Transferring Shares in a Czech s.r.o. to Family: Legal and Tax Essentials

Transferring a share in a Czech limited liability company (s.r.o.) to family members may seem straightforward, but it involves complex matrimonial property rights, inheritance laws, and tax implications under Czech legislation. Without proper planning, you risk financial losses, family disputes, or tax penalties. In this article, our Prague-based law firm will guide you through the necessary steps, highlight what to watch out for, and explain how to avoid common mistakes that business owners often address far too late.

Quick Summary

• Community Property of Spouses (SJM) affects the transfer: If you acquired the share during marriage, the asset value of the share is part of the community property under Czech law. Without the partner's consent, a transfer to a third party can be challenged.
• Distribution between spouse and children requires a legal structure: Transferring a share is not just about registration in the Commercial Register. It involves setting up rights and obligations and distinguishing between the asset value of the share and participation in the company.
• Tax and procedural risks are serious: A transfer without sufficient preparation can lead to financial loss, invalidity of the contract, or family disputes.
• The time factor is key: The sooner you address this issue, the better. You can minimize risks, take advantage of tax exemptions, and prevent situations where inheritance disputes erupt after the owner's death.

Why Succession Planning is Essential

Transferring a business share to loved ones is not a duty most business owners deal with during day-to-day operations. However, that is precisely the problem. If you do not decide on this matter proactively, the law will decide for you – and often not in the way you would wish. Statistics are cautionary; successful business handover to the second generation is achieved by only a minority of enterprises in the Czech Republic.

The problem is not that transferring a share is technically impossible, but that it is linked to a whole range of complex legal, tax, and business questions. How to handle community property? How to ensure all children have a fair share of the assets, while, for example, only one child manages the company without needing consent from siblings? How to structure the transfer to avoid unnecessary income tax?

Our attorneys in Prague at ARROWS encounter these questions regularly and know how to solve them systematically. Without professional help, an entrepreneur often ends up in a stalemate where the costs of rectification many times exceed the price of timely prevention.

Marriage and Community Property – The First Obstacle

One of the most common problems faced by owners of Czech limited liability companies (s.r.o.) is the relationship between their business share and community property of spouses (SJM). Czech legislation distinguishes between the share as an asset value and the actual participation in the company.

If you became a shareholder during the marriage and there is no prenuptial agreement, the asset value of your share falls into the SJM. This means your partner has a right to the settlement of the value of this share.

At the same time, the Czech Civil Code requires the consent of the spouse when disposing of property within the SJM. If you wish to transfer the share to a third party, you should have your partner's consent; otherwise, they may seek to have the transfer declared invalid.

An important distinction: Although the value of the share is part of the SJM, your spouse does not automatically become a shareholder in your company. Shareholder rights (voting at the general meeting, deciding on the managing director) are exercised by the spouse registered in the Czech Commercial Register. This distinction is important because by transferring a share to a spouse, you are changing both the legal regime of the property and the influence within the company.

Practical Example: How It Can Go Wrong

Imagine: You are the 100% owner of an s.r.o. that you founded during your marriage. Now you want to transfer 50% of the share to your spouse. You think it is enough to draft a transfer agreement.

If the share is part of the SJM, it cannot be "transferred" to the other spouse via a standard purchase or gift agreement, because you cannot transfer something you already jointly own. First, it is necessary to narrow the community property of spouses via a notarial deed and settle the share. If you were to simply sign a transfer agreement without addressing the SJM, such an act would be invalid under Czech law.

The correct procedure involves first resolving the matrimonial property regime (narrowing/settling the SJM) with a lawyer and only then setting up the ownership structure in the company.

MicroFAQ: Community Property and Share Transfer

1. I am married and acquired the share during the marriage. Is the share part of the SJM?
Yes, unless a matrimonial property agreement (prenuptial agreement or narrowing of SJM) was concluded to exclude it. An exception may be the acquisition of the share exclusively using funds that did not belong to the SJM.

2. Does my spouse automatically have the right to vote at the general meeting?
No. If only one spouse is registered in the Commercial Register, shareholder rights are exercised only by them. The other spouse only has asset rights within the SJM.

3. What if I want to transfer the share to a third party without my spouse's consent?
You are taking a risk. The spouse can claim relative invalidity of such a transfer in Czech courts if it involves property of non-negligible value. The court could invalidate the transfer.

Transfer Structure: Which Paths Lead to the Goal?

If you want to transfer ownership to your family, you have several options. The choice of path depends on your goals, tax implications, and family relationships.

Direct Transfer (Sale or Gift)

The most direct path is a business share transfer agreement. The agreement must be in writing with officially notarized signatures, and the change is recorded in the Commercial Register.

