Financial Market Report Czech Republic. In cooperation with AUSSENWIRTSCHAFT ÖSTERREICH (AWO) at WKÖ (the Austrian Federal Economic Chamber) - PDF

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Financial Market Report Czech Republic In cooperation with AUSSENWIRTSCHAFT ÖSTERREICH (AWO) at WKÖ (the Austrian Federal Economic Chamber) Country Profile: Czech Republic Raiffeisen Research. As of March

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Financial Market Report Czech Republic In cooperation with AUSSENWIRTSCHAFT ÖSTERREICH (AWO) at WKÖ (the Austrian Federal Economic Chamber) Country Profile: Czech Republic Raiffeisen Research. As of March The Czech Financial Market Currency: Czech crown Gross Domestic Product and Budget f 2016f Real GDP growth, % p.a Nominal GDP, bn Per capita GDP, PPP basis, 21,600 22,100 22,600 23,100 Growth in industrial output, % p.a Consolidated budget deficit, % of GDP Inflation and Employment Jobless rate, annual average, % Average monthly gross wage, ,001 Consumer price inflation, annual average, % p.a Balance of Trade and Current Account Goods exports, bn Goods imports, bn Current account deficit, bn Current account deficit, % of GDP Foreign debt, % of GDP Rates of Exchange and Interest Rates Local currency/us$ (average) Local currency/ (average) month money market rate (PRIBOR), average, % Country Ratings S&P AA- Moody s A1 Fitch A+ Important: 1. The Economic and Political Situation in the Czech Republic Company Law Taxes and Legislation Arbitration Support and Subsidies Risk Mitigation and Finance Payment and Account Services at Raiffeisenbank a.s Raiffeisenbank a.s Your International Business Specialists at Raiffeisenbank a.s. and the Global Raiffeisen Network Despite thorough research and the use of reliable sources, we cannot accept responsibility or liability for the completeness or accuracy of this brochure s contents. The purpose of this brochure is to give you initial, general information to help you develop business relationships in the Czech Republic. The content of this brochure does not constitute any form of advice or offer or invitation to make an offer. Prepared in cooperation with AUSSENWIRTSCHAFT AUSTRIA (the Austrian Federal Economic Chamber). Sources: Raiffeisen Bank International AG WKO: Czech Republic Country Report; Special Reports: Setting up a Company and Taxes in the Czech Republic, Property and Receivables in the Czech Republic, of the AUSSENWIRTSCHAFT AUSTRIA Copy deadline: May 1. The Economic and Political 2. Company Law Situation in the Czech Republic Firmly on course for growth Between 2009 and 2013, the Czech economy shrank by an average of 0.4 per cent, due in part to a restrictive financial policy and weak foreign demand. The Czech Republic is a small and open economy which, like many other CE countries, is dependent upon the export sector especially in the Euro region, which is why the export sector is of central importance for economic growth. The Czech Republic s six most important trading partners are Germany, Slovakia, Poland, France, the UK and Austria. Once the situation in the Euro region had improved, the small open Czech economy also gained in strength, driven by the growth in domestic and foreign demand. Domestic demand profited from less restrictive fiscal policy measures in 2014 and 2.6 per cent increase in GDP also pointed to a recovery of the Czech economy and a return to solid growth. For 2015, we see GDP growth at about 2.4 per cent before climbing to 3 per cent in 2016, putting it well above the forecast growth rates for the Euro region. Economic growth is supported the generally low level of debt in the private and public sectors. All in all, the Czech economy seems to be on a sustainable path of convergence with the Euro region, even if slightly more slowly than before the financial crisis. The Czech government addressed the financial crisis by taking unambiguous austerity measures. In doing so, the government was able to keep public debt below 50 per cent of GDP. Public debt reach its high point of 46 per cent of GDP in 2013 and will fall again slightly in the next few years. The budget deficit for 2014 amounted to about 1.5 per cent of GDP and should be less than 2 per cent in most of next few years. The political situation, often the source of uncertainties in the past, seems to have stabilised with the new government. Since the beginning of 2014, a coalition government consisting of the social democratic party ČSSD, the Christian democratic party KDU-ČSL and a new movement headed by the billionaire Andrej Babiš has been in office, led by prime minister Bohuslav Sobotka. Nevertheless, this stability seems to be due more to the lack of political alternatives. Inflationary pressure is currently absent. Inflation was only 0.4 per cent in 2014, is not expected to exceed 1 per cent in 2015, and will only reach the Czech National Bank s (CNB) inflation target of 2 per cent in Faced with sluggish growth and deflationary pressure, the CNB decided at the end of 2013 to take some unconventional monetary policy measures after the key interest