Legal and tax alternatives of foreign company activities in Czech Republic
Crucial legal code for such activities in Czech Republic is:
- Commercial and Civil codes of Czech Republic
- Tax legal code of Czech Republic
- Bilateral Tax conventions
- Bilateral Investment Promotion and Protection Agreements (BIPA)
- Tax Information Exchange Agreement
- Other Inter-governmental agreements important especially for ordinary administrative operations such as verification of foreign public documents
Abovementioned documents enable foreign entity to run its activities in the following manners:
- Direct participation of foreign company in Czech republic
- Participation of foreign company via Permanent Establishment
- Participation via Czech subsidiary company (FDI - foreign direct investment)
Direct participation of foreign company in Czech Republic
Foreign firm can carry out activities in the Czech Republic on its own behalf and own account. This means, that foreign entity is entitled to conclude contracts, acquire and sell properties and various foreign assets or hire employees. However, it is necessary to emphasize, that in this case all the activities in the Czech Republic abide by Czech legal code in particular Czech tax laws, commercial law, civil law and labour-law.
Permanent establishment in Czech Republic
Permanent establishment in the Czech Republic doesn´t have own legal personality (corporate). Legal entity is then directly foreign company. This company is also responsible for concluded contracts and agreements including employment contracts. Employees are via permanent establishment employees of the foreign company, nevertheless they are subject to Czech tax legal code (PAYE) and health and social insurance (NIC). Property acquired in the Czech Republic is direct asset of the foreign company. Permanent establishment thus doesn´t have any equity capital.
Economic and business activities of the permanent establishment (revenues, expenditures, property, liabilities etc.) enter directly into accounting of the foreign company in its country of origin. Profit taxation of the permanent establishment can be arranged in different ways, either on the basis of economic results (profit/loss account) as ratio criterion of annual turnover or otherwise. Permanent establishment can be also subject to value-added tax (VAT).
Permanent establishment arises either voluntarily or by law. By all means it must be subject to Czech taxes (taxation system), registered in register of companies and trade license office.
For successful registration of foreign company following steps are required:
- Existence verification - extract of commercial register of companies
- Decision of foreign company on institution of permanent establishment in Czech Republic
- Registered office - place of business
- Authorization of accredited representative (similar to CEO but not completely), Czech CEO could also be foreign citizen
- Bank account - could also be foreign bank account in other currency than CZK
Subsidiary company in Czech Republic (FDI)
Concerning the extent of business activities in the Czech Republic, it might be appropriate to establish a company. There are different types of companies in the Czech Republic; however the most common and most established is Limited liability Company (abbreviation Inc. or Ltd.).
Company established in this manner is Czech legal entity, it manages on its own behalf and own account, is liable for its liabilities. After the company formation, the company has to register to Czech taxes, to commercial register of companies and to trade license office.
For setting-up the company, following documents and steps are required:
- Existence verification - extract of commercial register of companies
- Decision of foreign company on institution of subsidiary company in particular legal form (for instance Inc.)
- Opening bank account (could also be foreign in other currency than CZK)
- Decision about the height of equity capital (at least 1,- CZK), then transferring the amount on the new bank account
- Determine place of business - registered office
- Authorization of at least one CEO, could also be foreign citizen
- Registration to trade license office
- Wording of partnership agreement by notary
The subsidiary company is beside other entitled to tender for enterprise promotions provided from the budget of Czech government or European structural funds, i.e. various foreign subsidies and grants.
Taxes in Czech Republic
Value added tax
In the Czech Republic, as well as in the whole European Union, is in force value added tax framework. This tax is somehow similar to foreign sales taxes or turnover taxes. For more detailed information please read my article on the blog: European VAT framework and the linkage to EU budget.
Anyway, as a subject to VAT it can be registered all above mentioned forms of legal entities. The registration entitles to deduct VAT from purchased goods and services. The current basic tax rate is 21 %. It is also convenient to mention that services provided to other EU member states than the Czech Republic and to the countries outside EU are exempted from VAT. Taxation of such services in the country of origin should be discussed with your local tax adviser or tax attorney, in order to find the optimal solution and minimize tax burden.
Income tax, Road tax, Property tax
There is just one federal corporate income tax in Czech Republic. Current tax rate is 19 %. Local taxes do not exist. Tax burden in comparison to other European countries is quite low. The main differences among Tax systems in Europe are caused by different assessment of tax base, mainly in so called tax deductable costs or expenses. All common tax expenses are deductable in Czech Republic.
Company vehicles are subject of Road tax. Be aware that road tax is different to toll. The height is dependent on the car type (volume of engine), but in comparison to other costs related to running the business it is negligible.
Similar to road tax, companies’ property is subject of Property tax, more precisely buildings and plots.
Nevertheless road and property taxes are for most companies absolutely negligible costs.
Further it is necessary to take into account social and health insurance (NIC) of potential employees. The joint rate of social and health rate is 34 % of gross wages. These payments are tax-deductible expenses of the company.
For further details or your interest please do not hesitate to contact us. We can provide you further information or consultation. We are also able to prepare all essential documents and on the basis of Power of Attorney execute all necessary steps.
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