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Doing Business in the Czech republic

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Are you going to grow to the Czech Republic? This guide may help you overcome difficulties when approaching Czech market and understand Czech business environment. You may also ask us for advice - …

Are you going to grow to the Czech Republic? This guide may help you overcome difficulties when approaching Czech market and understand Czech business environment. You may also ask us for advice - www.rsm-tacoma.cz/en

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  • 1. Doing Business in the Czech Republic DBI Czech Republic.indd 1 03/05/2012 11:59:08
  • 2. In a world of different cultures, it’s good to have advisors who are consistent everywhere. RSM International is one of the largest networks of independent audit and consulting firms in the world. RSM International is represented in 90 countries and brings together the talents of 32,500 individuals. RSM member firms are driven by a common vision of providing high quality professional services to ambitious and growing organisations. DBI Czech Republic.indd 2 03/05/2012 11:59:16
  • 3. Foreword Welcome to the Czech Republic. I believe this publication will guide you through the world of Czech business and, hopefully, you will decide to do business here. If you have already made the decision, you will be given a warm reception in a country with a rich history and good conditions for both doing business and living. Our country offers a stable economic and political situation and a strategic location in the heart of Europe. The Czech Republic is a member of the EU, offers skilled and educated workers, attractive tax legislation and a number of incentives for foreign investors. The following chapters will answer certain key questions that may arise and help you understand the characteristics and workings of this market. As legislation and business practices are subject to change and reinterpretations, it is sensible to seek local advice from appropriately qualified professional sources to deal with specific matters. This RSM Doing Business In guide offers access to an in-depth knowledge and understanding of local business in the Czech Republic in customs, tax and regulatory matters. Our aim is to attract companies to do business in the Czech Republic and to make it as easy and reliable as possible. We provide our clients with active and quality support in the fields of mergers & acquisitions, corporate finance, valuation, tax, trust services, audit, accounting, and payroll. The material included in this guide was compiled on the basis of data and information available at January 2012. Monika Mare ková Managing Partner monika.mareckova@rsm-tacoma.cz DOING BUSINESS IN THE CZECH REPUBLIC | 3 DBI Czech Republic.indd 3 03/05/2012 11:59:22
  • 4. The Prague Astronomical Clock (the Prague Orloj), installed in 1410 Previous image - Castle Konopišt DBI Czech Republic.indd 4 03/05/2012 11:59:30
  • 5. Contents 1 About RSM International 6 2 About RSM TACOMA 7 What defines us? 7 Our clients 7 General information 9 Basic facts 9 3 Background & history Climate Constitutional Institutions 9 10 11 Economy 13 Types of Czech business companies 14 Economic Freedom Index 15 Czech Republic’s ranking in ‘Doing Business 2011’ 18 4 Taxation 24 5 Labour Law in Czech Republic 28 Employment contract 28 Working hours 29 Holidays & absences 29 6 Accounting 30 7 Intellectual Property 33 Industry property rights 33 Copyright 34 Intellectual protection bodies 35 Protecting intellectual property rights abroad 8 35 Combating counterfeiting & piracy 35 Contact details 36 DBI Czech Republic.indd 5 03/05/2012 11:59:36
  • 6. 1 About RSM International RSM International is a worldwide network of independent accounting and consulting firms. RSM International and its member firms are separate and independent legal entities. RSM International does not itself provide accounting or consultancy services. All such services are provided by affiliate members practicing on their own account. RSM International is represented by affiliate independent members in 86 countries and brings together the talents of over 32,600 individuals in over 700 offices worldwide. The network’s total fee income of USD 3.9bn places it amongst the top six international accounting organizations worldwide. Affiliate member firms are driven by a common vision of providing high quality professional services, both in their domestic markets and in serving the international professional service needs of their client base. RSM International is a member of the Forum of Firms. The objective of the Forum of Firms is to promote consistent and high quality standards of financial and auditing practices worldwide. Amphawa | DOING BUSINESS IN THE CZECH REPUBLIC 6 Amphawa floating market, Bangkok DBI Czech Republic.indd 6 03/05/2012 11:59:36
  • 7. 2 About RSM TACOMA What defines us? RSM TACOMA is a leading advisory firm focusing mainly on project and transaction services, acquisitions, mergers and restructuring. In addition, we specialize in: Corporate Finance Valuation Tax Trust Services Consulting Accounting and Payroll. Our clients Large and medium-sized companies. Leading international and Czech banks, insurers, investment and financial companies, funds, chambers of industry and commerce, service providers, building contractors and developers, Czech ministries and other administrative authorities, regions and chartered towns, and international investors entering the Czech market. 18 Czech Top 100 companies. 6 Fortune 500 companies. DOING BUSINESS IN THE CZECH REPUBLIC | 7 DBI Czech Republic.indd 7 03/05/2012 11:59:36
  • 8. Lake in Rock City, 8 | DOING BUSINESS IN THE CZECH REPUBLIC National Park of Adrspach DBI Czech Republic.indd 8 03/05/2012 11:59:39
  • 9. 3 General Information Basic facts The Czech Republic is a landlocked country in Central Europe. The country is bordered by Poland to the northeast, Slovakia to the east, Austria to the south, and Germany to the west and northwest. The Czech Republic is a pluralist multi-party parliamentary representative democracy. The Parliament has two chambers: the Chamber of Deputies and the Senate. It is a member of the European Union, NATO, the OECD, the OSCE, the Council of Europe and the Visegrád Group. The Czech Republic has a land area of about 100,000 square kilometers. The population of the Czech Republic is 10.5 million inhabitants with GDP $253 billion, $24.093 per capita. Unemployment is currently stabilized at 6.7 percent. The inflation rate is 1.0 percent. Foreign direct investment inflow is calculated to be $2.7 billion. The national language is Czech. Background and history The Czech state, known as Bohemia and later as the Bohemian Crown, was formed in the late 9th century. The country reached its greatest territorial extent during the 13th and 14th century, under the rule of the P emyslid and Luxembourg dynasties. Following the Battle of Mohács in 1526, the Kingdom of Bohemia was integrated into the Habsburg monarchy as one of its three principal parts alongside Austria and Hungary. Bohemia later became the industrial powerhouse of the monarchy and the core of the Republic of Czechoslovakia which was formed in 1918, following the collapse of the Austro-Hungarian Empire after World War I. Following the events of the inter-war and wartime period, including the annexation of Zaolzie and Czechoslovakia and the liberation of much of the country by the Red Army, the Communist Party of Czechoslovakia won plurality (38%) in the 1946 elections. After World War II, the political system in Czechoslovakia was greatly affected by the introduction of a Soviet-style Communist regime, as it was in the other countries of Central and Eastern Europe. The system of power was distorted. In effect this imbalance meant that the three branches of power necessary for democratic development executive, legislative and judicial - were substituted by a unified Communist power. Its power was based on the constitution and for forty years it ruled all layers of social and political life throughout the country with the help of oppressive institutions. DOING BUSINESS IN THE CZECH REPUBLIC | 9 DBI Czech Republic.indd 9 03/05/2012 11:59:42
