Damalion Czech Republic Desk
Doing Business in the Czech Republic
Foreign investors are permitted to conduct business activities that include trade, real estate acquisition, and other provisions that are applicable to local companies. After four decades of communist rule, the Czech Republic slowly transformed into a command economy to a free-market economy inspired by its Velvet Revolution of 1989. Since 1990, the Czech Republic has been an appealing place for foreign investments. Its growth potential further grew when it officially joined and harmonized its laws with that of the European union on 1 May 2004.
The Advantages of Foreign Direct Investments in the Czech Republic
- The Czech Republic is an active member of the European Union.
- It has an independent and strong central banking system that regulates a stable currency.
It ensures the country easy access to European markets as well as positive interrelations with other countries outside Europe.
- A stable financial sector that showcased its incredible resilience amidst recent crisis.
- Overall public spending at a controlled and satisfactory level.
- Records one of the lowest unemployment rates in Europe, thus creating an ideal and attractive environment for foreign investors.
- Long-standing reputation of strong industrial production.
- Quality workforce at high intermediate cost.
- Centrally located in Europe
Once you are finally decided to do business in Czech Republic, there are many things that you need to deal with in order to successfully build a company in the country. Listed down below are all the requirements to meet when setting up a company in Czech Republic.
ESTABLISHING A BUSINESS PRESENCE
Foreign investors and companies that are looking to create a business presence in the Czech Republic can choose from a myriad of options. According to the Civil Code and Business Corporations Act, the primary corporate legal forms through which businesses may be operated in the country are as follows:
- Limited Liability Company
A limited liability company is a company whose registered capital is formed by contributions made by shareholders.
- Shareholders will only be held liable for their company’s obligations up to the amount of their unpaid contributions registered with the Commercial Register.
- The main corporate document of a Czech Republic limited liability company is featured in its Articles of association.
- Registered capital requirement must be at least CZK 1, while minimum contribution requirement of any one shareholder is CZK 1.
- Contributions in kind are permitted from members.
- Limited liability companies can create different kinds of shares with specific rights applicable.
- Shares in a Czech Republic limited liability are transferrable according to the share-transfer agreement, taking into effect on the pre-determined date in the agreement. Transfer of shares limitations may be created and included in the company’s Articles of association.
- May be established by a single founder. There is no limit to the number of shareholders allowed in a limited liability company framework.
- Shareholders’ names are duly registered in the Commercial Register.
- Shareholders schedule a general meeting, which is one of the most important events to be held once a year or no later than within six months of the end of the financial year.
- Management falls on the lap of one or more executive directors, duly appointed by members of company’s executive board.
- Creation of a supervisory board is optional. Like shareholders, the names of executives and members of a company’s board of directors must be registered with the Commercial Register.
- Joint Stock Company
A joint stock company is a legal form wherein the registered capital is formed by contributions made by shareholders. These shareholders are generally not held liable for a company’s obligations.
- Registered capital is subdivided into a certain number of shares.
- The primary corporate document is its Articles of association.
- Can be started by a single founder with no limitations on the number of shareholders.
- Apart from a joint stock company by a sole shareholder, shareholder names are registered in the Commercial Register.
- Required registered capital of at least CZK 2 million or approximately EUR 78,800.
- Non-monetary contributions from shareholders are permitted.
- Can issue bearer or registered shares and provided in the form of (i) Certificate (paper form) or (ii) book-entry (paperless) form. Czech Republic law allows for different share types to be formed with specific rights applicable.
- Paper shares can be transferred upon delivery and endorsement. For paperless shares, registration at the Central Securities Depositories is a requirement. Any limitations or conditions for transfer of shares are set in a company’s Articles of association.
- Shareholders must attend the general meeting, which ideally takes place at least once a year, no later than six months within the end of the fiscal year.
- A joint stock company with a monistic structure requires the appointment of a managing board or managing director
- A joint stock company with a dualistic structure, the board of directors plays an executive role in the company operations while the management role falls on the lap of the supervisory board. Unless stipulated otherwise under the articles of association, each board should have three members who may be Czech nationals or foreign citizens. All members of a company’s executive and supervisory bodies are to be registered with the Commercial Register.
- Unlimited Partnership
Under an unlimited partnership, there should be at least two individuals or legal entities that run the business using the same firm name. All concerned partners will assume obligations jointly with all their assets. There are no set requirements in terms of registered capital.
- Limited Partnership
A limited partnership is created with two or more natural persons. At least one of the partners must be identified as a limited partner who will assume liabilities up to the amount of unpaid contribution as registered with the Commercial Register. At least one partner should assume unlimited liability for any of a partnership’s debts.
