Tax Implications of Mergers and Demergers in the Czech Republic

Mgr. Daniel Půlpán
Mgr. Daniel Půlpán
20.3.2026 | ARROWS law firm

The decision to merge two companies, carve out part of a business, or restructure the ownership structure brings fundamental changes to documentation and accounting. However, the financial impact of the transaction is often underestimated and, if set up incorrectly, it can unnecessarily increase the tax burden by millions of Czech crowns in the Czech Republic. The tax implications of mergers and demergers are therefore among the most critical issues that managers and entrepreneurs must address.

The illustrative image shows an expert consulting on the tax implications of mergers and demergers.

Key takeaways
  • Tax neutrality requires a genuine economic rationale. A corporate transformation is tax-neutral under Czech law if you meet the statutory conditions and there is a proper economic reason. If the transaction is driven exclusively by the aim of obtaining a tax advantage, the tax authority may reclassify it and assess additional tax.
  • The transfer of tax losses is subject to strict rules. Although one benefit of a merger may be the ability to take over unused tax losses of the dissolving company, they may be used only against profits from the same or similar activity.
  • VAT and real estate tax specifics. For VAT purposes, this is not a supply of goods; however, the successor company steps into the rights and obligations, including the obligation to adjust input VAT deductions.
  • Statutory deadlines and formalities are strict. The transformation project must be filed in time in the Collection of Deeds of the Czech Commercial Register, and financial statements must be prepared as of the correct dates.

Principle of tax neutrality

When addressing the tax implications of mergers and spin-offs in the Czech Republic, the key concept is tax neutrality. This principle is set out in Section 23c of the Income Taxes Act, under which the transfer of assets and liabilities as part of a transformation is not subject to immediate Czech corporate income tax. The successor company does not take over the assets at their market value, but continues depreciation based on the original tax values.

This principle is very attractive because the tax liability is essentially deferred until the assets are actually sold.

However, the existence of a proper economic rationale is an essential condition. The transaction must not have as its main purpose the avoidance of a tax liability or tax evasion. If the Czech tax office finds that the only reason for the merger was an artificial reduction of the tax base without any real business restructuring, it will deny the tax benefits and assess additional tax together with penalties and late-payment interest.

A typical red flag for the tax authority is a situation where a profitable company merges with an empty company reporting high tax losses, without any integration of operational activities.

A proper economic rationale may include, for example, simplifying a holding structure, reducing administrative costs, or separating risky activities from asset-holding activities. It is important that this rationale is real and can be evidenced directly in the transformation project.

Related questions on the economic rationale for a transformation

1. Do I have to formally declare the economic rationale?
Yes. Although the Czech Transformations Act does not explicitly require it as a mandatory element of the project in every point, from a tax perspective it is essential. The economic rationale should be described in the transformation project or in the transformation report.

2. Is one economic rationale enough?
Yes, if it is sufficiently strong and provable. If there are multiple reasons, even better. If one of the side effects is also a tax saving, that is not unlawful in itself, provided that economic and business reasons prevail.

3. Is every merger automatically audited?
Not automatically, but mergers are a trigger event for the Czech Financial Administration. The tax authority sees the dissolution of an entity and the creation of succession. For large transactions or mergers involving companies with significant tax losses, the likelihood of a local inquiry is higher.

Transfer of tax losses

A common motive for mergers is taking over the tax loss of the dissolving company to reduce the tax base of the successor company. However, the law (Section 38na of the Income Taxes Act) guards against purpose-driven transactions. The use of the transferred loss is therefore strictly conditional on the successor company continuing to carry on the same business activity from which the loss originally arose.

After a merger, a tax loss may be used only against a tax base derived from the same or similar activity as that carried out by the company that generated the loss.

The second filter is economic justification. As noted above, if the purpose of the merger is merely to purchase a loss, it cannot be used. In such cases, the tax authority compares the revenue structure before and after the transformation.

A merger does not extend the time limit for using a loss, so if the loss arose in 2021, it can be used for the last time for the year 2026.

In practice, a thorough analysis is necessary. The attorneys and tax advisors at ARROWS, a Prague-based law firm, will carry out a pre-transaction review of whether these losses can be utilised, so the client is not buying a pig in a poke.

Related questions on the transfer and utilisation of tax losses

1. How is the same activity proven?
Income is compared based on the CZ-NACE classification and internal accounting. If there has been a material change in the revenue structure, the entitlement to deduct the loss may be limited or excluded entirely.

2. What are the penalties for an unauthorised loss deduction?
If the Czech tax office subsequently disallows the loss deduction, it will assess additional corporate income tax, impose a penalty of 20% of the additional assessment, and charge late-payment interest. The amounts can reach millions.

3. Can we ask the tax office for a binding ruling?
Yes. If there is uncertainty about using a loss after a transformation, you can request a binding assessment from the locally competent Czech tax office (tax administrator) under Section 38na of the Income Taxes Act. This is subject to an administrative fee (CZK 10,000), but it provides the company with full legal certainty.