  • 10. In a 1948 coup d’état, Czechoslovakia became a communist-ruled state. In 1968, the increasing dissatisfaction culminated in attempts to reform the communist regime. The events, known as the Prague Spring of 1968, ended with an invasion by the armies of the Warsaw Pact countries (with the exception of Romania); the troops remained in the country until the 1989 Velvet Revolution, when the communist regime collapsed. The Velvet Revolution of 1989 peacefully overthrew a Communist dictatorship and led to the election of dissident playwright Vaclav Havel as president of a democratic Czechoslovakia. Wide diversity of political parties were well-established even before the break-up of Czechoslovakia on December 31, 1992. The constitution of the Czech Republic, which became valid on the day of the birth of the new state, explicitly defined civil rights, the relationship between the executive and legislative branches of power, and the independence of the judiciary. The Czech Republic separated from Slovakia in the “velvet divorce”, becoming an independent nation in 1993 and joining the European Union in 2004. The leftist Czech Social Democratic Party was defeated in the May 2010 elections, and a centerright coalition now governs under Prime Minister Petr Necas. Historically, the Czech Republic has been among the world’s most industrialized states, and its economy was significantly affected by the 2009 recession, with declines in both industrial production and exports within the European Union. The Czech Republic made economic reforms such as fast privatizations. Annual gross domestic product (GDP) growth stood at around 6% until the outbreak of the recent global economic crisis. The country is the first former member of the Comecon to achieve the status of a developed country according to the World Bank. In addition, The Czech Republic has the highest human development in Central and Eastern Europe,[11] ranking as a “Very High Human Development” nation. It is also ranked as the most democratic and healthy (by infant mortality) country in the region and as the third most peaceful country in Europe. Climate The Czech Republic has a temperate continental climate, with relatively hot summers and cold, cloudy and snowy winters. Most rain falls during the summer. The temperature difference between summer and winter is relatively high, due to the landlocked geographical position. 10 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 10 03/05/2012 11:59:42
  • 11. Constitutional Institutions The President Elected for a term of five years by a joint session of both chambers of Parliament, the President may serve a maximum of two successive terms in office. The President is the Supreme Commander of the Armed Forces. Presidential power is limited; the most important is the right to veto any bill which has already been passed by Parliament, with the exception of constitutional bills. This power is void in times of constitutional or other political crises. Parliament The Parliament consists of two chambers - the Chamber of Deputies and the Senate. It passes all bills valid in the territory of the Czech Republic and expresses approval of important international treaties; i.e. those concerning human rights and basic liberties, political treaties, and general economic treaties. It decides the most important acts of state, such as declaring war or approving the deployment of foreign armies on Czech soil. Chamber of Deputies The Chamber of Deputies is made up of 200 deputies who are elected for a term of four years. The President can dissolve the Chamber of Deputies in cases outlined in the constitution. Political lobbies, ongoing parliamentary commissions and committees operate in the historical building which houses the Chamber. Senate The Senate is made up of 81 senators elected for six-year terms. Every two years onethird of the Senate’s seats come up for re-election. The Senate cannot be dissolved. Parliamentary Activity A resolution by a parliamentary chamber is passed by a clear majority of deputies or senators present. A constitutional bill or an international treaty must be passed by a 60% majority of the total number of deputies and senators present. The Legislative Process Bills are sent to the Chamber of Deputies. The right of legislative initiative is possessed by a deputy, a group of deputies, the Senate, the Cabinet or local or regional cabinet representatives. A bill passed by the Chamber of Deputies is sent to the Senate which has the power to veto it, send it back to the Chamber of Deputies with amendments, or table the bill. DOING BUSINESS IN THE CZECH REPUBLIC | 11 DBI Czech Republic.indd 11 03/05/2012 11:59:42
  • 12. Elections to the Legislative Bodies Elections to the Chamber of Deputies and the Senate take place by secret ballot on the basis of general, equal and direct voting. The Chamber of Deputies is elected on the basis of proportional representation. Political parties must obtain five percent of the popular vote in order to gain seats in the chamber. The Senate is elected on the basis of majority vote. All citizens of the Czech Republic over 18 years of age have the right to vote for representatives in both chambers of Parliament. Candidates for the Chamber of Deputies must be over 21 years of age, while candidates for the Senate must be over 40 years of age. The Government The Government is the supreme body of executive power. It consists of the Prime Minister, Deputy Prime Minister and Ministers, and coordinates activities of the ministries and the central bodies of the state administration and manages the state administration throughout the territory of the state. The Government has exclusive legislative initiative in terms of the state budget. The Supreme Audit Office The Supreme Audit Office is an independent controlling agency which audits the management of state property and the implementation of the state budget. It audits the ways in which the resources of the state budget of the Czech Republic are created and used. The Czech National Bank This is the central state bank of the Czech Republic. Based on law, the main goal of the bank is to preserve the stability and purchasing power of the currency, and while pursuing this goal, the bank is not dependent on the cabinet of the Czech Republic. The president and executives of the bank are appointed by the Head of State. The Constitutional Court The Constitutional Court was set up to protect constitutional rights. It consists of 15 judges who are appointed by the President - with the consent of the Senate - for a term of ten years. In their decisions judges are bound only by constitutional laws, international treaties, and by a law designating the proceedings of the constitutional court. The Supreme Court The Supreme Court is the supreme judicial body in all matters within the jurisdiction of the courts, except those within the jurisdiction of the constitutional court or the supreme administrative court. The judges are bound only by law and they are in a position to decide whether other legal regulations are in accordance with the law. 12 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 12 03/05/2012 11:59:42
