Investment in the Czech Republic

Meet the Heart of Europe

2016

Meet the Heart of Europe

Investment in the Czech Republic

2016 Why invest in the Czech Republic?

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Preface Meet a regional Meet your champion business destination in the geographical heart of Europe

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Meet a popular Meet your Meet the facts foreign capital investment destination opportunities

I. Automotive I. The current macroeconomic forecast II. Aerospace II. Ratings III. Business support services III. The Czech Republic in IV. Energy and the numbers environment IV. Living in the Czech V. High-tech mechanical Republic engineering VI. Information and communication technologies VII. Life sciences VIII. Nanotechnologies and materials

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Investment Business Employment Financial Direct incentives structures policy services taxes and state aid pg. 68 pg. 76 pg. 82 pg. 90 pg. 96

Indirect Financial Corporate How Useful taxes reporting transactions KPMG can addresses and audit help

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5 Welcome to the Czech Republic

In today’s highly competitive and dynamic The Czech Republic has been a popular des- economic environment, few decisions are as tination for foreign capital and has attracted critical to success as selecting your business high volumes of foreign direct investment (FDI) location. Most entrepreneurs at some point since the 1990s. FDI activities in the Czech Re- consider relocating to create fresh momentum public stand out in a very important feature: and pursue new growth opportunities. profitability. Compared to its regional peers, the Czech Re- The Czech Republic is home to many advanta- public is doing fairly well in terms of GDP per geous conditions – from its geographical loca- capita and in terms of competitiveness. It also tion combined with a reliable infrastructure, clearly stands out as a regional champion in the availability of suppliers and specialized inputs inflow of FDI. Currently, the Czech Republic is needed by foreign investors, to quality of life experiencing growth across various sectors of and social stability, cost competitiveness, fi- the economy, including merger and acquisition nancial stability and availability of financing, activity. investment incentives as well as a skilled work- While cost is a factor, it is only one of many force and a high educational level, all making it considerations that influence the choice of an attractive location for all types of investors destination: an education system that yields and companies. a highly skilled workforce; high living stan- This publication sets out insights and data rel- dards and a diverse culture; capacity for inno- evant to planning investments or conducting vation; a modern infrastructure combined with business in the Czech Republic. As the tax and a position in the heart of Europe. legal systems in the Czech Republic are still comparatively new, certainty about the legal

5 6 effects of transactions is sometimes less easy to obtain than in more developed economies. In addition, Czech and EU legislation are frequently amended. Accordingly, the information should be viewed only as a general guide for preliminary planning purposes. I nevertheless hope it will be a helpful source of background information and a constructive tool in making your investment decisions. Combining KPMG’s insights and expertise in relocation issues, we can help you determine if the Czech Republic is the right base for your business in Europe. If you have any questions, remarks or suggestions, please feel free to contact the respective KPMG experts. We look forward to assisting you with your investment in the Czech Republic.

Jan Žůrek, Managing Partner, KPMG in the Czech Republic

7 Meet a regional champion Where the Czechs score the best. The Czech Republic clearly stands out as a regional champion for the inflow of the foreign direct investments. Among the new member states of the EU1 the Czech Republic is:

#1 #1 #1

——in quality of air transport ——in country capacity to ——in company spending retain and attract talent on R & D (Research and Development) #1 #1 #1

——low wastefulness of ——in quality of ——in soundness government spending electricity supply of banks

8 #1 #1 #1

——in trustworthiness ——in state of cluster ——in capacity for and confidence development innovation #1 #1 #2

——in local supplier ——in business ——among the competition of quality sophistication 10 new member states of the EU

In the overall Global Competitiveness Report 2015-20162, the Czech Republic ranks 31st in the competition of 144 countries in the world. It has made remarkable progress from 37th to 31st place since 2014–2015.

1 Central and Eastern European new member states of the EU; this group consists of 10 post-socialist countries which entered the EU in 2004 and 2007: Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia and Slovenia. 2 The Global Competitiveness Report 2015–2016 assesses the competitiveness landscape of 144 economies, providing insight into the drivers of their productivity and prosperity. The Report series remains the most comprehensive assessment of national competitiveness worldwide.

9 Meet your business destination in the geographical heart of Europe

3h 2h 1h

The Czech Republic has an advantageous geographical location. Known as the heart of Europe, it is close to most major European business centres.

10 Meet a popular foreign capital destination The Czech Republic is one of the most successful CEE countries in terms of attracting foreign direct investment (FDI) since the 1990s. Where did most of the FDIs originate?

The primary investment sectors are: Germany ——manufacturing ——financial institutions Netherlands ——real estate Korea ——transport and communications Investment incentives include: France ——systematic investment incentives schemes ——tax breaks for up to 10 years ——subsidies related to job creation USA and employee training ——support related to the acquisition of land

TOP 8 investing countries Austria The Czech Republic has been given a strong Japan vote of confidence from investors with first- hand experience of the Czech economic Switzerland environment.

11 Meet your investment opportunities

1 Automotive1 Aerospace Globally, the Czech Republic is the Prague, the capital of the Czech second largest passenger car producer Republic, is home to the headquarters per 1 million inhabitants. of the European Global Navigation Satellite Systems Agency. The Czech Republic hosts one of the highest concentrations of automotive manufacturing A strong engineering background, excellent enterprises. By volume alone, it belongs to research and development (R&D) facilities, an the 15 largest global passenger car producers. outstanding product reputation and high prod- It has a long industrial tradition and is able to uct reliability ensure safe investment opportu- compete at a global level. More than half of the nities. The Czech Republic is an active member world’s top-100 tier one suppliers are located in of the European Space Agency. the Czech Republic. Current successful investors: Current successful investors: Honeywell Aerospace, GE Aviation, Latecoere Hyundai, Johnson Controls, Volkswagen/ Škoda Auto, Bosch, Toyota/PSA, Valeo

12 Business support services1 Energy and the environment1 The Czech Republic offers business The Czech Republic offers abundant support services in financial, opportunities for investors in the accounting, IT, customer support, design, manufacture and delivery of human resources, purchasing, logistics new technologies for environmental and legal services. protection and energy savings.

What makes the Czech Republic one of When investing in the Czech Republic, you can world’s most attractive locations for business? count on top technical competence, manufac- The answer is simple: its location, infrastruc- turing excellence and cost effectiveness. ture and a skilled workforce with foreign language skills. Current successful investors: Doosan, Vyncke, Solar Turbines, Bilfinger Current successful investors: DHL, Accenture, SAP, Infosys

13 High-tech mechanical Information and communication engineering1 technologies1 The Czech Republic is home to The Czech Republic represents world-class mechanical engineers. one of Europe’s top locations for Over 80 % of the sector’s output is ICT investments, outsourcing and exported. offshoring IT-related services and software design. The sector’s main exports are turbines, transportation solutions, air-conditioning equip- With the Czech Republic’s strong inflow of high ment, construction machinery and machine value-added projects, tradition of excellence in tools. technical fields and heritage of thorough technical and mathematical education, the Czech Current successful investors: origins of global ICT companies like AVG Tech- Ingersoll Rand, Siemens, Edwards, Daikin nologies, AVAST and Y Soft are not surprising.

Current successful investors: Microsoft, Skype, NetSuite, Tieto, Red Hat, So- larWinds and IBM

14 Life sciences1 Nanotechnologies and materials1 Viread, a successful antiviral drug for The Czech Republic is proud of its the treatment of HIV/AIDS has been network of collaborating business developed at the Czech Academy companies which has emerged around of Science’s Institute of Organic top research institutions involved in the Chemistry and Biochemistry. most prestigious projects.

The country offers a growing network of re- CEITEC, the Regional Centre of Advanced Tech- search clusters, state-of-the-art research facili- nologies and Materials, the Technical Univer- ties, attractive locations for manufacturing and sity of Liberec are undisputedly world-class contract R&D operations plus effective patent centres of nanotechnology research. They are protection. The government’s policy goals in- supported by a state-of-the-art research infra- clude the continuation of R&D support. GMP, structure and by the Czech Nanotechnology GLP and GCP standards have been adopted. Cluster and Nanotechnology for Society fund- ing programme. Current successful investors: Sanofi, TEVA, Lonza, Otsuka Current successful investors: Microsoft, Skype, NetSuite, Tieto, Red Hat, So- larWinds and IBM

1 Investment Climate in the Czech Republic, 2015, CzechInvest

15 The current macroeconomic forecast

The Czech Republic is a country with relatively Main macroeconomic indicators: Current macroeconomic forecast 20161 low external and internal macroeconomic imbalances and manageable levels of public Gross domestic product bil. CZK 4 657 debt and deficits.A stable and healthy banking sector with excess liquidity is able to meet the Average inflation rate % 0,5 financing needs of both domestic and foreign investors with a minimal risk of losses due to financial crises and related instabilities. Unemployment rate (LFS) average in % 4,7

Current account balance % of GDP 1,2

Exchange rate CZK/EUR 27,0

Long-term interest rates % p.a. 0,7

1 http://www.mfcr.cz/en/statistics/macroeconomic-forecast/2016/macroeconomic-forecast-january-2016-23829

16 (Winter 2015 estimates)

2 European Economic Forecast : 2016 2017 In the European Economic GDP growth 2,3% 2,7% Forecast, the Czech Republic is praised for its progress: Inflation to remain below 0,4% 1,4% ——in increasing growth‑enhancing expenditures; Unemployment rate to de- from to cline moderately 4,8% 4,7% ——strengthening the fiscal framework; ——developing public employment services; Public budget from to ——in improving tax compliance, deficit to -1,1% -1,0% pension and healthcare reform; decline of GDP of GDP ——in enhancing the inclusiveness and quality of education; Indebtedness of the general from an to estimat- ——in reforming regulated professions government sector (gross 40,1% ed 40,7 % and public administration; public debt) to decrease of GDP of GDP ——public debt below the 60% of GDP threshold. 2 http://ec.europa.eu/economy_finance/eu/countries/czech_republic_en.htm

17 Ratings

The Czech Republic has been rated very positively by all three major rating agencies, i.e. Moody’s, Standard and Poor’s and Fitch.

Fitch A+

Standard and Poor’s Moody’s AA- A1

Foreign currency long-term sovereign debt ratings (www.cnb.cz); Last update: 1st October 2015

18 The Czech Republic in numbers

The Czech Republic is an advanced democracy with a free-market economy. It is well known for its skilled workforce, reliable infrastructure, cost competitiveness and high educational level. Favourable labour costs are also among the main attractions of the Czech economy.

Prague, the capital as well as the largest city ——Since 1989 a parliamentary republic with with a population of 1.2 million, multi-party democratic political system other major urban centres: ——3 distinct regions: Bohemia, ——Brno (376,822) Moravia and Silesia ——Ostrava (294,955) ——10.5 million = population ——Plzeň (168,377) ——5.3 million = a working population of about ——Liberec (102,405) ——78,864 square kilometres (30,500 ——Olomouc (99,555) square miles) = area ——Ústí nad Labem (93,536) ——Since 1999 a member of NATO ——České Budějovice (93,175) ——Since 2004 a member of the EU ——Hradec Králové (92,871) ——Since 2007 a member of Schengen ——Pardubice (89,530)

19 Living in the Czech Republic

Foreign nationals coming to the Czech Republic are subject to the so-called Foreigners’ Act, which establishes two categories of foreigners: citizens of the EU, the EEA and Switzerland and nationals of third countries.

