Risks of Shareholder Invoicing in Czech Companies: Tax Reclassification and Penalties

JUDr. Jakub Dohnal, Ph.D., LL.M.
JUDr. Jakub Dohnal, Ph.D., LL.M.
16.5.2026 | ARROWS law firm

Shareholders often want to distribute the remaining profits or transfer money to themselves via invoices – and this is where one of the biggest risks for Czech companies lies. The case law of the Supreme Administrative Court is clear on this point: if a shareholder invoices their company for activities that fall within the company’s scope of business, they may face tax reclassification, substantial fines, and penalties. In this article, you will learn how to identify when invoicing is risky, what consequences may arise, and how to safely withdraw money from the company without legal and tax issues.

The photo shows a specialist providing a consultation on assessing the true substance of the relationship.

Why is invoicing between a shareholder and the company risky?

Most entrepreneurs think it is enough to enter into a contract with their company, issue an invoice, and the problem is solved. In reality, the situation is far more complex. Czech case law, especially that of the Supreme Administrative Court, has long insisted that the factual substance of the relationship is more important than its formal label.

When a shareholder invoices their own company for activities that fall within the company’s scope of business, the tax authority automatically assumes it is work performed for the company, i.e., income from dependent activity within the meaning of Section 6 of Act No. 586/1992 Coll., on Income Taxes. And this is exactly where a chasm of risks opens up. If the tax administrator classifies the invoice in this way, the shareholder cannot apply flat-rate expense deductions, must properly pay social security and health insurance contributions, and loses all the benefits they would have as a self-employed person (OSVČ).

The court does not require the shareholder to follow instructions—this would be nonsensical, because the shareholder de facto gives instructions to themselves. The only question is whether the activity they perform is consistent with what their company does, and whether it meets the characteristics of dependent work, such as performing work in the name of the employer, according to the employer’s instructions and during working hours determined by the employer, and in other cases also at the employer’s workplace, at the employer’s expense and under the employer’s responsibility.

How does the Supreme Administrative Court assess the issue?

Attorneys from ARROWS, a Prague-based law firm, handle these disputes regularly and understand the complexity of the case law. According to the established decision-making approach of the Supreme Administrative Court, there are key indicators signalling that this is dependent activity rather than independent business:

Indicator 1: A high degree of similarity of activities. If the activity the shareholder performs for the company almost entirely matches what the company itself does, the tax authority will be very sceptical. In practice, similar situations often lead to disputes with the tax administrator, where it is crucial to set a procedural strategy and propose evidence in time within commercial and litigation disputes. An example is a situation where the owner of a construction company invoices their company for construction work. In this case, it is practically impossible to claim that it is independent business.

Indicator 2: Economic interdependence. If the shareholder receives the majority of their income from one company—typically from their own company—this is a strong signal of a problem. If you are also considering whether it would be better to structure the relationship under employment law (e.g., for managing directors or key persons), you may find useful the practical context summarised in the update Agreements to perform work in 2026: How to set the limits correctly, avoid unexpected tax payments and penalties after changes to the Labour Code. The court asks: how can this be truly independent business if the income is entirely tied to a single company?

Indicator 3: Identity or similarity of the scope of business and trade authorisations. If the shareholder, as a self-employed person (OSVČ), has the same or very similar authorisation as their company, there is a risk that the tax authority will scrutinise them particularly closely. This can very easily be a concealed form of dependent activity disguised as independent business.

Importantly, these indicators are assessed comprehensively. It is not about one of them absolutely excluding all other possibilities. It is about the overall picture that the tax authority—and, in the event of a dispute, the court—examines.

Where does the burden of proof lie, and what risk does it mean?

The legal and tax system place a significant burden on the entrepreneur and the company here. In a dispute between the company and the tax administrator, where the shareholder’s invoicing is challenged, it is the entrepreneur who bears the obligation to prove that it is truly independent business. In similar cases, it is also crucial to properly address the tax impacts and communication with the tax administrator, which typically falls within tax law.

