Business Environment

Following the transformation of the economic structure and the institutional framework in the 1990s, the current state of the business climate in the Czech Republic is more or less stable. It is now fully comparable to the standard common in other countries in the European Union, with which the Czech Republic has shared a common internal market since 1 May 2004.

Legal forms of businesses 

Both smaller-scale trade and the environment for large corporations have developed successfully. In the Czech Republic, it is essentially possible to do business as a natural person – entrepreneur, or as an artificially created entity – a legal person. Individuals wishing to start up in business need a business permit – a trade certificate. The different types of legal entities are similar to those in most European countries: joint stock company, limited liability company, general commercial partnership, limited partnership, cooperative, association. The rules and conditions for their operation are also derived from the rules common in most EU Member States.

Taxation

The tax system in the Czech Republic is similar in its main characteristics to the systems in most developed countries, especially in Europe. Accounting standards have also been adapted to the rules in force throughout the EU, which provides opportunities for further European cooperation. The Czech Republic has also entered into double taxation agreements relating to dividends, interest and fees with numerous countries. Tax revenues from indirect and direct taxation are roughly equal. Direct taxes include personal income tax, corporate income tax, property tax, property transfer tax, road tax and inheritance and gift taxes. Indirect taxes largely comprise value added tax (VAT), excise duties and customs duties.

Personal income tax is charged at a flat rate of 15%. The income of employees and the self-employed is subject to tax. Corporate income tax stands at 21%. Tax rates have been steadily reduced since 2003. Investment funds and investment companies are subject to a lower 5% rate. Land and buildings are subject to property tax. Road tax is levied only on vehicles used or intended for business. The property transfer tax rate is 3%, and is paid by the seller. Any company registered in the Czech Republic may purchase property without restrictions, the purchase or transfer of property only needs to be registered in the relevant Land Register.

Value added tax has been harmonised with the corresponding EU regulations. VAT is levied on most taxable supply in the Czech Republic and on imported goods. The standard rate is 19% and the reduced rate is 9%. Most goods and services fall under the standard rate. Excise duties are also harmonised with the relevant EU directives. Excise duties are levied on mineral oil, alcohol, beer, wine and tobacco products.

Investment climate

The interest in investing in the Czech Republic is stimulated not only by the country’s favourable geographical location (its proximity to eastern markets), but also by its reliable infrastructure. Investors appreciate the sound protection of investments and the system of investment incentives. Other factors also support investment in the Czech Republic. Besides the country’s political and economic stability, there is zero discrimination. Under Czech law, foreign and domestic persons are equal in all areas, from the protection of proprietary rights to investment incentives. The Czech Republic is a member of MIGA, the international investment protection organization, and has signed numerous bilateral international agreements promoting and protecting foreign investments.

The protection of proprietary rights is also high in the Czech Republic. In addition, the Czech Republic is a signatory to international copyright agreements. Existing legislation thus guarantees the protection of all forms of property, including patents, copyrights and trademarks. As for the distribution and expatriation of profits by Czech subsidiaries to their foreign parent companies, there are no restrictions, apart from the obligation of joint stock companies and limited liability companies to create a statutory reserve fund and pay withholding tax.

Key sectors

The Czech Republic actively strives to promote investment in sectors with high added value. These sectors include the automotive industry, aviation, precision engineering, electrical engineering and electronics, genomics and biotechnology (life sciences), medical technology, strategic services, IT and software development. These sectors draw on industrial traditions, quality technology universities and the excellent language skills of the Czech population.

In this decade growth-driving sectors are different from those that dominated the 1990s in terms of production volume and revenues. For instance, Czech industry is now lighter and focused more on sectors offering higher added value. Almost a third of the total number of employees in the Czech economy – close to 1.3 million workers – work in industry. They are concentrated in about 150,000 firms. Besides the automotive sector, which is currently the driver of the Czech Republic’s economic growth, the chemical and pharmaceutical sector is also very developed. This sector now employs approximately 120,000 people.

