What’s changing?
The main change, which will come into force on 1 January 2025, relates to the obligation to carry out an expert’s report on the value of the share in the company as at 31 December 2024. This report will establish the value of the share before the date of the change in the rules and will serve as a reference point for the taxation of the proceeds from the future sale of the share. Importantly, this obligation applies to individuals who hold a share in a company and plan to sell it in the future.
Assessor determines value, taxes are based on the difference
An expert opinion, which will have to be prepared as of 31.12.2024, will determine the market value of the share at that particular moment. If the owner decides to sell the share after that date, the value of the sale price will be compared with the value determined in this opinion.
Pif the difference between the sale price and the value of the share according to the expert opinion is positive, this difference will be subject to taxation. The first CZK 40 million of this difference will be exempt from income tax, which means that the individual will not pay any tax up to this threshold. The amount above this threshold will already be subject to the standard personal income tax rate, which is currently 15 %, or 23 % for higher incomes.
Practical example: how will the new system work?
Let’s imagine that an individual owns a share in a family business, the value of which has been determined by an expert as at 31.12.2024 at CZK 50 million. In 2026 he decides to sell this share for CZK 90 million. The difference between the sale price and the value determined by the expert opinion is CZK 40 million. This difference will be fully tax exempt as it does not exceed the exemption threshold.
Now imagine another scenario where the same individual sells a share for CZK 110 million. The difference between the sale price and the value of the share according to the appraisal is CZK 60 million. In this case, CZK 40 million will be exempt from tax, but the remaining CZK 20 million will be subject to tax. If a tax rate of 15% is applied, the total tax liability on this sale would be CZK 3 million.
What will this change bring for business owners?
For owners of shares in companies, especially those planning to sell in the near future, it is crucial to take these changes into account in their strategic planning. The expert opinion will become an integral part of the sale process and will affect the amount of taxable income.
It is important to note that the selection of the expert and the quality of the report can play a crucial role. The accuracy of the assessed value as at 31.12.2024 may affect the overall tax liability on a future sale. Therefore, it is advisable to contact professionals with sufficient experience in valuation of shares and preparation of expert opinions.
Reason for adjustment
While dividend income is typically taxed at 15% withholding tax when paid, income from the sale of a share may be exempt from tax after certain conditions are met, such as compliance with a three-year time test.
This modification could therefore be justified by the desire to unify the approach and reduce the possibility of optimising tax liability through a different tax regime.
The proposed change could be seen as a step towards greater transparency and simplification of the tax rules, which would lead to a fairer tax burden for investors, reflecting the actual amount of their income, regardless of whether it comes from dividends or share sales. The question here, however, is why has taxation not been brought down to the level of withholding tax?
Market and business impacts
Changes in tax rules will bring some uncertainty to the market and may affect the strategic decisions of many businesses. Some shareholders may decide to sell before the end of 2024 to avoid the need for an assessment and potentially take advantage of the current tax benefits.
Therefore, I highly recommend that you contact a professional advisor who deals with mergers and acquisitions on this issue and not try to work it out with a “family lawyer”.
Conclusion: how to prepare?
Whether you plan to sell your stake in 2025 or later, we recommend you start preparing for the rule change as soon as possible. Preparing a good valuation report should be one of the first steps you take to ensure that you are able to correctly determine the value of your share. At the same time, we recommend that you consult with experts who can help you avoid mistakes and maximize your returns.
At Nexia One Corporate Finance CZ, s.r.o. we are ready to help our clients prepare for these changes and ensure that their transactions run smoothly and efficiently. Our experience in share valuation and tax consulting allows us to provide comprehensive solutions that meet the specific needs of each client.