Investment in The Czech Republic 2014

Investment
in the Czech
Republic
kpmg.cz
KPMG in the Czech Republic
Contents
3
Preface: Jan rek
13
Chapter 1: Investment climate

Chapter 2: Economy and fiscal policy
25
33
Chapter 3: Investment incentives and state aid

Chapter 4: Business structures
39
Chapter 5: Employment policy
45
Chapter 6: Financial services
51
Chapter 7: Direct taxes
61
Chapter 8: Indirect taxes
79
Chapter 9: Financial reporting and audit
87
Chapter 10: Corporate transactions
91
Chapter 11: Living in the Czech Republic

How KPMG can help
Useful addresses
2 I Investment in the Czech Republic
99
111
118
Preface: Jan rek

Dear Reader,
The Czech Republic has been a popular
destination for foreign capital since the 1990s.
It has been attracting high volumes of foreign
direct investment (FDI), the total amount of
which has reached the level of more than
EUR 104 billion (USD almost 141 billion) by
September 2013. Moreover, FDI activities
in the Czech Republic stand out in a very
important feature: profitability.
Compared to its regional peers, the Czech
Republic is doing fairly well in terms of GDP
per capita and in terms of competitiveness.
It also clearly stands out as a regional
champion in the inflow of FDI. Currently, the
Czech Republic is reasonably recovering from
the recent financial crisis and is experiencing
growth across various sectors of the
economy, including renewed mergers
and acquisitions activity.
Surveys and comparative macroeconomic
analyses show that the main factors of
attractiveness of the Czech Republic for
foreign investors are: its advantageous
geographical location combined with reliable
infrastructure, availability of suppliers
and specialised inputs needed by foreign
investors, quality of life and social stability,
cost competitiveness, financial stability and
availability of financing, investment incentives,
skilled workforce and high educational level.
The purpose of this publication is to set out
some general guidelines on investment and
business in the Czech Republic for those
interested in investing or doing business here.
As the tax and legal systems in the Czech
Republic are still comparatively new, certainty
about the legal effects of transactions is
sometimes less easy to obtain than in more

developed economies. In addition, Czech
and EU legislation is frequently amended.
Accordingly, the information should be
viewed only as a general guide for preliminary
planning purposes.
Every care has been taken to ensure that the
information presented is correct and reflects
the situation as of February 2014. More
detailed and up-to-date information can be
obtained from KPMG in the Czech Republic
(www.kpmg.cz), which provides audit, tax,
advisory and legal services for Czech and
multinational companies, government entities
and inward investors. Please consult
KPMG in the Czech Republic for specific
advice concerning your situation. We employ
several hundred professionals who can offer
you such assistance and would be pleased
to provide you with further information
on the matters discussed in this publication.
Thank you for taking the time to read this guide.
All of us here at KPMG in the Czech Republic
hope that you will find it helpful and informative.
Jan rek
Managing Partner
KPMG in the
Czech Republic
In terms of foreign direct investment (FDI),

the Czech Republic had
The second highest stock of total FDI
(cumulative FDI 19932012) per capita in CEE in 2012
The highest profitability of FDI among EU NMS1 in 2012

Source: See Figure 1 (page 14) and Figure 2 (page 15)
Key attractiveness indicators

of the Czech Republic
Skilled workforce
Reliable infrastructure
Cost competitiveness
High educational level

Source: IMD World Competitiveness Yearbook 2013
1 Central and Eastern European new member states of the EU; this group
consists of 10 post-socialist countries which entered the EU in 2004 and
2007: Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland,
Romania, Slovakia, Slovenia.
In comparative surveys of the quality of life,

the Czech Republic is
No. 1 among EU NMS and No. 28 globally
in The Economists Where To Be Born 2013 survey

in the Legatum Prosperity Index
in the Mercer Quality of Living survey 2012
Investment in the Czech Republic I 5
IMD World Competitiveness Yearbook 2013

The Czech Republic had the best scores among EU NMS2 in the following
indicators.
Indicator
Global rank
Within the NMS group
IMD financial risk factor
13
Density of railroads
Energy infrastructure
19
Internet users
24
High-tech exports (%)
20
Percentage of total first university

degrees in science and engineering
16
Human development index
27
Quality of life
26
2 Central and Eastern European new member states of the EU; this group consists of 10 post-socialist countries which entered
the EU in 2004 and 2007: Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia, Slovenia.
WEF GCR 201314 report

The Czech Republic had the best scores among EU NMS in the following indicators.
Indicator
Global rank
Within the NMS group
Quality of overall infrastructure
37
Quality of railroad infrastructure
22
Quality of air transport

infrastructure
21
Quality of electricity supply
20
Local availability of specialised

research and training services
26
Internet access in schools
24
Health
14
Individuals using the Internet (%)
28
Exports as a percentage of GDP
12
Local supplier quantity
25
Local supplier quality
21
Value chain breadth
24
Production process sophistication
32
Capacity for innovation
26
Quality of scientific research

institutions
26
Company spending on R&D
32
Czech Republic highlights

The Czech Republic hosts 12 UNESCO world heritage
sites of the 981 sites around the world.
The Czech Republic has the oldest university in
Central Europe (Charles University, founded in 1348).
The first Pilsener (Pils) type beer was produced in Pilsen,
in the Czech Republic in 1842.
The Czechs invented sugar cubes the worlds first

industrial production of sugar cubes took place in the Czech
town of Daice in 1843.
The Czech company Tatra is the third oldest car
manufacturer in the world (after Daimler and Peugeot).
It was also the company that pioneered aerodynamic design,
which was later copied by many followers (e.g. Ferdinand
Porsche). The resemblance of Porsches VW Beetle and
Tatras design (T97) was so striking that Volkswagen
eventually had to pay Tatra compensation.
Soft contact lenses were designed and first produced
in the Czech Republic (by Dr. Wichterle) in 1961.
Outstanding Czech personalities

Politics
Tom Garrigue Masaryk
f philosopher and the first Czechoslovak president
Vclav Havel
f playwright and dissident during the communist regime,
first president of democratic Czechoslovakia
Madeleine K. Albright
f former U.S. secretary of state
Sports
Emil Ztopek
f quadruple Olympic champion in long-distance running
Martina Navrtilov
f winner of the Grand Slam and the best female tennis player in Czech history
Ivan Lendl
f winner of the Davis Cup and member of the Tennis Hall of Fame
Dominik Haek
f ice hockey goalkeeper of the gold-medal winning Olympic team
in Nagano in 1998
Jaromr Jgr
f widely considered the best ice hockey player in the world
Petr ech
f goalkeeper of the English football club Chelsea
Film
Karel Zeman
f leading representative of animated film with special effects
Milo Forman
f Oscar winner for best director for One Flew over the Cuckoos Nest
and Amadeus
Jan Svrk
f Oscar winner for best director for his film Kolya
Music
Bedich Smetana
f co-founder of Czech national music, author of e.g. The Bartered Bride
Antonn Dvok
f composer, author of the opera Rusalka and 9th New World Symphony
Ema Destinnov
f opera singer, who also performed with Enrico Caruso
Magdalena Koen
f the most accomplished contemporary vocalist
Arts, architecture and design
Alfons Mucha
f painter and Art Nouveau graphic designer
Frantiek Kupka
f pioneer of Czech abstract painting
Eva Jiin
f architect and designer
Blanka Matragi
f haute couture fashion designer
Literature
Franz Kafka
f writer of German-Jewish origin, author of the novels
The Metamorphosis and The Trial
Jaroslav Haek
f writer, author of the world-famous novel The Good Soldier vejk
Karel apek
f writer and philosopher
Jaroslav Seifert
f poet, recipient of the Nobel Prize for Literature in 1984
Bohumil Hrabal
f writer, author of poetic prose
Josef kvoreck
f writer, author and publisher of banned works in exile
Milan Kundera
f writer and poet

Source: http://www.czech.cz
The Czech Republic clearly

stands out as a regional
champion in the inflow of
foreign direct investment.
Investment attractiveness
FDI by country of origin
FDI by sectors
Regions attractive for FDI
Culture, lifestyle and genius loci
13
18
19
20
21
Chapter 1
Investment climate
Investment attractiveness
The Czech Republic has been a popular destination for foreign capital since
the 1990s. By September 2013, the total stock of all forms of foreign capital
(i.e. the sum of inward direct investment, portfolio investment, financial
derivatives, and other investment) was more than 20 times higher3 than
in January 1993. What is even more important is that most of this capital
(58 percent) came in the form of foreign direct investment (FDI), the total
volume of which reached a level of more than EUR 104 billion (USD almost
141 billion) by September 2013.
While the Czech Republic still lags behind the most advanced economies,
both in terms of GDP per capita and in terms of competitiveness (holding
35th position in the IMD4 competitiveness ranking 2013), it is doing fairly
well compared to its regional peers (second highest GDP per capita, third
in IMD rankings). From a long-term point of view, the Czech Republic also
clearly stands out as a regional champion in the inflow of FDI. Before the
financial crisis, it had the highest stock of inward FDI per capita in Central
and Eastern Europe5. While the dynamics of the inflow of FDI decreased
after 2008 due to the financial crisis, and later largely to the recession
experienced by the country between 2011 and mid-2013 and the economic
problems of the eurozone, the Czech Republic was still No. 2 according
to inward FDI per capita among all Central and Eastern European countries
in 2012 (see Figure 1).
3 CNB investment position data in Euro; at: http://www.cnb.cz/en/statistics/bop_stat/investment_position/index.html

4 IMD (2013): World Competitiveness Yearbook 2013 published by the IMD World Competitiveness Center
5 WIIW FDI Database 2009; at: http://data.wiiw.ac.at/fdi-database.html
12,000
10,000
8,000
6,000
4,000
2,000
va
ru
do
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la
ai
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Be
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bl
pu
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Cz
ec
Es
to
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Figure 1: FDI inward stock per capita in EUR in 2012, calculations based on WIIW investment database
published by the Vienna Institute for International Economic Studies (WIIW)
FDI activities in the Czech Republic also stand out in another very important
feature: profitability. When the total profits on foreign investment in the country
are compared with the stock of FDI (see Figure 2), it is obvious that foreign direct
investment in the Czech Republic was significantly more profitable than in other
EU new member states (NMS)6 in 2012, in spite of the fact the Czech Republic
was experiencing a recession that year.
6 Central and Eastern European new member states of the EU; this group consists of 10 post-socialist countries which entered
the EU in 2004 and 2007: Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovakia, Slovenia.
12
10
8
6
4
2
Ro
an
ia
ia
en
ov
Sl
tia
oa
Cr
ia
Bu
lg
ar
ia
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ak
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Sl
tv
La
ga
un
H
th
ua
ni
ry
nd
Li
la
Po
a
ni
to
Es
Cz
ec
Re
pu
bl
ic
Figure 2: Profitability of FDI in EU NMS in 2012 (direct investment income/FDI stocks in %), calculations based
on WIIW data and on WIIW Handbook of Statistics 2013; at: http://data.wiiw.ac.at/annual-database.html
Analyses of the results of surveys among foreign and domestic businessmen,

as well as a comparative macroeconomic analysis, reveal the following five main
reasons for the attractiveness of the Czech Republic for foreign investors.
Advantageous geographical location combined with reliable infrastructure
The special location of the country, i.e. its geographical proximity (as well as a certain
cultural and historical affinity) to the engine of European economy (Germany) has
even been described as a kind of special location rent. Its infrastructure ranks
No. 1 within the group of the post-Soviet NMS according to both the IMD World
Competitiveness Yearbook 2013 and WEF Global Competitiveness Report 201314.
According to the IMD, the Czech Republic was the best among NMS in
sub-rankings such as general infrastructure and scientific infrastructure.
The WEF ranks the Czech Republic as No. 1 among NMS in quality of air transport
infrastructure, No. 2 in the quality of railroad infrastructure and No. 3 in the quality
of overall infrastructure.
Availability of suppliers and specialised inputs needed by foreign investors

Previous inflows of FDI had a positive effect on the availability of both general and
specialised inputs. The WEF Global Competitiveness Report 201314 ranks the
Czech Republic as No. 1 again (among NMS) in quite a few categories: local supplier
quantity and quality, value chain breadth and production process sophistication,
local availability of specialised research and training services, and quality of
electricity supply.
Quality of life and social stability
While quality of life and personal security are difficult to measure, they are very
relevant for foreign investors. Inflow of FDI is necessarily related to extended stays
of expatriate personnel, often with their families. The Czech Republic offers security,
social stability and reliable healthcare, but also style and convenience. Prague
(the Czech capital) was quite successful in the 2012 Mercer Quality of Living
Survey7; where it held 69th position globally, but was No. 1 in Central and Eastern
Europe. And for those looking for a convenient location for a business dinner: Prague
is one of only three cities in Eastern Europe that host Michelin-starred restaurants.
The Czech Republic was also No. 1 (among NMS) in the IMD World
Competitiveness Yearbook 2013 health and environment sub-ranking and
No. 2 in societal framework. Low income inequality (according to Eurostat, the
second lowest in Europe in 2012), as well as the recent experience of foreign
investors, also guarantee low or no risk of losses related to industrial disputes
and strikes.
Financial stability and availability of financing
The Czech Republic has had relatively low external and internal macroeconomic
imbalances, as well as manageable levels of public debt and deficits. The Czech
Republic thus enjoys the best rating among new member countries (see Table 1).
In addition to this, it boasts a stable and healthy banking sector, which managed to
stay clear of toxic assets before the financial crisis, and fairly conservative domestic
borrowers who avoided loans denominated in foreign currency. Consequently, the
Czech economy did not experience any problems with its banks after 2008.
Its banking sector currently has excess liquidity and is able to meet the financing
needs of both domestic and foreign investors. Also, the risk of losses related to
financial crises and related instability are minimal in the Czech Republic.
7 Mercer Quality of Living Survey 2012; at: http://www.mercer.com/qualityofliving
Investment incentives
The Czech government introduced systematic investment incentives in 1997.
The current version of the scheme includes tax breaks for up to 10 years, subsidies
related to job creation and training employees and support related to the acquisition
of land. The incentives are available for investors who decide to invest at least
CZK 100 million (about EUR 1.8 million) anywhere in the country, or CZK 50 million
in disadvantaged regions.
No.
Country
Local currency rating
Foreign currency rating
T&C assessment
Czech Republic
AA
AA-
AA+
Estonia
AA-
AA-
AAA
Poland
A-
A+
Slovakia
AAA
Slovenia
A-
A-
AAA
Latvia
BBB+
BBB+
AAA
Bulgaria
BBB
BBB
Lithuania
BBB
BBB
Romania
BB+
BB+
BBB+
10
Hungary
BB
BB
BBB-
11
Croatia
BB
BB
BBB
Table 1: Standard & Poors rating, March 2013
FDI by country of origin

Most of the FDI flowing into the Czech economy originates in the EU (87 percent
of total FDI stocks at the end of 2012). The top ten countries of origin of FDI
coming to the Czech Republic are as follows.
No.
Country
Equity capital
Reinvested earnings
Other capital
Total
Netherlands
12,338.15
11,294.92
1,929.095
25,562.17
Germany
6,896.324
6,256.46
753.458
13,906.24
Austria
4,951.873
5,960.239
1,343.578
12,255.69
Luxembourg
3,254.388
68.4268
2,406.579
5,729.393
France
2,777.861
2,536.324
-437.097
4,877.088
Switzerland
1,702.682
2,482.451
320.8319
4,505.965
Cyprus
1,669.986
1,800.631
-95.4206
3,375.196
United States
1,252.692
1,768.594
121.7562
3,143.043
Spain
2,159.61
802.8034
-18.6067
2,943.806
10
Belgium
1,009.58
1,829.11
73.53716
2,912.228
Table 2: Top 10 source countries (end of 2012, mil. of EUR). Source: Czech National Bank
The top three source countries of FDI to the Czech Republic accounted for
more than 55 percent of total FDI stocks. Most of the FDI coming to the Czech
Republic came from or via the Netherlands, which hosts many multinational
corporations. Not too surprisingly, the remaining two of the three countries were
the Czech Republics neighbours, i.e. Germany and Austria, this part of FDI is
clearly linked to the integration of the Czech economy in production networks
centred in Germany.
A significant proportion (over 38 percent) of FDI stocks take the form of
reinvested earnings. This only confirms the profitability of FDI-related activities in
the Czech economy, but it can also be understood as a strong vote of confidence
by investors with first-hand experience of the Czech economic environment.
FDI by sectors
The Czech Republic has been one of the most industrial regions in Europe for
more than a century. It would therefore be expected that a significant part of FDI
inflows is linked to manufacturing. However, although manufacturing is important
and while investment incentives were initially also focused mainly on industry,
the Czech Republic has also attracted an even higher volume of investment in
the services sector (banking, real estate activities, trade) see Table 3.
NACE
Rev. 2
Sector
01-03
Agriculture, forestry, fishing
05-09
Mining and quarrying
10-33
Manufacturing
35
Electricity, gas, steam and air

conditioning supply
36-39
Water supply, sewerage,

waste management and
remediation activities
41-43
Construction
45-99
Services
X9998
Private purchases and sales

of real estate
Equity
capital
Reinvested
earnings
Other
capital
Total in
mil. of EUR
Share of
total (%)
245.0
-29.4
35.4
190.2
0.2
1,047.0
1,481.1
636.0
2,398.3
2.3
20,801.0
24,346.8
-15.0
34,208.7
33.1
4,000.3
4,067.2
-867.7
5,457.1
5.3
440.0
501.7
103.0
791.8
0.8
1,645.0
880.2
-259.7
1,717.2
1.7
36,591.6
23,246.8
13,920.9
55,906.3
54.0
2,781.9
0.0
0.0
2,781.9
2.7
Table 3: FDI stocks in the Czech economy, end of 2012. Source: Czech National Bank
The top three service sectors (which accounted for over 40 percent of FDI in
the Czech Republic per se) were financial and insurance activities, wholesale
and retail trade, and real estate activities. The top three manufacturing sectors
accounted for slightly over 20 percent of total FDI stock, and almost half
of the amount went into the sector manufacturing motor vehicles, trailers and
semi-trailers. Its overall share was thus slightly below 10 percent, but it is this
sector that is typically described as a successful example of the positive effects
of FDI on the Czech economy and its export performance.
Regions attractive for FDI