rate had already fallen to a level of 0.05 per cent, and introduced an FX regime that holds the EUR/CZK complex above a level of The CNB could abandon this measure again at the end of 2016 and then raise key interest rates in Based on our assumption that Czech economic growth will outperform the Euro region in the coming years, we expect the CZK to appreciate against the EUR in the medium to long term. The Czech government finds itself in a favourable financing position. Consequently, net issues will be relatively small in 2015 and keep any rise in bond yields to a minimum. The ECB s government bond purchasing programme in the Euro region should keep yields on Czech government bonds low. Establishing and managing companies is regulated in the Czech Commercial Code (Law no. 513/1991 in all cases), which is the basic law for commercial activity in the Czech Republic. A foreign person must be entered into the commercial register in order to get a permit for permanent commercial activity in the Czech Republic. The commercial register is a public register; every person, whether Czech or foreign, who wants to be commercially active in the Czech Republic is entered into this register. Sole traders are exempt from this obligation. The respective regional courts are responsible for entries into this register. Data is entered on entrepreneurs or other persons specified by the special law. Everyone has the right to view and procure copies and extracts. It is possible to receive an official transcript of the entry or archived file on request. The following forms of business organisation are possible in accordance with commercial law: Limited Liability Company This is the most common form of business in the Czech Republic (spolecnost s rucením omezeným s.r.o.). This form of corporation corresponds for the most part to the Austrian GmbH. It is the most popular form of business organisation in the Czech Republic, above all because only CZK 200,000 of share capital needs to be raised to establish it. When converted, this amounts to approx. 8,000. Joint-Stock Company The joint-stock company (akciová spolecnost a.s.) is usually only chosen as a business form by medium or large companies. It corresponds for the most part to the Austrian AG. General Partnership The general partnership (verejná obchodní spolecnost v.o.s.) is based on similar principles to the Austrian OHG. However, it is not often chosen as a form of business organisation on the grounds of liability, and because of the compulsory publicity involved in being entered on the commercial register. 4 5 3. Taxes and Legislation Limited Partnership The limited partnership form of business organisation (komanditni spolecnost k.s.) is not common in the Czech Republic. One of the reasons for this is that Czech company law does not recognise the general partner s ( artificial ) limitation of liability in the form of a limited liability company. The share capital of a limited liability company is also not particularly high. Sole Trader Sole traders are created in the Czech Republic by registering a trade at the trade office. No basic capital is required, nor is it necessary for EU citizens to have an entry in the Czech commercial register, but this can be done on a voluntary basis. However, the sole trader is personally liable with all of his or her assets. Branch Foreign companies can set up a branch within the territory of the Czech Republic. It is not a legal entity, but it must be entered into the commercial register. The Czech branch bears the name of its parent company ( founder ) with the suffix organizacní slozka. As the branch is not a legal entity, the parent company is liable for the branch s accounts payable. Investments And Joint Ventures Czech commercial law provides for equal legal treatment for foreign persons (natural persons and legal entities) and Czech persons. In principle, foreign persons may conduct business in the Czech Republic under the same conditions and to the same extent as Czech entrepreneurs. A foreign natural person or legal entity can either participate in establishing a Czech legal entity, become a shareholder in a Czech legal entity that has already been established, or establish such an entity himself or herself as a sole shareholder. Income tax and VAT for natural persons and legal entities are some of the basic taxes in the Czech Republic. Other taxes include excise taxes, motor vehicle tax, capital transfer tax, stamp duty, as well as taxes on land and buildings. Company Taxation All companies founded within the territory of the Czech Republic are considered to be resident taxpayers and must pay tax on their total worldwide income in the Czech Republic. Foreign companies organisational units and foreign persons permanent establishments are also liable for Czech taxes, but only on revenue generated in the Czech Republic. The concept of the permanent establishment has been widely applied, such that foreign companies rendering services in the Czech Republic for a longer period than 183 days are deemed to be the owners of a permanent establishment and are