  • 13. Economy Of the emerging democracies in Central and Eastern Europe, the Czech Republic has one of the most developed industrialized economies. It is one of the most stable and prosperous of the post-Communist states of Central and Eastern Europe, and an EU member state. GDP per capita at purchasing power parity was $24,950 in 2010, which is 82 % of the EU average. The principal industries are heavy and general machine-building, iron and steel production, metalworking, chemical production, electronics, transportation equipment, textiles, glass, brewing, china, ceramics, and pharmaceuticals. Its main agricultural products are sugar beet, fodder roots, potatoes, wheat, and hops. While the conservative inward looking Czech financial system has remained relative healthy, the small, open, export driven Czech economy remains very sensitive to changes in the economic performance of its main export markets, especially Germany. When Western Europe and Germany fell into recession in late 2008, demand for Czech goods plunged, leading to double digit drops in industrial production and exports. As a result, real GDP fell by 4.1% in 2009, with most of the decline occurring during the first quarter. Real GDP, however, has slowly recovered with positive quarter-onquarter growth starting in the second half of 2009 and continuing throughout 2010. The automotive industry remains the largest single industry and, together with its suppliers, accounts for as much as 20% of Czech manufacturing. The Czech Republic produced more than a million cars for the first time in 2010, over 80% of which were exported. Foreign and domestic businesses alike voice concerns about corruption, especially in public procurement. Other long term challenges include dealing with a rapidly aging population, funding an unsustainable pension and health care system, and diversifying away from manufacturing and toward a more high-tech, servicesbased, knowledge economy. DOING BUSINESS IN THE CZECH REPUBLIC | 13 DBI Czech Republic.indd 13 03/05/2012 11:59:42
  • 14. Types of Czech Business Companies Czech Limited Liability Company (Spole nost s ru ením omezeným) The Limited Liability Company is the most common form of company in the Czech Republic. It offers simpler administration than a Joint Stock Company and one person can be both the sole owner and executive. For a limited liability company to function it must have a minimum registered capital of 200.000 CZK (Czech Republic Koruna, currency of the Republic of Czech). It can be founded by at least one natural member, or legal entity, and a maximum of 50 members. The minimum capital per member has to reach 2 .000 CZK. Czech Joint Stock Company (Akciová spole nost) The Joint Stock Company is more suitable for larger businesses and a larger number of shareholders. This type of company offers certain advantages regarding financing of a joint stock company due to the higher paid-up capital and stricter management controls. The minimum required capital is 2.000.000 CZK, and a minimum of 30% must be paid on registration for monetary contributions and 100% of non-monetary contributions. The shareholders can be Czech, foreigners, natural or legal entities. Czech General partnership (Ve ejná obchodní spole nost) In a general partnership, more than one party, individuals or legal entities, function under a trading name. All parties are liable for all of the debts of the partnership to the extent of their contribution or investment. The partnership functions on the basis of a previously signed agreement. The purpose is a business at a larger scale. Czech Limited Partnership (Komanditní spole nost) In a limited partnership one or more partners (individuals or legal entities) liability is limited to the amount of their paid and unpaid contributions. The amount of the contributions both paid and unpaid must be recorded in the Commercial Register. These partners are known as limited partners. One or more partners, individuals or legal entities, are known as general partners and are liable for the partnerships obligations with all their assets. The general partners can make management decisions and have the right to decide the future of the company. The limited partnership also functions on the basis of a signed agreement. 14 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 14 03/05/2012 11:59:42
  • 15. Economic Freedom Index The Czech Republic’s economic freedom score is 70.4, making its economy the 28th freest in the 2011 Index. Its overall score is 0.6 point better than last year, primarily reflecting improvements in business and monetary freedom. The Czech Republic is ranked 14th out of 43 countries in the Europe region, and its overall score is higher than the regional and global averages. Strong commitments to economic and structural reforms have helped the Czech Republic develop a modern and flexible economy. Open to global trade and investment, the country enjoys high degrees of trade freedom, fiscal freedom, and financial freedom. The private sector accounts for about 80 percent of GDP and is the main driver of economic growth. Years of stable and robust economic expansion came to a stop in 2009 as a result of the global financial and economic downturn, but the Czech Republic weathered the turmoil relatively well. Further growth in economic freedom in the Czech Republic will require strengthened management of public finances, better protection of property rights, and more effective elimination of corruption. The government is placing a high priority on fiscal discipline and striving for budgetary balance after years of fiscal deficits. Business Freedom Despite improvements, regulatory bottlenecks and lack of transparency remain burdensome. Licensing and bankruptcy processes are lengthy and costly. Trade Freedom The Czech Republic’s trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 1.2 percent in 2009. However, the EU has high or escalating tariffs for agricultural and manufacturing products, and its MFN tariff code is complex. Non-tariff barriers reflected in the EU and Czech policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans on some goods and services, market access restrictions in some services sectors, nontransparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among the EU members. Services market restrictions exceed EU policy, and non-transparent government procurement and the enforcement of intellectual property rights remain problematic. Ten points were deducted from the Czech Republic’s trade freedom score to account for non-tariff barriers. DOING BUSINESS IN THE CZECH REPUBLIC | 15 DBI Czech Republic.indd 15 03/05/2012 11:59:42
