Do You Want to Sell Your Business Share? Beware of New Taxation Rules for Individuals
As of 2025, a significant change in the taxation of share sales in companies owned by individuals has been introduced. This change can substantially impact the tax obligation (income tax) associated with the sale of shares. In the following article, we provide a comprehensive analysis of the rules applicable from this year, their practical implications, and possible tax optimization strategies.
What Has Changed for Individuals Owning Shares in a Company (Legal Entity)?
The tax regulation valid until December 31, 2024, allowed individuals to be fully exempt from income tax on the sale of shares in companies, provided they met the so-called holding period test—holding the share for at least five years. This principle had been a long-standing part of the Czech tax system, ensuring that if the holding period was met, the seller could receive income from the sale of shares in any amount without any tax liability.
For example, before December 31, 2024, it did not matter whether you received CZK 5,000,000 or CZK 500,000,000 for your company share. If you met the holding period test, the income tax obligation was CZK 0.
New Limit on Tax-Free Income as of January 1, 2025
However, from January 1, 2025, this practice undergoes a fundamental shift. A new legal amendment, approved as part of a consolidation package, retains the five-year holding period test but introduces a cap on tax-exempt income from share sales at a maximum of CZK 40 million per tax year.
Any income exceeding this threshold will be subject to the standard personal income tax rate, which as of March 2025, stands at 15% or 23% for higher incomes. This change significantly affects tax planning for business owners when the sale value exceeds the set limit.
Let’s illustrate this with a few examples:
- You own a share in a company that you have held for more than five years (holding period test) and are selling it for CZK 30 million. The taxation of such income will be zero under both the old and new rules.
- You own a share in a company that you have also held for more than five years and are selling it for CZK 100 million. Under the old law, you would pay CZK 0 in income tax. Under the new law, you will pay CZK 100 million – CZK 40 million = CZK 60 million * 23% = personal income tax of CZK 13.8 million.
The Crucial Role of Valuation Reports in the New Conditions
Lawmakers were aware of the potential retroactive effect of the new provision. Therefore, they incorporated into the law the possibility of replacing the original acquisition cost of a share with its market value as of December 31, 2024.
This key adjustment allows sellers to be taxed only on the difference between the selling price and the market value determined at the end of 2024, rather than on the difference between the selling price and the original acquisition cost. In many cases, the original acquisition cost could be significantly lower (or even zero, if the owners were the company’s founders).
The fundamental tool for determining the market value of a share as of the relevant date is an expert valuation report. Although neither the Income Tax Act nor the Property Valuation Act explicitly specifies the method for proving market value, an expert valuation report represents the most reliable and credible form of documentation for tax purposes. It not only provides a professionally substantiated value of the share but also offers sufficient evidence and arguments to justify the valuation process before the tax authorities.
Tax Calculation Under the New Rules
In cases where the income from the sale of a business share does not exceed the tax-exempt threshold (CZK 40,000,000), no taxation applies. The tax will always be zero.
However, if the income from the share sale exceeds this limit and the seller obtains an expert valuation report assessing the share as of December 31, 2024, the value determined by the valuation report serves as an expense item for tax purposes. This expense is deducted from the sale income to determine the final taxable base. However, keep in mind that the expense must be proportionally adjusted according to the portion of income subject to taxation.
For example, if you sell a company share for CZK 100,000,000 and the tax-exempt portion is CZK 40,000,000, the taxable income ratio is calculated as:
- (100,000,000 – 40,000,000) / 100,000,000 = 0.6
The expense (i.e., the share value as of December 31, 2024) determined by the valuation report must then be multiplied by this coefficient to determine the deductible amount that reduces the tax base. Let’s illustrate this with a practical example.
What Does This Mean in Practice?
Consider the scenario mentioned in the previous example: A private individual owns a company share and plans to sell it after January 1, 2025, for CZK 100 million. Under the new rules, CZK 40 million will be tax-exempt. The remaining CZK 60 million will be subject to a tax rate of 23%, resulting in a tax liability of CZK 13.8 million.
