From limited to joint-stock: Restructuring Czech companies under EU Law

Czech companies seeking growth, international expansion, or preparing for capital raising frequently face the challenge of transforming from a limited liability company into a joint-stock company structure. This comprehensive guide explains the legal framework, procedural requirements, and critical practical considerations for company restructuring under current Czech and EU regulations, with particular focus on the significant reforms introduced in 2024 that fundamentally changed how transformations are conducted in the Czech Republic.

Understanding the two main company structures in Czech business

The Czech Republic recognizes two primary capital company structures that dominate the business landscape: limited liability companies (společnost s ručením omezeným, or s.r.o.) and joint-stock companies (akciová společnost, or a.s.). These represent fundamentally different approaches to organizing capital, managing shareholder risk, and facilitating business growth. Understanding their distinctions is essential before embarking on any restructuring project.

The limited liability company: Foundations and current market position

The limited liability company remains the most popular business structure in the Czech Republic, accounting for the overwhelming majority of small and medium-sized enterprises across the country. This preference reflects the practical advantages of the s.r.o. model: a company can be established with a symbolic minimum registered capital of CZK 1 (approximately €0.04), making market entry economically accessible to virtually any entrepreneur regardless of available capital.

The simplicity of establishment and administration appeals to business owners who want to avoid excessive bureaucracy and maintain operational flexibility without surrendering liability protection afforded by the corporate veil.

Members of a limited liability company enjoy liability protection that extends only to the amount of their unpaid investment contributions as recorded in the Commercial Register (Obchodní rejstřík). This means that personal assets remain protected from company creditors in most circumstances, provided that capital contributions have been properly registered and paid.

The governance structure of an s.r.o. is streamlined compared to joint-stock companies: the company requires only two mandatory bodies—a general meeting and executive management—with a supervisory board remaining optional unless specified in the articles of association.

From a tax perspective, limited liability companies in the Czech Republic are subject to the standard corporate income tax rate, with dividends paid to shareholders subject to withholding tax unless exemptions apply under EU law or bilateral tax treaties. The taxation is relatively straightforward: the company calculates taxable income based on Czech accounting standards or IFRS for certain entities.

However, the limited liability company structure carries inherent constraints that become apparent as businesses mature, such as friction in share transfers when entrepreneurs seek to attract outside investors.

The joint-stock company: Structure for growth and public capital

The joint-stock company represents a fundamentally different organizational model designed to accommodate larger enterprises, multiple shareholders, and complex governance requirements. The a.s. requires a substantially higher minimum registered capital of CZK 2,000,000 (or EUR 80,000), with at least 30% of the nominal value of subscribed shares requiring payment before the company can be registered in the Commercial Register.

The governance framework for joint-stock companies is considerably more elaborate, typically maintaining three mandatory statutory bodies in the "dualistic" model or a single Administrative Board in the "monistic" model.

The critical advantage of the joint-stock company structure for growth-oriented enterprises is the ease of share transferability. Shares in an a.s., particularly if issued as book-entry securities, are easily transferable without requiring cumbersome formal agreements or shareholder approval. This makes the structure far more attractive to venture capital investors, private equity firms, and professional investment institutions.

The Czech regulatory framework explicitly authorizes joint-stock companies to issue bonds and other securities, creating additional capital-raising mechanisms that transform the a.s. from an administrative burden into a business necessity.

The 2024 Transformation Act amendment: Fundamental changes to company restructuring

Understanding the current legal framework for company transformations requires appreciation of the revolutionary changes introduced by the Amendment to the Transformation Act that entered into force on 19 July 2024. This amendment was not merely a technical correction but represented a comprehensive overhaul of how companies in the Czech Republic can restructure, merge, divide, and relocate across borders.

The Mobility Directive and cross-border transformation framework

The Mobility Directive fundamentally reimagined how European Union companies can restructure and move operations across member state borders. Prior to this directive's implementation, Czech law recognized cross-border mergers but left cross-border divisions and company relocations in a state of legal complexity.

The amendment explicitly extended the scope of Czech transformation law to encompass three primary forms of cross-border operations: cross-border mergers, cross-border divisions, and cross-border conversions.

The Mobility Directive introduced a harmonized framework through which member states recognize cross-border transformation certificates issued by notaries in the country of origin. This certification mechanism streamlines procedures that previously required duplicative legal verification. However, the amendment maintains robust protection mechanisms against abusive practices.

New transformation forms: Division by separation and strategic restructuring options

A significant innovation introduced by the 2024 amendment is the "demerger by separation" (vyčlenění). Prior Czech law recognized split-offs and spin-offs where shares in the new entities were given to the shareholders of the original company.

The demerger by separation introduces a fundamentally different mechanism: the company being demerged does not distribute assets/shares to its shareholders, but instead becomes the sole shareholder of the new successor company.

The strategic advantage of demerger by separation is immense for intra-group restructuring. Before this reform, creating a subsidiary with specific assets required sequential steps. The demerger by separation accomplishes this in one legal action, ensuring universal succession of rights and obligations, which provides greater legal certainty regarding transferred contracts and liabilities.

