New developments in the taxation of income from the transfer of shares in an LLC and from the sale of securities from 2025: what you need to know
Authors of the article: Mgr. Martin Faktor, Mgr. Pavel Čech, ARROWS (office@arws.cz, +420 245 007 740)
As of 1 January 2025, major changes to the Income Tax Act will come into force, which will particularly affect individuals on the sale of shares in limited liability companies and on the sale of securities. The most significant new feature is the introduction of a cap on the tax exemption of personal income from these transactions, which brings new challenges as well as opportunities for effective planning. How will these changes affect you and how should you prepare for them?
Current legislation until 31 December 2024
Until now, if an individual has owned an interest in an LLC for at least 5 years or has owned shares for 3 years (the "time test"), the sale proceeds are fully exempt from tax regardless of the amount. If this condition was not met, the income was subject to personal income tax at a rate of 15%, with the purchase price of the share being claimed as an expense.
New rules from 1 January 2025
As of 2025, income of individuals from the sale of shares or securities will be exempt only up to CZK 40 million per tax year. The part of the income that exceeds this limit will be taxed at standard personal income tax rates.
Practical example:
If a taxpayer sells a stake in an LLC for CZK 100 million in 2025 and meets the timing test, CZK 40 million will be exempt and the remaining CZK 60 million will be taxable.
New option to claim market value as an expense
In order to reduce the income tax base above the exemption limit, from 1 January 2025 it will be possible to use the market value of the share or securities as at 31 December 2024 instead of the acquisition price of the share or securities. This value must be supported by an expert's report. If the income from the transfer of the shares or securities exceeds the exemption limit of CZK 40 million, the expense is reduced in the proportion in which the income is subject to tax. Thus, the exempt part of the income will not "use up" the corresponding part of the expenditure.
Practical example:
A taxpayer acquired a share in an LLC in 2010 for CZK 10 million. According to an expert's report, this share has a market value of CZK 50 million as of 31 December 2024. In 2025, the taxpayer sells the share for CZK 100 million.
- Exempt part of income: Of the total amount of CZK 100 million, CZK 40 million is exempt from tax.
- Taxable portion of income: The remaining CZK 60 million is taxable.
- Ratio of the taxable part of the income: 60/100 = 0.6 (i.e. 60% of the income is taxable).
- Expenditure based on market value: The market value of the share on 31.12.2024 is CZK 50 million. This expense must be reduced to 60% based on the proportion of the taxable portion of the income:
- 50 x 0.6 = CZK 30 million
- Tax base: The taxable part of the income (CZK 60 million) is reduced by the proportionate part of the expense (CZK 30 million). The tax base will be CZK 30 million.
- The resulting tax: If the tax rate is 15%, the tax liability is CZK 4.5 million.
The key caveat is that if the total income is below C40 million, it is fully exempt and no expense reduction applies. If the expenditure exceeds the taxable portion of income, the excess expenditure cannot be used or carried forward. The ability to use market value as an expense applies only to shares and securities acquired before 31 December 2024.
Recommendations for taxpayers
- Sale by the end of 2024: If you are planning a sale and meet the timing test, consider completing the transaction by the end of 2024 to take advantage of the full exemption.
- Phased sales: Splitting the sale into multiple parts in different tax years can help you stay within the CZK 40 million annual limit.
- Expert opinion: Have an expert opinion on the market value of the share as at 31 December 2024 to optimise your tax liability.
We recommend careful planning of sales strategies and consultation with experts.
Impact on legal entities
For legal entities, the Income Tax Act does not bring any major changes to the rules for taxation of income from the transfer of shares as of 1 January 2025. It continues to apply that:
- Income from the transfer of shares is fully included in the tax base and is subject to the 21% rate.
- Only the actual cost of acquiring the share can be claimed as an expense.
- The exemption for income from the transfer of shares does not apply to legal entities.
Exception: Transfers between parent companies and subsidiaries
Income from the transfer of shares between a parent company and a subsidiary may be exempt from tax. This exemption is based on European legislation (Parent-Subsidiary Directive) and the Czech Income Tax Act implements it in Section 19.
Main conditions for claiming the exemption:
- Possession of shares: The parent company must hold at least 10% of the share capital of the subsidiary continuously for at least 12 months.
- Legal form and tax residence: Both companies must be commercial corporations (e.g. limited liability company or a.s.) and tax residents of an EU or EEA Member State. The exemption does not apply if the company benefits from a tax exemption.
- Beneficial ownership of income: The parent company must be the beneficial owner of the income from the transfer of the shareholding, not just the intermediary.
Conclusion
The changes to the taxation of share transfer income from 2025 may have a significant impact on your financial plans. If you need advice on how to prepare for them, apply market value to a share or optimise your tax burden, please do not hesitate to contact us. We will be happy to help you find the most effective solution tailored to your situation.