Withdrawal of money from the company and taxation of profit share
Do you own a company that is doing well and would you like to cash out your profits? Don't forget about taxes!
How much money can you pay out as a company owner?
Every entrepreneur carries out an economic activity with the aim of making a profit, which is also implied by law. If you own a limited liability company, a joint stock company or a cooperative, you would certainly like to use the funds earned by the company.
After the end of the tax year, your company must close its books, prepare financial statements, prepare an income tax return and pay the tax calculated. The profit made, booked to equity, can then be paid to the shareholders. This share distribution must be approved by the general meeting or by the shareholders in the case of a single-member LLC.
Taxation of the profit share
The tax on profit sharing differs depending on whether the funds are paid to an individual or to a legal entity (another company). We will also look at how profit sharing is taxed for foreign persons.
How is a profit share from a company taxed by an individual?
- If you receive a profit share as an individual, there is no other option but to withhold a 15% withholding tax on the amount paid.
- This income is not subject to further taxation or social security or health insurance (the withholding tax is final), nor is it included in your tax return as the recipient.
The tax is withheld and paid by the paying company, which must be registered for this tax. Advances of profit sharing are subject to the same regime. The company then discloses the tax in its Withholding Tax Statement, which it files by 1 April each year.
The 15% rate applies to Czech tax residents. If the recipient is a resident of a country other than the Czech Republic, the rate (or the possibility of reducing it) must be verified in the relevant double tax treaty.
If the payment is made to a foreign person from a country with which the Czech Republic does not have a double tax treaty or an information exchange agreement, withholding tax at the rate of 35% may be applied. In any case, such payment is reported in the notification of foreign income.
How is a share of the profits of a company taxed by a corporation?
- However, if the profit share is paid to a legal entity rather than an individual, it is possible to exempt this income from income tax on the recipient's side.
- The basic condition is that you hold at least 10% of the shares in the company for at least 12 months.
- Another important factor is the legal form of the paying and receiving entity (most commonly limited liability companies, joint stock companies and cooperatives).
The above exemption therefore offers the possibility of creating a holding structure and paying profit shares to the holding company. These funds (e.g. in the form of a loan or a deposit) can be used to further develop the business within the group of companies.
Alternatively, you can borrow money from the company as an individual, but remember that any loan should be interest-bearing and the interest should be set at market rates.
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