Residency and visas Cost of living in Prague1 To stay in the Czech Republic for more than three months, citizens of non-EU countries re- Average prices of quire a long-term visa or a long-term or perma- goods and services Wage levels nent residence permit. are 36.4 (including are 20.3, com- Natural persons with permanent residence out- rent) compared pared to the New side the Czech Republic or legal entities with to the New York York’s 100. a registered office outside the Czech Republic benchmark of 100. may run a business in the Czech Republic under 1 Goods and services comparison is based on the cost of a basket the same conditions and under the same limita- of 122 goods and services weighted according to European tions as a Czech person/entity. consumption habits. https://www.ubs.com/microsites/prices- earnings/edition-2015.html. Wage levels are calculated as effective hourly wages for 15 professions, weighted by distribution; net after tax and social security deductions. UBS, Prices and Earnings (Edition 2015); at: https://www.ubs.com/microsites/prices-earnings/edition-2015.html

20 ——The Czech healthcare system provides ——Prague and other larger Czech cities a high level of professional medical offer international cultural institutes or care assured by various health clubs, e.g. the American Center at the insurance providers. For foreigners, it US Embassy in Prague or the Goethe is essential to have medical insurance Institut (www.goethe.de/ins/cz/pra). to be able to pay for the cost of care. ——Numerous international schools exist in the Czech Republic, offering a growing choice of foreign-language educational programmes, ranging from preschools to MBA degrees.

21 *Lípa /li:pa/ Small-leaved lime (linden)

The Czech national tree and symbol since 1848, designated as such during the First Pan-Slav Congress to counterbalance the pan-Germanic oak tree. A symbol of protection thanks to its attractive crown, lovely smell and inviting shade. About 1850 small-leaved limes have been given protected tree status in the Czech Republic. Investment incentives and state aid

The Czech Republic’s current attitude towards incoming investors is the most positive in its history. Attracting new investment on them. The information below is based on Over the past few years, the Czech Republic has the new legislation. significantly increased its focus on both green field investments and the expansion of existing Investment incentives investments. Forms of support It currently has the most positive attitude to Incentives are provided in the following forms: incoming investors in its history. ——corporate income tax relief for Investors can obtain the following financial up to 10 years (tax holiday); benefits: ——employment subsidies in the form ——investment incentives – tax of cash grants for job creation and holiday + cash grants; training (only available in regions ——subsidies from EU funds – cash grants; with high unemployment rates); ——R&D tax allowances; ——cash grants for strategic projects; ——education tax allowances. ——availability of land at discounted prices; ——exemption from real estate tax All benefits are provided according to the law in selected industrial zones. and transparency rules, which are in compliance with EU regulations. In this respect, some Main conditions measures have been redesigned further to The main conditions for granting investment a change of EU rules in 2014. EU regulations incentives differ depending on the supported have generally become stricter and to a certain activity. extent limit the granting of incentives by individual member states. The Czech government Manufacturing industry: responded to the new rules with an amend- ——establishment of a new manufacturing ment to the Czech Act on Investment Incen- plant, or expansion of an existing tives, effective since May 2015. The aim of the plant, including its modernization and last amendment is to increase the attractive- diversification of product portfolio; ness of investment incentives for investors ——minimum investment in tangible and and to reduce the impact of the new EU rules intangible assets of CZK 100 million

24 (approx. EUR 3.6 million or USD 4 million), cannot start before the application in selected regions this is reduced to CZK for incentives is submitted. 50 million. Machinery must be new; ——The investment must be maintained (in ——creation of at least 20 new jobs. the minimum amount and structure) for Technology centres: at least five years from its finalization. ——establishment of a new technology centre, or expansion of an Strategic investment (large projects) existing technology centre; ——Large projects can qualify for ——minimum investment in tangible and strategic investment status. intangible assets of CZK 10 million (approx. ——The main benefit of this status is the EUR 360,000 or USD 400,000), of which possibility to obtain a higher portion of at least CZK 5 million must be invested incentives in cash instead of tax relief. in machinery. Machinery must be new; ——Cash grants can reach up to 10% and ——creation of at least 20 new jobs. can be further increased to 12.5% in case Business support services centres: of projects combining manufacturing establishment or expansion of: sites and technology centres. ——shared services centre ——For strategic investments in the ——software development centre manufacturing industry, the minimum ——high-tech repair centre amount to be invested in fixed assets is ——customer support centre CZK 500 million, of which CZK 250 million ——data centre; must be invested in new machinery. creation of at least 20 new jobs for software de- At least 500 jobs must be created. velopment centres, 500 new jobs for customer ——For strategic investments into technology support centre or 70 new jobs for other busi- centres, the minimum amount to be ness support services centres. invested in fixed assets is CZK 200 The following conditions apply for all types of million, of which CZK 100 million investments: must be invested in new machinery. ——The acquisition of assets for the At least 100 jobs must be created. project, including construction work,

25 Income tax relief gible assets) except for Prague, where no in- Calculation centives can be provided. The tax treatment of a new company (plant) dif- For technology centres and business support fers from that of an expanded facility only in services centres, eligible costs may alterna- the calculation of tax relief that can be claimed. tively comprise the wage costs of employees For new companies, taxpayers are entitled in newly created jobs within 24 months of the to full tax relief, excluding tax on net interest month in which a particular position was filled. income. For the expansion of an existing plant, the Job creation amount eligible for tax relief is the difference Cash grants will be provided to employers cre- between the tax relief that would be available ating new jobs in regions with unemployment for a new company and the average of the tax at more than 25 percent above the national av- liabilities in the three years immediately pre- erage or in special economic zones. The cash ceding the first year in which tax relief can be grants may amount to CZK 100,000 – 300,000 claimed. The latter figure is adjusted with refer- per new job. ence to industrial inflation and the current tax rate. This formula represents a rough attempt Training and retraining of employees to limit the amount eligible for tax relief to any Cash grants for the training and retraining additional profits resulting from the expansion. of employees will be provided to employers in the form of partial reimbursements of the Permissible level of state aid and subsidy costs incurred. Subsidies may cover 25 percent amounts of the eligible costs of employee training and The total value of incentives must not exceed retraining. the maximum permissible level of state aid. The maximum amount of state aid is based on Purchase of construction sites the rules set by the EU and is set at 25 percent The actual provision of this incentive depends of eligible costs (investment in land, buildings, on negotiations with the owner of the land machinery and equipment and selected intan- (state, region or municipality). The difference

26 between the market price and the actual pur- EU funds are available mostly in form of invest- chase price is treated as an incentive. ment cash grants. A wide selection of grants is available. The grants below are the most rel - How can KPMG help investors in the area evant to new investors: of incentives? ——Programme Innovation – support KPMG in the Czech Republic is a leading advi- for innovations in production; sor on investment incentives and can help ——Programme ICT – shared service centres; investors with: ——Programme Potential – support for R&D ——initial assessment of whether their project centre expansion/establishment; qualifies for investment incentives; ——Programme Energy Savings; ——calculation of estimated benefits; ——Program Applications – support for ——preparation of applications for operational costs of R&D projects. investment incentives; ——full support during the approval process; The first round of calls (i.e. periods for projects ——full support during the application submission) has already finished. implementation phase; A second round is planned for summer 2016. ——negotiations with the government To obtain more detailed information, please on extraordinary incentives; contact Jan Linhart at [email protected]. ——site selection analysis. R&D tax allowance To obtain more detailed information, please Companies performing R&D activities may ap- contact Jan Linhart at [email protected]. ply a special tax deduction. The R&D deduction in fact allows companies to EU structural funds claim internal R&D costs twice: first within the The Czech Republic (excluding Prague) profit and loss account, second as a special tax Businesses set up in the Czech Republic can deduction. Effectively, savings can thus be up also obtain support from EU Structural Funds to 19 percent of R&D costs. The deduction can under several operational programmes. be claimed every year and there is no limit on the maximum amount to be claimed.

27 KPMG in the Czech Republic is an authorised Education tax deduction advisor in the area of R&D tax deductions and The education tax deduction was introduced provides a wide range of related services. It can as a new tool in 2014. It allows companies to help clients with: obtain a special tax deduction for certain costs ——eligible activity definition; relating to vocational or professional education ——calculation of the deduction; activities. ——preparation of required documentation; The deduction covers various activities relat- ——obtaining a ruling from the tax authority; ing to the education of secondary school or ——issuance of a certified court expert opinion. university students on the premises of companies. Companies can also receive a deduction for assets acquired for the purposes of such education.

28 29 *Slivovice /slɪvɔvɪtsɛ/ Slivovitz, plum brandy

A distilled alcoholic beverage made of different types of plums. Traditional slivovice for home or small-scale consumption is produced in private distilleries and is very strong, with an alcohol volume of around 52%. Business structures

Establishing a company in the Czech Republic is neither financially demanding nor very time-consuming – e. g. for a limited liability company (s. r. o.), minimum registered capital of CZK 1 is sufficient and the company can be established within one month. The basic provisions governing business ob- A branch is not a legal entity, but must be reg- ligations and other specific aspects of doing istered in the Commercial Register. business in the Czech Republic are set out in The Act on Business Corporations regulates the Civil Code and the Act on Business Corpo- the status and activities of entrepreneurs and rations, both effective as of 1 January 2014. applies to both legal entities and individuals. The Act on Business Corporations addresses A Czech legal person is an entity that has its the main aspects of Czech corporate law. It also registered office in the Czech Republic. regulates the relationship between companies Foreign persons are defined as persons (indi- and their statutory representatives, their rights, viduals or legal entities) domiciled abroad or obligations and liabilities for breaches of due having their registered office outside the Czech care. Further, it sets out the rules for holding Republic. companies and the liability for damage caused A foreign person’s authorisation to carry out by their controlling entities. business in the Czech Republic takes effect on the date it is recorded in the Commercial Types of business entities Register. This does not apply to citizens of the The Act on Business Corporations recognises member states of the EU, the EEA or Switzer- the following types of business entities: land, their family members who have Czech ——limited liability companies; residence permits, citizens of other states with ——joint-stock companies; long-term residence in the EU and their family ——general partnerships; members with long-term residence permits. ——limited partnerships; A foreign person may participate in the es- ——co-operatives; tablishment of a Czech legal entity or become ——Societas Europaea (SE, a partner or member of an existing Czech legal European Company); entity. A foreign person may also be the sole ——European Economic Interest founder of a Czech legal entity, provided that Grouping (EEIG). Czech law permits a company to have a sole In addition, foreign persons may establish founder or sole shareholder. a branch in the Czech Republic. The main characteristics of the various legal entities are described below.

32 Limited liability company (společnost company and whose details, including s ručením omezeným – spol. s r. o. or information on their authorisation to s. r. o.) act on behalf of the entity, must be ——The company must have at least recorded in the Commercial Register. CZK 1 of registered capital. ——A legal entity may also be ——The list of shareholders, the amount of appointed as the executive. each shareholder’s contribution and the ——A limited liability company does not names of the members of the supervisory require an audit unless two or more of board (if one is established) must be the following criteria are met, for both the recorded in the Commercial Register. year in question and the preceding year: ——The law allows the creation of different ——net turnover exceeds CZK kinds of shares. Shares to which the 80 million per annum; same rights and obligations are attached ——total assets exceed CZK 40 million; form one kind of share. Shareholders ——the average number of may own more than one share and employees exceeds 50. also different kinds of shares. ——Establishment takes around 1 month ——The shares of a shareholder may from providing all necessary be represented by a common share documents and information. certificate kmenový( list). However, such a certificate cannot be in the form Joint-stock company (akciová společnost – of a registered certificate and may a. s.) not be publicly offered or admitted to ——Registered capital may not be less trading on the regulated market. than CZK 2 million or EUR 80,000. ——A supervisory board is only ——Non-cash contributions to registered necessary if required by the capital must be valued by an independent memorandum of association. expert proposed by the founders (when ——The general meeting appoints an executive a company is being established) or the (jednatel) or executives, who are legally company (registered capital increase). The responsible for the management of the valuation is binding on the company.

