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Bulletin no. 72

Prinsjesdag + Seminar 10/2010
September 2010

Contents

• Editorial

  As a trend watcher you should pay attention to the Czechs. In the second half of the nineties of the last century, Czech banks got into a lot of trouble because of an outrageous ratio of bad debts, and in the same period Czech politics invented its (in)famous “opposition agreement”, a novelty in coalition agreements.

  Nowadays, Dutch politicians consider a minority coalition government, tolerated by a third party, or as some say, an extraordinary majority coalition, with one of the partners outside the government. As we may remember, this was also an alternative considered earlier in the Summer, when three Czech political parties discussed their co-operation before establishing a more common coalition government.

  In the aforementioned situation, there were however important differences. In the Czech case, the “third party” was considering its support while staying out of the government in case its members would vote against joining the coalition government. In the Dutch situation, the “third party” was not fashionable enough, especially not for the outside world. In both cases the “third party” was a newcomer, supported by lots of voters, disgusted with traditional politics.

  If the Dutch novelty does not fly, it is probably once more up to the voters and hopefully the new election results will enable the creation of a more stable and less controversial coalition.  But when you will read this, the extraordinary minority/majority coalition government can be a reality as well.

• Interview with Alexandra Rudysarova

• Recent events

  ANNUAL GENERAL MEETING 2010

  This year’s General Meeting took place on 10 June, 2010 in our member hotel Le Palais, one of the Vienna International Group hotels.

  The participants of the meeting were presented the Annual Report which contains information on the activities and operation of the Chamber. A new Board of Directors was appointed – Richard van Reem was in his function succeeded by Miloš Malaník, Country General Manager TNT Express. Those present were also informed about activities that the Chamber is preparing for the next period, and they discussed ways how to attract other companies to become members of our Chamber.

  The Annual General Meeting was attended by the Dutch Ambassador, H. E. Jan C. Henneman, who introduced his vision on how to strengthen the promising developing cooperation between the Embassy and our Chamber.

  To conclude the meeting, the Chairman of the Board Rolf-Jan Zweep thanked all present for their active participation and invited them to have delicious refreshments which were prepared by the Le Palais Hotel team.

• New activities

  PRINSJESDAG 2010

  Come spend an interesting evening with us, extend your network and taste the great Indonesian rijsttafel! We are organizing the Prinsjesdag event on the third Tuesday in September, as usual, so this year it is on 21 September, 2010. However, the announced venue has changed – the event will take place in the Martinicky Palace in Prague 1 – Hradčany (near the Prague Castle, on the Hradcanske Square)!

  We look forward to seeing you!

  Seminar “Impact of the new government policy on business”

  Our Chamber and the Netherlands Embassy will organize a seminar on impact of the new government policy on business, to be held in Prague, on 19 October, 2010, from 16.00 till 18.00, at Villa Pelleova, followed by a cocktail at the nearby Residence of the Dutch Ambassador. The Seminar will be targeted to the Dutch business community (foremost our members and their/our relations) and other relations of the Embassy and will be part of the Embassy’s festival NethWorks.cz 2010.

  The program is still under discussion, the idea is to have approximately 5 to 6 speakers, each speaking for 15 minutes, approaching the general subject first and then focusing on a few specific areas, where we expect big changes.

  After a welcoming word from our Chairman and the opening speech of the Ambassador, Kamil Janáček (Czech National Bank) will speak about the general economic and monetary outlook of the CR.

  Other speakers will then focus on Taxes, Labour Law and Pension Reform, respectively. For the latter Jiri Rusnok confirmed he would be willing to give a speech, as member of the governmental Economic Council NERV, and as specialist on Pension Reform. A government speaker and a company specialist will cover the other two items.

• New activities - CSR

  CORPORATE RESPONSIBILITY CLUB

  Corporate Responsibility Club is a brand new initiative of the Netherlands-Czech Chamber of Commerce, which has been introduced by the company TNT Express.  The idea is to establish an informal CSR club consisting of members of our Chamber, and its primary objective would be to create a strong team which will influence development of CSR in the Czech Republic in a positive way.

