Czech Republic: The distribution of profit and other equity funds between shareholders and partners is subject to specific rules, and so are advance payments on such profit shares
Profit shares are to be determined based upon the annual (or extraordinary) financial statements, which must have been approved by the general meeting. Provided that the articles / memorandum of association allow for it, the distribution of profit to third parties (non-shareholders) is possible.
The decision to distribute profit may be passed at a general meeting that takes place no later than six months from the day as of which the relevant financial statements were compiled. This is because judicial practice has established that until that date (but no later), it ought still to be possible to develop a fair understanding of the company’s financial situation.
The law puts several restrictions on the distribution of profit. Above all, the amount allocated for distribution among the shareholders must not be higher than the net earnings generated in the previous fiscal year, plus profit carried forward and minus loss carried forward and minus payments into reserves built by the company.
In addition, joint-stock companies may not distribute profit or other own funds if their equity is lower than the subscribed share capital (plus non-distributable reserves), or would drop below the subscribed share capital upon such distribution.
The decision on the payout of the profit share is made by the statutory body. No such payment must be made if it would cause the company to become bankrupt.
As of the beginning of 2014, companies may make advance payments on future profit shares based on interim fiscal statements which must show that the company has sufficient funds for such a payout. The amount of such payout of an advance must not be higher than the net earnings generated in the previous fiscal year, plus profit carried forward and minus loss carried forward and minus mandatory payments into reserves. Reserves which were created for other purposes may not be used for paying advances, and nor may be own funds which have been earmarked (and which the company must not repurpose). The decision to pay out an advance on profit shares will be made by the statutory body.
Before the company proceeds and makes payment of profit shares (or advances on the same), it ought to review whether or not the profit share (or advance payment) is subject to withholding tax, or whether it is in fact tax-exempt, with a view to the legal form and the tax residence of the shareholder.
Source: Corporations Act (Act No. 90/2012 Coll.), Income Tax Act (Act No. 586/1992 Coll.)