Doing Business in the Czech Republic
2007
1. Business in the Czech Republic
Carrying on the business in the Czech Republic is defined as a continuous activity of a business person (both individuals and legal entities) performed individually, in one’s own name in order to generate profit.
Law of the Czech Republic determines six types of trading companies, i.e. the unlimited liability company, limited partnership company, limited liability company, joint stock company and also companies established under European regulations, i.e. the European company and European economic associations created for a common purpose. The first two are the so-called personal companies having associated disadvantages laws – i.e. particularly personal liability of members for company’s obligations. Limited liability companies and joint stock companies are stock corporations with a limited or no liability. In particular due to this in the Czech Republic mainly these two kinds of trading companies are established, and therefore the further interpretation will relate just to these companies.
1.1. Limited Liability Company
The company may be founded by one person, either a legal entity or an individual. A limited liability company with a sole shareholder cannot be the sole founder of, or sole shareholder in, another limited liability company. One individual can be a sole shareholder in three limited-liability companies maximum. The maximum number of shareholders is fifty.
The shareholders guarantee for the debts and other obligations of the company jointly and severally, but the liability is limited to the unpaid amount of the share capital of the company as registered in the Registrar of Companies. Therefore shareholders of the limited liability company are not liable for the company’s debts provided they have paid off their shares and such payment of the shares has been registered in the Registrar of Companies.
A limited liability company is set up in two phases. First is formation of the company by an Establishment Memorandum (if the company has only one shareholder) or by a Memorandum of Association. These documents must be in a form of notarial record.
The Establishment Memorandum or Memorandum of Association has to contain the following obligatory information:
- name of the company, registered office
- shareholders (their names and addresses of their residences or registered offices)
- purpose of the company
- amount of share capital, the amount to be paid up by each shareholder, and the manner and time for payment (share capital may be also non-monetary therefore there must be description of the non-monetary shares, value of the non-monetary shares has to be stated by an expert appointed by court)
- names and addresses of first Executives and the manner in which they act on behalf of the company.
- names and residential addresses of the members of the Supervisory Board, if established
- determination of the administrator of shares to the company's share capital
Share capital has to be at least in the amount of CZK 200,000. Minimum amount of the share of each shareholder is CZK 20,000. Generally a trade licence or a concession must be obtained for each business activity (trade) the limited liability company shall perform.
Second phase of setting up of the limited liability company is incorporation. The company is incorporated at moment it is registered by court in the Registrar of Companies; this is the moment when the corporation is created.
If the company wants to obtain trade licence(s) or concession(s), it must appoint a so-called “responsible representative” for each business activity (trade) it intends to perform. This does not apply to the unqualified trades. The responsible representative is an individual responsible, who has to meet all general requirements stated by the Trade Licensing Act and, in the case of some business activities (trades), must fulfil additional requirements in respect of specific education or experience.
Bodies
Executives - The Executive is the statutory body of the company, they are responsible for the management of the company. A limited liability company has to have at least one Executive. The Executives are appointed by the general meeting.
General Meeting - The General Meeting is a supreme body of the limited liability company.
Supervisory board - The supervisory board is established only if it is stated in the Establishment Memorandum or Memorandum of Association.
1.2. Stock Company
A stock company is a company share capital of which is divided into a certain number of stocks of a specific nominal value. A stock company can be established by one or more entities. If established entirely by individuals, at least two individuals must be involved.
Stock company is again set up in several phases. First it is founded by Founder's Deed (if the company has only one founder) or Memorandum of Association written in the form of notarial record. Then share capital of the company must be subscribed by the shareholder(s) and at least 30% of monetary shares and all non-monetary shares must be paid up before the company is registered in the Registrar of Companies. The remaining part of the monetary shares must be paid within the time limit specified in the company's Articles of Association, but no later than one year after the company is registered in Registrar of Companies.
A public offering for a subscription of stocks must be made and a Constituent General Meeting on the establishment of the company must be held by the subscribers, unless the founder(s) agree in the Memorandum of Association to pay the total share capital of the company themselves.
The Constituent General Meeting approves Articles of Association which has to contain, above all the following information:
- name of the company, registered office
- purpose of the company
- the amount of share capital and the manner of paying up the shares
- the number, nominal value and form of the issued shares and whether these are registered or bearer shares
- amount of votes attached to one share and the manner of voting at the General Meeting.
- procedure for convening General Meetings, the powers of the General Meeting and the rules governing the adoption of resolutions
- number of members of the Board of Directors and the Supervisory Board, the procedure for their election, the scope of their powers and the period for which they are elected
- manner for creation of reserve fund, its amount and way by which it will be replenished
- manner of distribution of profits and settlement of losses
- consequences of non-payment for subscribed shares within the prescribed time limit.
- manner for increasing or decreasing the registered capital.
- procedures for amending the Articles of Association.
Generally a trade licence or a concession must be obtained for each business activity (trade) the limited liability company shall perform (except unqualified trades). Stock company has to appoint “responsible representative” appointed under the same conditions as limited liability company.
Also in the case of stock company, the company must apply for registration in the Registrar of Companies. Once it is registered in the Registrar of Companies, the company comes is incorporated.
A minimum amount of share capital of stock company is CZK2,000,000; if it is established by a public offering of shares, then the minimum share capital is CZK20,000,000. No minimum nominal value of a stock is prescribed. There are no restrictions regarding the number of shareholders. Shares can be in the form of either registered or bearer shares.
