CZECH REPUBLIC

COMPANY FORMATION

Entrepreneurial even during the Communist era, Czechs have seized every opportunity to demonstrate their free-market credentials since joining the EU in 2004. Today the Czech Republic offers a stable and welcoming home to foreign investors.

Our firm provides clients from abroad with legal services in connection with their activities in the Czech Republic. Our team of attorneys, lawyers and other legal specialists offers comprehensive legal service in wide range of business activities of foreigners in the Czech Republic.

We provide legal assistance in the field of commercial and corporate law, real estate, development and tax law.

FORMS OF ENTITIES
There are four main kinds of business entity for foreign investors and they are as follows:

(a) Limited Liability Company (SRO)
(b) Joint Stock Company Partnership (AS)
(c) Partnership
(d) Branch Office

MAIN FEATURES OF A LIMITED LIABILITY (SRO) COMPANY
Total share capital to be at least CZK 200,000 (€7,000), at least 50% paid up
Each shareholder to contribute minimum of CZK 20,000 (€700)
An individual may be sole shareholder in no more than three SROs
A reserve fund from profits to be built up to 10% of registered capital

AUDIT AND ACCOUNTING REQUIREMENTS FOR A LIMITED LIABILITY (SRO) COMPANY
A statutory audit is mandatory if at least two of the following criteria are met:
Balance sheet exceeds CZK 40 million (€1.4 million)
Net turnover exceeds CZK 80 million (€2.8 million)
Number of employees exceeds 50

MAIN FEATURES OF AN (AS) JOINT STOCK COMPANY
Minimum share capital CZK 2 million (€70,000)
If via a public offering, minimum share capital CZK 20 million (€700,000)
30% of share capital to be paid up
Two-tier system comprising management and supervisory boards
Reserve fund from profits to be built up to 20% of registered capital

AUDIT AND ACCOUNTING REQUIREMENTS FOR AN (AS) JOINT STOCK COMPANY
A statutory audit is mandatory if at least one of the following criteria is met:
Balance sheet exceeds CZK 40 million (€1.4 million)
Net turnover exceeds CZK 80 million (€2.8 million)
Number of employees exceeds 50

MAIN FORMS OF PARTNERSHIP IN THE CZECH REPUBLIC
There are two main kinds of partnership under Czech corporate law:
General partnership (all partners have equal and unlimited liability)
Limited partnership (at least one partner has limited liability)

MAIN FEATURES OF A BRANCH OFFICE
Branches are not separate legal entities, but part of a foreign parent
Branch manager may be Czech or foreign national
Branch requires trade licence before it can be registered
Accounting records to be prepared in Czech language

REGULATORY ENVIRONMENT
The Czech Republic has made strong progress in its efforts to liberalise the business environment. 85% of the economy is now in private hands, corporate tax was cut from 26% to 24% in 2006, and foreign investment, reflecting this trend, has soared. But there’s still plenty of red tape around, which is why it is essential to secure expert advice on legal and accounting issues.

FINANCIAL INCENTIVES
Czech authorities offer a wide range of financial incentives for foreign investors:
New manufacturing investment: ten years’ full relief of corporate tax
Technology and business investment: the state pays up to 50% of costs
Substantial job-creation and training grants

BANKING FACILITIES
Foreign investors are well served by an array of international and local banks now operating in the Czech Republic. It is worth noting, however, that setting up a corporate bank account can be a complex procedure. Make it simple – talk to us and we’ll arrange everything.

One of the first and most crucial tasks that you will need to undertake in order to establish a European company is to open a bank account in your country of choice.

It sounds easy, it should be easy… but frequently it isn’t. In fact, sometimes it can feel like certain banks go out of their way to make it difficult!

A number of banks require applicants to visit the bank in person in order to open their account, which is fine if you’re a French company and you want to open an account in Paris. However, it’s not quite as convenient for those of us living outside France.

Other banks insist that you provide them with a letter of introduction, duly translated and certified, from your bank at home. This is fine if you are fluent in the local language and have a good understanding of what’s required, but cumbersome and expensive if you aren’t and don’t!

There are also a number of banks that won’t even talk to you unless your annual turnover is in excess of €1 million. This isn’t much help if you want to get your European company up and running as quickly and cost-efficiently as possible.

Our aim is to make the whole process as quick and painless as possible. You can also be assured of personal service from our staff every step of the way.

Through our knowledge of local banking regulations and our relationships with major banking groups, we help our clients to cut through the red tape and progress as quickly as possible. Where banks require you to visit in person, we will have a local representative on hand to assist you through this sometimes daunting process and we can negotiate a low minimum turnover threshold.

Leave the paperwork to us and manage your European bank account over the internet or telephone.