33 ——A joint-stock company requires an ——The names and addresses or the audit if one or more of the following registered offices of the partners must be criteria are met for both the year in registered in the Commercial Register. question and the preceding year: ——All partners are entitled to act on behalf of ——net turnover exceeds CZK the partnership and are jointly and severally 80 million per annum; liable for the partnership’s obligations ——total assets exceed CZK 40 million; to the extent of their entire property. ——the average number of ——Audit requirements are the same as employees exceeds 50. for a limited liability company. ——Annual financial statements must be published. Limited partnership (komanditní ——The company may decide between two společnost – kom. spol. or k. s.) internal structures: either a supervisory ——A limited partnership is formed by two board and a board of directors (dualistic or more persons (individuals or legal organisation of corporate bodies), or entities). At least one of the partners must an executive director and a managing be a general partner, with unlimited liability board (monistic organisation of for the debts of the partnership. At least corporate bodies). The chairman of one partner must be a limited partner, the managing board may be the same liable for the partnership’s debts only up person as the executive director. to the amount of unpaid contributions A legal entity may also be appointed recorded in the Commercial Register. as member of a board of directors. ——The names and addresses or registered offices of the partners, a statement on General partnership (veřejná obchodní whether they are limited or unlimited společnost – veř. obch. spol. or v. o. s.) partners, the amount contributed by ——A general partnership is formed by two or each limited partner and the amount more persons (individuals or legal entities). of their paid up contributions must be ——The partners in a general partnership recorded in the Commercial Register. are liable for the debts of the company.

34 ——Only unlimited partners are permitted business activities and the name and the to manage the partnership. address of its director (general manager). ——Audit requirements are the same as ——A branch must obtain a trade licence from for a limited liability company. the regional Trade Licensing Office. ——The liability of a branch is not limited. Co-operative (družstvo) ——Audit requirements are the same as ——Co-operatives are formed by at for a limited liability company. least three members, either legal entities or individuals, to undertake Company formation procedure business activities for the economic ——memorandum of association; or social benefit of their members. ——obtention of trade license; ——Members are not liable for the obligations ——contribution payment; of the co-operative; however, the ——registration in Commercial Register. co-operative may demand contributions A company is formed after a founder’s deed or from its members to cover losses. a memorandum of association has been com- ——Audit requirements are the same as pleted and signed. Limited liability companies for a limited liability company. and joint-stock companies must provide these documents in the form of notarial deeds. Branch of a foreign person (organizační After the founder’s deed or memorandum of složka zahraniční osoby) association has been signed and filed, the fu- ——Branches of foreign businesses can ture executives of the company must register conduct business activities in the their trade licences at the Trade Licensing Of- Czech Republic if they are registered fice and obtain the documents necessary to in the Commercial Register. register the address of the company. ——The entry in the Commercial Register The company’s founders also need to name must include details about the activities a contributions administrator, who will be re- of the foreign business and its office sponsible for proving to the Commercial Reg- in the Czech Republic, the scope of its ister that the contributions to the registered capital have been paid up by the shareholders.

35 After the future executives have collected all The Commercial Register necessary documents, they may file an appli- A company has legal status and is entitled to cation for registration of the company in the commence business activity in the Czech Re- Commercial Register. Once the court admin- public only after it has been registered in the istering the Commercial Register registers the Commercial Register. Cour ts have five business company, the process of the company’s forma- days to register the company in the Commer- tion is complete. The whole process may take cial Register after the application is submitted. up to two months. Fees amount to CZK 6,000 for a limited liability company and CZK 12,000 for a joint-stock company (approx. EUR 220 and 440). Entries in the Commercial Register include the name of the entity and the address of its registered office, the identification number of the entity, the scope of its business activities, the type of entity and the names and addresses of the executives or directors, together with details of their authorisation to act on behalf of the entity. Access to the Commercial Register is freely available on the internet (www.justice.cz; www.info.mfcr.cz/ares).

36 37 *Cibulák /tsɪbʊlak/ Cibulák china

Traditional porcelain decorated with an onion pattern. It is hand-decorated and its key motif is usually an aster or peony and the edges of the chinaware are decorated with compositions of peaches and pome- granates. The first Czech cibuláks were produced in 1885. Employment policy

The Czech Republic has a skilled and educated labour force and its literacy rate is above 98 percent. Czech labour law is not considered exces- Employment contracts sively rigid and is relatively flexible within the Employers are required to conclude written EU context. employment contracts with their employees. Employment law is governed by the Labour The contract must at least describe the type Code. Where an employee from another EU of work, the date the employee will commence member state is sent by an employer to work in work, and where the work will be performed. the Czech Republic as part of the transnational Trial periods may generally not be longer than provision of services, Czech Labour Code regu- three months, except for managerial positions, lations shall apply to basic conditions, such as where they may extend to up to six months. maximum working hours and the minimum A fixed-term employment contract may be con- length of rest periods, the minimum annual cluded for up to three years, and may only be leave entitlement, the minimum wage and renewed twice. overtime rates, occupational health and safety, An employment contract concluded for an etc. indefinite period or a fixed term may be The maximum working week is 40 hours. The terminated: standard working week is Monday to Friday. ——by agreement; The maximum amount of overtime which ——by notice; may be ordered by the employer is 150 hours ——by immediate termination; per year. The maximum amount of overtime ——by termination during the trial period. worked with the employee’s consent may not A fixed-term employment contract also termi- exceed 416 hours annually. Overtime must be nates on the expiry of the agreed period. distributed evenly. The employer or the employee may terminate The retirement age for individuals ranges from a contract by giving written notice. The notice 60 to 65 based on gender, date of birth and period for the employer and the employee is at the number of children raised (applicable to least two months, and the employee can give women only). notice without stating a reason. When the employer terminates an employment contract, it must be for one of the reasons stated in the Labour Code, such as:

40 ——The employer is being liquidated or pensive, it provides flexibility in the allocation is ceasing to carry on business. of human resources. ——The employer is relocating. ——The employer is undergoing Mass layoffs organisational changes. If an employer terminates the employment re- ——The employee has committed lationships of a certain number of employees a serious disciplinary breach. as defined in the Labour Code, for the specific Where an employment contract is terminated reasons set out above under points 1 to 3, with- for any of the reasons under points 1 to 3, the in a period of 30 calendar days, this is consid- employer is obliged to pay the employee up to ered a mass layoff and special conditions, such three months’ severance pay depending on the as a notification obligation to the Labour Office duration of the employment relationship. and unions, apply. Specific termination conditions apply in respect of temporarily disabled employees, preg- Trade unions nant women and employees caring for minors. Unions can be formed freely and neither the Specific termination conditions, severance pay state nor any other subject can restrict their rules and other conditions may also be includ- formation. ed in a collective agreement, if in force. Trade unions engage in collective bargaining During the trial period, the employment con- at a national level. A tripartite council including tract may be terminated by either side for any representatives from trade unions, employers reason, or without any reason being given. and the government meets annually to discuss labour issues. Employment agencies The role of trade unions in the Czech Republic An alternative to employment contracts is is to formulate and assure the labour, economic agency employment. and social interests of employees. The aim is to An employment agency provides its clients reach an agreement with the employer based with human resources, without the clients hav- on the collective bargaining. ing to conclude employment contracts with the employees. Even though this option is more ex-

41 Holidays ——pensions; An employee is entitled to holiday pay if the ——cash benefits such as sick leave, employment contract lasts for at least 60 con- maternity benefits, social benefits, etc. secutive days during a calendar year. For em- A social security treaty is concluded with cer- ployment relationships shorter than a year, tain countries and removes the burden of employees accrue one-twelfth of the annual paying social security contributions to both holiday for each calendar month of continuous countries. employment with the same employer. The minimum holiday period is four weeks per Concurrence of a function annum, unless increased by a collective bar- as a member of gaining agreement, employment contract or a corporation’s statutory body internal regulations. Holiday pay is calculated and employment on the basis of the employee’s average month- Current legislation does not allow the concur- ly salary. rence of the membership in a statutory body (executive officership) and employment. Social security and health insurance There are two major schemes to which both the employee and the employer must contribute: social security and health insurance. Payments from the social security insurance system typically include:

42 43 *Jitrnice /jɪtrnɪtsɛ/ Liver sausage

Also called jetrnica in Moravia. Made of pork meat and offal, it belongs among one of the most typical foods at a Czech pig slaughter, a traditional autumn feast at which domestic pigs are slaughtered and their meat is processed into various home- made food products stored for the winter. Financial services

The Czech financial sector: a safe harbour for foreign investments (continuing profitability, sufficient liquidity, as well as capital adequacy). Regulation and supervision applicable in EU member states and a decree The Czech National Bank (CNB) is the central issued in 2014 driven by measures agreed on bank of the Czech Republic. It determines at the EU level and implementing the require- the country’s monetary policy, carries out ments of Basel III/CRD IV into Czech legislation. and coordinates the supervision of the Czech Solvency II, a new, harmonised EU-wide insur- financial market, issues banknotes and coins, ance regulatory regime, will be effective from 1 and manages the circulation of currency as January 2016 in all EU member states, includ- well as the payment and settlement systems ing the Czech Republic. between banks. More details can be found at: www.cnb.cz. Licences The responsibility for preparing primary legis- The licensing of banks and other financial in- lation for the financial market sector mainly lies stitutions and matters connected with mergers with the Ministry of Finance; the CNB assists in and acquisitions and other market entries are this process. fully within the responsibilities of the CNB. As the Czech Republic is an EU member, in the area of supervision the CNB cooperates with A foreign financial institution can enter the European institutions (the European Banking Czech market in the following four ways: Authority, the European Insurance and Occu- ——as a new company, with up to a 100 pational Pensions Authority and the European percent foreign ownership; Securities and Markets Authority) on unifying ——by acquiring an equity stake supervisory procedures and creating condi- in an existing entity; tions for close cooperation between home and ——by establishing a branch of the parent host supervisors. The CNB also closely cooper- institution with a separate licence; ates with the European Central Bank in its role ——by establishing a financial institution of banking supervisor within the Single Super- of the parent based on the licence of visory Mechanism. the parent institution (applicable to all Prudential rules for banks, credit unions and in- banks and insurance companies with vestment firms are primarily regulated by the a registered office in the EU under Capital Requirements Regulation (CRR) directly the “single licence principle”).

46 Deposit insurance As at 30 September 2015, 47 banks (including for- Since 2010, the deposit limit for 100-percent eign branches) offered banking services to clients protection has risen to EUR 100,000. The de- in the Czech Republic; 39 of them were controlled posit claims of banks, foreign banks, financial by foreign investors and eight by local stakehold- institutions, health insurance companies and ers. The group of the four largest banks (banks state funds are not insured. with total assets greater than CZK 200 billion) All banks and branches of foreign banks (ex- played a predominant role in the banking sector in cluding branches of parent banks participat- the Czech Republic. As at 30 June 2015, their share ing in the deposit insurance scheme in their of total banking assets equalled approximately parent country) are obliged to participate in 58 percent. the scheme and to contribute to the deposit Despite a low interest rate environment, the Czech insurance fund in compliance with the Act on banking sector maintained very good profitability Banking. in 2015. Net profits for the first half of 2015- ex ceeded CZK 37 billion (for the whole year of 2014 Banking sector it was more than CZK 61 billion) with the level of The Czech banking sector is primarily represented non-performing loans at approximately 6 percent. by banking institutions with international ownership. It is dominated by big foreign banking groups Profitability of the Czech banking sector such as Erste, KBC, Societe Generale, UniCredit, 80

Raiffeisen or GE Money. Although the banking 70 sector is significantly concentrated, small and me- 60 dium banks have been able to strengthen their position on the Czech market in previous years. 50 Typical activities include commercial lending to 40 corporate and retail clients, customer accounts and deposits administration, credit card opera- 30

2015 2008 2009 2010 2011 2012 2013 2014 tions, international lending and loan syndications, 6/2015 extrapolated mutual funds management and administration, Figure 10: Net profit of the Czech banking sector, in billions of CZK bank treasury operations and back office activities. Source: http://www.cnb.cz/en/supervision_financial_market/ aggregate_information_financial_sector/basic_indicators_finan- cial_market/index.html

47 Insurance sector Investment management The Czech insurance sector is dominated by and funds the Generali and VIG insurance groups. The re- As at 30 September 2015, the Czech market mainder of the TOP 10 insurance companies is is represented by more than 350 investment made up by composite insurance companies, funds domiciled in the Czech Republic, accord- while the rest is represented by bank-assur- ing to CNB statistics. In addition, approximately ance and specialised insurance companies. 1,300 foreign investment funds are registered As at 30 September 2015, 54 insurers (including for public offer in the Czech Republic. foreign branches) and one reinsurance company offered insurance services to clients in the According to an act adopted in 2013, extending Czech Republic. Local shareholders controlled options for establishing new investment funds 14 insurance companies, whereas the rest in line with European regulations, investment had mostly foreign owners. The two largest funds may take the following legal forms: groups reached CZK 74.2 billion of gross writ- ——mutual fund; ten premium (measured by annual premium ——trust fund; equivalent). Overall market profitability is ap- ——joint-stock company; proximately a 12% return on equity (three-year ——investment company with variable capital average/2012 - 2015) and the market manages (société d‘investissement à capital variable); approximately CZK 480 billion of assets. ——limited partnership; Typical products include both life and non-life ——limited liability company; insurance. The non-life insurance business is ——European company. dominated by car insurance (compulsory mo- Generally, minimum fund capital of EUR 1.25 tor third party liability insurance and casualty million is required. The foundation of funds ful- and collision (automobile insurance)) and com- filling EU requirements must be approved by mercial insurance. the CNB. A notification duty to the CNB only ap- The supervision of the insurance market is per- plies to special investment funds not fulfilling formed by the CNB. these requirements. However, every fund’s as- set manager must have the approval of CNB.