Bodies
Board of Directors - The Board of Directors is responsible for the management of the company. It must have at least three members (with the exception of companies with a sole shareholder). Members are elected for a period not exceeding five years (re-election is possible) and they elect their own chairman.
Supervisory Board - The Supervisory Board has to have at least three members It is elected by the General Meeting. No member of the Supervisory Board may be a member of the Board of Directors. Members may serve for a maximum of five years and may be re-elected. The main functions of the Supervisory Board are to review the performance of the Board of Directors.
General Meeting - The Board of Directors has to summon a General Meeting at least once a year. The General Meeting is a supreme body of the limited liability company.
1.3. Branch of Foreign Company
Foreign entities may run business in the territory of the Czech Republic also through a branch of foreign company. Branches are not separate legal entities. They are organisational units of their founders; therefore the head of the branch (appointed by its founder) is not a statutory body.
2. Taxation in the Czech Republic – Overview
2.1. Corporate Income Tax
After the incorporation legal entities, including branches of legal entities, have to register with the tax authorities within 30 days of registration in the Registrar of Companies. Foreign entities establishing a permanent establishment must also register with the tax authorities; registration in the Registrar of Companies is not needed. Generally the tax period is a calendar year; however taxpayers may choose a different taxable period (a fiscal year) upon notification to tax authorities.
In general, expenses incurred to generate, assure, or maintain taxable income, are treated as tax-deductible. Proper documentation (receipts, invoices) must be kept to support the tax deductibility of such expenses.
Rate of corporate income tax is 24 % from the recipient’s tax base for year 2007.
Dividends received by a Czech resident company or individual from a Czech company are not to be included in the recipient’s tax base, as they are subject to a final 15 % withholding tax.
2.2. Personal Income Tax
Rates of personal income tax:
Income (CZK) Tax (CZK)
0 – 121,200 12%
121,200 – 218,400 14,544 + 19% on excess over 121,200
218,400 – 331,200 33,012 + 25% on excess over 218,400
over 331,200 61,212 + 32% on excess over 331,200
2.3. Value Added Tax
Czech individuals and legal entities must register for VAT if their turnover in the preceding 12 calendar months exceeded CZK 1 million. Foreign entities registered for VAT purposes in other EU states or entities from third countries, which carry out commercial activities defined by law on the territory of the Czech Republic, are obliged to register for VAT irrespective of their turnover.
Standard VAT rate – 19% – most products and services
Reduced VAT rate – 5% – basic foodstuffs, pharmaceutical products, paper products, books, newspapers, certain medical equipment, heating
2.4. Real Estate Tax
Real estate tax is payable by the registered owner of land or buildings located in the Czech Republic. If ownership cannot be determined, real estate tax is payable by the user of the land/property.
2.5. Real Estate Transfer Tax
Real estate transfer tax is levied on the sale or transfer of real estate. The tax rate is 3% and is levied on either the transfer price or the officially assessed value, whichever is higher. The tax is normally payable by the seller, with the purchaser acting as guarantor.
2.6. Other Taxes
Tax system of the Czech Republic recognizes also gift tax, inheritance tax, excise taxes and road tax.
3. Labour Law
With effect from January 1, 2007 the area of labour law in the Czech Republic is newly stipulated by Act No 262/2006 Coll., Labour Code. In most institutes the new Labour Code follows up the original legal regulations from 1965, which in 2000 harmonised the area of labour law with the law of the European Union.
3.1. Labour Law Relations
3.1.1. Employment Relationship
Employment relationship is established by an employment contract between the employer and the employee or by appointment, which, however, applies solely to the management functions in the state sector. The employer is obliged to conclude an employment contract with an employee in writing but non-existence of a written contract does not result in invalidity of such a contract. Employment contract can also be concluded orally or concludently.
Necessary and essential elements to be included in the employment contract are:
- type of work the employee is to perform for the employer
- place or places where the work is to be performed
- day of job commencement
Trial period can be agreed for maximum 3 months. Under the sanction of its invalidity, it must be agreed in writing.
Employment relationship is concluded for indeterminate time unless the employment contract specifies explicitly that it is concluded for determinate time. A possibility to conclude employment relationship for determinate time is limited in such a way that employment relationship between the same participants can only be concluded for the maximum time of 2 years from the day on which the employment relation was established. This does not apply if the minimum time of 6 months expired from the termination of the previous employment relationship for determinate period.
3.1.2. Termination of Employment
Employment relationship is terminated by:
- a written agreement between the employee and employer
- a notice from the employee or employer
- immediate termination
- termination in the trial period
Notice must be made in writing and delivered to the other party. The notice period for both the employee and the employer is 2 months and it starts to run on the first day of the month following the delivery of the notice. The employee can give a notice due to any reasons or even without specifying a reason. The employer can only give a notice to the employee due to the reasons specified explicitly in law, e.g. dissolution of the employer, its relocation; the employee becomes redundant after reorganisation; health of the employee disqualifies him/her from the work performance; the employee does not meet the requirements for proper work performance; dissatisfactory work results if the employee was asked in writing to improve the situation and did not do so; if the employee repeatedly breaches obligations relating to the work in question and was informed about a possible notice.
Save for exceptions, the employer cannot give notice to an employee in so-called protected period, e.g. during sick leave, pregnancy or maternity leave.
Under strict conditions determined by the act, the employer or employee can terminate the employment relation immediately (e.g. gross breach of obligations of employee or non-payment of wages within 15 days of its due date). In the trial period, the employment relationship can be terminated by any party immediately and without stating the reason.