- Technically, a branch established in the Czech Republic will not be considered an independent legal entity. Therefore, any actions made by the branch will be interpreted as actions made by the foreign company that registered the branch.
- The head of the branch may be a Czech national or a foreign citizen who can manage and supervise all actions related to the branch.
- The branch head will be registered with the Commercial Register.
- European Company
- In essence a European Company is an entity permitted to operate business all across Europe.
- A European Company may be set up as one of the following: (i) Merger between two or more joint stock companies from at least two different EU member states, (ii) holding company by companies meeting specific conditions, (iii) subsidiary of companies fulfilling specific conditions, (iv) joint stock company with a subsidiary in another UE member state for at least two years.
- Minimum required capital may not be less than EUR 120,000.
- Sole Proprietorship
Czech nationals and foreigners can operate in the Czech Republic under their own name after completing valid trade licenses and other crucial business permits.
Every business may commence operations after completion of the necessary permits and authorization unless the respective business activity does not necessitate the issuance of a permit (such as in the case of real estate leasing).
- Before a company can operate, a company must obtain a trade license according to the Trade Licensing Act. The Trade Licensing Act stipulates different trade types, with majority identified as free trades where no professional competence is needed to run a business.
- Prior to registration with the Czech Republic Commercial Register, specific business activities not under the Trade Licensing Act will require special authorization or permits. This is applicable for business under the financial, telecommunications, energy, and healthcare sectors.
LABOR RELATIONS & WORKING CONDITIONS
All employment-related activities are governed by Act No. 262/2006 Coll., Labour Code. Employment arises most commonly based on an employment contract.
An employment contract may include:
- Type of work
- Place or places of work
- Start date of employment
1. All employees under an employment contract are required to undergo initial medical examination before they commence their employment.
2. Trial period may be agreed on by both parties for a maximum of three months and up to six months for managerial positions, starting on the employment date.
3. Fixed-term employment is allowed for a maximum of 36 months and may be repeated two times. In essence, fixed-term employment cannot be longer than nine years. There are exceptions in case of serious operational problems.
4. Less informal employment set-ups may include agreements based on work performance and agreements on specific working activities such as in the case of seasonal or part-time work.
An employment contract may be terminated under the following cases:
- Termination agreement in written form.
- Notice of termination submitted in writing and directly delivered to the other party. Minimum notice period is two months and starts on the first date of the month following the delivery notice to the other party.
- Employers may impose termination as per Labor Code Laws, such as in the case of performance and organization reasons, as well as breaches of obligations.
- Employees may serve notice of termination without stating their reason. Notice period may be extended on by an individual written agreement between an employer and employee.
- Immediate cancellation of employment contract permitted provided both parties agree on immediate cancellation of employment.
- Cancellation during the trial period is possible for both parties. The employee and employer may terminate employment without stating their reasons.
- If an employee agrees to work after the agreed period, the nature of employment will be automatically changed to employment for an indefinite period.
- For foreign nationals, cancellation of their residence permit or expiry of work permit, Blue Card, Employee Card, or deportation.
- Death of an employee
Statutory minimum severance pay is issued to the employee in the case of termination by the employer due to organization reasons. By rule, severance pay should be one to three times tan employee’s average earnings and based on the length of tenure.
In case of an accident, occupational medical condition, or threat to developing occupational disease, the minimum statutory severance pay should be 12 times an employee’s average monthly income.
Other Important Labor and Employment Pointers:
- All employees are entitled to a minimum vacation of four weeks.
- As of 2018, the minumum wage is set by the Czech government at CZK 12 200 or EUR 480 per month, or CZK 73.20/hour.
- Overtime work will add at least 25% of average earnings unless an employer agrees to give an employee with compensatory leave instead.
- Salary may include renumeration for overtime work. For ordinary employees, a maximum of 150 hours per year may be included. On the other hand, managers can have up to 416 overtime hours per calendar year.
- Maximum working hours are 40 per week, or less under specific cases such as in two to three-shift business operations.
- Trade union formations are regulated by law.
- Collective bargaining agreement may be entered through a trade union organization for a fixed term or for an indefinite period, in which case it can be cancelled with six months’ notice.
- Strikes are permitted, but not exclusively, in support of the negotiation of collective bargaining agreements.
WORK PERMITS, RESIDENCE PERMITS, & VISAS
- Custom check of persons or goods are conducted at international airports as the Czech Republic do not have external UE borders.
- Employees from EU, EE, and Switzerland and former family members do not require work permits to gain employment in the Czech Republic.
- Employees from all other countries are required to obtain work permits and residence permits for employment reasons before they can start work.
