Social Enterprise Law Surveys |
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Czech Republic |
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| (Europe) Firm PRK Partners | |
| What jurisdiction(s) do you practice in? | Czech Republic |
| What are the most commonly used types of for-profit corporate organizational forms in your jurisdiction (e.g., corporation, limited liability company, benefit corporation, social purpose corporation, etc.) used by Enterprises operating a trade ... | The most commonly used types of for-profit corporate organizational forms are:
a. Enterprises focused on seeking financing from investors while having multiple owners are usually AS. It is also feasible and not uncommon to receive investments in the case of SROs which have multiple owners. b. Most commonly, Social Enterprises take the form of an SRO, constituting almost 50% of all Social Enterprises. |
| Do any of your jurisdiction’s traditional organizational forms require or permit the board or managers to consider, balance or prioritize interests other than shareholder value in decision making? What other interests, if any, are they required... | Managing bodies of Czech companies have to consider, balance or prioritize interests other than shareholder value in decision making in practice only in case that the company´s statute specifies its object of activities other than business, as the board members and managers are obligated to respect the company´s purpose as laid out in the statute; this is in line with the fiduciary duties which oblige the managing body to act in the best interest of the company. Part of Legal theory states, however, that the managing body of a company shall also take into consideration the interests of stakeholders, but this is not commonly known in practice and remains a legal theory at the moment. (Please note that the “object of activities” is closely tied to the “purpose” of an Enterprise under Czech law and we use these terms interchangeably in this questionnaire.) With regard to certain legal forms other than commercial companies, interests other than business (i.e. an object allowing/forcing the managing body to consider other factors than the shareholder value, e.g. in Institutes (as defined below)) follow from applicable law and are a mandatory part of the legal entity´s statute (e.g. SCs, as defined below). In other cases, the inclusion of a non-business purpose in the statute is at the shareholder´s discretion (i.e. SRO, AS and Cooperative). There are also legal forms in relation to which the law prohibits the enshrinement in the statute of an object of activity other than business or administration of one's own property (i.e. VOS and KS). As regards governance in general, there are no other specific statutory duties in connection to environmental and social matters in the Czech Republic apart from reporting requirements under the Accounting Act, see below. These reporting requirements relating to ESG would in theory be a strong incentive for the inclusion of ESG into governance, but the practice is still in its beginnings. The same applies to soft law, which is essentially non-existent, and therefore the environmental and social sensitive governance largely depends on the voluntary practice of the individual Enterprises and the influence of their equity holders. |
| Does your jurisdiction have organizational forms specifically designed for Social Enterprises? If so:a. What type(s) of organizational forms are they?b. How do they materially differ from the most closely analogous traditional organizational ... | Partially. It is necessary to mention that there is no legal definition of Social Enterprises in Czech law. There has been a draft law to that effect which is still under consideration from Parliament. This law has the purpose to create a legal entity that would follow mostly areas of public interest and general welfare as directed by the State, i.e. public functions would be outsourced to newly created Social Enterprises sanctioned by the State. Other than that no definition exists. From this follows that, rather than offering various specific legal forms designated for Social Enterprises, Czech law recognizes a so-called publicly beneficial status (“PBS”) of Enterprises, which denotes a legal person whose mission is to carry out its own activities to contribute, in accordance with its purpose (i.e. statute), to promote the common welfare, if (i) the decision-making of the legal person is significantly influenced only by persons with no criminal record, (ii) it has acquired its property from fair sources, and (iii) uses its assets and liabilities economically for a publicly beneficial purpose. The PBS is accessible to Enterprises of essentially any legal form. The PBS is not subject to any registration and therefore can be used by any Enterprise meeting its criteria. This being said, private law does not further address the PBS; partial issues are subject to public law provisions (mainly with respect to tax matters). In addition, Czech law recently introduced social cooperatives (in Czech: sociální družstvo) (“SC”), which represent the only type of an Enterprise solely reserved for social entrepreneurship de iure and de facto. a. The SC is an entity that continuously carries out activities for public benefit, aimed at supporting social cohesion in order to ensure labour and social integration of disadvantaged groups into the society, preferably by meeting the needs and using the resources local to the registered office and sphere of activities of the SC, particularly in the areas of job creation, social services and health care, education, housing and sustainable development. b. The most closely analogous form to SC is a Cooperative, the main material difference being the fact that the SC prohibits its members to pay dividends. However, the statute might allow the distribution of up to 33 % of its dispensable profit to its members, but only after a contribution to the reserve fund and other profit-based funds, if established, was paid. Czech law provides no benefits for the SC compared to the common cooperatives. On the contrary, the SC has numerous limitations not applied for the usual cooperatives. For instance, there are strict limitations regarding the members themselves: only a physical person who is permanently employed