Subsidiaries arecompanies with legal personality and freedom of administration, opened by foreign companies in the Czech Republic. The operations of this type of business are based on the trade license received from the Trade Licenses Office. There are many forms a subsidiary may take in the Czech Republic, but the most popular one is thelimited liability company; investors can receive advice on the advantages of a subsidiary registered here from our team of specialists in company registration in Czech Republic, who can assist in all theregistration steps that have to be concluded in this case.
The characteristics of the Czech limited liability company
Alimited liability companyopened by a foreign company in the Czech Republic must be established by at least one shareholder but not more than 50. There is aminimum share capital requested at registration of at least CZK 1. Thistype of company is established by drafting the articles of association and the memorandum.
The foreign company must issue the decision of opening the subsidiary in the Czech Republic and accompany it with the articles of association and a list of theshareholdersand their contribution. The above documents must be notarized. A bank account must be opened and the Czech subsidiary must deposit the minimum share capital. The bank will issue a certificate of deposit, necessary for future transactions.
The next step isregistering the company with the Trade Licensing Office andreceiving the trade license. Thistrade licenseis used, along with thefoundation deeds and the certificate of deposit, at registration in the Business Commercial Registry of the Regional Commercial Court; our representatives can assist investors on this procedure.
Which are the tax requirements for Czech companies in 2021?
Like any other ordinarycompany, the subsidiary established in the Czech Republic must pay the same taxes as a limited liability company, so it’s important to register with the tax authorities andapply for aVATnumber. This procedure is made at the same time with theregistration for the social securityand forhealth insurance.
Considering that the company will have a VAT number, this will imply having VAT obligations during a financial year. Those opening a company in Czech Republic have to be aware that VAT returns must be submitted on a monthly or quarterly basis, while the company’s tax accounts must be evaluated on a yearly basis. Then, the company is legally required to submit its financial statements following the tax rules, which can be presented to foreign investors by our team of consultants in Czech company formation.
In 2021, companies liable to the payment of the VAT can benefit from a reduced rate of 10% (normally charged at a rate of 15%) in the case in which they operate in the accommodation, cultural or sports industries. This measure was imposed due to the economic difficulties appeared during the Covid-19 measures and the tax rate will be maintained up until 16 August 2021. Also, companies are allowed to postpone their VAT payments for the last quarter of 2021 and the first quarter of 2021 until 16 August 2021.
Theregistration processof a subsidiary in the Czech Republic takes approximately20 days and, only after the completion of this process, thecompanymay begin the commercial activities. The subsidiaries opened in the Czech Republic receive the same treatment as the local companies, but due to the different treaties signed with other countries, thetaxation may differ.
What are withholding taxes considerations for subsidiaries in Czech Republic?
Czech Republic has signed treaties on double taxation avoidance with more than80 countries. Thesetreaties assure thesingle taxation of a foreign company in the country of origin or the refund of the paid taxes. The withholding tax on dividends, interests and royalties paid by thesubsidiary to the foreign company may be lowered or even abolished in some cases if the double tax treaties provide so. This is the main reason why so many foreign companies choose to open subsidiaries in the Czech Republic.
With regards to the payment of the withholding taxes, those interested in company formation in Czech Republic under a local subsidiary must know that they are entitled to an exemption on the withholding tax on dividends paid to the parent company (under the European Union’s Parent-Subsidiary Directive) if the company owns at least 10% of the shares of the subsidiary for a period of minimum 12 months (uninterrupted period of time).
This advantage is also available for businessmen who want to invest in opening a subsidiary in Czech Republic who are tax residents of Norway, Switzerland and Iceland, under a regulation that provided this right starting with 2009. Additional criteria can apply for the exemption on the payment of the withholding tax on dividends, which can be detailed at length by our team of consultants in company registration in Czech Republic.
For example, subsidiaries of foreign companies that are tax residents of non-EU countries can benefit from this exemption if the stipulations of the double tax treaties signed with the respective countries provide such advantages. This can also be obtained if the subsidiary is incorporated under a specific legal entity.
The same applies if the company is taxed in its home country with a tax similar to thecorporate income tax in Czech Republic at a rate of at least 12%. Please mind that if the company is exempt from the payment of the corporate income tax or a tax similar with this one, the exemption on the payment of the withholding tax on dividends will no longer apply. In this case, the tax applicable when the payment of dividends is made is of 15%.
The tax exemption on the payment of the withholding taxes on dividends can apply if the subsidiary incorporated in Czech Republic is registered as a limited liability company, a joint stock company or a co-operative. This regulation will also come into effect if the subsidiary has not entered the liquidation process.
Foreign businessmen who want to open a company in Czech Republic as a subsidiary, interested in obtaining the tax deductions or exemptions applicable to this structure, should know that the business form of the parent company abroad is also of importance. Thus, the exemption on the withholding tax will be granted if the parent company is incorporated as one of the legal entities presented earlier (limited liability company, joint stock company or co-operative).
What documents should investors provide for starting a Czech subsidiary?
In order to set up a Czech subsidiary, it is necessary to provide a set of legal documents, as prescribed by the regulations of the Commercial Code. Since the subsidiary is treated just like a regular company incorporated in Czech Republic, the subsidiary will need to follow the standard registration procedures. However, when registering a subsidiary, the investors will need to submit the following:
•anextractfrom theCommercial Register of the founder company;
•aresolution provided by the parent company, which states its decision to set up a subsidiary in Czech Republic;
•a proof regarding the company’s registered office operating in Czech Republic;
•anextract from the Criminal Register providing information on the appointed director of the subsidiary, issued by the authority in the country where the respective person had his or her last residency (or from the country of citizenship).
More details on the Czech subsidiary are available in the video below:
What are the statistics on foreign investments in Czech Republic?
Considering that the registration of a subsidiary in Czech Republic represents a form of foreign investment, concluded by a foreign company, we will present in the list below the latest data available with regards to the value of the foreign direct investment (FDI), the top investment sectors preferred by foreign investors, as well as the top investors (by nationality) that preferred this country as their investment destination:
• the level of FDI, measured from an inward flow perspective, stood at $9,479 million in 2018 (according to the Organization of Economic Cooperation and Development, the inward flow designates a term which refers to the transactions concluded by foreign investors for the purpose of increasing the investment they have in a business set up in a foreign country);
• the value of FDI stock (the total level of investment measured at a given moment in time) was of $155,024 million in 2018, accounting for an important increase compared to 2016, when the value was of $121,855 million;
• the number of greenfield investments concluded by foreign companies increased as well – there were 97 greenfield investments in 2016, 110 investments in 2017 and 132 investments in 2018;
• the most important investment sector preferred by foreign enterprises is the car manufacturing sector, accounting for 21.7% of all the foreign investments;
• the Czech Republic's most important investment partner is Germany, leading by far the list of foreign investors (it has a rate of 41.9% from all the investments, while the 2nd most relevant partner is Japan, accounting for only 6.6%).
You may contact our specialists in company formation in Czech Republic if you need to open a subsidiary or othertype of company in this country. Our representatives can also present the main advantages of operating through abranch office in this country and can advise on the tax system applicable in this case.
The team from CzechCompanyIncorporation.com is very qualified and benefits from extensive expertise in this area. I would definitely recommend them to any entrepreneur decided to start his own business here.
Mihai Cuc, Partner of Enescu&Cuc; Law Firm www.romanianlawoffice.com