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Expanding your business into a new country can be a transformative yet challenging process. For those seeking tips for foreign investors in the Czech Republic, understanding the nuances of its legal and tax landscape is crucial to ensuring a smooth and successful market entry. The Czech Republic, with its strategic location in the heart of Europe, robust economy, and strong infrastructure, presents numerous opportunities for foreign investors.
We reached out to Barbora Stejskalová, Tax Partner at Accace Czech Republic, and Jan Najman, Legal Partner in charge at Accace Czech Republic, for their insights on the challenges and tips for foreign investors in the Czech Republic.
From your years of experience working with international clients, what’s the biggest surprise foreign investors face when dealing with Czech tax regulations?
A key surprise foreign investors often face with Czech corporate income tax relates to the strict rules governing the deductibility of certain expenses. While some costs are universally deductible, such as employee salaries or business-related travel, other expenses are subject to significant restrictions. For instance, representation expenses, which include entertainment, gifts to business partners, or hospitality, are generally non-deductible for corporate tax purposes. This can be a shock for investors used to more lenient regimes elsewhere.
Moreover, interest expenses on loans from related parties are closely scrutinized under the thin capitalization rules. These rules limit the deductibility of interest if the debt-to-equity ratio exceeds 4:1. If this threshold is surpassed, the excess interest becomes non-deductible, which can significantly impact the tax base for companies relying heavily on intra-group financing.
Depreciation policies also often catch investors off guard. The Czech Republic has fixed categories and rates for asset depreciation, meaning that companies have less flexibility in depreciating their assets compared to other jurisdictions. For example, real estate is typically depreciated over 30 or 50 years depending on the use of the building, which can be longer than in other countries, delaying potential tax benefits.
These specific tax rules, combined with strict penalties for non-compliance, make navigating the Czech corporate tax environment more complex than foreign investors initially expect.
What’s one piece of advice you’d give to foreign investors about avoiding common legal pitfalls when entering the Czech market?
Think twice about the legal structure before you implement it. Once the legal structure is in place, it might trigger additional costs to rearrange things.
For example: You want to develop a new app. You and your friends simply start working on it. After some time, you realize that it might be a good idea to set up a company. The company is supposed to develop the app, and one day, you may sell the company with a fabulous profit. However, as at least part of the development was made prior to setting up the company, the IP rights (or at least some of them) are not with the company but with the people who worked on it prior to setting up the company. If this issue pops up once the investor wants to buy your company, it may discourage the investor, affect the purchase price, or trigger costs in terms of drafting additional documents.
If you found these tips for foreign investors in the Czech Republic valuable and want to explore the topic further, join our upcoming webinar, An investor’s guide for expansion to the Czech Republic, where Barbora Stejskalová, Jan Najman and Stanislav Železný will dive deeper into these and other key aspects of doing business in the Czech Republic, including:
The webinar is free of charge, held on 12.11.2024 at 1PM (CET).
About Accace
Accace is a proactive consultancy and outsourcing partner who bridges the gap between needs and solutions. Combining smart and streamlined technology with a holistic approach, we provide an all-round care to clients and consider their matters as our own. With over 800 experts and more than 2,000 customers, we have vast experience with facilitating the smooth operation and growth of small to large-scale, global businesses.
About Accace Circle
Accace operates internationally as Accace Circle, a co-created business community of like-minded BPO providers and advisors who deliver outstanding services with elevated customer experience and erase the borders of service delivery. Covering over 50 jurisdictions with nearly 2,500 professionals, we support more than 15,000 customers, mostly mid-size and international Fortune 500 companies from various sectors, and process at least 200,000 pay slips globally.