  As the Netherlands is one the strongest leaders in corporate responsibility and our current CSR project Promoting Good Entrepreneurship is already in its fourth year of successful existence, we welcomed the idea to establish the CR club very much. We think it has a big potential and offers space for an active engagement of our other members even in other areas of corporate responsibility.

  So make use of your membership in our Chamber and share your experience or ideas in CSR with other members – take an active part in common projects! We are convinced that mutual inspiration in this field will contribute to further development of us all.

  Elementary interests and activities of the Corporate Responsibility Club will include:

  • informing about developments and activities in CSR in the Czech Republic, and about trends in the Netherlands
  • sharing experience and best practice in CSR
  • participating actively in the defined fields of CSR (a possibility to create common projects among our member companies)

  Long-term vision:

  • positive influence of the CSR field in the business sector
  • establishment of our own prestigious CSR competition

  Come to the introductory meeting and learn more!

  This meeting, which is not considered binding, will take place on Thursday, 7 October, 2010 from 2.30 pm till 5.00 pm in the building of ING (Chamber’s seat) in Prague 5 – Smichov (station Andel).

  We kindly ask you to confirm your attendance by 27 September, 2010. We will send you an agenda in return.

• Moravian Chapter

• News from Slovakia

• Economic data

  Overview of available grants from EU funds

  Finances from the EU funds currently represent a major pillar of business support from public sources. Therefore, we bring you a brief overview of existing subsidy programs from the EU funds which are devoted to business entities.

  Research, development and innovation program

  Until 30 September, 2011, it is possible to submit a registration application to the program Potential, focused on investments in the establishment and development of centres of industrial research, development and innovation. Supported investments may include the acquisition of land, buildings and their technical improvement, and purchase of software. For small and medium-sized enterprises, some services also fall into eligible costs, such as services of consultants, as well as personnel costs and material costs. The subsidy for one project can reach up to CZK 200 million (based on the region of the project location). Applications may be submitted by companies irrespective of size. The location of the project cannot be Prague.

  Until 30 September, 2010, it is possible to submit a registration application under the program Innovation. The program is designed to encourage investment in innovation of products (goods and services), innovation of production and services processes, and organizational and marketing innovations (introduction of new sales channels). Eligible costs include expenses for the acquisition of fixed assets (with certain limitations for large enterprises). In case of small and medium enterprises, some services (e.g. special training, website, etc.) and personnel expenses fall into eligible costs as well. The subsidy can reach up to CZK 150 million (based on the particular region of the project location).

  Promoting ICT and Strategic Services

  Until 15 October, 2010, it is possible to submit applications to the program ICT and strategic services. The subsidy is devoted to the creation and development of shared services centres (with a strong international focus), high-tech centres for products and technologies repair, and the creation of new IS/ICT solutions and applications. The recipient must also create a certain number of new jobs, depending on the size and type of activities (from three to forty jobs within the project).

  The subsidy is to cover either the personnel costs related to the newly created positions, or investment in fixed assets. Based on the particular region, the maximum grant amount is CZK 150 million. Applications may be submitted by Companies irrespective of size, provided that the location of the project is outside of Prague.

  Subsidies for vocational training of employees

  Until 31 October, 2011, applications may be submitted support of the employee in the training program EDUCA. The grant can only be claimed by the firms from specified industries (manufacturing, construction and energy). In addition to the cost related to training, it may also directly support the creation of corporate training program and training for corporate trainers. The maximum grant per project is CZK 8 million. Applications may be submitted by companies irrespective of size and projects must be implemented outside of Prague.

  Environment

  Until 30 June, 2011, companies may submit applications for grants from the program Environment for large-scale projects (over EUR 25 million). A subsidy may be obtained, for example, for improving waste management, reduction of NO_x, SO₂ (particularly from major stationary sources) and investment in renewable energy (excluding solar photovoltaic systems). The maximum grant amount per project is CZK 300 million.