  • 16. Fiscal Freedom The Czech Republic has relatively low tax rates. The flat income tax rate is 15 percent, and the top corporate tax rate has been reduced from 20 percent to 19 percent. Other taxes include a value-added tax (VAT), a real estate transfer tax, and an inheritance tax on non-family recipients. In the most recent year, overall tax revenue as a percentage of GDP was 36.2 percent. Government Spending The government is critically involved in the economy, particularly in social programs. In the most recent year, total government expenditures, including consumption and transfer payments, held steady at 42.9 percent of GDP. The government has sold its remaining stakes in a telecommunications company and a petrochemicals refiner. The overall fiscal deficit is 6 percent, and public debt is 60 percent. Monetary Freedom Inflation has been low, averaging 2.5 percent between 2007 and 2009. As a participant in the EU’s Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. The Ministry of Finance can fix prices, set minimum or maximum commercial transaction prices, and establish periods when prices may not change. Energy, some raw materials, domestic rents, and rail and bus transport are subject to controls. Maximum prices apply to mail and telecommunications tariffs. Ten points were deducted from the Czech Republic’s monetary freedom score to account for measures that distort domestic prices. Investment Freedom Legally, foreign and domestic investors are treated identically. The government screens foreign investment projects in banking, insurance, and defense, where the state is a partner. Slow legislative and judicial reform, uneven contract enforcement, bureaucracy, and corruption are obstacles to foreign investment. Most major state-owned companies have been privatized with foreign participation. There are no restrictions on payments or current transfers, and residents and non-residents may hold foreign exchange accounts. Branches or offices of foreign companies may buy local real estate, except for farmland or woodland. Financial Freedom The Czech Republic’s financial sector is one of Central and Eastern Europe’s most advanced. The state is the controlling shareholder in two banks. Foreign-controlled banks account for over 80 percent of assets. Insurance companies and pension funds include significant foreign participation. The supervisory framework is well established. Capital markets are small and lack transparency, but regulatory bodies have been merged to streamline oversight. The global financial turmoil’s impact on banking has been relatively modest. 16 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 16 03/05/2012 11:59:42
  • 17. Property Rights Property rights are protected by law, and contracts are generally secure. The judiciary is independent, but decisions vary from court to court. Commercial disputes can take years to resolve. Company registration is controlled by the courts and can be slow and complicated. Enforcing judgments and foreclosing security interests in land and personal property can be difficult. Freedom from Corruption Corruption is perceived as significant. The Czech Republic ranks 52nd out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009. Allegations of corruption most often involve the court-controlled company registration system and the police. The Czech Republic has ratified the OECD’s anti-bribery convention, but there is little or no enforcement. It has signed but not ratified the U.N. Convention Against Corruption. Labor Freedom The labor market is relatively flexible. The non-salary cost of employing a worker can be high, but the severance payment system is relatively straightforward and not costly. Table 1 Summary of Doing Business Freedom Percentage Change Business Freedom 69.8 Trade Freedom 87.6 +4.3 +0.1 FIscal Freedom 81 +0.9 Government Spending 44.8 -0.8 Monetary Freedom 80.0 +4.4 Investment Freedom 70.0 no change Financial Freedom 80.0 no change Property Rights 65.0 no change Freedom From Corruption 49.0 -3.0 Labour Freedom 77.0 +0.6 Table 2 Distribution of Global Economic Freedom 100-80 79.9-70 Free Mostly free 69.9-60 Moderately free 59.9-50 49.9-0 N/A Mostly unfree Repressed not ranked DOING BUSINESS IN THE CZECH REPUBLIC | 17 DBI Czech Republic.indd 17 03/05/2012 11:59:42
  • 18. Czech Republic’s Ranking in Doing Business 2011 To make the data comparable across economies, the indicators refer to a specific type of business, generally a local limited liability company operating in the largest business city. As standard assumptions are used in the data collection, comparisons and benchmarks are valid across economies. The data not only highlight the extent of obstacles to doing business; they also help identify the source of those obstacles, supporting policymakers in designing reform. The data set covers 183 economies: 46 in Sub-Saharan Africa, 32 in Latin America and the Caribbean, 25 in Eastern Europe and Central Asia, 24 in East Asia and Pacific, 18 in the Middle East and North Africa and 8 in South Asia, as well as 30 OECD highincome economies. The Czech Republic - Compared to global good practice economy as well as selected economies: The Czech Republic is ranked 63 out of 183 economies in Ease of Doing Business. Table 3 The Czech Republic’s Ease of Doing Business ranking Ease of doing business 63 Starting a business 130 Dealing with construction permits 76 Registering Property 47 Getting credit 46 Protecting investors 93 Paying taxes 128 Trading across borders 62 Enforcing contracts 78 Closing a business 32 18 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 18 03/05/2012 11:59:42
  • 19. Table 4 The Czech Republic’s Ease of Doing Business Procedures (number) 9 Time (days) 20 Starting a business Cost (% of income per capita) 36 Time (days) 150 Cost (% of income per capita) 40649 Procedures (number) Registering property 30.9 Procedures (number) Dealing with construction permits 9.3 Paid-in min. capital (% of income per capita) 4 Time (days) 43 Cost (% of property value) 3.0 Strength of legal rights index (0-10) 6 Depth of credit information index (1-6) 5 Public registry coverage (% of adults) 4.9 4.9 Private bureau coverage (% of adults) 73.2 73.2 Extent of disclosure index 2 Extent of director liability index (0-10) 5 Getting credit Protecting investors Ease of shareholder suits index (0-10) 8 Strength of investor protection index (0-10) 5.0 Payments (number per year) 12 Time (hours per year) 557 Profit tax (%) 40640 Labour tax and contributions (%) 38.4 Paying Taxes Other taxes (%) 3.0 Total tax rate (% tax rate) 48.8 Documents to export (number) 4 Time to export (days) 17 Cost to export (US$ per container) 1060 Documents to import (number) 7 Trading across borders Time to import (days) 20 Cost to import (US$ per container) 11653 Enforcing contracts procedures (number) Bangkok city skyline DBI Czech Republic.indd 19 611 33.0 Recovery rate (cents on the dollar) Closing a business 27 Time (days) Cost (% of claim) Enforcing contracts 55.9 Time (years) 40577 Cost (% of estate) 17 03/05/2012 11:59:43