- Laws relating to long-term residency among foreign nationals looking for employment in the Czech Republic are streamlined and aligned with EU laws.
- The Employee Card by the Ministry of Interior is issued to employees under specific working positions. An employee with an Employee Card no longer needs to apply for an individual residence permit.
- Foreign nationals may apply for a Blue Card, which is a residence and work permit in one.
- Blue Card is typically issued to workers with higher educational attainment or those with employment contract for at least one year with an average gross salary that is at least 1.5 times the average salary in the Czech Republic.
- The Czech Republic is member of the World Intellectual Property Organization (WIPO), European Patent Organization (EPO), and is considered a contractual party of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).
- Legal protection system of IP in the Czech Republic is consistent with the prevailing principles of a market economy and harmonized with EU laws.
FINANCE AND INVESTMENT
- Business Regulation
IP including trademarks and copyrights are protected in the Czech Republic under the Copyright Act.
- Banking and Finance
Czech National Bank, the country’s central bank oversees money-related policies, banking supervision, and financial markets.
- Securities are traded on the Prague Stock Exchange with two operation markets, namely the SPAD for large and medium-scale investors and module auctions for smaller investors.
- The Exchange is owned by CCESEG Aktiengesellschaft- Winer Borse AG.
- Exchange Controls
the Czech Republic does not conduct exchange control, enabling funds to move freely in and out of the country. Statistical reporting is a requirement.
- Investment Incentives
The Czech Republic offers a myriad of investment incentives under various cases, such as:
- Income tax relief
- Certain property tax exemptions
- Employment subsidies for job creation
- Training and retaining employees
- Financial support for assets acquisition
The country also issues subsidies for EU Structural Funds and other projects.
ACCOUNTING AND AUDITING
1. Accounting legislations are harmonized with EU law.
2. Contents of financial statements must be created according to Czech generally accepted accounting standards.
3. Czech accounting slightly differs from the International Financial Reporting Standards.
4. Annual financial statements must include a balance sheet, income statement, and additional notes to the financial statements.
5. For companies with obligatory audited financial statements, a statement of cash flows and statement of changes in equity are required.
6. Annual financial statements are published by the Commercial Register and must be filed together with company tax return at the relevant local tax authority.
- All controlling entity is required to prepare consolidated financial statements when a group of companies on a consolidated basis exceeds net assets of CZK 100 million, turnover of CZK 200 million, and 50 employees.
- A small group is not required to prepare consolidated financial statements unless in the case of public-interest companies.
- Companies traded on the stock exchange are required to use IFRS, as modified by EU law.
- Entities are obligated to keep accounts in Czech language. On the other hand, Accounting documents may be created using a foreign language only if the condition of comprehensibility is met.
- Entities are required to keep accounts in Czech crowns.
In accordance with the Act on Accounting, all financial statements, consolidated financial statements, and annual reports must be audited by an external auditor from: (i) large and medium-sized accounting units, (ii) small accounting units in the form of a joint stock company, with the pervious accounting period meeting at least one of these criteria:
- total net asset of no more than CZK 40 millions
- net turnover of no more than CZK 80 million per year
- average number of employees no more than 50
- Micro accounting units are not required to have their financial statements audited.
- A new company in its first year of operations may not be audited if it’s likely to transform into a medium or large-sized company.
- A company may be audited for other legal reasons.
- All financial statements are audited following International Auditing Standards.
Publication and Archiving
Companies may publish financial statements in the Collection of Deeds under the Commercial Register. Audited companies will be published on an annual report featuring financial statements, management report, and an auditor report.
- All accounting documents must be archived for at least five years or up to 30 years depending on the document type.
- Regardless of archival period, tax-related documents must be available for taxable periods where the statute of limitations remain active.
OVERVIEW OF THE CZECH REPUBLIC TAX SYSTEM
The Czech Income Tax Act regulates taxations for both individuals and companies. Locally authorized tax office will be determined based on a company’s headquarters or by taxpayer residence.
A specialized tax office (STO) carries nationwide jurisdiction for large taxpayers, making important contributions to tax revenue, with turnover exceeding CZK 200 million.
Tax audit schedule and frequency will depend on a taxpayer’s place of residence. Tax audits typically occur in smaller towns and municipalities.
All taxpayers are entitled to appeal decisions made by tax authorities after a tax audit and leading to an increase in their tax obligations. Appeals are to be made in writing with the concerned authorities within the period relevant to the decision (30 days). Taxpayers who are dissatisfied with the appeal decision may then issue an appeal to the courts.
DIFFERENT TYPES OF TAX IN THE CZECH REPUBLIC
- Corporate Income Tax (CIT) rates
- Corporate income tax levied at a general rate of 19%.