by the SC, volunteers for the SC or is the recipient of SC´s services can become an SC member. The managing body is limited in a sense that it must consider the purpose of SC rather than members’ profit, as a goal or purpose of its decision. The SC has much less public awareness than PBS. These are the main reasons, why the SC is used very rarely, mostly by sheltered workshops. c. The main feature of the SC in terms of governance is that the managing body must consider the purpose of the SC in its decision making while excluding the members´ profit as a goal or purpose of its decisions. d. As described above, SCs are very limited in terms of profit distribution. In addition, only a physical person who is permanently employed by the SC, volunteers for the SC or is the recipient of SC´s services can become an SC member. Moreover, statutes of SC mandatorily include the objectives and conditions of operation of the SC in accordance with its role of social integration and support for local development. Other restrictions include e.g. the prohibition to issue bonds, etc. e. No. f. The SC form was introduced with effect from 1 January 2014 and since then it has failed to reach significant awareness in the public and is not widely used. To our knowledge, only dozens of SCs exist in the Czech Republic. Additionally, Czech law also recognizes a public benefit company (in Czech: obecnÄ› prospÄ›šná spoleÄnost) (“PBC”), which is being used by, but is not reserved to, Social Enterprises. This legal form mainly aims to provide publicly beneficial services under predetermined conditions that must apply identically for all beneficiaries and the profits of the PBC must be reinvested into providing its services. PBCs are fairly well-known, however, the legal form was discontinued as a result of the 2014 private law recodification, and therefore it is impossible to establish and register a new PBC, while the existing PBC´s were allowed to continue under their original legal form. Under Czech law, PBS is not a "status" or "legal form" in its usual sense. It is known as a concept, but is not regulated in Czech law. A Czech enterprise can declare that it is PBS, but this is a self declaration only. It is not a government certification. Another Czech legal form that might very well meet the requirements of social entrepreneurs is an institute (in Czech: ústav) (“Institute”). Institute is not a corporation and therefore (i) shareholders value is not a concern of its managing body and (ii) Institute is not excluded from tax benefits as described below. The purpose of the Institute can be either a socially or economically beneficial activity, which is then based on the usage of the personal and property assets of the Institute. The profit can be used only to support the Institute´s activity and the costs of administration. Similar to the Institute are endowed institutions (in Czech: fundace), i.e. foundations (in Czech: nadace) and endowment funds (in Czech: nadaÄní fond) (“Endowed Institutions”). These legal forms can be also used for Social Enterprises, even if they were not specifically designed for such purpose, as the Endowed Institutions are not corporations, which brings the above-described benefits (see Institute). Last but not least, another legal form often used by, but not designated solely for, Social Enterprises is the Association (in Czech: spolek) (“Association”). In non-legal terminology, an Association is a club of mostly individual members who join forces and want to participate in the not for profit purpose of the given Association. Associations represent the most common type of Nonprofit in the Czech Republic and are well known by the general public. The goal of the Association can be either achieving the mutual benefit of its members or the public interest, while they are also allowed to operate a trade or business, but only as a secondary activity and provided that the profits will be used to support the main activity of the Association. Typically for example this is a sports club that operates also a restaurant for its members.
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| Are Social Enterprises permitted to be formed and operated as Nonprofits? If so: a. Are Nonprofits that are Social Enterprises treated differently under the law as compared to Nonprofits that are not Social Enterprises, whether from a corporat... | Nearly any Enterprise can be formed as a Nonprofit, provided that the law allows for another object of activities to be indicated in the statute of the Enterprise other than business. Even if business is the only permitted object of activities of an Enterprise, under certain circumstances the profit might be distributed to persons/entities other than the shareholders (with the exception of VS and KS), making it materially a Nonprofit (while we admit that this is rather unusual, mainly because such beneficiary would need to be registered as the beneficial owner under the regulation relating to money laundering). a. No. b. No. c. Yes. The Czech Accounting Act lists a number of entities permitted to keep simplified accounts, incl. SCs and PBCs. There are no significant drawbacks connected to these forms other than as described above. d. We would argue that the use of Nonprofits for Social Enterprises is relatively common. |
| Does your jurisdiction allow for worker-owned Enterprises, such as cooperatives? If so, please describe any material benefits of, and/or restrictions on, using such forms. | Yes, Cooperatives and SCs. Cooperatives as a legal form offer to its workers (who must also be its members) control and management as well as access to the benefits provided by the Cooperative. However, Cooperatives are closed to outside investors and the capital increase by member´s extra payments is limited by law, and therefore raising capital might be problematic. Further, a transfer of membership can be rather difficult or even impossible in Cooperatives. The above applies to the SC´s as a subtype of the Cooperative, with a specific restriction of membership, as described above (please see our answer to item No. I.4.d.). |