Beware of restrictions: The Czech Business Corporations Act stipulates that the transfer of a share to a third party (including children) is subject to the consent of the general meeting, unless the Articles of Association state otherwise. If you have other partners in the company, they may have pre-emptive rights or the right to veto the transfer.

Gifting as a Common Choice in the Family

Within families, shares are most often gifted. The advantage is that gifting between direct-line relatives (parents-children) and between spouses is exempt from income tax in the Czech Republic.

However, even gifting requires compliance with formal requirements; therefore, check the Articles of Association to see if gifting to family members requires the consent of the general meeting.

The disadvantage of direct gifting lies in the fact that once you gift the share, you lose control over it. If the recipient descendant falls into debt, a bailiff may seize the share under Czech enforcement laws.

Generational planning via trust funds and holdings

An advanced method is utilizing a trust fund or a family holding company. A Czech trust fund (svěřenský fond) allows for the allocation of assets (a share in the company) into a special regime. The assets belong to "no one" (they are owned by the fund itself) and are managed by a trustee for the benefit of beneficiaries (e.g., children).

Advantages:

• Protection of assets from the creditors of the beneficiaries.
• The ability to set rules (children receive the proceeds but cannot sell the company).
• Prevention of asset fragmentation during Czech inheritance proceedings.

Disadvantages primarily include higher costs for establishment and management, as well as the administrative complexity of the entire process under Czech law.

Our Prague-based attorneys at ARROWS have extensive experience with these structures and can help you assess whether a simple transfer or a more robust structure is better suited to your situation.

Tax aspects of the transfer – where the risks are hidden

Tax implications are crucial during transfers. Incorrect procedures can cost you millions of Czech korunas.

Gratuitous Transfer (Gifting):

• Family (direct and collateral lines): Income from gifting between spouses, parents, and children (including grandparents/grandchildren) is exempt from personal income tax in the Czech Republic. The exemption also applies to siblings, uncles/aunts, and nephews/nieces.
• Notification: Beware, if the value of the exempt gift exceeds CZK 5,000,000, you are obligated to file a notification of exempt income with the Czech tax authorities. Failure to comply with this obligation is sanctioned with a high fine.

Transfer for Consideration (Sale):

• Time Test: Income from the sale of a share in a Czech s.r.o. (LLC) is exempt from income tax if at least 5 years have passed between acquisition and sale.
• Taxation: If you do not meet the time test, the profit (selling price minus acquisition price) is subject to taxation. The personal income tax rate in the Czech Republic is 15% or 23%.
• Valuation: In the case of a sale between related parties (e.g., a father selling to a son), the price should correspond to the usual market price. If the price is lower or higher without economic justification, the Czech Financial Administration may assess tax on the difference.

MicroFAQ: Tax questions during transfer

1. If I gift a share to my daughter, does she pay tax?
No, gratuitous income from a parent is exempt from income tax under Czech legislation. If the share has a value higher than CZK 5 million, the daughter must file a notification with the tax office.

2. I am selling a share after 3 years. Do I pay tax?
Yes, if you do not meet the 5-year time test for exemption, you must tax the profit.

3. How is the price determined for tax purposes?
For a sale between unrelated parties, it is the contract price. For related parties and specific situations, the tax office may examine the usual (market) price, often supported by an expert appraisal.

Mgr. Jan Medek

associate, partner

• medek@arws.cz

Mgr. Marek Hučík

associate, partner

• hucik@arws.cz

Key risks during transfer – what truly threatens you

Transferring a share in a Czech s.r.o. to a spouse or children may seem simple, but in practice, it carries risks that must be addressed.

The Articles of Association – what they must contain

The Articles of Association (společenská smlouva) are the fundamental document of a Czech s.r.o. Many business owners have not seen them since the company's founding, which is a mistake. The Czech Business Corporations Act (BCA) gives shareholders great freedom, but if you do not utilize it, statutory rules apply, which may not be suitable.

The statutory regulation (unless the contract states otherwise) stipulates that a transfer to a third party is only possible with the consent of the general meeting. Shares are inherited unless the Articles of Association exclude it (this can be excluded for an s.r.o.). If you want to facilitate or, conversely, restrict transfers, you must amend the Articles of Association.

Changes require the form of a notarial deed and the consent of the required majority (often all) of the shareholders under Czech law.

Important clauses for succession

Inheritance specifications: You can completely exclude the inheritance of a share (in which case heirs only receive a monetary settlement) or limit it with conditions (e.g., the heir must have a certain qualification). Establishing a right of first refusal for existing shareholders ensures that the share does not "escape" the company if an heir wishes to sell it.

