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There are different ways of structuring employment arrangements for foreign staff seconded to the Czech Republic. Each scenario set out below has various tax implications and expert advice from one of our registered tax advisors should be sought before embarking upon any of these.
· Expatriates employed directly by a Czech entity
· Expatriates employed by a foreign entity with/without any presence in the Czech Republic
· Expatriates employed under a “hiring out of labour” contract
Under each of the above scenarios, the Czech personal income tax position will generally be the same except for employees employed by a foreign entity working outside the Czech Republic. The main differences relate to the administrative burden of handling the various tax and other issues.
A fourth scenario is also referred to below (in Section 4) involving the application for trading licences. This scenario is much more of an administrative burden than the other 3 but offers cost savings provided there is a dedicated person to undertake the work involved.
1. Expatriates employed directly by a Czech Entity
If expatriates are employed by a Czech entity, they would enter into an employment contract directly with the Czech entity. This means the Czech employer is obliged to deduct all tax, social and health insurance contributions in the same way as for Czech staff. This liability arises from the first day of employment.
In addition, we would draw to your attention the following:
· Need to apply for work permits (only applies to non-EU nationals).
· Need to apply for residency permits. (In the case of EU nationals, they are entitled but not obliged to apply for a residence permit, but must only prove the purpose of stay, for example employment contract, or contract showing appointment as a director of a company ‘jednatel´ in Czech).
· Need to notify local Labour Office about their employment (also EU nationals).
· If the foreign staff have other taxable income, there might be a need to prepare year-end personal tax returns if they spend more than 183 days in the Czech Republic or are habitually domiciled here.
· Certain benefits provided by the Czech company such as accommodation, meal allowances during business travel exceeding statutory limits, school fees for children etc. would not be allowable for Czech tax purposes
2. Management Services Contract
a) Expats employed by a Foreign Entity WITHOUT any presence in the Czech Republic
The expats are employed by a foreign company which should not have a presence in the Czech Republic and are seconded by the foreign company to the Czech entity for the provision of services under a management services agreement or other contract. The employee is liable to the foreign company which is responsible for him. The foreign company serves as a service provider (through its employees seconded to the Czech Republic).
The employee would remain in his home tax and social insurance system. As there is no physical presence in the CR (or just occasional), such income (both the company´s and the individual´s) will be treated as Czech source income and is not declarable to the Czech tax authorities.
b)- Expats employed by a Foreign Entity WITH a presence in the Czech Republic
Should the foreign entity provide services in the Czech territory for a period of more than 6 months, it would be caught under the permanent establishment (PE) rule which means the foreign company would be obliged to register for corporate tax and pay tax on its profits in the Czech Republic. The corporate tax rate for 2005 is 26% (to reduce to 24% in 2006). The tax is calculated either based on an ‘accounting´ profit (even if the PE is not obliged to have proper book-keeping) or other bases for calculating the taxes are applied (e.g. a certain percentage of turnover). The method of taxation is usually agreed with the tax authority in advance, after registering for tax.
Under this situation, where a permanent establishment exists, all employees are subject to tax on their Czech source income, regardless of the duration of stay in the Czech Republic (However if their stay were to exceed 183 days, then they might be liable to Czech tax on their world wide income.).
In both cases, from the Czech company´s point of view, it would pay a service fee that would be basically tax deductible. However, it may incur withholding tax or a securement tax, which applies especially to non-treaty countries.
As in the direct employment scenario, the foreign staff (non-EU) will still need work and residence permits and additionally personal tax returns (as they would not be included in the Czech payroll system). In this scenario there may be various tax implications, and so we definitely suggest asking one of our tax advisors before adopting this scenario.
3. Expatriates employed under a “Hiring Out Of Labour” contract
Employment law allows foreign entities to second labour to the Czech Republic under a “hiring out of labour” contract. Although the employees are on the foreign company payroll, it is the Czech company that is responsible for making the various deductions under a payroll scheme. Any deductions would be off-set against payments made to the foreign employer. The Czech company is the actual ‘economic´ employer (i.e. the employees are considered as employees of the Czech company even though they are on the foreign company´s payroll).
Since 1 October 2004, there is now a requirement to apply for a licence at the local Labour Office to act as an employment agency in the Czech Republic
The Czech entity must account for salary tax deducted from the employees´ salaries and pay this to the Czech tax authority, and offset it against payments made to the foreign employer.
4. Applying for a Trade Licence and Long-Term Visa
The foreign individual could register as a sole proprietor and he would be responsible for his own tax and accounting compliance issues. Any payments made by the company to the sole proprietor would be gross of tax and allowable for corporate tax purposes.
One disadvantage however is that there is anti-avoidance provision (in Czech known as the ‘Svarc system´) whereby companies are not allowed to pay staff as if they are self-employed when in reality they are actually employed. Therefore any arrangements must be carefully planned regarding the area of working on the company´s premises using the company´s equipment and fixtures and fittings and so on.
This route may be the most burdensome from an administrative point of view, but may be the least expensive from a cost point of view – provided you had a dedicated person who can handle the administrative issues involved. Otherwise the professional fees would outweigh the benefits obtained.
Implications for the sole proprietor:
– Apply for trade licences.
– Apply for a long-term visa.
– Register for personal income tax.
– Register for social and health insurance contributions. The minimum payments amount to around CZK 2,000 per month. Non-EU nationals are additionally required to register in the commercial register. Therefore, double entry book-keeping would be required (as opposed to single entry).
– Preparation of accounts and personal tax return.
– When the employee leaves the Czech Republic, the trading licence must be cancelled which requires approval from the financial office and the approval must be subsequently filed with the trade licence office and a small fee paid.
There a number of scenarios under which foreign employees can be employed in the Czech Republic. The most straightforward scenario is for the employee to be employed directly by the Czech company. In the case of the other scenarios, the tax implications may be more involved and so if you needed any advice on these issues, we would recommend that you consult one of our tax advisors. We would be only too pleased to hear from you.