You might be thinking…

• “If it’s free, what could go wrong?”

• “It’s just a loan, there’s nothing to invoice.”

• “Helping a partner company shouldn’t be a problem, right?”

Clients often ask me…

• “Can I lend equipment to another company without breaching accounting rules?”

• “Who’s liable if the other company damages the property?”

• “Do I have to pay tax on free lending?”

Legal explanation

Under the Czech Civil Code (§2193 et seq.), it is possible to make a loan-for-use contract (výpůjčka) between two businesses.
However, three basic conditions must be met:

1. A non-consumable item is lent (e.g., machinery, equipment, vehicle).

2. The use is free of charge.

3. Ownership remains with the lender, and the item must be returned.

From a civil law point of view, a loan for use between companies is valid.
But from an accounting and tax perspective, it carries several hidden pitfalls.

Tax and accounting risks

1. Free use = hidden taxable income
   Under §18(1) of the Income Tax Act, free use of property may be treated as a non-monetary income.
   The company using the item should record the usual rental value as taxable income.

2. VAT implications
   If the lender is a VAT payer and allows another company to use its assets free of charge for business purposes, this may be treated as a taxable supply (§14 of the VAT Act).

3. Accounting entries
   The item remains an asset of the lender, but the borrower must often record it for control and reporting purposes.
   Incorrect recording can distort the company’s financial statements.

4. Liability for damage
   If the borrower damages the item, they are liable under §2199 of the Civil Code.
   However, proving the damage requires a handover protocol with the item’s condition recorded.

Common mistakes

• No written contract at all.

• Mixing up loan for use and loan of consumables.

• No record or protocol describing the item’s condition.

• Failing to disclose the free use — leading to hidden-tax assessments.

• Poor asset tracking and accounting errors.

How to do it properly

1. Sign a written contract – with both companies’ full identification, IČO, registered seat, and statutory representatives.

2. State the purpose and duration – e.g., “for testing the machine for 30 days.”

3. Attach a handover protocol – include date, signatures, and photos of the item’s condition.

4. Consider symbolic payment – e.g., 1 CZK per month, to reduce risk of “free supply” classification.

5. Check tax impacts – for both VAT and corporate income tax.

Example from practice

Company A lent a lifting platform to its business partner, Company B, “for testing.”
No written contract, no invoice, no handover record.
After two months, the machine was damaged. Company B refused to pay, claiming it was “a free trial.”
The tax office later assessed output VAT for Company A, treating it as a free taxable supply.
Result: damaged equipment and a 60,000 CZK tax penalty.

Lawyer’s recommendation

A loan for use between companies only makes sense when it’s properly drafted and accounted for.
It’s not a gesture of goodwill — it’s a legal act with tax consequences.

Checklist:

• Is there a written contract stating purpose and duration?

• Is there a signed handover protocol?

• Have tax implications (income tax, VAT) been reviewed?

• Is the item insured during the loan?

• Are both companies’ assets properly tracked?

FAQ

Can two companies lend each other property for free?
Yes, but it must be in writing and properly accounted for — otherwise it may be taxed as hidden income.

Does VAT apply to a loan for use?
It depends on the purpose — if the item is used for business by the borrower, VAT may be due on the item’s fair rental value.

How can I prove it was a loan, not a gift?
A written contract, signed handover protocol, and proper accounting records are essential.