How to set up management and cash flow between companies in a holding company

Do you own or manage a group of companies? Then you are surely dealing with how to optimize financial flows, centralize decision-making, and minimize legal and tax risks. This article will provide you with specific answers on how to properly set up management and cash flow in a holding company, what is the key difference between a holding company and a group under Czech law, and how to avoid personal liability for corporate debts.

Need advice on this topic? Contact the ARROWS law firm by email office@arws.cz or phone +420 245 007 740. Your question will be answered by "JUDr. Ondřej Stehlík, LL.M., MBA", an expert on the subject.

Holding Company vs. Group: Why is the legal definition crucial for your management?

In business practice, the terms "holding company" and "group" are often confused, but from a legal perspective, there is a fundamental difference between them that has a direct impact on your obligations and responsibilities. A holding company is primarily an economic and ownership term—it refers to a structure where the parent company owns shares in subsidiaries. However, the Czech Business Corporations Act (ZOK) does not explicitly define this term.

On the contrary, the law regulates conglomerates in detail, defining them as groups where one or more companies are subject to unified management. It is precisely the existence of unified management, i.e., a coordinated strategy and the promotion of common interests, that is the material feature that automatically subjects your group to the rules of group law, even without your formal involvement.

The Act distinguishes between three levels of influence: the lowest level of influence, a higher level of control, and the highest form, which is a group. You can become a controlling person even without a majority share. The law establishes rebuttable presumptions, for example, if you hold at least 40% of the voting rights. Many companies thus operate as de facto groups without realizing it, exposing themselves to unnecessary risks.

A key strategic step is therefore an official declaration, a so-called "recognized group," whose existence is published on the websites of all participating companies. This step gives you significant legal advantages. For executives and board members of subsidiaries, this means essential protection of their personal assets. In a recognized group, they are not liable for any damage incurred by their company as a result of complying with instructions from the controlling entity, if they could reasonably assume that the damage would be compensated within the group.

Practical management and control tools within the group

Effective group management is based on clearly defined rules and tools that ensure compliance with legislation and protect management. The basic tool is the ability of the controlling entity to issue binding instructions to controlled companies regarding business management, provided that they are in the interest of the group as a whole [Section 81 of the Business Corporations Act].

However, this does not relieve the members of the governing bodies of controlled companies of their duty to act with due diligence. However, the recognized group provides them with legal certainty – if they comply with instructions for which they are not responsible, their personal risk is minimized. At ARROWS, we will help you set up internal guidelines that precisely define the process of issuing and complying with instructions to ensure management protection. For a consultation, please contact us at office@arws.cz.

Another key document is the relationship report, which must be prepared annually by the statutory body of the controlled entity [§ 82 ZOK]. This report describes in detail all contracts, performances, and other transactions between related parties. Many perceive it as a bureaucratic burden, but its real value lies in prevention.

A carefully prepared relationship report serves as a primary defense document in tax audits, insolvency proceedings, or disputes with minority shareholders. It demonstrates that management has identified potentially disadvantageous transactions and ensured their compensation within the group, thereby fulfilling its duty of care. Our lawyers at ARROWS will help you prepare a report on relations that will be your insurance policy for the future. Write to us at office@arws.cz.

FAQ – Legal tips on management liability

1. What should I do as the managing director of a subsidiary when I receive instructions from the parent company that I consider disadvantageous?

In a recognized group, you are obliged to comply with the instruction if it is in the interest of the group. You are protected from liability if you could reasonably assume that any damage would be compensated within the group. Outside a recognized group, the situation is more risky. For an immediate solution to your situation, write to us at office@arws.cz.

1. Who is responsible for preparing the report on relations and what are the penalties for its absence?

The statutory body of the controlled company is responsible. The absence or incorrect information in the report may lead to personal liability of the members of the statutory body for any damage and questioning of their due diligence. Do you need legal assistance with documentation? Contact us at office@arws.cz.

Cash Flow Optimization: Strategic Financial Management in a Holding Company

Effective financial management is key to the success of a group. The two most common tools for optimizing liquidity are cash pooling and intra-group loans. Both offer significant advantages, but they also hide tax and legal pitfalls.