  It may be easier for the Czech entrepreneurs to deal with economic crisis than to manage the growth of their companies

  The survey showed that trust in the future is coming back – 70% of them are expecting growth in revenues

  PricewaterhouseCoopers Czech Republic (PwC) addressed the owners of important privately owned Czech companies and asked how they adjusted to the recent economic crisis and what their intentions were. The survey entitled “Reality Check: How will private Czech companies use past lessons to build a successful future?” showed that, although almost 60% of respondents recorded a decrease in revenues in 2009, almost 70% expect their revenues to grow this year. Owners call on the new government to reduce the administrative burden and make the labour laws more flexible.

  The survey clearly showed the strengths and challenges for private Czech companies: on the one hand, flexibility and an improved ability to find market opportunities even in a time of crisis; on the other hand, a stronger dependency on a company’s own financial resources and many times also the existence dependency on the business owner. This is fully demonstrated when the company reaches a specific size or should the owner be seriously ill or die.

  Crisis – the best time for innovations

  Czech companies confirmed hundreds of years of knowledge and experience which stated that a crisis is the best time for innovations and courageous practices. Many of them were thus successful

  in fields, otherwise hardly accessible, predominantly led by global corporations. This also results in the level of confidence of the owners about the market position of their company in comparison with their competitors: on a scale of 1 to 10 (the strongest position against competitors), most of the companies would rank themselves between 1 – 4.

  “The optimism of Czech companies is, paradoxically, primarily a result of the economic crisis. Many of these companies were managed reasonably well even before the crisis and used the crisis as an opportunity to reduce unnecessary costs, think about the core of their business and realise what their long-term sources of value are. Now, they are ready for future growth and expansion,“ says Jiří Moser, Managing Partner in PricewaterhouseCoopers Czech Republic.

  Entrepreneurs have a written mid-term strategy, but two thirds of them do not know who would take over the company in case of serious illnesses or even the death

  The fact that the private companies surveyed have a written mid-term strategy is a pleasant surprise. We expected that most owners would manage their business more or less intuitively. Nevertheless, it seems that formalisation of management in private Czech companies has reached, at least in terms of strategic planning, the standards of West European firms. Almost two thirds of respondents have a written business strategy, predominantly for a 3-year period.

  “For long-term success and the ability to handle future economic fluctuations and difficulties, it will be important that the lessons from the crisis also endure in times of growth and expansion. Growth will also bring new challenges – the need for greater formalisation and setting up functional structures and processes. It is perhaps paradoxical but, according to our experience, many private companies have more difficulties managing their growth than dealing with the economic crisis,” says Věra Výtvarová, Partner responsible for Private Company Services, PricewaterhouseCoopers Audit.

  The PwC survey showed that the most important motives for running one’s own business are mainly the desire for decision-making freedom, and passion for entrepreneurship. Money, success or social status only follows these. Many private Czech companies and their owners are relatively young, so it is understandable that selling or handing over a company to a successor is not planned in the near future – only 16% of respondents are considering an ownership change within the next two years. In the longer term, almost half of owners expect a change in ownership. For those who are thinking of handing over their business, 39% are considering selling to a strategic partner and 35% are considering it via succession within the family. A rather unsettling finding is that only one third of owners have an emergency succession plan in case of serious illness or even death.

  “This is clearly an area that owners should pay attention to, as a lack of preparation may seriously impact their business partners, employees and families. Also, a situation in which an owner’s future

  development plan for the company is unclear may cause a considerable degree of uncertainty for the potential successor, management and employees,” warns Věra Výtvarová.

  Main findings:

  • Trust in the future is coming back – almost 70% of Czech owners are expecting growth in revenues within the next year.
  • The growth is going to have rather an organic character in the near future – gaining new customers and increasing penetration of existing ones are the main growth strategies.
  • Costs will continue to be under strict control – the majority of the companies plan to decrease costs even during this year.
  • Besides the economic crisis, the biggest threat to growth is competition, especially low-cost competition.
  • Product quality and customer care are considered to be the main competitive advantages of privately owned Czech companies.
  • More than 80% of owners call on the government to lower the administrative burden.
  • Companies rely on their own resources to finance growth.
  • Two thirds of the owners surveyed do not have a plan about the future of their companies should the owner become seriously ill or die.
  • The owners are not planning to sell or hand over their companies in the near future – only 16% are thinking about it with a 2-year time horizon.

