Entering the Market
The Czech Market
There are many factors that make entering the Czech market an attractive proposition. The Czech Republic, landlocked in the region of central and eastern Europe, ranked 48th in the world with a Gross Domestic Product of 276 billion US dollars. The Czechs are members of the European Union (EU) but not of the Eurozone, using instead its traditional currency of the Koruna. ‘Czechia’ – the official short form adopted by the Czech government in 2016 – ranked 18th in Europe for GDP in 2021 and is a key player in the Central and Eastern European (CEE) economic block. Alongside Hungary, Poland and Slovakia, the Czechs form the ‘V4 Group’ which spearheads integration with other EU member states.
There are speedier and more cost-effective alternatives to launching a subsidiary, with Bradford Jacobs opening the door to a hassle-free route into the Czech Republic. Work alongside our Professional Employer Organization (PEO) recruitment specialists, then utilises our Employer of Record (EOR) in-country experts to handle every aspect of compliance. Employers can depend on our in-depth knowledge of the Czech economy and how to navigate its challenging legislative issues that revolve around statutes, collective agreements, and European Union directives. Here we have set out some basic summaries of what you need to make the transition into the Czech market, whichever sector you operate in.
Starting a Business in the Czech Republic
Czechia is ranked first among CEE economies for Foreign Direct Investment. The automotive industry accounts for close to 80% of Czech exports, with service industries contributing around 60% of GDP in 2021. Other key sectors are aviation, transport engineering, pharmaceuticals, machinery, and tools. A limited liability subsidiary is a usual choice for foreign companies starting a business in the Czech Republic. The subsidiary operates under the Czech Commercial Code and Trade Licensing Act as a resident Czech company and is a separate legal entity from the foreign parent company. The company is a legal entity once it is entered into the Commercial Register.
Initial requirements for starting a business and before operating payroll, include:
- Providing the subsidiary’s Memorandum or Association and an extract from the commercial register of the parent company
- Opening a business bank account for any share capital
- Parent company’s formal decision to launch a subsidiary and confirmation of the number and identity of directors and shareholders
- Registered Czech office address
- Named executive director (not necessarily a Czech) and proof of clean criminal record from home country or the last country they resided
- The subsidiary is established by a notarised deed, which can be by power of attorney allowing shareholders or directors to be outside the country at the time.
The company must be registered with the General Financial Directorate of the Czech Financial Administration for taxation and with the Czech Social Services Administration. Registering for VAT is compulsory if turnover exceeds CZK 1,000,000 (€39,240, US$47,550).
Expanding Business into the Czech Republic
Opening a business in any overseas territory brings issues. Moving staff across the world means lengthy processes to obtain visas and work permits. When employees are in place, who will handle payroll? How will your company deal with regulations on taxation, entitlements and benefits, termination, and severance? Drawing up your Global Expansion blueprint is not enough. Your business plan will have to answer all these questions. In the Czech Republic, issues surround strictly applied taxation and employment laws, which are subject to government laws, collective bargaining, and trade union agreements. In this complex geographical and economic landscape where will you find distributors, manufacturers, and offices?
There is a simple alternative: by partnering with a Professional Employer Organization (PEO) and Employer of Record (EOR) such as Bradford Jacobs, companies can plot a time-efficient and cost-effective path to locating and employing staff in the Czech Republic.
Czech Republic Business Facts
- Capital – Prague
- Population – 10.7 million
- Regions – there are 13 regions plus Prague. These include: Karlovy Vary, Liberec, Moravian-Silesian, Pardubice, Ústí, Vysočina, Zlín, South Bohemian, Hradec Králové, Olomouc, Pilsen, Central Bohemia and Southern Moravia
- Official language – Czech
- Religion – mainly a mixture of unaffiliated, Roman Catholicism and other Christian groups
- Economy and world ranking – GDP US$276 billion – ranked 48th in the world
- Leading sectors by GDP – service sector 56.2%; industry 32%; agriculture 1.9%. Key sectors include aviation, transport engineering, pharmaceuticals, machinery, and tools
- Main exports include – commodities: iron and steel, oil and fuel, wood, aluminium. Also, vehicles and vehicle parts, computers, broadcasting apparatus, office equipment
- Main imports include – commodities: oil and fuels, iron and steel, aluminium, and copper. Also, broadcasting equipment, vehicle spares, office equipment, computers, and cars
- Main trading partners – Germany, China, Slovakia, Poland, France, UK, Italy
- Government – a republic with a parliamentary democracy
- Currency – Czech Koruna (Crown)
- Advantages and Challenges of the Czech Market
- Advantages of expanding into the Czech market include:
- Prospects: Part of an economically developing region in central and eastern Europe with prospects of long-term growth and outward-looking business attitudes
- Logistics: Ideally positioned for cross-border trading throughout the European Union (EU) and with fellow members of the central and eastern European economies
- Workforce: Well-educated and with the second-lowest unemployment rate in the EU at 2.8% as of July 2021, compared with the EU average of 7.6%
- Work-Life Balance: Rich in heritage with many UNESCO World Heritage Sites, options for full social life and countryside with lakes, forests, and mountains to explore
- Challenges of expanding into the Czech economy include:
- Economics: Heavily dependent on exports to other EU members, which were over 80% in 2020
- Starting up: In 2020 the World Bank rated the Czechs only 134th out of 189 nations for ease of starting a business
- Red Tape: Other World Bank rankings are 157th for construction permits, 103rd for enforcing contracts and 53rd for paying taxes, which can involve over 400 hours of business time
- Politics: Element of Euroscepticism in government … although chances of a ‘Czexit’ seem remote
- Limited Company / Subsidiary or Branch in the Czech Republic?