  • 20. Starting a Business A number of studies have shown that among the benefits of streamlining the process to start a business have been greater firm satisfaction and savings and more registered business, financial resources and job opportunities. Economies with higher entry cost are associated with a larger informal sector and a smaller number of legally registered firms. The Czech Republic’s accession to the EU in 2004 put the regulation of business activities in line with European standards and EU legislation. Setting up a business in the Czech Republic has thus become much easier and more transparent not only for subjects domiciled in any member state of the EU but also for subjects domiciled outside the EU. Any business activity in the Czech Republic is generally subject to the issuance of a trade license (regulated by the Trade Licensing Act) or another specific permit (regulated by a number of specific acts), depending on the type of business activity. Czech law generally provides that a foreign legal entity may undertake business activities in the Czech Republic under the same conditions and to the same extent as Czech entities. Under the Czech Trade Licensing Act, a legal entity with its seat in another EU member state can temporarily provide its services within the territory of the Czech Republic based on the trade licenses issued in such member state. If this legal entity’s activities become more regular and meet the legal definition of a business activity (i.e. continuous business activity carried out independently, at its own responsibility and aimed at generating a profit), it should either apply for the respective trade licenses or other permits in the Czech Republic and subsequently register its branch in the Czech Commercial Register or set up a subsidiary company in the Czech Republic. Dealing with construction permits Complying with building regulations in developing economies can be so costly in time and money that many builders opt out. Builders may pay bribes to pass inspections or simply build illegally. Therefore, entrepreneurs tend to move to grey economy where they operate with less concern for safety, leaving everyone worse off. Registering Property Ensuring formal property rights is fundamental. Effective administration of land is part of that. If formal property transfer is too costly or complicated, formal titles might go informal again. 20 | DOING boats, Railay Beach, Krabi Traditional Thai BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 20 03/05/2012 11:59:43
  • 21. Getting Credit The depth of credit information index measures rules and practices affecting the coverage, scope and accessibility of credit information available through either a public credit registry or a private credit bureau. Credit information system mitigates the information asymmetry in lending and enables lenders to view a borrower’s financial history, providing them with valuable information to consider when assessing risk. Credit information system benefits borrowers as well, allowing good borrowers to establish a reputable credit history which will enable them to access credit more easily. The Legal Rights Index measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders and thus facilitate lending. Sound collateral lase will enable businesses to use their assets, especially movable property, as security to generate capital while having strong creditor’s rights has been associated with higher ratios of private sector credit to GDP. Protecting Investors Stronger investor protections matter for the ability of companies to raise the capital needed to grow, innovate, diversify and complete. This is all the more crucial in times of financial crisis when entrepreneurs must navigate through defiant environments to finance their activities. Paying Taxes Taxes are essential to provide public amenities, infrastructure and services which are crucial for a properly functioning economy. Data shows that economies where it is more difficult and costly to pay taxes have larger shares of informal sector activity. Trading Across Borders Making trade between countries easier is increasingly important for business in today’s globalized world. Excessive document requirements, burdensome customs procedures, inefficient port operations and inadequate infrastructure all lead to extra costs and delays for exporters and importers, stifling trade potential. Trade facilitation tools such as electronic data interchange systems, risk-based inspections, and single windows help improve an economy’s trading environment and boost firms’ international competitiveness. DOING BUSINESS IN THE CZECH REPUBLIC | 21 DBI Czech Republic.indd 21 03/05/2012 11:59:43
  • 22. Enforcing Contracts Well-functioning courts help businesses expand their network and markets. Where contract enforcement is efficient, firms have greater access to credit and are more likely to engage with new borrowers or customers. Data measures the efficiency of the judicial system in resolving a commercial sale dispute before local courts. Following the step-by-step evolution of a standardized case study, data relating to the time, cost and procedural complexity of resolving a commercial lawsuit are collected through study of the codes of civil procedure and other court regulations, as well as through survey completed by local litigation lawyers. Closing a Business A robust bankruptcy system functions as a filter, ensuring the survival of economically efficient companies and reallocating the resources of inefficient ones. Fast and cheap insolvency proceedings result in businesses’ speedy return to normal operation and increase returns to creditors. By improving the expectations of creditors and debtors about the outcome of insolvency proceedings, well-functioning insolvency systems can facilitate access to finance, save more viable businesses, and thereby improve growth and sustainability in the economy overall. The Czech Republic made it easier to deal with insolvency by introducing further legal amendments to restrict setoffs in insolvency cases and suspending for some insolvent debtors the obligation to file for bankruptcy. Changes to business regulation The Czech Republic simplified its labor tax processes and reduced employer contribution rates for social security. The Czech Republic made it easier to deal with insolvency by introducing further regulations. 22 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 22 03/05/2012 11:59:45
  • 23. City of Tel , in central south Czech Republic, is a UNESCO World Heritage site DOING BUSINESS IN THE CZECH REPUBLIC | 23 DBI Czech Republic.indd 23 03/05/2012 11:59:50
  • 24. 4 Taxation Czech income tax rate for individuals is a flat rate of 15%. Corporate tax is 19%. Pension and investment funds pay a 5% corporate tax. The rate of corporate tax has been reduced constantly to encourage economic activity. For instance, the rate of corporate tax was 45% in 1992. For residents the world-wide income is taxable, for non-residents only the Czechsource income is included in the tax base. The tax base is the accounting result adjusted in compliance with the special provision of the Income Taxes Act. Among the examples of non-deductible costs there are entertainment costs, remuneration paid to the board members, shortages and damages. Set-off of losses can only be carried forward for five years and cannot be carried back. Incentives Incentives like training and job-creation grants are available in the manufacturing industry. However, these depend on utilization of the EU funds by local bodies and they are often subject to changes. In order to be eligible for these incentives you have to, for example, establish, expand or modernize the production, and be environmental friendly. There is also a special tax allowance for entities performing research & development. Group relief No tax consolidation is available. Participation exemption Participation exemption of capital gains and dividends is applicable on condition that 10% of the shares in a subsidiary are held for at least 12 months. Anti-avoidance rules There are no specific CFC rules in the Czech Republic. Only very general rules regulate the issue of anti-avoidance in international tax. In principal, general abuse of law and substance-over-form rules are in place. 24 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 24 03/05/2012 11:59:50