  Source: PricewaterhouseCoopers ČR

   

   

• News from members

• New members

• Tax and legal corner

  What the coalition agreement brings

  On 12 July, 2010, the representatives of the “coalition of budgetary responsibility”, i.e. of the Civic Democrats, TOP 09 and Public Affairs (Veci verejne), signed the Coalition Agreement in which they outlined their programme for the upcoming election period.

  The fundamental points of the coalition cooperation should mainly be pension reform and budgetary discipline. Under the assumption of economic growth, the public budget deficit should be decreased below the 3% threshold during the current term of office of the Government. Looking forward, the public budget should be balanced by 2016. Budget deficit cuts should be achieved by limitation of the expenses which might also affect individuals.

  Better late than never – in this way we can refer to the effort of the government to reform the Czech pension scheme, as one of the last countries from the former socialist bloc in Central and Eastern Europe to do so. The initial steps (i.e. increasing the retirement age, increasing the length of the mandatory insurance period necessary to create entitlement for pension benefits) should be followed by the most important one: the possibility of insured persons to partly opt out from the state scheme and re-allocate part of the contributions mandatorily to a private scheme. The income from privatization and from dividends of state-owned companies (held on a separate state financial assets account) should be fully used for financing the pension reform and for covering the drop in income (due to the partial opt-out of insured individuals).

  Impacts of the coalition agreement on business activities

  The coalition agreement does not represent the obligation of the ruling parties, but it implicates the changes which will influence your businesses. Let’s focus on the impacts which the coalition agreement can be expected to bring for your company and its tax liabilities.

  Income tax

  The coalition agreement’s goal is to simplify and streamline the tax system. One step is the transformation of inheritance and gift taxes under income tax.

  It is planned that most of the existing tax exemptions, with the exception of the support of science and research, families with children, responsibility towards the weak and the needy, housing and responsibility for own education and age, will be repealed.

  The government does not plan an increase in the progression of personal income tax. On the other hand, it would like to eliminate the degression in the ceilings of social and healthcare insurance contributions until 2012 in connection with pension reform and the new Income Tax Act. From the coalition agreement it is not clear how these prima facie conflicting objectives will be met.

  The taxation of lotteries, gambling and the removal of existing exemptions in this area is planned. Revenues of e.g. lottery companies will be taxed at the flat rate of 20%.

  In case of termination of business, an entrepreneur will not have to pay income tax on invoices which are more than four years overdue. Seniors who receive pension contributions and also have income which exceeds three times the average wage will have to pay income tax.

  Value added tax

  Steps will be taken to relieve taxpayers of VAT, whose delivery of goods or services has not been paid for a long time. In this case, the VAT paid by the supplier will be returned. The government will seek to change the VAT system within the EU, so the VAT is paid after the payment of the invoice.

  Other taxes

  The obligation to pay road tax for cars will be removed for small and medium enterprises. Under the EU rules, steps towards the universal abolition of road tax for cars will be taken.

  The administration of taxes

  The project of a “Single Collection Place” – where payment of tax, social security and health insurance will be centralised having one base and using one form – will continue. The project will unify the base for all direct contributions of taxpayers. However, this should not cause worse position of self-employed persons. Audits will be performed only by the Tax Office. The project should be completed by 2013.

  The analysis of the tax amnesty on budget revenue with the experience of countries that have implemented it will be prepared.

  Within the fight against tax fraud, the period of re-assessment of the tax will be extended from the current 3 to 5 years.

  Employment and social insurance

  The state relieves companies of social insurance in the amount of CZK 7,200 per year for each part-time job for parents with children under 6 years old, for the disabled or for those taking care of the disabled.

