Business in Czech Republic

The Czech Republic is located in the centre of Europe, bordering Germany, Poland, Slovakia and Austria, which is strategically advantageous for businesses focused on the eastern and western European markets. This position makes the Czech Republic an important transport and logistics hub providing easy access to key European markets.

Political system

The Czech Republic is a parliamentary democracy with a liberal political system, which creates a stable political climate for doing business. The principles of free competition and legal protection of business activity favour the development of the private sector and attract foreign investment.

Integration into international structures

European Union (EU): Accession to the EU in 2004 contributed to the Czech Republic’s integration into the European economic space, facilitating trade and economic relations.

Organisation for Economic Co-operation and Development (OECD): Membership in the OECD confirms the Czech Republic’s compliance with international economic standards and norms.

NATO and other international organisations: Belonging to these structures strengthens the Czech Republic’s international position and contributes to political and economic stability.

Business environment

Improving the business environment: The Czech government is actively working to improve the business environment, which includes reforms to simplify business-related procedures, making the country attractive to international investors.

Intellectual capital and innovation: The Czech Republic has significant intellectual resources and supports the development of high-tech industries and innovative entrepreneurship.

Investment climate

Foreign investment: Stability, integration into international economic structures, and active support for innovation create favourable conditions for attracting foreign investment.

Infrastructure development: The Czech Republic continues to invest in the development of its infrastructure, which improves the conditions for doing business.

Overall, the Czech Republic offers a stable and growing economy with strong support for innovative businesses and a convenient geographical location for access to major European markets.

Starting a business in the Czech Republic

Foreign companies have the right to operate in the Czech Republic on equal terms with local companies. This includes the right to trade, to acquire real estate and to participate in Czech companies as founders or co-founders.

Organisational forms of enterprises

Limited liability companies (s.r.o.) and joint stock companies (a.s.) are the most popular forms of business for foreign investors in the Czech Republic.

Companies need to register a unique trade name and comply with local legal requirements for registration and administration.

Visa and immigration issues

Foreign nationals must comply with Act No. 326/1999 Coll. regulating the stay of foreign nationals in the Czech Republic.

Depending on the purpose of the activity, different types of visas and residence permits may be required.

Resources for investors

Association for Foreign Investment (AFI): Provides information support and professional services to foreign investors.

Services offered through AFI:

• Legal and tax consulting
• Real estate and environmental consulting
• Financial and investment advisory services
• Audit and HR consulting

Practical steps to start a business

Recommendation

Consultation with experts: It is strongly recommended that you seek professional consultants for specialised services and support at all stages of starting and running a business in the Czech Republic.

These recommendations will help foreign investors navigate the process of establishing and developing their business in the Czech Republic, making the most of the opportunities and resources the country offers.

Tax system of the Czech Republic

The Czech tax system, which was established in 1993 and has undergone significant changes since the country’s accession to the EU in 2004, consists of three main categories of taxes:

Tax rates in 2024

Corporate income tax: The standard rate is 21%.

Special rates: 5% for underlying investment funds.

Withholding tax: Varies from 5% to 35%, depends on the type of income and can be reduced under double tax treaties.

VAT: Standard rate of 21%, with reduced rates for special categories of goods and services.

Property tax: Depends on the type and location of the property.

Features and reforms

The Czech Republic actively uses international taxation standards, including double taxation treaties based on the OECD Model Tax Convention, which makes it attractive to international investors. The country also pursues a policy of harmonising its tax laws with EU legislation, which simplifies cross-border transactions and reduces administrative barriers.

The Czech tax system offers a combination of a progressive approach to taxation for individuals and a moderate tax burden for businesses, which contributes to a favourable economic environment for domestic and foreign enterprises.

General information about the Czech Republic

The Czech Republic stands out among Eastern European countries due to the high level of education of its population. A significant part of the Czech population has secondary and higher education. The labour force in the country is not only well-educated, but also highly qualified, flexible and innovative. These qualities make Czech workers in demand, while labour costs are noticeably lower than in Western economies, which is a significant advantage for foreign investors.

Economic environment

The Czech economy belongs to the highly developed and open economies with a strong dependence on exports. About 85 per cent of Czech exports go to European Union countries, with Germany accounting for 33 per cent of this volume. The main exports include mechanical engineering, computer technology and transport vehicles. The country’s economic model is based on a strong manufacturing sector, including the automotive industry, which supports stable economic growth.

