Profit Share Advances in Czech Companies: Legally Withdrawing Cash Before Year-End

5.5.2026 | ARROWS law firm

Entrepreneurs want to access their profits before the end of the financial year. However, a company account is not a personal wallet, and withdrawing money on an ongoing basis is subject to strict rules—breaches can result in severe additional tax assessments. This article therefore guides you in detail through the process of paying profit advances and shows how to take cash out entirely legally and safely under Czech law.

The photograph shows an expert consulting on the payment of profit advances.

Why owners do not want to wait until year-end
Accounting constraints and the need for interim financial statements
Insolvency test: Why accounting profit alone is not sufficient for a payout
Duty of due managerial care and extensive personal liability
Tax implications and the withholding tax mechanism for individuals
Foreign shareholders and international taxation
Complications with refunding remitted withholding tax

Key takeaways

Basic condition: An advance may be paid out only on the basis of carefully prepared interim financial statements showing that the company has sufficient funds.
Insolvency test: The executive director bears personal responsibility for ensuring that paying the advance will not financially endanger the company or push it into insolvency.
Withholding at source: The paid advance is subject to immediate 15% withholding tax, which the company must remit to the Czech state by the end of the following month.
Repayment risk: If the company does not report sufficient profit at year-end to cover the advance, the shareholder must, by law, return the paid funds within three months.
Holding benefits: If the conditions are met, advances within a holding structure can be moved between companies entirely without any tax burden.

Why owners do not want to wait until year-end

The standard process of distributing company profit is lengthy and full of bureaucracy. The financial year usually ends in December; afterwards, it takes several months to prepare the statutory financial statements and file the corporate income tax return. The general meeting then often decides on the distribution of the previous year’s profit only in June.

This means that, in practice, owners may wait up to a year and a half for money earned in January of the previous year. This delay is absolutely unacceptable for most dynamic entrepreneurs. Especially in periods of high inflation, money sitting idle in company bank accounts gradually loses its purchasing power.

Owners therefore quite logically and legitimately look for ways to safely move cash that they know with certainty the company has actually earned. They need funds for their personal budgets, purchasing real estate, private investments, or financing other family projects.

However, this entirely legitimate requirement runs up against the Czech Business Corporations Act, which strictly separates the company’s assets from the shareholders’ assets. Company cash cannot be transferred at will. This is precisely where the legal tool of advances on profit distributions comes into play. Our Prague-based corporate law team (including general meeting resolutions and related documentation) can also assist with setting up a lawful process through the corporate law, holdings and structures agenda.

Illegal practices and hidden pitfalls of “wild” withdrawals

Unfortunately, many company owners ignore the more complex advance process and resort to illegal or highly risky practices. The most typical is misuse of company payment cards for ordinary private purchases. Shareholders pay for family holidays, private cars, or luxury goods from company accounts.

However, this approach is entirely wrong and represents an easy first target for a potential audit by the Czech tax authority. Inspectors will uncompromisingly disallow these private expenses as tax-deductible costs of the company, assess additional corporate income tax, and add severe penalties on top.

But it does not end there. The tax authority will also reclassify these private payments as a so-called hidden profit distribution. This means it will additionally demand, retroactively, payment of 15% withholding tax that should have been remitted on this hidden cash extraction. We also discuss the practical impacts of withholding tax (including correctly setting interest rates for alternative cash-flow solutions) in our update Loans between the company and the owner: How to correctly set interest rates and avoid additional tax assessments during an audit. The damage can then run into hundreds of thousands of Czech crowns.

Another common bad practice is setting up opaque “cash boxes”, where a shareholder simply withdraws cash from an ATM and it is recorded in the accounts as a fictitious employee advance. With ARROWS attorneys in Prague, you can prevent these guerrilla methods and implement a transparent profit distribution process. Contact us at office@arws.cz.

Accounting constraints and the need for interim financial statements

A decision to pay an advance on profit cannot be made off the cuff based on the executive director’s feeling that the company is currently doing well. Czech law strictly requires the preparation of interim financial statements. If you are also addressing related process settings and supporting documentation for accounting, it may be practical to involve accounting services as well. This is an accurate, realistic, and substantiated picture of the company’s performance as of a specific date during the year.

