Typical due diligence issues
The due diligence process in the Czech Republic is well established and standardized. The disclosure of documents and information, however, is still very much driven by the seller, and the buyer has limited independent sources from which to confirm issues such as litigation, compliance, environmental exposures and regulatory risks. Post-closing confirmatory due diligence is one way to avoid risks.
It is common to reflect any risks that the buyer is not able to sufficiently verify from other sources (litigation exposure, anti-bribery risks or import/export compliance) into transaction documents, combined with escrow arrangements. Privacy, information security and related matters have arisen recently as issues that require significant attention from the buyer's side.
Pricing and payment
Independent appraisals are generally not required to support the valuation of the target in a share deal and some forms of asset deal. In some more sophisticated transactions (spin-offs and other types of divesting of operational business), independent appraisal reports are required by governmental authorities to record the divesting process in the Czech Commercial Register.
Wire transfers of funds are common and wire transfers through the SWIFT Code international system are also common. Generally, no approval by Czech authorities is required to make an investment. In some cases, simple reporting to the Czech National Bank is required.
Acquisition methods
Share sale
The acquisition of shares or participation interests is generally simpler than asset acquisitions in terms of paperwork and procedural issues.
Where shares are acquired, all assets remain in the target company and few transfer documents are required. Thus, the acquisition may be completed fairly quickly. A share sale does not trigger any transfer tax. Records, if any, are only needed if the share deal requires registration with the Czech Commercial Register, but the process is relatively simple. The target company will retain all of its assets, including its licenses and permits. In addition, unlike in asset acquisitions, third-party consents for the assignment of important contracts and leases will generally not be required unless they contain change-of-control clauses.
In a share acquisition, the target company will usually retain its tax attributes, both favorable and unfavorable, assuming that the business is continued. A higher purchase price paid for the business may not be reflected in the tax basis of the target company's assets after the acquisition. The target company will retain all of its liabilities (including tax), whether disclosed or undisclosed. Indemnification for tax (and other) liabilities is frequently part of the transaction.
A share acquisition may not be a suitable solution if the buyer does not wish to purchase the target company in its entirety; in that situation, a sale as a "going concern" will be a better fit (see "Asset sale" below). In certain cases, it may be advisable for the target company to be spun off and divided into the wanted and unwanted businesses or assets before a share acquisition. However, the legal and tax aspects of a demerger (or corporate split) are more complicated in the Czech Republic and take longer (several months or more) to implement.
Asset sale
In an asset acquisition, the buyer acquires specified assets (tangible and intangible) of the target company. However, Czech law is quite restrictive regarding the ability to acquire liabilities. Frequently, an asset acquisition may only be made with the consent of a third party holding a liability against the target company. Clear identification of the specific assets to be transferred and the specific liabilities to be assumed is critical in an asset acquisition.
In an asset transaction, licenses and official permits are not usually transferable and stay with the original entity. Therefore, the buyer needs to obtain new licenses and permits for its operation, though this can often be achieved quickly. Change of control is frequently triggered under asset transactions. Tax benefits and risks stay with the original asset owner. Employees and all rights and obligations connected with the labor contracts transfer alongside the respective assets by virtue of law. However, a number of other assets (business contracts, loan agreements, other types of contractual arrangements, etc.) may only be transferred with the consent/approval of the relevant third party. If assets are acquired, the buyer's tax basis in the assets may be increased to reflect the actual purchase price. Certain liabilities may pass to the buyer in any case, for example, environmental liabilities linked to the real estate transfer to the new owner of the real estate if the real polluter is not identified.
Favorable tax attributes of the target company will normally be lost in an asset acquisition. An asset acquisition is more complex than a share acquisition because all assets that are to be transferred to the buyer must be properly identified and explicitly listed. To transfer liabilities, agreements or other types of contractual relationships, the buyer needs to seek approval from the party to the contract or liability. An asset acquisition will generally trigger "anti-assignment" clauses in the target's key contracts, licenses and permits, necessitating third-party consents for the transfer of certain valuable assets of the target. These consents may not be obtainable or may only be obtainable at a significant price or after long delays.