While the Czech Republic is relatively small, its economic activity is still
distributed rather unequally. Its capital (Prague) also functions as its economic
centre. With less than 12 percent of the total population, Prague generated
almost 25 percent of economic activity in 20128. Its GDP per capita was more
than double (208 percent) of the Czech average. If the fact that the infrastructure
network is fairly Prague-centric and that most important institutions have their
seat in Prague is factored in, it is not surprising that Prague also dominates
FDI statistics. Prague alone was the host territory for more than 50 percent of
FDI activities (see Table 4), Stedoesk region (Central Bohemia the region
surrounding Prague) was second with more than 10 percent. Moravskoslezsk
region (Northwest of the country) was third while it is relatively far from
Prague, it benefited from its industrial traditions, lower wages and a feature
of the Czech investment incentive scheme (lower thresholds for
disadvantaged regions).
This structure, i.e. the dominance of Prague (and the location of a second smaller
centre in the Northwest), is preserved when FDI data is analysed in more detail
(district level). Prague (as a city) still accounts for over 50 percent of FDI, the
Ostravamsto district (the administrative centre of the Moravskoslezsk region)
climbs to second place, but at a huge distance (only 4.9 percent of FDI stocks in
the whole Czech Republic).
If the Czech Republic manages to further improve (especially to decentralise)
its infrastructure, its border regions should become the logical target for foreign
direct investment in the near future, whereas Prague would be disadvantaged by
higher incomes and congestion effects. However, the dominance of Prague will
definitely survive in the short and medium term outlook.
8 Based on regional data by the Czech Statical Office; at: http://www.czso.cz
Code
Region
Share in total FDI positions (%)
CZ011
Capital City of Prague
52.3
CZ021
Region Stedoesk
10.6
CZ081
Region Moravskoslezsk
7.2
CZ062
Region Jihomoravsk
6.6
CZ031
Region Jihoesk
3.7
CZ042
Region steck
3.6
CZ032
Region Plzesk
3.1
CZ051
Region Libereck
2.4
CZ053
Region Pardubick
2.2
CZ072
Region Zlnsk
2.1
CZ061
Region Vysoina
2.1
CZ052
Region Krlovhradeck
2.0
CZ071
Region Olomouck
1.3
CZ041
Region Karlovarsk
0.8
Table 4: Regional distribution of FDI positions (end of 2011, %). Source: regional statistical yearbooks
Culture, lifestyle and genius loci

While dry and soporific statistics are appreciative for the Czech Republic, they are
incapable of depicting many other facets of the country; features which attracted
European and global elites, thinkers, and artists for centuries. Every visitor of the Czech
Republic (and Prague) learns about Franz Kafka or Gustav Mahler, but the cultural and
socioeconomic history of the country hides many more interesting names and facts.
Science and technology: the future supported by deep traditions
The Czech Republic is proud to have the oldest university in Central Europe and one of
the oldest continuously existing universities in the world: Charles University, founded
in 1348. Quite a few important scientists and innovators have been attracted to the
country or were born here, and the local environment often positively contributed to
their work.
The foundations of Czech success in the automotive sector can also be traced deep
into history: the third oldest car manufacturer in the world (Tatra) produced its first car
in 1897 and many influential car designers and innovators had ties to Czechoslovakia
or the Czech Republic (Hans Ledwinka, Ferdinand Porsche) or copied earlier Czech car
(Ferdinand Porsche) and motorcycle designs.
Many other important inventions and discoveries were made in the territory of the
current Czech Republic. For instance, convenient soft contact lenses were also designed
and produced for the first time by Otto Wichterle in the Czech Republic in 1961. A few
other examples of famous scientists and technicians from Czech history follow.
Physicist Albert Einstein lived in Prague during 19111912. In Prague, Albert
Einstein found according to his own words the necessary composure to give
the basic thought of the general theory of relativity (1908) a more definite shape.9
Physicist Ernst Mach was born and did most of his research, which remains
indispensable to this day e.g. for supersonic aeronautics (Mach number), in
a small place near Brno in 1838.
Gregor Johann Mendel, who laid the foundations of modern genetics lived and
worked in Moravia.
Economist Joseph Alois Schumpeter, world-famous for his creative destruction, was
born in the small town of Te in the South-East part of the Czech Republic in 1883.
In short, the Czech Republic, with its industrial traditions, was at the forefront
of technical development in Europe between the 19th century and the 1960s;
and has had the ambition to return to this position since 1989. Modern Czech
scientists and designers are successful in the following areas.
Nanotechnology
The Czech Republic is a world-class centre of nanotechnology research, and not just
research a network of collaborating business companies has emerged around top
research institutions. A special Nanotechnology for Society funding programme was
created and the Czech Nanotechnology Cluster was formed, which aims to further
support collaboration between business and research institutions. The Czech Republic
can thus be considered an ideal location for nanotechnology (esp. nanofibers) related
research in Europe.
9 Albert Einstein in the World Wide Web; at: http://www.einstein-website.de/z_biography/prague.html
Medicine pharmaceuticals and genetic research

Dr. Hol and the Institute of Organic Chemistry and Biochemistry have been at the
forefront in the development of antiviral drugs. Some of the most successful antiviral
drugs also used in HIV/AIDS treatment (Viread) were developed in the Czech Republic.
Again, the Czech Republic can not only offer tradition, but also state-of-the-art research
and a growing network of clusters centred on research institutions.
IT and software design
The Czech Republic has become one of the top locations for outsourcing and offshoring
IT-related services and software design, mainly thanks to a heritage of very good
technical and mathematical education. This field is very vibrant, with medium and small
companies and start-ups set up by students of Czech universities. These start-ups often
succeed important software brands of Czech origin include AVG technologies and Alwil
(AVAST), which specialised in on-line security and antivirus products.
Health resorts and spas
A chance for a convenient respite, combined with a healthy environment has
been another factor that has attracted prominent celebrities, artists, and influential
businessmen to the territory of todays Czech Republic. Places such as Karlovy Vary
(Carlsbad), Marinsk Lzn (Marienbad), Frantikovy Lzn (Franzensbad) have
charmed many visitors from around the world: composers and musicians (Beethoven,
Mozart, Paganini), politicians and celebrities (King Edward VII), writers (Twain, Goethe),
inventors and businessmen (Edison). Czech spas became such important centres of
social and cultural life in Europe that they were nicknamed the salons of Europe.
Fine arts and music
Culture and arts have a number of functions, many of which are quite useful in the
business environment. The Czech Republic has many cultural monuments of global
importance, 12 of these are registered on the UNESCO cultural heritage list. Places
such as esk Krumlov or Tel are well-known around the world and very popular with
Asian visitors and trade partners. Whether one is fond of gothic architecture, modern
art, classical music (ernohorsk, Dvok, Smetana) and festivals (Prague Spring), or
modern architecture (Villa Tugendhat), Prague and many other places in the Czech
Republic are sure to meet all their needs.
The Czech Republic is likely to

continue to be appealing to
foreign investors in the long run.
Chapter 2
Economy and fiscal policy

A long period of dismal growth, low inflation, and low interest rates make
the Czech economy an exception among emerging market economies, more
evocative of the post-crisis experience of richer developed economies. With its
high export orientation, the economy has ultimately fallen victim to the struggling
world economy, despite the fact that its financial sector has remained sound.
Furthermore, the general economic uncertainty, inflamed by the crisis, has
stymied domestic demand and stifled investment in this traditionally high
saving, thrifty economy, which remains a net creditor to the rest of the world.
As a result, the Czech economy has not yet managed to recover to its
pre-crisis levels, despite its strong macroeconomic fundamentals, underpinned
by a resilient financial sector and sound fiscal policies, although signs of fragile
growth have begun to appear recently. Boding well for this fledgling recovery
is the expected improvement in main export markets, the fading contractionary
effects of fiscal consolidation, and, most recently, exchange rate depreciation
engineered by the central bank to help revive domestic demand.
The Czech economy is currently experiencing a prolonged double-dip recession,
the longest in its modern history. Although spared substantial direct contagion
by the financial and subsequent debt crisis, the Czech economy was ultimately
impacted due to its export-oriented nature and strong trade links with the
struggling euro area. After a brief episode of recovery to positive growth rates
in 20102011, the economy plunged into yet another period of contraction in
2012. Together with a deteriorating domestic environment, consisting mainly
of impaired consumer confidence and a more difficult investment climate,
these factors caused Czech GDP to substantially underperform its main trade
counterparties, Germany and Slovakia.10 Similarly to the EU as a whole, Czech
output has not yet recovered to its pre-crisis peak11 (see Figure 3).
10 Germany currently accounts for 32 percent of Czech exports and 30 percent of imports, while Slovakia accounts for 9 percent
and 8 percent, respectively. Source: CzechInvest, Basic Data on the Czech Republic; at:
http://www.czechinvest.org/data/files/fs-06-basic-data-on-the-czech-republic-70-en.pdf
11 Moreover, preliminary data for the first three quarters of 2013 points to a further decline of 1.8 percent compared to the
same period last year. Source: Czech National Bank, CNB comments on GDP figures for 2013 Q3 Q3; at:
http://www.cnb.cz/en/public/media_service/comments/2013/13_hdp_3q.html
6%
4.0%
4%
2.5%
4.4%
4.0%
2.7%
2%
0%
2.0%
0.7%
1.1%
-0.3%
-0.3%
-1.4%
-1.4%
-2%
-4%
-4.6%
-5.1%
-5.0%
-4.5%
-6%
Czech Republic
Germany
Slovakia
EU 28
Average growth (20092012)
Cumulative growth (2012 versus 2008)
Growth 2009/2008
Growth 2010/2009
Figure 3: Real GDP growth (20082012). Source: Eurostat
Unemployment surged as the recession hit the Czech labour market, and real wages
have been declining since 2010 (see Figure 4), undermining consumer confidence,
already impaired by the precautionary saving behaviour of households. The fiscal
austerity package passed in spring 2012, with an associated VAT increase and cuts in
social spending, put additional downward pressure on household disposable income
and consumption (see Figure 5). Moreover, with the investment climate deteriorating
and fiscal capital expenditures declining, gross capital formation expenditure dropped
by 5 percent in real year-on-year terms in 2012, despite a low-interest environment
and high household saving rate.12 Underscoring the importance of these domestic
factors is the fact that the only positive contribution to GDP growth in 2012 came
from exports despite the dismal performance of the world economy at the time.
In line with the contraction in both domestic and external demand, inflationary
pressures evaporated and inflation threatened to undershoot the target of
2 percent. The Czech National Bank (CNB) therefore embarked on a path of
12 Czech Statistical Office, Macroeconomic Indicators; at: http://www.czso.cz/eng/redakce.nsf/i/macroeconomic_indicators
9
12
7
10
8
6
3
4
2
-1
-3
-1
2008
2009
2010
2011
2012
2008
2009
2010
2011
2012
Registered unemployment rate (% avg)
Gross household saving rate (%)
Average real wages (% year-on-year)
Household consumption (% year-on-year, real terms)
Figure 4: Labour market overview and

consumers behaviour
Figure 5: Consumer behaviour

Source: Czech Statistical Office
Source: Czech Statistical Office
monetary easing. In November 2012, after a series of cuts, the CNBs key
interest rate, the two-week (2W) repo rate, was brought down to technical
zero13 (see Figure 6). These extreme steps otherwise only seen in developed
economies at the time nevertheless proved insufficient to revive the economy
against fiscal austerity and low consumer confidence, and private-sector credit
grew by only 2.6 percent in 2012, i.e. 3.7 percentage points (pp) lower than
in 2011.14
With inflation already below its target and still on a downward path, the CNB
finally intervened on the FX market, effectively depreciating the Czech crown by
6.2 percent in the month of November 2013.15 As a result of this measure, the
CNB expects inflation to moderately exceed its target by the end of 2014, paving
the way for interest rates to eventually lift off in 2015. The most recent figures
13 The 2W repo rate has been standing at 0.05 percent since August 2012 and the 1 pp corridor around the 2W repo rate for
automatic facility rates has been distorted. Source: Czech National Bank, CNB Board decisions; at:
http://www.cnb.cz/en/monetary_policy/bank_board_minutes
14 Czech National Bank, ARAD database; at: http://www.cnb.cz/docs/ARADY/HTML/index.htm
15 The CZK/EUR exchange rate moved from around 25.8 at the beginning of November 2013 to 27.4 by the end of the month.
Source: Czech National Bank, Selected exchange rates; at:
http://www.cnb.cz/en/financial_markets/foreign_exchange_market/exchange_rate_fixing/charts_form_js.jsp
already show a move in the desired direction. Inflation speeded up to 1.4 percent
in December 2013 (from 0.9 percent in October 2013), while both retail sales and
industrial production have trended up throughout the year, peaking at year-on-year
growth of 4.9 percent and 6.2 percent respectively, in November 2013.16
7.5
6.5
5.5
4.5
3.5
2.5
1.5
0.5
3
-1
IX
V1
I-1
-1
IX
V1
I-1
-1
IX
V1
I-1
0
-1
IX
V1
I-1
-0
IX
V0
I-0
-0
IX
V0
I-0
-0.5
Headline inflation
Inflation target
Automatic facilities
2W repo rate
Figure 6: Inflation, inflation target and monetary policy instruments (%). Source: Czech National Bank
In spite of recent election uncertainties, fiscal austerity measures are not

expected to be intensified until at least 2015. If so, the contractionary effects of
the 2012 austerity package should gradually fade away and consumer confidence
should be slowly restored. With improvements in both domestic and external
demand and a weaker currency, the economy should finally embark on
an export-led recovery. Output is expected to be growing at around 2 percent
by the end of 2014.17
16 Czech Statistical Office, Time series Retail and industry; at: http://www.czso.cz/eng/redakce.nsf/i/time_series
17 Czech National Bank, CNB comments on GDP figures for 2013 Q3; at:
http://www.cnb.cz/en/public/media_service/comments/2013/13_hdp_3q.html
Despite the prolonged period of economic downturn, the long-term

fundamentals and attractiveness of the Czech economy remain sound. Both the
financial sector and government finance have proven resilient in the face of the
spill-over of the financial and sovereign debt crisis.
Although predominantly foreign-owned, the Czech financial system has
weathered the worldwide financial turmoil well. The large deposit base,
corresponding to the high savings of the population, makes domestic banks
largely financially independent of their parents abroad. Although the ratio of total
non-performing loans has doubled since the beginning of the crisis, it has not
surpassed 6.5 percent in the past few years.18 Moreover, the financial sector is
quite immune to currency risk, as it is not euroised, and households hold low
levels of foreign currency debt and assets, unlike in some other economies in
the region. Thanks to these characteristics, the banking system has managed to
remain well-capitalised, liquid, and profitable despite the crisis.
Czech public debt, standing at 46 percent as of the end of 2012, remains very low
in a European context (totalling 85 percent of EU27 GDP), even disregarding the
economies most affected by the recent sovereign debt crisis (see Figure 7).19
On the other hand, the debt has been growing steadily since the end of the 1990s
and suffered a significant hit during the financial crisis for example, the budget
deficit reached 5.1 percent of GDP in 2009.20 As a result, the government agreed
with the European Commission (under the Excessive Deficit Procedure) to reduce
its public deficit to three percent of GDP by 2013 and provide a basis for long-term
fiscal sustainability. The deficit target was to be achieved through a combination
of expenditure cuts, higher direct and indirect tax rates, and social and health
contributions. At the same time, reforms of the social security, health and pension
systems should underpin this sound fiscal position in the medium term.
18 Czech National Bank, ARAD database; at: http://www.cnb.cz/docs/ARADY/HTML/index.htm

19 These countries include Portugal, Ireland, Italy, Greece, and Spain, often referred to as PIIGS.
20 Czech Statistical Office, Macroeconomic Indicators; at: http://www.czso.cz/eng/redakce.nsf/i/macroeconomic_indicators
24%
90%
7%
22%
80%
6%
20%
70%
5%
4%
18%
60%
16%
3%
50%
14%
2%
III-13
XI-13
VII-12
III-11
XI-11
VII-10
III-09
0%
XI-09
30%
,
y
a
h
27 S
nd aki
27
an
ec lic
la
v
U EU IIG
o
o
Cz pub erm
E
P
P
Sl
G
no
Re
VII-08
10%
1%
III-07
40%
XI-07
12%
Debt accumulated since 2008 (LH axis)
Czech Republic
Poland
Debt outstanding in 2012 (RH axis)
Slovakia
Germany
Austria
Figure 7: Debt accumulation and debt outstanding
Figure 8: 10Y government bond yields
Source: Eurostat
Source: Bloomberg
The former centre-right government embarked on a serious programme of fiscal

austerity and consolidation measures in 2012. Despite their dampening effect
on the economy, the efforts seem to have worked. In response, the sovereign
debt rating has improved (local currency rating: S&P AA, Moodys A1) and
yields on government securities have fallen to historic lows (10Y sovereign
generic bond yields averaged 2.1 percent in 201321 see Figure 8), significantly
alleviating the debt service burden on the budget. Moreover, according to latest
Ministry of Finance estimates, the 2013 target was achieved, with the public
deficit standing at 2.9 percent of GDP.22
The Czech economy has been benefiting from abundant skilled labour at
affordable costs, making its exports competitive enough to generate sustained
trade surpluses. Since the 1990s, liberalisation and privatisation programmes
have been attracting a large amount of foreign direct investment (FDI).
21 Bloomberg, 10 Year Sovereign Bond Generic; at: http://www.bloomberg.com
22 The recently published 2013 realised deficit of CZK 81.3 bn is the lowest recorded since 2008. Source: Ministry of Finance,
Fiscal outlook of the Czech Republic (November 2013); at:
http://www.mfcr.cz/en/statistics/fiscal-outlook/2013/fiscal-outlook-11-2013-15291
The Czech Republic ranks as the most successful transition country in terms of
FDI per capita23 and managed to outperform its transition neighbours, Poland and
Slovakia, even during the crisis years (see Figure 9).
7%
5%
3%
1%
-1%
-3%
-5%
Czech Republic
Germany
CA surplus (% of GDP)
Austria
Trade balance (% of GDP)
Poland
Slovakia
Net FDI (% of GDP, +<=> net inflow)
Figure 9: Current account and net foreign direct investment. Source: Eurostat
Although the high accumulated stock of foreign investment is associated with

sizable repatriation of earnings (pushing the current account into a mild deficit,
averaging 2.9 percent of GDP since 2009), much of it is reinvested in the
economy. Foreign investment thus constitutes a reliable source of financing.
Given the solid long-term fundamentals and attractiveness of the Czech
economy, underpinned by a competitive export sector, fiscal prudence, a stable
financial sector, low inflation, and low interest rates, the Czech Republic is likely
to continue to be appealing to foreign investors in the long run.
23 CzechInvest, Investment climate in the Czech Republic as of December 2013; at:

http://www.czechinvest.org/data/files/ic-en-brozura-obalka-prosinec-2012-nahled-53-en.pdf
The Czech Republic currently

has the most positive attitude to
incoming investors in its history.
Attracting new investment