Simply signing a contract or formally labelling a document as an “order” or “service” is not enough. On the contrary, the court requires specific evidence that:

  • the shareholder truly acted independently of the company,
  • they had their own initiative and decision-making autonomy,
  • the price and terms corresponded to standard terms between independent entities (the “arm’s length principle”),
  • the activity was not inconsistent with the company’s operations,
  • the service was actually provided in accordance with the contract.

If the entrepreneur cannot prove this—and in many cases it truly is not possible—the tax authority and, potentially, the court will conclude that it is dependent activity. And then the problems begin.

What are the specific tax and legal consequences?

When the tax administrator assesses invoices between a shareholder and the company as income from dependent activity, it is not just a paperwork matter. It has very specific and very painful financial impacts.

Additional assessment of income tax

The shareholder must pay personal income tax. The standard personal income tax rate is 15%; for higher income (exceeding 48 times the average wage, which for 2026 will be approximately CZK 2.5 million per year), the 23% rate applies.

What is worse is that this tax and the insurance contributions are calculated from an amount determined as gross salary, to which the invoiced amount is recalculated into a “super-gross salary”. If you stated a price excluding VAT on the invoice but you are a VAT payer, the situation becomes even more complicated, because the company loses the right to deduct VAT from such an invoice. If the error is only discovered retrospectively, it may be appropriate to consider the procedure described in the update Additional tax return: How to proceed when an error is found in the accounts and eliminate the risk of high penalties.

Social security and health insurance contributions

This is often the biggest hit to cash flow. If the activity has been reclassified as dependent, both the company and the shareholder must pay additional social security and health insurance contributions as if it were employment.

Total costs for the company (including both employer and employee payments) are around 44% of the gross salary (for 2026, it is expected to be 33.8% for the employer – 24.8% social security contributions, 9% health insurance – and 11% for the employee – 6.5% social security contributions, 4.5% health insurance). If you return to the example with invoiced CZK 300,000, after recalculating to gross salary and assessing additional insurance contributions, these amounts can reach hundreds of thousands of Czech crowns.

Penalties and default interest

When the Czech tax authority assesses additional tax and insurance contributions, penalties and default interest are automatically added. The penalty is typically 20% of the additionally assessed tax if the tax liability is increased, or 1% of the additionally assessed deduction.

Default interest is calculated daily on the outstanding amount and its rate is set as the Czech National Bank repo rate increased by 14 percentage points; this rate is variable and can reach high levels. If the matter has remained unresolved for a long time, the total amount can very quickly double or even multiply.

Loss of flat-rate expense allowances

If the shareholder was treated as a self-employed individual (OSVČ) and applied flat-rate expense allowances (i.e., standard percentages of income that can be deducted without having to document actual expenses), they lose this benefit because the income is reclassified as employment income. Instead, they would have to document each expense with supporting evidence, which is practically impossible in the context of employment.

Most common questions about the impacts of invoicing

1. Can the Czech tax authority reassess my invoices retroactively for 3 years?
Yes, as a standard rule. The Czech tax authority has the right to conduct a tax audit and reassess invoices retroactively for three years from the end of the tax period in which the tax liability arose (the so-called limitation period for assessing tax under Section 148 of the Tax Code). In some cases—especially where a tax loss is involved or where criminal prosecution has been initiated for a tax offence—the period may be extended up to 10 years. So if you have been issuing invoices for a longer time and are not sure they are correct, the risk accumulates with each year.

2. What if the company did not pay the invoices?
Paradoxically, non-payment of an invoice is even a problem. If the company did not pay the invoice, the Czech tax authority may suspect that it was a fictitious invoice. Such an invoice then looks like a paper construct without real substance. It is also possible, however, that the invoices do not relate to the company at all, creating a risk of hidden income of the shareholder if they withdrew money without a legal basis.

3. How else will I find out that I have a problem?
Most often when the Czech tax authority initiates an audit. This usually starts with a request to submit documentation—contracts, bank statements, communication with the company, and similar materials. If the documents reveal risks, an additional assessment may follow. It is not uncommon for an entrepreneur to learn about the problem only upon receipt of a tax assessment notice.

When do exceptions actually apply? What exactly do the courts recognise?

