How to Determine the Tax on the Sale of a Share in a Business by an Individual

A new limit of CZK 40 million for tax exemption on income from the sale of a share in a business will come into effect in the Czech Republic in 2025. The existing five-year ownership requirement remains unchanged.

When selling a share in a business corporation, individuals must consider the potential tax liabilities that may arise. This article will explain when income from the sale of a share in a business may be exempt from tax, when it is not exempt, and what obligations must be met to qualify for this exemption.

According to Act No. 90/2012 on Commercial Corporations, a share in a business is defined as follows: “A share represents the participation of a partner in a business corporation, along with the rights and obligations that arise from this participation in each commercial corporation.”

An individual may own only one share, but this rule does not apply to capital companies or to the shares held by limited partners in limited partnerships. Capital companies include limited liability companies and joint-stock companies.

A partner who owns a share in the business has the right to make decisions, receive information, and participate in the company’s profits or liquidation balance. Additionally, a partner can file a lawsuit on behalf of the company if the manager causes damage through their actions or if another partner delays fulfilling their deposit obligation.

What Tax Is Levied on the Sale of a Share in a Company

Income from the sale of a share in a company is generally subject to income tax. For individuals, income from the transfer of a share is governed by § 10 of Act No. 586/1992 on Income Tax. Therefore, income from the sale of a share in a business is included in the tax base as “other income” under this section.

What are the specifics of selling a share in a business, and what changes have occurred in this area due to the government’s consolidation package that took effect at the beginning of this year?

While the changes will not come into effect until 2025, owners of shares in business corporations still have a few months to take advantage of more favorable conditions when selling. Currently, legislation allows for the exemption of all income from the sale of a share in a commercial corporation only if the owner has held the share for at least five years.

However, starting in 2025, these rules will become stricter. Beginning next year, income from the sale of a share in a business will be subject to a CZK 40 million limit for exemption from personal income tax. The five-year ownership requirement remains unchanged.

The limit set by the consolidation package applies collectively for the tax period (calendar year) to all income from the sale of business shares.

Income from the sale of securities is also included in this limit, with similar rules applying (the only difference being a three-year holding period for tax exemption).

It is important to note that to comply with this limit, an individual must aggregate all income from the sale of securities and shares in commercial corporations to ensure they meet the exemption threshold.

Additionally, it’s worth mentioning that the exemption for an individual is not recognized at the time of the legal sale of a share (or security); rather, it is the moment of receiving income from this transaction that is significant for the taxpayer.

Example of Potential Risk

A potential risk can be illustrated with the following example: Suppose a personal income taxpayer sells their share at the end of 2024, but the payment does not arrive in their account until 2025. In this case, it must be assumed that this income will undergo a more detailed review during the 2025 tax period to determine whether it is exempt from tax, along with any other income. Income tax will apply to any portion of the income that exceeds the CZK 40 million limit.

If the CZK 40 million limit is exceeded, only part of this income may be subject to tax. The seller has the option to declare expenses in their tax return equal to the market value of the business share (or securities) as determined by Act No. 151/1997 on Property Valuation, effective December 31, 2024.

This approach ensures that the individual will only be taxed on the increase in the share’s value from January 1, 2025.

In cases where sales are legally completed in 2024 but payment is expected only in 2025, taxpayers can claim reimbursement for expenses based on the value of the share (or securities) as determined by a valuation report dated at the time of sale in 2024. Therefore, it is likely that when filing a personal income tax return for the 2025 calendar year, a taxpayer will report taxable income and expenses that are similar or equal in amount.

Generally, taxpayers can declare the cost of purchasing a share (or securities) as an expense. This can be particularly beneficial if the value has decreased since the date of purchase. However, it’s important to note that when claiming expenses, they must be applied proportionally. For example, if taxable income is 30% and tax-exempt income is 70%, then expenses can only be claimed in that same ratio—30% of the total allowable expenses. 

Understanding Czech Tax Legislation

Navigating the complexities of Czech tax legislation and staying updated on the latest changes can be challenging for business owners. If you need assistance, you can reach out to the specialists at 360WEDO for expert advice. We keep a close eye on all legislative changes and help our clients ensure timely tax payments while conducting efficient financial transactions.

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