FORMING A CZECH LIMITED LIABILITY CORPORATION (SRO)
Forming a Czech limited-liability corporation, called an SRO, is the fastest and most convenient way for a foreign citizen to establish themselves as a resident in the Czech Republic with all the required visas, a tax base, health insurance, and the many benefits of being a legitimate resident.

An SRO is required for any non-EU citizen to purchase property in the Czech Republic, and highly encouraged for all EU and local citizens.

Our firm can provide you ready-made or freshly established limited liability and joint-stock companies and services related, such as virtual offices, tax advising, offshore structures, etc.

Currently, two methods exist for establishing a company in the Czech Republic.

The first is to form it from scratch. After all the paperwork is properly notarised and submitted, it takes about ten days for the new entity to be put into the country's Commercial Register.

The second - and much easier - method is to purchase a shelf company already registered in the country. Ready-made firms have many advantages over those built from scratch. Most significantly, they can immediately be used for a transaction, as they are already registered in the Czech Republic.

The off-the-shelf limited liability and joint-stock companies offered by us have many other benefits. Our companies are guaranteed to have no activities, obligations or claims against them, and to have their registered capital paid in full. Furthermore, the entire transaction can be carried out online - it is not necessary to travel to Prague in order to buy it.

Once you have made the decision as to whether you would like a ready-made or newly-formed company, the next is to decide what type of company form is most suited to your needs.

ADVANTAGES TO INCORPORATE IN CZECH REPUBLIC
Why an SRO is essential for all foreign investors?

For both EU citizens and non-EU citizens forming an SRO allows you as a foreigner to purchase property - start a business - or relocate an existing company in the Czech Republic safely, legally, and with the appropriate tax and liability shelters to protect your assets both here and at home from legitimate, or fraudulent lawsuits.

READY MADE OR NEW COMPANIES
QUICK COMPAIRISON TABLE

DIFFERENCES SUMMARY
In order to understand the difference between a new and a ready-made company, it is important to note the following legal requirements applying to Czech corporate entities:

1. The Czech company (limited liability or joint-stock company) is incorporated by the signature of the Memorandum of Association signed by all the incorporators in front of a notary public.

2. Each company has to have a registered office and, while being registered, it must prove a legal title to this office (rental agreement or consent of the owner of the premises). This registered office must NOT be a P.O.Box, or a temporary address serving only for company registration purposes.

3. Each company has to pay-up its share capital to a bank account opened in the Czech Republic - in case of a limited liability - it is CZK 200,000.00, i.e. EUR 7,000.00 approximately)

4. In case that a Czech company intends to do active business (does NOT apply to companies used only for property holding purposes), it has to define and register its nature of business (business activity) and receive a trade license corresponding to such nature of business. Moreover, with respect to each trade licence, a trade representative must be appointed. He/she must be in a contractual relationship with the company.

5. The director of a Czech company (i.e. the person acting and signing on its behalf) may be a foreigner, notwithstanding whether he/she has a residence permit or visa in the Czech Republic. For the purpose of his/her registration as a company director, such person has to present a "clean" police record not older than three months, from the Czech Republic as well as from the country of origin. The latter must be duly certified (by notary public/ apostilled depending on the country) and translated into the Czech language by a certified translator.

6. The company is registered only if the application form is accompanied (among other) by documents proving that the above conditions were met.

According to the new legislation, the registration of a new company at the Companies Register takes no longer than 5 days, under the condition that all the documentation is submitted to the Companies Register in the correct form and to the full extent. If any of the necessary documents are incorrect or missing, the registration application is rejected.

In practice, the preparation of the necessary documentation takes 3 - 4 weeks.
Therefore, the whole incorporation process of a new company might take 30 - 60 days, if the application is approved at the first attempt.

By acquiring a ready-made company, our clients take benefit of the fact that an appointment of a director in a Czech company, made by a general meeting of partners/shareholders of this company has an immediate effect.

Therefore, we as an initial owner of the ready-made company are ready to appoint the new director without any delays and, at the same time, transfer the shares in the company to the new owner.

As a result, our client owns the ready-made company, can act on its behalf immediately, and the registration of all effected changes in the ready-made company is done subsequently.

THE READY-MADE COMPANIES OFFERED BY OUR FIRM HAVE THE FOLLOWING ADVANTAGES:
Existence: these companies have already been registered with the Companies Registry, ie. they are already existing legally.
Transparency: no activity has ever been carried out by any of these companies (except for the legal steps necessary for the company registration at the Companies Register and the obligatory corporate income tax registration. We guarantee they have no obligation and no claims.
Paid-up capital: registered capital of our ready-made companies has been paid-up to the full extent.
Possibility to act and sign immediately: our client may act on behalf of the company immediately after the general meeting appoints him/her as a new company director.