therefore liable for Czech tax. A company or permanent establishment must be registered for tax within 30 days of being established. The flat rate of corporation tax for legal entities has been 19% since 1 January The flat rate is applicable to all companies regardless of who owns them. Following on from the Bookkeeping Act, the Income Tax Act gives legal entities the option of having a fiscal year that differs from the calendar year. A tax period can also be a so-called financial year, i.e. any period of 12 consecutive months beginning on the first day of a month. It is necessary to report your intention to change your tax period from the calendar year to the financial year to the competent local tax administration office. Value Added Tax/VAT number When the Czech Republic entered the EU in 2004, the most extensive VAT reform since 1993 took place in May of that year. The aim of the reform was to adapt Czech VAT legislation to EU Community Law. All European Union VAT Directives have been implemented in Czech VAT Law. The rate of VAT on goods and services is generally 21 per cent. Goods and services subject to the reduced VAT rate of 15% are listed in the annexes to the law (e.g. certain foodstuffs, books, cultural events). Commercially active persons and other economically active persons must be VAT registered. The rule for small businesses is that they do not need to be VAT registered if their turnover in the past 12 calendar months has not exceeded CZK 1 million (approx. 39,000). 6 7 Foreign companies (from the EU and third countries) must be VAT registered in the Czech Republic if they generate revenue in the Czech Republic where the place of performance is in the Czech Republic and the tax liability is not transferred to the Czech recipient if they have a permanent establishment in the Czech Republic. Reverse Charge System The basic VAT mechanism is applied to goods deliveries between persons registered in different EU member states, i.e. taxation in the country of the recipient (= reverse charge system). When a Czech VAT payer purchases goods from the EU, the place of taxable performance is the location of the goods after the shipment or transportation is complete in other words, the Czech Republic. The Czech customer informs the supplier of his or her tax identification number (in Czech: DIC), and the supplier charges the goods delivery excluding VAT. This price represents the tax basis for the recipient of goods. In accordance with the VAT rate applicable in the Czech Republic (standard rate: 20 per cent, reduced rate: 14 per cent), the recipient of goods is obliged to calculate the tax from the price excluding VAT, and to state this tax in his or her tax declaration as his or her tax liability his or her obligation to the Czech state. If the taxpayer uses the acquired goods for his or her taxable services, he or she is also entitled to claim a tax deduction. For intra-community deliveries, the Austrian invoice for the delivery of goods to the Czech Republic shall therefore be issued without charging VAT. However, the following prerequisites must be fulfilled: 1. The delivered goods actually arrive in a different EU member state; this is verified using the customer s certificate of receipt, delivery note or confirmation from the haulage company, etc. 2. The foreign customer is an entrepreneur (this is verified using the foreign sales tax identification number, see below). 3. The customer has purchased and paid for the delivered goods for his or her company. 4. The goods are liable for sales tax in the other EU member state; this is indicated by the customer s foreign sales tax identification number, see below for verification. Intra-community delivery to Austria is only exempt from sales tax if all four prerequisites are simultaneously fulfilled and the supplier can provide evidence for this. The supplier issues an invoice excluding sales tax. Standard additional services (e.g. packaging, transportation, insurance) are also exempt from tax. The procedure for goods delivery by a Czech VAT payer to a VAT payer in a different EU country is carried out inversely. In addition to general information, the following must be stated on the invoice for intra-community deliveries: VAT number of the entrepreneur providing the service VAT number of the Czech recipient A note that the recipient is obliged to register for and pay the tax (suggestion for phrasing in the Czech language: Povinnost priznat a zaplatit dan prechází na Vás jakožto príjemce plnení. Translation into English: The obligation to declare and pay tax is transferred to you as the recipient). Writing the translation on the invoice is sufficient. The sales tax number can be verified using the following EU system: Since 2010, the following general B2B clause applies to services that a company renders for a different company: if the service is granted to a taxpayer, the fundamental place of performance is the recipient s place of business or company location. There are, however, many exceptions to this clause. In accordance with EU Directive 2008/8/EC, since 2010 all