Tax exemptions on the sale of securities are facing restrictions. The dividing line comes at 40 million

The consolidation package will significantly limit the exemption of income from the sale of securities and interests in corporations by individuals starting January 1, 2025. Specifically, it introduces a limit of exempt income to CZK 40 million (subject to a time test of 3 years or 5 years between acquisition and sale).

However, the amendment also introduces the possibility to determine the acquisition price (i.e. the expense applicable to taxable income) as the market value of the share or security determined in accordance with the Act on Valuation of Assets as at 31 December 2024. The aim is that the taxpayer will effectively tax only the increase in value after the end of 2024.

The question is what is the most appropriate way to document the market value and when to prepare such a valuation. In terms of format, there are several options ranging from an internal valuation, a professional opinion, to an expert report. However, the market value must in any case be determined in accordance with the Valuation Act, which, in addition to the definition of market value itself, sets out the procedure for determining it.

The procedure must be 'clear from the valuation, its use, including the data used, must be justified and must be appropriate to the type of the subject of the valuation, the purpose of the valuation and the availability of objective data for the valuation'.

"In our opinion, for long-standing companies, a justified approach is the income and comparative valuation methods, which should support each other in the final determination of the market value," says Boris Mišun, director of E & Y Valuations in the Czech Republic.

The income approach is based on the future financial plan of a particular company, while the comparative method is usually based on market/transaction multiples (e.g. EV/EBITDA) of comparable companies. However, market expectations for comparable companies may differ from those of a particular company. In the event of discrepancies, a reasonable explanation should then be prepared.

"Given the expertise of the valuation and in order to avoid possible future disputes with the tax authorities, it is therefore advisable, in our opinion, to prepare a realistic, robust valuation in cooperation with the relevant expert, which the preparer will be able to defend years later. The quality and experience of the preparer with the defensibility of such a valuation is therefore decisive," explains Marek Jindra, partner in the Transaction Advisory Department and head of the Valuation and Financial Modelling team at EY Czech Republic.

Another practical question is when to prepare such a valuation. Again, there are several options. The first option is to have the valuation prepared at the beginning of or during 2025. This is the earliest opportunity to prepare such a valuation, as the valuation can be prepared retrospectively, but not forward to a future date. All valuation assumptions such as macroeconomic and industrial forecasts must be known at that date. As a rule, information before and after the valuation date cannot be taken into account.

Another option is to prepare the valuation documents in an internal archive (the aforementioned macro forecasts, financial plans provided to banks for the purpose of drawing down credit, etc.) and have the valuation prepared at a later date, perhaps when you are considering selling the securities/business shares. However, this possibility may not arise until well beyond the horizon of 2025, and such a valuation would be difficult to carry out without the underlying historical material. There are also advantages and disadvantages to both approaches.

With change comes a number of question marks

Further, the legislative change traditionally raises many interpretive questions. For example, the treatment of sales made as late as 2024 (i.e. with the exemption) with a later payment of (part of) the purchase price in the case of deferred payment, instalments or earn-outs is not entirely clear. Then there is the question of whether the CZK 40 million limit will apply without further application for each tax year separately or whether in some (and if so which) cases one overall limit will apply (again relevant for staggered repayment of the purchase price).

"However, if you are considering a sale more in the near future, the most appropriate way may be to start the sale as soon as possible and avoid the valuation issue and possible discussion with the tax authorities. Currently, there are 13 months until the tax measure comes into force, which is enough time to make the sale," says Štěpán Flieger, head of the M&A team in the Strategy and Transactions Department of EY Czech Republic.

In conclusion, we would recommend discussing the issue with the relevant tax and valuation experts well in advance - we would be happy to help with assessing the application of the exemption for planned sales or with modelling the tax burden, preparing related documentation, valuation or implementation of the sale itself.