48 The supervision of the investment fund market system of payments. The Czech Republic has is handled by the CNB. concluded many agreements with other countries on the promotion and reciprocal protec- The stock exchange tion of investments. The Prague Stock Exchange (PSE) began trading in April 1993. Trading on the PSE is con- Market development ducted via licensed securities dealers, who are The exchange rate of the Czech crown (CZK) also PSE members. to the euro (EUR) as well as to other main cur- These are primarily major banks and brokers. rencies was affected by the intervention of the If a common investor decides to invest in the CNB, which started in November 2013 (see exchange, they need to contact one of the PSE Figure 11). The CNB announced its intention members or become a member themselves. to keep the Czech currency below the level of It is currently possible to conclude trades either 27 CZK/EUR. The intervention was primarily directly through the regulated market (adminis- driven by the fact that inflation had been well trated by the PSE) or the non-regulated market, below the inflation target for a prolonged pe- primarily intended for OTC (over-the-counter) riod, potentially threatening deflation. The CNB trades (administrated by the Central Deposito- subsequently announced that it will not discon- ry). Since 2012, trades on the regulated market tinue using foreign exchange market interven- are traded via the stock international exchange tion as a monetary policy instrument sooner platform – Xetra. The basic criteria for trading than in the second half of 2016. and listing on either market can be found at: As is shown in the graph below, during 1H 2015, www.pse.cz. the CZK stayed around the threshold of 27 CZK/ EUR set up by the CNB and the Czech crown Foreign exchange significantly depreciated to 25.5 CZK/EUR Regulation against the US dollar (March/April 2015). These The Act on Foreign Exchange fully implement- movements were caused by a weak euro due ed the obligations which the Czech Republic to the Greek crisis and the expected increase accepted under international agreements in re- of interest rates by the FED. These two effects lation to the free movement of capital and the

49 resulted in the significant depreciation of EUR/ Repatriation of capital and profit USD. The Czech currency is convertible outside the As at 30 September 2015, the foreign exchange Czech Republic. Czech companies may freely rate of CZK to EUR was 27.180; the exchange repatriate both current year profits and re- rate of CZK to USD was 24.266. tained earnings in whatever currency they de-

30 sire. However, they should follow the minimum

USD capital requirements – if applicable – imposed by the CNB. 25 Branches of foreign banks do not have such EUR limitations as the capital is managed and moni- tored centrally. 20 The following types of payments from a Czech company to its foreign parent may be trans- 15 ferred abroad freely, subject to the appropriate withholding taxes: 1/3/2017 5/3/2018 1/3/2019 9/2/2019 3/22/201713/6/20178/31/2017 2/12/2018 7/23/201810/9/2018 3/24/20196/13/2019 11/20/2017 ——dividends; Figure 11: CZK development during 2013, 2014 and 2015 (CZK/EUR ——interest; and CZK/USD) ——charges for intangible property (e.g. Source: ČNB royalties and know-how fees); ——management fees; ——liquidation balances.

50 51 *Robot /rɔbɔt/

A word denoting artificial beings akin to people, used for the first time by Czech writer Karel Čapek during the premiere of his play R.U.R. nearly 100 years ago. Čapek used the word robot following advice from his brother Josef. Direct Taxes

The Czech Republic is party to a large number of double taxation treaties and has implemented the relevant EU directives. Taxation of legal entities ing profits as these enjoy certain restricted tax Corporate income tax is levied on the profits of privileges. legal entities, primarily limited liability compa- In 2016, the corporate income tax rate is 19 per- nies (s. r. o.) and joint-stock companies (a. s.). cent. A reduced rate of five percent applies to Although partnerships are also legal entities, the income of qualifying investment funds and the profits of a general partnership (v. o. s.) a reduced rate of 0 percent applies to qualify- are not subject to corporate tax; instead, the ing pension funds. Full or partial tax relief from partners’ share of profits is taxed in their own corporate tax may be claimed for certain quali- hands. fying investments (see Chapter 3 – Investment In the case of a limited partnership (k. s.), the incentives and state aid). limited partner’s share of the profits is sub- Capital gains are generally included in income ject to corporate income tax at the level of and taxed at the same rate. However, if at least the limited partnership, while the general 10 percent of the shares of a company are held partner’s share is taxed in the same way as in by a parent company for 12 months, income the case of a general partnership. In addition, from the sale of the shares is tax exempt if the trusts are subject to corporate tax even though parent is a Czech tax resident company and the they are not legal entities. subsidiary is resident in an A branch or permanent establishment of a for- EU member state or a non-EU member state eign company is generally subject to tax on the with which the Czech Republic has concluded same basis as a company. They may also be a double taxation treaty (subject to certain con- taxed on a deemed profit basis, which is usu- ditions). Income derived by non-residents from ally a percentage of the revenues generated in the sale of shares in a Czech company is tax- the Czech Republic, or a percentage of costs. able, unless the seller is a company resident in Since most of these legal entities by definition the EU, Norway, Iceland or Liechtenstein, and exist for the purpose of carrying on a business, at least 10 percent of the shares have been held virtually all the income and gains they realise for 12 months. are included in the calculation of their business There is no tax consolidation in the Czech Re- profits (see below). There are special rules for public. Each company within a group is taxed entities not established for the purpose of mak- individually, with no set-off of losses against

54 the profits of a different company. However, ——able to claim a corporate income tax virtual tax consolidation can be achieved exemption or corporate income tax relief; through a partnership structure. ——subject to corporate income tax at a rate Dividends received by Czech resident compa- of 0 percent, or if the recipient is not nies from non-residents are taxed at a rate of 15 the beneficial owner of the income. percent. They are exempt from tax if the payer An amendment regarding hybrid loan arrange- is a company resident in an EU member state, ments (i.e. payments which are treated as de- provided that at least 10 percent of the shares ductible expenses in the source state and as have been held for 12 months. tax exempt dividends in the recipient state) is The exemption also applies if all the following expected to be adopted during 2016, denying criteria are met: tax exemptions for such payments at the level ——the payer is a tax resident of a state of the recipient company. with which the Czech Republic has Mergers and divisions of companies can gener- concluded a double taxation treaty; ally be carried out on a tax neutral basis. The ——the payer has a similar legal form EU Mergers Directive and the EU Cross-Border to a limited liability company Merger Directive have been broadly assimilat- (s. r. o.), joint-stock company (a. s.) ed into Czech law. In general, domestic legis- or co-operative (družstvo); lation maintains the tax neutrality of mergers ——the recipient has held at least 10 and allows the transfer of unused tax losses for percent of the shares for 12 months; transactions satisfying certain legal conditions ——the payer is subject to a tax similar (transfers of business and mergers), provided to Czech corporate tax, and the that tax avoidance is not the main purpose of rate is at least 12 percent. the transaction. Additionally, there is a “same Exemptions for capital gains and dividends do activity” rule, under which tax losses can only not apply if the parent company or the subsid- be offset against income earned from the same iary are either: economic activity that generated the tax loss. ——exempt from corporate income tax (or similar tax);

55 Taxation of business income A special deduction equal to deductible expen- The starting point for computing taxable profit ditures on research and development (R & D) is the profit before tax in the Czech statutory can be claimed and effectively means that such financial statements. This is then subject to ad- expenditure is deducted twice; this deduction, justments under the Income Taxes Act. Unless if not used in the period in which it arises, may this Act contains a provision to the contrary, be carried forward to the next three tax peri- income and expenses booked for accounting ods. The Act on Reserves allows restricted de- purposes are taxable/deductible. Where capi- ductions for bad debt reserves. It also allows tal gains form part of business profits they are taxpayers to create tax deductible reserves for taxable as normal income or exempt under the future repairs, subject to the existence of sup- participation exemption rules. porting evidence in the form of project plans, For companies, the tax year is generally the as long as the funds are transferred to a sepa- same as the financial year. It is possible to rate bank account by the due date for filing the adopt a financial year ending on a date other annual tax return. than 31 December provided that it is the last The Act on Reserves contains special rules on day of a calendar month. If the financial year- loan provisions for banks and reserves for in- end changes, provisions in the Income Taxes surance companies. Act deal with the resultant long or short pe- Tax depreciation can be claimed on fixed as- riod. However, these are not perfectly drafted sets. For this purpose, fixed assets are divided and numerous issues can arise in such cases. into several categories broadly reflecting their Individuals are always taxed on a calendar year expected useful life. Depreciation on most as- basis. sets may be claimed on either a straight-line or The Income Taxes Act attempts to define which an accelerated basis. deductible and non-deductible expenses in Tax losses may be carried for ward for five years. some detail. The general rule is that expenses Losses may not be carried forward following incurred for the purpose of generating, as- a substantial change in the direct ownership of suring or maintaining taxable income are tax a company unless it can be shown that at least deductible. 80 percent of the company’s revenues are derived from the same activities as those carried

56 out in the period when the loss arose. A change thorities regarding the method of setting the of at least 25 percent in the ownership of reg- transfer price between related parties. No ret- istered capital or the voting rights, or a change roactive agreements are possible. resulting in a person obtaining a controlling in- In addition to the provisions of the Income fluence in the company, is always considered Taxes Act, the Ministry of Finance has issued a substantial change. Restrictions also apply guidelines providing more detailed informa- in the case of certain corporate restructuring. tion especially on transfer pricing documen- A ruling may be obtained from the tax authority tation (e.g. Decrees D-332, D-333, D-334 and to confirm whether a loss may be utilized after D-10). These are not legally binding, but given a substantial change or restructuring. that the tax authorities usually follow them, they represent useful guidance for taxpayers. Transfer pricing Companies are also required to disclose vari- As has been the case in other OECD countries, ous types of related party transactions, includ- the review of transfer pricing policies has being the volumes realized with each related par- come one of the biggest priorities of the Czech ty, in an appendix to the corporate income tax tax authorities. The focus is not only driven by return. global BEPS (Base Erosion and Profit Shifting) This disclosure obligation falls upon Czech initiatives, but also by the general focus of the tax payers who meet one of the three criteria state administration on increasing the compli- listed below: ance of companies with valid regulations and ——assets totalling more than CZK 40 million; arm’s length principles. ——a net turnover of more than CZK 80 million; Czech legislation is relatively simple in this ——a recalculated headcount area. Transfer pricing is dealt with in a short exceeding 50 employees. provision that states that if prices agreed in The obligation is further limited to companies transactions between related parties are not meeting the above criteria, which either: at arm’s length and the difference is not prop- ——performed transactions with erly justified, the tax base should be adjusted. related parties abroad; It is possible to request unilateral or bilateral ——incurred tax losses; advance pricing agreements from the tax au- ——are recipients of investment incentives.

