Czech Republic: Payout of profit shares to non-shareholders
The payout of profit shares triggers double taxation – the profit is first taxed with 19% corporate income tax on the level of the company, and then again upon distribution to the beneficiary (as a natural person), at a rate of 15% of the (already taxed!) profit.
When the Commercial Code was still in force, profit distribution to non-shareholders was taxed as “other income” within the meaning of Sec. 10 of the Income Tax Act, as the profit share was not based on ownership interest in a corporation and thus exempt from withholding tax. (This did not apply to the profit share of a partner in a general partnership or of the general partner in an unlimited partnership, which qualified as “income from business operations”.)
According to the current wording of the Income Tax Act, the payment of a profit share is seen as income of various categories as follows:
– the profit share of a shareholder qualifies as capital gain within the meaning of Sec. 8 (1) (a) of the Income Tax Act,
– the profit share of an employee qualifies as income from dependent gainful occupation within the meaning of Sec. 6 (1) of the Income Tax Act, and
– the profit share of the partner in a general partnership (or of the general partner in a limited partnership) qualifies as income from independent gainful activities within the meaning of Sec. 7 (1) (d) of the Income Tax Act.
A shareholder’s profit share is subject to capital gains tax (on grounds of the shareholder’s gains on its “capital” in the form of the ownership interest which they hold in the company); withholding tax is therefore applied at a rate of 15%.
The managing director, or executive (“jednatel”, in Czech), holds no ownership interest in the company which is why their profit share is considered income from dependent gainful occupation and is thus treated, in terms of taxes and levies, like an employee’s income (wage). The paid-out profit share is included in the salary for the given month; aside from 15% wage tax, contributions to social and health insurance must also be deducted. Worse still: on the level of the company, the profit share represents a non-deductible expense item. Nor can the employee (manager) deduct the profit share. In other words, under the current rules of taxation, paying out a share in the company’s profit in this manner is extremely unfavorable. It is therefore preferable to motivate the relevant employees e.g. with a one-time special compensation (bonus) that can be made dependent on the amount of profit generated by the company.
Source: Income Tax Act (Act No. 586/1992 Coll.), Corporations Act (Act No. 90/2012 Coll.)