Effective date and accounting implications

From a tax and accounting perspective, the key moment is the so-called effective date of the merger. From this date, the actions of the dissolving company are, for accounting purposes, considered actions carried out on the account of the successor company.

The dissolving company prepares final financial statements and files a tax return for the period ending on the day preceding the effective date.

The period from the effective date until the date the merger is registered in the Czech Commercial Register is already part of the accounting and tax period of the successor company. This means that although, legally, the dissolving company exists until registration in the register, for tax and accounting purposes from the effective date it is treated as if it were already part of the successor.

The successor company continues depreciation started by the original owner and cannot revalue the assets and start depreciating again from a higher value.

Related questions on the effective date and tax obligations

1. What are the risks of setting the effective date incorrectly?
The effective date must not precede the date of filing the application to register the merger in the Czech Commercial Register by more than 12 months. If the deadline is missed, the entire transaction must be redone from an accounting perspective.

2. What about the obligation to file a tax return for the dissolving company?
For the period before the effective date, the dissolving company must file a regular tax return. The deadline is standard, but if the effective date is set retroactively, this deadline may already be tight.

3. Who files the return?
If the deadline for filing the dissolving company’s tax return expires only after the company has ceased to exist, the obligation transfers to the successor company. It must file the return for the dissolved entity.

VAT and real estate tax

Mergers and demergers are not regarded as a supply of goods or provision of services where they involve the transfer of an undertaking (business) or part of it. However, the successor company becomes the legal successor and assumes all tax obligations under Czech law, including automatic VAT registration if the dissolving company was a VAT payer.

If the successor changes the purpose for which the assets are used, it must repay part of the previously claimed VAT deduction that the dissolved company had claimed.

In a merger, ownership of real estate transfers at the moment the merger is registered in the Commercial Register in the Czech Republic, not only upon registration in the Cadastral Register. In this case, the entry in the Cadastral Register is merely declaratory.

The successor company must file a real estate tax return with the competent Czech tax office by 31 January of the year following the year in which the merger was registered in the Commercial Register.

Cross-border mergers and EU directives

Cross-border transformations are more complex and are governed by the Czech Act on Transformations, which transposes the relevant EU directives, in particular the so-called Mobility Directive. From a tax perspective, the aim is to allow neutrality across borders, but the rules on reporting cross-border arrangements (DAC 6) apply.

In cross-border mergers, exit taxation (exit tax) is also addressed if, as a result of the merger, assets would be transferred abroad and the Czech Republic would lose the right to tax those assets in the future. In such a case, hidden reserves would have to be taxed before the transfer.

Practical risks and most common mistakes

Although a merger involves universal succession, for registration in the Cadastral Register and for legal certainty it is essential to specify the real estate precisely in the transformation project. Errors in plot numbers lead to rejection of the application for registration in the Cadastral Register.

The successor company becomes a VAT payer by operation of law on the date the merger is registered, but the registration application is often forgotten within the statutory deadline.

Many agreements with banks and suppliers include an obligation to notify a change of control or a merger in advance, and a breach may result in loans becoming immediately due and payable. It is necessary to review so-called change of control clauses.

Under the 2024 amendment to the Act, companies select the expert from the list of experts, which speeds up the process, but responsibility for the correctness of the valuation remains.

Risk

Solution with a Prague-based law firm

Challenge to tax neutrality

Legal and tax analysis of the economic reasons, precise wording in the transformation project.

Inability to utilise tax losses

Due diligence of tax losses and assessment of the same-activity test.

Penalties for unfiled returns

Timeline of all registration and tax obligations after the merger is registered.

Legal defects in the transformation project

Comprehensive preparation of the project under the current wording of Act No. 125/2008 Coll.
Legislative framework and updates

The legal regulation is based on the consolidated wording of the Act on Transformations of Commercial Companies and Cooperatives (Act No. 125/2008 Coll.), which was substantially amended in 2024. This amendment introduced the concept of a spin-off (vyčlenění), where the demerged company does not cease to exist but separates part of its assets into a new or existing company in exchange for shares.

This form is very attractive from a tax perspective for holding restructurings, as it allows divisions to be separated into subsidiaries without the need to sell the business, while maintaining neutrality provided the statutory conditions are met under Czech law.

Final summary

The tax implications of mergers and spin-offs require a precise approach. It is not only about whether the transaction is registered in the register, but whether it will withstand a potential tax audit in three or five years. Tax neutrality is the standard, but it is not an unconditional right, and it requires demonstrable economic rationale and compliance with formal procedures under Czech legislation.

If you do not want to risk additional tax assessments and penalties, entrust the preparation of the transaction to professionals. The attorneys at ARROWS advokátní kancelář specialise in corporate transformations and their tax aspects under Czech law and will guide you safely through the entire process. Contact us at office@arws.cz.

Notice: The information contained in this article is of a general informational nature only and is intended for basic orientation in the matter based on the legal status as of 2026. Although we take maximum care to ensure accuracy, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client protection we maintain professional liability insurance with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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