  • 25. Taxation of Individuals An individual pays the tax on income either as a wage earner or as a self-employed person. The income tax of an individual who meets the criteria of a “permanent resident” of the Czech Republic is calculated from the income earned in the Czech Republic and abroad. A foreign resident who is employed in the Czech Republic pays the tax only on income earned in the Czech Republic. An employer is obliged to deduct, on monthly basis, tax advances from employees’ salaries. A self-employed person must prepay taxes that will be offset on making an annual tax return. The advances are calculated on the basis of the previous year’s tax liability. In the case of a new business, the advances are calculated on the basis of estimates made by the taxpayer. Reporting Dates The tax year in the Czech Republic is the calendar year ending on 31 December. If a taxpayer’s income is derived solely from a salary, he or she is not obliged to file the annual tax return. In all other cases, the tax return has to be submitted by 31 March (3 months after the end of the tax year). If a taxpayer is represented by an authorized Czech tax advisor, he or she may apply to submit the return by 30 June. A delay in submitting an annual return will entail fines, in most cases, of 10% of the tax payable. Fines are imposed even after the tax has been prepaid. Value Added Tax The supply of goods and rendering services carried out in the Czech Republic, import of goods and intra-community acquisitions of goods in the Czech Republic are subject to the VAT. Table 5 Tax rates Rates Normal 20% Reduced 14% DOING BUSINESS IN THE CZECH REPUBLIC | 25 DBI Czech Republic.indd 25 03/05/2012 11:59:50
  • 26. Corporate Tax Corporate tax in the Czech Republic has been 19% since 2010 Tax of 15% is imposed on dividends paid by Czech corporations Dividend paid between 2 Czech companies is exempt from the tax, depending on the conditions Income from the interest is deemed to be a part of your income and as such is taxed at 19%. Capital Gains In general, capital gains in the Czech Republic are taxed as an income of companies and individuals If a company owning 10% or more of the shares receives the capital gains from the sale of these shares, it is entitled to participation exemption under certain terms For an individual, a gain from the sale of the main private dwelling held for at least 2 years is tax exempt. Or, when not used as the main residence, if held for more than 5 years. Tax Losses In the Czech Republic losses can be carried forward for 5 years. There is no carryback of losses. Consolidated Accounts Any company which qualifies as a controlling entity as defined by the Czech accounting law is obliged to compile group consolidated financial statements. This has to be carried out in compliance with the Czech GAAP consolidation rules. However, any accounting consolidation is disregarded for the tax purposes. Thin Capitalization Financial expenses related to the loans from related parties are not tax deductible if the ratio of a related-party loan to equity exceeds 4:1. Tax is deducted at source from the following payments to non-residents: Table 6 Withholding taxes Interest -15% Dividends -15% Royalties -15% 26 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 26 03/05/2012 11:59:53
  • 27. DOING BUSINESS IN THE CZECH REPUBLIC | 27 The Dancing House, Prague DBI Czech Republic.indd 27 03/05/2012 11:59:59
  • 28. 5 Labor Law in Czech Republic Legal framework for labor and employment issues is mainly provided for by the Labor Code. Furthermore, there are several Collective Agreements entered between the employers and employees’ representatives that provide specific rules for some sectors of economy. Having entered the EU, the Czech Republic was obliged to incorporate a series of Euro¬pean Directives with regard to labor relations, which apply generally through¬out the EU. Employment contract Types of contract The labour law identifies various types of employment contract, including the following: Permanent contracts Employment contracts subject to a term Part-time employment contracts Agency contracts (i.e. temporary contracts). Trial Period The length of the trial period must be stipulated in writing, which varies accord¬ing to the type of contract. For permanent contracts the trial period is three months. Termination of employment contracts Employment contracts can be terminated as follows: Expiration of a particular term or on the completion of a particular task (for fixed or uncertain term contracts) Revocation by mutual agreement Dismissal (with a just cause, cancelation of the labor position, collective dis¬missal or dismissal based on the lack of adaptation of the employee to new technologies) Rescission by the employee with a just cause Termination with a pre-notice period. 28 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 28 Giant Buddha in Grand Palace, Bangkok 03/05/2012 11:59:59
  • 29. Working Hours Except from specific cases and sectors of economy, the working hours shall not exceed 40 hours per week. The employees cannot work more than 5 consecutive hours, hav¬ing the right to a rest period of not less than one hour after that period. Overtime is limited to a certain number of hours per year but this limit may vary depending on the particular collec¬tive agreement. Such agreements also provide for some specific rules related to working shifts, night work, etc. The law allows flexible working time under specific conditions and shall not exceede certain limits. Holidays and Absences Holidays Employees are entitled to 20 working days of holidays per year. An employee, at the beginning of the contract, is entitled to 2 days per each month worked and can only take holiday after 3 months of the employment. The employer is entitled to stipulate the holiday dates, however, the period of holidays is usually a matter mutual agreement. Public holidays Legally there are 11 national public holidays. Public holidays are not movable and are not changed in order to minimize mid-week interruptions. Absences Labor law lists a series of circumstances that can justify absences from work. In case of a sickness, the employee shall receive a wage compensation for the first 21 calendar days, i.e. 15 working days, however, the first three days are not paid. From 22nd calendar day onwards, the employee shall receive the sickness insurance benefits from the CSSA (Czech Social Security Administration). The amounts of the wage compensation provided by the employer or the sickness insurance benefit provided by the CSSA are capped by three limits. DOING BUSINESS IN THE CZECH REPUBLIC | 29 DBI Czech Republic.indd 29 03/05/2012 11:59:59
