Legal Framework of Czech Companies Presented by: Martin Krištof Department of Corporate Economics kristof@econ.muni.cz 1. Czech law 2. Natural entities 2.1 Trades 3. Legal entities 3.1 Limited liability company 3.2 Joint stock company 3.3 General commercial partnership 3.4 Limited partnership 4. Other types of business entity 5. Commercial registration Czech law in general • Continental law • Strongly influenced by German and Austrian law • After the fall of the Communist regime - significant influence from other quarters, including Anglo-Saxon law • Extensive legislative process - harmonisation of the Czech legal system with the legal system operating in the EU Essential commercial codes (laws): • The Commercial Code • The Civil Code • Small Businesses Act (Code) • Tax Laws • The Law on Accounting • The Health and Social Insurance Laws Czech law makes a distinction between natural and legal entities. Natural and Legal Entities Natural Entities (Sole proprietor, entrepreneur) Individuals can carry on business activities in their own name, on their own risk with the purpose to achieve profit, and on the basis of a valid trade licence and according to law(s) Trade certificate (Živnostenský list) is given according to the Small Businesses Act. Legal Entities (Companies) Capital companies • Limited liability companies • Joint stock companies. Partnerships • General commercial partnership (unlimited partnership) • Limited partnership (also called commandite company) Other types of legal entities Natural Entities Economic activity NÉuralpersons 1995 2000 2002 2005 Nwiber % Number % Number % Number % mal 112*662 100,0 1680169 100,0 1732082 100,0 1817490 100,0 Agriculture, hunting and fote síry 104 152 9ß 119 494 %1 120 739 7?0 119 571 676 Manufacturing 167 285 149 230 466 13,7 243 265 14,0 260 030 14,3 Construction 131593 11,7 191 650 11,4 199 083 11,5 210 707 11,6 Whdesah and re ti£ trade; repair of motor vehicles, motomycks and personal and household goods 353 108 31,4 523 268 31,1 524 057 30,3 542 574 29,9 Fbtels and restaurants 50 338 4,5 90 087 5,4 93 674 5,4 100 031 %5 Transport, storage and communfcation 42 969 3?8 63 016 3?8 69 780 4?0 71668 3?9 Financ id interme diatbn 7 075 0:6 69115 4,1 68 401 3,9 68 533 3,8 Real estate, renthg and business activities 187 345 16,7 269 733 16?1 282 673 16?3 305177 16?8 Education 9 337 0,8 16 497 L0 17897 1,0 18 978 1,0 Halůi andsocialwork 23 284 2,1 25 946 15 26 533 1,5 27685 1,5 Other community, social and personal service activities 44 624 4,0 79 012 4,7 84287 4,9 90 251 5,0 Source: www.czso.cz. Czech Statistical Office Number of entities in the Register of Economic Entities Year Total Nr. of employes s 0X> 1 -5 6 - 19 20 -249 250 a vice 1998 1999 2000 2001 2002 2003 2004 2005 1 781 334 1 963 319 2 050 770 2 121 562 2 223 745 2 325 977 2 337 873 2 332 283 1 398 082 1 602 460 1 680 188 1 816 576 1 921 123 2 005 938 2 016 220 2 012 139 287 247 268 302 278 255 216 591 214 953 228 133 229 942 229 025 63 796 60 982 60 471 57 305 56 094 59 290 59 223 59 023 30 072 29 560 29 843 29 065 29 620 30 686 30 574 30 184 2 137 2 015 2 013 2 025 1 955 1 930 1 914 1 912 a bez udání poctu Year Total Nr. of employes s 01J 1 -5 6 - 19 20 -249 250 a vice 1998 100% 78,49% 16,13% 3,58% 1,69% 0,12% 1999 100% 81,62% 13,67% 3,11% 1,51% 0,10% 2000 100% 81,93% 13,57% 2,95% 1,46% 0,10% 2001 100% 85,62% 10,21% 2,70% 1,37% 0,10% 2002 100% 86,39% 9,67% 2,52% 1,33% 0,09% 2003 100% 86,24% 9,81% 2,55% 1,32% 0,08% 2004 100% 86,24% 9,84% 2,53% 1,31% 0,08% 2005 100% 86,27% 9,82% 2,53% 1,29% 0,08% Source: www.czso.cz. Czech Statistical Office Trades Trades (živnosti) - several categories -the applicant (either natural entity, optionally his statutory representative or statutory representative of a legal entity) must fulfil the following 4 basic general conditions: • a minimum age of 18 years • legal competence to perform legal acts • trustworthyness (not convicted for intentional crime act for more than 1 year or other crime act connected with the craft or some casual act connected with the craft) • the entity has no arrears of taxes Notifiable trades Regulated trades Unregulated trades Licensed trades Trades Notifiable trades (živnosti oznamovací) 1) Easiest to obtain - the appropriate department at the Trades Licensing Office must be notified 2) A trade certificate will be issued, provided that the conditions have been met (the time limit is 15 days from notification) Unregulated trades (živnosti volné) can be practised by those without professional qualifications, but the general conditions (above) must be met. Regulated trades (živnosti vázané) can be acquired once the conditions according to the type of business activity have been fulfilled. Crafts (živnosti řemeslné) - it is necessary to have either certificate of apprenticeship (výuční list) or a certificate of finished secondary school or higher education in the branch (or in similar branch and several years of work experience) Trades Licensed trade (živnost