| Are there unique reporting requirements for Social Enterprises? If there are, please describe them. Please also discuss what government bodies Social Enterprises are required to report to. | There are no specific reporting requirements for Social Enterprises. The general reporting duty under the Accounting Act includes the preparation of yearly financial statements and annual reports. However, the duty to prepare an annual report only arises in case the Enterprise meets certain criteria under the Accounting Act (i.e. annual turnover/number of employees / total assets). In terms of ESG reporting, a special duty of non-financial reporting was imposed by Czech law with effect from 1 January 2017 in connection with large Enterprises (i.e. large business corporations, which are also public-interest entities exceeding the criterion of 500 employees during the accounting period). These entities are obligated to state in their annual report or in a separate report the non-financial information on: environmental and social matters, respect for human rights and fight against corruption and bribery. The Accounting Act further provides for detailed requirements regarding the structure of such ESG (non-financial) reporting (i.e., the Enterprise must state its business model, actions taken in connection with the non-financial matters and results and main risks thereto, and key performance indicators of non-financial nature). The reporting documents are intended for the shareholders of the Enterprises and are subject to publication in the Czech Collection of Deeds (after being approved by the shareholders), which is publicly accessible via the internet. If a Social Enterprise decides to form as a Nonprofit or use one of the traditional Enterprise forms, no additional reporting requirements by virtue of them being a Social Enterprise would arise. |
| In your jurisdiction, has case law and jurisprudence evolved to address Social Enterprises? If there is meaningful jurisprudence around Social Enterprises, please provide some brief examples. | No. |
| Does your jurisdiction have any ESG requirements for Enterprises generally? If it does, please describe. | No. |
| Does your jurisdiction have any ESG requirements specifically for Social Enterprises? If it does, please describe. | The purpose of the SC is mandatorily a publicly beneficial activity, whereas other Social Enterprises might chose its purpose within the ESG framework. |
| Does your jurisdiction have any ESG requirements for investors? If it does, please describe. | No. |
| Are any major investor classes (e.g., pension funds, mutual funds, etc.) required to look at ESG issues when making investment decisions in your jurisdiction? a. If they are, please describe the requirements.b. If they are not, are they permi... | There are no major investor classes required to look at ESG issues when making investment decisions in the Czech Republic, however, they might be allowed to do so. Increased focus on factors other than profit are developing across countries in Europe and the EU is supporting the role of such consideration through its opinions and documents, although it does not yet have the ambition to coordinate its development and leaves it in the hands of each individual Member States. |
| What kinds of philanthropic funding do Social Enterprises in your jurisdiction commonly receive (e.g., grants, charitable investment, traditional investment)? | Social Enterprises may receive grants, charitable investments, and traditional investments. The type of funding typically varies based on the Enterprise form that the Social Enterprise chooses. Philanthropic funding could also be provided by foundations and endowment funds (e.g. Nadace Via, SrdcerváÄi, etc.) |
| How prevalent, if at all, are new for-profit impact investments in your jurisdiction (e.g. traditional instruments with impact terms, new investment instruments, aggregation with philanthropic capital, community based funding, etc.)? | For-profit impact investments are on the rise in the Czech Republic as a result of an incline in public awareness of ESG. Many prominent investors are forming specific impact funds (for example large Czech banks like CSOB or ÄŒeská spoÅ™itelna or the telecom operator Vodafone have all created programs supporting Social Enterprises). |
| What are the types of government funding and support available to Social Enterprises, if any, available in your jurisdiction (e.g., grants, investments, bonds, and guarantees)? a. How difficult is it for Social Enterprises to obtain government... | No specific type of government funding or support is available solely to the Social Enterprises, with the exception of “S-Záruka”, a program of the Czech-Moravian Guarantee and Development Bank (wholly owned by the state), which aims to facilitate access to commercial loans to social entrepreneurs by providing guarantees over commercial loans. In general, other forms of government support might be available depending on the Enterprise form and industry, such as government grants, loans, bonds, and guarantees. For example, funding is available in areas including housing, tourism, nonprofit enterprises, etc. A wide range of possible funding is provided by the EU (e.g. Operational Program Employment, Operational Program Enterprise and Innovations for Competitiveness, Integrated Regional Operational Program, etc.) Obtaining government funding is generally complicated and administratively demanding and in general difficult for all enterprises. |
| Are there any companies that are formed as a Social Enterprise listed on your jurisdiction’s leading securities exchange(s)? | No, there are no Social Enterprises listed on the Prague Stock Exchange. |
| To what extent are publicly traded Enterprises required to disclose ESG related factors in annual reports/public filings in your jurisdiction. | Please see our answer to item No. I.7 above in terms of non-financial reporting, which also applies to the publicly traded Enterprises. |
| How prevalent, if at all, are impact bonds in your jurisdiction? | Impact bonds are not common in the Czech Republic. |
| In your jurisdiction, are there any restrictions on foreign investments or donations that are unique to Social Enterprises (whether incorporated as for profit entities or as Nonprofits)? | No. Standard restrictions on foreign investments would apply. Only very few such restrictions exist. |