  • 30. 6 Accounting Accounting regulations and standards System and scope of accounting legislation in the Czech Republic The basic rules and regulations are set out in Act No. 563/1991 Coll., on Accounting, as amended (the “Accounting Act”). The Accounting Act refers to: Decrees of the Ministry of Finance of the Czech Republic (“MF CR”) issued for each type of organization (banks and financial institutions, private enterprises, insurance companies, state-funded organizations, foundations, not-for-profit organizations, and political parties); and Czech accounting standards prepared and promulgated by the MF CR, which describe in detail the accounting procedures for each type of organization (see previous point). The Accounting Act also defines the basic requirements for preparing and publishing annual reports and the conditions that trigger the need for a mandatory statutory audit of financial statements. Companies whose securities are traded publicly are subject to stricter rules for publication of financial information, especially information that must be included within annual reports and the obligation to present financial information on an ongoing basis to the Czech National Bank, which acts as the common regulator of the financial markets. Yet more extensive requirements on these organizations are stipulated by the Act on Undertaking on the Capital Markets. The main body regulating accounting and audit is still the state but developments in this area are shared by a number of professional organizations: Chamber of Auditors of the Czech Republic, Union of Accountants, and, in particular, the all-encompassing National Accounting Council. The latter first and foremost comments on bills and interpretations of accounting regulations. Although the interpretations of the National Accounting Council are not a component of accounting legislation and subsequently are not binding, their influence on practice has been growing. Obligatory application of IFRS for issuers of public securities A company whose securities are traded on regulated public markets in the EU Member States has to compile and present both financial statements and consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union instead of financial statements prepared according to Czech regulations. All other private enterprises in the Czech Republic can use IFRS directly instead of Czech accounting regulations when compiling their consolidated financial statements. 30 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 30 03/05/2012 11:59:59
  • 31. The obligation described above to present financial statements in accordance with IFRS has no effect on the current corporate income tax liability. As tax laws are based on bookkeeping done in accordance with Czech regulations, companies who report in accordance with IFRS must also maintain accounting records sufficient to enable them to ascertain their business result in accordance with Czech accounting regulations. In practice, adjustment of the accounting records kept according to IFRS with the accounting records kept according to Czech accounting regulations is done outside the accounting system, with the reconciliation of the business results and equity being performed subsequently. If technically feasible, it is possible to do bookkeeping according to both IFRS and Czech accounting regulations in the accounting system directly. Voluntary application of IFRS The companies whose securities are temporarily NOT traded on regulated public markets in the EU Member States can either continue doing the bookkeeping according to IFRS and report financial statements according to IFRS (assuming meeting requirements stated in the Accounting Act) or do the bookkeeping within the Czech accounting regulations. The companies presuming preparation of consolidated financial statements (or consolidation package) in accordance with IFRS as consolidating, respectively consolidated, company can either do the bookkeeping according to IFRS or do the bookkeeping within the Czech accounting regulations. As stated in the preceding article, tax laws are based on bookkeeping done in accordance with Czech regulations. Companies who report in accordance with IFRS must also maintain accounting records sufficient to enable them to ascertain their business result in accordance with Czech accounting regulations. The main differences between financial reporting according to Czech accounting regulations and IFRS Financial reporting requirements stem from the fourth and seventh directives of the European Union (EU). Some important terms and principles are taken from IFRS (International Financial Reporting Standards), the most important being the priority that facts be portrayed truly and accurately. Other basic principles – such as the accruals principle, the principle of due care, and the principle of going concern – are also in accordance with internationally recognized financial reporting principles. This applies in particular to banks, financial institutions, and private enterprises. The accounting rules valid for other types of organization are closer to valid tax regulations and the needs of the state. Despite the fact that Czech accounting principles and IFRS are becoming closer, the financial reporting and accounting system in the Czech Republic is still influenced strongly by tax regulations. DOING BUSINESS IN THE CZECH REPUBLIC | 31 DBI Czech Republic.indd 31 03/05/2012 11:59:59
  • 32. Despite the efforts to harmonize accounting regulations with IFRS in the past couple of years, there exist areas of significant difference between IFRS and Czech financial reporting. Such areas include, for example, financial leasing. Other areas where Czech regulations differ from IFRS are, for example, provisions, reporting of extraordinary items, accounting for revenues including long-term contracts (it is prohibited to use the percentage of completion method to account for revenues) and accounting for business combinations. Czech regulations also require the information in the financial statements to be significantly more succinct than those required by IFRS. Publication and disclosure obligations Each year, all subjects must submit electronically their approved financial statements to the commercial register maintained at the pertinent court. Subjects whose financial statements have to be audited by statutory auditors also have the obligation to present annual reports. These must include the audited financial statements as well as the auditor’s report and information about previous and anticipated economic and business developments. Companies controlled by other entities must also include in their annual reports and a report on relationships with related parties in accordance with Section 66a of the Commercial Code. This report must also be reviewed by the company’s auditor. Issuers of public securities are also obliged to disclose on an ongoing basis semi-annual reports to the Czech National Bank. The reports must contain the balance sheet and profit and loss account and some other financial information. These reports do not have to be audited however. You can obtain more details and relevant information regarding Accounting and Financial Reporting in the Czech Republic on the link bellow: http://www.cfe-eutax.org/taxation/accounting/czech-republic Common differences between IFRS and CZ Accounting Standards You can obtain more details and relevant information regarding the common differences between IFRS and CZ Accounting Standards on the link bellow: http://www.pwc.com/cz/en/ucetnictvi/ifrs-publikace/PwC_IFRS_CZGAAP_SimDif_ ENG_09_ele.pdf 32 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 32 03/05/2012 11:59:59