These statements must not be just a quickly generated report from your accounting software. They must include all formal requirements. The accounting department must carry out at least an extraordinary inventory of key items, post a proportional part of depreciation, and reflect all accruals and provisions.

The aim is to obtain an absolutely precise figure of the real profit the company has generated up to that point. For example, if you want to pay an advance in September, you must have clean financial statements prepared, for instance as of 31 August, which demonstrably show that the company achieved profit from which the advance can be covered.

Preparing high-quality interim financial statements requires close cooperation between management and accountants or auditors. It means some additional administrative burden, but this step simply cannot be legally skipped. Proper interim financial statements are your key evidence for the Czech tax authority in the event of a future tax audit. In connection with potential additional tax assessments during an audit, it may also be useful to know the related rules described in our article Unpaid B2B receivables: When a loss from invoices can be claimed as a tax expense and meet the Czech tax authority’s strict conditions.

Detailed calculation of the maximum advance amount

Even if an interim financial statement shows a million-crown profit, it does not mean you can pay out exactly that million. The Czech Business Corporations Act sets a very strict mathematical cap for calculating the maximum possible amount of an advance payment. The purpose of this formula is to provide maximum protection to the company’s creditors.

An advance payment must never be higher than the sum of the current profit shown in the interim financial statement and retained earnings from previous years. From this positive amount, you must additionally deduct any unpaid losses from previous years, as well as funds that you are required by law or by the articles of association to transfer to reserve funds.

Imagine it with an example. A company generates a fantastic profit of CZK 2 million for the first half-year, but it carries an unpaid loss from previous years of CZK 1.5 million. In such a case, the maximum advance payment may not exceed CZK 0.5 million.

This strict calculation guarantees that the owners will not extract more money from the company than its real historical and current surplus of results allows. Specialists from our Prague-based law firm will be happy to assist you professionally with the precise calculation of the limits for paying profit advances.

Insolvency test: Why accounting profit alone is not enough for a payout

Even if a perfectly prepared interim financial statement shows a safe profit and the shareholders are vehemently demanding their money, the statutory body must have the final say. Czech law requires managing directors to carry out the so-called insolvency test. A managing director must not distribute profit if it would cause the company to become insolvent.

The insolvency test means that the managing director must assess current and future cash flow in a very sober manner. They must be absolutely sure that after sending million-crown advances to the shareholders’ private accounts, the company will still have enough liquid funds to pay upcoming taxes, wages, and supplier invoices.

A nice profit on a paper income statement often does not even remotely equal real cash in the bank account. Profit may be tied up in full warehouses of goods, in unsold work in progress, or in due receivables from clients who have not paid you for three months.

To carry out the insolvency test, we always recommend creating a demonstrable written record of the liquidity assessment, which will become part of the company documentation. This step is your main protection in case the company faces any problems in the future.

Duty of due managerial care and extensive personal liability

A decision to pay out cash in the form of advances is one of the most serious steps a managing director can take. If a managing director paid money to the owners from a company that in reality does not have stable cash available and thereby subsequently drove it into insolvency, they would run hard into the limits set by Czech law.

In such a case, they would clearly breach the duty to act with due managerial care. They lose the protection of the so-called business judgment rule and expose themselves to severe personal consequences. In particular, they are liable for the damage caused and for the company’s debts with all of their personal assets.

In addition to civil liability and the obligation to surrender all their assets to angry creditors, the managing director is also on thin ice under criminal law. An uncovered payout of money to owners shortly before an impending collapse can very easily be classified as the criminal offence of harming a creditor, or even embezzlement.

This is precisely why a managing director must not give in to blind pressure from shareholders if they are not absolutely certain about the company’s financial stability after the advance payment. The attorneys at ARROWS help statutory bodies navigate these situations safely and prepare watertight written documentation to protect their personal assets.

Differences in processes for an s.r.o. and a joint-stock company

Although the basic principles of profit advances apply across the corporate spectrum, there are minor procedural differences between a limited liability company (s.r.o.) and a joint-stock company. In a joint-stock company, the structure of corporate bodies is usually more complex, and the supervisory board enters the picture with significant control powers.