EU Structural Funds
R&D tax allowance
Education tax deduction
33
34
37
37
37
Chapter 3
Investment incentives and

state aid
Attracting new investment
The Czech Republic has developed attractive conditions for new investments.
The priority focus is on investments in:
manufacturing all sectors, but with special attention to high-tech
manufacturing industries
research and development (R&D) facilities, technology centres
business support centres, including shared services centres.
The Czech Republic has significantly increased its focus on new investments, both
green field and the expansion of existing investments, over the past few years.
It currently has the most positive attitude to incoming investors in its history.
Investors can obtain the following financial benefits:
investment incentives
subsidies from EU funds
R&D tax allowance
education tax allowance.
All benefits are provided based on the law and transparent rules, which are in
compliance with EU regulations. However, due to a change of EU rules in 2014,
some measures are currently being redesigned in order to comply with the new
rules. Therefore, detailed rules are not yet known and should be available during
2014. To obtain up-to-date information, please contact Jan Linhart
at jlinhart@kpmg.cz.
Investment incentives are available for:
the manufacturing sector
R&D and technology centres
business support services centres.
Overview
Incentives are provided based on the law and consist of:
corporate income tax relief for up to 10 years
employment subsidies in the form of grants for job creation and training
(only available in regions with high unemployment rates)
cash grants for strategic projects
purchase of land at discounted prices.
KPMG in the Czech Republic ranks among the leading advisors on investment
incentives and can help investors with:
initial assessment of whether their project qualifies for investment incentives
preparation of applications for investment incentives
full support during the approval process
negotiations with the government on extraordinary incentives.
Main conditions
The main conditions for granting investment incentives are as follows.
Manufacturing industry
Establishment of a new manufacturing plant, or expansion of an existing plant.
The minimum amount of investment in tangible and intangible assets is
CZK 100 million (approx. EUR 4 million or USD 5 million), in selected regions
this is reduced to CZK 50 million. Machinery must be new.
In the case of a Strategic Investment in the manufacturing industry, the minimum
amount invested in fixed assets is CZK 500 million, of which CZK 250 million must
be invested in new machinery, and at least 500 jobs must be created.
Due to a change in EU legislation, Czech legislation will be amended in 2014.
Conditions, as well as benefits, may change. To obtain up-to-date information,
please contact Jan Linhart at jlinhart@kpmg.cz.
Technology centres
Establishment of a new technology centre, or expansion of an existing
technology centre.
The minimum investment in tangible and intangible assets is CZK 10 million
(approx. EUR 400,000 or USD 500,000), of which at least CZK 5 million must
be invested in machinery. Machinery must be new.
At least 40 new jobs must be created.
In the case of a Strategic Investment in the area of technology centres, the
minimum amount invested in fixed assets is CZK 200 million, of which CZK 100 million
must be invested in new machinery, and at least 120 jobs must be created.
Business support services centres
The investor must establish a new business support services centre, or expand
an existing business support services centre:
shared services centre
software development centre
high-tech repair centre.
The main condition is the creation of at least 40 new jobs for software
development centres or 100 new jobs for other business support services centres.
The following conditions apply for projects in the manufacturing industry, technology
centres and business support services centres.
The project must comply with Czech environmental standards.
All general conditions must be met within three years of the date on which
incentives are formally granted.
Acquisition of assets for the project, including construction work, cannot start
before the application for incentives (Statement of Intent) is submitted to
CzechInvest and the applicant receives confirmation of project eligibility.
If an investment has received state aid, that investment must be maintained
(in the minimum amount and structure) for at least five years from its finalisation.
Income tax relief
Calculation
The calculation of the tax relief that can be claimed is the only significant area where
the treatment of a new company (plant) differs from that of an expanded facility.
For a new company, the taxpayer is entitled to full tax relief, excluding tax on net
interest income.
For an expanded plant, the amount eligible for tax relief is the difference between
the tax relief that would be available for a new company and the higher of the tax
liabilities in the two years immediately preceding the first year in which relief can
be claimed. The latter figure is adjusted with reference to industrial inflation and the
current tax rate.
This formula can be seen as a rough attempt to restrict the amount eligible for tax
relief to the additional profits resulting from expansion.
Tax relief may be claimed for 10 consecutive tax periods, or until the maximum
amount of state aid is reached, whichever occurs first.
Job creation
Cash grants will be provided to an employer creating new jobs in a region where
unemployment is more than 50 percent above the national average. The subsidy
(financial support) amounts to CZK 200,000 per new job.
Training and retraining of employees
Cash grants for training and retraining employees will be provided to an employer
in the form of a partial reimbursement of the costs incurred. The subsidy covers
25 percent of the eligible costs of training and retraining employees.
Purchase of construction sites
The actual provision of this incentive depends on negotiation with the owner of the
land (state, region or municipality). The difference between the market price and the
actual purchase price is treated as an incentive.
Permissible level of state aid
The total value of incentives must not exceed the maximum permissible level of
state aid. The maximum amount of state aid is based on the rules set by the EU
and varies according to the individual regions of the Czech Republic. Generally,
the maximum amount of state aid cannot exceed 40 percent of eligible costs
(investment in land, buildings, machinery and equipment and selected intangible
assets), but this will be reduced to 25 percent from July 2014.
For technology centres and business support services centres, eligible costs may
also comprise the wage costs of employees in newly created jobs within 24 months
of the month in which a particular position was filled.
EU Structural Funds
The Czech Republic (excluding Prague)
Businesses set up in the Czech Republic can also obtain support from EU Structural
Funds under several Operational Programmes. The most important programmes for
businesses are:
the Operational Programme Enterprise and Innovation for Competitiveness
the Operational Programme Human Resources and Employment
the Operational Programme Environment.
Subsidies granted under EU Structural Funds are generally subject to the same state
aid rules and limits as investment incentives.
Conditions for funds available from 2014 were not known as of the date of issuing
this publication due to a new scheme valid for 20142020.
R&D tax allowance

Companies performing R&D activities can apply a special tax deduction for this activity.
The R&D deduction in fact allows companies to claim internal R&D costs twice: for
the first time within the profit and loss account, for the second time as a special tax
deduction. Effectively, savings can thus be up to 19 percent of R&D costs. The deduction
can be claimed every year and there is no limit on the maximum amount to be claimed.
KPMG in the Czech Republic is an authorised advisor in the area of R&D tax
deduction and provides a wide range of related services. It can help clients with:
definition of eligible activity
calculation of the deduction
preparation of required documentation
obtaining a ruling from the tax authority
issue of a certified court expert opinion.
Education tax deduction

The education tax deduction is a new tool introduced in 2014. It allows companies
to obtain a special tax deduction for certain costs relating to educational activities for
professional education.
The deduction covers various activities relating to the education of secondary school
or university students on the premises of companies. Companies can also receive
a deduction for assets acquired for the purposes of such education.
It is not financially demanding

to establish a company in the
Czech Republic e. g. for a limited
liability company (s. r. o.),
minimum registered capital
of CZK 1 is sufficient.
Types of business entities

Company formation
39
43
Chapter 4
Business structures
The basic provisions governing business obligations and other specific aspects of
doing business in the Czech Republic are set out in the Civil Code and the Act on
Business Corporations, both effective as of 1 January 2014.
The Act on Business Corporations addresses the main aspects of Czech
corporate law. It also regulates the relationship between companies and their
statutory representatives, their rights and obligations and liability for a breach of
due care. Further, it sets out the rules for holding companies and the liability for
damage caused by their controlling entities.
The Civil Code governs contractual relationships (e.g. purchase contracts,
contracts for work, contracts for the sale of a business, lease contracts or credit
contracts). Insolvency is governed by the Act on Insolvency.
Types of business entities

The Act on Business Corporations recognises the following types of business entities:
joint-stock companies
limited liability companies
general partnerships
limited partnerships
co-operatives
Societas Europaea (European companies)
European Economic Interest Grouping (EEIG).
In addition, foreign persons may establish a branch in the Czech Republic.
A branch is not a legal entity, but must be recorded in the Commercial Register.
The Act on Business Corporations regulates the status and activities of

entrepreneurs and applies to both legal entities and individuals. An entrepreneur is:
a person recorded in the Commercial Register, or
a person engaged in a business activity on the basis of a trade licence
(ivnostensk list or koncesn listina), or
a person engaged in a business activity on the basis of authorisation issued
under a special legal regulation (e.g. attorneys, doctors, auditors or tax
advisors), or
a natural person engaged in agricultural activities and recorded in an
appropriate register.
A Czech legal person is an entity that has its registered office in the Czech Republic.
Foreign persons are defined as persons (individuals or legal entities) domiciled
abroad or having their registered office outside the Czech Republic.
A foreign persons authorisation to carry out business in the Czech Republic takes
effect on the date it is recorded in the Commercial Register. This does not apply to
citizens of member states of the EU, the EEA or Switzerland, their family members
who have Czech residence permits, citizens of other states with long-term
residence in the EU and their family members with long-term residence permits.
A foreign person may participate in the establishment of a Czech legal entity or
become a partner or member of an existing Czech legal entity. A foreign person
may also be the sole founder of a Czech legal entity, provided that Czech law
permits a company to have a sole founder or sole shareholder.
The main characteristics of the various legal entities are described below.
Joint-stock company (akciov spolenost a. s.)
The company exists independently of its shareholders, who are not liable for
the debts and obligations of the company.
Registered capital may not be less than CZK 2 million or EUR 80,000.
Non-cash contributions to registered capital must be valued by an independent
expert proposed by the founders (when a company is being established) or the
company (registered capital increase). The valuation is binding on the company.
Registered capital is divided into a fixed number of transferable shares of
a fixed nominal value.
A joint-stock company requires an audit if one or more of the following criteria

are met for both the year in question and the preceding year:
net turnover exceeds CZK 80 million per annum
total assets exceed CZK 40 million
the average number of employees exceeds 50.
Annual financial statements must be published.
The company may decide between two internal structures: either to have
a supervisory board and a board of directors (dualistic organisation of corporate
bodies), or to have an executive director and a managing board (monistic
organisation of corporate bodies). The chairman of the managing board may
be the same person as the executive director. A legal entity may also be
appointed as a statutory representative of the company.
Rights to receive dividends and other rights attached to shares may be
transferred separately from the shares to which these rights are attached.
Limited liability company (spolenost s ruenm omezenm spol. s r. o. or s. r. o.)
The company exists independently of its shareholders (members), who are
jointly and severally liable for the obligations of the company only up to the
amount of total unpaid contributions recorded in the Commercial Register.
The name must include spolenost s ruenm omezenm or the abbreviation
spol. s r. o. or s. r. o.
The list of shareholders, the amount of each shareholders contribution and the
names of the members of the supervisory board (if one is established) must be
recorded in the Commercial Register.
The company must have registered capital of at least CZK 1.
The memorandum of association of a limited liability company may allow the
creation of different kinds of shares. The shares to which the same rights and
obligations are attached form one kind of share.
The memorandum of association of a limited liability company may set out that the
shareholder may own more than one share and also shares of different kinds.
The share of a shareholder may be represented by a common share certificate
(kmenov list) (however, such a certificate cannot be in the form of a registered
certificate and it cannot be publicly offered or admitted to trading on the
regulated market).
A supervisory board is only necessary if required by the memorandum of association.
The general meeting appoints an executive (jednatel) or executives, who are
legally responsible for the management of the company and whose details,
including information on their authorisation to act on behalf of the entity, must
be recorded in the Commercial Register.
A legal entity may also be appointed as a statutory representative of the company.
A limited liability company does not require an audit unless two or more of the
following criteria are met, for both the year in question and the preceding year:
the average number of employees exceeds 50.
General partnership (veejn obchodn spolenost ve. obch. spol. or v. o. s.)
A general partnership is formed by two or more persons (individuals or legal entities).
The partners in a general partnership are liable for the debts of the company.
The names and addresses or registered offices of the partners must be
recorded in the Commercial Register.
All partners are entitled to act on behalf of the partnership and are jointly and
severally liable for the partnerships obligations to the extent of their entire property.
Audit requirements are the same as for a limited liability company.
Limited partnership (komanditn spolenost kom. spol. or k. s.)
A limited partnership is formed by two or more persons (individuals or legal
entities). At least one of the partners must be a general partner, with unlimited
liability for the debts of the partnership. At least one partner must be a limited
partner, liable for the partnerships debts only up to the amount of unpaid
contributions recorded in the Commercial Register.
The names and addresses or registered offices of the partners, a statement on
whether they are limited or unlimited partners, the amount contributed by each
limited partner and the amount of their paid up contributions must be recorded
in the Commercial Register.
Only unlimited partners are permitted to manage the partnership.
Co-operative (drustvo)
Co-operatives are formed by at least three members, either legal entities or
individuals, to undertake business activities for the economic or social benefit
of their members.
Members are not liable for the obligations of the co-operative; however, the
co-operative may demand contributions to cover losses from its members.
Branch of a foreign person (organizan sloka zahranin osoby)
Branches of foreign businesses can conduct business activities in the
Czech Republic if they are recorded in the Commercial Register.
The entry should include details of the foreign business and its office in the
Czech Republic, the scope of business activities and the name and address
of its director (general manager).
A branch must obtain a trade licence from the regional Trade Licensing
(Business Registration) Office.
A branch does not have limited liability.
Company formation
A company is formed after a founders deed or a memorandum of association is
executed. Limited liability companies and joint-stock companies must execute
these documents in the form of a notarial deed.
After the founders deed or a memorandum of association is executed, the future
executives of the company must register their trade licences at the Trade Licensing
Office and procure documents necessary to register the registered address of
the company. The companys founders name a contributions administrator, who
is responsible for proving to the Commercial Register that the contributions
to the registered capital have been paid up by shareholders. After the future
executives have collected all the necessary documents, they may file an application
for registration of the company in the Commercial Register. Once the court
administering the Commercial Register registers the company, the process of the
companys formation is complete. The whole process may take up to two months.
The Commercial Register
Commercial Registers are maintained by the courts. A company has legal status
and is entitled to commence business activity in the Czech Republic only after it
is recorded in the Commercial Register. Courts have five business days to record
the company in the Commercial Register after the application is submitted. Fees
vary between CZK 6,000 for a limited liability company and 12,000 for
a joint-stock company (approx. EUR 220 and 440).
An entry in the Commercial Register includes inter alia: the name of the
entity and the address of its registered office, the identification number of the
entity, the scope of its business activities, the type of entity and the names
and addresses of the executives or directors, together with details of their
authorisation to act on behalf of the entity.
Access to the Commercial Register is freely available on the Internet (www.justice.cz).
The Czech Republic has a skilled

and educated labour force.
Employment contracts

Employment agencies

Mass layoffs

Unions and trade unions
Employment confirmation
Holidays

Social security and health insurance
Concurrence of an employment relationship
with the execution of the office of director
45
47
47
47
47
48
48
48
Chapter 5
Employment policy
The Czech Republic has a skilled and educated labour force, and the literacy rate
is above 98 percent.
Employment law is governed by the Labour Code and numerous government
decrees. Where an employee from another EU member state is sent by an
employer to work in the Czech Republic as part of the transnational provision of
services, Czech Labour Code regulations shall apply to basic conditions, such as
maximum working hours and the minimum length of rest periods, the minimum
annual leave entitlement, the minimum wage and overtime rates, occupational
health and safety, etc.
The maximum working week is 40 hours. The standard working week is Monday
to Friday.
The maximum amount of overtime is 150 hours per year. Overtime must be
distributed evenly.
The retirement age for individuals ranges from 60 to 65 based on the sex, date of
birth and number of raised children (applicable to women only).
Employment contracts
Employers are required to conclude written employment contracts with their
employees. The contract must describe the type of work, the date the employee
will commence work, and where the work will be performed.
Trial periods cannot be longer than three months. The trial period of managers
may be concluded for a period of up to six months.
A fixed-term employment contract may be concluded for up to three years, and
may only be repeated twice.
It is possible to temporarily assign an employee to work for another employer
based on an agreement between the employee and his or her original employer.
An employee may have more than one employment contract concurrently, but
must obtain written consent from his or her employer if the business of the other
employer is identical with the activities of the first employer.
An employment contract concluded for an indefinite period or fixed term may be
terminated:
by agreement
by notice
by immediate termination
by termination during the trial period.
A fixed-term employment contract also terminates on the expiry of the agreed period.
Termination by agreement must be in writing.
The employer or the employee may terminate a contract by giving written notice.
The notice period for the employer and the employee is at least two months, and
the employee can give notice without stating a reason.
When the employer terminates an employment contract, it must be for one of
the reasons stated in the Labour Code, such as:
1. the employer is being liquidated or is ceasing to carry on business
2. the employer is relocating
3. organisational changes
4. serious disciplinary breaches by the employee, etc.
Where an employment contract is terminated for any of the reasons under
points 1 to 3, the employer is obliged to pay the employee up to three months
severance pay depending on the duration of the employment relationship.
Specific termination conditions apply in respect of disabled persons, pregnant

women and employees caring for minors. Specific termination conditions,
severance pay and other conditions may also be included in a collective
agreement, if in force.
During the trial period, the employment contract may be terminated by either
side for any reason, or without any reason being given.
Employment agencies
An alternative to an employment contract is agency employment.
An employment agency provides its clients with human resources, without the
necessity to conclude employment contracts with employees. Even though this
option is more expensive, it provides much broader flexibility in the allocation of
human resources.
Mass layoffs
If an employer terminates an employment relationship with a certain number
of employees as defined in the Labour Code, for the specific reasons set out
above under points 1 to 3, within a period of 30 calendar days, this is considered
a mass layoff and special conditions, such as a notification obligation to the
Labour Office and unions, apply.
Unions and trade unions

Unions can be formed freely and their formation cannot be limited by either
the state or any other subject.
Trade unions engage in collective bargaining at a national level. A Tripartite
Council, including representatives from trade unions, employers and the
government, meets annually to discuss labour issues.
Employment confirmation
Employers have a duty to provide proof of employment (potvrzen o zamstnn)
to all employees upon termination of an employment contract. It must contain
information regarding the duration of employment, paid social security and health
insurance contributions, the employees obligations to the company, and details
of the employees annual salary during the employment period.
Holidays
An employee is entitled to holiday pay if the employment contract lasts for at
least 60 consecutive days during a calendar year. Where the contract lasts for
less than a year, one-twelfth of the annual holiday is accrued for each calendar
month of continuous employment with the same employer.
The minimum holiday period is four weeks per annum, unless increased by
a collective bargaining agreement or internal regulations. Holiday pay is
calculated on the basis of the employees average monthly salary.
Social security and health insurance