Czech law permits the transfer of a going concern (TOGC) or part of a going concern as part of an asset sale, under which, by virtue of law, all assets, liabilities and other items of the balance sheet of an enterprise (or its selected separate part) transfer to the buyer alongside the rights and liabilities attached to the enterprise (including agreements and contracts with third parties). However, some elements of the rights and liabilities connected to the corporate entity (corporate issues, tax liabilities, rights and obligations of stakeholders of the entity or its boards, and public licenses) stay with the original corporate entity. The assets, contracts and liabilities of the seller pertaining to the enterprise pass to the buyer without the consent of creditors. The buyer, however, acquires only those liabilities that were known to it, or that the buyer must have reasonably expected.
Signing/closing
Share sale
With respect to the sale of participation interests in a Czech limited liability company, Czech law requires that the signatures of the seller and the buyer, on the relevant transfer agreement, are notarized and that the relevant transfer agreement is submitted to the Commercial Register (to register the shareholder change). As a result, in accordance with typical market practice, a long-form share purchase agreement (SPA) - which includes the entire commercial terms of the share sale - is signed at signing and a short-form transfer agreement (under which the title to the participation interests in the target company is transferred to the buyer), is signed at closing. This is done in order to avoid submitting the entire commercial terms of the share sale to the Commercial Register (for the purpose of the registration of the shareholder change).
Similar considerations do not apply to the sale of shares in a Czech joint-stock company as Czech law does not require notarization of signatures on the relevant transfer agreement. As a result, sales of shares in a Czech joint-stock companies are often implemented by simply signing the SPA and arranging for the handover of the shares. Nevertheless, the parties may consider entering into a short-form transfer agreement in order for that to be submitted to the Commercial Register.
Where signing and closing do not occur simultaneously, signing may also take place in virtual form, with the parties signing the SPA electronically.
Asset sale
An asset sale does not typically require any notarization unless the sold assets include owned real estate or shares in a limited liability company. An asset purchase agreement (APA) is typically more extensive and detailed, because it must specify all the individual transferring assets, liabilities, contracts, employees, etc. In an asset sale, for the preparation of the relevant asset lists, the parties should allow sufficient time and involve personnel with adequate knowledge of the target's business.
A specific closing mechanism applies to asset sales which qualify as a TOGC, or part of a going concern, and where the buyer is registered in the Czech Commercial Register (e.g., as a Czech corporation). In this scenario, the transfer of the title to the enterprise as a whole (or part of it), which consists of the relevant individual assets, liabilities, contracts and employees, only occurs once certain information is published in the Czech Commercial Register (that information being a confirmation that the purchase has been filed with the Collection of Deeds (Confirmation)). Where signing and closing are due to occur on the same day, the relevant Confirmation is commonly prepared in the form of a notarial deed so that the relevant notary public can file the Confirmation with the Collection of Deeds on the same day as signing and closing occurs.
Buyers that do not own an existing Czech entity, but who wish to acquire assets located in the Czech Republic, usually set up a special purpose vehicle to act as the buying entity and to conduct the Czech business operations going forward.
Closing
Simultaneous signing and closing is common in smaller deals. Whether signing and closing is simultaneous or not will depend on whether there are conditions precedent that must be satisfied, including regulatory approvals (e.g., merger control or foreign direct investment approvals), carve-outs of certain parts of the target entity, third-party consents or waivers, or the resolution of issues discovered during due diligence.
Where signing and closing do not occur simultaneously, the SPA or the APA would provide, among other things, a list of the closing actions, including arrangements for the actual transfer of the shares or assets and the payment of the purchase price.