Whereas in an s.r.o. the entire burden of the decision and the performance of the insolvency test rests exclusively with the managing director, in a joint-stock company the situation is somewhat more formal. The board of directors prepares the accounting documents and assesses liquidity, but the entire operation should be submitted for discussion to the supervisory board.

The supervisory board should thoroughly review both the interim financial statements and the board of directors’ written record of the insolvency test. Although any dissenting opinion does not de jure block the board of directors, it is a major warning signal and shifts any future liability exclusively onto the shoulders of the members of the board of directors.

In addition, some joint-stock companies have a condition directly embedded in their articles of association that the payment of any advances is subject to the supervisory board’s prior strict consent. Therefore, always check your company’s articles of association first with the experts at ARROWS (office@arws.cz) so you do not commit a formally fatal mistake.

Tax implications and the withholding tax mechanism for individuals

From a tax perspective, the payment of an advance on a profit share is viewed in exactly the same way as the payment of a standard final dividend at the end of the year. As soon as you decide to send money to a shareholder who is an individual to their private bank account, an obligation to tax this income arises immediately.

In the Czech Republic, a flat 15% withholding income tax applies to this type of capital income. It is important to understand that this tax must not—and cannot—be paid by the shareholder themselves as part of their annual tax return. Full legal and financial responsibility for taxation lies with the paying company.

The company must withhold 15% from the total approved advance and pay the shareholder only the net amount. The withheld tax must then be sent by the accounting department to the tax authority no later than the end of the calendar month following the month in which the advance was formally accounted for and paid.

If, due to lack of knowledge, the accountant paid the shareholder the advance in gross amount and did not remit the tax to the state, this failure is fully borne by the company. The tax authority will assess the withholding tax against the company, add a strict late-payment penalty, and for the managing director it again means a potential issue of breaching the duty of due managerial care.

Withholding tax exemption in a holding structure

A fundamental tax and strategic turning point arises if advances on profit are not paid to individuals, but are moved between companies within a well-designed holding structure. This is where the so-called Parent-Subsidiary Directive comes into play, offering remarkable advantages.

If the parent company holds at least a 10% ownership interest in the subsidiary continuously for twelve months, a 100% exemption from withholding income tax applies. If these conditions are met, you can transfer advances on profit to the parent company entirely without any tax burden.

The tax exemption makes advances an extremely powerful tool for safely centralising corporate cash across the entire group. Money earned by subsidiary “operating” companies can be continuously and tax-free upstreamed to the “vault” parent company, which can use it to finance acquisitions or loans.

However, it is necessary to remember the strict bureaucratic reporting requirements. Even if the transfer of a multi-million advance to the parent company is 100% exempt from withholding tax, you must formally report this transfer to the tax authority. Unfortunately, the vast majority of accountants overlook this notification obligation for exempt income.

Failure to submit the required form-based notification to the tax administration is punished by fines that can reach hundreds of thousands of Czech crowns, even though the state budget has not lost a single crown in tax. ARROWS tax specialists will therefore always thoroughly review your holding documentation and ensure the correct deadlines are met.

Foreign shareholders and international taxation

When money from advances on profit crosses national borders, you enter a minefield of international taxation. If a shareholder of your Czech s.r.o. has a tax domicile abroad, you must be extremely careful to correctly apply Czech legislation and the relevant double tax treaties.

Withholding tax paid in the Czech Republic for foreign non-residents does not always follow the standard 15% rate. If you pay an advance to a so-called tax haven (a state with which the Czech Republic has not concluded a tax treaty or an information exchange agreement), the withholding tax rate jumps to a punitive 35%.

On the other hand, if you pay an advance to an owner, for example to Slovakia or Germany, the relevant international treaty may significantly reduce the withholding tax rate, typically to 10% or 5%. However, to apply this lower rate, you must have a certificate of the shareholder’s foreign tax domicile in hand.

The above-mentioned participation directive for parent and subsidiary companies within the EU is also entirely specific. If your “parent” is registered in Austria and has held your 10% for more than a year, you can send it an advance without taxation, but again you must have strict evidence that the Austrian parent is not merely a fictitious shell.

International taxation is a complex process where mistakes become expensive. At ARROWS, a Prague-based law firm (office@arws.cz), we analyse your cross-border corporate structures and determine the correct tax rate precisely, so you do not risk serious international disputes with tax authorities across Europe.