There are two major schemes to which both the employee and the employer
must contribute: social security and health insurance.
Payments from the social security insurance system typically include:
pensions
cash benefits such as sick leave, maternity benefits, social benefits, etc.
A social security treaty is concluded with certain countries and removes the
burden of paying social security contributions to both countries.
Concurrence of an employment relationship with the

execution of the office of director
Current legislation does not explicitly allow the concurrence of an employment
relationship with the execution of the office of director. With respect to the
non-uniform interpretation of current legislation and previous court decisions
regarding this issue, such a scheme is not recommended.
The Czech banking and financial

sector: a safe harbour for foreign
investments during the financial
crisis (continuing profitability,
sufficient liquidity, as well as
capital adequacy).
The banking sector

Investment management and funds
The Stock Exchange
Foreign exchange
Repatriation of capital and profit
51
54
55
57
59
Chapter 6
Financial services
The banking sector
The Czech banking sector is represented by banking institutions with primarily
international ownership. It is dominated by big foreign banking groups such as
the Erste Group, KBC Group, Societe Generale, Raiffeisen Group, UniCredit
Group or GE Money Group. Although the banking sector is significantly
concentrated, small and medium banks have strengthened their position
on the Czech market in previous years.
Typical activities include commercial lending to corporate and retail clients,
customer accounts and deposits administration, credit card operations,
international lending and loan syndications, mutual funds management and
administration, bank treasury operations and back office activities.
Regulation
The Czech National Bank (CNB) is the central bank of the Czech Republic.
Its function is to determine monetary policy, issue banknotes and coins, and
to manage the circulation of currency, the payment system, and the settlement
system between banks. More details can be found at: www.cnb.cz.
The CNB coordinates the supervision of the Czech financial market, which
includes:
the banking sector
capital market
insurance and pension funds sector
credit institutions
the foreign exchange market,
and electronic money institutions.
The responsibility for preparing primary legislation for the financial market sector
lies mainly with the Ministry of Finance, CNB assists in this process.
As an EU member, CNB cooperates in the area of supervision with European
institutions (the European Banking Authority, the European Insurance and
Occupational Pensions Authority and the European Securities and Markets
Authority) on unifying supervisory procedures and creating conditions for close
cooperation between local and host supervisors. The process of integrating
supervisory responsibilities, usually called the banking union, is ongoing;
however, the Czech Republic as a non-euro zone member will not participate
in this process in its first stage.
Prudential rules for banks, credit unions and investment firms are primarily
regulated by a decree issued in 2007. It introduced the principles of Basel II into
Czech banking regulations. Recent regulatory changes have been, and continue
to be, primarily driven by measures agreed at EU level. A major package of
changes will come with the implementation of Basel III/CRD IV and the Capital
Requirements Regulation (CRR) in 2014. The CNB already announced that it
would apply the full limit of the conservation buffer at a level of 2.5 percent
above the initial 8-percent capital requirement. At present, the countercyclical
buffer is not likely with respect to the current phase of the business cycle. The
CNB also indicated that it would use the systemic buffer for four selected banks;
the surcharge will be applied discretionarily in the range of 13 percent.
Banking licence
The licensing of banks and other financial institutions (from countries outside the
EEA) and matters connected with mergers and acquisitions and other market
entries are fully within the responsibilities of the CNB.
A foreign bank can enter the Czech banking sector in the following four ways:
as a new company, with up to 100 percent foreign ownership
by acquiring an equity stake in an existing commercial bank
by establishing a branch of the parent bank with a banking licence, and
by establishing a financial institution of the parent bank based on the banking
licence of the parent bank (applicable to all banks with a registered office in the
EU under the single banking licence principle).
Before it grants a banking licence, the CNB requires:

a minimum registered capital of CZK 500 million (fully paid-up) (not applicable
to a branch)
a detailed business plan based on a comprehensive economic analysis
information about the founders and the amount, structure and source of share capital
a detailed description of related parties of the newly established bank
details of the registered office of the bank in the Czech Republic, and
information about the scope of the banks intended activities (organisational
structure, management of the bank, internal control system and processes, etc.).
A financial institution operating under the single banking licence principle must
fulfil the following requirements to operate in the Czech Republic.
The parent bank must hold at least 90 percent of the voting rights and
registered capital of this subsidiary.
The activities intended to be carried out on the local market must also be
carried out on the foreign market of the parent bank.
The local financial institution must be included in the scope of consolidated
supervision of the parent bank for regulatory supervision purposes.
The parent bank must jointly and severally guarantee the commitments
entered into by this financial institution.
The parent bank must satisfy domestic supervisory authority requirements
regarding the prudent management of this subsidiary.
Deposit insurance
Since 31 December 2010, the deposit limit for 100-percent protection has
risen to EUR 100,000. The deposit claims of banks, foreign banks, financial
institutions, health insurance companies and state funds are not insured.
All banks and branches of foreign banks (excluding branches of parent banks
participating in the deposit insurance scheme in their parent country) are obliged
to participate in the scheme and to contribute to the deposit insurance fund in
compliance with the Act on Banking. The quarterly contribution of a bank to the
fund is 0.04 percent of the average volume of insured deposit claims for the
relevant quarter, including interest accrued.
Market development
As at 30 September 2013, there were 45 banks (including foreign branches)
offering banking services to clients in the Czech Republic, of which 37 were
controlled by foreign investors and eight by local stakeholders. The group of the
four largest banks (banks with total assets greater than CZK 200 billion) played
a predominant role in the banking sector in the Czech Republic. As at
30 September 2013, their share of total assets equalled approximately
57 percent. Although the Czech economy was in recession, the banking sector
remained profitable in 2013, with the level of classified loans at approximately
10 percent. Net profit for the first nine months of 2013 exceeded CZK 50 billion
(for the whole of 2012 it was more than CZK 64 billion).
70
67.5
64.3
60
59.7
55.7
50
53.3
50.6
47
45.7
40
30
20
10
0
2007
2008
2009
2010
2011
2012
9/2013 extrapolated
(for 9 months) 2013
Figure 10: Net profit of the Czech banking sector, in billions of CZK24
Investment management and funds

The Czech market is represented by around 350 investments funds domiciled
in the Czech Republic according to CNB statistics as at 31 December 2013.
In addition, approximately 1,200 foreign funds are registered for public offer
in the Czech Republic.
24 Czech National Bank, Basic indicators of the banking sector; at:

http://www.cnb.cz/en/supervision_financial_market/aggregate_information_financial_sector/
basic_indicators_financial_market/banks/index.html
In 2013, the new Act on Investment Companies and Investment Funds came
into force, which extended options for establishing new investment funds in line
with the European regulation.
According to the new Act, investment funds may take the following legal forms:
mutual fund
trust fund
joint-stock company
investment company with variable capital (socit dinvestissement capital variable)
limited partnership
limited liability company
European company.
Minimum fund capital of EUR 1.25 million is required. The foundation of funds,
which fulfil EU requirements, must be approved by the CNB. A notification duty
to the CNB is only required for special investment funds, which do not fulfil
these requirements. However, the asset manager of each fund must have the
approval of the CNB.
Supervision of the investment fund market is performed by the CNB.
The Stock Exchange

The Prague Stock Exchange (PSE) began trading in April 1993. Trading on the
PSE is conducted via licensed securities dealers, who are also PSE members.
These are primarily major banks and brokers. If a common investor decides
to invest in the Exchange, they need to contact one of the PSE members or
become a member.
It is currently possible to conclude trades either directly through the regulated
market (administrated by the PSE) or the non-regulated market primarily for OTC
(over-the-counter) trades (administrated by the Central Depository see below).
Since November 2012, trades on the regulated market are traded via the stock
international exchange platform Xetra. The basic criteria for trading and listing
on each market can be found at: www.pse.cz. Generally, the rule that a more
regulated market has more conditions to be fulfilled for listing applies.
Securities maintained on securities accounts are administrated in the Central

Depository. The activity of the Central Depository is regulated by the CNB.
Regulation
In 2004, a complex regulatory framework for investment trading was introduced
by the Act on Capital Markets. This Act defines investment instruments and
investment services, as well as capital adequacy requirements for brokers.
In addition, the Act enabled trading at a non-regulated exchange. The main
non-exchange market in the Czech Republic was the RM System.
In 2008, the CNB issued a decree on prudential rules for the provision of
investment services for securities traders (further amended in 2010). This decree
implemented the principles of MiFID into Czech legislation. In compliance
with the implementation of MiFID requirements in local legislation and the
amendment of the Act on Capital Markets, the RM System was transformed into
a stock exchange as of 1 December 2008. As a result, securities trading on the
RM System is allowed for individual investors or shareholders, primarily through
licensed intermediary brokers.
In the RM System, both the security and related cash consideration must be
delivered on the trade date. The regulatory and reporting requirements for
companies listed on the RM System are significantly less stringent than for
companies listed on the PSE. More details can be found at: www.rmsystem.cz.
Market development
The main index of the Prague Stock Exchange (PX Index) closed
on 30 December 2013 at 989 points (28 December 2012: 1038.7 points), having
decreased year-on-year by 4.8 percent. The overall trade volume of securities
for 2013 reached CZK 185,731 million (2012: CZK 236,541 million). Market
capitalisation decreased from CZK 1,142,090 million as at 28 December 2012
to CZK 1,093,484 million as at 30 December 2013, representing a drop
of 4.26 percent compared to the end of 2012.
1,100
1,050
1,000
950
900
850
13
20
2.
.1
12
21
.1
1.
20
13
13
3
0.
.1
31
10
9.
20
01
3
.2
01
01
.2
.9
18
28
.8
.2
20
01
8.
7.
13
3
.2
.7
17
25
.6
.2
01
13
20
6.
.5
14
4.
.2
01
01
3
01
19
.4
.2
.2
.3
27
6.
3.
20
13
01
.2
01
13
.2
.2
.1
23
2.
1.
20
13
800
Figure 11: Movement in the PX Index during 201325
Foreign exchange
Regulation
The Act on Foreign Exchange, amended in July 2009, fully implemented the
obligations which the Czech Republic accepted under international agreements in
relation to the free movement of capital and the system of payments. The Czech
Republic has concluded many agreements with other countries on the promotion
and reciprocal protection of investments.
If granted a foreign exchange licence, a bank may trade freely in foreign
currencies and is subject to foreign exchange trading regulations.
The Act on Foreign Exchange allows:
a resident without a foreign exchange trading permit to undertake contractual
obligations towards a non-resident, and to fulfil the resulting commitments in
either Czech or foreign currency
a resident to acquire foreign currency or other rights denominated in a foreign
currency, to acquire property abroad and to export and import Czech and
foreign currency
25 Prague Stock Exchange, PX Index, Historical data; at: http://www.pse.cz/dokument.aspx?k=Burzovni-Indexy
a non-resident to purchase foreign currency or other rights denominated

in a foreign currency in exchange for Czech currency or vice versa, to acquire
real estate (subject to restrictions) and to import and export Czech and
foreign currency.
These general clauses are restricted by required qualifications. Generally, any
foreign exchange is subject to a notification duty to the CNB. The foreign
exchange regulation is an important instrument for the prevention and detection
of money laundering.
Market development
The foreign exchange rate of the CZK to the EUR, as well as other main
currencies, was affected by the intervention of the CNB, which started in
November 2013 (see significant movement in Figure 12). The CNB announced its
intention to depreciate the CZK to a level of 27 CZK/EUR. The intervention was
primarily driven by a significant deviation in inflation below the inflation target;
a potential threat of deflation was also mentioned. As shown in the graph below,
the CZK surpassed the intended target FX rate of 27 CZK/EUR in December
2013, as it reached up to 27.7 CZK/EUR.
29.00
27.00
CZK/EUR
25.00
23.00
21.00
19.00
CZK/USD
26 Czech National Bank, Exchange rates; at:

http://www.cnb.cz/en/financial_markets/foreign_exchange_market/exchange_rate_fixing/year_form.jsp
11
.1
13
2.
20
20
1.
.1
Figure 12: CZK development during 2013 (CZK/EUR and CZK/USD)26
13
13
20
0.
10
.1
30
8.
20
01
.2
01
01
.2
.9
17
27
.8
.2
20
8.
6.
13
01
.2
.7
16
24
.6
.2
01
13
20
6.
3.
13
.5
.2
01
01
3
01
18
.4
.2
.2
.3
27
6.
3.
20
13
3
13
.2
.2
01
01
20
.1
1.
23
2.
.2
13
17.00
Repatriation of capital and profit

The Czech currency is allowed to float freely and is convertible outside the
Czech Republic. Czech companies may freely repatriate both current year profits
and retained earnings in whatever currency they desire. However, they should
follow the minimum capital requirements if applicable imposed by the CNB.
Branches of foreign banks do not have such limitations as the capital is managed
and monitored centrally.
The following types of payments from a Czech company to its foreign parent
may be transferred abroad freely, subject to appropriate withholding taxes:
dividends
interest
charges for intangible property (e.g. royalties and know-how fees)
management fees
liquidation balance.
The Czech Republic is a party to

a large number of double taxation
treaties and has implemented
relevant EU directives.
Taxation of legal entities

Taxation of business income
Transfer pricing/thin capitalisation
Taxation of individuals
Tax on the acquisition of immovable property
Inheritance and gift tax
Tax on immovable property
International tax issues
Beneficial ownership concept
Tax administration
61
63
64
65
69
69
69
70
76
76
Chapter 7
Direct taxes
Taxation of legal entities
Corporate income tax is levied on the profits of legal entities, primarily limited
liability companies (s. r. o.) and joint-stock companies (a. s.). Although partnerships
are legal entities, the profits of a general partnership (v. o. s.) are not subject to
corporate tax; instead, the partners share of profits is taxed in their own hands.
In the case of a limited partnership (k. s.), the limited partners share of the profits
is subject to corporate income tax at the level of the limited partnership, while
the general partners share is taxed in the same way as in the case of a general
partnership. In addition, trusts are subject to corporate tax even though they are
not legal entities.
A branch or permanent establishment of a foreign company is generally subject to
tax on the same basis as a company. It is also possible to tax them on a deemed
profit basis, which is usually a percentage of revenues generated in the Czech
Republic, or a percentage of costs.
Since most of these legal entities by definition exist for the purpose of carrying
on a business, virtually all the income and gains they realise are included in the
calculation of their business profits (see below). There are special rules for entities
not established for the purpose of making profits. These enjoy certain restricted
tax privileges.
The corporate income tax rate is 19 percent in 2014. A reduced rate of 5 percent
applies to the income of qualifying investment and pension funds. Exemptions
from corporate tax may be claimed for certain qualifying investments

(see Chapter 3 Investment incentives and state aid).
From 1 January 2014, electricity produced from solar power in a facility that was
put into operation in 2010 is subject to mandatory payments by the operators of
transmission networks or operators of regional distribution networks. These are
based on the amount earned by the producer (excluding VAT) in the form of an
agreed tariff or a green bonus. The rates are 10 percent of the agreed tariff and
11 percent of the green bonus.
Capital gains are generally included in income and taxed at the same rate.
However, if at least 10 percent of the shares of a company are held by a parent
company for 12 months, income from the sale of the shares is tax exempt if the
parent is a Czech tax resident company and the subsidiary is resident in an
EU member state or a non-EU member state with which the Czech Republic has
concluded a double taxation treaty (subject to certain conditions). Income derived
by non-residents from the sale of shares in a Czech company is taxable, unless the
seller is a company resident in the EU, Norway or Iceland, and at least 10 percent
of the shares have been held for 12 months.
There is no tax consolidation in the Czech Republic. Each company within a group is
taxed individually, with no set-off of losses against the profits of a different company.
However, virtual tax consolidation can be achieved through a partnership structure.
Dividends received by Czech resident companies are taxed at a rate of 15 percent.
They are exempt from tax if the payer is a company resident in an EU member state,
provided that at least 10 percent of the shares have been held for 12 months.
The exemption also applies if all the following criteria are met:
the payer is a tax resident of a state with which the Czech Republic has
concluded a double taxation treaty
the payer has a similar legal form to a limited liability company (s. r. o.),
joint-stock company (a. s.) or co-operative (drustvo)
the recipient has held at least 10 percent of the shares for 12 months, and
the payer is subject to a tax similar to Czech corporate tax, and the rate is
at least 12 percent.
Exemptions for capital gains and dividends do not apply if the parent company or
the subsidiary:
are exempt from corporate income tax (or similar tax), or
may claim a corporate income tax exemption or corporate income tax relief, or
are subject to corporate income tax at a rate of 0 percent,

or if the recipient is not the beneficial owner of the income.
Mergers and divisions of companies can generally be carried out on a tax neutral
basis. The EU Mergers Directive and the EU Cross-Border Merger Directive have
been broadly assimilated into Czech law. In general, domestic legislation maintains
the tax neutrality of mergers and allows the transfer of unused tax losses for
transactions satisfying certain legal conditions (transfers of business and mergers),
provided that tax avoidance is not the main purpose of the transaction. Additionally,
there is a same activity rule, under which tax losses can only be offset against
income earned from the economic activity that generated the tax loss.
Taxation of business income

The starting point for computing taxable profit is the profit before tax in the Czech
statutory financial statements. This is then subject to adjustments under the
Income Taxes Act. Unless this Act contains a provision to the contrary, income and
expenses booked for accounting purposes are taxable/deductible. Where capital
gains form part of business profits, they are taxable as normal income or exempt
under the participation exemption rules.
For companies, the tax year is generally the same as the financial year. It is
possible to adopt a financial year ending on a date other than 31 December
provided that it is the last day of a calendar month. If the financial year-end
changes, there are provisions in the Income Taxes Act for dealing with the
resultant long or short period. However, these are not perfectly drafted and
numerous issues can arise in such cases. Individuals are always taxed on
a calendar year basis.
The Income Taxes Act attempts to define in some detail which expenses are
deductible and which are not. The general rule is that expenses incurred for the
purpose of generating, assuring or maintaining taxable income are tax deductible.
A special deduction equal to deductible expenditure on research and development
(R&D) can be claimed which effectively means that such expenditure is deducted
twice; this deduction, if not used in the period in which it arises, may be carried
forward to the next three tax periods.
The Act on Reserves allows restricted deductions for bad debt reserves and
write-offs. It also allows taxpayers to create tax deductible reserves for future
repairs, subject to the existence of supporting evidence in the form of project

plans, as long as the funds are transferred to a separate bank account by the due
date for filing the annual tax return.
The Act on Reserves contains special rules on loan provisions for banks and
reserves for insurance companies.
Tax depreciation can be claimed on fixed assets. For this purpose, fixed assets
are divided into several categories broadly reflecting their expected useful life.
Depreciation on most assets may be claimed on either a straight-line or an
accelerated basis.
Tax losses may be carried forward for five years. Losses may not be carried
forward following a substantial change in the ownership of a company unless it
can be shown that at least 80 percent of the companys revenues are derived from
the same activities as those carried on in the period when the loss arose. A change
of at least 25 percent in the ownership of registered capital or the voting rights, or
a change resulting in a person obtaining a controlling influence in the company, is
always a substantial change. Restrictions also apply in the case of certain corporate
restructuring.
A taxpayer can apply to the authorities to confirm the availability of carried forward
losses after the end of the taxable period in which the losses are to be used.
Transfer pricing/thin capitalisation

