Treasury shares

What it means

Treasury shares are shares that a joint-stock company has acquired from its shareholders and holds itself. Similarly, an s.r.o. can, under statutory conditions, acquire its own ownership interest. The company thus owns part of itself.

The Commercial Code strictly limits the acquisition of own shares to protect creditors from a company paying shareholders at the expense of its capital. Acquisition usually requires general meeting approval, must not reduce equity below the level protected by law, and must be funded from resources the company could otherwise distribute.

The company cannot vote its own shares and no dividends are paid on them. In the balance sheet they are not shown as assets but as a deduction from equity. The company may later sell them, use them for an employee scheme or cancel them through a share capital reduction.

How it works in practice

In practice, own shares or interests are used mainly when a shareholder leaves and the others do not want or cannot afford to buy the stake immediately, in management incentive schemes or when restructuring ownership. Rules are more flexible in a simple joint-stock company.

Before an acquisition, we check that the company has enough free equity, that is retained earnings and funds available for use. Otherwise the acquisition would breach the law and could be treated as an unlawful return of capital.

In the accounts, own shares are recorded in a separate account shown as a negative item within equity. When they are later sold, the difference between cost and sale price is taken directly to equity rather than to profit or loss.

What to watch out for

The most common mistake is acquiring an own interest without meeting the legal conditions, such as sufficient free capital. Creditors or a bankruptcy administrator can challenge the transfer, and shareholders who received money may have to return it.

The tax treatment depends on whether it is an ordinary purchase or a way of distributing profit to shareholders. For related parties, the price must also be at arm’s length. It is advisable to consult a tax adviser before the transaction.