The Supreme Administrative Court accepts that there are situations where a shareholder’s activities for their own company may not have to be considered dependent work (employment). But—and this is a big BUT—these exceptions are extremely rare.

These are mainly activities that are so specific and outside the company’s standard business scope that they cannot be regarded as work for the company. Typically, this includes:

  • Copyright/authorial work: If the shareholder is an author creating content (e.g., a book, screenplay, music) and the company is not a media or creative agency, such activity may be recognised. Even here, however, if the company uses the results commercially, the issues return unless it is clearly separated what falls within the company’s business activities and what is a one-off authorial activity of the shareholder.
  • Artistic activity: The same principle as with authorial work. If the shareholder is a musician and invoices a musical performance for a company event, the court may assess it as independent business activity. If, however, the company is a music agency, the situation changes fundamentally.
  • Sporting activity: When an athlete contributes to the company’s marketing with their name and image, this may be recognised as independent business activity—but again on the condition that the company is not a sports agency or that it is not ordinary marketing that falls within its business scope.

In practice, however, the attorneys at ARROWS advokátní kancelář see that courts recognise these exceptions only in truly exceptional cases. Legislators and judges have a strong interest in ensuring that shareholders do not circumvent the obligation to pay insurance contributions and employment income tax. So if you want to be sure, do not rely on fitting within such an exception.

A comprehensive view: what does the “practical substance of the activity” take into account?

The attorneys at ARROWS advokátní kancelář will tell you that a court never assesses a situation solely based on the name of the contract or formal paperwork. The court looks at the real substance of the relationship and asks:

  • What is the actual time and effort the shareholder devotes to the activity?
  • Is there proper communication between the shareholder and the company, orders, work specifications?
  • Is it possible for the shareholder to refuse work assigned by the company?
  • What company resources and IT are involved in the work? (If the shareholder uses company software, office space, hardware, it is a strong indicator of dependence.)
  • How long has the relationship lasted and how continuous is it?
  • Is it truly only occasional, extraordinary activities, or is it systematic, long-term work?

These factors are decisive. So, for example, if a shareholder occasionally manufactures something at home using their own equipment and the company buys it from them, that is different from a situation where the shareholder sits in the office every day, on the company’s computer, receives email tasks from management, and invoices all of it as independent business activity.

Most common questions about the practical substance of the activity and practice

1. How can I protect myself from a problem if I am already issuing invoices?
The safest approach is to stop immediately and change the system. Call the attorneys at ARROWS advokátní kancelář and work together to determine which option is safest for your situation. If you are concerned that an additional audit may be coming, it is even urgent. The sooner you take control of the matter, the better.

2. Is the risk the same if the invoice amount is very low?
No, the amount matters. But be careful—it is not a mandatory rule. The Czech tax authority may also be interested in low invoices if they are systematic. Worse is when there is a large number of small invoices over time.

3. Will it help if both parties contractually agree that it is not dependent work?
A contract helps, but it will not be sufficient on its own. The court will focus on the factual reality. If reality contradicts the contract, it will only be evidence that both parties tried to conceal the situation. You are more likely to make it worse—the Czech tax authority may even assess it as an attempt at intentional fraud.

What are the lawful and tax-safe alternatives?

Once you know that invoicing is risky, you naturally ask: how can I pay money out of the company without exposing myself to these risks? The good news is that there are several legal and tax-safe routes.

Option 1: employment contract

If a shareholder is also an executive director or a managerial employee, the simplest solution is a formal employment contract under the Czech Labour Code. On that basis, the shareholder receives a salary, and the company pays insurance contributions as for a standard employee (for 2026, it is expected to be 33.8% for social security and health insurance paid by the employer and 11% for social security and health insurance paid by the employee).

Advantages: The income is clearly classified as employment income, with no uncertainty. Disadvantages: Salary is taxed more heavily and comes with the full set of employer obligations – attendance records, payroll system, personal data in the social security system, etc. If you want more flexibility, this is not ideal.

Option 2: agreement to perform work (DPP)

An agreement to perform work is an interesting alternative if the activity is not regular work, but a one-off or extraordinary task. The scope of work must not exceed 300 hours per year for one employer. Income tax is paid on the remuneration.

