Sat right in the centre of continental Europe, the Czech Republic (now officially known as Czechia) has thrived as an independent company since the fall of communism and its amicable split from neighbours Slovakia in 1993. In particular, its economy has grown significantly since it became a member of the European Union in 2004. Not only have these changes contributed to a vast improvement in living standards for its population of just over ten million people, but it has also made the Czech Republic an exciting destination for incoming businesses from abroad.
Services and manufacturing underpin the Czech economy, as do the vast numbers of tourists who come to Prague to experience its castles and culture every year. However, prospective foreign investors should be aware that the country has its fair share of idiosyncrasies around payroll regulations, including the need to retain records for up to 30 years. To help you get a sense of the key responsibilities, this guide covers the basics around payroll and business in the Czech Republic.
Most incoming businesses in the Czech Republic set up as limited-liability companies (SROs), which have a minimum start-up capital requirement of 200,000 Czech korunas (approximately £6700; $9000; €7500). At the start of the registration process, businesses must provide relevant records to demonstrate that they have no outstanding police or tax issues. They'll also need notarized statutory declarations and partnership articles before officially registering at the Trade Licensing Office. Within 90 days of establishing the company, businesses will need to apply for a Commercial Register to confirm their registration, and companies also must register with the Social Security Administration and Revenue Authority.
Bank accounts are required to open up a business in the Czech Republic, and while this isn’t a difficult process in paperwork terms, it can take some time. Because of this, all companies, especially larger ones, should expect the overall set-up process to take longer than they may be accustomed to in other countries.
Collective bargaining is heavily practiced in the Czech Republic, so employers should be ready to handle potentially complex negotiations with workers, depending on their industry. As in most developed economies, written contracts that detail location and type of work, and employment start dates are mandatory; the inclusion of salary or probation information is common but not a legal requirement. Probation periods cannot last more than three months for standard employees or six months for management.
Working weeks in the Czech Republic are capped at 40 hours, generally spread across five eight-hour days. Overtime is limited to a maximum of eight hours per week and 150 hours within a calendar year, and the total length of daily shifts must not exceed 12 hours. Overtime pay must run at a minimum of 125% of usual rate, or alternatively, employers and employees can agree to give time off in lieu as compensation for overtime worked. Working at weekends should be paid at a minimum of 110% of the usual rate.
Compensation and Severance
The Czech Republic has a national minimum wage structure divided across eight ‘work groups’ of different professions. The lowest group - Group 1 - generally consists of relatively unskilled roles like shop assistants, delivery drivers and cleaners: as of 2020, their minimum rates are 87.30 Kč per hour (approx. £3.00; $3.90; €3.30) or 14,600 Kč per month (approx. £500; $650; €550). The highest group is Group 8 and contains the likes of financial and sales directors and brokers: their rate for 2020 is 174.60 Kč per hour (approx. £6.00; $7.80; €6.60) or 29,200 Kč per month (approx. £1000; $1300; €1100).
Bonuses in the Czech Republic are not required, though many companies will restructure salaries to either dole out wages differently throughout the month or issue a bonus twice a year. It's also standard practice to supplement employee salary with perks, such as a gym membership or free parking. The specific compensation plan is generally discussed with the employee prior to onboarding.
Notice periods for termination are two months, starting from the first day of the month following that in which the notice is given. Severance pay is one month of salary for those with one full year of service, two months for those with two years, and three months for those with three years of service or more.
Tax and Social Security
The Czech Republic has one flat income tax rate of 15% on all earnings. The corporate tax rate is 19%, a relatively attractive rate for foreign businesses compared to many other countries. VAT runs at 21%, with some reductions in place for certain goods. Businesses should remain vigilant as to the status of these rates, however, as they are normally subject to change on a regular basis.
Social security contributions cover pensions, unemployment benefits and the sickness fund. In total, employers contribute 33.8% of an employee’s salary to these, while the employee contributes 11%.
All tax and social security contributions are withheld at source by employers.
Holidays and Leave
Employees are entitled to a minimum of 20 days of paid leave per calendar year, and this is normally accrued on a month-by-month basis. The Czech Republic has 12 days of public holidays per year. Employees who work these days are entitled to at least double their normal rate, or the normal rate plus the same amount of time off in lieu, depending on agreement between employee and employer.
Maternity leave entitlement is 28 weeks (37 weeks for multiple births) and starts six weeks before an expectant mother’s due date. This is paid at 70% of salary and employers must keep the mother’s position available for them to return to after the leave has been completed. Legal entitlement to paternity leave was introduced in 2018, lasting seven days and taken within the first six weeks post-birth. This is also paid at 70% of salary.
Sick pay must be paid by employers from the fourth to the 14th day of sickness at 60% of salary; the Czech government picks up any sick pay beyond this initial two-week period.
Low tax rates, EU membership and relatively low wages all make the Czech Republic very attractive to foreign businesses. But administrative processes are cumbersome and many of the rules and regulations change on a regular basis. Keeping on top of all relevant responsibilities is important and is an area where a global payroll provider can play its part, delivering expertise that ensures compliance and freeing up business resources that can be focused on carving out Czech market share.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.