Silent Partnership in the Czech Republic: A Guide to Legal Setup and Risks

18.7.2025 | ARROWS law firm

What exactly is a silent partnership under Czech law? What is the difference compared to a standard loan or an investor's equity entry? How is the contract structured and how are profits distributed? And what risks does a silent partner face, for example, during insolvency proceedings in the Czech Republic? In the following article, you will find specific answers to these questions. You will learn how this proven investment tool of the Czech legal system works, what to watch out for during negotiations, and how the experienced Czech legal team at the ARROWS law firm in Prague can assist you.

Article Content

What is a silent partnership and when does it make sense?
Silent partnership vs. loans and direct equity entry
Contractual setup and profit distribution
Our specialists for you
What happens if the company profits and pays out first, but falls into loss the next year?
Insolvency of the entrepreneur: risks for the silent partner
When to contact experts

What is a silent partnership and when does it make sense?

A silent partnership is a special form of cooperation between an entrepreneur and an investor under Czech law, which is created purely by contract and is not recorded in any public register. The entrepreneur enters into an agreement with a so-called silent partner, in which the investor undertakes to provide certain funds (a contribution) in exchange for the right to share in the entrepreneur's profits. In return, the silent partner also bears a portion of any potential loss – but only up to the amount of their contribution.

A silent partnership is not a separate legal entity or a new business; it is merely a private contractual relationship between the entrepreneur and the investor. Because of this, it remains "silent" – the existence of such an investor is not visible to the outside world and does not appear in the Czech Commercial Register or the company's registered capital. A silent partner can be either a natural person or a legal entity (they do not need to be an entrepreneur themselves), and the contribution does not have to be cash – it can also be property, rights, or other values usable in the business.

A silent partnership allows a company in the Czech Republic to obtain capital without a traditional loan and without the formal entry of an investor into the ownership structure. In practice, it is used, for example, when an entrepreneur has a development project or has encountered temporary financial difficulties but does not want (or cannot) take a bank loan and simultaneously wishes to retain full control over the company. A typical example: A company needs funds for a new project, the bank will not provide further credit, and you do not want to offer an ownership stake to an investor.

The solution can be a silent partner – an investor who provides capital in exchange for a share of future business profits. The ARROWS law firm encounters many such situations in its practice, and our Prague-based attorneys regularly help set up silent partnerships so that the company obtains the necessary funds discreetly while ensuring the investor is sufficiently protected by contract. This method can be used to finance, for example, one-off real estate development projects, production expansion, bridging a crisis period, or other business expansion – all without the existing owners giving up a portion of the company.