The Income Taxes Act contains two basic provisions relating to transfer pricing and
thin capitalisation.
Transfer pricing is dealt with in a short provision that states that if prices agreed in
transactions between related parties are not at arms length and the difference is
not properly justified, the tax authorities will adjust the tax base. It is possible to
request unilateral or bilateral advance pricing agreements from the tax authorities
on the method of setting the transfer price between related parties. No retroactive
agreements are possible. An administration fee of CZK 10,000 is charged
per transaction.
In addition to the provisions of the Income Taxes Act, the Ministry of Finance
has issued several guidelines providing more detailed information especially on
transfer pricing documentation. These are not legally binding, but given that the tax
authorities usually follow them, they represent useful guidance for taxpayers.
The thin capitalisation provisions act to restrict the deductibility of interest and
other loan expenses where the borrower has insufficient equity. The rules can
be summarised as follows.
Financial expenses (including interest) arising from loans and credits received
from related parties in excess of four times (six times for banks and insurance
companies) the borrowers equity are not tax deductible.
Interest on loans and credits received from unrelated parties, or those secured
by a related party, is fully deductible on general principle, except for interest on
back-to-back loans (i.e. where a related party provides a loan, credit or deposit
to an unrelated party, which then provides the funds to the borrower), which is
treated as interest on related party debt.
Where the interest or other revenue is derived from the borrowers profit, all
financial expenses on the loans or credits received are non-deductible.
Notwithstanding the thin capitalisation provisions, financial expenses incurred
which directly relate to taxable income (e.g. interest income) can be deducted
up to the amount of that income.
Any upward adjustment of profit resulting from a transfer pricing or thin
capitalisation adjustment relating to a non-EU or EEA resident counterparty may be
treated as a dividend, i.e. is subject to dividend withholding tax, as reduced by the
provisions of any applicable double taxation treaty.
Taxation of individuals
Individuals are subject to income tax, social security, health insurance, and taxes
on land and buildings. The taxation of individuals primarily depends on their
residence status. Residents of the Czech Republic are subject to tax on worldwide
income, whereas non-residents are subject to tax on Czech source income only.
Residence is defined as:
having a permanent home in the Czech Republic, or
spending 183 days or more in the Czech Republic during the tax year
(the year to 31 December).
Personal income tax is charged on:

employment income
business income
investment income
rental income
capital gains
any other income not within the above categories.
There are numerous exemptions, of which the most important are the exemptions
from tax on gains from the sale of securities.
Gains on the sale of securities acquired before 31 December 2013 are exempt
if the securities have been held for more than six months and do not represent
more than 5 percent of registered capital and voting rights for 24 months
preceding the sale.
Gains on the sale of securities acquired before 31 December 2013 representing
more than 5 percent of registered capital and voting rights and any securities
acquired on or after 1 January 2014 are exempt if held for three years.
Gains on the sale of shares in a limited liability company are exempt if held for
five years.
No tax is payable if taxable sales of securities do not exceed CZK 100,000 in a tax year.
Gains from the sale of non-business real estate are exempt if the property has
been held by the taxpayer for at least five years prior to the sale. Gains from the
sale of a dwelling are also exempt if it was used as the taxpayers main residence
for at least two years. If it was used for less than two years, the exemption applies
if the gains are used for the taxpayers housing in the future.
The income of individuals is subject to a flat tax rate of 15 percent plus 7 percent
(the solidarity tax increase) for income (gross salary) in excess of the maximum
annual assessment base for social security contributions (CZK 1,245,216 in 2014).
The solidarity tax increase should only apply until 2015. The tax on employment
income is calculated on the basis of super-gross salary, which is the gross
salary increased by social security and health insurance contributions payable by
the employer. Foreign employment income that is taxable in the Czech Republic
is increased by deemed contributions of 34 percent regardless of the amount of
social security and health insurance contributions actually paid. Thus, the effective
tax rate is not 15 percent (or 22 percent for persons subject to the solidarity tax)
but a higher rate, depending on the income level.
Dividends and other income are taxed separately and are subject to 15 percent
withholding tax at source.
Foreign source investment income should be included in the tax base and is
subject to a flat tax rate of 15 percent.
Business income or other income of the self-employed may be reduced by actual
expenses or by an optional lump-sum deduction ranging from 30 to 80 percent of
gross income. The annual lump-sum deduction is limited to a maximum
of CZK 600,000 for rental income and CZK 800,000 for non-business income.
Employees are subject to tax on income in all forms, whether in cash or in
kind. In particular, benefits, such as the provision of a car which is available for
private use, are taxable. It is not possible to deduct an employees social security
and health insurance contributions from the tax base. However, items such as
mortgage interest, payments for supplementary pension insurance with state
support, private life insurance premiums, and donations can be deducted if certain
conditions are met. Employer contributions to private pension schemes in excess
of CZK 30,000 are taxable for the employee.
Before 2013, the Czech pension system comprised two pillars a mandatory
pay-as-you-go pension system run by the government (the first pillar) and a voluntary
additional pension system administered by commercial insurance companies (the third
pillar). From 1 January 2013, a second pillar has been added. Employees who opt for
the second pillar pay 5 percent of their salary to an account at a private pension fund
and their obligatory payments to the first pillar are reduced by 3 percent.
There are no special provisions dealing with employee share option schemes, so
that gains realised on exercising an option are regarded as taxable income. It is
generally accepted, however, that no gain arises on the granting of an option.
The salaries of employees are usually subject to the deduction of tax at source on
a monthly basis, with annual reconciliations. It is possible to second expatriate staff
through a permanent establishment of a foreign employer that, although taxable,
is not registered in the Commercial Register. In such a case, there is no liability to
withhold tax. Instead, the employees themselves are liable to file tax returns and
pay tax, normally in quarterly instalments.
There is a further possible tax treatment of the employees of foreign companies,
the deemed employer rule, which is essentially an anti-avoidance provision.
The rule may apply where the employees of a foreign employer work in the Czech
Republic under the control of a Czech person, which pays a fee to the foreign
employer for their services. In such a case, the Czech person is regarded as the
employer for tax purposes and has to account for the employees income tax.
In practice, this rule is rarely applied to employees of bona fide foreign investors,
unless they choose to use it as an alternative to the permanent establishment
described above.
Resident and non-resident individuals may claim a basic personal tax allowance
of CZK 24,840 unless they are in receipt of a state pension on the first day of the
tax year. Various other credits are granted to a resident, such as a tax credit of
CZK 24,840 for a spouse living in the taxpayers household, if the spouses annual
income does not exceed CZK 68,000 and CZK 13,404 for a dependent child.
Limitations apply to individuals with business or rental income, who claim flat
rate expense deductions. The allowances are also granted to residents of the EU,
Norway and Iceland if at least 90 percent of their income is derived from sources
in the Czech Republic. The amount of income from foreign sources should be
confirmed by the foreign tax authorities in the state of residence.
Social security contributions, where payable, amount to 45 percent of an
employees salary. This consists of the employees contribution of 11 percent
and the employers contribution of 34 percent, made up as follows.
Employer (%)
Pension
21.5
Employee (%)
6.5/8.5*
Sickness insurance
2.3
0.0
Unemployment insurance
1.2
0.0
Health insurance
Total
9.0
34.0
4.5
11.0/13.0*
* for employees participating in the second pillar of the pension system
The maximum annual assessment base for social security premiums in 2014
is CZK 1,245,216. There is no cap on health insurance premiums. Social
security and health insurance contributions must be paid on a monthly
basis. Social security contributions must be paid until the aggregate of the
monthly assessment base exceeds the maximum annual assessment base.
Upon achieving this limit, the employer should stop paying social security
contributions. The assessment base is very similar to the tax base.
Foreign persons under local employment contracts are subject to Czech social
security. Foreign persons employed by a non-Czech employer, where there
is a social security treaty between the Czech Republic and the country of the
employer, are subject to Czech social security unless, under the terms of the
treaty, they can remain in the social security system of the home state.
The authorities take the view that expatriate employees of EU employers are
subject to Czech social security based on the EU social security rules. In practice,
this means that expatriates are liable to Czech contributions, unless they remain
in their home state system under EU rules.
Tax on the acquisition of immovable property

With effect from 1 January 2014, real estate acquisition tax replaced the former
real estate transfer tax. The tax liability arises when the transfer of the ownership
of real estate is registered in the land register. The tax is payable by the
transferor, although the parties can agree that it is paid by the acquirer.
The tax rate is 4 percent of the tax base. The tax base is the higher of the agreed
price and the reference value. The reference value is calculated by tax authorities
based on prices for similar transactions. If tax authorities cannot calculate
a reference value, the tax base is the higher of the agreed price and 75 percent
of the value assessed by an expert. If real estate is transferred as part of an
enterprise, the tax base is based on an expert valuation.
The taxpayer must submit a tax return by the end of the third month following
the month in which the transfer is registered. The tax is due by the same
deadline. The tax declared in the return is considered as a prepayment and is
subject to review by the tax authorities.
Inheritance and gift tax

From 1 January 2014, gift and inheritance taxes have been abolished and the
taxation of such income is governed by the Income Taxes Act. Gifts are taxable
unless the donor is a qualifying spouse or close relation and are subject to a flat
rate of 15 percent for individuals and 19 percent for companies. No tax is payable
on inherited property.
Tax on immovable property

Tax on immovable property is payable by the owners of immovable property
situated in the Czech Republic. Different rates apply to land and buildings.
The property tax on buildings used for business purposes is based on the area of
the buildings, using the rates below.
CZK/m2
Residential and agricultural
Industrial
10
Other business
10
An additional charge of CZK 0.75 per square metre is levied for each storey
(above the ground floor) of a building if the area of the storey exceeds one third
of the area of the ground floor.
Real estate tax on agricultural land is 0.75 percent of the deemed value. Special
rates apply for forests, lakes and ponds. For other types of land, the tax is based
on the area, and the rate is CZK 2 per square metre for building plots, CZK 5 per
square metre for improved land surface used for business purposes and
CZK 0.20 per square metre in other cases.
For some types of property, the rates are multiplied by a coefficient ranging
from 1 to 5 depending on the location of the property. In addition, the tax can be
increased by another coefficient, varying from 2 to 5, based on the decision of
the relevant municipality.
Real estate tax is deductible for corporate income tax purposes.
International tax issues

Companies having their seat in the Czech Republic are subject to Czech tax on
their worldwide income. The companys seat is defined as the registered office
or the place where the effective management of the company is located. Such
companies are referred to as Czech residents.
Other companies (non-residents) are only subject to tax on their Czech source
income, subject to the provisions of any double taxation treaties.
Foreign source income of Czech resident companies is generally taxable in the
Czech Republic, subject to the provisions of any double taxation treaties. The
income of foreign branches or permanent establishments of Czech residents
is included in taxable profit. Dividends from foreign companies are a separate
source of income, which is taxable at a special rate, currently 15 percent, unless

the Parent-Subsidiary Directive applies.
Under certain double taxation treaties, however, the foreign income of Czech
residents is exempt from Czech tax. In such cases, expenses related to that
income are not tax deductible. Credit for foreign taxes on income that is also
subject to Czech tax is only available if there is a double taxation treaty with the
other state. Otherwise, the foreign tax can only be treated as an expense.
The main types of Czech source income for non-residents are:
income of a permanent establishment in the Czech Republic
income from dependent activity (employment) performed in the Czech Republic
income from services provided in the Czech Republic
income from the sale or use of real estate situated in the Czech Republic
royalties, dividends and other profit distributions, interest, and lease rentals
income from the transfer of shares in Czech resident companies, which is not
tax exempt under domestic legislation
income from the sale of a business located in the Czech Republic.
These tax liabilities are to some extent mitigated by tax treaties, where
applicable. In particular, where there is a treaty:
income from services can usually be taxed only if the service provider has
a permanent establishment in the Czech Republic
income from employment can usually be taxed only if the employee is employed by
a Czech company or a Czech permanent establishment of a foreign company, or if
he or she spends more than 183 days in the Czech Republic.
Income liable to tax is generally subject to withholding taxes at a rate of
15 percent. The rate is increased to 35 percent if the income is paid to residents
of countries which have not signed a double taxation treaty with the Czech
Republic, when no arrangement is in place for the exchange of information on
tax matters.
Withholding tax is a final tax that is generally reduced by double taxation
treaties. Residents of other EU and EEA countries can file a tax return in respect
of some types of income (e.g. interest, royalties, freelance work) subject to
withholding tax and claim a deduction for any related expenses (this does not
apply for withholding tax from dividends). In such a case, the withholding tax is
considered an advance payment. This may result in a reduction in the tax burden
as withholding tax is calculated on a gross basis.
The EU Parent-Subsidiary Directive has been implemented in the Czech

Republic, which means that dividends paid by a Czech subsidiary to a parent
company that is tax resident in an EU member state may be exempt from
withholding tax. These provisions also apply to dividends paid between Czech
companies and dividends paid to Swiss, Norwegian and Icelandic corporate
shareholders.
The EU Interest and Royalties Directive has also been implemented in the Czech
Republic. As a result, interest and royalties paid to some associated companies
resident in the EU, Switzerland, Norway and Iceland are generally exempt from
withholding tax (subject to advance clearance procedures).
The Czech Republic has implemented the EU Savings Directive, which allows
the provision of information about interest paid by Czech financial institutions to
non-residents.
Other types of income paid to non-EU or EEA residents, notably from permanent
establishments, real estate and sales of securities, etc., are subject to
withholding tax which is not the final tax, but a prepayment in respect of the
ultimate tax liability. This tax is generally levied at the rate of 10 percent
(1 percent for sales of securities or payments for receivables purchased from
third parties), but may be reduced by prior negotiation with the tax authorities.
The Czech Republics double taxation treaties are listed below.
Dividends
(%)
Lower rate on
dividends (min.
percent holding)
(%)
Interest
(%)
1.1.1997
15
5 [25]
5/01
10
1.1.2010
10
10/52/01
10/53
Country of
residence
of recipient
Effective
date
1.
Albania
2.
Armenia
No.
Royalties (%)
3.
Australia
1.1.1996
15
5 [20]
10
10
4.
Austria
1.1.2008
10
0 [10]
5/03
5.
Azerbaijan
1.1.2007
5/101
10
6.
Bahrain
1.1.2013
10
7.
Barbados
1.1.2013
15
5 [25]
5/01
10/53
8.
Belgium
1.1.2001
15
5 [25]
10/01,2
5EQ/54/04
5
10/03
9.
Belarus
1.1.1999
10
5 [25]
5/01,2
10.
Bosnia and
Herzegovina
1.1.2011
Dividends
(%)
Lower rate on
dividends (min.
percent holding)
(%)
Interest
(%)
Royalties (%)
1.1.1991
15
15/10/01
25TM/15
1.1.2000
10
10/01
10
10
No.
Country of
residence
of recipient
Effective
date
11.
Brazil
12.
Bulgaria
13.
Canada
1.1.2003
15
5 [10]
10/0
14.
China
1.1.2012
10
5 [25]
7.5/01
10
15.
Croatia
1.1.2001
10
16.
Cyprus
1.1.2010
0 [10]
10/03
17.
Denmark
1.1.2013
15
0 [10]
10/03
18.
Egypt
1.1.1996
15
5 [25]
15/01
15
19.
Estonia
1.1.1996
15
5 [25]
10/01
10
10
20.
Ethiopia
1.1.2009
10
10/01
21.
Finland
1.1.1996
15
5 [25]
10/5OL/1FL/03
22.
France
1.1.2006
10
0 [25]
10/5EQ/03
23.
Georgia
1.1.2008
10
5 [25]
8/01
10/5EQ/03
24.
Germany
1.1.1984
15
5 [25]
25.
Greece
1.1.1990
15
10/01
10/03
26.
Hong Kong
1.1.20135
10
27.
Hungary
1.1.1995
15
5 [25]
10
28.
Iceland
1.1.2001
15
5 [25]
10
1
10
29.
India
1.1.2000
10
10/0
30.
Indonesia
1.1.1997
15
10 [20]
12.5/01
12.5
31.
Ireland
1.1.1997
15
5 [25]
10
32.
Israel
1.1.1995
15
5 [15]
10/01
33.
Italy
1.1.1985
15
5/03
34.
Japan
1.1.1979
15
10 [25]
10/01
10/03
10/01
10
10
35.
Jordan
1.1.2008
10
36.
Kazakhstan
1.1.2000
10
10/0
37.
Kuwait
1.1.2005
0 [25]6
10
1
38.
Latvia
1.1.1996
15
5 [25]
10/0
10
39.
Lebanon
1.1.2001
5EQ/10
40.
Lithuania
1.1.1996
15
5 [25]
10/01
10
41.
Luxembourg
1.1.1993
15
5 [25]
10/03
Dividends
(%)
Lower rate on
dividends (min.
percent holding)
(%)
1.1.2003
15
5 [25]
10
1.1.1999
10
12/01
12
1.1.1998
1.1.2003
10
10/01
10
Moldova
1.1.2001
15
5 [25]
10
Mongolia
1.1.1999
10
10/01
10
48.
Morocco
1.1.2007
10
101
10
49.
Netherlands
1.1.1975
10
0 [25]
50.
New Zealand
1.1.2009
15
10/01
10
51.
Nigeria
1.1.1991
15
12.5 [10]
15/01
15
52.
Norway
1.1.1980
15
0 [10]
10/5EQ/03
53.
Panama
1.1.2014
10
10/52/01
10
54.
Peoples
Republic of
Korea
1.1.2006
10
10/01
10
55.
Philippines
1.1.2004
15
10 [10]
10/01
10/157
56.
Poland
1.1.2013
5/01,2
10
No.
Country of
residence
of recipient
Effective
date
42.
Macedonia
43.
Malaysia
44.
Malta
45.
Mexico
46.
47.
Interest
(%)
Royalties (%)
57.
Portugal
1.1.1998
15
10 [25]
10/0
10
58.
Romania
1.1.1995
10
7/01
10
59.
Russia
1.1.1998
10
10
60.
Saudi Arabia
1.1.2014
61.
Serbia and
Montenegro
1.1.2006
62.
Singapore
1.1.1999
63.
Slovakia
1.1.2004
64.
Slovenia
1.1.1999
65.
South Africa
1.1.1998
10
10
1
10/53
10/0
10
15
5 [10]
10/03
15
5 [25]
5/01
10
15
5 [25]
10
66.
South Korea
1.1.1995
10
5 [25]
10/0
10/03
67.
Spain
1.1.1982
15
5 [25]
57/03
10/01
10/03
68.
Sri Lanka
1.1.1979
15
Dividends
(%)
Lower rate on
dividends (min.
percent holding)
(%)
Interest
(%)
Royalties (%)
1.1.1981
10
0 [25]
5/03
Switzerland
1.1.1996
15
0 [10]
5SPEC
71.
Syrian Arab
Republic
1.1.2010
10
10/01
12
72.
Tajikistan
1.1.2008
7/01
No.
Country of
residence
of recipient
Effective
date
69.
Sweden
70.
8/01
73.
Thailand
1.1.1996
10
74.
Tunisia
1.1.1992
15
10 [25]
12/01
15/53
75.
Turkey
1.1.2004
10
10/01
10
76.
Ukraine
1.1.2000
15
5 [25]
5/01
10
77.
United Arab
Emirates
1.1.1998
0 [25]6
10
78.
United
Kingdom
1.1.1992
15
5 [25]
10/03
79.
United States
1.1.1994
15
5 [10]
10/03
80.
Uzbekistan
1.1.2001
10
5 [25]
5/01,2
10
81
Venezuela
1.1.1998
10
5 [15]
10/01
12
10
82
Vietnam
1.1.1999
10
10
10
157/109/53
10/0
Notes:
1 Exemption for certain government loans or investments
2 Exemption for interest on bank loans and credits

