As the saying goes, man is a social animal. When it comes to entrepreneurship, however, we tend to prefer being our own bosses, we strive for independence. And the way to do that is entrepreneurship, or, as described by the term used by tax experts “self-employed activity”. According to Section 420 of the Czech Civil Code, an entrepreneur is a “person who, on his own account and responsibility, independently carries out a gainful activity in the form of a trade or in a similar manner with the intention to do so consistently for profit”. A person who works hard can over time become very successful at this and develop his business. Then comes a time when the entrepreneur is carrying out contracts generating large turnover, and at that point he cannot carry them out alone anymore and needs a certain level of personal, material, and technical support for his business. But this growth is also connected with other risks which the entrepreneur still bears the responsibility for and stands surety for with all of his assets. Thus he is at risk of losing everything that his hard work created or helped achieve. And this is the phase when one must look for a way how to protect the entrepreneur’s private assets, which he acquired and uses for private needs, from possible outcomes of business failure or setbacks.

A way to achieve this protection can be through a creation of a business corporation, usually a limited company (s.r.o. - a private limited company, or a.s. - a joint-stock company). Because as a business partner or shareholder, the entrepreneur stands surety only up to the amount of not paid-up share of the capital, or not paid-up part of shares, respectively. The subject of this process will be specifically a business enterprise. According to Section 502 of the Civil Code, a business enterprise is an “organised set of assets and liabilities created by an entrepreneur which, based on his will, are used to pursue his activities. An enterprise is presumed to comprise everything that is typically used for its operation.”

The transfer of a business enterprise can be realised via sale or a non-monetary contribution. For the business enterprise to be sold, there must be a buyer which means that the limited company must be established before the sale of the enterprise. With non-monetary contribution, the prior existence of a limited company is not necessary because the non-monetary contribution will represent the investment obligation by the business partner, or shareholder, into the registered capital of the company.

Regarding the sale of a business enterprise, the Civil Code states specific provisions which, besides other things, specify on one hand, what the buyer gains and on the other, what cannot be transferred by the sale of the enterprise. The sale must be governed by a contract. The form and shape of such a contract is not explicitly stated in any legal provision but in light of the fact that most often the buyers of business enterprises are persons listed in a public register who - according to the Civil Code - must make available in the register the confirmation of the sale, and from this obligation arises the gaining of the proprietary right, the contract for the sale of a business enterprise shall be in written form. If the buyer is a person not listed in the public register, this person gains proprietary right to the enterprise once the contract of the sale takes effect.

The transfer of a business enterprise has consequences following from various legal provisions and case-law.

• Firstly, we should point out that in accordance with the settled case-law the transfer of a business enterprise does not include transfer of public institutional claims or debts.
• If the entrepreneur has employees, the sale of the enterprise also brings obligations following from the Labour Code. The sale of a business enterprise is considered to be transfer of activity of the employer, and, in accordance with the Labour Code, the previous and the new employers must inform the affected employees, or a labour union if there is one, about it, and they must do so no later than 30 days prior to the day of the transfer of employment relationships taking effect (ergo the day when the sale of the enterprise takes effect).
• Other consequences follow from tax legislation. The Tax Code states that the buyer of a business enterprise must present the contract of sale to the tax administration and do so within the 15 days following the signing of said contract. The Tax Code further states that an agreement, which would impose the tax duty on another person than the tax subject, is not valid for the tax administration. This then fortifies the established case-law which confirms that public institutional claims or debts are not transferred.
• From the point of view of the VAT Act, the transferee (a taxable person) becomes a taxpayer if the business enterprise is being acquired from a taxpayer. The transfer of the business enterprise itself is not liable to value added tax because it is not considered to be delivery of goods or provision of services. The acquirer of the business enterprise is obliged to settle the right of deduction of VAT which was applied by the previous entrepreneur with those assets which are part of the business enterprise upon the transfer.
• If the sale of the business enterprise includes a transfer of proprietary rights to immovable assets, this transfer of proprietary rights is subject to real estate transfer tax, the basis of which is the exclusively recorded price, that is the price according to the legislation on property appraisal.
• From the point of view of income tax, it should be mentioned that in the case a non-monetary contribution the transferee continues the depreciation for tax purposes initiated by the depositor. In the case of the business enterprise being sold to a business corporation of which the entrepreneur is the only associate, or shareholder, one must remember provisions relating to transactions between associated persons because in this case the sale will be a transaction between associated persons. The business enterprise should be sold at such a price that would be agreed on between unassociated persons in an ordinary business relation under the same or similar conditions. If the purchase price is lower than what it would be in case of a sale between unassociated persons, the difference shall be calculated into the tax base of the entrepreneur. The purchase price should not be higher either, so that there is no unacceptable lowering of the tax base of the buyer. Besides, the entrepreneur as a statutory body of the buyer (the business corporation) is under the obligation to be diligent and prevent any unnecessarily enormous expenses. If it is the case that the entrepreneur does not keep the books, the income from sale of the business enterprise and the value of all assigned debts enter his tax base. If the sale of the business enterprise includes also stocks applied as expenditure, the tax base increases by the difference between the value of the stocks and their price settled upon the sale. If the entrepreneur keeps the books, the tax base will be assessed based on the profit or loss according to the Czech accounting and budgetary legislation.

In the previous paragraphs we have listed a few consequences stemming from the transfer of entrepreneurship into a business corporation as according to some legal provisions. In order for the transfer to be successful and for one to avoid other risks connected with it, it’s vital to define the appropriate procedure which will take into account and coordinate all demands stated by legal provisions and regulations. Should you need assistance with that, we are more than happy to offer it. We can also offer you our services regarding the ongoing process in order to assess whether everything was taken into acount.

Jan Dyškant and Šárka Veselá