| Is “crowdfunding” legal in your jurisdiction? Are there rules under applicable securities laws that make it easier for smaller businesses or Social Enterprises to take money from investors that are not sophisticated/accredited/qualified under a... | There is no specific regulation on crowdfunding in the Czech Republic, meaning it is legal and a wide range of different laws apply. The specific legislation relating to a particular platform has to be assessed in light of its business model. Crowdfunding has established itself as a financing practice in the Czech Republic. |
| Are there any tax exemptions that are uniquely available for Social Enterprises? a. Please describe any tax exemptions that are available and whether they are partial or full.b. Are they dependent on the Social Enterprise utilized using a spe... | There are tax exemptions available for Nonprofits generally, but there are no tax exemptions that are uniquely available for Social Enterprises structured using a for-profit organizational form. Nonprofits (even though not organized as Social Enterprise) have two key tax exemption provisions, one being that they do not have to pay corporate income tax on income from non-for-profits activities provided that their expenses (deductible or non-deductible) exceed income, and the other being that donors may take deductions on their reported income up to 30 % of their tax base. In addition, under certain conditions and within the limits imposed by the Czech Income Taxes Act, non-profits could claim 30% allowance from their corporate income tax base (subject to minimum and maximum) provided they use the amount of allowance received for non-profit activities. However, the above exemptions are not accessible to business corporations (i.e. AS, SRO, VOS, KS and Cooperative (incl. SC)) even if meeting the Nonprofit criteria. |
| Are individuals or other organizations able to provide tax deductible donations to for-profit Social Enterprises? If they are, please describe any restrictions applicable to tax deductible donations? | Yes, but if the recipient is a for-profit organization the recipient needs to treat the donation as subject to the Czech corporate income tax base, i.e. as its taxable income. In other words, if the recipient is a nonprofit organization and uses the donation for a publicly beneficial purpose, the donation is exempt from taxation. |
| Are there any other tax benefits uniquely available for Social Enterprises? (e.g. deferrals, favorable tax rates, business deductions, etc.) | No. |
| Does your jurisdiction provide for reciprocal recognition of tax-exempt status that has been granted under the law of any other jurisdictions? | No. |
| Does your jurisdiction have Regulatory Sandboxes or similar policy frameworks for Social Enterprises? If it does, please describe. | No. |
| What government operational support, resources, training or services, are available for small businesses or Social Enterprises? | The Czech government grants loans and guarantees to small and medium businesses incl. Social Enterprises. Moreover, a government project Social Entrepreneurship Support (in Czech: Podpora sociálního podnikání) is currently in place (until November 2021). The main objective of the project is to offer a network of consultants and traineeships in order to build relevant experience and know-how and to promote the creation of Social Enterprises. Moreover, a wide variety of support programs are currently in place in connection to the Covid-19 pandemic. |
| Are there different compliance requirements for different types of Social Enterprises than for traditional Enterprises? Please provide examples if there are. | No (with the exception of reporting requirements as described in our answer to item No. I. 5. c. above). |
| Is there a dedicated government agency or department that oversees Social Enterprises? If there is, please describe its mandate and effectiveness. | No. |
| Is there a different bankruptcy system available for Social Enterprises? | No. |
| What are the average time and filing fees to form an Enterprise in your jurisdiction? | The filing process is quite straightforward as an Enterprise will usually be registered in the Czech Commercial Register within 5 - 10 business days from filing the relevant application with the registration court. The court fee amounts to CZK 12,000 in case of an AS and CZK 6,000 in case of other legal forms, whereas some exemptions from paying the filing fee exist (e.g. in case of trusts). Alternatively, an Enterprise might be registered via notary public, in which case the registration only takes 1 or 2 business days and the fees are slightly lower. |
| What government or third-party certifications or accreditations, if any, are available for Social Enterprises that allow for access to benefits e.g. funding, beneficial tax status, etc.? Please provide examples and briefly describe them as well... | There are no certifications or accreditations available to Social Enterprises in the Czech Republic, and still less those which would make available any official benefits. |
| Please describe whether, in your opinion, startups and other entrepreneurial Enterprises generally can easily form and flourish in your jurisdiction. | Generally speaking, startups and other entrepreneurial Enterprises can easily form and flourish in the Czech Republic, thanks to a variety of legal forms to choose from, various support programs and easy and fast filing/registration process. |
| Please describe whether, in your opinion, Social Enterprises, in particular, can easily form and flourish in your jurisdiction. | In general, we refer to our answer above. As regards Social Enterprise´s flourishment, there is a great connection between the means of financing and their lifespan, since many of the Social Enterprises are (to varying degrees) dependent on government grants and are unable to survive after the end of supporting programs. |
| Please describe whether in your opinion there are any laws that are obstructive to the formation of Social Enterprises (i.e. that actively disfavor or penalize, or otherwise discourage their formation) in your jurisdiction (for example, are Soc... | There are no laws directly obstructing the formation of Social Enterprises. On the other hand, the lack of regulation of Social Enterprises (incl. the definition thereof) might have an obstructive impact on the development and broader awareness of Social Enterprises. |
| In your jurisdiction, are there any major fraud concerns or defects due to corruption or fraud that should be addressed? If there are, please briefly discuss the concerns or defects. | In connection to the Social Enterprises there is a minor concern that the missing legal definition of the Social Enterprise and lack of control of using the designation by the authorities might lead to misuse of subsidy programs, therefore harming the good name of Social Enterprises as a whole. |
| What changes to the law do you think would be most beneficial to enabling Social Enterprises to flourish in your jurisdiction? | The following changes would be beneficial: 1. Providing tax benefits to Social Enterprises using corporation legal forms (i.e. AS, SRO, KS, VS and Cooperatives, incl. SC). 2. Incorporating the legal definition of Social Enterprise into Czech law. 3. Systemic and strategic support of Social Enterprises. 4. Simplification of administrative/bureaucratic duties of Social Enterprises. 5. Create a special corporate form for Social Enterprises with a mix of for-profit and non-profit purposes (in US terminology (Public-) Benefit Corporation). However, Czech law already provides for a wide selection of legal forms which allow for modifications in their statutes to form a Social Enterprise by including in the statutes both profit and not-for-profit purposes. |
| What changes to the law do you think would be most beneficial to enhancing the social and environmental responsibility of Enterprises generally (whether or not Social Enterprises)? | Creating a set of uniform mandatory reporting standards for ESG policies and actions would make the information more accessible to the public combined with tax incentives. Providing tax benefits and/or subsidies to companies creating an incentive to transform into a Social Enterprise. |
| Is there anything else you would like to add or guidance you would like to provide? Are there any questions we should have asked but did not? | For the sake of completeness, we feel it is necessary to mention that social entrepreneurship in the Czech Republic often overlaps with philanthropy, and therefore certain legal forms usually used for philanthropy might be used by Social Enterprises as well (e.g. trusts (in Czech: svěřenský fond)). |
Social Enterprise Law Surveys
Czech Republic
The most commonly used types of for-profit corporate organizational forms are:
- Limited Liability Company: Limited liability company (in Czech: spoleÄnost s ruÄením omezeným) (“SRO”) is the most widely used company legal form used by the Enterprises operating a trade or business in the Czech Republic. Among the advantages of the SRO is a very low minimum registered capital requirement (CZK 1, in a one-member SRO), and limited liability of the members (interest holders) of the SRO for the company’s obligations. Each member of an SRO is jointly and severally liable for the obligations of the SRO up to the aggregate amount of unpaid capital contributions, as registered in the Commercial Register. The fiduciary duties and business judgment rule apply to members of the statutory body.
- Joint-Stock Companies: SROs are generally the most prevalent companies in the Czech Republic. In the field of operating trades and businesses, joint-stock companies (in Czech: akciová spoleÄnost) (“AS”) are also used relatively often. The AS is fully responsible for its obligations towards third parties; however, the shareholders are not personally liable for the company’s obligations. The founders can choose whether to have the company with a corporate structure that is monistic (managing board) or dualistic (board of directors and supervisory board). The fiduciary duties and business judgment rule apply to members of the statutory body.
- Partnership/Limited Partnership: When operating smaller scale businesses or trades, the legal forms of partnership (in Czech: veÅ™ejná obchodní spoleÄnost) (“VOS”) or limited partnership (in Czech: komanditní spoleÄnost) (“KS”) can be a reasonable solution. However, these are less common in the Czech Republic as they are accompanied by a wider (or even unlimited) extent of the partner´s liability for obligations of the company.
- Cooperative: Lastly, another practically used legal form of an Enterprise used for operating a trade or business is a cooperative (in Czech: družstvo) (“Cooperative”). Even though the principal purpose of a cooperative should be mutual support of its members or third parties, operating business is also an allowed purpose of the company.
a. Enterprises focused on seeking financing from investors while having multiple owners are usually AS. It is also feasible and not uncommon to receive investments in the case of SROs which have multiple owners.
b. Most commonly, Social Enterprises take the form of an SRO, constituting almost 50% of all Social Enterprises.
Managing bodies of Czech companies have to consider, balance or prioritize interests other than shareholder value in decision making in practice only in case that the company´s statute specifies its object of activities other than business, as the board members and managers are obligated to respect the company´s purpose as laid out in the statute; this is in line with the fiduciary duties which oblige the managing body to act in the best interest of the company. Part of Legal theory states, however, that the managing body of a company shall also take into consideration the interests of stakeholders, but this is not commonly known in practice and remains a legal theory at the moment. (Please note that the “object of activities” is closely tied to the “purpose” of an Enterprise under Czech law and we use these terms interchangeably in this questionnaire.)
With regard to certain legal forms other than commercial companies, interests other than business (i.e. an object allowing/forcing the managing body to consider other factors than the shareholder value, e.g. in Institutes (as defined below)) follow from applicable law and are a mandatory part of the legal entity´s statute (e.g. SCs, as defined below). In other cases, the inclusion of a non-business purpose in the statute is at the shareholder´s discretion (i.e. SRO, AS and Cooperative). There are also legal forms in relation to which the law prohibits the enshrinement in the statute of an object of activity other than business or administration of one's own property (i.e. VOS and KS).
