The consolidation package, which takes effect on 1 January 2024, was signed on Wednesday, 22 November 2023 by President Petr Pavel. Among other things, it comes with new conditions for individuals when selling securities and shares in a business corporation, like limited liability companies. Originally, the new conditions for the exemption of capital gains from the sale of securities and shares in a business corporation were to apply from 2024, but the amendments postponed them to 2025.
Under the current legislation, capital gains from the sale of securities and shares in a business corporation are exempt only if they meet a time test (three years for securities, five years for shares in a business corporation). If this time test is met, the proceeds from the sale are exempt from personal income tax in full.
From 2025 onwards, such income (not profits) will be exempt only up to CZK 40 million, provided that the time test of three or five years is met. The limit set by the new law is aggregated per calendar year for all income from securities and shares. Therefore, the exemption limit of CZK 40 million cannot be applied. It must be assessed for all income from sales of securities and shares that meet the time test during the year in question. It is important to stress that the exemption is assessed upon the receipt of the proceeds from the sale not at the time of the "legal" sale of the security or share. For example, if the sale occurs in 2024, but the cash from the sale is received only in 2025, proceeds received after 1 January 2025 are already subject to the income exemption limit of up to CZK 40 million.
Expenditure
Income from the sale of securities or shares in a business corporation may be taxable only in part due the limit of CZK 40 million being exceeded. In addition to such taxable income, the seller can opt to claim the market value of the security or interest in the business corporation as determined under the Valuation Act as of 31 December 2024 as an expense. This ensures that the individual is taxed only on the increase in the value of the interest after 31 December 2024. The value of the share in an appraisal prepared as of 31 December 2024 right at the beginning of 2025 may differ significantly from an appraisal prepared later that also determines the value of the share as of 31 December 2024.
For sales made in 2024 where the seller will not receive income until 2025, the value of the security or share will be deductible as an expense as determined under the Valuation Act as at the date of the sale in 2024. In practice, this means that instead of the current exemption, the individual seller will report taxable income for 2025 on their tax return, plus an expense probably in a very similar amount. As a result, the seller may pay de facto almost no tax on the sale. However, the individual will have to pay for an appraisal to value the interest in the corporation.
In addition to the above-mentioned option to use the market value as an expense under the Valuation Act, individuals still have the option of using the cost or acquisition price as an expense. This situation may arise if the market value under the Valuation Act as of 31 December 2024 is lower than the cost or acquisition price of the security or share.
Proportionate exemption and claiming of expenses
If there are several sales of securities and shares during the year that meet the conditions for exemption and in aggregate exceed the limit of CZK 40 million, the exemption must be divided proportionally. The exemption of income also affects the claimable expense against income. If only 40% of the income is taxable, since 60% of the income is exempt, only an expense equal to 40% of the total otherwise deductible expense can be claimed against the taxable income.
Example
An individual whose total income in 2025 from the sale of securities and shares in an LLC meeting the conditions for exemption would be CZK 127.5 million will pay almost CZK 8 million in tax. Below is an illustrative example to show how we arrived at this result. If the income occurred in 2024, the individual would pay no tax.
Zenon Folwarczny
Partner
Lukáš Voráček