3 Cultural royalties
4 The 0-percent rate applies to cultural royalties (the rate of 10 percent is reduced to 0 percent from 1 January 2004
following the conclusion of the treaty between the Czech Republic and the Slovak Republic most-favoured
nation treatment); the 5-percent rate applies to industrial royalties and know-how (the treaty rate of 10 percent
is reduced to 5 percent from 1 January 2008 following the conclusion of the treaty between the Czech Republic
and Austria most-favoured nation treatment)
5 For Ethiopia the effective date is 8 July 2008, for Hong Kong 1 April 2013
6 The recipient of dividends is a government or company which is at least 25 percent government-owned
7 Including royalties arising from any copyright of cinematographic films and films or tapes for television or
radio broadcasting
8 The 10-percent rate only applies to interest received by financial institutions, including insurance companies;
for other interest payments there is no limitation under the treaty and the domestic rate applies
9 Industrial royalties
EQ Royalties for using equipment

TM Trademark royalties only
OL Operating lease
FL Financial lease
SPEC 5-percent withholding tax under Article 2 of the Protocol to the Czech-Swiss Double Taxation Treaty
Beneficial ownership concept

A number of double taxation treaties concluded by the Czech Republic expressly
limit their benefits to the beneficial owners of income.
In situations where an investor in the Czech Republic is a foreign entity or a trust
that is tax transparent under its own tax laws, the Czech Republic will generally
honour its transparency for the application of the Income Taxes Act and double
taxation treaties. The income paid from Czech investments will normally be
treated as the income of the ultimate beneficial owner of the investment via the
transparent entity.
Tax administration
Tax administration is mainly governed by the Tax Code with specific procedures
provided by other Acts.
All Czech resident companies, limited partnerships, and permanent
establishments of non-resident companies must file tax returns. This does
not apply to general partnerships, where the partners declare their share of
partnership profits.
All individuals with annual taxable income exceeding CZK 15,000 must file tax
returns unless the income is tax exempt or subject to withholding tax. A return
must also be filed by any individual who is liable to the solidarity tax. This means
that, in general, low paid employees of Czech companies or branches of foreign
entities are not required to file returns unless they have other taxable income.
Anyone who claims a tax loss must also file a return.
The deadline for the submission of a tax return is three months from the end of
the taxable period. For all taxpayers, with the exception of legal entities that have
adopted a non-calendar year-end, the taxable period is the calendar year, and the
tax return deadline is therefore 1 April. This deadline is extended by a further

three months if:
the taxpayer is subject to a statutory audit, or
the taxpayer engages a registered tax advisor to submit the tax return on its behalf.
Except for withholding tax, income tax is collected during the year by a system of
prepayments based on the previous years liability. The final deadline for settling
the liability is the same as for the submission of the return. The tax is treated as
paid when it is received by the tax authority.
The tax authority has the power to carry out tax inspections in order to establish
or examine the tax base or other circumstances decisive for the correct
determination of the tax liability.
Tax may not be assessed or additionally assessed after three years have elapsed
from the deadline for filing the ordinary tax return. However, the deadline for
assessment of additional tax may be extended to a maximum of 10 years under
certain circumstances, such as filing an additional tax return or a tax audit taking
place. In the event of some tax-related crimes, additional tax may be assessed
regardless of the fact that the period for tax assessment has ended.
Where a taxpayer has declared a loss, the period in which a tax audit may be
carried out is extended by the period during which the loss may be utilised.
Since losses may be carried forward for up to five years, if extended deadlines
apply, an audit can be carried out up to 15 years after the tax return is due.
If an appeal is lodged against an assessment, the payment of any additional tax
is deferred until the payment order is legally effective, but interest continues to
be calculated on the outstanding amount.
Interest on overdue tax is assessed at the Czech National Bank repo rate plus
14 percent starting on the fifth working day following the due date for the first
five years; no interest accrues after this date. Where additional tax is assessed
by the tax authorities, a penalty of 20 percent of the additional tax is levied.
If a VAT refund is reduced, the penalty is 20 percent of the reduction. If a tax
loss is reduced, 1 percent of the reduction is payable as a penalty. If the taxpayer
corrects the tax base in an additional tax return, only interest on overdue tax
is payable.
The Czech VAT system is based

on the harmonised principles
of EU Directive 2006/112.
Value added tax (VAT)

VAT rates
VAT registration
Persons identified for VAT
Reporting requirements
Recovery of input VAT
Other notes
Customs duties
Excise duties
Energy taxes
79
79
80
80
81
82
83
83
84
84
Chapter 8
Indirect taxes
Value added tax (VAT)
The Czech Value Added Tax Act is based on the general principles
of EC Directive 2006/112.
VAT is generally due on any supply of goods or services, intra-community acquisition
of goods and import of goods with the place of supply in the Czech Republic.
VAT rates
The standard VAT rate is 21 percent (effective from 1 January 2013). There
is a reduced rate of 15 percent, which applies to e.g. food products, books,
brochures, pharmaceuticals, newspapers and magazines, public transport
services, social residential housing construction, and the transfer of social
residential houses, unless exempt.
Exports and intra-community supplies of goods, as well as the international
transport of goods relating to exports or imports of goods, are zero-rated.
Certain supplies of goods and services are exempt from VAT, for example:
insurance and financial services
postal services
education
health and welfare services
transfer and financial leasing of immovable property under certain conditions, and
renting immovable property (apart from short-term lease, the lease of parking
spaces and the lease of safe deposit boxes).
VAT registration
VAT registration is obligatory for a taxable person established in the Czech
Republic, whose turnover for the preceding 12 consecutive months exceeds
CZK 1 million (CZK 750,000 from 1 January 2015). There are also other situations
that can lead to obligatory VAT registration (e.g. the purchase of a going concern
from a VAT payer, the transfer of the assets of a dissolved or spun-off entity that
is a VAT payer to a taxable person).
A taxable person, who is not established in the Czech Republic, becomes
a Czech VAT payer if they make a specific transaction with the place of supply in
the Czech Republic, such as a zero-rated supply of goods to another EU member
state or a Czech local taxable supply (supply of goods, provision of services) on
which they have to account for VAT. No registration threshold applies.
Taxable persons (both established and not established in the Czech Republic)
can ask for voluntary VAT registration.
A group of related parties established in the Czech Republic, or who have a VAT
establishment in the Czech Republic, can register as a single VAT payer (group
registration).
Persons identified for VAT

A taxable person, who is not a VAT payer, can become a person identified for
VAT if they purchase a specific type of supply, where the place of supply is in the
Czech Republic, e.g. they acquire goods from another EU member state, or they
supply services where the place of supply is determined in another EU member
state under the general rule. The person identified for VAT is obliged to account
for VAT on the received supply, however, they are not entitled to claim relating
input VAT.
Reporting requirements
VAT returns
In general, VAT returns have to be submitted electronically on a monthly basis.
Under certain circumstances, VAT payers can opt for a quarterly period. However,
a quarterly period is not possible for VAT groups and taxable persons whose
turnover exceeds CZK 10,000,000 in the previous calendar year.
VAT returns must be submitted by the 25th day of the month following the tax
period. VAT payers who are not established in the Czech Republic and who do
not have a VAT establishment in the Czech Republic, and persons identified
for VAT, are only required to submit VAT returns for VAT periods in which they
performed taxable or zero-rated transactions.
VAT must be paid by the due date for submitting the VAT return. If there is
excess input VAT, VAT credit should be paid to the VAT payer within 30 days
of the deadline for submitting the VAT return.
There is a penalty for non-submission/delay in submission of a VAT return
(max. CZK 300,000) and penalty interest applies for the late payment of VAT
(14 percent p.a.).
EC Sales Lists
An EC Sales List must be completed if a VAT payer or person identified for VAT
(where applicable):
1. supplies goods from the Czech Republic to another EU member state to
a person registered for VAT in another EU member state, or
2. moves its own goods from the Czech Republic to another EU member state, or
3. acts as the intermediary in a triangular transaction between VAT registered
traders in other EU member states, or
4. provides a service to a customer established in another EU member state,
where the place of taxable supply is determined in that EU member state

under the general rule.
The EC Sales List should be submitted electronically on a monthly basis, within
25 days of the end of the month in which the supply takes place. Quarterly VAT
payers, who only provide services as described in point 4 above, may submit
EC Sales Lists on a quarterly basis.
Intrastat declarations
Businesses that dispatch goods to, or receive goods from other EU member
states that exceed relevant annual thresholds (CZK 8 million for dispatches or
CZK 8 million for goods received) must complete and file an Intrastat declaration.
Intrastat declarations are submitted on a monthly basis, by the 12th working
day of the month following the month for which the declaration is filed. Intrastat
declarations must be submitted electronically. A penalty of up to CZK 1 million
may be imposed for failing to submit an Intrastat declaration.
Recovery of input VAT

In general, a Czech VAT payer is entitled to deduct input VAT in respect of
received supplies that are used for the VAT payers business activity. Input VAT
can be claimed in three years after the end of the tax period in which the taxable
supply was made. A VAT payer must have a VAT invoice to exercise its right to
deduct input VAT (VAT document).
A VAT payer is generally not entitled to deduct input VAT on taxable supplies
used for VAT exempt supplies, representation (entertainment) or non-business
purposes.
A partial VAT deduction could be claimed in respect of taxable inputs related to
both types of supplies, i.e. those qualifying for deduction of input VAT and those
not qualifying for deduction (e.g. exempt supplies or non-business use).
The Czech Republic has implemented the general provisions of EU directives
in respect of VAT refunds for entities registered for VAT purposes in other
EU member states or non-EU businesses. VAT incurred in the Czech Republic
is recoverable under the same conditions that apply to Czech VAT payers.
The application for a VAT refund should be filed electronically in the state where
the taxable person has a registered office or place of business. The application
must be submitted by 30 September of the year following the year in which the
VAT was incurred.
Non-EU businesses can claim refunds of Czech VAT by submitting a written
application to the Tax Authority for Prague 1. Refunds are only made on the basis
of reciprocity (currently applicable only for Switzerland, Norway and Macedonia).
Other notes
Local reverse charge for selected transactions
The reverse charge mechanism applies for certain local taxable supplies.
This concerns supplies of gold, scrap and waste, emission allowances and supplies
of construction and assembly work as specified by the Czech Value Added Tax Act.
Specific compliance obligations are linked to supplies subject to local reverse charge.
Bad debt relief
A VAT payer is allowed to claim a VAT refund for uncollectible receivables
(bad debts). A VAT refund should be possible for certain receivables after
maturity, where the debtor is under bankruptcy proceedings.
Liability for payment of VAT
A Czech VAT payer, as the recipient of a taxable supply, can be liable for VAT from
the received supply if it is unpaid by the supplier. The tax authority may demand
VAT payment if:
a supplier intentionally fails to pay VAT and the customer knows or should
know of this fact
the price for the received taxable supply is clearly different from an arms
length price, without business justification
consideration for a taxable supply is remitted to a foreign account
the supplier is identified by the tax authority as an unreliable VAT payer
the payment is made to a bank account which is not published in the tax
authoritys register (liability is only applied if the payment exceeds CZK
700,000, including VAT)
fuel is supplied by a fuel distributor which is not published as a registered
distributor of fuel at the moment of taxable supply.
Customs duties
The Czech Republic has been a member of the EU since 1 May 2004, and customs
matters are therefore governed by EU law. Customs duties are payable on goods
imported from outside the EU. Customs rates depend on the type of goods.
The Czech Republic has an Inward Processing Regime (IPR), which effectively
allows a Czech manufacturer to import, process and export goods exempt of
customs duty and VAT.
Excise duties
Excise duty is payable on hydrocarbon fuels and lubricants, wine, spirits, beer,
and tobacco products. Excise duties are fixed at a set amount per unit for each
group of products.
The Czech Act on Excise Duty implements EU rules governing the production
of excise goods and their release into free circulation. They must generally be
produced in a tax warehouse. Once removed from the tax warehouse, they must
be released into free circulation and excise duty must be paid. The regime of the
suspension exemption can be applied if excise goods are transported to another
EU member state or exported.
Energy taxes
Energy taxes include tax on natural gas and other gases, electricity and solid
fuels. Only supplies of such products delivered within the Czech Republic
are subject to tax. The rules for energy taxes are harmonised within the EU.
The rates of energy taxes are fixed at a set amount per unit for each group of
products.
An exemption from energy tax may be claimed under certain conditions, e.g. if
the energy is used in metallurgical or mineralogical processes, the electricity is
generated from renewable sources or natural gas and other gases are used for
the production of heat for households and heating facilities.
The extent of disclosures in

Czech accounting legislation is
considerably less demanding
compared to IFRS. IFRS can/must
be used under specific conditions.
Financial reporting
Auditing requirements
87
89
Chapter 9
Financial reporting and audit

Financial reporting
Main features of financial reporting
Czech accounting rules are close to International Financial Reporting Standards
(IFRS), although there are some significant differences. In particular, Czech
accounting rules are much less detailed compared to IFRS.
The Act on Accounting serves as the main framework, and detailed guidance is
provided in Decrees on Double-Entry Accounting and Czech Accounting Standards.
Different Decrees and Standards specify the rules and standards for different
types of corporations (accounting units), e.g. companies, sole entrepreneurs,
banks, insurance companies and non-profit organisations, as well as
municipalities and institutions financed by the state.
All corporations recorded in the Commercial Register are obliged to use
double-entry bookkeeping. Some specific accounting units that are not
recorded in the Commercial Register are permitted to keep simplified
accounting records (tax evidence).
All accounting records must be in Czech.
All accounting records must be kept and financial statements presented in
Czech crowns (CZK).
It is possible to specify a business year-end other than 31 December.
A physical count of inventory and fixed assets is required annually.
The general structure of accounts must be in accordance with the standard
chart of accounts.
Statutory financial statements consist of a balance sheet, an income statement
(minimally classified by nature) and notes. They may also include a cash-flow
statement and a statement of changes in equity.
The exact layout, structure and headings of the balance sheet, the income
statement and the cash-flow statement are set in prescribed templates, and
minimum disclosures in notes are prescribed in the Decrees. The extent of
disclosures in Czech accounting legislation is considerably less demanding
compared to IFRS.
A separate annual report must be prepared by all accounting units that are
subject to a mandatory statutory audit.
All accounting units with shares or bonds publicly listed in the EU must
maintain books and prepare their financial statements in accordance with IFRS,
as adopted by the EU.
All other accounting units may choose to maintain books and prepare their
financial statements in accordance with IFRS if they are consolidated by
a parent, or an ultimate parent company in accordance with IFRS.
All other accounting units may also choose to maintain books and prepare
their financial statements in accordance with IFRS if they have to consolidate,
and if they prepare both stand alone and consolidated financial statements in
accordance with IFRS.
The Act on Accounting requires that consolidated financial statements be
prepared for an accounting unit that is a controlling entity. Subsidiaries and
accounting units over which significant influence is exercised are deemed
consolidated accounting units.
The obligation to consolidate applies to groups that meet at least two of the
following criteria:
the combined turnover (without elimination) exceeds CZK 700 million
the combined assets (without elimination) of the parent company and the
subsidiaries exceed CZK 350 million
the average number of employees during the accounting period was more than 250.
Consolidation is not obligatory where the consolidating entity is part of another
consolidating entity that is governed by the law of an EU member state, and
where specific prescribed conditions have been met.
The above exemption from the duty to prepare consolidated financial
statements does not apply to banks, insurers and reinsurers, and publicly listed
share or bond issuers.
Accounting principles and policies
The going concern, materiality, prudence, matching and consistency principles
must all be observed during the preparation of Czech statutory financial
statements. The true and fair view concept has been fully introduced in the
Czech Republic. The fair value accounting concept has only been implemented in
certain specific areas. The legal form, however, frequently overrides substance.
Common accounting policies include the following.
Fixed assets are stated at acquisition cost and are depreciated over their
expected useful lives. Component accounting is allowed, but not required.
The option to value an investment at cost or at fair value. In this particular case,
fair value is defined as the market price. An adjusted equity method (based on
the net asset amount) can be used if the market price is not available.
Costs of inventories may be accounted for using standard, average, or first-in,

first-out (FIFO) principles. The last-in, first-out (LIFO) method is not permitted.
Goodwill (intangible asset) or an adjustment to acquired fixed assets (tangible
asset) arises on the acquisition and transformation of businesses: the classification
depends on the precise nature of the transaction. Goodwill is most frequently
amortised over 60 months from the date of acquisition. An adjustment to acquired
fixed assets is most frequently amortised over 180 months.
Both realised and unrealised exchange gains and losses arising from monetary
assets and liabilities denominated in a foreign currency are recognised in the
income statement.
There is no concept of finance lease (leased assets are generally treated as
fixed assets by the owner, not by the lessee), unlike the finance lease concept
under IFRS. Finance leases are treated similarly to operating leases.
Deferred tax should be recognised for all timing differences arising between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for taxation purposes. A deferred tax asset is
recognised only to the extent that it is probable that future taxable profits
will be available against which it can be utilised.
Auditing requirements
Audits are compulsory for:
all banks and mutual funds
foundations and certain other non-profit organisations
joint-stock companies that, in both the current and previous accounting period,
meet at least one of the following criteria:
the average number of employees exceeds 50
all other accounting units that meet at least two of the above criteria.
The Act on Auditors defines the responsibility of the Chamber of Auditors, which
is responsible for the authorisation of auditors and for setting the standards for
audits. Audits are carried out in accordance with the International Standards on
Auditing issued by the International Federation of Accountants (IFAC) and relevant
guidance (aplikan doloky) of the Chamber of Auditors of the Czech Republic.
Auditors must be appointed by the general meeting, a supervisory board is
responsible for audit quality supervision, and public interest entities are defined
in the Act. Responsibilities for both public interest entities and their auditors
are stipulated in the Act, e.g. audit committee, lead partner rotation, and
transparency report.
Corporate transactions have become

an important feature of the Czech legal
environment, making it possible for
entrepreneurs and business persons to
expand or restructure their business
activities in the Czech Republic.
Privatisation
Ownership of real estate
Acquisition and disposal of Czech legal entities
Purchase of an enterprise
Contribution to a company
Transformation of a company
Public bid for purchase or exchange of participating
securities issued by a joint-stock company
Takeover bids
Right to buy out participation securities (squeeze out)
Regulation
91
91
92
92
92
93
95
95
96
96
Chapter 10
Corporate transactions
Corporate transactions have become an important feature of the Czech legal
environment, making it possible for entrepreneurs and business persons to expand
or restructure their business activities in the Czech Republic. The process of
mergers and acquisitions itself is primarily regulated by the newly adopted Civil
Code, the Act on Business Corporations, the Act on Takeover Bids, the Act on
Transformations of Business Companies and Co-operatives, accounting and tax
laws, anti-monopoly regulations, and a number of special regulations applicable
to specific sectors, such as banking, insurance and other financial services.
Privatisation
Although it is not currently a hot topic, there are still a number of enterprises
in sectors such as electricity and transport that may be the subject of potential
privatisation by sale to strategic investors. The privatisation process is initiated
by a government decision. All transactions are subsequently carried out by the
relevant ministry, generally through a tender.
Ownership of real estate