Simplified expert valuation procedures

The 2024 amendment reformed the expert valuation procedures that previously created delays. Under the previous regime, the appointment of an expert for asset valuation in transformations often required a court petition.

The reformed framework allows companies to select experts directly from the official list of experts maintained by the Czech Ministry of Justice, dramatically reducing timelines and administrative hurdles.

Specifically, for investment securities traded on regulated markets, the value can be determined by the weighted average of trading prices over the six months preceding the transformation. This alignment with EU standards reduces costs and accelerates the process for companies holding liquid assets.

Procedural framework for limited liability company to joint-stock company transformation

Converting a limited liability company to a joint-stock company represents one of the most common transformation structures. The process under current Czech law involves multiple coordinated steps with specific procedural requirements.

Initial preparation phase and strategic feasibility analysis

Before embarking on formal transformation procedures, company management must conduct a comprehensive preliminary analysis to ensure the entity is ready for the transition.

First, management must verify that the limited liability company's equity (vlastní kapitál) satisfies the minimum joint-stock company capital requirement of CZK 2,000,000 (or EUR 80,000).

Second, management must audit all existing shareholder agreements, investor contracts, and financing arrangements. Many investment agreements and bank loan contracts contain explicit change-of-control or reorganization clauses that require prior consent.

Third, management must assess the new governance structure, identifying and vetting candidates for the board of directors or the administrative board as required by the new legal form.

Drafting and approval of transformation documentation

Once feasibility is confirmed, management drafts the Transformation Project (projekt přeměny). This document must specify the identification of the transforming company, the capital structure, the share exchange ratio, and the articles of association for the resulting joint-stock company.

The Transformation Report explains the legal and economic aspects, though under the simplified 2024 rules, this report can be omitted if all shareholders provide consent.

All transformation documentation involving the change of legal form must be executed in the form of a notarial deed. This is a strict validity requirement that ensures legal certainty for all stakeholders involved.

Shareholder approval and voting thresholds

This is a critical area where legal precision is required. Unlike ordinary business decisions, changing the legal form of a limited liability company generally requires the consent of all members pursuant to the Act on Transformations.

However, the law allows for flexibility if the company's memorandum of association explicitly authorizes the General Meeting to decide on a change of legal form by a qualified majority.

This is a higher standard than for joint-stock companies. Investors and management must verify the memorandum of association early to determine if a 100% consensus is required or if a qualified majority suffices.

Creditor protection procedures

Czech law mandates creditor protection. The transforming company must publish the Transformation Project in the Collection of Documents of the Commercial Register to inform the public.

The 2024 amendment modified creditor protection to balance interests, reducing the period for creditors to demand security to three months following the publication of the transformation entry.

Registration and publication requirements under revised framework

The 2024 amendment simplified publication. The requirement to publish notices in the Commercial Bulletin (Obchodní věstník) has been largely replaced by publication in the Collection of Documents (Sbírka listin) and on the company's website.

The company must deposit the Transformation Project in the Collection of Documents at least one month before the date of the General Meeting that will approve the transformation.

Once approved, the management files a petition for registration in the Commercial Register. This petition must be accompanied by the notarial deeds, the project, the new articles of association, and proof of publication.

International dimensions and cross-border considerations

Cross-border transformation certificates

For cross-border transformations, a Cross-Border Transformation Certificate issued by a Czech notary is mandatory. The notary verifies compliance with all Czech legal requirements, creditor protection, and employee rights.

Once the Czech notary issues this certificate, it is accepted by the foreign registry court as conclusive evidence that the pre-transformation steps in the Czech Republic were lawful.

Third-country relocations

The 2024 amendment clarifies that Czech companies can relocate their registered office to third countries (outside the EU/EEA), provided the host country's laws allow for such immigration of a legal entity without liquidation.

ARROWS Law Firm advises foreign and domestic clients on these complex cross-border movements, ensuring compatibility between Czech law and the target jurisdiction.

Employee rights

The amendment strengthened employee rights. Employees must be informed at least 30 days before the general meeting deciding on the transformation. They have the right to comment on the Transformation Project. In a change of legal form, employment contracts transfer automatically to the new legal form, maintaining continuity of service and seniority.

Risks, complications, and legal pitfalls in transformation procedures

Despite statutory frameworks, the process involves potential complications.

Risks and Sanctions	How ARROWS (office@arws.cz) helps
Procedural errors in approval: Failure to secure the consent of all members or failure to meet the qualified majority can render the transformation invalid.	Expert legal guidance: ARROWS Law Firm ensures the correct voting threshold is identified and documented.
Tax neutrality & VAT: Incorrect transfer of assets or failure to meet the "going concern" criteria can trigger VAT clawbacks.	Tax planning: We conduct analysis to ensure the transformation meets the definition of a tax-neutral transaction.
Creditor disputes: Creditors suing for security can create legal friction.	Creditor management: ARROWS Law Firm manages the notification process and negotiates security arrangements.
Capital Adequacy: If equity is below 2 million CZK, the registration will be rejected.	Financial Review: We coordinate with accountants to verify equity sufficiency before the process starts.
Valuation Challenges: Inadequate valuation of non-monetary contributions can lead to shareholder liability.	Valuation oversight: We facilitate the selection of experts from the Ministry of Justice list.