The Czech Republic’s reputation as a place of car production is rooted in the fact that one of the three oldest car-making corporations in the world is located here. Automobile engineering and manufacture currently benefits from the excellent skills and innovative solutions of Czech engineers combined with competitive service costs. The manufacture of plastic products is an important subcontracting sector for car production. It also supplies intermediary products to all other industry segments. Czech hi-tech engineering is represented in particular by precision engineering, especially the manufacture of tools (cutting machines and metal shaping machines) and machinery. The manufacture of metal working machinery enjoys a tradition in the Czech Republic stretching back for more than a century.

The Czech Republic also offers numerous opportunities in microelectronics and electronics. The country is particularly suited for the establishment of production facilities, design centres, joint ventures with Czech companies and as a source of final products from existing Czech facilities. The electronics and microelectronics industry, with 180,000 employees, is the second largest sector in the country. 

Those who locate their strategic services in the true heart of Europe have access to solutions at highly competitive costs, and other benefits. The Czech Republic also remains the leading IT market in Central Europe; the increasing technological literacy of Czech end users means there are market opportunities for both small players and the traditional large technology suppliers. Projects classified as strategic services include ICT expert solution centres, software development centres, customer contact centres, hi-tech repair centres and shared service centres.

Science, research, education

Given the ingrained spirit of innovation and the number of skilled secondary school and university graduates, the Czech Republic has recently seen growing numbers of global corporations launching research and innovation operations in the country.

Czech scientists are universally recognised for their discoveries and groundbreaking approaches in many fields of science. Czech laboratories supply the world with smart, practical inventions – eye-controlled computers for the disabled, nanofibre production machinery, modern drugs against HIV, cancer and hepatitis B, and new crime-fighting methods. Today, Czech scientists are members of numerous teams contributing to advances in key technologies. Czech chemists, whose reputation and results are impossible to ignore, are among the world elite.

Besides the well-known EU schemes to promote science and research (e.g. 7FP, CIPs), several institutions run programmes and offer subsidies for the promotion of science in the Czech Republic. One such institution is the Academy of Sciences of the Czech Republic; various ministries also commonly offer grants and subsidies.

Successful exports

The stability of the Czech economy has been accompanied in recent years by a foreign trade surplus and the sustained appreciation of the domestic currency. From today’s perspective it is important that, during the transformation from a centrally planned economy to a market economy after 1989, the Czech economy – once it had been placed in private hands – was flexible enough to find new markets, replacing the practically dead markets of Eastern Europe and other countries under Soviet influence. The constantly increasing quality of Czech production gradually opened avenues leading to the demanding West European and global markets, where it has remained highly competitive.

Intra-Community trade (trade with other EU Member States) is progressing particularly well and now accounts for almost 80% of aggregate turnover. The surplus generated in trade with the EU in 2007 was almost CZK 415 billion, which set off the high deficits recorded with non-European countries (CZK 174 billion, or roughly EUR 6.3 billion), the CIS – Commonwealth of Independent States (CZK 63 billion, or roughly EUR 2.3 billion) and emerging economies (CZK 53 billion; approximately EUR 1.9 billion). Broken down into individual countries, Germany remained the largest trade partner (absorbing over 30% of domestic exports), followed by Slovakia (approximately 9%).

Highly developed external trade is currently one of the basic conditions underpinning the sound economic developments in the Czech Republic. Exports of goods and services have a positive impact by improving the competitiveness of domestic companies, reducing unemployment, increasing the growth of labour productivity and speeding up innovation processes.

The main trend today is unquestionably further internationalisation of Czech business – the opening of branches in other countries, the forging of links with competitors, the outsourcing of production and increased added value in process-managed enterprises. All market players, including the creators of the institutional framework, are conscious of the fact that the key competitive factors today are not only the quality of goods and services, but also the quality of education, public services and business conditions in the broadest sense.

Links:

  • Czech Business Web Portal: www.businessinfo.cz/en
  • Specialists from the CzechInvest government agency can provide further details to investors about trends and specific features in individual sectors in the Czech Republic, and are able to provide investment assistance: www.czechinvest.org/en

Last update: 16.8.2011 16:02

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