57 There is currently no legal obligation to have all financial expenses on the loans or transfer pricing documentation prepared. credits received are non-deductible. However, the tax authorities regularly requires Any upward adjustment of profit resulting from transfer pricing documentation to be provided a transfer pricing or thin capitalisation adjust- during tax inspections with the usual deadline ment relating to a non-EU or EEA resident of 15-30 days. counterparty may be treated as a dividend, i.e. is subject to dividend withholding tax, as Thin capitalisation reduced by the provisions of any applicable Thin capitalisation provisions act to restrict the double taxation treaty. deductibility of interest and other loan expenses where the borrower has insufficient equity. Taxation of individuals The rules can be summarised as follows. Individuals are subject to income tax, social se- ——Financial expenses (including curity, health insurance, and taxes on land and interest) arising from loans and buildings. The taxation of individuals primarily credits received from related parties depends on their residence status. Residents of in excess of four times (six times for the Czech Republic are subject to tax on world- banks and insurance companies) the wide income, whereas non-residents are sub- borrower’s equity are not tax deductible. ject to tax on Czech source income only. ——Interest on loans and credits received from unrelated parties, or those secured Czech tax residence is defined as either: by a related party, is fully deductible on ——having a permanent home general principle, except for interest on in the Czech Republic; “back-to-back” loans (i.e. where a related ——spending 183 days or more in the party provides a loan, credit or deposit to Czech Republic during the tax year an unrelated party which then provides (the year to 31 December). the funds to the borrower), which is Personal income tax is charged on: treated as interest on related party debt. ——employment income; ——Where interest or other revenue is ——business income; derived from the borrower’s profit, ——investment income; ——rental income;

58 ——capital gains; sale of a dwelling are also exempt if the ——any other income not in the dwelling was used as the taxpayer’s main above categories. residence for at least two years. If it was used for less than two years, the exemption There are numerous exemptions, the most im- applies if the gains are to be used for portant of which are the exemptions from tax the taxpayer’s housing in the future. on gains from the sale of shares and securities. From 2015, exempt income exceeding CZK 5 ——Gains on the sale of securities acquired million in a given tax year must be declared to before 31 December 2013 are exempt if the the tax authorities. securities have been held for more than six The income of individuals is subject to a flat months and do not represent more than tax rate of 15 percent. An additional seven five percent of registered capital and voting percent (a “solidarity tax increase”) is applied rights for 24 months preceding the sale. on income (either the gross salary or the self- ——Gains on the sale of securities acquired employment tax base) in excess of the maxi- before 31 December 2013 representing mum annual assessment base for social secu- more than five percent of registered rity contributions (CZK 1,296,288 in 2016). The capital and voting rights and any securities 15% percent flat tax on employment income is acquired on or after 1 January 2014 are calculated on the basis of the super-gross sal- exempt if they were held for three years. ary, which is the gross salary increased by so- ——Generally, no tax is payable if the income cial security and health insurance contributions from the sale of securities does not payable by the employer. Employment income exceed CZK 100,000 in a tax year. of individuals who are not subject to Czech so- ——Gains on the sale of shares in a limited cial security that is taxable in the Czech Repub- liability company are exempt if the lic is increased by the amount of an employ- shares were held for five years. er’s deemed contributions regardless of the ——Gains from the sale of non-business amount of social security and health insurance real estate are exempt if the property contributions actually paid. Thus, the effective was held by the taxpayer for at least five tax rate is not 15 percent (or 22 percent for per- years prior to the sale. Gains from the

59 sons subject to the solidarity tax) but a higher Employer contributions to defined private pen- rate, depending on the income level. sion schemes up to CZK 30,000 per year are tax Dividends and certain types of other Czech free for the employee. source income are taxed separately and are The Czech pension system comprises two pil- subject to a 15 percent withholding tax at their lars – a mandatory pay-as-you-go pension sys- source. tem run by the government (the first pillar) and Foreign source investment income should be a voluntary additional pension system admin- included in the tax base and is subject to a flat istered by commercial insurance companies tax rate of 15 percent. (the third pillar). A second pillar which involved Business income or other self-employed in- optional payments of part of the mandatory come may be reduced by actual expenses or by obligations to private pension funds, was abol- an optional lump-sum deduction ranging from ished with effect from 1 January 2016. 30 to 80 percent of gross income. The annual There are no special provisions dealing with lump-sum deduction is limited to a maximum employee share option schemes and gains re- of CZK 1,600,000 for income from agricultural alised on exercising an option are regarded as business, CZK 1,200,000 for business income taxable income. It is generally accepted, how- based on a trade license, CZK 600,000 for rent- ever, that no gain arises on the granting of an al income and CZK 800,000 for other business option. income. The salaries of employees are usually subject Employees are subject to tax on income in all to the deduction of wage tax withheld by their forms, whether in cash or in kind. In particular, employer on a monthly basis, with possible benefits, such as the provision of cara available annual reconciliations. It is possible to second for both business and private use, are taxable. expatriate staff through a permanent establish- It is not possible to deduct an employee’s so- ment of a foreign employer that, although tax- cial security and health insurance contribu- able, is not registered in the Commercial Reg- tions from the tax base. However, items such ister. In such cases, no liability to withhold tax as mortgage interest, payments for supple- arises. Instead, the employees themselves are mentary pension insurance with state support, liable to file tax returns and pay tax, normally in private life insurance premiums, and donations quarterly instalments. can be deducted if certain conditions are met.

60 Employees of foreign companies may fall under and any subsequent child1). Tax allowances up a further possible tax treatment, the “deemed to the amount of the minimal wage announced employer” rule, which is essentially an anti- for a given tax year (CZK 9,900 for 2016) can be avoidance provision. claimed for fees paid to child care facilities. The rule may apply if employees of a foreign Limitations apply to individuals earning busi- employer work in the Czech Republic under the ness or rental income, who claim flat rate ex- control of a Czech person who pays a fee to the pense deductions. foreign employer for their services. Here, the Allowances are also granted to residents of the Czech person is regarded as the employer for EU or EEA if at least 90 percent of their income tax purposes and has to account for the em- is derived from sources in the Czech Republic. ployees’ income tax. The amount of income from foreign sources In practice, this rule is rarely applied to employ- should be confirmed by the foreign tax authori- ees of bona fide foreign investors, unless they ties in the state of residence. choose to use it as an alternative to the perma- Social security contributions, where payable, nent establishment described above. Further amount to 45 percent of an employee’s salary special treatment applies to licensed labour (for income up to an annual cap for social secu- agencies. rity – see below). This consists of an employee Resident and non-resident individuals may contribution of 11 percent and an employer claim a basic personal tax allowance of CZK contribution of 34 percent, made up as follows. 24,840 per year. Various other credits are Employer (%) Employee (%) granted to a resident, such as a tax credit of Pension 21.5 6.5

CZK 24,840 per year for a spouse living in the Sickness insurance 2.3 0.0 taxpayer’s household if the spouse’s annual Unemployment insurance 1.2 0.0 income does not exceed CZK 68,000 and tax al- Health insurance 9.0 4.5 lowances for children (a tax allowance of CZK Total 34.0 11.0 13,404 for the first-born, CZK 15,804 for the second-born and CZK 17,004 for the third-born 1 According to a proposed amendment to the Income Taxes Act which is expected to be passed during 2016,the allowance for the second-born child will increase to CZK 17,004 and that for the third and any subsequent child will increase to CZK 20,604. The increased allowances should apply for the whole of 2016.

61 The maximum annual assessment base for so- Tax on the acquisition of cial security premiums in 2016 is CZK 1,296,288. immovable property There is no cap on health insurance premiums. Tax liability arises upon the registry of the Social security and health insurance contribu- transfer of the ownership in the land register. tions must be paid on a monthly basis. Social The tax is payable by the transferor (seller), al- security contributions must be paid until the though the parties can agree that it will be paid aggregate of the monthly assessment base ex- by the acquirer2. ceeds the maximum annual assessment base. The tax rate is four percent of the tax base. Upon achieving this limit, the employer should The tax base is the higher of the agreed price stop paying social security contributions. The (including VAT if applicable) and of a refer- assessment base is very similar to the tax base. ence value. The reference value is calculated Foreign persons under local employment by tax authorities based on prices for similar contracts are subject to Czech social security. transactions. If the tax authorities cannot cal- Foreign persons employed by a non-Czech em- culate a reference value, the tax base will be ployer, with a social security treaty between the higher of the agreed price and 75 percent of the Czech Republic and the country of the the value assessed by an expert. If real estate employer in place, are subject to Czech social is transferred as part of an enterprise, the tax security unless, under the terms of the treaty, base will be based on an expert valuation. they can remain in the social security system of The taxpayer must submit a tax return by the the home state. end of the third month following the month The authorities take the view that expatriate in which the transfer was registered. The tax employees of EU employers are subject to is due by the same deadline. Tax declared in Czech social security based on EU social secu- the return is in some cases considered a pre- rity rules. In practice, this means that expatri- payment and is subject to review by the tax ates are liable to Czech contributions unless authorities. they remain in their home state system under EU rules.

2 According to a proposed amendment, which should become effective as of 1 April 2016, the acquirer of the real estate should always be the tax payer.

62 Taxation of income from ground floor) of a building used for business inheritance and gifts purposes if the area of the storey exceeds one From 1 January 2014, gift and inheritance taxes third of the area of the ground floor. have been abolished and the taxation of such Real estate tax on agricultural land is 0.75 per- income is now governed by the Income Taxes cent of the deemed value. Special rates apply Act. Gifts are taxable unless the donor is a qual- for forests, lakes and ponds. For other types of ifying spouse or close relation and are subject land, the tax is based on the area, and the rate to a flat rate of 15 percent for individuals and is CZK 2 per square metre for building plots, 19 percent for companies. No tax is payable on CZK 5 per square metre for improved land sur- inherited property. face used for business purposes and CZK 0.20 per square metre in other cases. Tax on immovable property For some types of property, the rates are mul - Tax on immovable property is payable by own- tiplied by a coefficient ranging from 1 to 5 ers of immovable proper ty situated in the Czech depending on the location of the property. In Republic. This tax is generally small compared addition, the tax can be increased by another with other developed countries. Different rates coefficient, varying from 2 to 5, based on the apply to land and buildings. decision of the relevant municipality. The property tax on buildings used for business purposes is based on the area of the build- International tax issues ings, using the rates below. A company’s registered office is the place where the effective management of the com- CZK/m2 pany is located. Companies with their regis-

Residential and agricultural 2 tered office in the Czech Republic are subject to

Industrial 10 Czech tax on their worldwide income and are

Other business 10 referred to as Czech residents. Other companies (non-residents) are subject to tax only on their Czech source income, sub- An additional charge of CZK 0.75 per square ject to the provisions of any double taxation metre is levied for each storey (above the treaties.

63 Foreign source income of Czech resident com- ——income from the sale or use of real panies is generally taxable in the Czech Repub- estate situated in the Czech Republic; lic, subject to the provisions of any double taxa- ——royalties, dividends and other profit tion treaties. The income of foreign branches or distributions, interest, and lease rentals; permanent establishments of Czech residents ——income from the transfer of shares is included in their taxable profit. Dividends in Czech resident companies not tax from foreign companies are a separate source exempt under domestic legislation; of income taxable at a special rate of currently ——income from the sale of a business 15 percent, unless the Parent-Subsidiary Direc- as a going concern located tive applies. in the Czech Republic. Under certain double taxation treaties, however, the foreign income of Czech residents is ex- These tax liabilities are to some extent miti- empt from Czech tax. In such cases, expenses gated by tax treaties, where applicable. In par- related to that income are not tax deductible. ticular, if there is a treaty in place, then: Credit for foreign taxes on income that is also ——Income from services can usually be taxed subject to Czech tax is available only if a double only if the service provider has a permanent taxation treaty exists with the other state. Oth- establishment in the Czech Republic. erwise, the foreign tax can only be treated as ——Income from employment can usually be an expense. taxed only if the employee is employed by a Czech company or a Czech The main types of Czech source income for permanent establishment of a foreign non-residents are: company, or if they spend more than ——income of a permanent establishment 183 days in the Czech Republic. in the Czech Republic; Income liable to tax is generally subject to with- ——income from a dependent holding taxes at a rate of 15 percent. The rate activity (employment) performed is increased to 35 percent if the income is paid in the Czech Republic; to residents of countries which have not signed ——income from services provided a double taxation treaty with the Czech Repub- in the Czech Republic;

64 lic, when no arrangement is in place for the ex- generally exempt from withholding tax (sub- change of information on tax matters. ject to advance clearance procedures). Withholding tax is a final tax that is generally The Czech Republic has implemented the EU reduced by double taxation treaties. Residents Savings Directive, which allows the provision of other EU and EEA countries can file a tax re- of information about interest paid by Czech fi- turn in respect of some types of income (e.g. nancial institutions to non-residents. interest, royalties, freelance work) subject to Other types of income paid to non-EU or EEA withholding tax and claim a deduction for any residents, notably from permanent establish- related expenses (this does not apply for with- ments, real estate and sales of securities, etc., holding tax from dividends). In such a case, are subject to withholding tax which is not the the withholding tax is considered an advance final tax, but a prepayment in respect of the ul- payment. This may result in a reduction in the timate tax liability. This tax is generally levied tax burden as withholding tax is calculated on at the rate of 10 percent (one percent for sales a gross basis. of securities or payments for receivables pur- The EU Parent-Subsidiary Directive has been chased from third parties), but may be reduced implemented in the Czech Republic, which by prior negotiation with the tax authorities. means that dividends paid by a Czech subsidiary to a parent company that is a tax resident Beneficial ownership concept in an EU member state may be exempt from A number of double taxation treaties conclud- withholding tax. These provisions also apply to ed by the Czech Republic expressly limit their dividends paid between Czech companies and benefits to the beneficial owners of income. dividends paid to Swiss, Norwegian, Icelandic In situations where an investor in the Czech Re- and Liechtenstein corporate shareholders. public is a foreign entity or a trust that is tax The EU Interest and Royalties Directive has transparent under its own tax laws, the Czech also been implemented in the Czech Republic. Republic will generally honour its transparency As a result, interest and royalties paid to some for the application of the Income Taxes Act and associated companies resident in the EU, Swit- double taxation treaties. The income paid from zerland, Norway, Iceland and Liechtenstein are Czech investments will normally be treated as

65 the income of the ultimate beneficial owner of year, and the tax return deadline is therefore the investment via the transparent entity. 1 April. This deadline is extended by a further three months if: Tax administration ——the taxpayer is subject to a statutory audit; The administration of tax is mainly governed ——the taxpayer engages a registered by the Tax Code with specific procedures pro- tax advisor to submit the tax vided by other Acts. return on its behalf. All Czech resident companies, limited partner- Except for withholding tax, income tax is col- ships, and permanent establishments of non- lected during the year by a system of prepay- resident companies must file tax returns. This ments based on the previous year’s liability. does not apply to general partnerships, where The final deadline for settling the liability is the the partners declare their share of partnership same as for the submission of the return. The profits. tax is treated as paid when it is received by the All individuals with an annual taxable income tax authority. exceeding CZK 15,000 must file tax returns The tax authority has the power to carry out unless the income is tax exempt or subject to tax inspections to establish or examine the tax withholding tax. A return must also be filed by base or any other circumstances decisive for any individual who is liable to the solidarity tax. the correct determination of the tax liability. This means that, in general, low-paid employ- Tax may not be assessed or additionally as- ees of Czech companies or branches of foreign sessed after three years have elapsed from entities are not required to file returns unless the deadline for filing the ordinary tax return. they have other taxable income. However, the deadline for the assessment of Anyone who claims a tax loss must also file additional tax may be extended to a maximum a return. of 10 years under certain circumstances, such The deadline for the submission of a tax return as the filing of an additional tax return or the is three months from the end of the taxable occurrence of a tax audit. In the event of some period. For all taxpayers, with the exception of tax-related crimes, additional tax may be as- legal entities that have adopted a non-calendar sessed regardless of the lapse of the period for year-end, the taxable period is the calendar tax assessment.

66 For taxpayer declaring a loss, the period in which a tax audit may be carried out is extended by the period during which the loss may be utilised. Since losses may be carried forward for up to five years, if extended deadlines apply, an audit can be carried out up to 15 years after the tax return became due. If an appeal is lodged against an assessment, the payment of any additional tax is deferred until the payment order becomes legally effective, but interest continues to be calculated on the outstanding amount. Interest on overdue tax is assessed at the Czech National Bank repo rate plus 14 percent, starting on the fifth working day following the due date. Where additional tax is assessed, a penalty of 20 percent of the additional tax is levied. If the tax authorities reduce a VAT refund, they will levy a penalty of 20 percent of the reduction. If a tax loss is reduced, one percent of the reduction becomes payable as a penalty. If the taxpayer corrects the tax base in an additional tax return, only interest on the overdue tax is payable.

67 *Kostkový cukr /kɔstkɔvi: tsʊkr/ Sugar cubes

Sugar processed into small cubes. As late as until the mid-19th century, sugar was commonly distributed in the form of sugar loaves. Sugar cubes are said to have been invented by Jakub Kryštof Rad, director of a sugar company in the town of Dačice. He was awarded a patent in 1843. Indirect Taxes

The Czech VAT system is based on the harmonised principles of EU Directive 2006/112. Value added tax (VAT) Certain supplies of goods and services are ex- The Czech Value Added Tax Act is based on the empt from VAT, for example: general principles of EC Directive 2006/112 and ——insurance and financial services; as such is very similar to other EU countries. ——postal services; VAT is generally due on supplies of goods or ——education; services, intra-community acquisitions of ——health and welfare services; goods and imports of goods with the place of ——transfer and financial leasing of immovable supply in the Czech Republic. property under certain conditions; ——renting of immovable property (apart VAT rates from short-term leases, leases of parking The standard VAT rate is 21 percent (effective spaces and leases of safe deposit boxes). from 1 January 2013). The Czech Republic also applies two reduced rates. The first reduced VAT registration rate of 15 percent applies to e.g. food products, VAT registration is obligatory for taxable per- public transportation services, social housing sons established in the Czech Republic whose construction, and transfers of social housing, turnover for the preceding 12 consecutive unless these are tax-exempt. The second re- months exceeded CZK 1 million. Other situa- duced rate of 10 percent (effective since 1 Jan- tions may also lead to obligatory VAT registra- uary 2015) applies to essential baby nutrition, tion (e.g. the purchase of a going concern from pharmaceuticals for human and veterinary pur- a VAT payer, the transfer of the assets of a dis- poses, books, mill products and their mixtures solved or spun-off VAT payer entity to a taxable for the production of foods for gluten-intoler- person). ant individuals. A taxable person not established in the Czech Exports and intra-community supplies of Republic becomes a Czech VAT payer if they goods, as well as the international transport of make a specific transaction with the place of goods relating to exports or imports of goods, supply in the Czech Republic, such as a zero- are zero-rated. rated supply of goods to another EU member state or a Czech local taxable supply (supply of goods, provision of services) on which they

70 have to account for VAT (i.e. the reverse-charge a quarterly period. However, a quarterly period regime is not applicable). No registration is not possible for VAT groups and taxable per- threshold applies. sons whose turnover exceeds CZK 10,000,000 Taxable persons (both established and not es- in the previous calendar year. tablished in the Czech Republic) may voluntari- VAT returns must be submitted by the 25th ly register for VAT. day of the month following the relevant tax A group of related parties established or hav- period. VAT payers who are not established in ing a VAT establishment in the Czech Repub- the Czech Republic and do not have a VAT es- lic may register as a single VAT payer (group tablishment in the Czech Republic and persons registration). identified for VAT are only required to submit VAT returns for VAT periods in which they per- Persons identified for VAT formed taxable or zero-rated transactions. A taxable person who is not a VAT payer can VAT must be paid by the due date for submit- become a person identified for VAT if they ting the VAT return. If there is excess input VAT, purchase a specific type of supply, where the VAT credit should be paid to the VAT payer place of supply is in the Czech Republic, e.g. within 30 days of the deadline for submitting they acquire goods from another EU member the VAT return. state, or they supply services where the place The VAT returns must be submitted electroni- of supply is determined in another EU member cally via special-purpose application. state under the general rule. The person identi- There is a penalty for non-submission/delay in fied for VAT is obliged to account for VAT on the submission of a VAT return (max. CZK 300,000) received supply; however, they are not entitled and penalty interest applies for late payment of to claim related input VAT. VAT (14.05 percent p.a.).

Reporting requirements EC Sales Lists VAT returns An EC Sales List must be completed if a VAT In general, VAT returns have to be submitted payer or person identified for VAT (where appli- electronically on a monthly basis. Under cer- cable) either: tain circumstances, VAT payers can opt for

71 ——supplies goods from the Czech a VAT period. VAT payers are obliged to report Republic to another EU member particular data about: state to a person registered for VAT ——local supplies; in another EU member state; ——local purchases; ——moves their own goods from the Czech ——acquisition of goods from another Republic to another EU member state; EU member state and supplies ——acts as the intermediary in a triangular acquired from persons not transaction between VAT registered established in the Czech Republic; traders in other EU member states; ——supplies (both received and provided) ——provides a service to a customer under the local reverse charge regime. established in another EU member The VAT Ledger Statement does not substitute state, where the place of taxable supply VAT return or the EC Sales List. is determined in that EU member state under the general rule. Intrastat declarations The EC Sales List should be submitted elec- Businesses dispatching goods to or receiving tronically on a monthly basis, within 25 days of goods from other EU member states and ex- the end of the month in which the supply takes ceeding relevant annual thresholds (CZK 8 mil- place. Quarterly VAT payers, who only provide lion for dispatches or CZK 8 million for goods services as described in point 4 above, may received) must complete and file an Intrastat submit EC Sales Lists on a quarterly basis. declaration. Intrastat declarations are submitted on VAT Ledger Statement a monthly basis, by the 12th working day of Since 1 January 2016, Czech VAT payers are the month following the month for which the obliged to file a VAT Ledger Statement which declaration is being filed. Intrastat declarations is considered an effective tool to detect and must be submitted electronically. A penalty of prevent tax evasion and fraud. The VAT ledger up to CZK 1 million may be imposed for failing statement is filed electronically on a monthly to submit an Intrastat declaration. or quarterly basis (depending on the status of the VAT payer) within 25 days after the end of