Risk to be addressed	Potential problems and sanctions	How ARROWS assists
Poorly drafted silent partnership agreement (unclear terms, missing provisions)	Ambiguities regarding the share of profit or loss can lead to disputes between the entrepreneur and the investor. There is a risk of protracted litigation in Czech courts over money if the contract does not address all scenarios (e.g., early termination, sale of the company, etc.).	Careful preparation or review of the contract by experienced ARROWS attorneys – setting clear conditions (contribution, % share of profit/loss, duration, notice period, termination, etc.) that minimize the risk of future disputes.
Omission of tax obligations (withholding tax on profit shares, tax registration)	Incorrect payment of the 15% withholding tax on the silent partner's profit can lead to tax assessments, late payment interest, or fines from the Czech Financial Administration. The company must fulfill reporting obligations to the tax office – neglecting them risks sanctions.	Legal consultation on tax aspects – ARROWS ensures that the client fulfills all legal obligations under Czech legislation (tax registration, correct withholding and payment of tax on profit shares, etc.). Properly set up documentation protects both the company and the investor from unnecessary penalties.
Disclosure of the silent partner's identity ("breach of silence")	If the entrepreneur discloses the silent partner's name externally or includes it in the company name, the silent partner loses their limited liability and becomes indefinitely liable for business debts. This can pose an existential threat to the investor.	Setting up confidentiality and internal rules – ARROWS attorneys will include strict confidentiality clauses in the contract and advise company management on the necessity of not disclosing the investor. If necessary, we prepare internal guidelines or management training to prevent unintentional disclosure.
Incorrect calculation or payout of profit share (accounting manipulation, payment delays)	The risk that the entrepreneur intentionally or unintentionally reports lower profits (e.g., disputed costs), and the silent partner receives less than they are entitled to. Or the entrepreneur delays the payout – creating a default and a potential claim by the partner for late interest or contract termination.	Rigorous contractual safeguards – ARROWS will help set rules for profit calculation and business monitoring (right to inspect accounting records, etc.). In the event of a dispute, ARROWS attorneys will represent the client in enforcement (lawsuits for profit shares, late interest, etc.) and ensure expert assessment of financial statements.
Insolvency or bankruptcy of the entrepreneur (risk of company failure)	If the entrepreneur goes bankrupt, the silent partner changes from an investor to a creditor in insolvency. The chance of recovering their contribution in bankruptcy proceedings is minimal – their claim is satisfied only after other creditors and often is not reached at all. Furthermore, the silent partnership agreement terminates and the partner loses the right to future profits.	Legal audit and crisis solutions – ARROWS attorneys can identify impending insolvency in advance and propose steps (e.g., restructuring). In the event of insolvency, we represent the silent partner in the proceedings, register their claims, and guard their rights. Alternatively, we can assist the entrepreneur with reorganization to prevent bankruptcy.
Unclear investor exit strategy (how the silent partner exits)	A silent partner may wish to terminate their participation early – if the contract does not allow for this, they are dependent on an agreement with the entrepreneur. Without a pre-agreed notice period or a fixed term, there is a risk that the investor will be "trapped" in the company longer than desired under Czech law.	Setting termination conditions – our Prague-based attorneys will thoroughly incorporate termination options into the contract (fixed term, notice periods, withdrawal for breach of contract, etc.). The client thus prevents a situation where it is unclear how a silent partner can exit and recover their investment.

Silent partnership vs. loan and direct equity entry in the Czech Republic

If you are considering a silent partnership, it is advisable to compare it with alternatives – a classic loan (credit) and a direct equity entry by an investor. Unlike a loan, a silent partner is not entitled to any fixed remuneration (interest). Their return depends purely on the success of the entrepreneur – they receive remuneration only when the business achieves a profit. For the investor, this is riskier: if the company does not earn, they receive nothing; if the business fails, they may lose all invested capital.

Investors usually compensate for this higher risk by requiring a higher share of the profit than would correspond to standard loan interest. From the entrepreneur's perspective, however, a silent partner is "cheaper" during times when the business is not doing well – unlike a bank, you do not have to pay any interest or installments during loss-making years; you simply do not pay out a share of the profit. This can help a firm bridge difficult periods where regular loan repayments would be liquidating under Czech commercial law.

Compared to a classic investor entry into a company (acquisition of a share or stocks), a silent partnership has the advantage that the investor does not enter the ownership structure of the firm. The silent partner has no voting rights or formal influence on management – they remain anonymous to the outside world. The share of existing owners is not diluted, and there is no need to change the entry in the Czech Commercial Register. The entrepreneur thus retains full control over the company while obtaining capital.

For an investor, it can be attractive to participate in profits similarly to a shareholder, but without all the corporate formalities and public publicity. A silent partner is also not liable for the entrepreneur's debts, provided they remain truly "silent" – unlike an official partner, they bear no personal liability for the company's obligations (unless they breach the confidentiality condition). Their risk is limited to the capital contribution; they cannot be called upon to provide additional funds beyond the scope of the contract.

Of course, a silent partnership also has its disadvantages compared to a direct ownership stake. A silent investor has no say in the management of the company and must trust that the entrepreneur will lead the firm well and report results honestly.

The liquidity of such an investment is low – unlike a shareholder, a silent partner cannot simply "sell" their share on the market or transfer participation without the entrepreneur's consent. Everything depends on the contractual arrangements; usually, participation can be terminated by notice or agreement, but until then, the investor has money tied up in the firm.