As regards governance in general, there are no other specific statutory duties in connection to environmental and social matters in the Czech Republic apart from reporting requirements under the Accounting Act, see below. These reporting requirements relating to ESG would in theory be a strong incentive for the inclusion of ESG into governance, but the practice is still in its beginnings. The same applies to soft law, which is essentially non-existent, and therefore the environmental and social sensitive governance largely depends on the voluntary practice of the individual Enterprises and the influence of their equity holders.
Partially. It is necessary to mention that there is no legal definition of Social Enterprises in Czech law. There has been a draft law to that effect which is still under consideration from Parliament. This law has the purpose to create a legal entity that would follow mostly areas of public interest and general welfare as directed by the State, i.e. public functions would be outsourced to newly created Social Enterprises sanctioned by the State. Other than that no definition exists. From this follows that, rather than offering various specific legal forms designated for Social Enterprises, Czech law recognizes a so-called publicly beneficial status (“PBS”) of Enterprises, which denotes a legal person whose mission is to carry out its own activities to contribute, in accordance with its purpose (i.e. statute), to promote the common welfare, if (i) the decision-making of the legal person is significantly influenced only by persons with no criminal record, (ii) it has acquired its property from fair sources, and (iii) uses its assets and liabilities economically for a publicly beneficial purpose. The PBS is accessible to Enterprises of essentially any legal form. The PBS is not subject to any registration and therefore can be used by any Enterprise meeting its criteria. This being said, private law does not further address the PBS; partial issues are subject to public law provisions (mainly with respect to tax matters).
In addition, Czech law recently introduced social cooperatives (in Czech: sociální družstvo) (“SC”), which represent the only type of an Enterprise solely reserved for social entrepreneurship de iure and de facto.
a. The SC is an entity that continuously carries out activities for public benefit, aimed at supporting social cohesion in order to ensure labour and social integration of disadvantaged groups into the society, preferably by meeting the needs and using the resources local to the registered office and sphere of activities of the SC, particularly in the areas of job creation, social services and health care, education, housing and sustainable development.
b. The most closely analogous form to SC is a Cooperative, the main material difference being the fact that the SC prohibits its members to pay dividends. However, the statute might allow the distribution of up to 33 % of its dispensable profit to its members, but only after a contribution to the reserve fund and other profit-based funds, if established, was paid. Czech law provides no benefits for the SC compared to the common cooperatives. On the contrary, the SC has numerous limitations not applied for the usual cooperatives. For instance, there are strict limitations regarding the members themselves: only a physical person who is permanently employed by the SC, volunteers for the SC or is the recipient of SC´s services can become an SC member. The managing body is limited in a sense that it must consider the purpose of SC rather than members’ profit, as a goal or purpose of its decision. The SC has much less public awareness than PBS. These are the main reasons, why the SC is used very rarely, mostly by sheltered workshops.
c. The main feature of the SC in terms of governance is that the managing body must consider the purpose of the SC in its decision making while excluding the members´ profit as a goal or purpose of its decisions.
d. As described above, SCs are very limited in terms of profit distribution. In addition, only a physical person who is permanently employed by the SC, volunteers for the SC or is the recipient of SC´s services can become an SC member. Moreover, statutes of SC mandatorily include the objectives and conditions of operation of the SC in accordance with its role of social integration and support for local development. Other restrictions include e.g. the prohibition to issue bonds, etc.
e. No.
f. The SC form was introduced with effect from 1 January 2014 and since then it has failed to reach significant awareness in the public and is not widely used. To our knowledge, only dozens of SCs exist in the Czech Republic.
Additionally, Czech law also recognizes a public benefit company (in Czech: obecnÄ› prospÄ›šná spoleÄnost) (“PBC”), which is being used by, but is not reserved to, Social Enterprises. This legal form mainly aims to provide publicly beneficial services under predetermined conditions that must apply identically for all beneficiaries and the profits of the PBC must be reinvested into providing its services. PBCs are fairly well-known, however, the legal form was discontinued as a result of the 2014 private law recodification, and therefore it is impossible to establish and register a new PBC, while the existing PBC´s were allowed to continue under their original legal form. Under Czech law, PBS is not a "status" or "legal form" in its usual sense. It is known as a concept, but is not regulated in Czech law. A Czech enterprise can declare that it is PBS, but this is a self declaration only. It is not a government certification.
Another Czech legal form that might very well meet the requirements of social entrepreneurs is an institute (in Czech: ústav) (“Institute”). Institute is not a corporation and therefore (i) shareholders value is not a concern of its managing body and (ii) Institute is not excluded from tax benefits as described below. The purpose of the Institute can be either a socially or economically beneficial activity, which is then based on the usage of the personal and property assets of the Institute. The profit can be used only to support the Institute´s activity and the costs of administration.
