating model, the parent company can centralize shared services such as accounting, HR, IT, or legal departments. This leads not only to cost savings but also to unified strategic management and faster decision-making across the entire group.

The process of creating a holding structure naturally compels you to organize and document all assets and liabilities. This serves as a form of internal due diligence, which not only streamlines company operations but also ensures the business is constantly transaction-ready, whether for a sale or an investor's entry. At ARROWS, our Prague-based attorneys will help you set up this process not just as a legal restructuring, but as a strategic tool to increase the value and stability of your business in the Czech Republic. For an immediate solution to your situation, please write to us at office@arws.cz.

Three proven holding models: Which one is right for you?

There is no one-size-fits-all solution. Choosing the right model depends on your specific goals – whether it is asset protection, management efficiency, or tax optimization under Czech law. Here are three basic models we most frequently encounter in practice.

Model 1: Pure Holding

In this model, the parent company carries out no operating activities of its own. Its sole purpose is to hold and manage valuable assets – real estate, intellectual property, investments, and shares in subsidiary companies. All commercial and operational risk is thus completely isolated within the subsidiaries. This model is ideal for companies with high-value assets, entrepreneurs in high-risk sectors (construction, manufacturing), and family businesses seeking maximum protection of family wealth in the Czech Republic.

Model 2: Operating Holding

Here, the parent company plays an active role. It not only owns shares but also strategically manages and coordinates its subsidiaries. It often provides centralized services (finance, HR, marketing, IT), achieving significant savings and synergies. This model is suitable for growing companies with multiple divisions or those expanding into new markets that wish to maintain strong central control and optimize administrative costs under Czech commercial law.

Model 3: Mixed Holding

As the name suggests, this model combines elements of both previous types. The parent company may hold key assets while also performing certain operational or management activities, such as strategic planning or development for the entire group. This is a flexible solution that can be adapted to the specific needs of the enterprise.

Choosing and correctly setting up the model is crucial for the future functioning of the entire group. Our Czech legal team at ARROWS analyzes the specific goals and situation of each client to design a tailor-made structure that is not only functional but also legally and tax-robust. Do not hesitate to contact our law firm in Prague – office@arws.cz.

The biggest risks and how to avoid them: A practical perspective

A holding structure is a powerful tool, but if set up incorrectly, it can become a source of serious problems. The greatest threats lie in the tax area and the complexity of intra-group relations. Understanding these risks and prevention is the foundation of success.

Abuse of law: The thin line between optimization and sanctions

The biggest risk is that the Czech Financial Administration may label your structure as artificial with the aim of abusing the law. According to Section 8 of the Czech Tax Code, the tax administrator can ignore legal transactions whose prevailing purpose is to obtain an unauthorized tax advantage. This can lead to tax assessments, penalties, and late payment interest.

Fortunately, recent landmark case law from the Supreme Administrative Court of the Czech Republic (e.g., judgment No. 10 Afs 16/2023-78) has brought more legal certainty to this issue. The court confirmed that a holding is a standard and legitimate way of structuring a business. Achieving a tax advantage is not an abuse of law in itself if there are compelling economic, strategic, or other rational reasons for establishing the holding.

The key to a successful defense is the ability to prove these non-tax reasons at any time. Our Prague-based attorneys and tax advisors will help you prepare robust documentation (meeting minutes, strategic plans, communication with banks) that demonstrates the legitimate purpose of your holding structure and protects you from challenges by Czech tax authorities.

Tax and regulatory threats

Transfer pricing: The hidden threat of intra-group transactions

Another area under the scrutiny of Czech tax authorities is transfer pricing. These are the prices at which companies within a holding group provide goods, services, or financing to each other. These prices must comply with the "arm's length principle," meaning they must be set as if two independent companies were dealing with each other. Incorrect settings can be considered an artificial shifting of profits and lead to tax assessments under Czech tax law.

Operational and legal complications

FAQ – Legal tips for risk management

• What is a report on relations?
  It is a statutory obligation for a controlled entity to prepare a report on relations with related parties for the past accounting period (Section 82 of the Czech Business Corporations Act). Its goal is to ensure transparency within the group. ARROWS can assist you with the preparation of this report; contact us at office@arws.cz.
• How to defend against allegations of abuse of law?
  The key is to have all real commercial and strategic reasons for establishing the holding carefully documented from the beginning. Although the burden of proof lies with the tax administrator, your preparedness and high-quality documentation are the best defense. Our Czech legal team is ready to help – write to office@arws.cz.

Who can you contact?

JUDr. Jakub Dohnal, Ph.D., LL.M.

associate, managing partner

• dohnal@arws.cz

JUDr. Ondřej Stehlík, LL.M., MBA

associate, partner

• stehlik@arws.cz

Holdings with an international reach: How to proceed with ARROWS International?

In today's global world, international expansion is a natural step for many successful companies. A holding structure is an ideal platform for managing foreign subsidiaries and entering new markets. However, international presence brings a new layer of legal and regulatory obligations that must be met flawlessly.