Foreign investment restrictions
The Czech Republic has a mandatory and suspensory foreign investment screening procedure, which means that transactions that meet the relevant criteria need to be notified to the relevant authority and cleared before they can be completed.
The foreign investment review regime is limited to certain sectors. For further information, see the more detailed section on "Foreign investment restrictions".
Antitrust/merger control
The Czech Republic has a mandatory and suspensory merger control regime, which means that transactions that meet the relevant criteria need to be notified to the competition authority and cleared before they can be completed.
It is also necessary to consider EU merger control rules. Mergers involving companies active in several member states and reaching certain turnover thresholds are examined at European level by the European Commission. This allows companies trading in different EU member states to obtain clearance for their mergers in one go. For further information, see the more detailed section on "Antitrust/merger control".
EU Foreign Subsidies Regulation
As of 12 October 2023, the EU Foreign Subsidies Regulation (FSR) requires qualifying transactions, and bids in response to certain large public tenders in the EU, to be notified for upfront clearance by the European Commission where the companies involved have benefited from foreign financial contributions (a broad concept) that exceed certain (low) thresholds. Acquisitions of a target with annual revenues in the EU of at least EUR 500 million will trigger FSR deal notifications. Acquisitions of smaller targets will not, regardless of deal value. Outright mergers and large joint ventures will trigger a notification requirement if the EUR 500 million EU-wide revenue threshold is met by one of the merging parties or the joint venture.
Other regulatory or government approvals
Approval by the competent regulator may be required where a company is acquiring a company (or business) that is subject to specific regulatory supervision, such as a financial institution or a telecom provider.
A share transaction does not trigger any obligations on the buyer or the target company towards existing employees or trade unions, other than a requirement to provide a courtesy notification to the employees and trade union of the change in ownership. An ownership change does not, by itself, trigger any additional employee or trade union rights.
The European Regulation on Protection of Employment under Transfer of Undertakings (TUPE) applies to asset sales in the Czech Republic. Employees generally follow the business activity transfer and are transferred (by operation of law) to the buyer alongside the transferred assets. Generally, all rights and liabilities attached to the employment follow with the employees.
There is no stamp duty on the transfer of shares or other ownership participation. Czech tax residents are subject to Czech income tax on their worldwide income. Czech tax nonresidents are subject to Czech income tax only on their Czech-sourced income, including the sale of assets or shares. Czech-sourced income subject to Czech income tax could be modified by a relevant double tax treaty.
Capital gains from the sale of fixed and financial assets are taxable at the general corporate income tax rate of 19% (5% for mutual, investment and pension funds). Capital gains realized by Czech tax nonresidents from the sale of shares/ownership interest in a Czech company represent Czech-sourced income subject to Czech income tax. Nonetheless, this tax on capital gain is generally eliminated by applicable double tax treaties (with some exceptions).
Capital losses from the disposal of tangible and intangible assets are generally recognized as tax-deductible. Losses on securities, shares not valued at market value (shares in subsidiaries), promissory notes and other items (e.g., receivables, ownership interests in limited liability companies) are nondeductible and cannot be carried forward.
Tax grouping has not been introduced; therefore, each taxpayer must file its own tax return and any intragroup transaction cannot be consolidated for Czech income tax purposes. Furthermore, the fiscal unity concept has not been introduced and it is not possible to offset intragroup losses and profits (with certain exceptions for partnerships).
The EU Parent-Subsidiary Directive is part of Czech tax law and allows distributed dividends to be exempt from tax under explicit conditions. Mergers (as well as demergers, capital contributions and share exchanges) are generally treated as a tax-neutral operation with no tax on non-realized incomes arising from the mergers.
The ordinary asset transaction will bear value-added tax (VAT) at the standard rate of 21% or at reduced rates of 15% or 10%.
Careful review and planning are required if the target company has any governmental subsidies. These subsidies will frequently be lost in asset transfers, or the Czech authorities might require that they be returned.
OECD's Two Pillar Solution
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.
Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.
For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.