Cash Pooling: Centralize Liquidity and Reduce Costs

Cash pooling allows you to consolidate the balances of the individual companies in the group into a single master account and earn interest on them as a whole. This optimizes interest income and reduces the cost of overdrafts, as the positive balances of one company offset the negative balances of another.

There are two basic forms: fictitious (no actual transfers take place) and real (funds are physically transferred to the master account). From a legal and accounting perspective, real cash pooling is considered a system of intra-group loans and deposits. This means that the transferred funds are not reported in the accounts as cash, but as a receivable or liability to the controlling entity.

Cross-border cash pooling involves additional complications, such as withholding tax on interest and different regulations in different countries. Thanks to our international network ARROWS International, we handle cross-border financial transactions on a daily basis and can set up cash pooling for you in accordance with all relevant jurisdictions. Contact us at office@arws.cz for a tailor-made legal solution.

Risks and penalties associated with cash pooling	How ARROWS can help
Additional income tax assessment due to incorrectly set interest rates (violation of transfer pricing rules).	Preparation and defense of transfer pricing documentation. We will ensure that your interest rates stand up to scrutiny. For a review, contact us at office@arws.cz.
Non-tax deductibility of interest due to violation of thin capitalization rules.	Legal and tax analysis of financing structure. We will assess your capital structure and propose the optimal solution. Need an analysis? Write to office@arws.cz.
Withholding tax on cross-border payments and risks associated with double taxation treaties.	International tax planning. Thanks to the ARROWS International network, we optimize your cross-border financial flows in accordance with treaties. For international consulting, write to office@arws.cz.
Incorrect accounting (funds recorded as cash instead of receivables/liabilities).	Legal opinions on accounting and regulatory implications. We will provide your finance department with certainty that the correct procedure is being followed. Contact us at office@arws.cz.

Intragroup loans: A flexible alternative to bank financing

Intragroup loans are an increasingly popular alternative to traditional bank financing. They offer greater flexibility, faster approval processes, and are aligned with the strategic objectives of the entire group. However, their provision is subject to strict rules.

It is absolutely essential to adhere to the arm's length principle. This means that the interest rate and all other terms and conditions of the loan must correspond to what independent entities on the market would agree among themselves. Any deviation may be assessed by the tax authorities as a hidden redistribution of profits, resulting in additional tax assessments and penalties.

It is therefore necessary to have a formal loan agreement and thorough documentation of transfer prices to justify the interest rate set. In addition, for international loans, the European ATAD 3 directive requires that the foreign parent company have a real economic substance (offices, employees) and not just be an empty shell for tax optimization.

Key tax and legal risks you must not underestimate

Incorrect setting of intra-group relations can lead to serious financial and personal penalties. Here are the three most risky areas you need to focus on.

Transfer Pricing: A ticking time bomb under your tax base

Any transaction between related parties—whether it involves loans, sales of goods, provision of services, or licensing fees—is under the scrutiny of the tax authorities. The Income Tax Act [Section 23(7)] requires that prices in these transactions correspond to market conditions.

The tax authorities focus intensively on transfer pricing, and audits often result in additional tax assessments in the millions of crowns and high penalties. Your only defense is well-prepared transfer pricing documentation (the Master File and Local File), which proves that your prices are set correctly. Our experts at ARROWS specialize in transfer pricing and will prepare complete documentation for you that will protect you during a tax audit. Do not hesitate to contact our office – office@arws.cz.

Thin capitalization rules and tax deductibility of interest

If a subsidiary is financed mainly by loans from related parties and has low equity, the law limits the tax deductibility of interest paid. This mechanism, known as thin capitalization rules, is designed to prevent artificial reduction of the tax base. Incorrect assessment of these rules may result in interest not being recognized as a tax expense.

Liability of statutory bodies: When are you liable for the company's debts with all your assets?

This is the most serious personal risk for every executive and member of the board of directors. Your basic duty is to act with due care. If the company goes bankrupt, you have a legal obligation to file for insolvency without undue delay.

If you violate this obligation, you are liable to creditors for the damage they incurred, which is the difference between what they would have received if the petition had been filed on time and what they will actually receive [Section 99 of the Insolvency Act]. The new amendment to the Business Corporations Act has also introduced further severe penalties, including the obligation to return remuneration paid up to two years retroactively or to guarantee the company's debts if you contributed to its bankruptcy.

