Business in the Czech Republic: a branch office or an LLC?
As a foreign entity, you can enter the Czech market in several ways. In this article, we will focus on the two most common. We will talk about what advantages the formation of a branch office offers and when it is worth incorporating a new limited liability company.
Foreign companies, which intend to do business in the Czech Republic or which are already conducting business here to a lesser extent, proceed to establishing a domestic legal entity for various reasons. One of them is easier contracting in the given market, another is greater credibility in the eyes of potential customers, or the use of tax and other advantages.
3 ways to enter the Czech market
Foreign entities are subject to the same conditions for conducting business as Czech entities. The Czech Commercial Code lists three ways you can start on the Czech market:
- through a business plant or a branch in the territory of the Czech Republic,
- by participating in the business of a Czech legal entity,
- by relocating the registered office to the territory of the Czech Republic.
The second and third variants are used marginally. Most companies choose to establish their own business (a business plant according to the Civil Code). Foreign companies, unless the law directly requires business in the form of a joint-stock company (for example insurance companies and financial services), most often choose between the establishment of a Czech limited liability company and the creation of a branch.
These variants differ in several respects, especially the varying degree of administrative complexity during the creation and subsequent operation.
Establishment of a limited liability company
Establishing a Czech business company is faster and cheaper than creating a branch, so we recommend that most clients consider it as a first choice. However, the administration, operation and possible liquidation of a company is more demanding, since it involves the establishment of an independent legal entity, which has its registered capital, must have executive directors and shareholders and hold general meetings. These obligations and a few minor obstacles during the formation can tip the scales in favour of a branch office when making a decision.
The process of establishing an LLC
In cooperation with experts, you can usually set up a limited liability company within 7 days, as they will perform most administrative tasks for you and help you avoid procedural delays. In the classic case, the establishment of an LLC by yourself takes place at the notary’s office in several basic steps:
- Choosing the name of the company and drawing up the Deed of Foundation / Articles of Incorporation
- Submission of an excerpt from the Criminal Records Register of the executive from the Czech Republic and from the place of permanent residence
- Drawing up a notarial deed
- Establishment of a trade licence at the Trade Licensing Office
- Payment of registered capital (amounts over CZK 20,000 must be deposited to a bank account)
- Registration of the company in the Commercial Register
- VAT registration, vehicle registration, …
You can complete all these tasks by yourself, or rely on professional help and establish a limited liability company online. In general, our practice shows that the greatest delays arise for two reasons: the excerpt from the Criminal Records Register, and the bank account.
An excerpt from the Criminal Records Register in the executive’s place of permanent residence is easier to obtain from EU countries. For other countries, the office may require an official translation into Czech with an apostille, i.e. a higher form of verification of the authenticity of the document. We also recommend a registered capital of less than CZK 20,000, as you can deposit it in cash and need not have a bank account already when setting up the company.
Accounting and taxes in the case of an LLC
The requirements for bookkeeping, including any obligation to audit the financial statements, are the same for an LLC as for a branch. In both cases, you keep the accounts in accordance with Czech accounting regulations and you are obliged to publish the financial statements in the Commercial Register.
In addition, in the case of a limited liability company, you must hold general meetings and, in the case of sale of property or other acts, you conclude contracts with the parent company. The profit achieved is paid by the limited liability company as a share in profits to the parent company.
Summary of the business rules for an LLC
- A limited liability company is a separate legal entity.
- It must have at least one executive director, a shareholder and the registered capital.
- Its establishment can be faster than in the case of a branch office.
- It must be registered in the Commercial Register where it publishes the financial statements.
Establishment of a branch office
A branch office is a more demanding form of starting a business in the Czech Republic financially and in terms of time, however, the advantages in tax relations and simpler administration than in the case of an independent company may prevail in some cases. It is not a separate legal entity, but a branch of the parent company in a given country, which has an assigned manager.
The process of establishing a branch office
The process of setting up a registered branch from the moment of delivery of all documents takes at least 3 weeks. The first step is the decision of the parent company to set up a branch. This is followed by an application for the necessary trade licences and then by registration in the Commercial Register. You must submit a whole range of legal documents, while all acts in the Czech Republic can be carried out on your behalf by an expert or a lawyer based on a power of attorney.
Accounting and taxes in the case of a branch office
In most aspects, conducting business through a branch is no different from a limited liability company. In the case of a branch, you must correctly allocate the costs and revenues of the foreign founder. You perform all property transfers and other acts de facto informally, without the need to conclude contracts between the Czech branch and the parent company.
Pay attention to the correct determination of transfer prices of the intragroup transactions in accordance with the arm’s length principle. For this reason, also keep the transfer pricing documentation and a benchmark (comparative study).
In the case of a branch, the profit is part of the economic result of the foreign founder. Income tax is an item that the foreign founder can include (if the conditions are met) in its tax liability abroad in accordance with the relevant double taxation treaty.
Summary of the business rules for a branch office
- A branch does not acquire legal personality, legal capacity or competence to participate in proceedings. Contracts are concluded through the branch office with the parent company.
- A branch must be registered in the Commercial Register and publish its financial statements.
- A branch has one branch manager, who personally acts on behalf of the foreign company in matters relating to the branch.
- You can find more details in the article about the advantages and the process of establishing a registered branch.
Comparison of a limited liability company and a registered branch
|Establishment term||7 days on average||more than 3 weeks|
|Difficulty of establishment||Minimal with registered capital up to CZK 20,000.||Necessary provision of documents about the parent company.|
|Representation at estabilishment||possible (except for opening a bank account)||possible|
|Legal regime||Contracts are concluded directly with the LLC, clear responsibility.||Contracts are concluded directly with the parent company through the branch.|
|Income tax||The limited liability company’s profit is paid to the parent company as a share in profits.||The profit and the Czech income tax of the branch can be part of the economic result of the parent company. More advantageous due to avoiding double taxation.|
|VAT, excise duties and other taxes||identical||identical|
Which way is the right one?
Obviously, it is not possible to give a general answer to the question of which form will be more suitable for your case. It all depends on the specific case, the legal and tax specifics of your business, as well as the plans and strategy of the parent company. If there is no clear advantage that one of the options would bring you, it is always appropriate to consult with experts who can comprehensively evaluate the whole case from different perspectives.
In our portfolio of services, you will find both a complete service for establishing Czech companies and the possibility of buying a ready-made company or assistance with setting up a registered branch.
If you need help to decide which method to choose or if you are interested in further details about doing business in the Czech Republic, please contact us.