- International companies moving into the Czech Republic typically choose between opening a limited liability subsidiary or a branch office. There are differences in registration and how they operate. Key points are:
Main characteristics of a subsidiary:
- Subsidiaries are independent legal entities from the foreign parent company
- Generally, the parent company has no responsibility for the debts or liabilities of the subsidiary
- The subsidiary can follow independent business activities from the parent company, under a different name
- Subsidiaries are registered under the Czech Commercial Code
- Share capital of CZK 1, corresponding to the minimum value of one share
- The parent company’s directors provide a declaration of intention to open a subsidiary
- All documents for the subsidiary must be notarised, including the parent company’s Articles or Memorandum of Association
- Must register for taxation and social security payments with the relevant authorities
- The subsidiary is a Czech tax resident and must file annual returns and is liable for corporation tax on its worldwide income
Main characteristics of a branch:
- A branch is not a separate legal entity from the parent company, but an extension
- The branch must follow the same business activities as the parent company and have the same name
- The parent company is responsible for any debts or liabilities of the branch
- Business activities must be entered with the Commercial Register
- The parent company must ensure its branch complies with the Trade Licensing Act, Civil Code, Commercial Code on Legal Entities, and the Act on Private International Law
- Must provide the parent company’s Articles of Incorporation
- Branches are liable to Czech taxes only on the profits of their local business
Expert guidance is vital when weighing the options between a subsidiary and a branch in the Czech Republic. There is an alternative route – one that is quicker, stress free, cost-effective and will have you up and running in days rather than weeks or even months. Bradford Jacobs will locate the top talent for your company. Once you select your new employee our Employer of Record (EOR) specialists will handle every aspect of employment law, including payroll and tax.
Legal Structure for Czech Market Entry
Companies operating in the Czech market come under the Civil Code, Commercial Code, Trade Licensing Act and other Acts and Statutes covering all aspects of employment, taxation, and social security. Under the Commercial Code, the main types of legal entities that operate are:
- General Commercial Partnership (Unlimited Partnership)
- Limited Partnership
- Limited Liability Company
- Joint Stock Company
- European Joint Stock Company
- European Economic Interest Grouping
- European Cooperative Society
- Legal structure for a limited liability company:
The legal structure for a subsidiary allows it to operate independently from the parent company, under its own name and able to follow its own commercial and business activities. The subsidiary is a distinct and separate legal entity from the foreign parent company and is one of the most common company types in the Czech Republic. Registered capital comprises contributions from shareholders who are liable up to the limit of their contributions.
Legal structure for a branch:
The branch is an extension of the foreign parent company and is not a separate legal entity. The parent company is responsible for any debts or liabilities of the branch, which has the same name as the parent company but must include the Czech language equivalent of ‘organizational unit’ in its title. The branch’s legal framework is regulated by the Civil Code, the International Private Law Act, the Trade Licensing Act, and the Business Corporations Act. The branch is taxed only on its Czech-sourced income.
Opening a Business Bank Account in the Czech Republic
Selecting your bank depends on the services offered and costs/fees charged. Foreign banks dominate the banking vista retaining 85% of the assets. Available banks feature HSBC, Deutsche Bank, and Citi Bank as well as local banks such as CSOB and VUB Banka. Foreigners starting a company will want to open a professional bank account. The company’s responsible manager deposits any share capital, which cannot be used until after company registration is complete – when the account is then activated to operate the business. The party making the initial deposit needs to appear in person at the bank, alternatively a company representative with power of attorney. All banks will have their own requirements. Documents should be notarized by legal authority and certified as a true copy:
- Paperwork issued when the company is incorporated
- Memorandum or Articles of Association
- Details of directors and shareholders
- Share certificates
- Proof of registered office
- Business plan/budget
- Proof of the company’s good standing
Documents are also required from any responsible manager, signatories, officers of the company or owner/shareholders. Any copies should be certified:
- Valid passport as photo ID
- Utility receipt or bank statement
- Some companies open an account with their home bank before transferring this to one of their branches in the Czech Republic, although there can be operational differences depending on the country.