Compensation Bonus for Certain Shareholders in Limited Liability Companies

On Monday, 4 May 2020, the government submitted an amendment to the Compensation Bonus Act to the Chamber of Deputies. The amendment should support, in addition to self-employed individuals (sole proprietors), certain shareholders in limited liability companies. This article provides details on the requirements, forms of application, and the amount of compensation.

On Monday, 4 May 2020, the government decided to offer a compensation bonus to help support certain shareholders in limited liability companies whose operations have been adversely by the spread of COVID-19. The amendment to the Compensation Bonus Act is expected to be debated on Wednesday, 6 May 2020 by the Chamber of Deputies and the Senate in an abbreviated session within a legislative emergency meeting.

Who are the target shareholders?                                                        

The compensation bonus is intended for individuals (natural persons) who:

  • are shareholders in a limited liability company which:
    • was incorporated to generate profit;
    • has no more than two shareholders; or
    • has several shareholders if such shareholders are family members, i.e. relatives in a direct line of descent, siblings, spouses or partners under the Registered Partnership Act
  • were such shareholders on 12 March 2020
  • were, on 12 March 2020, tax residents of
    • the Czech Republic; or
    • another EU or EEA country, if their income from the Czech Republic is at least 90% of their overall income in the 2020 tax period
  • is not simultaneously engaged in any operations as a result of which they would participate in health insurance as employees (save for employment in the company in which they are shareholders).

Therefore, limited liability company shareholders cannot obtain the compensation bonus, for example, if they have any income in the bonus period under a work performance agreement with monthly remuneration exceeding CZK 10,000 or a work activity agreement with monthly remuneration exceeding CZK 3,000, or if their remuneration for serving as an executive or member of a cooperative or a statutory body of an association of apartment owners exceeds CZK 3,000 in the relevant calendar month. Moreover, the shareholder’s share in the limited liability company must not be represented by a share certificate.

In addition, the limited liability company in question must comply with the following requirements:

  • it is not bankrupt or in liquidation;
  • it is not an unreliable payer or an unreliable party as per the VAT Act;
  • its turnover for the previous taxable period exceeded CZK 180,000;
  • as of 12 March 2020, it was a tax resident of the Czech Republic or of another EU or EEA country (in such an event, its income from the Czech Republic must be at least 90% of its overall income)
  • it could not operate, wholly or in part, beyond its standard level due to health threats or emergency measures, because:
    • it had to shut down or limit its operations;
    • there was limited demand for its products or services;
    • its suppliers limited or terminated their deliveries;
    • an employee or a shareholder of the limited liability company was ordered to be in quarantine or he/she has to stay home to take care of his/her child/children.

Companies that were established in the course of 2019 and have not yet been able to operate throughout an entire tax period will assess the CZK 180,000 threshold as per its expected 2020 turnover.

Contrary to the original intention, shareholders in limited liability companies that have employees (other than the shareholders themselves) will also be entitled to the compensation bonus. However, the compensation bonus does not apply to executives who are not shareholders in the limited liability company at the same time.

What is the highest amount that shareholders can receive?

Limited liability company shareholders may receive a compensation bonus of CZK 500 for each day of each bonus period in which all the requirements outlined above have been met, i.e. for the first bonus period from 12 March to 30 April 2020 and for the second bonus period from 1 May to 8 June 2020S.

If an individual is a shareholder in several limited liability companies, he/she has the right to receive the compensation bonus only once for each relevant day. It is therefore necessary to indicate in the application the exact company in relation to which (in relation to its restricted operations) the compensation bonus for the relevant days in the bonus period is being requested (non-compliance, if any, with the statutory requirements by another company in which the applicant is also a shareholder will not be relevant and the tax authority will not examine it). Theoretically, it is possible to apply for the compensation bonus within the bonus period gradually in relation to several companies if the effects of the government measures on their activities would change (however, a shareholder can receive only one bonus per day).

The application for the compensation bonus for each bonus period must be submitted to the shareholder’s local tax authority. The application can be submitted in the same form as the tax return or by e-mail. An affidavit must be attached to each application in which the shareholder shall confirm that the company in question “has not been able to carry out its operation in whole or in part beyond the standard level due to health threats or emergency measures”.

The compensation bonus can be applied for no later than 60 days from the end of the bonus period, i.e. by 29 May 2020 for the first bonus period and by 7 August 2020 for the second bonus period. The shareholder’s tax authority will then pay the compensation bonus to the bank account specified in the application. For more information on how to claim the compensation bonus, see our previous article here.

In order to avoid the simultaneous granting of aid, the right to the compensation bonus is not established for the day on which the applicant received an unemployment benefit or the compensation bonus as a self-employed individual, nor for the day on which the limited liability company received Antivirus support for a shareholder who is an employee. However, it is possible to receive the compensation bonus and “nursing” allowance paid to self-employed individuals simultaneously under another government measure. It is also possible to combine the compensation bonus and maternity allowance or parental allowance.

The explanatory memorandum suggests that this restriction does not aim to avoid co-existence with any support that a limited liability company may receive in the Czech Republic or abroad in connection with the coronavirus epidemic. What is restricted is concurrence with support that de facto targets the shareholders of a particular limited liability company, i.e. any double support of a similar nature that goes into the hands of the same natural person.

What happens if a shareholder incorrectly assesses that he/she is eligible for the compensation bonus?

If the tax authority discovers during a tax audit that the bonus was paid incorrectly and thus that the shareholder was not eligible to claim it in whole or in part, the shareholder will have to return the relevant amount and pay default interest (16% or 15% of the amount p.a. on the unduly received bonus for the period during which the amount was available to him/her). It is therefore important to carefully assess whether the shareholder and the company comply with all the requirements before the application is submitted. For practical reasons, each applicant should keep a record of how he/she has determined the degree of impact on the company’s operations (“beyond the standard level”) and the relationship thereof to the health threats or emergency measures due to the coronavirus.

If the shareholder subsequently finds out that he/she was not in fact eligible for the compensation bonus or has applied for an incorrect amount, he/she should inform the relevant tax authority thereof. If he/she has already received the bonus, he/she must return the relevant amount to the tax authority.

We will keep you informed on our blog about the further course regarding the compensation bonus eligibility requirements.