Since the Czech Republic’s accession to the EU on 1 May 2004, Czech law has been generally harmonised with EU law, although the process is ongoing. But while the Czech Republic meets technical, health and other minimal standards set by the EU, certain local standards are actually stricter than those imposed by the EU.
There are a number of new bills and amendments currently being prepared by the Czech government, with the expectation that they will be passed during the next two to three years. Examples include a new law on public procurement, the Bankruptcy Code, the Civil Code, the Commercial Code and a Companies Act.
The political environment
The Czech Social Democratic Party (CSSD) has ruled the Czech Republic since 1998. The next elections will be held in May or June next year, with polls currently showing stronger support for the conservative Civic Democratic Party (ODS). However, it is not expected that the legal environment will change significantly after the elections, regardless of whether social or civil democrats form the government. The exception to this may be the treatment of taxes.
The Czech legal system is, with respect to business, based fully on market economy principles. However, in certain areas the level of regulation might be found to be more extensive than in the UK (labour law, for example). Generally, the efficiency of regulatory bodies, such as the Energy Regulatory Office, the Office for Protection of Economic Competition and the Czech National Bank, is expanding, both in terms of secondary regulation and of subsequent control. However, a number of problems continue to hamper the Czech legal system, such as the inefficiency of courts, vague and unclear bankruptcy law and a lack of relevant administrative and judicial precedents due to recent major changes to the law.
Setting up a business entity
The establishment of a business entity consists of two main stages: the foundation by execution of foundation documents at the Notary Office and the incorporation of the company into the relevant Commercial Registry maintained by the relevant court, which has a deadline of 10 business days.
All companies are deemed to exist upon incorporation in the Commercial Registry; however, in a limited number of cases the founders are entitled to act on behalf of a company prior to its incorporation. The process of foundation and incorporation requires a considerable amount of administration. For example, the Commercial Registry has to be provided with relevant business licences, affidavits and excerpts from criminal registries. Major corporate changes need to be registered with the Commercial Registry, some of which become effective upon registration. Standard business licences, for the sale and purchase of goods, advisory services etc, may be obtained within 15 days. More specialised business licences and permits may take several months, such as for broadcasting, energy business and dealing with chemicals.
In 1992, investment and business development agency CzechInvest was founded by the government to advise, support and provide investors with information on the business climate and investment opportunities.
The Act on Investment Incentives simplified and extended the former incentive scheme for the manufacturing sector. Subject to certain conditions, which are equal for both foreign and domestic investors, corporate tax relief for up to 10 years, job creation, training and retraining grants and transfers of public land at an advantageous price may be granted. The minimum investment is Koruna200m (£4.7m). However, the limit is reduced in regions with high unemployment to either Koruna150m (£3.5m) or Koruna100m (£2.3m).
The Framework Programme for Support of Technology Centres and Centres of Business Support Services, organised by CzechInvest, supports investments into technology centres and business support services. On the basis of this programme, the government offers subsidies for business activity of up to 50 per cent of eligible business expenses and subsidies for training and retraining at a level of 35 per cent or 60 per cent.
According to government decree, the incentives are offered in regions with high unemployment at the rate of Koruna200,000 (£5,000) per newly created job and of 35 per cent of eligible costs incurred for training or retraining, up to Koruna30,000 (£700) per newly created job.
Business in regions
Particularly in areas of high unemployment, the regional and local governments support infrastructure constructions and attempt, in cooperation with national government and its agency CzechInvest, to create favourable conditions for foreign investors. Recent examples of major investments in the regions include Kyocera, Benteler Automobiltechnik and Donaldson Company (all in north Bohemia), Kiekert (central Bohemia), Vigona-Fibertex (south Moravia) and SungWoo Hitech (north Moravia).
CzechInvest has created a special programme for the regions and has opened 13 regional centres to provide support and advice on the EU structural funds. The support includes joint regional operational programmes and is financed from the European Regional Development Fund. The basic requirement for participation in the programme is the desire to increase levels of employment. Support from the fund cannot exceed 50 per cent of a project’s costs and it is available to enterprises with up to 249 employees.
Public-private partnerships, a rising star
PPPs have already received the go-ahead in the Czech Republic, even though the legislative framework is not yet in place.
Momentum has been building through a number of developments, most notably the approval of a policy document by the Czech government, which includes the proposal of a new act, scheduled to come into force in January 2006, involving concession agreements between the public and private sectors, which will be working together as equal partners; and more recently, with the tender process for advisers to the Czech Ministry of Justice in connection with the country’s pilot PPP project – the construction of two regional Justice Courts in Ústí nad Labem and in Karlovy Vary, as well as a guarded prison.
The current draft of the act is far from ideal and has attracted significant criticism; however, it should be welcomed, as it signals the arrival of the day when PPP projects are not just considered to be a sexy topic for discussion, but when they will finally start to happen.
Elections 2006 – tax reform
The opposition ODS Party is attempting to win the upcoming summer election by promising to lower taxes, simplify the tax system and make the country attractive for investors by introducing a flat rate of income tax and VAT of around 15 per cent.
Under these proposals there would be major changes to current personal income taxes, with the introduction of a linear rate at around 15 per cent, regardless of the value of annual personal income, as compared with current progressive tax rates of between 15 and 32 per cent. To simplify the tax, the ODS would also abolish a complicated system of more than 100 deductible items by which taxpayers can lower taxable income, replacing the system with a fixed deductible tax allowance per person and another per child. The result would be a hugely simplified one-page tax return.
The corporate income tax rate would also be lowered to 15 per cent from 26 per cent, tax evidence would be significantly simplified and the general tax deductibility of assets in the year of acquisition would be introduced. Finally, the current two VAT rates of 5 per cent on food and 19 per cent on other goods and services would be replaced by one flat tax rate of 15 per cent.
Hilary McDowell is Prague managing partner at CMS Cameron McKenna