Czech Republic: Tax consequences of the cancellation of the statutory reserve
The Corporations Act does not require joint-stock companies or limited liability companies to create a statutory reserve (with the exception of certain special cases, such as when a joint-stock company’s balance sheet includes own shares). Companies which were incorporated after 1 January 2014 may thus freely decide whether they wish to create such a reserve, and in what amount. Companies which were incorporated on or before 31 December 2013 may dissolve the reserve which they had to create at the time, but ought to keep in mind the new rules for the distribution of own funds.
The tax treatment of the cancelled reserve depends on the decision on how to dispose of the funds released from the cancelled reserve. If these funds are merely shifted to other reserves created from the company’s earnings, or from profit/loss carried forward, in a purely 'technical’ accounting operation, then this transfer between different equity items has no tax consequences whatsoever.
Conversely, if the funds which previously formed the cancelled reserve are to be paid out (to the shareholders), one must expect them to be taxed. The Income Tax Act provides no express rules as to the tax treatment of a distribution of funds from the cancelled statutory reserve. The distribution of the reserve among the shareholders will be treated in a manner analogous to the distribution of profit – after all, in terms of substance, the relevant funds are profit (i.e., earnings of the company retained from previous years). The actual tax treatment is affected by whether the beneficiary is a legal entity or private individual, by the beneficiary’s tax residence, etc. Provided a parent-subsidiary relationship (with a stakeholding of at least 10% maintained for at least 12 months – which may also be fulfilled after the fact), and provided that the parent company has the proper legal form, this income is tax-exempt.
In other cases (e.g. a distribution to a legal entity which is not eligible for an exemption, or a distribution to a private individual / natural person), withholding tax will be charged on the income at a final rate of 15%, on the level of the given taxpayer (i.e., the company which distributes the funds). The tax assessment of the situation will also have to take into account the origin of the funds from which the statutory reserve was created: If a part of the statutory reserve which is being distributed was not created from net profit, but e.g. from capital injections by the shareholders, then such funds ought not qualify as an increase of the shareholders’ property but merely represent the repayment of money which was made available by the shareholder in the first place.
Source: Corporations Act and Income Tax Act