Method of determining the settlement share: The law sets the calculation of the settlement share primarily from equity, which often does not reflect the market value of the company. A different, fairer method (e.g., based on an appraisal or an EBITDA multiple) can be agreed upon in the Articles of Association.

Our attorneys in Prague can help you revise your existing Articles of Association to ensure they align with your plans for handing over the company.

MicroFAQ: Articles of Association and succession

1. I am the sole shareholder. Do I need to deal with the Articles of Association?
As the sole shareholder, you decide on changes to the Foundation Deed (the equivalent of Articles of Association) yourself. It is advisable to check whether it allows for inheritance as you wish and whether mechanisms are correctly set for the event of your death.

2. What happens if I exclude inheritance in the articles of association?
The share will cease to exist (or become a vacant share) and the heirs are entitled to a settlement payment from the company. It is important to ensure the company has sufficient cash flow for this payout under Czech law.

3. Can I change the articles of association without the consent of other shareholders?
Generally, no. Amending the articles of association requires a qualified majority (usually 2/3) or the consent of all shareholders if their rights are being affected under the Czech Business Corporations Act.

Practical steps – a step-by-step guide

Transferring a share to family members requires a systematic approach under Czech legislation.

Step one: Consultation and analysis
Connect with our Czech legal team and a tax advisor. Determine if the share is part of the joint property of spouses (SJM), what the tax value of the share is, and what legal limits apply.

Decide whether the transfer will be via sale, gift, or contribution to a trust fund, and determine which family members will receive the share and in what proportion.

Step three: Preparation of documentation
Our Prague-based attorneys will prepare the draft amendment to the articles of association, the share transfer agreement, spousal consents or general meeting resolutions, and affidavits for new managing directors.

The share transfer agreement must have officially verified signatures, and if you are amending the articles of association, a visit to a Czech notary will be required.

Step five: Registration in the Commercial Register
Filing the application for registration of changes with the relevant Czech Registration Court. Upon registration, the change becomes effective against third parties (effectiveness of the transfer towards the company occurs upon delivery of the effective agreement).

Conclusion

Transferring a business share in a Czech s.r.o. to a spouse and children is a strategic decision. It is not just administration – it is about securing the future of your family and your business.

The attorneys at ARROWS law firm in Prague have extensive experience with these processes and will help you set everything up so that the transfer proceeds smoothly, without tax errors and while minimizing future disputes.

If you want to ensure that your company and family are safe, contact us at office@arws.cz to arrange a consultation. Prevention is always more cost-effective than resolving subsequent litigation in Czech courts.

FAQ – Frequently asked legal questions regarding share transfers in a Czech s.r.o. to a spouse and children

1. Can I transfer a share to my spouse without the other shareholders knowing?
This depends on the wording of your articles of association. If the agreement requires the consent of the general meeting for a transfer to a third party (which is the legal standard in the Czech Republic), then it cannot be done without their knowledge and consent.

2. What is the difference between gifting and selling from a tax perspective?
Gifting in a direct line (parent-child) and between spouses is exempt from income tax in the Czech Republic. A sale is only exempt if the 5-year holding period "time test" is met; otherwise, the profit is taxed. For a specific calculation, contact our Prague-based attorneys at office@arws.cz.

3. What happens if I die without a will or share arrangement?
The share is inherited according to statutory inheritance classes (most often equally between the spouse and children), unless the articles of association exclude inheritance. This can lead to fragmentation of ownership and disputes over company management.

4. Does a notary have to be involved in the share transfer?
The share transfer agreement itself does not require the form of a notarial deed (verified signatures are sufficient), unless the transfer modifies the articles of association in a way that requires a notarial deed, or if the articles of association themselves require it.

5. What is a "settlement share"?
It is a monetary amount that the company pays to a shareholder (or their heir) whose participation in the company has terminated (e.g., if inheritance of the share is excluded). The method of calculation is determined by Czech law or the articles of association.

6. Is it worth handling the transfer with an attorney?
Yes. Errors in the process can lead to the invalidity of the transfer, tax penalties, or future disputes that could cost the company significantly more than the legal fees. Contact our Czech legal team at office@arws.cz.

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 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; therefore, do not hesitate to contact us.

Read also:

• How to Transfer Shares in a Czech Company: Step-by-Step Legal Overview:
• Trust Funds and Taxes: When Is a Payment to a Beneficiary Tax-Exempt, and When Is It Taxed as Other Income?:
• Setting Up a Czech Subsidiary: Key Legal and Tax Considerations:
• Holding Structures and Beneficial Ownership in the Czech Republic: Compliance Checklist:
• Tax Implications of Closing a Company in the Czech Republic: