A guide to doing business in the Czech Republic

The Czech Republic is a full-fledged parliamentary democracy and among the emerging democracies in central and eastern Europe, it has one of the most developed industrialized economies. The Czech koruna (CZK) is a fully convertible currency. Since 1991, its stability has been maintained by the independent Czech National Bank. One of the Czech Republic’s most important economic advantages is its well established infrastructural links to both western and eastern Europe.

Business participation

The Czech Republic, as an EU member state, is a part of the European internal market, which features freedom of movement for workers, freedom of establishment, freedom to provide services, and free movement of goods and capital. Even though these fundamental freedoms are not guaranteed to economic operators outside the EU, the legal and political environment of the member states is business-friendly and attractive to foreign entrepreneurs.

Accordingly, foreign entities may (and do) set up affiliates in the Czech Republic, most frequently in the form of a limited liability company. The incorporation process is quite simple and capital of only CZK200,000 (US$9,700) is required.

A joint-stock company is common in the Czech business world but, as a more sophisticated legal entity with more complex corporate governance, it is usually used in cases where a large volume of business is contemplated and huge financial resources are necessary. General commercial partnerships or limited partnerships are used less frequently, mostly due to the unlimited liability of their members.

An organizational branch or subsidiary of a foreign company can also be established in the Czech Republic. A company or a branch may conduct business in the Czech Republic after it has been established and registered with the Czech Commercial Register (the average time for completion of this process is 40 days).

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Foreign investment

The Czech Republic is one of the region’s most successful countries for attracting foreign direct investment, partly thanks to its accession to the EU in 2004 and investment-incentivizing legislation.

The Investment Incentives Act grants various benefits to investors that comply with its specific requirements (e.g. the launch of a new production line or the expansion of an existing one). Investment incentives include income tax discounts, material support for the creation of new jobs, training and requalification grants for employees, and real estate transfers under favourable conditions.

Several Indian companies are currently taking advantage of the dynamic business environment in the Czech Republic, including Ashok Leyland, Infosys and Lloyd Electric & Engineering.

Taxes

Entities that have a registered seat or principal place of business (i.e. an address from which the entity is managed) in the Czech Republic are subject to tax on income derived from sources in the Czech Republic as well as abroad. Entities without a registered seat in the Czech Republic are subject to tax on income derived from sources in the Czech Republic only.

The general corporate income tax rate is 19%, but a special 5% tax rate applies to certain types of tax categories, e.g. investment trusts and unit trusts.

The standard value-added tax (VAT) rate is 20% and the reduced VAT rate is 14%. The standard rate applies to most goods and services and the reduced rate applies to specific goods and services chosen for their necessity (food, books, etc.).

The Czech Republic has double taxation avoidance agreements with several countries, including India, the US, UK, Canada and Japan.

Merger control

There are several legal conditions under which mergers are subject to the approval of the Czech Office for the Protection of Competition. In general, an approval is required if the aggregate net turnover of all the companies involved in the merger exceeded CZK1.5 billion in the Czech market during the latest accounting period, and at least two of the companies involved in the merger achieved a minimum net turnover of CZK250 million during the latest accounting period.

Approval is also required if the net turnover in the Czech market for one of the companies in the merger during the latest accounting period, under certain conditions specified in the relevant act, exceeded CZK1.5 billion and, at the same time, the worldwide net turnover in the latest accounting period by another of the companies in the merger exceeded CZK1.5 billion.

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