koncesovaná) concession trade license (koncesní listina) must be aquired at the Trades Licensing Office can only be practised by those who possess professional qualifications, as specified in appendix 3 of the Small Businesses Act (firearms, taxi, DDD - disinfection, desinsection, deratization and rat extermination, toxical waste liquidation) The entity is then registered in Trade register (Živnostenský rejstřík) and in Business Register {Rejstřík ekonomických subjektů provided by Czech Statistical Office) Some expatriates resident in the Czech Republic choose to start their own businesses. In the case of a foreign individual, entry in the Commercial Register is also required. Trades - distribution LJ Number to date 31.12.1993 31.12.1999 31.12.2000 31.12.2002 31.12.2005 LJ % ľ Total Trade s 1 263 758 2 837 831 3 001 820 3 251 556 3 02 149 100% - licensed trades 124 553 123 932 130 223 131 633 131 972 3,33% - regulated trades 203 503 190 604 234 405 259 390 270 550 7,95% - crafts 224 947 506 165 543 986 594 780 619 826 18,22% -unregulated trades 710 745 2 012 130 2 093 206 2 265 698 2 379 801 69r95% Trade s - natural entitle s 1 030 631 2 241 460 2 351 737 2 505 503 2 603 175 76,66% Trade s - le gal entitle s 233 127 596 371 650 083 746 053 793 974 23,34% Trades - foreigners 8 323 68 586 72 471 78423 75 661 2,22% [{Entities - total 339 357 1 713 134 1 733 203 1 361 705 1 903 306 100%i] - natural entities 794 937 1 523 553 1 573 323 1 634 311 1 676 221 37,34% - legal entities 94 920 139 531 204 330 226 394 232 035 12,16% Foreigners 7 292 58 386 61 34 0 64 000 60 532 3,17% Nr. of citizens 10 328 970 10 303 036 10 293 662 10 292 933 10 132 471 Nr oftrades per 1000 of citizens 122,35 275,44 291,62 315,9 334,12 Nr. of natural entities per 1000 inhabitants 86,15 166,27 173,23 180,87 187,41 Number o f trade s per _ enterpreneur 1,42 1,66 1,63 1,75 1,73 Ú Trades The following is required in case of foreign individual to obtain a Trade Licence: •Extract from the Criminal Record from the country of origin; •Translation of the Criminal Record form the country of origin; •Birth Certificate; •Translation of the Birth Certificate; •Extract from the Czech Criminal Record; •Landlord Statement; •Landlord agreement of having the business address on this place; •Extract from the Katastral register; •Proof of having the current mandatory amount of Czech Crowns on a bank account; •In the case of not having a Residence Permit, it is necessary to have a Guarantor; •Extract from the Czech criminal record for the Guarantor; •A copy of the Guarantor's ID; •Guarantor's statement that he/she agrees with this post; •Proof of Guarantor's taxes being paid; •Proof of Applicant's taxes being paid; Legal entities Legal Entities (Companies) Capital companies Partnerships Limited liability companies General commercial partnership (unlimited partnership) Joint stock companies Limited partnership (commandite company) Other types of legal entities - co-operative - considered to be an independent legal entity. - association of natural or legal entities, - purposeful asset associations, - municipalities, - other subjects, as prescribed by law. Legal entities The most commonly used commercial companies are limited liability companies and joint stock companies. Table 1: Legal entities by selected legal form Legal farm Legal entities 1995 2000 2002 2005 Number % Number % Number % Number % Registered legalpersons? total 196 434 100,0 370 Ö01 100,0 389 480 100,0 40Ö 295 100,0 Business companies and partners hps, total 112 514 57,3 204 075 55,1 214 637 55,1 220 461 54,3 Ge ne ral com m e rcial partnerships 5 879 3,0 7489 2,0 7 629 2,0 7 729 1,9 Lim ited liability companies 98 558 50,2 181 819 49,1 191 476 49,2 196 772 48,4 Joint-stock companies 7 564 3,9 14 092 3,8 14 845 3,8 15 260 3,8 S täte-owned enterprises 2 270 1,2 1 117 0,3 1 054 0,3 995 0,2 Cooperatives 6 172 3,1 11 007 3,0 11 536 3,0 12 085 3,0 Foundations 4 351 2,2 5 360 1,4 3 641 0,9 2 542 0,6 Budgetary organizations 1} 1 217 0,0 857 0,2 496 0,1 500 0,1 Semi-budgetary organizations 2 973 1,5 3 100 0,8 4 445 1,1 5 596 1,4 Schools, school and health establishments 5 297 2,7 5 521 1,5 4 392 1,1 3 626 0,9 Associations of natura I persons, associations of legal entities 43 473 22,1 80450 21,7 85 167 21,9 89 178 21,9 Other 18 167 9,2 59 114 10,0 64 112 16,5 71 312 17,6 Budgetary organization bejors 2001 Source: ;\ jz, Czech Statistical Office Limited liability company 1 to 50 individuals or legal entities (known as "shareholders" or "partners") can establish a limited liability company The liability of each of the partners is limited to the total of the unpaid parts of all partners' contributions to the registered capital as registered in the Commercial Register. Two or more founding partners -> a memorandum of association is drawn up in the form of a notarial deed. If there is a single founding partner, a notarised foundation deed is required. Registered capital requirements The minimum registered capital is CZK 