Risks and penalties for executives/board members	How ARROWS can help
Personal liability for company debts in the event of late filing of an insolvency petition.	Insolvency consulting and representation. We will help you identify insolvency in a timely manner and guide you through the entire process. For crisis consulting, contact us at office@arws.cz.
Obligation to return paid remuneration and other benefits up to 2 years retroactively.	Setting up contracts for the performance of functions and remuneration systems. We will prepare documentation that will stand up even in the event of insolvency. Do you need a contract review? Write to office@arws.cz.
Disqualification from office (prohibition from being a statutory body in any other company).	Compliance programs and internal guidelines. We implement processes that demonstrate due diligence and protect you. For compliance setup, contact us at office@arws.cz.
Criminal liability in cases of serious damage to creditors.	Representation in criminal proceedings and preventive legal audits. We defend your rights and help prevent the most serious consequences. Contact us at office@arws.cz.

How ARROWS ensures the safe and effective functioning of your holding company

Properly setting up management and financial flows in a holding company is a complex discipline requiring in-depth knowledge of corporate, tax, and insolvency law. Our experience from long-term consulting for more than 150 joint-stock companies and 250 limited liability companies allows us to provide fast and high-quality tailor-made solutions.

At ARROWS, we can help you with:

• Legal analysis and optimal setup of your group structure.
• Drafting internal guidelines for management, cash flow, and issuing instructions.
• Preparing and reviewing service agreements and intra-group agreements.
• Comprehensive consulting and preparation of transfer pricing documentation.
• Representation during tax audits and before administrative authorities.
• Professional training for management focused on risk prevention and compliance.
• Utilizing our international network ARROWS International for secure cross-border transactions.

Setting up a holding company correctly is not an expense, but an investment in the stability and security of your business and personal assets. Don't leave key decisions to chance. Contact our experts at office@arws.cz for a tailor-made legal solution.

FAQ – Frequently asked legal questions about management and cash flow in a holding company

Does every intra-group loan have to have a written contract, even if it is only a short-term transfer of money?

Yes, we strongly recommend it. A written agreement is key evidence for the tax authorities that this is a standard business transaction and is necessary to defend the interest rate and other conditions under transfer pricing rules. If you are facing a similar issue, contact us at office@arws.cz.

How often do I need to update my transfer pricing documentation?

The documentation should be reviewed and updated on an annual basis, especially if there have been changes in the nature of the transactions, business conditions, or the economic situation of the group. Regular updates are a sign of your diligence to the tax authorities. For assistance with documentation, contact us at office@arws.cz.

Our group operates in several EU countries. How does ARROWS deal with international aspects?

Thanks to the ARROWS International network, which has been built up over ten years, we have experts in key jurisdictions. We ensure that your intra-group transactions comply not only with Czechia legislation, but also with the laws of other countries and the relevant double taxation treaties. Our lawyers are ready to help you – write to office@arws.cz.

What exactly does "acting with due diligence" mean in the context of a group of companies?

It means acting in an informed, loyal, and justifiable manner in the interests of the company. In a group of companies, this obligation is modified – the interests of the entire group must also be taken into account. Careful documentation of decisions and compensation for any damages is key to proving that you have fulfilled this obligation. For a legal opinion on your situation, write to us at office@arws.cz

What is the difference in the liability of an executive if the group is "recognized" as opposed to a situation where it is not?

In a recognized group, the managing director of a subsidiary is protected from liability for damage caused by following instructions from the parent company. In a non-recognized (de facto) group, this protection does not exist, and the managing director is in a difficult position between loyalty to his company and pressure from the group, which increases his personal risk. Please do not hesitate to contact our office – office@arws.cz.

Can a parent company order a subsidiary to sell assets below market value? How should the managing director of the subsidiary proceed?

Yes, this is possible within the framework of the group's strategy. However, it is crucial that the damage caused to the subsidiary is compensated within a reasonable period of time by another advantage within the group (e.g., by providing more favorable financing or access to a new market). The managing director should ensure that this compensation is documented in a verifiable manner. Do you need legal assistance? Contact us at office@arws.cz