What to do with the statutory reserve?

Czech Republic: As of 1 January 2014, limited liability companies and joint-stock companies are no longer obliged to create a statutory reserve.

As of 1 January 2014, matters of corporate governance are addressed by the Corporations Act, which (save for a few special cases) does not require limited liability companies or joint-stock companies to create a statutory reserve from their earnings. In other words, these companies may create and replenish a special reserve as they see fit. An exception applies to companies whose balance sheet accounts for own shares among their assets: these must indeed form a statutory reserve.

Until 31 December 2013, the rules for the creation and appropriation of the statutory reserve were contained in the Commercial Code, but they were also spelled out in the memorandum (or articles) of association of individual companies. In other words, to the extent that a company’s memorandum (articles) of association contain(s) provisions on how to create and replenish a statutory reserve from earnings, the company must still abide by these rules.

Companies which were incorporated prior to 31 December 2013 and which wish to dissolve an existing statutory reserve without replacement (having duly contemplated the consequences for the company’s equity), must (i) submit to the Corporations Act in its entirety (making use of a procedure known as opt-in), and (ii) amend their memorandum (articles) of association such that the provisions concerning the statutory reserve are being removed.

Once these steps have been successfully taken, the statutory reserve (i.e., the balance in the ledger account of that name – Account No. 421) may be dissolved, based upon a decision taken by the general meeting as it approves the financial statements. For instance, the balance of the statutory reserve could be transferred to the account Profit Carried Forward, or be used to cover Loss Carried Forward. Alternatively, the company could use the reserve to perform a distribution of own funds among its shareholders. Such a distribution from own funds is prohibited, however, as long as the company accounts for unsettled loss from previous years, or if the company would cause its own bankruptcy by such a payout.

Also effective as of 1 January 2014, decree No. 500/2002 Coll. on the implementation of the Accounting Act has been amended and now contains a changed definition of balance item “A.III”, newly called “Retained Earnings”. This balance item comprises funds set aside under the Corporations Act, the articles of association, the memorandum of association, the articles of incorporation, the foundation deed, or the State Enterprises Act.

Michaela Tamoková, Tax & Accounting Senior Consultant


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