The Czech tax authority has had enough of business owners cashing out tax-free by re-routing the payments through a new holding company. E15 reported on this last month and called it a hot topic amongst the country’s bigger business moguls. That’s because it’s targeted around 100 suspicious looking cases to investigate to see if they were legitimate business moves, or mere tax optimization. Curious what impact this could have on real estate investment structures, I turned to ASB partner Dan Ledvinka for his views.
To be clear, the authority isn’t going after the usual property SPV under a holding — that’s a normal, legitimate structure for liability, financing and exit reasons.
The exemption of dividends under Section 19 of the Income Tax Act exists to prevent economic double taxation within a parent-subsidiary relationship, not to remove profit from taxation altogether. However, the dividend tax exemption does not apply to company owners who are natural persons. For domestic residents – natural persons, a 15% tax is withheld from their dividend’s income.
What the authorities are using is the abuse of law doctrine under Section 8(4) of the Tax Code, and the Supreme Administrative Court applies a two-step test, whether a formally compliant arrangement produces a result contrary to the purpose of the law, and whether the conditions were artificially created with a tax advantage as the main purpose.
So, the line runs between the structure, which is fine, and a specific transaction, which may be challengeable.
How exposed are Czech property owners and developers to this compared to other sectors?
A holding structure with multiple SPVs is not a problem itself. The risk arises when such a structure is created artificially by a shareholder who is a natural person. The Tax Authority deal cases which involve a situation where an owner – a natural person – is directly involved in the ownership structure and there is no change in ownership when the holding structure is introduced. However, there is no economic reason for restructuring as well. Transactions are carried out solely for the purpose of obtaining tax-exempt income, which is then paid to the owner from accumulated profits. In contrast, in a standard real estate development ownership structure, the holding company is built logically and economically through acquisitions. Cash flows reflect the evolution of the project and are often reinvested after the project is completed.
Are you seeing clients review or delay restructurings, generational transfers or exits because of it?
It is clear that legal practice is shifting in a direction that has recently been shaped by court rulings. When structuring a transaction, owners consider and properly evaluate each individual step, including whether an alternative instrument or structure would be more appropriate.
Is returning capital contributions from SPVs after a sale or refinancing now a risk in itself?
The Tax Authority has also identified as one of the abusive models a situation in which the share or other assets are contributed to the company, followed by a cash payout of the contribution – again from accumulated profits. This is therefore a variation on the model of selling a share. Such a model is, of course, a clear abusive practice.
In practice, however, equity contributions are commonly distributed to shareholders, and this can raise a genuine concern as to whether such a transaction might be deemed as abusive. Here, too, the specific circumstances must be evaluated. Courts often emphasize the timing and sequence of actions. If everything happens in rapid succession without any apparent economic or other justification for such actions, the situation may be deemed an abuse.
Once again, returning of equity contribution or refinancing is not the issue; what matters are the specific circumstances and reasons that led to it. Court rulings often show that, while taxpayers clearly define the economic reasons, they lack the evidence to support their claims.
How are buyers in share deals dealing with this? More tax due diligence, indemnities, escrow?
Yes, buyers are protecting themselves more, and rightly so. When you buy a share in a structure, you inherit its tax history, including the risk of a reassessment of a past distribution years later.
In the specific case we are discussing, withholding tax was assessed. Unlike the income tax the responsibility for withholding tax payment lies with the payer of the income, not with the recipient. Any unpaid withholding tax and related late payment interest or penalties would therefore be assessed against the company.
As a result, we increasingly see more extensive tax due diligence, tax indemnities where the seller remains liable for historic tax exposure, and escrow arrangements under which part of the purchase price is retained to cover potential reassessments. We are also seeing growing use of warranty and indemnity insurance used to transfer this kind of historic tax risk to an insurer rather than leaving it between buyer and seller. We regularly assist clients with these structural and tax considerations in real estate SPV transactions, from the due diligence phase through to the implementation of appropriate risk-mitigation measures.
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