72 Recovery of input VAT ness. The application must be submitted by In general, a Czech VAT payer is entitled to de- 30 September of the year following the year in duct input VAT in respect of received supplies which the VAT was incurred. used for the VAT payer’s own business activity. Input VAT can be claimed within three years Non-EU businesses can claim refunds of Czech after the end of the tax period in which the tax- VAT by submitting a written application to the able supply was made. A VAT payer must have tax authority for Prague 1. Refunds are only a VAT invoice to exercise the right to deduct made on the basis of reciprocity (currently input VAT (a VAT document). applicable only for Switzerland, Norway and A VAT payer is generally not entitled to deduct Macedonia). input VAT on taxable supplies used for VAT exempt supplies, representation (entertainment) Other notes or non-business purposes. Local reverse charge for selected transactions A partial VAT deduction could be claimed in The reverse charge mechanism applies to sup- respect of taxable inputs related to both types plies of gold, scrap materials and waste, con- of supplies, i.e. those qualifying for deduction struction and assembly works and emission of input VAT and those not qualifying for de- rights effected between Czech VAT payers. duction (e.g. exempt supplies or non-business As of 1 April 2015, the application of the re- use). verse-charge mechanism has been extended The Czech Republic has implemented the gen- to cereal and technical crops, metals, mobile eral provisions of EU directives in respect of phones, integrated circuits, tablets, laptops, VAT refunds for entities registered for VAT pur- and videogame consoles. Furthermore, as of 1 poses in other EU member states or non-EU September 2015, the mechanism has been ap- businesses. VAT incurred in the Czech Republic plied also to sugar beets. The mechanism shall is recoverable under the same conditions that be applied when the commodities are supplied apply to Czech VAT payers. between two domestic VAT payers and if the The application for a VAT refund should be filed total tax base for all of the selected goods sup- electronically in the state where the taxable plied exceeds CZK 100,000 (the limit is relevant person has a registered office or place of busi- only for goods subject to the local reverse-

73 charge mechanism from 2015). According to Liability for payment of VAT a proposed amendment, the reverse-charge As the recipient of a taxable supply a Czech regime could be applied also to supplies below VAT payer can be liable for VAT from the CZK 100,000 provided that the contracting par- received supply if it has not been paid by the ties agree on this treatment in writing. supplier. Further changes related to the local reverse charge mechanism came into effect in 2016. The tax authority may demand VAT payment if: The local reverse charge mechanism now ap- ——a supplier intentionally failed to plies to supplies of immovable property, unless pay VAT and the customer knew or they are exempt. As of February 2016, the local should have known of this fact; reverse charge mechanism should also apply ——the price for the received taxable to supplies of gas and electricity to a dealer and supply is clearly and unjustifiably to supplies of electricity certificates. different from an arm’s length price; ——consideration for a taxable supply Local supplies of goods effected by a person is remitted to a foreign account; not established in the Czech Republic ——the supplier has been identified by the tax According to a proposed amendment, as of authority as an unreliable VAT payer; May 2016 the reverse charge mechanism ——the payment is made to a bank should also apply to local supplies of goods ef- account which is not published in the fected by a person not established in the Czech tax authority’s register (liability is Republic to a Czech VAT payer unless the sup- only applied if the payment exceeds plier is already registered as a Czech VAT payer. CZK 540,000, including VAT); ——fuel is supplied by a fuel distributor not Bad debt relief published as a registered distributor of A VAT payer is allowed to claim a VAT refund fuel at the moment of taxable supply. for uncollectible receivables (bad debts). A VAT refund should be possible for certain receivables after maturity, where the debtor is under bankruptcy proceedings.

74 Customs duties Energy taxes As the Czech Republic is an EU member state, Energy taxes include tax on natural gas and customs matters are governed by EU law. Cus- other gases, electricity and solid fuels. Only toms duties are payable on goods imported supplies of such products delivered within the from outside the EU. Customs rates depend on Czech Republic are subject to tax. The rules for the type of goods. energy taxes are harmonised within the EU. The Czech Republic has an Inward Processing The rates of energy taxes are fixed at a set Regime (IPR), which effectively allows a Czech amount per unit for each group of products. manufacturer to import, process and export An exemption from energy tax may be claimed goods exempt of customs duty and VAT. under certain conditions, e.g. if the energy is used in metallurgical or mineralogical pro- Excise duties cesses, the electricity is generated from renew- Excise duty is payable on hydrocarbon fuels able sources or natural gas and other gases are and lubricants, wine, spirits, beer, and tobac- used for the production of heat for households co products. Excise duties are fixed at a set and heating facilities. amount per unit for each group of products. The Czech Act on Excise Duty implements EU rules governing the production of excise goods and their release into free circulation. They must generally be produced in a tax warehouse. Once removed from the tax warehouse, they must be released into free circulation and excise duty must be paid. The regime of the suspension exemption can be applied if excise goods are transported to another EU member state or exported.

75 *Pivo /pɪvɔ/ Beer - A fermented bitter-tasting alcoholic beverage

Made of malted grains, water, hops and brewer’s yeast. It is the most frequently consumed alcoholic beverage in the Czech Republic. Pilsner beer is very popular thanks to its strong hops flavour. Financial reporting and audit

The extent of disclosures in Czech accounting legislation is considerably less demanding compared to IFRS. IFRS can/must be used under specific conditions. Financial reporting Commercial Register; all financial data about all Main features of financial reporting Czech corporations is thus publicly accessible. Czech accounting rules are similar to The Act on Accounting defines public inter- International Financial Reporting Standards ests entities in line with EU legislation; i.e. (IFRS), although there are some significant dif- accounting units whose transferable securities ferences. In particular, Czech accounting rules are admitted to trading on a regulated market, are much less detailed compared to IFRS. credit institutions and insurance companies. The Act on Accounting serves as the main All accounting units and groups are catego- framework, and detailed guidance is provided rised depending on the following criteria: net in the Decree on Double-Entry Accounting and turnover, balance sheet total and number of the Czech Accounting Standards. employees. In total, there are four account- Different decrees and standards specify the ing unit categories (micro, small, medium rules and standards for different types of cor- and large) and three group categories (small, porations (accounting units), e.g. companies, medium and large). sole entrepreneurs, banks, insurance compa- All accounting records must be in Czech. nies and non-profit organisations, as well as All accounting records must be kept and finan- municipalities and institutions financed by the cial statements presented in Czech crowns state. (CZK). All corporations recorded in the Commercial It is possible to specify a business year-end Register are obliged to use double-entry book- other than 31 December. keeping. Some specific accounting units that An annual physical count of inventory and fixed are not recorded in the Commercial Register assets is required. are permitted to keep simplified accounting The general structure of accounts must be in records (tax evidence). ac cordance with the s tandard char t of ac counts. All corporations recorded in the Commercial Statutory financial statements consist of a bal- Register are obliged to publish their annual ance sheet, an income statement (minimally statutory financial statements, annual reports classified by nature), a cash flow statement, and consolidated financial statements in the a statement of changes in equity and notes.

78 Different categories of accounting units dis- company in accordance with IFRS, or if they close different information in their financial have to consolidate, and if they prepare both statements (e.g. the cash flow statement and standalone and consolidated financial state- the statement of changes in equity are manda- ments in accordance with IFRS. tory for medium and large entities only; there The Act on Accounting requires that consol- are different requirements for disclosures in idated financial statements be prepared for the notes, etc.). an accounting unit that is a controlling entity. The exact layout, structure and headings of the Subsidiaries and accounting units over which balance sheet, the income statement and the significant influence is exercised are deemed cash-flow statement are set in prescribed tem- consolidated accounting units. plates, and minimum disclosures in notes are The obligation to consolidate applies to prescribed in the decrees. The extent of disclo- medium and large groups. Small groups must sures in Czech accounting legislation is consid- consolidate only if they include a public inter- erably less demanding compared to IFRS. est entity. A separate annual report must be prepared by Consolidation is not obligatory where the con- all accounting units that are subject to a man- solidating entity is part of another consolidat- datory statutory audit. ing entity that is governed by the law of an EU A separate report on payments to governments member state, and where specific prescribed must be prepared by large entities and public conditions have been met. However, this rule interest entities that are active in extractive does not exempt from the obligation to pub- industries or in the logging of primary forests. lish consolidated financial statements as men- All accounting units with shares or bonds pub- tioned above. A Czech corporation using the licly listed in the EU must maintain books and exemption not to consolidate has to translate prepare their financial statements in accor- and publish the consolidated financials of its dance with IFRS, as adopted by the EU. parent or ultimate parent. All other accounting units may choose to main- The above exemption from the duty to prepare tain books and prepare their financial state- consolidated financial statements does not ments in accordance with IFRS if they are con- apply to banks, insurers and reinsurers, and solidated by a parent or an ultimate parent publicly listed share or bond issuers.

79 The Act on Accounting also requires that all ——all other small accounting units that meet corporations for which audit is compulsory at least two of the above criteria in both the (see below) are obliged to prepare an annual current and previous accounting period; report in addition to financial statements. The ——foundations and certain other Act on Accounting and also some other acts non-profit organisations. specify the disclosure requirements of the annual report. Financial statements are an inte- Audit requirements also apply to annual gral part of the annual report as well. reports: The Act on Corporations requires that all cor- ——The auditor expresses an opinion on porations that are part of a group prepare whether the annual report is consistent a report on relations between related parties. with the financial statements for the same This report forms an integral part of the annual financial year and whether it was prepared report where relevant. in accordance with legal requirements; or ——the auditor issues only one report which Auditing requirements comprises their opinion on both the Audits are compulsory for: financial statements and the annual report. ——large accounting units; The Act on Auditors defines the responsibility ——medium accounting units; of the Chamber of Auditors, which authorises ——small accounting units that are joint-stock auditors and sets the standards for audits. Au- companies and that, in both the current dits are carried out in accordance with the Inter- and previous accounting period, have national Standards on Auditing issued by the met at least one of the following criteria: International Federation of Accountants (IFAC) ——net turnover exceeds CZK and relevant guidance (aplikační doložky) of the 80 million per annum; Chamber of Auditors of the Czech Republic. ——total assets exceed CZK 40 million; Auditors must be appointed by a corpora- ——the average number of tion’s general meeting and its supervisory employees exceeds 50; board is responsible for audit quality supervision. Public interest entities are also defined in the Act on Auditors, which stipulates responsi-

80 bilities for both public interest entities and their auditors, e.g. audit committees, lead partner rotation, and transparency reports. Extensive amendments to the Act on Auditors are expected around mid-2016 in relation to the new EU regulation that will require mandatory firm rotation for public interest entities and im- pose other limitations on audit/non-audit services provided to public interest entities. *Buchta /bʊxta/ Stuffed sweet bun

A type of sweet leavened pastry of Czech origin with a filling (most often poppy- seed, curd-cheese, plum jam but also custard). Each buchta is made separately and placed into a cake tin directly next to another to make them easy to break apart after baking. Corporate transactions

Corporate transactions have become an important feature of the Czech legal environment, making it possible for entrepreneurs to expand or restructure their business activities in the Czech Republic. Corporate transactions have become an im- Acquisition and disposal of czech portant feature of the Czech legal environment, legal entities making it possible for entrepreneurs to expand For foreign individuals and legal entities, no or restructure their business activities in the restrictions apply to owning a business or hold- Czech Republic. The process of mergers and ing shares in companies, and they may acquire acquisitions is primarily regulated by the Civil and sell up to 100 percent of the share capi- Code, the Act on Business Corporations, the Act tal of a limited liability or joint-stock company. on Takeover Bids, the Act on Transformations Likewise, foreign individuals and legal entities of Business Companies and Co-operatives, ac- can also participate in companies with other counting and tax laws, anti-monopoly regula- legal forms. tions, and a number of special regulations ap- The transfer of an ownership interest in a lim- plicable to specific sectors, such as banking, ited liability company must be recorded in the insurance and other financial al services. Commercial Register. The shares of certain joint-stock companies are registered with the Privatisation Central Securities Depository Prague or depos- Although it is not currently a hot topic, a num- ited in escrow at the Central Securities Deposi- ber of enterprises in sectors such as electricity tory Prague, a bank or other entity entitled to and transport may still be subject to potential maintain records of investment instruments. privatisation by sale to strategic investors. In the case of shares traded on the regulated The privatisation process is initiated by gov- securities market in the Czech Republic or an- ernment decision. All transactions are subse- other EU member state, the acquirer is obliged quently carried out by the relevant ministry, to notify the company (the issuer) and the generally through a tender. Czech National Bank if their share of the company’s voting rights exceeds a certain level. In Ownership of real estate addition, if shareholders acquire a minimum of The Czech Republic does not place any restric- 30 percent of voting rights and actually control tions on real estate ownership. the company, they are obliged to bid for the shares of the remaining shareholders.