Social security and health insurance contributions are not paid from a DPP if the monthly income with one employer does not exceed the statutory limit (for 2026, let us assume CZK 10,000). However, since 2024, new rules have applied that also take into account the concurrent performance of multiple DPPs with different employers, which may lead to an obligation to pay insurance contributions even at lower amounts if total income is higher.

Limitations: The scope of work is limited. Therefore, if the shareholder works regularly and long-term, this option is not suitable.

Option 3: agreement on work activity (DPČ)

Similar to a DPP, but with one key difference – insurance contributions apply more often under an agreement on work activity. Social security and health insurance contributions are paid if monthly income exceeds the statutory threshold (for 2026, let us assume CZK 4,000, which is usually increased slightly each year). A DPČ may be agreed for a maximum of half of the stipulated weekly working hours.

Option 4: contract for the performance of office

If the shareholder is a member of the statutory body (e.g., an executive director of an s.r.o. or a member of the board of directors of an a.s.) or another body, they may be paid remuneration for the performance of office based on a written contract for the performance of office. This remuneration is taxed as employment income and is subject to social security and health insurance contributions. It offers a certain flexibility in setting the terms of the performance of office compared to a standard employment contract.

Option 5: profit share (dividend)

The most commonly used method – the shareholder does not receive remuneration for work, but a share in the company’s profit. This profit is first taxed at the company level (for 2026, corporate income tax is 21%), and then paid to the shareholder in the form of a dividend, which the shareholder must tax again (withholding tax on personal income at 15%).

It is therefore taxed twice – which is why this route is chosen only for higher profits where it pays off. Advantage: It is the cleanest solution with no attempt to circumvent the law.

Option 6: interest-free loan (extra caution only!)

A shareholder can take an interest-free loan from the company. This is legal and safe – the company does not have to pay anything, and the shareholder does not have to tax anything.

But: It really must be only a loan that the shareholder is obliged to repay, and this obligation must be properly agreed and complied with. If it looks like hidden salary or remuneration (e.g., the loan is not repaid, it is repeatedly extended), the Czech tax authority may reclassify it as employment income, with consequences comparable to invoicing.

Most common questions about safe alternatives

1. Which option is used most often?
In larger companies, it is a combination: salary or remuneration for the performance of office for regular work, and then profit in the form of dividends at the end of the year. In smaller companies, an interest-free loan is often used, supplemented by occasional profit distributions.

2. Can I switch between options during the year?
Yes, you can. But it is better to plan it from the beginning of the year. If you alternate options during the year, questions may arise later. The lawyers at ARROWS, a Prague-based law firm, would rather help you set up a system for the whole year.

3. Which option should I choose if I am not sure?
Here is the answer: contact the lawyers at ARROWS, a Prague-based law firm. Each situation is individual – it depends on the size of the company, the shareholder’s age, the type of activity, and many other factors. It is worth setting it up correctly once; you will save yourself stress and tens of thousands of Czech crowns.

Transfer pricing and the “arm's length principle”: when it is necessary to genuinely ensure a market price

If, in one of the legal options, you decide that the shareholder will in fact invoice (for example, on the basis of a contract for work or similar, typically in situations where it is not dependent work but a genuinely independent business transaction), there is one more important rule: the price must correspond to market conditions – the so-called “arm's length principle”. This rule is set out in Section 23(7) of the Czech Income Taxes Act.

What does this mean in practice? If a shareholder invoices their company for services that would cost CZK 500 per hour on the market, they cannot invoice CZK 5,000 per hour just because they agreed it. The Czech tax authority will immediately challenge such an invoice and assess additional tax, because it considers the difference between the agreed price and the usual (market) price to be taxable income.

The courts dealing with this principle then decide based on a comparison with market prices – what would an independent person pay an unrelated person for a similar service? If your price differs significantly, you will have to justify it.

The lawyers at ARROWS, a Prague-based law firm, deal with transfer pricing intensively, especially in cases with a cross-border element. If you are operating in unfamiliar territory, it is worth having your prices verified by attorneys who understand both economics and law.