- For basic investment funds, corporate income tax rate is set at 5%.
- Pension funds are subject to tax rate of 0%.
- For local and foreign business entities whose place of operations and management is in the Czech Republic, income subject to taxation is gross worldwide income less tax-deductible expenses, less non-taxable revenue, and allowable deductions.
- Non-resident companies are taxed only from income generated in the Czech Republic.
- Time limit for tax return filings is within a three-month period.
- For CIT is filed by a tax advisor or if the taxpayer was subject to audit, time limit of submission is six months.
- Tax advancements paid semi-annually if last known liability is between CZK 30,000 and CZK 150,000 (EUR1,135 and 5,670)
- Advance payment should be 40% of tax liability.
- In case last known tax liability is more than CZK 150,000, advance payment should be one fourth of the previous tax liability and should be paid on a quarterly basis.
- All expenses incurred in obtaining and maintaining taxable income are fully tax deductible, unless listed under non-deductible items or items which are deductible only up to a limit set by law.
- Expenses incurred from research and development initiatives can be deducted from the tax base up to 100% and 110% of the total expense respectively.
- Research and development costs may be claimed twice as cost of research and development projects may remain in the calculation of tax base up to three years.
- A deduction may be obtained in two ways. Deduction for assets acquired for professional education purposes can be made twice through (i) depreciation of asset which decreases the tax base and (ii) deduction of up to 110% of total asset value in the year of acquisition.
- Companies that offer professional education can deduct up to CZK 200 per hour of education activity.
- Tax losses derived after 1993 are carried forward for five years.
- Starting July 2020, tax losses are carried backwards for two years. Maximum amount that can be claimed is CZK 30 million.
- Dividends paid by a subsidiary from CZ or EU member state resident to its parent company from CZ or another EU member resident.
- Income from sale of participation in a subsidiary
- Dividends and income generated from the sale of a participation in a subsidiary if the part is a non-EU member resident from a double tax treaty will be subject to corporate income tax not lower than 12%
Foreign Investors may claim exceptions with the following key conditions:
- Parent company must hold at least 10% of the subsidiary for at least 12 straight months.
- Income is tax exempt if it’s paid to a Switzerland, Norway, Liechtenstein, and Iceland as well.
Investment incentives are available for both local residents and foreign investors under the following categories:
- Technology centers
- Manufacturing industry
- Business support service providers, such as software development centers, shared-services centers, higg-technology repair facilities, call centers, and data centers.
Investment incentives can be provided in the following forms when all requirements are fulfilled:
- Income tax relief for up to 10 years
- Financial assistance in the creation of new jobs
- Financial support for training and retraining new employees
- Financial assistance of strategic investments in technology centers and manufacturing companies.
- Transfer of public land at ideal prices.
- Real estate tax exemption for five years.
- Withholding tax
- Dividends paid to residents and non-residents are assessed with 15% withholding tax.
- Under EU parent-subsidiary directive, dividends paid from a subsidiary to parent company will be exempted from taxation when the parent holds at least 10% of shares in the subsidiary for 12 uninterrupted months.
- For dividends paid by a CZ subsidiary to a parent company seated in Iceland, Norway, Switzerland, and Liechtenstein will be exempted from taxation.
- Withholding tax rate of 35% is applicable in cases wherein dividends are paid to other jurisdictions outside the EU and EEA.
- Interest paid to non-residents is subject to 15% withholding tax.
- Exemption applied when interest paid by a local resident to a company with permanent residency in the EU, Switzerland, Norway, Iceland, and Liechtenstein.
- Taxpayers from EU and EEA are allowed to file tax return to reduce costs related to interest payments.
- 35% rate applies when interest is paid to other EU or EEA members states with which CZ have no concluded double tax treaties.
- Royalties paid to non-residents are subject to 15% withholding tax.
- Exemption applied when royalties paid by a local resident to a company with permanent residency in the EU, Switzerland, Norway, Iceland, and Liechtenstein.
- Taxpayers from EU and EEA are allowed to file tax return to reduce costs related to royalties.
- 35% rate applies when royalties are paid to other EU or EEA members states with which CZ have no concluded double tax treaties.
- Anti-avoidance rules
- If loan recipient is a bank of insurance company, they are prohibited to deduct interest expenses from total loan amount when the sim of loans during a given tax period amounts to six times the equity.
Excessive Borrowing Costs
- Tax deductible up to a pre-determined limit. Limit set at 30% of tax profit before taxes, interest, depreciation, or up to CZK 80 million.