Similar to the Institute are endowed institutions (in Czech: fundace), i.e. foundations (in Czech: nadace) and endowment funds (in Czech: nadaÄní fond) (“Endowed Institutions”). These legal forms can be also used for Social Enterprises, even if they were not specifically designed for such purpose, as the Endowed Institutions are not corporations, which brings the above-described benefits (see Institute).
Last but not least, another legal form often used by, but not designated solely for, Social Enterprises is the Association (in Czech: spolek) (“Association”). In non-legal terminology, an Association is a club of mostly individual members who join forces and want to participate in the not for profit purpose of the given Association. Associations represent the most common type of Nonprofit in the Czech Republic and are well known by the general public. The goal of the Association can be either achieving the mutual benefit of its members or the public interest, while they are also allowed to operate a trade or business, but only as a secondary activity and provided that the profits will be used to support the main activity of the Association. Typically for example this is a sports club that operates also a restaurant for its members.
Nearly any Enterprise can be formed as a Nonprofit, provided that the law allows for another object of activities to be indicated in the statute of the Enterprise other than business. Even if business is the only permitted object of activities of an Enterprise, under certain circumstances the profit might be distributed to persons/entities other than the shareholders (with the exception of VS and KS), making it materially a Nonprofit (while we admit that this is rather unusual, mainly because such beneficiary would need to be registered as the beneficial owner under the regulation relating to money laundering).
a. No.
b. No.
c. Yes. The Czech Accounting Act lists a number of entities permitted to keep simplified accounts, incl. SCs and PBCs. There are no significant drawbacks connected to these forms other than as described above.
d. We would argue that the use of Nonprofits for Social Enterprises is relatively common.
Yes, Cooperatives and SCs.
Cooperatives as a legal form offer to its workers (who must also be its members) control and management as well as access to the benefits provided by the Cooperative. However, Cooperatives are closed to outside investors and the capital increase by member´s extra payments is limited by law, and therefore raising capital might be problematic. Further, a transfer of membership can be rather difficult or even impossible in Cooperatives.
The above applies to the SC´s as a subtype of the Cooperative, with a specific restriction of membership, as described above (please see our answer to item No. I.4.d.).
There are no specific reporting requirements for Social Enterprises. The general reporting duty under the Accounting Act includes the preparation of yearly financial statements and annual reports. However, the duty to prepare an annual report only arises in case the Enterprise meets certain criteria under the Accounting Act (i.e. annual turnover/number of employees / total assets).
In terms of ESG reporting, a special duty of non-financial reporting was imposed by Czech law with effect from 1 January 2017 in connection with large Enterprises (i.e. large business corporations, which are also public-interest entities exceeding the criterion of 500 employees during the accounting period). These entities are obligated to state in their annual report or in a separate report the non-financial information on: environmental and social matters, respect for human rights and fight against corruption and bribery. The Accounting Act further provides for detailed requirements regarding the structure of such ESG (non-financial) reporting (i.e., the Enterprise must state its business model, actions taken in connection with the non-financial matters and results and main risks thereto, and key performance indicators of non-financial nature).
The reporting documents are intended for the shareholders of the Enterprises and are subject to publication in the Czech Collection of Deeds (after being approved by the shareholders), which is publicly accessible via the internet.
If a Social Enterprise decides to form as a Nonprofit or use one of the traditional Enterprise forms, no additional reporting requirements by virtue of them being a Social Enterprise would arise.
No.
No.
The purpose of the SC is mandatorily a publicly beneficial activity, whereas other Social Enterprises might chose its purpose within the ESG framework.
No.
There are no major investor classes required to look at ESG issues when making investment decisions in the Czech Republic, however, they might be allowed to do so. Increased focus on factors other than profit are developing across countries in Europe and the EU is supporting the role of such consideration through its opinions and documents, although it does not yet have the ambition to coordinate its development and leaves it in the hands of each individual Member States.
Social Enterprises may receive grants, charitable investments, and traditional investments. The type of funding typically varies based on the Enterprise form that the Social Enterprise chooses. Philanthropic funding could also be provided by foundations and endowment funds (e.g. Nadace Via, SrdcerváÄi, etc.)
For-profit impact investments are on the rise in the Czech Republic as a result of an incline in public awareness of ESG. Many prominent investors are forming specific impact funds (for example large Czech banks like CSOB or ÄŒeská spoÅ™itelna or the telecom operator Vodafone have all created programs supporting Social Enterprises).
No specific type of government funding or support is available solely to the Social Enterprises, with the exception of “S-Záruka”, a program of the Czech-Moravian Guarantee and Development Bank (wholly owned by the state), which aims to facilitate access to commercial loans to social entrepreneurs by providing guarantees over commercial loans.
In general, other forms of government support might be available depending on the Enterprise form and industry, such as government grants, loans, bonds, and guarantees. For example, funding is available in areas including housing, tourism, nonprofit enterprises, etc.