Financial risks and penalties: what can go wrong

Once the Czech tax authority is convinced that you have breached your obligations, it is not just about an additional assessment. It involves complex financial and legal consequences that accumulate.

Amounts of fines and penalties in 2026

This year (2026), penalties for breaches of tax obligations are governed by the strict rules of Act No. 280/2009 Coll., the Tax Code. Specifically:

  • Penalty: 20% of the additionally assessed tax if it involves an increase in the tax liability. So if you pay yourself CZK 300,000 on an unsubstantiated invoice, insurance contributions and tax may be additionally assessed in total at, say, CZK 150,000, and add CZK 30,000 as a penalty.
  • Late payment interest: Calculated daily from the day the tax or insurance contributions should have been paid. The late payment interest rate is set as the Czech National Bank repo rate increased by 14 percentage points; this rate is variable and can lead to a rapid increase in the outstanding amount.
  • Fines for failure to comply with obligations or obstruction of tax administration: If you knowingly failed to keep proper documents or tried to conceal the situation, fines may also be imposed for failure to comply with non-monetary obligations or for obstructing tax administration, which may reach up to CZK 500,000, and in serious cases even more.
Criminal liability

There is also a risk of criminal liability. If the Czech tax authority believed that you intentionally understated tax (for example, invoicing items you never performed), it may file a criminal complaint.

While criminal prosecution is usually not pursued for smaller amounts and in cases of a purely administrative error, it is pursued for systematic and intentional fraud. The criminal offence of tax evasion, evasion of a fee and similar mandatory payments under Section 240 of Act No. 40/2009 Coll., the Criminal Code, arises if the damage caused to the state reaches:

  • Minor damage: CZK 50,000 or more.
  • Greater damage: CZK 500,000 or more.
  • Significant damage: CZK 5,000,000 or more.

Criminal prosecution is initiated only once the damage reaches at least CZK 50,000.

Possible issues

How ARROWS helps (office@arws.cz)

Invoicing for activities related to the company’s scope of business: Automatic reclassification of income as employment income without evidence

We will assess the factual substance of your relationship, prepare documentation and arguments for your defence during a tax audit, or set up a lawful alternative.

Additional assessment of tax and social security contributions: Additional liabilities in the tens or hundreds of thousands of Czech crowns

We represent you in dealings with the Czech tax authority, file appeals, and defend you against incorrect additional assessments.

Penalties and late-payment interest: Accumulation of sanctions that significantly increases the original amount over time

We negotiate with the Czech Financial Administration on remission or reduction of sanctions, and assess whether an application for deferral or instalment payments can be supported.

Criminal prosecution: If systematic fraud is identified, reputational damage and criminal proceedings may follow

We provide representation in criminal proceedings and negotiate with the public prosecutor on the terms for discontinuation of the proceedings.

Inability to evidence legitimate activity: Missing contracts, communications, or documentation of work actually performed

We help you retroactively reconstruct documentation where possible, or set up a proper system for the future.

When to contact attorneys: specific warning signs

If you have any of the following signs, you should seriously consider contacting our attorneys in Prague at ARROWS, a Prague-based law firm:

  • Invoices between you and your company have been running for more than one year and you have not addressed it at all.
  • The Czech tax authority has sent you a request to submit documentation relating to invoices or income.
  • You are not sure whether your invoices are tax-compliant.
  • You are planning a large profit distribution and want to be sure it is safe.
  • You have an in-house accountant or tax adviser who tells you the invoicing is fine, but you feel it is not.

In these cases, obtaining a consultation with an attorney is not unnecessary. The cost of a consultation is disproportionately lower than the consequences that may arise.

Final summary

Invoicing between a shareholder and their own company is one of the most common legal issues entrepreneurs encounter. The problem is that it appears to be a simple matter that can be handled within minutes—yet it has enormous legal and tax consequences.

The case law of the Supreme Administrative Court is clear on this topic: if a shareholder invoices for activities related to the company’s scope of business, it will be assessed as employment income, regardless of what the parties agreed contractually. This means that social security contributions and taxes will have to be paid, and penalties and interest may apply.

