Czech Republic (CZ) is the leading economy in Middle and Eastern Europe. There are several significant reasons for this:

  • Stability and sustainability, key characteristics in the sector of European “New Countries”,
  • Great location and reachability to Germany, Austria or Poland,
  • For international companies, the capital Prague serves as local headquarters not only for CZ, but also for other neighbouring countries like Slovakia, Poland or Hungary
  • Presence of global companies with wide range of specialisation
  • Skilled workforce, fluent in foreign languages
  • Low labour costs, especially compared to neighbouring Western countries such as Germany

Main business types in CZ
All of the following business types are defined by Act no. 90/2012 Coll., on Corporations.

Limited liability company (Společnost s ručením omezeným)
Private limited company is by far the most used type of company set up in Czech Republic. Partners share liabilities of the company up to the amount of their respective share on equity. Nowadays, it is an easy and cheap way to start one’s business, as since 2014 minimum equity is set to 1 CZK. Necessities contain:

1. Name and address for the company
2. At least one Partner required
3. At least one Director required
4. Articles of association, main scope of business
5. Registration with Companies House
6. Registration for Corporate tax and VAT if applicable

Joint-stock company (akciová společnost)
Joint-stock company is a legal entity with its equity divided into shares. Shareholders can be legal or private entities. This form of business is chosen by bigger companies, and requires at least 2 million in equity. The company is led by Board of Directors and supervised by Supervisory board. Annual stockholder meetings are required by the law. Otherwise, registration and other necessities for company creation are similar to Private limited company.

Limited partnership (komanditní společnost)
Limited partners in Limited Partnership Company are liable only up to their share on company equity, while general partners are fully liable also with their own property.

General partnership (Veřejná obchodní společnost)
Similar to the Limited partnership, but all partners are fully liable in case of losses.

Sole trader (Osoba samostatně výdělečně činná)
One of the easiest ways to start a business is to become Sole trader. There are many different specialisations, some require licence and some just require registration. Sole traders can even employ workers of their own.

Regulatory environment

Companies Act (90/2012)
This Act is crucial for legal form of above mentioned types of businesses. It defines necessary steps for setting up the company depending on the business type chosen, specifies inner workings of the different types of companies and determines who represents the company.

Accounting Act (563/1991)
Accounting Act defines the manner in which companies record their transactions. Pursuant to §20, it also specifies which companies need to have their accounting audited. If two out of three conditions listed below are satisfied, company must be audited. In case of Joint-stock company, even one satisfied condition triggers the requirement for statutory audit.

1. 40 million CZK in total assets
2. Annual turnover over 80 million CZK
3. Recounted average number of employees over 50

Acts concerning taxes
There are several Acts which define different taxes, e.g. VAT, income tax, road tax, property tax and others. Vital taxes will be covered in greater detail in the following text. Act on accounting sets up specific rules of bookkeeping in Czech Republic.

Taxes

Corporate Income tax
Corporate income tax on all taxable income is set at 19% for 2015. Taxable income is considered worldwide income for residents and CZ-sourced income for non-residents. Tax period is set at calendar year, and Tax return is to be filed by 31. 3. in the following year. If you make use of a certified tax advisor, this deadline is automatically postponed until 30.6. It is also possible to use fiscal year (instead of a calendar year).Tax return is to be filed with financial statements and the tax payment is due on the same date, as is the statutory audit. Losses can be used to decrease future Tax base (in 5 years following the loss). Research and Development, employment of disabled persons or gifts (e.g. to specific non-profitable companies) also act as tax relief.

Dividend tax
Dividend withholding tax is set at 15%. Every dividend paid out from a Czech company towards shareholders or partners is subject to this tax. However, depending on respective Double Tax Treaty, some dividends to foreign entities are exempt from tax. Dividends to parental companies are exempt from tax, if the parental company controls more than 10% of equity in the subsidiary company for a time period of at least 12 months.

Personal income tax, social security and health insurance
Calculation of personal income tax is a bit complicated in CZ. To show how social security, health insurance and personal income tax affect gross and net salary, please see a short example (2015):

Let’s assume a monthly gross salary of 27 500 CZK (approx. 1000 EUR). First, social security (6,5%) and health insurance (4,5%) is paid out from this salary by employee:

Gross Salary: 27 500
Social Security: -1 788
Health Insurance: -1 238
Remaining Salary before tax: 24 474

Now from the gross salary, the employer also pays health insurance (9%) and social security (25%):

Gross Salary: 27 500
Health Insurance: 2 475
Social Security: 6 875
Total costs for the employer: 36 850

The personal income tax is calculated from the total costs for the employer (rounded up to whole hundreds), and tax rate is set at 15%.

Tax base: 36 900
Tax: 5 535

There are several deductions applicable. Every taxpayer can deduct 2070 CZK per month for himself or herself, another same value if his or her spouse is not working (or is on maternity leave), and one of the parents can claim 1117 CZK per month as a deduction for the first child (1317 CZK per month for the second child and 1417 CZK per month for the third child) or student he or she raises. Let’s assume our taxpayer has two children and her husband works (so no tax deduction for her).

Tax: 5 535
Personal allowance: -2 070
Children deduction: -2 434
Final tax: 1 031

Monthly net salary would then be 23 443 CZK (24 474 – 1 031). All social security, health insurance and tax advances are withheld by the employer and the employee only receives his or her net salary. Tax base and resulting final tax can be altered by other sources of income – employee who is also a sole trader, or has capital income, or from other sources.

Value added tax
From 2015 there are three different tax rate levels for VAT in CZ. Most of the goods and services are set in the 21% rate. Several categories of goods and services are separated for lower tax rate of 15%. Tax rate 10% is used mainly for books and medicaments. Requirement of registration for VAT is triggered by exceeding 1 000 000 CZK in turnover in a period of 12 months (doesn’t necessarily imply calendar year).

Investment incentives
In CZ investment incentives are administered by state agency Czechinvest. Investments into production (factory halls, engines, etc.) or research are stimulated depending on the amount of money invested and chosen region. In the districts with highest unemployment, investments over 50 mil. CZK are sufficient for an incentive claim. In other regions barring the capital city Prague, 100 mil. CZK in investments is required to fulfil the criteria. Investing in Prague is will not yield any incentives. There are several forms of incentives:

Corporate income tax relief
Corporate income tax relief is the most used type of incentive. It is valid for 10 years after completing of all the criteria set by Czechinvest. The value of relief amounts to 25% of the investment, and decreases the corporate income tax, meaning that it is applicable when the company is in profit.

Transfer of property under discount
Czechinvest can help with property transfer, if the property in question is owned by state. The transfer can be done with discount as a form of incentive, often in industrial zones around bigger cities.

Subsidy to job creation
For strategic investments, which create more than 500 jobs and more than 500 mil. CZK is invested, direct subsidies are available – up to 200 000 CZK per job created under these circumstances.

Subsidy to employee requalification
Czech Republic also subsidizes requalification of workers – depending on the size of the company, small can get up to 45% of the price as incentive, medium 35%, and big companies up to 25%.