DURING THE READY-MADE COMPANY PROCEDURE, WE TAKE CARE OF:
(a) Preparation of all necessary documentation to effect the changes in the ready-made company;
(b) Organisation of the General Meeting approving all the changes in the company further to our client's requirements, certified translations;
(c) Filing of the documents to the Companies Register, and assistance with the registration of the changes in the company;

CORPORATE STRUCTURE OF READY-MADE COMPANIES
OFFERED IN THE CZECH REPUBLIC

ADDITIONAL BENEFITS OF OWNING A SRO
There are many benefits, and they include but are not limited to:
- You may easily form a company, small business or perform freelance consulting and/or teaching in the Czech Republic legally and legitimately.
- You may use the Czech Republic as a legal tax base for income earned here or abroad.
- You will more easily qualify to acquire a Long Term Visa (non-EU citizens), health and social insurance for yourself, your spouse, children, partners and employees in order to live and work legally and safely in the Czech Republic.
- You may purchase a property in the Czech Republic for business, residence, holiday or investment purposes (required for non-EU citizens) without restrictions (for all foreign citizens) that are otherwise attached to the types of property you can purchase.

In a nutshell, a SRO provides you with the tools you need to operate legally and responsibly as a foreign citizen in the Czech Republic, whether you reside locally in this country or abroad.

Additionally, it makes your yearly accounting and tax requirements simple and straightforward to fulfil.

This is all in addition, of course, to the essential tax and liability protection provided legally by a SRO, which prevents your properties and personal assets from being attached in the case of a legitimate, or fraudulent, lawsuit.

CORPORATE TAX – GENERAL FEATURES
Companies having their seat or place of management in the Czech Republic are treated as Czech tax residents and are subject to Czech corporate income tax on their worldwide income. Permanent establishments of foreign companies are generally taxable in the Czech Republic on their Czech-source income only.

Czech-source income is defined as income arising in or relating to the Czech Republic (OECD models are in place). Tax-deductible expenses are generally defined as expenses incurred to generate, maintain, and/or assure taxable income.

The 2005 corporate income tax rate is 26%. This rate falls to 24% in 2006. There is no separate tax rate for capital gains.

As of 1 January 2001, a change to the Accounting Act enables taxpayers to choose whether their accounting period (and therefore tax period) will be based on the calendar year or a fiscal year. Previously, the tax period was the calendar year only. A fiscal year must be 12 successive calendar months.

Corporate income tax returns must be filed within three months following the end of the tax period. A three-month extension of the filing deadline is available to taxpayers represented by a registered tax advisor; this three-month extension is automatically granted to taxpayers subject to a statutory audit.

Losses incurred in one period may be carried forward against profits made within the following seven tax periods. Starting with tax losses assessed in 2004, the carry-forward period is reduced to five years and in case of substantial change of ownership subject to the same activity test.

Foreign companies may create a taxable presence (permanent establishment) by carrying out activities in the Czech Republic. Find out more about the creation of a permanent establishment and the method of its taxation.

Companies without any registered presence in the Czech Republic can be subject to Czech withholding tax on Czech-source income. Double tax treaties may reduce or eliminate Czech withholding tax.

Dividends paid to parent companies registered in an EU member state are exempt from withholding tax. In general, dividends paid abroad are subject to 15% withholding tax, unless a double tax treaty provides otherwise.

Prices between related parties must be at fair market value (the arm's length principle). The tax authorities may adjust a tax base if fair market prices are not used in related-party transactions.

No provisions for group taxation are in force, i.e., consolidated returns cannot be filed, and each group company subject to Czech taxation must submit a separate tax return.

KEY POINTS FOR CORPORATE TAX PLANNING
The type of corporate entity will not normally have a significant effect on the Czech tax liability.

The application of withholding tax to dividends paid to resident companies and to non-residents is subject to reduction or exemption under double taxation treaties or the EU Parent/Subsidiary Directive.

Generally no distinction is made in the treatment of capital and revenue items.

Losses incurred in one period may be carried forward against profits made in the following five years (seven years for losses incurred for 2003 and prior years). Losses incurred in the year 2004 onwards may be transferred within a merger or demerger process from a dissolving entity to the legal successor.

It is possible to interrupt tax depreciation of qualifying assets, i.e. effectively defer the tax depreciation to a later period, preferably one in which a tax charge arises.

Interest paid on loans from related-party borrowers in excess of the maximum permitted debt/equity ratios is re-characterized as a dividend.

Foreign borrowings over CZK 1 million must be reported to the Czech National Bank.

Related-party transactions must be at arms-length value.

The following mergers are possible: joint-stock company and limited liability company; and limited partnership and general partnership.

Liquidation distributions are taxable in the Czech Republic.

Asset purchase results in depreciation; a step-up in basis cost cannot be achieved via a share purchase.

Tax concessions are available in the Czech Republic under the rules for investment incentives. Find out more about the incentives offered for large-scale investment in the Czech Republic.
The Czech Republic has treaties closely following the OECD model with 67 countries.