A wide range of possible funding is provided by the EU (e.g. Operational Program Employment, Operational Program Enterprise and Innovations for Competitiveness, Integrated Regional Operational Program, etc.)
Obtaining government funding is generally complicated and administratively demanding and in general difficult for all enterprises.
No, there are no Social Enterprises listed on the Prague Stock Exchange.
Please see our answer to item No. I.7 above in terms of non-financial reporting, which also applies to the publicly traded Enterprises.
Impact bonds are not common in the Czech Republic.
No. Standard restrictions on foreign investments would apply. Only very few such restrictions exist.
There is no specific regulation on crowdfunding in the Czech Republic, meaning it is legal and a wide range of different laws apply. The specific legislation relating to a particular platform has to be assessed in light of its business model. Crowdfunding has established itself as a financing practice in the Czech Republic.
There are tax exemptions available for Nonprofits generally, but there are no tax exemptions that are uniquely available for Social Enterprises structured using a for-profit organizational form.
Nonprofits (even though not organized as Social Enterprise) have two key tax exemption provisions, one being that they do not have to pay corporate income tax on income from non-for-profits activities provided that their expenses (deductible or non-deductible) exceed income, and the other being that donors may take deductions on their reported income up to 30 % of their tax base. In addition, under certain conditions and within the limits imposed by the Czech Income Taxes Act, non-profits could claim 30% allowance from their corporate income tax base (subject to minimum and maximum) provided they use the amount of allowance received for non-profit activities.
However, the above exemptions are not accessible to business corporations (i.e. AS, SRO, VOS, KS and Cooperative (incl. SC)) even if meeting the Nonprofit criteria.
Yes, but if the recipient is a for-profit organization the recipient needs to treat the donation as subject to the Czech corporate income tax base, i.e. as its taxable income. In other words, if the recipient is a nonprofit organization and uses the donation for a publicly beneficial purpose, the donation is exempt from taxation.
No.
No.
No.
The Czech government grants loans and guarantees to small and medium businesses incl. Social Enterprises. Moreover, a government project Social Entrepreneurship Support (in Czech: Podpora sociálního podnikání) is currently in place (until November 2021). The main objective of the project is to offer a network of consultants and traineeships in order to build relevant experience and know-how and to promote the creation of Social Enterprises.
Moreover, a wide variety of support programs are currently in place in connection to the Covid-19 pandemic.
No (with the exception of reporting requirements as described in our answer to item No. I. 5. c. above).
No.
No.
The filing process is quite straightforward as an Enterprise will usually be registered in the Czech Commercial Register within 5 - 10 business days from filing the relevant application with the registration court. The court fee amounts to CZK 12,000 in case of an AS and CZK 6,000 in case of other legal forms, whereas some exemptions from paying the filing fee exist (e.g. in case of trusts). Alternatively, an Enterprise might be registered via notary public, in which case the registration only takes 1 or 2 business days and the fees are slightly lower.
There are no certifications or accreditations available to Social Enterprises in the Czech Republic, and still less those which would make available any official benefits.
Generally speaking, startups and other entrepreneurial Enterprises can easily form and flourish in the Czech Republic, thanks to a variety of legal forms to choose from, various support programs and easy and fast filing/registration process.
In general, we refer to our answer above. As regards Social Enterprise´s flourishment, there is a great connection between the means of financing and their lifespan, since many of the Social Enterprises are (to varying degrees) dependent on government grants and are unable to survive after the end of supporting programs.
There are no laws directly obstructing the formation of Social Enterprises. On the other hand, the lack of regulation of Social Enterprises (incl. the definition thereof) might have an obstructive impact on the development and broader awareness of Social Enterprises.
In connection to the Social Enterprises there is a minor concern that the missing legal definition of the Social Enterprise and lack of control of using the designation by the authorities might lead to misuse of subsidy programs, therefore harming the good name of Social Enterprises as a whole.
The following changes would be beneficial:
1. Providing tax benefits to Social Enterprises using corporation legal forms (i.e. AS, SRO, KS, VS and Cooperatives, incl. SC).
2. Incorporating the legal definition of Social Enterprise into Czech law.
3. Systemic and strategic support of Social Enterprises.
4. Simplification of administrative/bureaucratic duties of Social Enterprises.
5. Create a special corporate form for Social Enterprises with a mix of for-profit and non-profit purposes (in US terminology (Public-) Benefit Corporation). However, Czech law already provides for a wide selection of legal forms which allow for modifications in their statutes to form a Social Enterprise by including in the statutes both profit and not-for-profit purposes.
Creating a set of uniform mandatory reporting standards for ESG policies and actions would make the information more accessible to the public combined with tax incentives.
Providing tax benefits and/or subsidies to companies creating an incentive to transform into a Social Enterprise.
For the sake of completeness, we feel it is necessary to mention that social entrepreneurship in the Czech Republic often overlaps with philanthropy, and therefore certain legal forms usually used for philanthropy might be used by Social Enterprises as well (e.g. trusts (in Czech: svěřenský fond)).