From a tax perspective, a silent partner's share of the profit is similar to a dividend – the company must pay a 15% withholding tax on it. This tax is deducted when the profit is paid to the silent partner, and the company pays it to the Czech state (for which it must be registered for income tax collected by withholding).

ARROWS provides clients with a complete service in this area – we will explain the advantages and disadvantages of individual forms of financing and help you choose the optimal variant. Our Czech legal team has extensive experience in setting up silent partnerships as well as preparing classic investor entries or loan agreements, so they can advise on what is most suitable for your project and how to handle everything legally and fiscally.

Contractual setup and profit distribution

A silent partnership is relatively simple to establish – it is sufficient to conclude a contract between the entrepreneur and the investor. The law does not even require a written form, but we definitely recommend it. In a silent partnership agreement, several basic points must be carefully defined: the amount and form of the contribution, the silent partner's share in profit and potential loss, the duration of the silent partnership, termination options, and other rights and obligations of the parties.

Our specialists for you

Mgr. Jan Medek

associate, partner

medek@arws.cz

Mgr. Pavel Čech

associate

pavel.cech@arws.cz

The share in profit and loss can be agreed upon freely, but it must be in the same ratio. It is not possible to agree that a silent partner would only participate in profit and not in loss or vice versa – any such arrangements would be invalid under the Czech Civil Code. If the parties do not agree on the share amount, the statutory rule applies: the partner's share is determined by the ratio to their contribution and according to custom. For example, if they contribute 20% of the total capital, they are entitled to 20% of the profit (or bear 20% of any loss), unless agreed otherwise.

A well-prepared silent partnership agreement is absolutely essential – it must anticipate various "what if" scenarios and protect both the entrepreneur and the investor. The contract can regulate special situations, such as the sale of the business or a change in the company owner (standardly, a silent partnership terminates upon the sale of a company, but it can be agreed that the entrepreneur will pay out the silent partner preferentially from the liquidated firm, etc.).

Furthermore, it is recommended to agree on how often the silent partner will have access to information – by law, they have the right to inspect the accounting records and receive the annual financial statements. The contract can also arrange for expanded control (e.g., quarterly management reports) or, conversely, certain restrictions.

If the company wishes to avoid providing important data, it must have a very compelling reason – the silent partner has the right to verify that the profit for distribution is calculated correctly and honestly.

Profit distribution usually takes place once a year after the approval of the financial statements. If the entrepreneur does not pay out the profit share within the agreed or statutory period, they fall into default, and the silent partner can demand late payment interest and potentially withdraw from the contract if the agreement allows. Naturally, the right to a share of the profit only arises if the company has generated a profit – in loss-making years, the silent partner receives nothing.

What happens if the company first makes a profit and pays it out, but falls into a loss the following year?

Received profit is not returned. The loss is reflected by a reduction in the value of the silent partner's contribution to the silent partnership. In other words, the loss eats away at part of the money the investor put into the firm.

The new Czech Civil Code abolished the obligation to replenish the contribution after a loss – therefore, the silent partner does not have to return paid-out profits to the company or top up the contribution back to its original value. However, if losses reach the full amount of the contribution, the silent partnership automatically ends (unless the silent partner decides to replenish the contribution themselves to "save" the project).

Upon termination of the contract, the entrepreneur is obliged to repay the silent partner’s contribution, increased or decreased by the business results as of the date of the contract's termination. In practice, this means the investor receives back what remains of their contribution (e.g., a contribution of CZK 1 million reduced by shares in losses). Therefore, it is crucial to consider an exit strategy and have clearly defined terms in the contract regarding when and how the partner can claim the return of the contribution under Czech law.

The law firm in Prague, ARROWS, emphasizes detail when preparing these contracts. Our experienced attorneys in Prague will address all essential provisions in the contract and propose above-standard protection elements – such as contractual penalties for concealing profits, mechanisms for resolving disputes arising from differing accounting opinions, confidentiality clauses, and everything else that protects your investments and business from unforeseen complications in the Czech Republic.