Technical compliance risks

The most common risk is procedural invalidity. For example, failing to deposit the project in the Collection of Documents fully 30 days before the vote is a fatal flaw that requires restarting the process. Similarly, if the board structure is not correctly defined in the new Articles of Association according to the latest statutes, the court will refuse registration.

Tax consequences

While transformations are generally tax-neutral, exceptions apply. For instance, if real estate is transferred to a new entity in a demerger, Real Estate Transfer Tax is usually exempt, but specific conditions must be met. The continuity of tax losses is also subject to the "same line of business" test.

Regulatory compliance

Companies in regulated industries must notify their regulators before the transformation. Some licenses may need to be re-issued or formally transferred, as the legal entity's form is a material fact in the license.

Related questions to company restructuration

1. What happens if we don't get 100% shareholder approval?
If your Memorandum of Association does not explicitly allow the General Meeting to decide by a majority, you must have the consent of all shareholders. Without it, you cannot transform. The solution is to first amend the Memorandum to allow majority voting for transformations.

2. Can management decide to transform without shareholders?
No. A change of legal form is a fundamental change to the social contract and is the exclusive competency of the partners/shareholders.

3. Do we need to re-sign all contracts with suppliers?
Generally, no. In a change of legal form, the legal personality of the company remains the same; only its internal form changes. The company retains its ID number (IČO). However, you must notify partners of the change in the company name and update the Commercial Register.

Mitigating risks through expert legal guidance

Given the procedural complexity—especially regarding the specific voting majorities for s.r.o. transformations and the new 2024 publication rules—expert legal guidance is indispensable.

ARROWS Law Firm handles 50-100 company restructurings annually and is insured for professional liability up to CZK 400,000,000, providing clients with assurance that their structural changes are backed by substantial security.

Executive summary for management

• Capital Requirement: Ensure your s.r.o. has at least CZK 2,000,000 in equity (not just registered capital, but own resources) before starting.
• Voting Threshold: Check your Memorandum of Association immediately. Unless it says otherwise, you need 100% shareholder consent.
• Timeframe: Expect 4 to 6 months for the full process, including the 1-month notification period and expert valuation (if required).
• 2024 Simplified Rules: You can likely skip the court appointment of experts and use the Collection of Documents for notices, saving time and administrative costs.
• Tax: The process is generally tax-neutral, but verify the carry-forward of tax losses if business activities are changing.

Conclusion

The transformation of a limited liability company into a joint-stock company is a strategic milestone that unlocks capital potential and professionalizes governance. The 2024 amendments to the Transformation Act have modernized the process, introducing flexibility in expert valuation and cross-border mobility. However, the requirement for strict adherence to procedural timelines and voting thresholds remains.

ARROWS Law Firm combines deep expertise in Czech transformation law with practical experience guiding international clients, so contact office@arws.cz to discuss your specific situation with specialists in this field.

FAQ – Frequently asked legal questions about company transformation

1. How long does the transformation process take?
Typically 4 to 6 months. This includes the preparation of the project, the mandatory 1-month publication period prior to the General Meeting, the meeting itself, and the registration window.

2. Does the company get a new ID number (IČO)?
No. In a "Change of Legal Form" (s.r.o. to a.s.), the entity remains the same legal person. It keeps its IČO, tax ID (DIČ), and contractual relationships. Only the internal structure and name suffix change.

3. What is the main cost driver in transformation?
Apart from legal fees, the main costs are the Notarial fees (calculated as a percentage of registered capital) and accounting/audit costs for the closing financial statements and opening balance sheet.

4. Can we transform directly into a Monistic a.s.?
Yes. You can adopt the monistic system (Administrative Board only) directly in the transformation project and new articles of association. This is often preferred for SMEs moving to a.s. structure to avoid creating two separate boards.

5. Is a mandatory audit required?
Yes. A transformation requires a closing of books and an opening balance sheet. The opening balance sheet of the joint-stock company must be audited by an auditor to verify the existence and value of the assets covering the share capital.

6. Can foreign shareholders participate?
Yes. Foreign entities or individuals can be shareholders. Documents signed abroad typically require apostilles or super-legalization and certified translations into Czech for the Commercial Register. ARROWS Law Firm coordinates these cross-border formalities.

Notice : Disclaimer: The information contained in this article is for general informational purposes only. Although we strive for maximum accuracy, legal regulations evolve. To verify the application to your specific situation, contact ARROWS Law Firm directly (office@arws.cz). We accept no responsibility for damages arising from independent use of this information without our expert assessment.