- Reduction of tax base (difference between income and expenses) is allowed in tax period when a taxpayer fails to meet the limit of excessive borrowing costs.
Controlled Foreign Company
- When determining the tax base for a controlled foreign company, the controlling company must consider revenues achieved, including revenues cover such as dividend income, license fees, income from sale of ownership shares, income from sale of goods and provision of services from or to affiliates with little to no added value, insurance, banking, and other financial services.
- Included revenues are included in the tax base of the controlling company in proportion to the share capital of the controlled foreign company. By rule, tax base adjustment of the controlling company shall not be executed if the adjustment would result in a reduced tax base.
The Czech Republic introduced DAC VI EU guidelines that features cross-border arrangements that potentially lead to tax advantages, which in turn must be reported to tax authorities.
Transfer pricing applies to local and foreign related parties. The parties are in direct or indirect relation if one of the parties have 25% participation in capital or voting rights. Parties may also be related when the same individual participates in management and control of both parties. When transaction prices between related parties are different from market prices with the difference not justified, tax base will be automatically adjusted by the difference.
INTERNATIONAL TAX ELEMENTS
- Double Tax Treaties
Elimination of double taxation, credit, or exemption are available under certain double tax treaties. Unused part of foreign tax will be deducted as tax expense in the following tax period.
VALUE ADDED TAX RATES
- Value Added Tax standard rate at 21%.
- Reduced VAT at 15% is applicable for food and non-alcoholic drinks plants, special healthcare products, and pharmaceutical products.
- Reduced VAT at 10% is applicable for drugs, vaccines, books, water and sewer prices, public transportation, catering services, hotel accommodations, sports and cultural events, hairdressing, and minor repairs.
- Taxable person is any legal entity or individual carrying economic activity in CZ.
- Taxable events may include (i) the supply of goods and provision of services in relation with an economic activity within the Czech Republic, (ii) intra-community acquisition of goods within the territory of the Czech Republic from another EU member state, and (iii) imported goods into the Czech Republic.
- Taxable amount is the total consideration charged for supply, excluding VAT but including any excise duties, as well as other taxes and fees.
- Tax period may be on a monthly or quarterly basis and in accordance to turnover for previous 12 straight months. Compulsory tax period for new VAT payers is calendar month.
- Since 2016, VAT payers are required to provide a recapitulation statement that features details of transactions subject to VAT in the Czech Republic and transactions for claimed input VAT deductions.
- Threshold for mandatory VAT registration for any taxable individual with a registered office, place of business, or fixed establishment in the Czech Republic is the turnover of CZK 1 million for the previous 12 consecutive calendar months. Voluntary VAT is also applicable.
- A foreign taxable person conducting long-distance sales (via mail order) in the Czech Republic to any unregistered VAT person in the Czech Republic has to register VAT in the Czech Republic for goods and supplies that reach CZK 1.14 million or EUR 43,110 in a calendar year.
- VAT threshold since 1 July 2021 will be EUR 10,000 for all distance sales, including digital services to non-taxable persons. One-Stop-Shop single EU Vat is also made an option for this type of transaction.
- Taxable persons need to register as an identified person in the following cases: (i) purchase of services from individuals or entities established outside the Czech Republic but with a supply hub in the Czech Republic, (ii) supply of services with supply hub in another EU member state, (iii) intra-community acquisition of goods from another EU member state.
- VAT group registrations must be applied to taxable persons with seats place of business, or fixed business establishment within the Czech Republic and are linked economically, financially, and organization-wise will be considered a single taxable person.
- There is no net worth tax in the Czech Republic. .
- Real estate tax includes land, building, and apartment taxes. The amount of real estate tax will depend on the main purpose of the land, building, or apartment, as well as location. The basic real estate tax rates may be adjusted at the municipality level.
- Real estate transfer tax rate set at 4%.
- Road tax is assessed on motor vehicles and trailers registered in Czech Republic and used for business reasons. No matter the purpose, vehicles that are more than 3.5 tons will be subject to tax.
- Excise duties will be levied on mineral oil, electricity, coal, natural gas, beer, wine, and tobacco products.
- Goods imported from non-EU member states are subjected to import customs clearance.
To streamline and simplify the business registration process in the Czech Republic, we highly recommend that foreign investors seek partnership with an experienced and knowledgeable consulting firm. Here at Damalion’s, we provide a wide range of professional services in all aspects of set-up and development of Czech Republic companies, including legal consulting, accounting consulting, financial advisory consulting, corporate management, auditing, tax advisory solutions, human resources consulting, recruitment, and many more. Contact us today and let our Damalion experts help you overcome the challenges of setting up a business in the Czech Republic.
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