  It is planned to enforce the employer‘s duty to report the entry of an employee one day before the date of entry.

  Payment of sickness benefits by an employer will be extended from the current 7 days to 12 days. This extension will be valid for 3 years, after which it will return to 7 days.

  Sickness benefits will be transferred to health insurance, which will be carried by health insurance companies.

  The development of company nurseries, alternative preschools and alternative institutes for day care for children will be encouraged.

  The state will encourage the unemployed to start their own business. An unemployed individual who starts a business as a tradesman will also be able to receive the full amount of unemployment benefits for the entire period of support. Tradesmen will pay back the support received in the form of increased income tax over the next five tax periods.

  Working based on a contract of services will be favoured, the possibility of fixed term contracts will be enlarged and flexible working hours and alternative models of employment will be supported. The maximum range of employment on the basis of a contract on performance of work will be increased from 150 to 300 hours, while strengthening controls to prevent abuse of this rule.

  The amount of severance pay will be linked to the number of years worked for the employer (up to 1 year of work – 1 month severance pay, up to 2 years of work – 2 months’ severance pay, over 2 years of work – 3 months’ severance pay).

  The repeated conclusion of agreements and length of contracts for newly created jobs for fixed-term (over 5 years) will be allowed.

  More flexible working time accounts will be introduced; therefore, flexible unequal distribution will be enabled. As a result, a company will be able to better utilise employees‘ working hours in relation to the quantity of orders.

  Law and Legislation

  The annual review of the laws with a regulatory or bureaucratic burden or with a corruption risk is planned. The aim is to repeal or modify regulations so as to reduce the risk or burden. A proposal to incorporate the rights of citizens and companies to protect them against bureaucracy and corruption will be introduced for public discussion.

  A draft of the Act on Administrative Fees will be prepared, which will take into account the costs of public authorities on provision of appropriate management with the need to enable non-discriminatory access to opportunities for all citizens and businesses to services provided by the state.

  The project of an electronic Collection of Laws will be launched, which will ensure the publication of valid and effective rights for its users with the state guarantee and with no barriers in electronic form.

  A draft of the law on corporate responsibility in the administrative or criminal area will be presented.

  The Civil Code Private International Law Act and the Commercial Companies and Cooperatives Act will be substantially amended.

  The administrative requirements to start a business will be simplified. A clerk may not require from the applicant a certificate from another public official. Changing the laws will apply this rule to all administrative proceedings.

  Government drafts of laws on taxes and fees, including laws to support their administration, will be presented as agreed by the coalition. This means that extensive changes in the form of political initiatives will not be subsequently made.

  Science and education

  The government will take advantage of cooperation in research and development between universities, public research institutions and the business sector.

  Transport

  The introduction of electronic vignettes instead of highway marks for cars will be postponed until an EU-wide solution is found, or the payment of toll based on the car’s capacity is used. The analysis of the possibility of extending the toll to lower class roads for transporting goods will continue.

  It can be expected that the abovementioned planned actions will be implemented with regard to the fact that there is no overall negative impact on the state budget.

  Source: PricewaterhouseCoopers

  Update to the OECD Model Tax Convention on Income and on Capital and its Commentary

  Authors: Libor Frýzek, Karel Hronek

  On 22 July, 2010 the Organisation for Economic Co-operation and Development (OECD) approved the updated version of the Model Tax Convention on Income and on Capital (the “Model Convention”) and the updated version of the Commentary thereon (the “Commentary”). The Model Convention and its Commentary set a basic framework for negotiating individual double taxation treaties. Although not legally binding, they represent an important interpretation source in the field of international taxation. The key changes are outlined below.

  Attribution of profits to permanent establishments

  A completely re-worked Article 7 of the Model Convention and the Commentary thereon incorporate conclusions of the 2010 Report on the Attribution of Profits to Permanent Establishments[1].