Diversification strategy

Czech producers face the challenge of finding new markets outside the EU to reduce dependence on traditional export destinations. The new export strategy, developed by the Ministry of Industry and Trade in co-operation with the business community, aims to expand the industrial base by developing the chemical and chemical-technology sectors. This will provide an opportunity to strengthen the country’s economic position and reduce its dependence on certain industries, thus increasing its resilience to external shocks.

Conclusions

The Czech Republic offers foreign investors a unique combination of benefits: a strategic location in the centre of Europe, a skilled and relatively inexpensive labour force, a developed industrial base and a stable economic environment. Investing in the Czech Republic can offer high returns due to these competitive advantages, especially if companies utilise diversification and innovation strategies to ensure long-term growth.

Dominant industries and investment environment of the Czech Republic

Machine building and automotive industry

The Czech Republic has traditionally attracted foreign direct investment in the mechanical engineering and automotive industries. These sectors have become a symbol of Czech industrial success due to historically established production traditions, a skilled and relatively inexpensive labour force, and the country’s favourable geographical location. Large investment projects have been implemented mainly in the north-eastern and central regions, making these areas the main centres of the automotive industry.

Research and development (R&D)

In recent years, the Czech Republic has been actively developing its R&D sector in an effort to attract investment in high-tech and innovative areas. R&D expenditure has grown from 0.95% of GDP in 1995 to over 2% of GDP in 2019, indicating significant public and private investment in this area.

IT and financial services

The software, IT and financial services sector has also seen significant development, becoming the second largest beneficiary of foreign direct investment after the automotive industry. This reflects the global trend of digitalisation and automation of business processes.

Geography of investments

Significant investments have been concentrated in regions such as the South Moravian Region, the Ustec Region, the Central Bohemian Region and the capital city of Prague. These regions offer developed infrastructure, access to educational and scientific centres and a high quality of life.

Population and linguistic characteristics

The Czech Republic has a population of about 10.7 million people, the majority of whom are ethnic Czechs. The country is characterised by a high level of multilingualism and cultural diversity, which makes it attractive for international business. Czech is the official language, but English and German are widely used in business communication.

The Czech Republic is an attractive destination for international investors due to its strategic location, skilled labour force, strong manufacturing traditions and active development of innovative industries. The country continues to strengthen its position as a key player in the European economic space.

Business culture in the Czech Republic and key economic initiatives

Business culture

The Czech Republic maintains a working week of 40 hours, with working hours spread from Monday to Friday, usually from 8/9am to 5/18pm. These standardised working hours ensure a work-life balance, which is valued in Czech society. The existence of 13 official public holidays also contributes to maintaining a high standard of living for employees.

Key economic events

The Czech Republic actively participates in international economic processes and aims at further integration with European economic structures. One of the most recent significant steps in this direction is the approval of the National Recovery Plan, which is financed with approximately CZK 200 billion. These funds will be used to modernise the economy, including the development of environmentally friendly transport, healthcare, high-speed internet networks and educational infrastructure. Such measures contribute to improving the business climate and the country’s attractiveness for foreign investment.

Political changes

The latest parliamentary elections in the Czech Republic in October 2021 resulted in significant changes in the political landscape. The Communist Party did not enter parliament for the first time since the Velvet Revolution, reflecting changes in the political preferences of the population. The formation of a new government by the coalition groups SPOLU and Piráti a Starostové opens up new prospects for political stability and economic development.

Investment attractiveness

The Czech Republic’s ambition to become a centre for high value-added investment is underlined by its emphasis on R&D and services. The Czech Republic offers foreign investors a unique combination of a skilled labour force, a high level of innovation and a strategic location in the heart of Europe, making it one of the most attractive countries to do business in the region.

New legislation in the Czech Republic: Key changes and their impact on the business environment

Business Corporations Act (Act No. 33/2020 Coll.)

As of 1 January 2021, significant changes were introduced to Czech corporate law, especially concerning limited liability companies and joint stock companies. The amendments clarified and optimised the company establishment and management processes, including the introduction of a monistic management structure in joint stock companies. These amendments are aimed at improving transparency and simplifying commercial activities, which may contribute to increasing the Czech Republic’s investment attractiveness.

Law on the Register of Ultimate Beneficial Owners (Law No. 37/2021)

Introduced from 1 June 2021, this law provides a new definition of ultimate beneficial owner (UBO) and requires all companies to update the relevant data in the UBO register. The legislation is aimed at combating money laundering and enhancing corporate transparency, which is a key aspect for maintaining international investors’ confidence in the country’s business environment.

Foreign Investment Verification Act (Act No. 34/2021 Coll.)

