Fri, Feb 7, 2020

Check Your Wages Before Applying for Czech Tax Incentives

The Czech Republic has long been known as a business-friendly country that actively seeks to attract foreign investment with compelling features such as low labor costs, a central European location and generous tax and cash grant incentives. Like many other OECD countries, the Czech Republic offers incentives to foreign and domestic firms that invest in manufacturing, technology, and research and development (R&D). These incentives are funded from the country’s national budget as well as from EU funds. 

However, with a renewed focus to attract higher value-added jobs—particularly from the R&D and technology sectors—the country recently amended Act No. 72/2000 in September 2019, changing the requirements for how investors can qualify for valuable investment incentives. The amendment will shift incentives from support for all types of companies towards support for investments that require higher-value-add jobs, including technical and R&D support. 

How Does a Company Qualify as a Higher Value-Add?

While the new legislation continues to support all sectors and types of production, the long-term goal of the amended Act is to reduce support for low-cost manufacturing and place greater emphasis on higher value-added companies, meaning companies with the following characteristics:

  • No fewer than 80% of employees have a gross salary of no less than the average monthly gross salary in the region; and
  • Cooperation contract with a research organization or a university, and the applicant will have to spend no less than 1% of the costs for this cooperation; concurrently, it has to meet the condition of no less than a 10% share of employees with university-level education; or
  • The share of R&D employees is no less than 2%; or
  • It must purchase machinery equipment for R&D in the amount of no less than 10% of the total investment.

It is important to note that these requirements only apply to large enterprises. Small and medium-sized enterprises (SMEs) emphasizing technology and digitization might be most impacted by this change, possibly finding it easier to obtain valuable investment incentives in all regions of the Czech Republic (except Prague). They can now look forward to:

  • The minimum investment threshold for SMEs prior to the change in legislation was CZK 50 million (USD 2.2 million), but it is now reduced by half in selected regions to CZK 25 million (USD 1.1 million). 
  • The incentive could increase from the standard 25% to up to 45% of the investment in the form of a corporate income tax credit. 
  • Combined with the relatively low administrative burden and the absence of a tendering obligation for suppliers, this program can be interesting for SMEs.
Economic Impact Considerations

Another important aspect of the amended Act involves changing the approval process by re-establishing the hierarchy of approval, starting with local municipality, then ministry, and finally the national government. When approving an application, the Czech government will have the final say in the allocation of specific incentives and will take into consideration things like the amount and justification of the benefit to the region and the state, including the impact on energy consumption and the environment.

Provided your business meets these parameters, you can apply the income tax abatement over the subsequent 10 years, possibly with the above-mentioned additional incentive of up to 45 % of the amount of the incentive in a corporate income tax credit (according to company size). 

In addition to qualifying for the new investment incentives, the Czech Republic allows a tax allowance of up to 100% of certain R&D costs to be deducted during a given tax year. This means these costs are deducted twice: first, as a normal tax-deductible cost, and second, as a special tax allowance. An additional 10% allowance is also available based on the difference by which current-year qualifying costs exceed those of the prior period. The following costs can be included:

  • Direct costs (e.g., R&D personnel costs, consumed materials)
  • Tax depreciation of fixed assets used for R&D activities
  • Other operational expenses related to R&D activities (e.g., telecommunications fees, electricity, water, gas)
Why Choose the Czech Republic?

Companies investing in most parts of the Czech Republic are currently eligible for a tax exemption equal to 25% of the higher of the project’s capital investment or two-year salary costs, and it is available to all sectors and types of production. In the past, many assemblers and low-cost producers have taken advantage of these incentives, further lowering their initial operating costs or those related to subsequent expansions. While the new legislation may make it more difficult for larger enterprises to qualify, there are several other attractive aspects of choosing the Czech Republic as a business destination, including:

  • Geography – The strategic location in the heart of Europe makes it extremely accessible from both the established western markets and emerging eastern markets, and the extensive transport and rail infrastructure makes the Czech Republic a crossroads of major European transit corridors. 
  • Skilled Workforce – The wide availability of an educated, relatively low-cost labor force on the doorstep of western Europe is a major attraction, and the Czech Republic ranks among EU countries with the highest percentage of science and engineering students.
  • Infrastructure – The Czech Republic has taken strides to diversify its traditional investments in engineering into new fields of R&D and innovative technologies. EU structural funding has enabled the country to open several world-class scientific and high-tech research centers. EU member states are the largest investors in the Czech Republic, while the U.S. is the Czech Republic’s largest non-EU partner.  
  • Focus on Sustainability – The Czech government incentivizes investment into energy-efficient equipment and solar (Stay tuned for our upcoming article on those cash grant programs).
  • Low Labor Costs – The Czech Republic also ranks among countries with the lowest average labor cost, much lower than most western European and developed Asian countries. It is also competitive (especially in the IT sector) in comparison to neighbouring countries such as Poland or Hungary. 

Again, for large companies, only those in which at least 80% of employees receive wages above the regional average will be eligible for incentives, so it’s important to note that wages in the Czech Republic are on the rise. The national average monthly salary in the second quarter of 2019 reached an all-time high of over CZK 34,000 (USD 1,500), a 7.2% increase over the same period in 2018—still a competitive rate both regionally and globally.

Important Questions to Ask

Whether you are already utilizing a tax incentive to support your expansion efforts—or you’re just entering the planning stage—there are several important economic, legal and technical issues to consider moving forward. A detailed analysis of your current business goals and subsequent support method will help you make a qualified decision as to what kind of support suits your business best. 

Encouraging high value-added jobs, especially in the area of R&D and innovation activities has become a major priority for many countries, regions and jurisdictions. OECD governments increasingly rely on tax incentives and direct support measures like cash grants to promote R&D in firms and encourage technological and economic growth. See our recent article on the new German R&D tax incentive.

As such, the pace of change in R&D incentive regimes continues to evolve and mature, attempting to match the speed of business, and they have become pivotal in establishing new industries and growing knowledge economies. 

Businesses that take advantage of these incentives will be able to reduce the cost of doing business or drive more R&D and innovation at the same cost. An experienced Tax, Site Selection and Incentives team can help you navigate these updated Czech tax incentive laws while working with grant providers, tax authorities and the state administration. The right team helps minimize the time spent on the application process and ensure all relevant funding sources are in place.

Valuation Advisory Services

Our valuation experts provide valuation services for financial reporting, tax, investment and risk management purposes.

Tax Services

Built upon the foundation of its renowned valuation business, Kroll's Tax Service practice follows a detailed and responsive approach to capturing value for clients.

Site Selection and Incentives Advisory

Kroll has a proven track record of assisting companies with location strategies in the U.S. and around the globe.