Refund risk: What if the company does not show a profit at year-end?

The Business Corporations Act is absolutely clear and strict on this point. If the proper financial statements at year-end do not demonstrate sufficient final profit to cover previously paid advances, those paid amounts become unjust enrichment of the shareholder, to which they have no legal entitlement.

This creates an absolute statutory obligation to return this money to the company in full. It is not an option or the owner’s goodwill, but their duty, which the law strictly enforces. Protecting the stability of the company and its potential external creditors is unconditionally prioritised over the owners’ interests.

The deadline for returning unlawfully paid cash is uncompromising and very short. The advance must be returned within just three months from the day the general meeting approved (or, at the latest, should have approved) that unsuccessful proper financial statements. Time therefore runs relentlessly fast against the owners.

Enforcement of an unreturned advance: Conflict between owner and manager

If the shareholder does not voluntarily return the unlawful advance within the statutory three months, the statutory body finds itself in a highly stressful situation. The managing director is obliged to begin actively and entirely uncompromisingly enforcing this amount, as if it were any third-party debtor.

If the managing director does not do so because they fear removal from office or have respect for the owner, they grossly and fatally breach their duty of due managerial care. By failing to enforce the debt against the shareholder, they harm the company, and ultimately may be personally liable for the damage they caused.

Moreover, the owner will not get out of trouble by returning only the principal amount. Statutory default interest due to unjust enrichment applies immediately to the unreturned advance. The managing director has a duty to the company to recover from the owner not only the principal, but also this accruing interest.

Potential issues	How ARROWS helps (office@arws.cz)
Risk of mandatory repayment of an advance in the event of an unexpected loss at the end of the financial year.	Review of financial performance, setting a safe advance amount, and preparing documentation for any potential repayments.
Personal liability of the executive director for the company’s insolvency caused by irresponsible cash extraction.	Professional completion of the insolvency test and preparation of a written opinion, which serves as key evidence of due managerial care under Czech law.
Additional assessment of withholding tax and high penalties due to incorrect accounting or late payment.	Comprehensive tax oversight of the payment process, monitoring reporting deadlines and representing the client in communications with the Czech tax authority.
Tax-non-deductible loans to shareholders without market interest (the arm’s length principle).	Preparation of loan documentation, determination of the customary interest rate and elimination of the risk of additional assessment of unjustified financial benefit.
International taxation and withholding for non-residents or foreign parent companies.	Expert review of double tax treaties, securing certificates of tax residence and applying for exemption within the holding structure.

Complications with refunding paid withholding tax

When a shareholder has to repay an unjustified advance, an additional absurd bureaucratic problem arises. During the summer payment, the company withheld 15% tax and sent the shareholder only the net amount. However, by law, the owner must return the full gross amount, because the tax was paid on their behalf.

The company must then immediately approach the Czech tax authority with a complicated application for a refund of the withholding tax overpayment. It argues that the final profit distribution did not actually take place at all, and the tax was therefore paid last year without legal grounds.

In this process, tax inspectors typically require detailed financial statements, general meeting resolutions and, above all, bank statements proving that the shareholder actually returned the full amount to the company. This is a huge administrative burden, with the risk that the authorities may also open up the company’s complete accounting records.

Alternatives to advances: shareholder loans and their risks

Many entrepreneurs avoid the complex rules for advances by taking a loan from their own s.r.o. With such a transaction, there is no need to prepare interim financial statements or pay withholding tax. However, this fast approach carries tax risks, because a loan between related parties must strictly comply with the arm’s length principle.

A loan to a shareholder must bear interest at the usual market rate. If you borrow money interest-free or at an inadequately low interest rate, you, as an individual, receive a taxable financial benefit. In such cases, the Czech tax authorities will calculate the interest and assess additional personal income tax, including the relevant penalties.

Moreover, a loan does not represent a permanent extraction of cash. Sooner or later, you must repay the money to the company, which does not solve the long-term issue of accumulating untaxed profits.

