The Czech economy entered a deep slump in 2023 caused by the rather rare and unfortunate combination of negative economic and geopolitical factors, including one of the highest inflation rates in the EU, rising interest rates, high energy prices, a large public finance deficit, and the adverse impacts of the war in Ukraine. Altogether, these economic difficulties resulted not just in an economic recession but also adversely affected the Czech M&A market.
Even during such challenging times, both Czech and foreign investors kept fighting for attractive Czech targets in various sectors and successfully closed several large M&A deals, such as the strategic acquisitions of gas lines operator NET4GAS and gas storage facilities operator RWE Gas Storage by state-owned Czech electric energy transmission system operator CEPS, the sale of well-known manufacturer of optical equipment Meopta Optika to Carlyle, and the Christmas-time acquisition of Czech parcels logistics company Packeta by a consortium formed by CVC and Czech investment group EMMA Capital. However, the number of smaller M&A deals dwindled significantly, and the overall number of transactions closed in 2023 dropped by approximately 20%.
Expectations for 2024 are much brighter. Inflation is slowing and interest rates are expected to decline, which indicates the Czech economy might rebound soon. The anticipated economic resurrection may also have a positive impact on the local M&A market. Besides economic factors, the 2024 Czech M&A environment will also be affected by noteworthy legislative changes.
New Tax Regime Applying to Sales of Shares by Individuals
It’s no secret that tax changes can be a strong (de)motivating factor in any economic activity, and the Czech M&A market is no exception.
One of the main goals of the current Czech Government has been to tame rampant public debt. Therefore, it introduced a new tax consolidation plan that substantially limits various existing tax exemptions, including an exemption for individuals on the taxation of proceeds from share sales and sales of other types of stakes in business entities, among other measures. As of 2025, sellers meeting statutory conditions (such as holding for periods of three years for shares and five years for other types of stakes) will no longer benefit from an unlimited exemption. Instead, gross proceeds from sales of shares and stakes exceeding an annual cap of CZK 40 million will be subject to a tax.
Since this change will only apply to individuals and the tax cap is relatively low, sellers will logically be motivated to avoid the additional tax burden and might attempt to close their contemplated share sales and receive the cash proceeds from such deals in 2024 rather than waiting until 2025. This might result in an increase in the number of small and medium-sized Czech M&A transactions. Moreover, investors will probably prefer holding their shares indirectly through legal holding entities in the future (which will still benefit from an unlimited exemption), and we might also see a different approach to the structuring of the purchase price mechanism in share purchase agreements. In particular, there will probably be more deals where the purchase price will be divided into smaller annual installments or will include some form of annual earn-out.
New Regulation for Cross-Border Transformations
The second legislative change worth noting is an amendment to the Czech Transformations Act – a piece of legislation that provides the legal framework for mergers, demergers, and other forms of corporate transformations. The amendment is currently halfway through the Czech legislative process, and its main purpose is to implement new European rules introduced by the EU Mobility Directive for cross-border conversions, mergers, and divisions.
The prepared amendment will be the largest change to the Czech Transformations Act since 2011, and it will introduce several new concepts not recognized by the current Transformations Act, such as the possibility of transferring the seat of a Czech entity to a non-EU country or the use of a new type of demerger: division by separation. In addition, the amendment should provide for a number of useful technical changes, including the explicit regulation of parallel transformations or newly simplified publication and information duties that may open new opportunities for more complex local and cross-border transactions, offer more flexibility, and lower transaction costs.
By Jan Varecha, Associate Partner, PRK Partners
This article was originally published in Issue 11.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