Our attorneys in Prague at ARROWS, a Prague-based law firm, regularly help clients with this issue—whether it involves setting up a safe structure for the future or defending you during a tax audit. It is not complicated, but it requires expert knowledge of the Czech legal and tax environment.

If you are not sure how to withdraw money from your company safely, or if you think your current setup is not correct, contact our attorneys in Prague at ARROWS, a Prague-based law firm. We will ensure that you are not later caught off guard by a tax audit or an additional assessment. Contact us at office@arws.cz.

FAQ - Most common questions about invoicing between a shareholder and their own company

1. Can my accountant or tax adviser approve the invoices?
Your accountant or tax adviser can help you with proper bookkeeping and tax treatment. However, they cannot provide you with legal protection. In a dispute with the Czech tax authority, a court will decide the legal issues, examining whether the invoicing was lawful—and that is a legal, not an accounting, question. If you want to be truly safe, consult attorneys. Our attorneys in Prague at ARROWS, a Prague-based law firm, can provide a legal opinion that you can then use as a defence. Contact us at office@arws.cz.

2. Which invoices are the riskiest?
The riskiest invoices are those that are systematic and long-term—i.e., where the shareholder invoices regularly, month after month. Invoices for activities that exactly mirror the company’s scope of business are also very risky. By contrast, one-off invoices for very specific activities that are unrelated to the company’s ordinary business and do not bear the characteristics of dependent work are less problematic—provided it can be well documented what was actually performed.

3. What happens if I ignore the problem and hope the Czech tax authority does not find out?
A very bad plan. The Czech tax authority will come—either during a routine audit or once it has a trigger for a deeper review. And then the sanctions will be significant. Moreover, the longer you wait, the longer late-payment interest will accrue. It is better to address the issue proactively. Our attorneys in Prague at ARROWS, a Prague-based law firm, will help you resolve the situation in a prudent way, without it looking like you were trying to hide something. Email us at office@arws.cz.

4. Can my company deduct VAT from an invoice I issued to it even if it is later assessed as tax-incorrect?
If the tax administrator or a court later decides that the invoice was issued for an activity that was in fact dependent work, such a transaction will not be considered a taxable supply within the meaning of the VAT Act. As a result, the company will lose the right to deduct VAT from that invoice and will have to repay the deduction already claimed. This is another layer of the problem. The company then suddenly faces an additional assessment of corporate income tax (because the invoice will not be recognised as a tax-deductible expense) while also losing the right to deduct VAT. The situation becomes very complicated. If you suspect your invoices are not in order, address it as soon as possible. Contact us at office@arws.cz.

5. How do I know what the correct price is for an invoice I want to issue?
The correct price is the price that an independent person would pay for a similar service in ordinary commercial dealings. This means benchmarking against the market—what do competitors charge for the same service? How much would it cost if you purchased it from an unrelated party? If you are not sure, you should not agree on the price informally. There are methods for determining an “arm’s length price”—the arm’s length principle, which is regulated in Section 23(7) of the Income Taxes Act. Our attorneys in Prague at ARROWS, a Prague-based law firm, can help you validate the price. Email us at office@arws.cz.

6. Is it a problem if a shareholder takes money from the company without an invoice – e.g., withdraws cash?
If this involves cash taken without an invoice and without any legal basis (i.e., neither salary, nor remuneration, nor a loan, nor a dividend), there is a risk that it will be assessed as unauthorised withdrawal of the company’s assets. Both the court and the tax authority could interpret this as a breach of the shareholder’s fiduciary duty (the duty to act with due managerial care under Czech law). If it were investigated later, it could also be assessed under criminal law, for example as embezzlement or breach of duty in the administration of another person’s property. Moreover, if other shareholders or the company’s creditors discover it, they may take legal steps to seek compensation for damage. Therefore, if a shareholder takes money, it must be documented—either as a loan, a profit distribution, or salary/remuneration. 

Notice: The information contained in this article is of a general informational nature only and is intended to provide basic guidance on the topic based on the legal status as of 2026. Although we strive for maximum accuracy, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client security we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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