  The updated Article 7 and the Commentary thereon emphasise that the attribution of profits to a permanent establishment should be based on a separate entity approach under which, with certain exceptions, a permanent establishment is considered to be a separate and independent enterprise for taxation purposes. This approach requires that a functional analysis is performed first within the process of attribution of profits to a permanent establishment, identifying activities and transactions of both the permanent establishment and the enterprise of which the permanent establishment is a part (the “headquarters”), including the internal transactions between the headquarters and the permanent establishment. Under step two of the above process, any transactions (including internal ones) are priced on an arm’s length basis in accordance with the OECD transfer pricing methods for transactions between related parties. As explicitly given in the Commentary on Article 7, this approach may lead to a situation where the permanent establishment will be attributed profits although the enterprise as a whole incurs a loss (and vice versa).

  However, the above-mentioned approach does not set out how the profits attributed to the permanent establishment should be taxed (e.g. what expenses are tax deductible, what income is taxable or tax exempted) in the state in which the permanent establishment is located. Subject to the rules of non-discrimination of permanent establishments, the way of taxation remains to be determined according to the domestic law of this state (Article 24 of the Model Convention).

  The new Article 7 of the Model Convention also explicitly regulates the situation where tax administrations of a Contracting State (for example, the state in which the permanent establishment is located) adjust the profits that are attributable to the permanent establishment. In that case, the other Contracting State (i.e. the state in which the headquarters are located) should take appropriate measures  to eliminate double taxation on an adjusted portion of profits, or both the Contracting States should consult each other. The Czech Republic has reserved the right to limit this possibility of double taxation elimination only to entities acting bona fide.

  Having these more detailed rules, it can be expected that during tax audits the Financial Authorities will concentrate to a greater extent on issues of the attribution of profits to permanent establishments.

  Other changes

  • The Commentary incorporates conclusions of the report on taxation of common telecommunication transactions[2]. For example, the updated Commentary explicitly confirms that payments made to purchase the transmission capacity (for example, of electrical power, gas, signal) are not made in consideration for the use of, or right to use, industrial, commercial or scientific equipment (and therefore they will not constitute royalties) but for the services provided.
  • The updated Commentary on Article 1 (Persons covered by the Convention) deals with the granting of double taxation treaty benefits with respect to the income of collective investment vehicles[3], i.e. whether and under what circumstances a collective investment vehicle can be considered as “resident” and as “beneficial owner of income” for the purposes of double taxation treaties. The principles set out in the Commentary are general and, therefore, the Commentary recommends that (in order to provide legal certainty taxpayers) tax administrations should clarify the treatment of individual collective investment vehicles in terms of concrete double taxation treaties, for example based on paragraph on a mutual agreement.
  • The Commentary on Article 15 (Income from employment)[4] newly specifies cases where an actual short-term employment relationship between a company and a foreign employee is replaced with the provision of services by a foreign company in which this employee is formally employed (this is qualified as misuse of the exception to taxation of employee in the State where the employment is actually exercised). The Commentary lists a number of factors relevant to determine the nature of employment relationship, e.g. the work is not performed at the expense and responsibility of the foreign company and is performed in accordance with instructions and at the expense of the service recipient[5].

   Source: Ernst & Young

  ---

  [1] Updated version of the Report was approved by the OECD on 22 July, 2010. The Report does not change conclusions of the original report dated 17 July, 2008 and it only takes account of the new wording of Article 7 of the Model Convention and an updated version of the OECD Transfer Pricing Guidelines.

  [2] Discussion draft of this report was released on 25 November, 2009.

  [3] Updated Commentary is based on the OECD Report on the Granting of Treaty Benefits with Respect to the Income of Collective Investment Vehicles that was approved by the OECD on 23 April, 2010.

  [4] Updated Commentary is based on the revised draft changes to the Commentary on paragraph 2 of Article 15 of the Model Convention that was released on 12 March, 2007.

  [5] Factors listed in the Commentary to a great degree correspond to factors typical for employment relationship as defined by the Supreme Administrative Court in its judicial decisions concerning the so called “Schwarz system”, for example the Supreme Administrative Court’s decision ref. No. 1Afs 124/2009-75 dated 13 April, 2010.

   

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