Thanks to our ARROWS International network, built over ten years, we handle cases with international elements daily and can provide comprehensive legal and tax advice directly in the given jurisdiction. Whether you plan to establish a branch in Germany, Slovakia, or anywhere else, our experts will ensure a smooth and secure process.

With an international structure, you cannot avoid fulfilling strict regulatory rules. The most important include:

• Ultimate Beneficial Owner (UBO) registration: The obligation to identify and register the ultimate owner is Europe-wide. Failure to comply can lead to a ban on profit distribution or the exercise of voting rights.
• Common Reporting Standard (CRS): A system for the automatic exchange of financial account information between tax administrations, which practically makes it impossible to hide funds abroad.
• Controlled Foreign Company (CFC) rules: These rules prevent the artificial transfer of profits to tax havens and can lead to the taxation of a foreign subsidiary's income in the Czech Republic if it does not perform real economic activity abroad.

Our experts within the ARROWS International network will ensure that your international structure is fully compliant with all local and international regulations, from the establishment of a foreign company to the fulfillment of reporting obligations. For international legal solutions, contact us at office@arws.cz.

Holding as a strategic tool, not just a legal formality

A correctly structured holding company is one of the most powerful tools available to the modern entrepreneur. It is not merely a defense against risks or a way to legally optimize taxes under Czech law. Above all, it is a strategic platform for future growth, flexible management, and the long-term stability of your business in the Czech Republic.

Our experience in the long-term portfolio management of more than 150 joint-stock companies and 250 limited liability companies gives us unique insight into the practical needs of entrepreneurs. We understand that every company is unique, which is why our Czech legal team approaches every client individually. We pride ourselves on speed, high quality, and, above all, clear communication.

At ARROWS, we also believe in the power of connection. We connect our clients when we see interesting investment or business opportunities, and we are always happy to hear your business ideas.

Whether you are just considering establishing a holding company or need to revise your existing structure, our Prague-based attorneys are ready to provide expert consultation. Contact us at office@arws.cz and take the first step toward a more secure and efficient future for your business.

FAQ – Frequently Asked Legal Questions Regarding Holding Structures in the Czech Republic

1. How long does it take to set up a holding structure?
   The process depends on the complexity. Establishing a new parent company (s.r.o. or a.s.) under Czech legislation is a matter of a few weeks. Subsequent share transfers or restructuring may take longer. With the help of ARROWS, the entire process can be significantly accelerated. If you are dealing with a specific timeline, contact us at office@arws.cz.
2. What are the initial costs of creating a holding company?
   Costs include fees for incorporating the new company, potential expert opinions for valuing the contributed shares, and legal fees. However, this investment usually pays for itself quickly through tax savings and asset protection. For an individual calculation, please contact office@arws.cz.
3. Does the holding (parent) company need to have its own employees and office?
   Not necessarily, if it is a so-called "pure holding," whose sole purpose is asset management. Even such a structure is fully legitimate according to the case law of the Czech Supreme Administrative Court. However, it is necessary to be able to demonstrate its real function and purpose. Do you need to assess your situation? Write to us at office@arws.cz.
4. Can I pay out profits from a subsidiary directly, without involving the parent company?
   Yes, but you will lose a key tax advantage. Direct payment of profit to a natural person is subject to withholding tax, whereas payment to a parent company is exempt from tax under specific conditions of the Czech tax code. For effective tax optimization setup, contact us at office@arws.cz.
5. What happens if one of my subsidiaries goes bankrupt?
   Due to the legal separation of individual entities, the bankruptcy of one subsidiary generally does not jeopardize the parent company or other subsidiaries. Assets held in the parent company are thus protected from the creditors of the bankrupt firm. For a detailed risk analysis, contact office@arws.cz.
6. How difficult is it to dissolve a holding in the future?
   Dissolving the structure usually involves the liquidation or merger of individual companies, which can be administratively and time-consuming. Therefore, it is crucial to have a clear and long-term strategy from the beginning. Our Prague-based law firm can help you with planning; write to office@arws.cz.

Disclaimer: The information contained in this article is for general informational purposes only and serves as a basic guide to the issue. Although we ensure maximum accuracy of the content, legal regulations and their interpretation evolve over time. To verify the current wording of regulations and their application to your specific situation, it is essential to contact ARROWS law firm in Prague directly (office@arws.cz). We bear no responsibility for any damages or complications arising from the independent use of information from this article without our prior individual legal consultation and professional assessment. Every case requires a tailor-made solution, so please do not hesitate to contact us.

Read also:

• Holding Structures and Beneficial Ownership in the Czech Republic: Compliance Checklist
• Reorganising Your EU Group Structure Why the Czech Republic Might Be the Right Jurisdiction
• Setting Up a Czech Subsidiary: Key Legal and Tax Considerations
• How to Transfer Shares in a Czech Company: Step-by-Step Legal Overview
• Mergers and Acquisitions in the Czech Republic: Legal Steps for Foreign Investors