There are no restrictions on ownership of real estate in the Czech Republic.
Acquisition and disposal of Czech legal entities

There are also no restrictions for foreign individuals and legal entities to own
a business or hold shares in companies, and they can acquire and sell up to
100 percent of the share capital of a limited liability or joint-stock company.
Likewise, they can also participate in companies with other legal forms.
The transfer of an ownership interest in a limited liability company must be
recorded in the Commercial Register, the shares of certain joint-stock companies
are registered with the Central Securities Depository Prague (i.e. shares that do not
exist in paper form but whose details and ownership is recorded) or deposited in
escrow at the Central Securities Depository Prague, a bank or other entity entitled
to maintain records of investment instruments (this compulsorily applies to all
certificated bearer shares). In the case of shares traded on the regulated securities
market (Prague Stock Exchange and RM System) in the Czech Republic or another
EU member state, the acquirer is obliged to notify the company (the issuer) and
the Czech National Bank (CNB the supervisory body of the capital market)
if its share of the companys voting rights exceeds a certain level. In addition,
if a shareholder acquires a minimum of 30 percent of voting rights and actually
controls the company, it is obliged to bid for the shares of the remaining
shareholders.
Purchase of an enterprise
An acquisition can also be made by purchasing an enterprise or part of it, in
which the buyer acquires rights, assets and liabilities connected with running the
business. The sale and purchase agreement associated with the acquisition must
be approved by the general meeting or shareholders of the company.
Contribution to a company
Another way of securing a share in a business is by making a financial or
non-monetary contribution, where the general meeting of the company must
decide on a new share issue. The increase is registered at the Commercial Court.
In the case of a non-monetary contribution, an independent valuation of the
investment must be submitted by an independent, generally accepted expert,
listed on a special register(s), with some exceptions.
Transformation of a company (merger, transfer of assets

to a shareholder, demerger, change of legal form and
cross-border relocation)
If more entities are controlled by one person, their consolidation is possible or
alternatively a business can be restructured.
In Czech legislation, mergers come under the category of transformation of
a business, which also includes the demerger of a company, transfer of assets to
a shareholder, any change in a companys legal form and cross-border relocation.
Transformation of a business is possible even if the company is in liquidation or
insolvency proceedings. The transformation can be undertaken as a national or
cross-border transaction with legal entities registered in other EU or EEA countries,
including a European Company (Societas Europaea).
Probably the most frequent form of transformation is a merger by acquisition: one
of the companies carries on its activities and the other ceases to exist, and its
assets and liabilities are transferred to the successor company. Another option is
a merger by the formation of a new company: all of the participating companies
cease to exist, and their assets are transferred to a newly established
successor company.
From a financial point of view, carrying forward the tax losses of wound up
companies is generally allowed.
Mergers are carried out on the basis of merger projects, which are subject to
approval by general meetings. Share exchange ratios, the successor companys
registered capital and other possible arrangements applicable after the merger
are key factors in merger projects. If a company merges with its sole shareholder
as the legal successor, the merger will be subject to a simplified legal procedure.
The merger becomes legally effective on the date it is recorded in the Commercial
Register. From a corporate income tax and accounting point of view, the
companies are considered a single entity as of the merger date. The merger date
can be determined either retrospectively or prospectively. In some cases, subject
to the agreement of all shareholders or members, the merger procedure can be
simplified significantly. In the case of mergers of joint-stock companies, there is an
option allowing the voluntary buyout of new shares representing a minority share
in the merging company, if the successor company owns more than 90 percent
of the merging companys voting rights. Should the legal status of shareholders
of any participating company be worsened as a result of the merger, the

successor company has an obligation to buy out these shareholders under certain
circumstances.
Companies with a different legal form can also merge, and the merger may involve
more than two entities.
A number of special regulations apply to cross-border mergers. An important
condition is that the merger procedure must be regulated in the same way as
in the legal systems of the countries in which the participating companies are
registered. The preparatory phase of a cross-border merger is carried out in
accordance with the laws applicable to each of the participating companies,
and the completion process is governed by the laws of the country where the
successor company has its registered office.
The transfer of assets to a shareholder is a legal form of company transformation,
where a shareholder owning more than 90 percent of the companys registered
capital, also representing more than 90 percent of the companys voting rights,
may transfer the companys assets to itself, provided it has obtained the consent
of the general meeting; at the same time it has a duty to fairly compensate all
other minority shareholders.
A company can be demerged (divided) through:
1. demerger by the formation of new companies
2. demerger by acquisition
3. spin-off connected with the formation of new companies
4. spin-off connected with acquisition, or
5. a combination of the options mentioned under either 1 or 2, or under 3 and 4.
Upon demerger of a company by the formation of new companies or by
acquisition, the company being demerged ceases to exist, without liquidation,
while it does not cease to exist on demerger by spin-off.
Czech legislation allows a company to change its legal form, whereby the company
does not cease to exist, but only changes its internal legal position and structure.
Under certain conditions stipulated by Czech legislation, a foreign company with its
registered office in another EU or EEA country can relocate to the Czech Republic
and a Czech company can relocate to another EU or EEA country.
Public bid for purchase or exchange of participating

securities issued by a joint-stock company
Should someone (an entity or individual) intend to make an offer to more than
100 shareholders or the volume of requested securities exceeds 1 percent of the
issue of the regulated market, the offer must be made in the form of a public bid.
If a public bid is required by law, the offer must correspond to the value of the
participating securities. If the securities are traded on the regulated market, the
bidder must submit an offer and provide evidence to the CNB that consideration
is adequate.
Takeover bids
Voluntary takeover bids
For joint-stock companies traded on the regulated market, an investor can make
a public offer to the shareholders, if the bid allows it to gain control over the
company. The bid is binding for no less than four weeks. All shareholders must be
treated equally; the statutory bodies of the target company shall maintain neutrality
and are obliged to inform trade unions or other employee representatives. Under
the breakthrough rule, the restriction regarding the transferability of listed
securities or settlements between shareholders and/or the target company
may be broken within the duration of the takeover bid, with the approval of the
target companys general meeting. During the bids validity period, the bidder can
increase consideration or prolong the validity. In addition, another person may
make a counter bid during the validity period of the first bid. Takeover bids may
only be published with the prior consent of the CNB.
The Act on Takeover Bids also deals with a situation where the target company is
registered in the Czech Republic, but its shares are traded on the foreign regulated
market, and where the target company has its registered office in a foreign
country, but its shares are traded on the Czech regulated market.
Obligatory takeover bids
An investor acquiring a minimum of 30 percent of the voting rights in a target
company traded on the European regulated market, and who actually controls
the company, must offer to buy out other shareholders within 30 days of the
acquisition (obligatory takeover bids). Consideration can be provided in cash,
shares or a combination of both. Minimum consideration must correspond to
the highest price for which the investor acquired shares in the target company in
the 12 months before the takeover bid obligation arose. If such a price cannot be
determined, minimum consideration must correspond to the weighted average of

prices for which the shares were traded on the European regulated market during
the six months before the obligation arose. An obligatory takeover bid may be
published after its approval by the CNB.
Obligatory takeover bids are also required if a company decides to displace its
shares from trading on the European or other foreign regulated market, or changes
the nature of its shares or their transferability.
Right to buy out participation securities (squeeze out)

A shareholder owning securities representing more than a 90-percent share of
the voting rights of a joint-stock company (major shareholder) is entitled to ask
the board of directors to convene a general meeting to decide on the transfer of
all the other participating securities owned by minority shareholders (a squeeze
out of minority shareholders). The general meeting of the company approves the
squeeze out by paying them adequate compensation on the basis of an expert
valuation. Should the shares be traded on the European regulated market, instead
of an expert valuation, justification of compensation and the prior consent of the
CNB is required.
On the other hand, the minority shareholder has the right to sell its shares to the
major shareholder as defined above.
Regulation
With regard to mergers and acquisitions, the interests of minority shareholders
are protected as companies are obliged to ensure early notification and, for the
majority of transactions, the opinion of an independent expert is required to
determine whether the parameters of the transaction, in particular the price, are
fair and reasonable. In the Czech Republic, mergers and acquisitions are also
regulated by special legal measures. For example, for a transaction to come into
effect in the banking and insurance sector, the appropriate authorities (the CNB
and the Ministry of Finance) must give their prior consent to a contract on the
merger or acquisition of a bank or insurance company.
Mergers and acquisitions also fall within the jurisdiction of the Office for the
Protection of Competition. Its permission is required if:
the aggregate net turnover of the participants in a transaction in the Czech
Republic for the prior accounting period exceeded CZK 1.5 billion and at least
two of the merging companies each recorded a net turnover of more than
CZK 250 million in the Czech Republic for the same period, or
one or more of the participants in the transaction had net turnover in the Czech
Republic of at least CZK 1.5 billion in the previous accounting period and the
worldwide net turnover recorded by the other participant exceeded
CZK 1.5 billion for the same period.
The Czech Republic offers many places

famous for their architectural heritage,
numerous museums, theatres, cinemas,
galleries and concert halls, and a wealth
98 sporting
I Investment in opportunities.
the Czech Republic
of
Chapter 11
Living in the Czech Republic

The Czech Republic enjoys the status of an advanced democracy and is a country
with a free-market economy. After 1989, it went through profound political and
economic reform, including a redefinition of the nation-state, and has provided
a stable environment for its citizens ever since.
Czech foreign policy is pursued in an environment consisting of international
organisations and institutions. The Czech Republic is a member of:
the European Union (EU)
the Council of Europe
the North Atlantic Treaty Organisation (NATO)
the Organisation for Economic Co-operation and Development (OECD)
the United Nations
the International Monetary Fund
the International Labour Organisation
the World Trade Organisation
and others.27
Modern history and government
The Czech Republic was under communist rule from 1948 until November 1989,
when the Velvet Revolution took place. The communist party relinquished
political power and the Czech Republic has enjoyed a multi-party democratic
political system ever since.
In 1989, Vclav Havel was elected head of state,
in 2003 he was succeeded by Vclav Klaus,
in 2013, Milo Zeman was elected president.
27 Ministry of Foreign Affairs, lenstv esk republiky v mezinrodnch organizacch; at:

http://www.mzv.cz/jnp/cz/zajimave_odkazy/mezinarodni_organizace.html
Until 1993, the Czech Republic was part of a federation with Slovakia, which
constituted the former Czechoslovakia. Peaceful negotiations concerning the
division of the country led to an agreement that the state of Czechoslovakia would
cease to exist as of 1 January 1993.
Today, the countrys official name is the Czech Republic, and it is a parliamentary
republic. Parliament is elected by universal suffrage. The lower house
(the Chamber of Deputies) consists of 200 representatives and is elected on
the basis of a proportional representation system. The upper house (the Senate)
consists of 81 members and is elected on the basis of a plurality system. Political
parties must pass a five-percent threshold to win seats in Parliament.
Geography and climate
The Czech Republic is located in the geographical heart of Europe, close to most
major Western European economic centres. It shares borders with Austria,
Germany, Poland and Slovakia. The Czech Republic has an area of 78,864 square
kilometres (approximately 30,500 square miles) and consists of three distinct
regions: Bohemia in the west, and Moravia and part of Silesia in the east.
The climate is continental, with hot, short summers and frequently cold winters;
rainfall is generally moderate.
Population
According to the latest statistics, the population of the Czech Republic is
10.5 million (as of 30 September 2013). Population density is around 133 per square
kilometre and most inhabitants live in towns and cities. Prague, the capital, is the
largest city, with a population of 1,246,780. Other major urban centres include:
Brno (378,327)
Ostrava (297,421)
Plze (167,472)
Liberec (102,113)
Olomouc (99,471)
st nad Labem (93,747)
esk Budjovice (93,467)
Hradec Krlov (93,035)
Pardubice (89,467)28
28 Czech Statistical Office, Poet obyvatel v obcch esk republiky k 1. 1. 2013; at:
http://www.czso.cz/csu/2013edicniplan.nsf/p/1301-13
The Czech Republic has a working population of about 5.3 million29. A well
educated and skilled workforce, together with favourable labour costs, is one
of the main attractions of the Czech economy.
Educational level
Ninety-two percent of the population in the 2564 age range has completed at
least upper secondary education, ranking the Czech Republic highest of all of
the OECD countries and well above the OECD and EU average. In the same age
range, 18.24 percent have attained tertiary education.30
Population in the 2564 age range
Completed at least upper secondary
education (%)
Completed tertiary education

(%)
Czech Republic
92
18.24
EU average
76
not available
OECD average
75
31.51
Language skills
The official language of the Czech Republic is Czech. The foreign languages most
widely spoken are English and German. In foreign-language education, English is
predominant in primary schools, while German is taught more often in secondary
schools. The proportion of secondary-level students studying English is as high in
vocational courses as in academic areas, and is high by European standards,
at 95 percent. According to the Institute for Information on Education, 79 percent
of university students study one foreign language, 19 percent study two and
1.7 percent study three or more foreign languages.31
29 Czech Statistical Office, Pracovn sla dle oblast a kraj; at:

http://www.czso.cz/csu/2013edicniplan.nsf/kapitola/3103-13-r_2013-103
30 OECD (2013), Education at a Glance 2013: Highlights, OECD Publishing; at:
http://www.oecd-ilibrary.org/education/education-at-a-glance_19991487
31 Czechinvest, Skills in the Czech Republic; at: http://www.czechinvest.org/en/educated-workforce
Schengen area
The Czech Republic joined the Schengen area, a group of 26 European countries
that have abolished all border controls between them, in 2007. Any Schengen
citizen, or non-Schengen citizen with a valid Schengen visa, is allowed to travel
freely throughout the 26 countries.
Residency and visas

Foreign nationals who come to the territory of the Czech Republic are subject to
the so-called Foreigners Act, which establishes two categories of foreigners:
EU citizens; the same treatment also applies to citizens of the EEA (European
Economic Area: Norway, Iceland, Liechtenstein) and Switzerland and their family
members
nationals of third countries, i.e. countries outside the EU/EEA and Switzerland.
EU citizens may stay temporarily in the Czech Republic, without any permit, on the
basis of a passport or identity card. Under the Act, if their intended stay is longer
than 30 days, foreigners are required to report their presence to the office of the
Foreign Police responsible for the area in which they are staying within 30 days of
arrival. If they intend to stay in the Czech Republic for longer than three months, they
can request a certificate of temporary residence or a permanent residence permit.32
32 Ministry of Foreign Affairs, lenstv esk republiky v mezinrodnch organizacch; at:

http://www.mzv.cz/jnp/cz/zajimave_odkazy/mezinarodni_organizace.html
Third country nationals are subject to visa policy. For short-term stays (not
exceeding three months), most are required to hold a visa, while citizens of some
third countries are exempt from visa requirements. Lists of these countries can
be found at: http://www.mzv.cz/jnp/en/information_for_aliens/index.html. To stay
in the Czech Republic for more than three months, citizens of non-EU countries
require a long-term visa or a long-term or permanent residence permit.33
Citizens of the EU, the EEA or Switzerland, and their family members, do not need
a work permit in order to work in the Czech Republic.
Third country nationals may be recruited and employed provided that the foreigner:
has a valid work permit and a valid residence permit for the Czech Republic, or
holds a green card (a permit for long-term residence for employment purposes in
the Czech Republic under special circumstances), or
holds a blue card (a long-term residence permit for the purpose of employment for
foreigners with a higher qualification that is in demand in the Czech Republic).34
Natural persons with a permanent residence outside the Czech Republic, or legal
entities with a registered office outside the Czech Republic, may run a business in
the Czech Republic under the same conditions and under the same limitations as
a Czech person/entity. A natural person, who holds a permanent residence permit
or who has been granted asylum, or a legal entity with a registered office in the
Czech Republic, are treated as Czech entities. Foreign nationals with permanent
residence status, asylum holders and persons granted supplementary protection,
therefore have the same status in terms of their ability to run a business as Czech
citizens. Foreign nationals, without permanent residence status in the Czech
Republic (this excludes EU, EEA and Switzerland citizens), must possess a valid
residence permit in order to run a business in the Czech Republic (a visa for a stay
exceeding three months, long-term residence permit).35
More detailed information about foreign nationals in the Czech Republic can be
found on the Ministry of the Interior website at:
http://www.mvcr.cz/mvcren/article/immigration.aspx.
33 Ministry of the Interior, Immigration, Third-country nationals; at:

http://www.mvcr.cz/mvcren/article/third-country-nationals-third-country-nationals.aspx
34 Ministry of Labour and Social Affairs, Integrovan portl MPSV, Green Card Information for Employers; at:
http://portal.mpsv.cz/sz/zahr_zam/zelka/zam
35 Ministry of the Interior, Information Publication for Foreigners; at:
http://www.mvcr.cz/mvcren/SCRIPT/ViewFile.aspx?docid=21686490
Cost of living
According to UBS36, average prices of goods and services in Prague are 54.3
(excluding rent) and 48 (including rent) in comparison to the New York benchmark
of 100 (based on the cost of a basket of 122 goods and services weighted
according to European consumption habits). Domestic purchasing power (subject
to net hourly pay) in Prague is 46.2 compared to New Yorks 100. Wage levels
(calculated as effective hourly wages for 15 professions, weighted by distribution;
net after tax and social security deductions) are 25.1 in Prague, compared to the
New York 100.
70
66.1
61.2 63.3
60
50
58.2
56.7
55.1
54.3
48.0
50.1
54.5
53.9
50.3
47.1
53.7
53.1
50.8
47.9
47.0
46.8
43.5 42.3
40
36.4
39.8
34.7
30
20
10
0
Prague
Moscow Ljubljana
Excl. rent
Tallinn Budapest
Riga
Bratislava Warsaw
Kiev
Vilnius
Sofia
Bucharest
Incl. rent
Figure 13: Average prices of goods and services (New York = 100)37
Residential accommodation and office space

