Czechia offers many opportunities for employers based in the UK. As a former communist state, the country has undergone rapid socio-economic changes over the last several decades. Many successful new sectors have emerged, and the Czech economy has seen broad growth.
For employers based in the UK thinking about recruiting in Czechia, there are several considerations, including strict and sometimes complex employment laws, multiple options for setting up legal entities, and broader legal stipulations that derive from Czechia’s membership of the European Union. For British companies looking to expand into Central Europe, Czechia is an attractive base of operations.
There are five key facts that potential overseas employers should be aware of.
Foreign investors are often eligible for incentive programmes
The Czech government is eager to stimulate growth and develop its market-oriented economic model. It has launched many incentive programmes to attract foreign investment and wants to move up the value chain.
CzechInvest is the main government organisation responsible for disseminating information about doing business in Czechia. It can help overseas employers navigate the multifaceted landscape of grants, tax relief packages, loans, property discounts and so on.
Incentive programmes tend to be tied to specific industries, such as transport and energy. To qualify for state-aid programmes, employers must usually submit applications to CzechInvest directly, which can also guide potential investors.
CzechInvest has a dedicated office in London that is able to help potential British investors answer any questions and navigate the various bureaucratic requirements.
Employee taxes in Czechia are among the highest in Europe
While Czechia benefits from membership of the European Economic Area (EEA), its employer taxes are among the highest in Europe. As an overseas employer, you will pay close to 34% of your workforce’s gross salary in tax contributions, which is higher than UK National Insurance (NI) contributions, which stand at 13.8%
50% of employees earn 53,200 CK (Czech Koruna), equivalent to around GBP1800 or less per month. (Source)
You will be required to pay 24.8% in social security contributions (covering pensions, sickness and unemployment), with a cap of forty-eight times the average national salary. On top of this, you will also pay 9% in health insurance, with no cap. However, it’s worth keeping in mind that Czechia benefits from a low rate of corporation tax, set at 19% (similar to UK rates), and an equally low employee income tax of 15% (flat rate).
Most overseas employers set up Czech companies or branch offices
Overseas employers not using an employer of record will pursue one of two strategies: registering a branch office in the Czech Commercial Register or setting up a tax-resident company.
There are four legal structures used to form companies in Czechia, of which limited liability companies (LLC) (společnost s ručením omezeným) and joint-stock companies (JSC) (akciová společnost) are the most popular. Smaller and medium-sized businesses (SMEs) usually opt for LLCs.
Once foreign investors have set up an appropriate legal entity, the Association for Foreign Investment and its partnered consultants can help directors and managers to navigate the complex domain of financial, legal, environmental, visa and property regulations.
Employers of Record (EOR) provides a streamlined way of running payroll in Czechia
Overseas employees that want to avoid the resource-intensive task of setting up a new Czech company may opt to use an Employer of Record regime, which represents a perfectly legal employment framework in Czechia.
An EOR or Professional Employer Organisation (PEO) allows you to run Czech payroll for your overseas employees without the need to establish and manage a separate legal entity. An EOR is essentially a foreign company that hires employees on your behalf in your country of choice.
As a team grows, many overseas employers find it beneficial to set up their own legal entities. EORs, although sometimes viable as long-term solutions, are often sought out by companies that are dipping their toes in the water for the first time.
EORs will be the most feasible alternative to setting up a separate legal entity for many UK companies that want to hire in Czechia.
Employment contracts are legally required in most cases
The Labour Code (Act No. 262/2006 Coll., as amended) is the main body of law governing employment relationships in Czechia. Other pieces of legislation may be relevant, depending on circumstances.
If you hire somebody in Czechia, you are legally required to provide them with a contract. This contract must include all details pertinent to the employment relationship, including working hours, travel expenses, sick pay, parental leave, benefits, etc. Fixed-term contracts cannot be greater than two years.
The one exception to this rule relates to “Limited Extent Work”. Companies can enter into a flexible arrangement with employees who work no more than twenty hours a week. The relationship can be terminated without a notice period or severance pay.
Citizens of countries within the European Economic Area (EEA) do not require any visas or permits to work in Czechia apart from their national travel documentation.
The prospect of organising a workforce in Czechia can appear daunting. But overseas employers should keep in mind that many initiatives and organisations have been created to streamline the process of investing in the Czech economy. The government is keen to attract foreign investors, and international companies will find they are very welcome and may be entitled to various incentives.
Furthermore, if you are not ready to set up a separate legal entity in Czechia, an EOR is a feasible alternative that will reduce much of the administrative and legal burden of recruiting new employees.
This article is a “Business Operations Report” (BOR), from a series of occasional articles that look at the nuts and bolts of setting up a business in a country that bne IntelliNews covers from the perspective of a foreign investor.