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Establishing limited liability companies finally cheaper in the Czech Republic?

June 7, 2016

Yet another amendment came into force this Tuesday (7 June 2016) aiming to facilitate establishment of so-called simple limited liability companies at minimum cost. This amendment (Act No. 161/2016 Coll.) to Act No. 549/1991 Coll., on court fees follows a number of steps previously taken by Czech legislature in order to simplify and speed up the process of and reduce the cost of establishing limited liability corporations (usually denominated by their affix of “s.r.o.) which remain the most used form of corporation in the Czech Republic. The objective of these legislative efforts is to create and support business environment in general and is motivated mostly by requirements enforced by European Union, respectively European Commission which respect to aid from structural and investment EU funds. Simple, fast and cheap establishment of an s.r.o. (and these cost are understood as the administrative cost of establishing an s.r.o., not its capital) is the necessary prerequisite for receiving further aid. These ex ante conditions must be met by Member States  in order to participate in the 2014–2020 programming period, no later than by 31 December 2016. Czech Republic has clearly elected to take a large number of very small steps to achieve this goal. One of these previous small steps was to allow registrations into Commercial Registry directly by notary, instead of the court, and another was to reduce the court fee due for first-time registrations by notaries. The current amendment seeks to allow establishments of the so-called simple s.r.o. at minimum cost.

The amendment that came into force on 7 June introduces certain conditions under which certain types of first-time registrations into commercial registries will be exempt from court fees altogether. These conditions are:

1. Registration must be done by the notary, not the court;

2. Capital contribution must be made in money, and

3.  The first-time registration will be based on the so-called simplified legal act establishing the company (i.e. the act / founding deed forming the firm will be a ‘bare bone’ deed containing / complying only with the mandatory requirements set forth by the Civil Code and by the Corporations Act). However, even these simple legal acts must be made in the form of a public document – notarial deed.

This amendment thus does not mean that any newly established limited liability company will be automatically exempt from the court fee, but only those that will be established under the above conditions. The exemption applies only to first-time registrations and this any later changes will be subject to standard fees, which amount to 1 000 CZK if made in front and by the notary, and 2 000 if processed through the registry court. This exemption applies only to court fees, while the notarial fees charged for drawing up the documents remains the same.

The white paper to this amendment anticipates that future amendments will result in reducing also the fees charged by notaries for drawing up necessary documents. Currently a foundation deed establishing an s.r.o. costs about 4 000 CZK and the objective is to halve this fee to 2 000 CZK excl. VAT, which the white paper considers (inaccurately) enough to meet the European Commission’s requirements. The truth is that mere halving of the notaries’ fees will still not be enough to meet the EU targets considering other necessary costs directly associated with the establishment such as the CZK 1 000 fee paid for a basic trade license. This means that at present time it is still not possible to establish even the most basic s.r.o. in the Czech Republic at the cost envisioned by the European Commission, which set this minimum cost at 2 700 CZK, respectively 100 EUR.

Under the current law the minimum cost of establishing an s.r.o. in the Czech Republic involves the following charges and fees:

a)  Court fee for first-time registration of a corporation into the commercial registry, either in the amount of 6 000 CZK if processed by the court, or in the amount of 2 700 CZK if the registration is handled directly by notary (if this first-time registration is not exempt under the conditions outlined above); the notary charges 300 CZK to make the registration on to.

b)  Notary’s fees for drawing up the documents amounting to 4 000 CZK (excl. VAT) and additional 1 000 CZK in more complicated forms of establishment if the notary will need to draw up additional certified documents.

c)  Administrative fee of 1 000 CZK for obtaining a trade license, which is usually necessary except for very limited circumstances,

d)  Charges paid for having one’s signatures on various documents officially verified which usually amounts to several hundred CZK.

Given the outline directly above, it is clear that minim cost of establishing an s.r.o. usually reaches about 10 000 CZK in the Czech Republic, which is almost three times the required minimum of 100 EUR (approximately 2 700 CZK) set as a target by the European Commission. The present amendment thus represents just another piecemeal attempt to reduce the true cost of establishment of an s.r.o., and only under certain conditions where the court fee of 6 000 CZK, respectively 2 700 CZK (if the registration is processed by notary) will be eliminated.

As a result the scope of the amendment is rather narrow – it may reduce the cost (and simplify and speed up the process) of establishment only if one can do with the simplest forms of an s.r.o. and even though the exemption amounting to 2 700 – 6000 CZK may be in such circumstance s considerable it still does not meet the 100 EUR target. Czech Republic will therefore need to pass additional legislative act to further simplify the s.r.o. establishment by the end of 2016.

Mgr. Jan Dudák, trainee advocate

AK Holec, Zuska & Partners