Other alternatives: leasing assets and remuneration

A lawful way to draw funds on an ongoing basis may be where the owner leases their personal assets to the company (for example, real estate or vehicles) which the company demonstrably needs for its business. For the company, this is a tax-deductible expense, and for the owner, taxable income. Here too, the requirement to comply with customary market prices applies, which the Czech tax authority may require to be evidenced by an objective market survey or an expert valuation.

Another common solution is a standard monthly executive director’s remuneration based on an agreement on performance of office. However, unlike profit distributions, this option is fully subject to health insurance and social security contributions. Whichever of these alternatives you choose, the experienced attorneys of ARROWS, a Prague-based law firm, can help you set the transaction parameters so that they reliably withstand any potential tax audit.

Settlement of advances after approval of the annual financial statements

The final phase of the entire annual process is the spring or summer approval of the annual financial statements. The subsequent resolution of the general meeting (or the sole shareholder) officially confirms the profit actually achieved and definitively determines its final allocation.

The general meeting resolution must expressly state that the advances paid earlier are formally set off against the newly approved distribution. By this act, the receivable against the shareholder is cleared. If the total profit was higher, the approved difference is paid to the shareholder and is normally subject to 15% withholding tax.

Any mistake or inaccuracy in the wording of the resolution may result in the advance not being properly covered from a formal perspective. Experienced attorneys and in-house counsel must therefore pay maximum attention to the preparation of these corporate documents.

Final summary

Ongoing extraction of company cash in the form of advances is a lawful and effective tool. It allows owners to enjoy the funds they have earned in real time, without the lengthy wait for the year-end accounting close.

However, this approach requires strict compliance with statutory conditions under Czech law. It is necessary to prepare interim financial statements, carry out an insolvency test, and correctly pay withholding tax. Without sufficient profit, there is a risk of an obligation to repay the money.

To avoid personal liability and additional tax assessments, leave the complex bureaucracy to professionals. The ARROWS team (office@arws.cz) will prepare watertight documentation for you and ensure a safe payment process.

FAQ – Most common questions about paying profit advances

1. Can an executive director receive an advance if they have no ownership interest in the company?
An advance on a profit share is, by law, an exclusive proprietary right of a shareholder (owner). If the executive director is merely a hired manager without an ownership interest in the relevant s.r.o. or a.s., they have no entitlement to any profit advance. Their remuneration is addressed exclusively through a standard salary or executive director’s remuneration.

2. Our company made a heavy loss last year, but this year it is extremely profitable. Can an advance be paid?
Yes, but with great and consistent caution. When calculating the maximum permitted advance amount, you must mandatorily deduct the entire unpaid loss from previous years from this year’s profit shown in the interim financial statements. If, even after this deduction and any required allocations to reserve funds, a net profit remains, you may provide an advance from it. For more information, contact us at office@arws.cz.

3. Do all shareholders have to give written consent to paying a million-CZK advance?
No, the decision to make an advance payment from the cash desk or bank accounts is made exclusively by the statutory body (the executive director). However, they must strictly comply with the principle of equal treatment. Advances are paid in exact proportion to the ownership interests held (unless the articles of association provide for an asymmetric model), so cash must flow out of the company to all shareholders proportionately.

4. The company shows a profit on paper, but the money is tied up in inventory. Can we take out a bank loan to fund an advance payment?
This is an extremely dangerous and very risky step. Paying out shareholders using an expensive operating bank loan will, in all likelihood, fail the insolvency test in court, and the managing director would thereby seriously breach the duty of due managerial care under Czech law. Any profit achieved must always be supported by real, readily available cash; financing owners from external sources is usually a path to prison or bankruptcy. Contact us at office@arws.cz.

5. Our accountant prepared a nice interim financial statement three months ago. Can we pay six-figure advances based on it today?
We strongly advise our clients against this. From a prudence perspective, an interim financial statement should reflect as accurately as possible the company’s economic position as close as possible to the actual moment of payment. A three-month delay is far too long in today’s turbulent times, and there is always a risk that the company’s real financial situation has significantly deteriorated in the background. Instead, have the accounts updated as of today’s date.

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 situation as of 2026. Although we take the utmost care to ensure accuracy, legal regulations and their interpretation evolve over time. We are ARROWS, a law firm in Prague, an entity registered with theCzech Bar Association (our supervisory authority), and for maximum client protection 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 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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