This law, which came into force on 1 May 2021, establishes national security mechanisms to screen foreign investments. It covers investments that pose a potential threat to national security or public order and includes sectors such as military material and critical infrastructure. Such measures are synchronised with European standards and strengthen the protection of Czech economic interests.

Construction Law

The new Construction Law, which will come into force on 1 July 2023, aims to speed up the processes of issuing construction permits and introduce digitalisation in this area. These changes can significantly improve the efficiency of public administration and simplify the construction business, which is particularly important to support economic growth and infrastructure development.

The adopted laws reflect the Czech Republic’s endeavour to create a more open, transparent and regulated business environment. This strengthens the legal basis for investment and commercial activities, increases investor confidence and contributes to the further economic development of the country.

Competition Act in the Czech Republic

The Czech Act on Protection of Competition (Act No. 143/2001 Coll.) establishes a legal framework for the regulation and protection of competition on the market for goods and services. The Act aims to prevent actions that may eliminate, restrict or distort competition and applies to both domestic and international transactions that affect the Czech market.

Key aspects of the law

Restrictive agreements: The law prohibits agreements between enterprises that may prevent, restrict or distort competition. This includes cartel agreements, concerted price fixing, market sharing and other types of anticompetitive arrangements.

Abuse of dominance: The Competition Law prohibits companies with a dominant market position from abusing that position. Examples of abuse include unfair prices, restricting production or development to the detriment of consumers, and conditions that put competitors in an unequal position.

Extraterritorial application: The Czech Competition Act also applies to actions of companies outside the Czech Republic if these actions may affect competition within the country. However, actions affecting exclusively foreign markets are regulated in accordance with international treaties to which the Czech Republic has acceded.

Importance for foreign investors

For foreign companies wishing to do business in the Czech Republic, understanding and complying with the Competition Act is critical. Knowledge of the restrictions imposed by the law helps avoid significant fines and maintain a healthy competitive environment. Companies, especially those that may have a dominant position in certain industries, should carefully analyse their market strategies to ensure compliance with Czech antitrust regulations.

The role of public authorities

The Czech Antitrust Regulatory Governing Body actively monitors compliance with the law, handles complaints, conducts investigations and imposes fines for violations. This emphasises the need for companies to have internal controls and compliance mechanisms in place to ensure full compliance with the law.

Fundamentals of the Competition Act (Act No. 143/2001 Coll.)

The Competition Act of the Czech Republic aims to prevent agreements and practices that may restrict, distort or eliminate competition. The main provisions of the Act address a variety of anti-competitive behaviour, including:

1. Price fixing: The law prohibits direct or indirect agreements on prices or other trading terms between enterprises that may distort competition.
2. Restrictions on production and investment: The law discourages agreements that restrict or control production, sales, research and development or investment.
3. Market sharing: An agreement between enterprises that results in the sharing of markets or sources of supply is prohibited.
4. Discriminatory terms and conditions: It is prohibited to apply different conditions to the same or similar transactions that put some businesses at a disadvantage compared to others.
5. Group boycott: The law prevents agreements that require parties to refrain from trading or otherwise engaging economically with businesses that are not parties to the agreement.

Exemptions from the Competition Act

There are certain conditions under which anticompetitive agreements may be excluded from the prohibitions of the Competition Law:

• Agreements may be permitted if they improve the production or distribution of goods, support technical or economic development, and provide consumers with a fair share of the benefits received.
• Such agreements must not impose restrictions necessary to achieve those objectives and must not enable the elimination of competition in a significant part of the relevant market.

EU legislation

The Competition Act of the Czech Republic also takes into account EU provisions, in particular Article 101 of the Treaty on the Functioning of the European Union (TFEU), which regulates anticompetitive agreements and practices at the level of the entire European Union.

Practical application

Companies operating in the Czech Republic or interacting with the Czech market need to carefully analyse their commercial agreements and practices for compliance with both national and European competition rules. Failure to comply with these requirements can result in significant fines and other legal consequences.

Unilateral behaviour and dominant position in Czech antitrust law

Determination of dominant position

Under Czech law, an enterprise (or a group of enterprises acting together) is considered to have a dominant position if it is able to act independently of competitors, customers or consumers. The criterion for determining dominance is a market share of more than 40 per cent, although other factors may be taken into account that may indicate dominance even with a smaller market share.

Prohibition of abuse of dominant position

The Czech Competition Act prohibits the abuse of a dominant position, which may take the following forms:

Key aspects of the law

Unfair terms in contracts: Setting terms that differ significantly from those that could be achieved in a competitive market, e.g., imposing disproportionate obligations on counterparties.