84 Purchases of enterprises which also include demergers of companies, An acquisition can also be made by purchasing transfers of assets to shareholders, any chang- an enterprise or its parts, with the buyer acquir- es in a company’s legal form and cross-border ing the rights, assets and liabilities connected relocations. Transformations of businesses with running the business. The sale and pur- are possible even if the companies are in liq- chase agreement associated with the acquisi- uidation or insolvency proceedings. Trans- tion must be approved by the general meeting formations can be undertaken as national or or the shareholders of the company. cross-border transactions with legal entities registered in other EU or EEA countries, includ- Contributions to companies ing European Companies (Societas E uropaea). Another way of securing a share in a business Probably the most frequent form of transfor- is by making a financial or non-monetary con- mation is the merger by acquisition: one of tribution upon which the general meeting of the companies carries on its activities and the the company must decide on a new share is- other ceases to exist while its assets and li- sue. The increase is registered at the Commer- abilities are transferred to the successor com- cial Court. With some exceptions, in cases of pany. Another option is the merger by forma- non-monetary contributions, an independent tion of a new company: all of the participating valuation of the investment by an independent, companies cease to exist, and their assets are generally accepted expert listed in a special transferred to a newly established successor register must be submitted. company. From a financial point of view, carrying forward Transformations of companies the tax losses of wound up companies is gener- (merger, transfer of assets to a share- ally allowed. holder, demerger, change of legal form and ——Mergers are carried out on the cross-border relocation) basis of merger projects, subject to If several entities are controlled by one person, approval by the general meetings. it is possible to consolidate or restructure them. ——The merger date can be determined In Czech legislation, mergers come under the either retrospectively or prospectively. category of transformations of businesses,

85 ——In some cases, the merger procedure ——a combination of the options mentioned can be significantly simplified. under either 1 or 2 or 3 and 4. ——In the case of mergers of joint-stock Upon the demerger of a company by the for- companies, it is possible to allow mation of new companies or by acquisition, the the voluntary buyout of new shares company being demerged ceases to exist with- representing a minority share in the out liquidation, while in a demerger by spin-off merging company, if the successor its existence continues. company owns more than 90 percent of Czech legislation allows a company to change the merging company’s voting rights. its legal form solely by changing its internal Companies with different legal forms can also legal position and structure, but not having to merge, and mergers may involve more than cease to exist. two entities. Under certain conditions stipulated by Czech Cross-border mergers are possible; however, legislation, a foreign company with its regis- a number of special regulations apply. tered office in another EU or EEA country can The transfer of assets to a shareholder is a le- relocate to the Czech Republic while a Czech gal form of company transformation in which company can relocate to another EU or EEA a company’s assets are transferred to a share- country. holder owning more than 90 percent of the company’s registered capital and also repre- Public bid for purchase or senting more than 90 percent of the compa- exchange of participating ny’s voting rights. securities issued by a joint-stock company A company can be deme rged (d ivided) through: Should someone (an entity or individual) in- ——demerger by formation of new companies; tend to make an offer to more than 100 share- ——demerger by acquisition; holders or if the volume of requested securities ——spin-off connected with new exceeds one percent of the issue of the regu- company formation; lated market, the offer must be made in the ——spin-off connected with acquisition; form of a public bid. If a public bid is required by law, the offer must correspond to the value

86 of the participating securities. If the securities regulated market, or changes the nature of its are traded on the regulated market, the bidder shares or their transferability. must submit an offer and provide evidence to the CNB that consideration for the trade is Right to buy out participation adequate. securities (squeeze-out) A shareholder owning securities represent- Takeover bids ing more than a 90-percent share of the voting Voluntary takeover bids rights of a joint-stock company (a major share- For joint-stock companies traded on the regu- holder) is entitled to ask the board of directors lated market, investors can make apublic offer to convene a general meeting to decide on the to the shareholders, if the bid allows them to transfer of all the other participating securities gain control over the company. owned by minority shareholders, resulting in a squeeze out of minority shareholders. The Obligatory takeover bids general meeting of the company approves the An investor acquiring a minimum of 30 percent squeeze out by paying minority shareholders of the voting rights in a target company traded adequate compensation determined through on the European regulated market and actually an expert valuation. Should the shares be trad- gaining control of the company, must offer to ed on the European regulated market, a justifi- buy out the other shareholders within 30 days cation of the compensation and the prior con- of the acquisition by, submitting an obligatory sent of the CNB is required. takeover bid. In contrast, minority shareholder have the right An obligatory takeover bid may be published to sell their shares to the major shareholder as only after it has been approved by the CNB. defined above. Obligatory takeover bids are also required if a company decides to displace its shares from trading on the European or other foreign

87 Regulations Mergers and acquisitions also fall within the With regard to mergers and acquisitions, the in- jurisdiction of the Office for the Protection of terests of minority shareholders are protected Competition. Its permission is required if: as companies are obliged to ensure early notifi- ——the aggregate net turnover of the cation and, for the majority of transactions, the participants in a transaction in the Czech opinion of an independent expert to determine Republic for the prior accounting period whether the parameters of the transaction, in exceeded CZK 1.5 billion and at least two of particular the price, are fair and reasonable. In the merging companies each recorded a net the Czech Republic, mergers and acquisitions turnover of more than CZK 250 million in are also regulated by special legal measures. the Czech Republic for the same period; or For example, for a transaction to come into ef- ——one or more of the participants in the fect in the banking and insurance sector, the transaction had a net turnover in the appropriate authorities (the CNB and the Min- Czech Republic of at least CZK 1.5 billion istry of Finance) must give their prior consent. in the previous accounting period and the worldwide net turnover recorded by the other participant exceeded CZK 1.5 billion for the same period.

88 89 *Lodní šroub /lodni: ʃroub/ Propeller

A Czech invention of Mr. Josef Ressel (pat- ented in 1827) that moves ships forward. Its rotation under the water creates a force that pushes backwards a mass of water, allowing the boat to move. Propellers re- placed steamboats and are still used today. How KPMG can help

KPMG in the Czech Republic is the advisor of choice for many businesses who have selected the Czech Republic as an investment location. We can assist in the following areas

We understand the challenges and pressures Initial assessment and start-up faced by those looking to set up business in a A timely, pragmatic and cost effective assess- new jurisdiction. We can work with you to help ment of the key issues, including the most ben- you focus on what matters, to avoid pitfalls and eficial corporate and tax structures available, unnecessary costs and to ensure your invest- any potential for maximising group taxation ment projects will start to deliver a measurable benefits on a global basis and available grant return in the shortest possible time frame. assistance. We can also advise on employee We work with both leading names as well as benefit issues, e.g. those relating to foreign and start-up companies in every sector. Czech state option schemes. We also provide As a result, KPMG in the Czech Republic has be- practical business-focused advice and support come the advisor of choice to many who have in dealing with areas such as incorporations selected the Czech Republic as an investment and grant application and assessment. location, providing all the support required to ensure continued business success. Thanks to Ongoing business the KPMG global network of professional firms, We offer a broad range of audit, tax, advisory we can also work with you in your home coun- and legal services designed to ensure that try to maximize the potential of your invest- investors in the Czech Republic continue to ment in the Czech Republic. receive timely, proactive and relevant advice and support.

92 Our services

Audit ——Transfer pricing ——Audits of Czech financial statements ——Tax inspections and tax disputes ——Audits of financial statements ——Tax services for the financial sector (IFRS, US GAAP, HGB, etc.) ——Tax outsourcing ——Audits of financial reports and information ——Audits of prospective financial information Legal Services ——Review reports ——Corporate law ——Reporting on internal control systems ——Transactions and restructuring ——Sustainability reporting ——Labour law ——Regulatory issues Petr Škoda Partner in charge of Audit Radek Halíček T: +420 222 123 548 Partner in charge of Tax and E: [email protected] Legal Services T: +420 222 123 540 Tax Services E: [email protected] ——Corporate tax ——Indirect tax Management Consulting ——International executive services ——Corporate strategy ——International tax ——Enterprise architecture ——Investment incentives and subsidies ——Finance, capital and profit management ——Mergers and acquisitions ——Programme and project management

93 ——People and change Deal Advisory ——EU funds advisory ——Corporate finance ——Marketing advisory ——Restructuring ——IT advisory ——Transaction services ——Export advisory ——Forensic ——Customers and sales ——Business intelligence (BI) Alex Verbeek and data management Partner in charge of Deal Advisory ——Sports and gaming advisory T: +420 222 123 148 ——Operations management E: [email protected] ——Data and analytics Accounting Services and Payroll Petr Bučík ——Management reporting Partner in charge of ——Financial accounting Management Consulting ——Payroll outsourcing T: +420 222 123 951 ——Administrative support E: [email protected] Michael Cianci Risk Consulting Director ——Accounting advisory services Services and Payroll ——Financial risk management T: +420 222 123 135 ——Internal audit, risk consulting services E: [email protected] ——Regional and local authorities and organisations

Romana Benešová Partner in charge of Risk Consulting T: +420 222 123 129 E: [email protected]

94 Our priority sectors: KPMG in the Czech Republic ——Automotive KPMG has been active in the Czech Republic ——Banking since 1990, when the first office in Prague was ——Building, Construction and Real Estate opened. Currently, KPMG Czech Republic has ——Consumer Markets 840 employees and offices in Prague, Brno, ——Energy České Budějovice and Ostrava. KPMG Czech ——Food and Drink Republic provides Audit, Tax, Advisory and Le- ——Government and Public Sector gal services. Our 700 professionals include 26 ——Healthcare partners, 29 certified auditors, 110 certified -ac ——Industrial Manufacturing countants and 88 tax advisors. At KPMG Czech ——Insurance Republic, we employ a total of 23 qualified for- ——Middle Markets eign practitioners. ——Retail KPMG is a global network of professional firms ——Sports and Gaming providing Audit, Tax and Advisory services. We ——Telecommunications operate in 155 countries and have 155,000 em- ——Transportation ployees working in member firms around the ——Travel, Leisure and Tourism world. The independent member firms of the KPMG network are affiliated with KPMG Inter- Our foreign desks: national Cooperative (“KPMG International”), a ——Chinese Desk Swiss entity. Each KPMG firm is a legally dis- ——German Desk tinct and separate entity and describes itself as ——Japanese Desk such. ——Korean Desk ——Russian Desk

95 Useful addresses

Czech government offices

Ministry of Finance of the Czech Republic CzechInvest (Investment and Business Letenská 15 Development Agency) 118 10 Prague 1 Štěpánská 15 T: +420 257 041 111 120 00 Prague 2 www.mfcr.cz T: +420 296 342 500 www.czechinvest.org Ministry of Industry and Trade of the Czech Republic Czech National Bank (the Central Bank of Na Františku 32 the Czech Republic) 110 15 Prague 1 Na Příkopě 28 T: +420 224 851 111 115 03 Prague 1 www.mpo.cz T: +420 224 411 111 www.cnb.cz Ministry for Regional Development of the Czech Republic Staroměstské náměstí 6 110 15 Prague 1 T: +420 224 861 111 www.mmr.cz

96 Banks active Business organisations in the Czech Republic An up-to-date list of business organisations ac- An up-to-date list of banks active in the Czech tive in the Czech Republic can be found on the Republic can be found on the website of the BusinessInfo portal, at: www.businessinfo.cz Czech National Bank, at: www.cnb.cz

97 Contact us The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual KPMG Česká republika, s.r.o. or entity. Although we endeavour to provide accurate and timely Pobřežní 1a information, there can be no guarantee that such information is ac- 186 00 Prague 8 curate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without Czech Republic appropriate professional advice and after a thorough examination T: +420 222 123 111 of the particular situation. E: [email protected] © 2016 KPMG Česká republika, s.r.o., a Czech limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The reference to KPMG Czech Republic includes all companies associated with KPMG in the Czech Republic. Designed and produced by KPMG Česká republika, s.r.o.