member states must use the reverse charge system for all services that come under this general B2B clause. The member states can also apply the reverse charge system to other services. Excise Tax This tax only applies to products listed in the Excise Tax Law, such as fuel, alcohol, and tobacco. The EMCS (Excise Movement and Control System) is a computerised system for controlling the transportation of goods liable for excise tax under duty suspension arrangements within the EU. Since 1 April 2010, this system has replaced the paper form that had previously been used in this type of transportation with electronic messages from the sender to the recipient. EMCS overview Legislation Excise duty rates Double Taxation Agreement A new double taxation agreement between Austria and the Czech Republic was introduced in This new agreement replaces the previous agreement, dated 1979, and is essentially based on the OECD Model Tax Convention The concept of the permanent establishment is important in the double tax agreement. However, permanent establishments within the meaning of the double tax agreement are not the same as permanent 8 9 establishments for the purposes of the Czech Republic s internal tax legislation. Within the meaning of the agreement, a permanent establishment is a fixed place of business through which a company s business is wholly or partly performed. In particular, such permanent establishments include branches, agencies, production facilities, workshops and mines. Permanent establishments are also: A building construction or an assembly project, or supervisory activities associated with these activities, where the duration of the construction, assembly, or supervision exceeds 12 months. Services, including consultation services and business management activities, rendered by a company from a contractual state; or employees or other members of staff hired for this purpose by a company if this activity in the other contractual state lasts for a total of more than six months within a period of 12 months (so-called service permanent establishments) Construction sites and assemblies which do not exceed the duration of 12 months; warehouses; and information offices that only perform ancillary activities are not considered to be permanent establishments. An agent is considered to be a permanent establishment of the principal if he or she is authorised to sign contracts and exercises this authority regularly in the other state, and he or she is not an independent agent (e.g. estate agents, commission agents, and commercial agents). The most common manifestation of the permanent establishment is the branch. A company s profits in a contractual state are liable for tax in this state. Thus, if a company has a permanent establishment in the other contractual state, those profits that are apportioned to the permanent establishment are taxed in the other contractual state. The profits of the permanent establishment are calculated as if the establishment had performed its operations as an independent company. The expenditure accrued for this permanent establishment, including the costs of management and general administration, are deducted from the profits. Dividends are subject to a 10% deduction at source; no deduction at source is paid for a reduction in shareholding of 10 per cent. Interest may only be taxed in the recipient s country of residence; there may be no deduction at source. Royalties may be taxed in the recipient s country of residence, with the exception of certain royalties, such as royalties for use of patents, prototypes, brands, knowledge, and software, which are subject to a deduction at source of 5 per cent. This is charged in the recipient s country. There may be no deduction at source for the use of copyrights. Fees for services, e.g. consultation, are not considered to be royalties. On 31 December 2010, an exemption clause in the Interest and Royalty Directive, which the Czech Republic arranged with the EU (Directive 2003/49/EC on the joint tax regulation for interest and royalty payments between affiliated companies of various member states) became invalid. As a result, on 1 January 2011 a provision came into force which exempted royalties paid in the EU and Switzerland to Norway and Iceland from deduction at source. However, this exemption is subject to certain conditions both the royalty payer and the recipient of royalties must be persons who have direct access to capital (in other words, their proportion of share capital or of voting rights must amount to at least 25 per cent) during a period of at least 24 consecutive months. A ruling from the fiscal authority is necessary for the exemption to be enforced. The 183 day rule applies to income from employment (wages and salaries). Here it should be noted that if employment in this state is continued after this period, temporary absences are included when calculating the period, e.g. travels abroad or trips home at the weekend. The 183 day rule now refers to a period of 12 months; this was one calendar
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