Discrimination: Applying different terms and conditions to identical transactions with different trading partners, putting some of them at a disadvantage.

Production limitation: Artificial reduction in production or innovation that is detrimental to consumers.

Dumping: Selling goods at prices below cost in order to drive competitors out of the market.

Denial of access to infrastructure: Refusal to grant access to essential infrastructure or intellectual property where such access is necessary to compete in the market, and the refusal cannot be justified on operational or other valid reasons.

Exceptions and defence mechanisms

Abuse of a dominant position is not always easy to prove, as a comprehensive analysis of the market situation and the behaviour of the enterprise is required. The law provides opportunities for enterprises to justify certain actions if they can prove that such actions have objective justifications or contribute to the improvement of competition for the benefit of consumers.

Practical implications for business

It is important for companies, particularly those that may have a dominant position in a market, to carefully analyse and assess their commercial practices in terms of compliance with competition law requirements. Failure to comply with these requirements can result in significant fines and negative consequences for both the company’s reputation and financial position.

Office for the Protection of Competition of the Czech Republic

The Office for the Protection of Competition of the Czech Republic strictly monitors compliance with antitrust rules and has extensive powers to investigate and punish infringements. It plays a key role in maintaining a healthy competitive environment by discouraging anti-competitive practices such as restrictive agreements and abuse of dominant position.

The important powers of the Authority:

• Investigation: The Office may independently initiate investigations and require enterprises to provide necessary information and documents.
• Proceedings: After an investigation, the Office may decide to impose a fine or other sanction. This decision may be appealed, providing an opportunity for judicial review.

Fines and penalties:

• Maximum fine: Up to CZK 10 million or up to 10% of the company’s annual turnover.
• Disqualification: Companies may be temporarily excluded from participation in public tenders.

Procedures to restore competition:

• Obligations: the Office may terminate the proceedings if the infringer proposes measures to restore competition.
• Leniency Programme: Provision is made to reduce or waive penalties for companies that actively cooperate with the Authority’s investigation.

Legal defence and redress:

• Damages Act: Victims of anti-competitive practices can claim damages for damages caused by the infringement of competition rules. This law establishes clear procedures for damages and does not allow for the reduction of compensation at the discretion of the court.

The Office for the Protection of Competition acts as the main guardian of the competitive order in the Czech Republic, preventing practices that could harm the market economy and consumers. This includes both administrative action against undertakings and ensuring the rights of victims to redress.

Transactions subject to merger control

In the Czech Republic, merger control is strictly regulated, especially if such transactions may lead to a significant reduction of competition on the market. Here are the main points to consider when planning such transactions:

Final Clauses

The Competition Authority may impose additional conditions or restrictions on the approval of a transaction in order to maintain competition. Particular attention is paid to preventing the formation or strengthening of a dominant position that could lead to a significant distortion of competition.

Where the aggregate market share of the concentration participants does not exceed 25%, it is generally assumed that the concentration will not lead to a significant deterioration of the competitive environment. However, each situation requires individual consideration.

Acquisitions from abroad

In cases of acquisition of foreign companies that may affect the market of the Czech Republic, several key rules and procedures stipulated by the Competition Act apply:

Applicability of the Competition Law

The Competition Act applies to all concentrations, including those occurring abroad, if they may affect the competitive environment within the Czech Republic.

This requires that the total turnover of all participants in a transaction on the Czech market reaches the established thresholds.

Peculiarities of the financial sector

Banks and financial institutions: Net turnover is calculated on the basis of income from interest, fees and commissions and financial transactions.

• Insurance companies: Net turnover is defined as the sum of premiums written.

Need for notification and approval

Concentrations reaching turnover thresholds must be notified to the Competition Authority for review and approval.

In the case of the financial sector, in addition to notification to the Office for the Protection of Competition, the approval of the Czech National Bank is also required.

Main stages of the concentration approval procedure

1. Filing an application: Businesses must file an application for concentration before it can be implemented.
2. Assessment by the Office: The Office analyses the transaction for its potential impact on the market, especially on reducing competition.
3. Decision: Management may approve the transaction, reject it, or approve it with certain conditions to maintain a healthy competitive environment.

Application of penalties

Violation of the conditions under the Competition Law may result in the imposition of fines, including significant financial penalties and prohibition from participating in public tenders.

Thus, when planning acquisitions of foreign companies that may affect the Czech market, it is necessary to strictly comply with the requirements of Czech competition law and to obtain the relevant regulatory approvals.