  • 33. 7 Intellectual Property Intellectual property law covers all legal property rights over original creations such as commercial and artistic products. Protection is granted to both tangible and intangible works (i.e. musical, literary and artistic works, ideas, discoveries and inventions, words, phrases, symbols and designs). Industrial property rights Copyrights, trademarks, patents and industrial designs are the most common forms of intellectual property protection. Industrial property rights cover: Technical products (inventions and utility models) Industrial design items (industrial models, including designs) Identification rights (designations of origin and trade marks) Other types of works, such as improved integrated circuits (semiconductor topographies), new animal breeds and farming methods. According to industrial property law, inventions that fulfill certain conditions may be granted patents. A utility model is a new, industrially-useful technical solution which goes beyond the bounds of mere professional know-how. For items with a lower level of inventiveness or less economic importance, a simpler quicker and less costly form of protection than a patent may be chosen for the invention. The topography of semiconductor products is a series of fixed or coded interrelated patterns representing a three-dimensional permanent arrangement of layers. An “industrial model” is understood to mean the appearance of a product or the parts thereof (marks of lines, outlines, colors, shape and the materials or decorations used). A registered trade mark is a distinctive sign or indicator that allows people to distinguish your products or services from the others already present on the market. It can be a name, a logo, the shape of a product or its cover. A “designation of origin” is understood to mean the name of an area or location identifying goods typical of such a location because of their quality or special characteristics. DOING BUSINESS IN THE CZECH REPUBLIC | 33 DBI Czech Republic.indd 33 03/05/2012 11:59:59
  • 34. The geographical indication is the name of an area that identifies goods coming from that area. Your product is entitled to geographical indication protection if it has a specific quality, reputation or other characteristic linking it to a specific geographical area where it has to be produced, processed and prepared. The types of property rights resulting from a creative activity are: Industrial rights (right to inventions, utility models, industrial models, etc.) Copyright. For the types of ownership rights arising from non-creative activities there is mainly the right of the producer of a sound recording over the use of the recording and to assign to a third party by contract an entitlement to exercise this right. The different types of identification rights are: Trade mark Designation of origin Geographical indication. Rights to the protection of personality include the protection of your private life, reputation, human dignity and privacy. Copyright Copyright grants to the creator of an original piece of work exclusive rights to his or her work for a certain period. It is not necessary to register pieces of work in order to be entitled to protection. This intellectual property right is, in fact, automatic. Property rights last, unless otherwise stipulated, for the period of the author’s life and for 70 years after his or her death. Copyright includes: Personality rights of the author - the personal interests of the author and his or her connection to the work Property rights of the author - the asset value of the work. 34 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 34 03/05/2012 11:59:59
  • 35. The Act on Copyright and Rights Related to Copyright is the main law covering this issue. For copyright protection to arise for a computer program in the Czech Republic, no actual registration is necessary, as all computer programs are subject to informal protection. Databases are also protected under copyright law regardless of what form they take. Advertising is regarded under the Copyright Act as a work of art and is protected in the same way. However, the Act does not protect actual suggestions before they have been put into effect and nor does it protect ideas, processes or methods. Design is the legally protected form of industrial models (see above). As to the multimedia, the producer of an audiovisual recording has exclusive property rights to use the audiovisual recording and to assign to another by contract an entitlement to exercise this right. Industrial drawings are the legally protected form of utility models (see above). Works of cartography (maps) are regarded under the Copyright Act as collective works, since individual contributions cannot be used independently. The Copyright Act also covers literary works and other scientific and artistic works, as well as television broadcasts. Commercial strategies Commercial strategies may be commercially confidential and therefore included among industrial property rights. Related concepts include know-how and confidential information. Intellectual protection bodies The Industrial Property Office collects all applications for intellectual property rights and decides on their eligibility. It keeps records of all products covered by industrial property rights. The list of the products is published in the Official Gazette and in its public registers. Protecting intellectual rights abroad The Czech Republic is a member of the World Intellectual Property Organization (WIPO) and the European Patent Organisation, (EPO) and it is a participating state in the Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS agreement) administered by the World Trade Organization. Combating counterfeiting and piracy At the Ministry of Industry and Trade an inter-ministerial commission for combating illegal actions in violation of intellectual property rights has been set up, the aim of which is to help increase protection and respect for intellectual property rights in the Czech Republic. The government of the Czech Republic has drawn up an Action Plan against Piracy and Counterfeiting. DOING BUSINESS IN THE CZECH REPUBLIC | 35 DBI Czech Republic.indd 35 03/05/2012 11:59:59
  • 36. 8 Contact details RSM TACOMA is a leading Czech advisory firm providing services in respect of mergers & acquisitions, corporate finance, valuation, tax, trust services, audit, management consulting, accounting, and payroll. RSM TACOMA has been active in the Czech market since 1993, and in 2011 joined RSM International, the sixth largest global independent consulting network. For more information, visit our website at www.rsm-tacoma.cz. RSM TACOMA Amazon Court Karolinská 661/4 186 00 Prague Czech Republic T +420 226 219 000 E info@rsm-tacoma.cz W www.rsm-tacoma.cz RSM International 11 Old Jewry London EC2R 8DU T +(0)20 7601 1080 F +(0)20 7601 1090 W www.rsmi.com 36 | DOING BUSINESS IN THE CZECH REPUBLIC DBI Czech Republic.indd 36 03/05/2012 12:00:00
  • 37. Notes DBI Czech Republic.indd 39 03/05/2012 12:05:01
  • 38. Notes DBI Czech Republic.indd 39 03/05/2012 12:05:01
  • 39. Charles Bridge with Prague Castle in the background Charles DOING BUSINESS IN THE CZECH REPUBLIC | 37 DBI Czech Republic.indd 37 03/05/2012 12:00:04
  • 40. RSM International Executive Office 11 Old Jewry London EC2R 8DU United Kingdom T: +44 (0)20 7601 1080 F: +44 (0)20 7601 1090 E: rsmcommunications@rsmi.com www.rsmi.com RSM is the brand used by a network of independent accounting and advisory firms each of which practices in its own right. The network is not itself a separate legal entity of any description in any jurisdiction. The network is administered by RSM International Limited, a company registered in England and Wales (company number 4040598) whose registered office is at 11 Old Jewry, London EC2R 8DU. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug. © RSM International Association, 2012 DBI Czech Republic.indd 52 03/05/2012 12:00:11