200,000 Each partner is required to invest at least CZK 20,000 (If a single entity establishes the company, the registered capital must be fully paid-up before the company can be entered in the Commercial Register. Limited liability company Reserve fund - must be at least 10% of registered capital. General meeting • Supreme body • Rights similar to those of the general meeting of a joint-stock company • fundamental decisions on the company's activities Management Statutory representatives (Executives) • Statutory body • General meeting appoints one or more executives, who can act either independently or jointly • can only be a natural person Supervisory board • not mandatory • supervise the acts of the company and those of the executive(s) Limited liability company - advantages & disadvantages Advantages Disadvantages • Limited liability of partners • Less credible for partners T vi- + (banks, creditors, suppliers) • Low capital requirements v > ±-±- / A/r^ ! * ~ r* • For start-up enterpreneurs • Most commonly used form 01 . . . . . ! ! ... more administratively legal entity 11. demanding Accounting & Audit Requirements A limited liability company is subject to a mandatory statutory audit if at least two of the following criteria are met: • the balance sheets for the current and immediately preceding accounting periods exceeded CZK 40 million • the net turnover exceeds CZK 80 million • the average number of employees exceeds 50. Joint-stock company Can be set up by a single legal entity (including state), at least two natural entities (private individuals). It can be established by: • the original founder(s) subscribing shares • inviting other investors to subscribe shares, Share capital requirements The minimum share capital requirement is CZK 2 million for companies set up without a public offer for share subscription CZK 20 million for companies set up with a public offer for share subscription CZK 500 million for banks Joint-stock company Management The formal bodies of a joint-stock company are: • General meeting Board of directors Supervisory board An individual cannot simultaneously be a member of both the board of directors and the supervisory board at any one time. General meeting > company's supreme body > amends the company's statutes, > approves changes to share capital, > elects and reappoints members of the board of directors and supervisory board > approve financial statements and profit allocations and wind up the company > If there is only one shareholder, it has the same powers as the general meeting. > A simple majority is sufficient for most decisions, > a two-thirds majority is required to approve changes to share capital, amend the company's statutes or dissolve the company by liquidation, > a majority of three-quarters is needed to change the class, type, or underlying rights of shares, restrict the transferability of registered shares or cease public trading of the shares. Joint-stock company Board of directors • The board must have at least three members who are either Czech nationals or foreign individuals with Czech residency visas • Board of directors is elected for a maximum of five years. • Board oversees the day-to-day running of the company and is responsible for maintaining proper accounting and reporting procedures. • Board members act and sign on behalf of the company, within the guidelines approved by the general meeting. Supervisory board • At least three members elected by the general meeting for a maximum of five years • If the company has more than 50 employees, the employees must elect one-third of the members. • The board monitors the activities of the directors and the performance of the company, and reviews the annual financial statements. Joint-stock company The following types of shares are permitted: • Ordinary (common) shares. • Preferred shares (the articles of association may reduce or remove the voting rights attached to this type of share). • Convertible debentures of up to one-half of the nominal value of share capital can also be issued. Shares A joint-stock company can issue either registered shares or bearer shares. The shares may be issued either in certificated or uncertificated (paperless) format. Employees of the company can acquire ordinary shares - the amount cannot exceed 5% of the company's share capital. Preference shares may be issued of up to a maximum of 50% of the company's share capital. Joint-stock company Payment of Dividends The payment of dividends or profit shares is not restricted provided: • company has sufficient distributable profits according to Czech accounting and commercial law • and have sufficient funds to make the payment. The company may not distribute profit among shareholders if its equity is lower (or after the distribution of profit would be lower) than the company's registered capital Reserve fund At least 5% of annual after-tax profits must be transferred, until the fund is equal to at least 20% of the nominal value of the registered