In addition to drafting or reviewing the contract, ARROWS will assist you with complete supporting documentation – preparing internal documents, legal opinions on ambiguous issues (e.g., tax implications under Czech legislation), and naturally providing follow-up legal services, such as reviewing contract performance, consulting on profit calculations, or representation during negotiations with the counterparty.

Entrepreneur Insolvency: Risks for the Silent Partner

The greatest concern for any investor is that the company will go bankrupt. As previously mentioned, a silent partner has limited risk – they cannot lose more than they invested in the business. However, this does not mean they are not at risk in the event of insolvency. On the contrary, in Czech bankruptcy proceedings, the silent partner’s claim stands behind all other creditors.

A silent partnership agreement terminates upon the entrepreneur's insolvency, and the silent partner gains the right to register a claim in the insolvency proceedings for the amount of their unpaid contribution (or unpaid profit shares). However, they are essentially a general creditor – if there are insufficient assets to satisfy all claims, the silent partner often receives nothing. They are left only with what they may have previously received in profit shares.

For the investor, a silent partnership is therefore very uncertain in terms of guarantees – it carries no security or preferential rights. This must be taken into account (higher yield for higher risk). On the other hand, for the entrepreneur, this means that in the event of failure, they do not have to pay anything extra to the silent partner – the silent partner simply joins the other unsecured creditors under the Czech Insolvency Act.

Another risk for the silent partner arises from the human factor. If their participation in the business is disclosed, they may lose their limited liability. Czech law stipulates that if the silent partner's name is included in the company name, or if the silent partner publicly declares to business partners that they are conducting business together, they become a guarantor for the entrepreneur's debts like any other partner.

This is an extremely dangerous situation – the silent partner could then be liable for all the company's debts without limit, with all their personal assets. Fortunately, this risk can be relatively easily avoided by maintaining discretion. The Prague-based attorneys at ARROWS always emphasize the necessity of strict confidentiality to clients and help set up internal processes so that the investor's anonymity is not compromised (e.g., only a limited circle of people in the company knows the investor's identity, NDA agreements, etc.).

And how can a silent partner minimize risks associated with insolvency? It is impossible to fully guarantee the return on investment, but one can prepare in advance. For example, it is possible to stipulate in the contract that if economic indicators fall below a certain threshold, the silent partner has the right to terminate the contract and demand the return of the contribution before it is too late.

ARROWS can incorporate these so-called early-warning mechanisms into contracts. Furthermore, the investor can continuously monitor the management – e.g., by requesting regular financial reports to catch warning signals in time. We can assist clients with this as well, including legal assessment of financial statements or setting up control powers within the contract under Czech commercial law.

If insolvency does occur, ARROWS attorneys can represent the silent partner in Czech insolvency proceedings – registering their claim, negotiating with the insolvency trustee, and ensuring that the chance for any payout is maximized. Simultaneously, they can help the entrepreneur evaluate options for reorganization or other solutions to the crisis situation to avoid bankruptcy (konkurs), which is the worst-case scenario for investors.

When to Consult Experts

A silent partnership is an attractive investment tool that can connect entrepreneurs seeking financing with investors seeking a share of the profits. It brings mutual benefits – it provides the company with funds without debt or loss of control, and gives the investor a chance for an interesting return. However, it also places high demands on trust and careful legal structuring. If you are considering using a silent partnership, whether as an entrepreneur or an investor, we recommend a consultation with experts.

Our Czech legal team at ARROWS has extensive experience with these contracts – they will help you negotiate fair terms, prepare all documentation, and advise on how to minimize risks. Contact us and we will discuss your situation individually. Together, we will find a tailored solution to ensure your silent partnership cooperation brings the expected results and is in full legal compliance.

Do not hesitate to contact the ARROWS law firm in Prague for a non-binding consultation – we are here to help you safely grow your investments and develop your business in the Czech Republic.

Disclaimer: The information contained in this article is for general informative 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 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 tailored solution, so please do not hesitate to contact us.

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