Prague and other major urban centres offer a wide choice of rented furnished and
unfurnished housing for expatriates and their families, and many estate agencies
offer relocation services. Sale and rental prices of residential properties vary,
depending on the city, location, size and quality. The purchase price of a three-room
apartment in Prague ranges from USD 700 to 4,000 per square metre, in Brno
from USD 300 to 1,100 per square metre, and in Ostrava from USD 200 to 900
36, 37 UBS, Prices and Earnings (Edition 2012); at:

https://www.ubs.com/global/en/wealth_management/wealth_management_research/prices_earnings.html
per square metre. The average monthly rent for a standard three-room apartment
is USD 660 in Prague, USD 390 in Brno and USD 350 in Ostrava. Prices in other
cities are lower than those in Prague or Brno.38
The highest office occupancy costs in the country are in the centre of Prague:
the rent here is approximately EUR 262.44 per square metre per year.39
Transport
Compared to that of Western Europe, the public transportation system in the
Czech Republic is comprehensive, efficient and reasonably priced. Every major
urban centre offers an excellent local transportation network.
Foreigners who hold a driving licence issued by an EU or EEA member country or
Switzerland can use it to drive in the Czech Republic. Driving licences issued by
other countries that comply with conditions specified in the Convention on Road
Traffic, entitle their holders to drive in the Czech Republic, if they have a short- or
long-term visa or a long-term residence permit. Drivers with a permanent
or temporary residence permit need to replace their driving licence with
a Czech one. Drivers with licences that do not comply with these conditions
are not entitled to drive in the Czech Republic. More information can be found
on the Ministry of the Interior website at:
http://www.mvcr.cz/docDetail.aspx?docid=21693331&doctype=ART.
The Czech Republic has 55,716.5 kilometres of roads in operation, of which
751.2 kilometres are motorways. In terms of road infrastructure, the Czech
Republic ranks among the leading European countries, with a density of 0.7km
of roads and motorways per square kilometre.40
Motorways and major roads carry the heaviest traffic volumes and connect the
most important administrative, financial and recreational centres. Prague is at the
centre of the road network. The main roads run from the capital to Brno (then on to
Slovakia, Austria or through Ostrava to Poland), esk Budjovice (on to Austria),
Plze, Karlovy Vary, st nad Labem (on to Germany), Liberec and Hradec Krlov
(on to Poland).
38 CzechInvest, Life in the Czech Republic; at: http://www.czechinvest.org/en/life-in-the-czech-republic

39 Cushman & Wakefield, Office Space Across the World 2013; at:
http://www.cushmanwakefield.com/en/research-and-insight/2013/office-space-across-the-world-2013
40 Road and Motorway Directorate of the Czech Republic, Roads and Motorways in the Czech Republic 2011; at:
http://www.rsd.cz/doc/Silnicni-a-dalnicni-sit/silnice-a-dalnice-v-ceske-republice-2013
Medical care
The Czech healthcare system provides a high level of professional medical care,
which is paid for by a range of health insurance providers. For a foreigner seeking
medical care in the Czech Republic, it is essential to have medical insurance to
pay for the cost of care in the event of sudden illness or injury. A foreigner can be
insured either under the public health insurance programme or through commercial
travel health insurance.
The public health insurance programme is available to the following individuals:
Czech and EU citizens, foreigners with a permanent residence permit, all
foreigners employed in the Czech Republic, and some foreigners in special cases.
Detailed information on healthcare for foreign nationals can be found on the
Ministry of Health website at: http://www.mzcr.cz/Cizinci.
Education
There are a number of international schools in the Czech Republic, with a growing
choice of foreign-language education programmes, ranging from kindergartens to
Master of Business Administration (MBA) courses.
The Czech Republic has 26 public, two state and 44 private universities41. Many
offer courses in foreign languages (primarily English) and MBA programmes.
For these, tuition fees must usually be paid. The Institute for Language and
Preparatory Studies, Charles University in Prague (http://ujop.cuni.cz) offers Czech
language courses for foreigners, and prepares applicants for university studies.
The Ministry of Education, Youth and Sports annually offers scholarships to foreign
nationals, pursuant to bilateral intergovernmental or departmental agreements
concluded with a number of countries. Regional exchange programmes include
Aktion (bilateral cooperation between the Czech Republic and Austria in the field
of science and education), Ceepus (a programme that aims to build a Central
European university network), and the International Visegrad Fund (grant and
scholarship programmes through which the Czech Republic, Hungary, Poland and
Slovakia develop closer cooperation in culture, science and research, education,
youth exchange, tourism and cross-border cooperation). The Czech government
also offers scholarships within its Foreign Development Assistance Programme
in support of study by foreign nationals from developing countries at public
41 Ministry of Education, Youth and Sports, Pehled vysokch kol; at:

http://www.msmt.cz/vzdelavani/prehled-vysokych-skol?lang=1
institutions of higher education in the Czech Republic. Information on scholarships

can be found on the Ministry of Education, Youth and Sports website at:
http://www.msmt.cz/international-cooperation-1/scholarships?lang=2.
A number of higher education institutions offer student mobility programmes
under bilateral university agreements. European students can take advantage of
a number of exchange programmes, e.g. Erasmus or EEA and Norway Grants.
The Erasmus Mundus programme offers scholarships to non-European students.
More information can be found at the National Agency for European Educational
Programmes website at: http://www.naep.cz.
Leisure activities
The Czech Republic offers a wealth of sporting opportunities. The most popular
sports are ice hockey, football (soccer), basketball, tennis, volleyball, swimming
and table tennis, with many clubs and venues for all of these throughout the
country. It has a high number of golf courses per capita and a long golfing history,
dating back to the early twentieth century. More information can be found on the
Czech Golf Federation website at: http://www.cgf.cz.
Prague and other places in the Czech Republic are famous for their architectural
heritage (see e.g. the UNESCO World Heritage List at: www.unesco.org). The
country prides itself on numerous museums, theatres, cinemas, galleries and
concert halls. There is a wide choice of cultural events, embracing all forms of
music and a long theatrical tradition. Every May, Prague hosts the Prague Spring,
a music festival that attracts top artists from all over the world and is a showcase
of the Czech Republics musical tradition.
There are many international cultural institutes or clubs run by embassies in Prague
and other cities, e.g.:
British Council in Prague and Brno (www.britishcouncil.org/czechrepublic.htm)
American Center at the US Embassy in Prague (www.americkecentrum.cz)
Goethe-Institut in Prague (www.goethe.de/ins/cz/pra)
sterreichisches Kulturforum Prag (www.oekfprag.at)
Institut Franais Prague (www.ifp.cz)
Instituto Cervantes in Prague (http://praga.cervantes.es/cz/default.shtm)
Istituto Italiano di Cultura di Praga (www.iicpraga.esteri.it/IIC_Praga)
Information and Culture Centre of the Japanese Embassy in the Czech Republic
in Prague (http://www.cz.emb-japan.go.jp/cz/jicc.html)
Korean Cultural Centre (http://www.koreakc.cz).
The Prague English speaking business and international community portal
www.expats.cz provides extensive information essential to expatriates living in
Prague. The International Womens Association of Prague (www.iwa-prague.com)
is a highly popular organisation, which offers its members numerous opportunities
to participate in special-interest groups, social and cultural events, and charity work.
Restaurants and shopping
Restaurants of all types abound, from the most luxurious to authentic Czech pubs
and a wide variety of fast food facilities. In larger cities, all kinds of international
cuisine are available, alongside the countrys famous pubs, which offer traditional
Czech food and famous brands of Czech beer. More information can be found in
on-line restaurant guides, e.g. www.grand-restaurant.cz.
Local concepts of shopping and customer service are comparable to those in
Western European countries, and major international retail chains and boutiques
are all present in the Czech market.
The Czech currency is the Czech crown (CZK or K), which is fully convertible.
ATMs are widely available. Depending on the type of business and location,
opening hours can vary: most offices and businesses, as well as smaller shops,
are closed on weekends, while major stores are open and in larger cities some
hypermarkets are open around the clock.
KPMG in the Czech Republic has

become the advisor of choice for many
of those who have chosen the Czech
Republic as an investment location.
How KPMG can help

We understand the challenges and pressures faced by those looking to set up
business in a new jurisdiction. We can work with you to focus on what matters, to
help avoid pitfalls and unnecessary costs while helping ensure investment projects
start to deliver a measurable return in the shortest possible time frame.
We work with both leading names and start-up companies in every sector.
As a result, KPMG in the Czech Republic has become the advisor of choice to
many of those who have chosen the Czech Republic as an investment location,
providing all the support required to ensure continued business success. As part of
the KPMG global network of professional firms, we can also work with you in your
home country to ensure your Czech Republic investment maximises its potential.
We can assist in the following areas

Initial assessment and start-up a timely, pragmatic and cost effective
assessment of the key issues. These include the most beneficial corporate and
tax structures available, the potential for maximising group taxation benefits on
a global basis and available grant assistance. We can also advise on employee
benefit issues, for example those that relate to foreign and Czech state option
schemes. We also provide practical business focused advice and support in
dealing with areas such as incorporations and grant application and assessment.
Ongoing business we offer a range of audit, tax, advisory and legal services
designed to ensure that investors in the Czech Republic continue to receive
timely, proactive and relevant advice and support.
Our services
Audit
Audits of Czech Financial Statements
Audits of Financial Statements (IFRS, US GAAP, HGB, etc.)
Audits of Financial Reports and Information
Audits of Prospective Financial Information
Review Reports
Reporting on Internal Control Systems
Sustainability Reporting
Petr koda
Partner in charge of Audit
T: +420 222 123 548
E: pskoda@kpmg.cz
Tax Services
Corporate Tax
Indirect Tax
International Executive Services
International Tax
Investment Incentives and Subsidies
Mergers and Acquisitions
Transfer Pricing
Tax Inspections and Tax Disputes
Tax Services for the Financial Sector
Tax Outsourcing
Legal Services
Corporate Law
Transactions and Restructuring
Labour Law
Regulatory Issues
Radek Halek
Partner in charge of Tax and Legal Services
T: +420 222 123 540
E: rhalicek@kpmg.cz
Advisory
Management Consulting
Data and Analytics
Sales and Distribution
HR Management
IT Advisory
Marketing and Customer Value Management
BI and Data Management
EU Funds Advisory
Finance, Capital and Profit Management
Operations and Sourcing
Export Advisory
Sports and Gaming Advisory Services
Petr Buk
Partner in charge of Management Consulting
T: +420 222 123 951
E: pbucik@kpmg.cz
Risk Consulting
Accounting Advisory Services
Financial Risk Management
Internal Audit, Risk Consulting Services
Regional and Local Authorities and Organisations
Romana Beneov
Partner in charge of Risk Consulting
T: +420 222 123 129
E: rbenesova@kpmg.cz
Transactions and Restructuring
Corporate Finance
Restructuring
Transaction Services
Forensic
Alex Verbeek
Partner in charge of Transactions and Restructuring
T: +420 222 123 148
E: averbeek@kpmg.cz
Accounting Services and Payroll

Management Reporting
Financial Accounting
Payroll Outsourcing
Administrative Support
Jan Linhart
Partner in charge of Accounting Services and Payroll
T: +420 222 123 575
E: jlinhart@kpmg.cz
Our industry experience

Automotive
Banking
Building, Construction and Real Estate
Consumer Markets
Energy
Food and Drink
Government and Public Sector
Healthcare
Industrial Manufacturing
Insurance
Middle Markets
Retail
Sports and Gaming Advisory Services
Telecommunications
Transportation
Travel, Leisure and Tourism
Our foreign desks

Chinese Desk
German Desk
Japanese Desk
Korean Desk
Russian Desk
KPMG in the Czech Republic
KPMG Praha
KPMG Ostrava
KPMG esk
Budjovice
KPMG Brno
KPMG has been active in the Czech Republic since 1990, when the first office in
Prague was opened. Currently, KPMG Czech Republic employs 760 people, with
offices in Prague, Brno, esk Budjovice and Ostrava. KPMG Czech Republic
provides Audit, Tax, Advisory and Legal services. Our 625 professionals include
28 partners, 28 certified auditors, 106 certified accountants and 67 tax advisors.
In KPMG Czech Republic, a total of 22 qualified foreign practitioners are employed.
KPMG is a global network of professional firms providing Audit, Tax and Advisory
services. We operate in 155 countries and have 155,000 people working in
member firms around the world. The independent member firms of the
KPMG network are affiliated with KPMG International Cooperative
(KPMG International), a Swiss entity. Each KPMG firm is a legally
distinct and separate entity and describes itself as such.
KPMG esk republika, s.r.o.

Poben 1a
186 00 Praha 8
Czech Republic
T: +420 222 123 111
E: kpmg@kpmg.cz
www.kpmg.cz
Jan rek
Managing Partner
Awards for KPMG in the Czech Republic

Every year, KPMG in the Czech Republic ranks in the top
prominent polls, for example:
three in several
No. 3 in the Business Services category of the Czech Top 100 most
admired companies for 2013.
No. 1 in the Employee Community Involvement category
and No. 2 in the Most Generous Donor category of the
TOP Responsible Company competition in 2013.
No. 1 among professional firms in the Business/Commerce category
of the Universums Top 100 IDEAL Employers 2014
student survey.
KPMG supports sports

KPMG in the Czech Republic is an official supplier of the Czech Olympic Team
for 20132016.
www.podporujemesport.kpmg.cz
Useful addresses
Czech government offices
Ministry of Finance of the Czech Republic
Letensk 15
118 10 Prague 1
Tel.: +420 257 041 111

www.mfcr.cz
Ministry of Industry and Trade of the Czech Republic

Na Frantiku 32
110 15 Prague 1
Tel.: +420 224 851 111

www.mpo.cz
Ministry for Regional Development of the Czech Republic

Staromstsk nmst 6
110 15 Prague 1
Tel.: +420 224 861 111

www.mmr.cz
CzechInvest (Investment and Business Development Agency)

tpnsk 15
120 00 Prague 2
Tel.: +420 296 342 579

www.czechinvest.org
Czech National Bank (the central bank of the Czech Republic)

Na Pkop 28
115 03 Prague 1
Tel.: +420 224 411 111

www.cnb.cz
Banks active in the Czech Republic

An up-to-date list of banks active in the Czech Republic can be found on
the website of the Czech National Bank, at:
http://www.cnb.cz/en/supervision_financial_market/lists_registers/index.html.
Business organisations
An up-to-date list of business organisations active in the Czech Republic can
be found on the BusinessInfo portal, at: http://www.businessinfo.cz/cs/clanky/
prehled-zahranicnich-obchodnich-komor-4550.html.
Contact us
KPMG esk republika, s.r.o.
Poben 1a
186 00 Praha 8
Czech Republic
T: +420 222 123 111
E: kpmg@kpmg.cz
www.kpmg.cz
The information contained herein is of a general nature and is not intended to address the circumstances of any
particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no
guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the
future. No one should act on such information without appropriate professional advice after a thorough examination
of the particular situation.
2014 KPMG esk republika, s.r.o., aCzech limited liability company and amember firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (KPMG International), aSwiss entity.
All rights reserved.
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG
International.
The reference to KPMG Czech Republic includes all companies associated with KPMG in the Czech Republic.
Designed and produced by KPMG esk republika, s.r.o.
Printed in the Czech Republic
May 2014
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I Investment in the Czech Republic

Investment in The Czech Republic 2014

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Investment in The Czech Republic 2014

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Investment

KPMG in the Czech Republic

Preface: Jan rek

Chapter 1: Investment climate

Chapter 3: Investment incentives and state aid

Chapter 5: Employment policy

Chapter 6: Financial services

Chapter 7: Direct taxes

Chapter 8: Indirect taxes

Chapter 9: Financial reporting and audit

Chapter 10: Corporate transactions

Chapter 11: Living in the Czech Republic

2 I Investment in the Czech Republic

Preface: Jan rek

sometimes less easy to obtain than in more

In terms of foreign direct investment (FDI),

Source: See Figure 1 (page 14) and Figure 2 (page 15)

Key attractiveness indicators

Source: IMD World Competitiveness Yearbook 2013

4 I Investment in the Czech Republic

In comparative surveys of the quality of life,

in The Economists Where To Be Born 2013 survey

No. 2 among EU NMS and No. 29 globally

No. 1 among EU NMS and No. 69 globally

in the Mercer Quality of Living survey 2012

Investment in the Czech Republic I 5

IMD World Competitiveness Yearbook 2013

Within the NMS group

IMD financial risk factor

High-tech exports (%)

Percentage of total first university

Human development index

6 I Investment in the Czech Republic

WEF GCR 201314 report

Within the NMS group

Quality of overall infrastructure

Quality of railroad infrastructure

Quality of air transport

Quality of electricity supply

Local availability of specialised

Internet access in schools

Individuals using the Internet (%)

Exports as a percentage of GDP

Local supplier quantity

Local supplier quality

Value chain breadth

Production process sophistication

Capacity for innovation

Quality of scientific research

Company spending on R&D

Investment in the Czech Republic I 7

Czech Republic highlights

8 I Investment in the Czech Republic

The Czechs invented sugar cubes the worlds first

Investment in the Czech Republic I 9

Outstanding Czech personalities

10 I Investment in the Czech Republic

Investment in the Czech Republic I 11

The Czech Republic clearly

3 CNB investment position data in Euro; at: http://www.cnb.cz/en/statistics/bop_stat/investment_position/index.html

Investment in the Czech Republic I 13

14 I Investment in the Czech Republic

Analyses of the results of surveys among foreign and domestic businessmen,