capital Joint Stock company - advantages & disadvantages Advantages Disadvantages • shareholders are not liable • capital requirements • solid image • higher administrative costs • higher level of control Accounting & Audit Requirements Joint-stock companies are required to maintain a full set of double-entry accounting records prepared in accordance with Czech legislation. A joint stock company is obliged to have: • annual accounts audited by a Czech registered auditor and • selected information from its accounts published in the business newspaper Commercial Bulletin (Obchodní vestník) Partnerships General rules • Two or more individuals or legal entities ('partners') can establish a limited or unlimited partnership. • The partners must draw up a partnership agreement. General commercial partnership (unlimited partnership) • The company is liable for a breach of its obligations with all its property, all partners are jointly and severally liable for the partnership's obligations - with all their (personal) property • No capital requirements • Any partner can act on behalf of the partnership, unless otherwise stipulated •Unlimited partnerships are not required to have a Czech statutory audit. General commercial partnership - advantages & disadv. Advantages Disadvantages • No capital requirements • Unlimited liability of a • Trustworthyness for company company's partners • Unlimited liability of partners (including their personal property) Limited partnership (commandite company) • Limited partnerships must have both general and limited partners • General partners are jointly and severally liable for obligations of a company (as in unlimited partnership) • The liability of limited partners (commandites) is restricted to the unpaid part of their investment (as in limited liability companies) => This company is thus a "hybrid" between the two forms mentioned above Limited partnership (commandite company) • Limited partnerships must have both general and limited partners • General partners are jointly and severally liable for obligations of a company (as in unlimited partnership) • The liability of limited partners (commandites) is restricted to the unpaid part of their investment (as in limited liability companies) => This company is thus a "hybrid" between the two forms mentioned above Limited partnership - advantages & disadv. Advantages Disadvantages • No capital requirements • Unlimited liability of a • Limited liability of limited company partners • Unlimited liability of general partners (including their personal properly) Other types of business entity Co-operative • Five or more individual members, or at least two legal entities • No maximum number of members • The minimum initial capital is CZK 50,000 • The members are not liable for the co-operative's obligations, unless the cooperative's statutes state otherwise • The co-operative's supreme body is the members* meeting, which is held at least annually. • Members* meeting elects the board of directors to manage the day-to-day affairs of the co-operative and act on its behalf • The members' meeting also elects an audit commission to perform regulatory and ombudsman functions • A lot of co-operatives are not focused to generating profit, but to providing or gaining benefit for the members Other types of business entity Silent partnership • Established by a written contract between a silent partner and a Czech business -silent partner invests in the Czech business in return for a share of profits. • A silent partner can be either an individual or a legal entity • Silent partners are only liable for losses to the extent of their original investment. Association • Two or more individuals or legal entities can establish an association • Association is not considered to be a legal entity under Czech law • Members are jointly and severally liable for obligations arising from the association's activities, profits and losses are shared equally, unless the agreement specifies otherwise. Business Register Business activities can commence as soon as entry in the Business Register has been made. The documents include: • the company's statutes and any subsequent amendments • resolutions on changes to the company's statutory bodies • financial statements (together with auditor's report, if required) • copies of resolutions winding up the company • details of any merger, division, change in status (eg from a company to a partnership) and related documents • expert valuations of non-monetary contributions • any contracts on transfer or lease of the enterprise, or a part thereof, control contracts, contracts on the transfer of profit, and several other documents www.justice.cz Commercial Bulletin Tax Issues Legal Entities: 2003-31% 2004 - 28% 2005 - 26% 2006 - 24% Natural entities and employees - progressive tax rate Profit m& Profit Wi^ivAi To Tax täte 0 121 200 0 12,00% 0 121 200 218 400 15 444 19,00% 121 200 218 400 331 200 33 012 25,00% 218 400 331 200 61 212 32,00% 331 200