From 1 January 2025, an amendment to the Income Taxes Act comes into effect that introduces a CZK 40 million limit for natural persons to exempt income from the sale of shares and securities. The relevant limit applies per taxable period (i.e. for the calendar year). It includes the total income from the sale of shares and securities received by a natural person in the given year. Any part of the total income exceeding the limit of CZK 40 million will be subject to taxation, and it will have to be divided proportionally into exempt income and taxable income due to the limitation of the deductibility of expenses.

Along with this limitation, the amendment introduces the possibility of applying a special deduction to the sale price. It allows for shares and securities acquired till the end of 2024 deducting the market price of the share or security as of 31 December 2024 as an expense instead of the acquisition or purchase price of the share or security. Therefore, if you hold securities that are not publicly traded or shares whose value could exceed the limit of CZK 40 million and/or their acquisition or purchase price is relatively low (for example, if you have built your company over a long period of time), we recommend considering preparing a valuation report or an expert opinion as early as 2025. Thus, you will have the basis for the estimate of your potential future tax liability if you decide to sell your currently held shares or securities in the near or distant future. Of course, it will be possible to request the valuation in the future; however, the preparation of the expert opinion or report, even several years back, may be a more complex task for the expert, as it may be more difficult to obtain the information needed for the valuation with a time delay.

However, these new rules do not only apply to sales made after 1 January 2025. If the sale takes place before 31 December 2024, but the funds are paid to the seller only after 1 January 2025, these funds will have to be included in the newly introduced limit of CZK 40 million for exempt income. It will then be possible to deduct the market price of the share or security as an expense as of the date of its sale.

Example:

In 1999, an individual acquired a share in company A for CZK 100 thousand. It will sell this share on 29 November 2024 for CZK 50 million, which corresponds to the market price of this share as of the date of sale. The purchase price will be paid in two instalments:

(i) CZK 30 million paid on 30 November 2024; and

(ii) CZK 20 million paid on 31 January 2025.

In addition, the individual acquired securities in company B for CZK 34 million in 2021. These securities will have a market value of CZK 35 million as of 31 December 2024. The natural person will sell them on 15 June 2025 for CZK 40 million and receive this income in the relevant year.

What will be the tax liability related to these incomes in individual years?

(i) In 2024, the income of CZK 30 million is generated which is fully exempt because the time test of holding the share in business corporation for more than 5 years is fulfilled.

(ii) In 2025, the income from the sale of share A (CZK 20 million) and the income from securities B (CZK 40 million), i.e. CZK 60 million, is generated in total:

       i. CZK 40 million will be the exempt income; and

       ii. CZK 20 million will be the taxable income, i.e. 1/3 of the total income, and this ratio will have to be considered when reducing the deductible expense according to the valuation of share A as of the date of sale and securities B as of 31 December 2024.

It is clear from the above example that the calculation of the exempt and taxable income has become more complex with the introduction of this limitation, namely in the case of several different sales of shares and securities per calendar year exceeding the limit of CZK 40 million, or if the purchase price is paid in instalments over a period of several years. Therefore, we recommend that you discuss your situation with a tax advisor so that an adequate amount of deductible expenses against the taxable income is determined and your tax liability is calculated correctly.

We would also like to point out that even such (partially) exempt income is still subject to the obligation to file a Notification of Tax-Exempt Income if its amount exceeds CZK 5 million.

For completeness, we would like to state that from 1 January 2025, the above-described limit of CZK 40 million on the income from the sale of shares and securities may also include income from the sale of crypto assets, which are currently not subject to the exemption on the basis of fulfilling a time test. As we have already informed you in one of our articles, a bill was presented in the Chamber of Deputies in September that, if adopted, includes the income from the sale of crypto assets within the CZK 40 million exemption limit (however, a special regulation for the acquisition price as of 31 December 2024 is not to be introduced for this income). This bill is now in the legislative process, and we will keep you informed about its progress.

If you are affected by the above changes, contact us at your convenience. We will be pleased to discuss the situation with you.