The shareowner commissions a valuation report, which determines the market value of the share as of December 31, 2024, to be CZK 90 million. The tax liability calculation is as follows:
- Sale price: CZK 100,000,000
- Market value of the share (from the valuation report): CZK 90,000,000
- Tax-exempt income: CZK 40,000,000
- Taxable income ratio: (Sale price – Tax-exempt income) / Sale price = (100M – 40M) / 100M = 0.6
- Expense based on market value: Market value from the valuation report × Taxable income ratio = 90,000,000 × 0.6 = 54,000,000 CZK
- Tax base calculation: Sale price – Tax-exempt income – Expense based on market value = 100,000,000 – 40,000,000 – 54,000,000 = 6,000,000 CZK
- Final tax (23% rate): Tax base × rate = 6,000,000 × 23% = CZK 1,380,000
Valuation Methodology for Business Shares
The market value of a company share is determined using several standardized methods, which valuation experts apply depending on the nature of the business and the available data. In Czech practice, the most commonly used methods for functioning companies are:
- Income-based methods: Such as the Discounted Cash Flow (DCF) method, the Capitalized Earnings method, and the Economic Value Added (EVA) method. These methods rely on forecasting the company’s future earnings and their present value.
- Market-based methods: Based on comparisons with similar companies or market transactions, including valuations using market capitalization, comparable companies, or comparable transactions.
- Asset-based methods: Including the book value of equity, liquidation value, and net asset value based on reproduction costs. These methods are primarily used for non-profitable companies or in liquidation cases.
Valuation experts typically combine multiple methods to achieve the most objective result. They follow recognized standards such as the methodologies of the Institute of Property Valuation at the University of Economics in Prague, the European Valuation Standards (EVS), and the International Valuation Standards (IVS).
When and How to Obtain a Valuation Report
To maximize tax optimization opportunities, proper timing of the valuation report is essential. Although the law sets December 31, 2024, as the key valuation date, the valuation report itself can be prepared at any time afterward, ideally in 2025 after the final financial statements for 2024 become available.
Only court-appointed experts in the field of economics, specializing in pricing and valuation of businesses, are authorized to prepare valuation reports. These experts are listed in the official register of court experts, and their reports bear the official “round stamp,” making them valid for tax and legal purposes.
For a high-quality valuation report, the expert typically requires the following:
- Financial statements for the last five years
- A description of the business activities
- A description of the company’s organizational structure
- Documents related to assets, liabilities, or development plans
The valuation process includes an initial consultation, data collection, analysis of internal and external factors, and the preparation of a comprehensive valuation report.
Recommendations for Shareholders
For shareholders planning to sell their shares in the coming years, it is strongly recommended to consult with tax advisors and obtain a high-quality valuation report. Given the potential savings on income tax, investing in a valuation report is a highly rational decision that can yield significantly higher savings than the cost of obtaining it.
It is also important to note that this change does not apply only to the sale of shares in limited liability companies but also to the sale of securities, where a three-year holding period was previously in effect. In these cases as well, a valuation report will be a key tool for tax optimization. We will discuss changes in the taxation of securities sales in a future article. We therefore recommend following our blog.
Tax Optimization Through a Valuation Report
A valuation report is not just a formality. It becomes a central tool for legitimate tax optimization. If properly prepared, it can significantly influence the amount of tax liability, as demonstrated by the examples above. A valuation report provides taxpayers with a legitimate means to establish a new basis for tax calculation and thereby respond to legislative changes without retroactive impacts.
Considering Selling Your Share? Contact Jaspar’s Tax Specialists
In our accounting and tax practice, we frequently encounter clients dealing with the sale of business shares. Our role is to help them optimize the entire process and provide support in preparing the necessary documents for court-appointed experts. If you are considering selling your share in a company, do not hesitate to contact us in time for a consultation on your case.