OTHER IMPORTANT ISSUES
The following issues are all addressed thoroughly in our "Frequently Asked Questions" section.

FREQUENTLY ASKED QUESTIONS

What exactly is an SRO and do I need one?

Forming a Czech limited-liability corporation, called an SRO, is the fastest, most convenient and cost-effective way for a foreign citizen to establish themselves as a resident in the Czech Republic with all the required visas, a tax base, health insurance, and the many benefits of being a legitimate resident.

An SRO is required for any non-EU citizen (except for those from 'favoured nation' countries to purchase property in the Czech Republic, and highly encouraged for all EU and local citizens. Why is it so encouraged?

Because for both EU citizens and non-EU citizens alike, forming an SRO allows you as a foreigner to purchase property - start a business - or relocate an existing company in the Czech Republic safely, legally, and with the appropriate tax and liability shelters to protect your assets both here and at home from legitimate, or fraudulent lawsuits.

Are there other benefits of owning an SRO?

Yes there are many benefits, and they include but are not limited to:

You may easily form a company, small business or perform freelance consulting and/or teaching in the Czech Republic legally and legitimately.
You may use the Czech Republic as a legal tax base for income earned here or abroad.
You will more easily qualify to acquire a Long Term Visa (non-EU citizens), health and social insurance for yourself, your spouse, children, partners and employees in order to live and work legally and safely in the Czech Republic.
You may purchase a property in the Czech Republic for business, residence, holiday or investment purposes (required for non-EU citizens) without restrictions (for all foreign citizens) that are otherwise attached to the types of property you can purchase.

In a nutshell, an SRO provides you with the tools you need to operate legally and responsibly as a foreign citizen in the Czech Republic, whether you reside locally in this country or abroad.

This is all in addition, of course, to the essential tax and liability protection provided legally by an SRO, which prevents your properties and personal assets from being attached in the case of a legitimate, or fraudulent, lawsuit.

Can you please explain the foreign terms regarding SROs?

Czech law requires that these four requirements are met for every SRO, with the exception of the Z. List (see below), which is not actually required if you will be using the SRO for property purchases only. Czech Point 101 can provide you with any or all of these requirements for a set fee if you wish.

Sidlo - pronounced 'SEED-lo'
The Sidlo is the address where your business will be located. Typically this is not the actual physical address, but simply a physical location where you will receive all official mail for your SRO. If you intend to buy property with your SRO then your new property can become your Sidlo.

Jednatel - pronounced "YED-na-tel"
The Jednatel is your company executive (CEO) in the Czech Republic. They are responsible for all the basic functions of your business, such as proper accounting, tax reporting, contracts and banking. Who your Jednatel will be is by far the most important consideration you will have when forming your SRO.

Zastupce - pronounced "ZAS-toop-seh"
The Zastupce is the company representative, who insures that your business meets the requirements of the local Trade Office. Typically, this person has no function except to meet the legal requirement that you have one, in which case you can function as your own Zastupce.

However, in certain circumstances (such as if your business will be handling food or toxic chemicals) your Zastupce must be a licensed, experienced professional whom you must hire on as a paid employee of the company.

Zivnostensky ("Z") List - pronounced "ZIV-no-sten-ski"
Use a soft "z" like the "s" in the English word "treasure. List is as the English word 'list.'"

The Z. List is the Trade or Business License your company will be provided when you form your SRO. For example, if your company will be performing computer repair, you will receive a Zivnostensky List for computer repair. You can apply for as many Z. Lists as you require. However, as with the Zastupce above, some Z. Lists may require proof of special education or experience.

How exactly does the SRO start-up process work?

We provide comprehensive, quality legal work for all of your investment and property needs, but we are not just an SRO provider.

Our team provides personal assistance with the cultural, legal and financial issues involved in planning a sensible investment, and critically, we will minimize your exposure to the fraud commonly directed against foreign investors in this country's financial environment.

The entire SRO process through our company is fairly straightforward.

The time until job completion includes about 3 to 6 weeks of filing forms, (depending on your location), then approximately 14 days for the Czech Commercial Register to issue your completed SRO certificate.

However, once the initial paperwork has been filed, (as quickly as 24 hours), you may begin conducting limited business with your company, such as signing lease agreements, almost immediately.

What do the Czech terms SRO and AS stand for?

SRO (also s.r.o.): "Spolecnost S Rucenim Omezenim" An SRO is a Czech limited liability company. An SRO requires an intial investment capital of 200 000 CZK.

AS (also a.s.): "Akciova Spolecnost" An AS is a joint-stock company. Typically used for larger real estate or business ventures where there are numerous investors. An AS requires an initial investment capital of 2 000 000 CZK or 20 000 000 CZK if the company is started through an initial public offering of shares.

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