The Czech Republic is a unitary parliamentary constitutional republic located in Central Europe with over 10,700,000 citizens. The country has been a member of the European Union since 1 May 2004 and a Member State of the Schengen area since 21 December 2007.
The Czech legal system belongs to the continental legal system and is strongly influenced by German legal culture. Since entering the EU, the EU law plays a vital role in the Czech legal order, as the Czech Republic is bound by all the legal acts enacted by EU institutions.
In the last years, the Czech law witnessed significant changes in the commercial area due to complete recodification of private law in 2012. As a result of long-term works in 2012 two important statutes were enacted – Act No. 89/2012 Coll. the Civil Code (hereinafter referred to as the New Civil Code) and Act No. 90/2012 Coll. on Commercial Companies and Cooperatives (further referred to as the Business Corporations Act), entering into force on 1 January 2014 and bringing new modern solutions to the Czech legal system. A good example of such a modern solution is the legal institute of trust fund, newly introduced to the Czech legal system and inspired by the Civil Code of Quebec. The obligation law, which was before regulated separately for commercial purposes and separately for other civil purposes, is now unified in one place, in the New Civil Code. Furthermore, the New Civil Code includes the regulation of family law, absolute property rights together with modern law of succession, as well as the general regulation of legal persons, definition of the consumer, entrepreneur, and some other commercial matters. The Business Corporations Act on the other hand constitutes a lex specialis in relation to the New Civil Code and regulates the forms of commercial companies and cooperatives.
The Czech Republic has a developed and export-oriented economy, where the industry plays a more significant role than in most European countries, as it accounts for 35 % of the economy, services account for 63 %, and the rest (around 2 %) belongs to the agriculture. According to the EUROSTAT data of September 2021, the Czech Republic’s unemployment rate is currently the lowest in the whole EU, namely, it is 2,5 % (as opposed to the EU average of 6,6 %).
Rules of conducting an economic activity in the Czech Republic by foreigners
In terms of conducting an economic activity, the same conditions are granted for foreign legal persons as for domestic companies. In order to operate on the Czech market, foreign companies may set a branch office in the Czech Republic, establish a Czech company, or join to an existing one.
There are four legal forms of companies typical for the Czech legal system:
1. limited liability company (s.r.o.)
2. joint-stock company (a.s.)
3. unlimited partnership (v.o.s.)
4. limited partnership (k.s.).
The most popular form of company is the limited liability company (s.r.o.) since it is extremely easy to establish such a company and the minimum amount of contribution of one shareholder as well as the minimum amount of the company´s registered capital is only CZK 1. It may be established by a single person or by more persons. The average time it takes to establish the s.r.o. in the Czech Republic according to the World bank study – Doing business 2020 is 24,5 days. A limited liability company itself is fully liable to its debts and all legal acts, whereas the shareholders are jointly and severally liable to the company’ s debts only up to the unpaid amount of the share capital.
The second most popular company form is the joint stock company, where the shareholders are not liable to the company’ s debts at all. It may be established by one or more shareholders. The minimum amount of the company’s registered capital is CZK 2 000 000 or EUR 80 000, and it is divided to certain amount of shares, which are easily transferable. The 30 % of registered capital must be paid before the company is registered in the commercial register. This form of company is suitable for larger businesses that need to raise capital from the public or want to enter the stock market. The new Business Corporations Act introduced two variants of the joint stock company, so that nowadays it is possible to choose between the monistic and dualistic structure. The main bodies of the company with the dualistic structure are the General Meeting, Board of Directors and Supervisory Board, whereas in the company with monistic structure there is only the General Meeting and the Administrative Board, in which the powers of the Board of Directors and Supervisory Board are concentrated.
The standard corporate income tax rate in the Czech Republic is 19 %, though there are some exceptions, such as investment funds, where only the rate of 5 % applies. When it comes to personal income tax, it is a flat rate of 15 % from gross income and in case that the individual exceeds 48 times the average monthly salary within the calendar year there is a solidarity rate of 23 % for the exceeding part of income. Apart from that, the social security contributions, and public health insurance, which are divided between the employer and employee, are paid monthly. There are three VAT rates in the Czech Republic: a standard rate of 21 % and reduced rates of 15 % and 10 %. The reduced rate of 15 % applies for instance to food or public transport, while the reduced rate of 10 % to medicines, pharmaceuticals, books, and baby food.
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