One of the common routes to doing business in the Czech Republic is though a limited liability company (společnost ručení omezení, or “s.r.o.”).
An owner or owners manage the business via shareholdings in the company through annual or more frequent shareholder meetings (valná hromada). Physical persons may own 100% of an s.r.o., but legal persons (companies) may not. Decisions of the shareholder meeting are executed on a day-to-day basis by the s.r.o.’s director (jednatel) or directors, who serve at the will of the shareholders. The primary source of legal guidance on s.r.o.s can be found in the Commercial Code, Part II (Zákon č. 513/1991 Sb., obchodní zákoník, část II). The relationships of both shareholders and directors are subject to scrutiny by regulatory authorities, and the shareholder/director interactions are subject to arm’s-length rules intended to avoid misuse of the company’s assets and support taxation of income. The accounting records of the company must reflect these relationships. The accounting records must also be entered using the accrual principle, practically forcing a company to engage an accountant.
DirectorsThe Commercial Code, in particular Sections 133 to 136, sets out several requirements of directors. They can be shareholders or other physical persons. They must keep accrual-basis accounting records. They must avoid conflicts of interest not excused in the articles of association or bylaws of the s.r.o., in particular, they generally cannot be directors of other companies in the same industry. Directors are generally liable as a result of their functions only to the shareholders of the s.r.o., not third parties. However, they can be held criminally liable for failing to remit employment taxes to the government.
Directors may be resident or non-resident in the Czech Republic. They may be paid or unpaid. If they are paid and they are 1) non-resident, their payments are not deductible to the company; 2) resident, their payments are subject to most of the same rules as employees. The company will be required to pay health and social insurance on directors’ fees. Directors do not need to speak Czech.
Formation or acquisition of an s.r.o.S.r.o.s can be formed from scratch (can take from 5 to 15 or more days from filing papers with the Commercial Court (Obchodní soud)) or be purchased “off the shelf”, that is, already formed (within 5 days of filing papers with the court). Comprehensive services in this area are provided by accounting and business services firms, as well as many legal offices. The cost of formation and purchase is generally very similar, with fees ranging from 15,000-35,000 CZK including notarial, court and professional fees. The cost of forming or purchasing an s.r.o. is generally higher when shareholders are themselves legal entities, since documentation legitimizing decisions of the shareholder legal entity can be difficult and expensive to obtain. Forming a company from scratch requires founders to invest 100,000 to 200,000 CZK in capital that is temporarily frozen during the incorporation process.
The process of forming a company is as follows:• Shareholders or their representatives sign a foundation deed/articles of association at a notary containing company name (obchodní jméno), registered address (sídlo), list of trade licenses (živnostenský list), amount of basic capital (základní kapitál), administrator of founding deposit (správce vkladu), details of first directors and their decision-making authority (usually independent, sometimes joint).• The director or representative files a petition to the Commercial Court to issue an identification number (identifikační číslo, or IČ) . The petition contains the notarized foundation deed/articles of association, proof of deposit of foundation capital, trade license certification, owner’s permission to use registered address and deed of same, director’s criminal record extracts from the Czech Republic and home country, director’s affidavit of eligibility and model signature, powers of attorney enabling representatives to act on behalf of principals. If a founder includes a foreign corporation, the petition must also contain that corporation’s certificate of incorporation and power of attorney for its representative, both apostilled or super-legalized. There is a 5,000 CZK stamp tax on incorporating a new s.r.o. Documents must be in Czech or translated into Czech from a foreign language. If the original language of the document is an EU member state language, it does not need to be court-certified (but the underlying document might need to be!).• As soon as the Commercial Court approves the petition and issues the identification number, about 5-15 days, the director normally opens commercial accounts with a bank, transfers the foundation capital to current accounts, and registers the company with the financial regulator, health and social insurance regulators.
The process of purchasing a company off the shelf requires the new director to file a petition to the Court to change the company’s certificate that contains a notarially-certified foundation deed or articles of association approving the changes of commercial name, trade licenses, shareholders and directors, plus the original or notarially-certified documents supporting those changes. There is a 2,000 CZK stamp tax on filing changes to an s.r.o. certificate. Depending on circumstances, the director may also need to open new bank accounts, register a change of address with regulatory agencies, or expand trade authorizations.
Taxes and RegulationThe s.r.o. can be regulated by a great number of government entities, including the Commercial Court; Trade License Regulator, Finance Regulator and, if there are employees, again the Finance Regulator, and social and health insurance agencies. There are a variety of indirect and excise taxes depending on the business of the s.r.o. – it is important to consult with an accountant in advance of formation in order to understand the regulatory and tax demands on your company. Americans, in particular, might be surprised to find that the IRS will demand an information return on the activities their s.r.o.s each tax year, too.
2011 Tax RatesIncome tax (2011): 19.0%Dividend withholding tax (2011): 15.0%Employment law taxes (2011) Employer Employee- Social security insurance tax and withholding:* 25.0% 6.5%- Health insurance tax and withholding: ** 9.0% 4.5%- Employment income tax withholding:*** 15.0%* Social insurance includes pension (21.5%) and disability (2.3%) insurance, and unemployment fund insurance (1.2%). Seconded employees from abroad are subject to disability insurance. Both employer and employee taxes max out at 1,781,280 CZK of taxable income.** Both employer and employee taxes max out at 1,781,280 CZK of taxable base compensation.***Employment income tax withholding is 15% x “super gross” wage, which includes the employer-paid share of health and social insurance taxes, thus 20.1% of the gross wage.
EmployeesIt is possible that you intend to hire employees to carry out the work of the company. If this is the case, be aware that this activity is highly regulated in the Czech Republic. The issues to consider are worthy of a book (the regulations are themselves a very long book!), but bear these issues in mind: 1. Employees who will work in the Czech Republic must have permanent or temporary residence (most Europeans, family members of same) or special work permission (third countries).2. There are multiple types of employment and work contracts: full, part-time, agreements on the performance of work and work activities, each with special legal and tax conditions.3. Employees and their documents need to be registered with government agencies within 8 days of commencing work; with foreign employees the documentation requires the process be started well in advance.4. There are significant penalties for companies and directors who fail to collect and remit employment taxes.
This is but a brief summary of issues confronting an entrepreneur interested in conducting business through an s.r.o. If you are considering this or another route to business in the Czech Republic, you will need to acquaint yourself with many more details and contact a professional in the international accounting and business services sectors.
