Czech Republic

Current as of January 2014 | Download print version (in PDF)
Comments related to any information in this note should be addressed to Brittany Grabel.

Table of Contents

  1. Summary
    1. Types of Organizations
    2. Tax Laws
  2. Applicable Laws
  3. Relevant Legal Forms
    1. General Legal Forms
    2. Public Benefit Status
  4. Specific Questions Regarding Local Law
    1. Inurement
    2. Proprietary Interest
    3. Dissolution
    4. Activities
    5. Political Activities
    6. Discrimination
    7. Control of Organization
  5. Tax Laws
    1. Tax Exemptions
    2. Deductibility of Charitable Contributions
    3. Value Added Tax
    4. Property Tax
    5. Import Duties
    6. Double Tax Treaties
  6. Knowledgeable Contacts

I. Summary

A. Types of Organizations

The Czech Republic is a civil law country with six primary forms of not-for-profit organizations (NPOs):

  • Associations
  • Foundations
  • Funds
  • Registered Institutes
  • Social Co-operatives
  • Public Benefit Corporations (PBCs)[1]

These legal entities (with exception of the social co-operative) are considered publicly beneficial taxpayers or not-for-profit organizations (NPOs) if their statutory (main) activity is not entrepreneurial (systematically pursuing profit making), as stated in their incorporation documents, statute, bylaws, or according to the decision of a public authority. Excluded from the class of NPOs are: business corporations, professional chambers with obligatory membership for certain vocation, and foundations which serve to benefit persons close to their founders. (Income Tax Law Art. 17a) The social co-operative was introduced by the new Civil Code of the Czech Republic in January 2014. It is not necessarily included in the class of NPOs, but will be discussed in this Note because it is a new type of organization that may be a useful tool for social enterprise.

Other not-for-profit legal forms, which are outside the focus of this Note, include: religious organizations, political parties, political movements, interest associations of juridical persons, trade unions, and professional chambers, as well as specialized legal forms such as public educational juridical persons, public research institutions, and public universities.[2]

B. Tax Laws

Under the Income Tax Law, NPOs are exempt from tax on income from non-commercial activities that during the entire taxation period do not generate a surplus of revenue over related expenses (provided that certain conditions are met), as well as income from state subsidies and similar forms of support from public budgets. (Income Tax Law Art. 18a(1))

Foundations, funds, registered institutes, and PBCs are generally exempt from the tax on donations or other forms of income (fulfillments) provided free of charge. This exemption also applies to other public benefit NPOs, assuming that the exempted donation will be used for the organization's public benefit activities. (Income Tax Law Arts. 15(1) and 20(8)) Accordingly, NPOs as defined above generally do not have to pay income tax on foreign grants. The exemption applies to all NPOs with a seat in a European Union and European Economic Area member states. (Income Tax Law, Art. 19b(2b))

Economic activities and statutory activities that generate a surplus of revenue over related expenses are taxed at a reduced rate, up to a certain limit. Foundations considered as NPOs are exempt from tax on income generated from their registered endowments if this income is used exclusively for the purpose for which the foundation has been established, and if the use of such income is not used in violation of the Income Tax Law.

The above exemptions from income tax are applicable only if the NPO submits a request to receive the exemptions. (Income Tax Law Art. 19b(3))

Effective May 2004, when the Czech Republic entered the European Union and the Act on Value Added Tax took effect, NPOs are no longer generally exempt from output VAT on supplies provided to others in pursuit of statutory activities. However, activities of NPOs related to accredited educational activities, the provision of medical and social services, and certain other activities remain exempt from output VAT.

NPOs are also eligible for certain Real Property Tax exemptions. Both legal entities and natural persons may deduct donations to NPOs pursuing certain enumerated public benefit purposes and to organizations that filed and organized "public collections" under the Public Collections Law. (For more details see Section V.A., below.)

II. Applicable Laws

  • Constitution of the Czech Republic and the Constitutional List of Freedoms and Rights ("Constitutional Act"), Act No. 2/1993 Sb., as most recently amended by Constitutional Act No. 71/2012 Sb.
  • Civil Code, Act No. 89/2012 Sb. (entered into force on January 1, 2014)[3]
  • Act on Business and Cooperates (Law on Commercial Corporations), No. 90/2012 Sb. (entered into force on January 1, 2014)[4]
  • Act on Public Benefit Corporations ("Law on PBCs"), No. 248/1995 Sb., as most recently amended by Act No. 231/2010 Sb.[5]
  • Act on Public Collections ("Public Collections Law"), No. 117/2001 Sb., as most recently amended by Act No. 142/2012 Sb., Part XIX, and Act No. 313/2013 Sb., Part L
  • Act on Basic Register of Juridical Persons, Self-Employed Natural Persons and Public Authorities ("Law on Basic Register of Persons"), No. 111/2009 Sb., as most recently amended by Act No. 313/2013 Sb., Part LXXXIV
  • Act on Income Tax ("Income Tax Law"), No. 586/1992 Sb., as amended by Act on Changes of Tax Laws, No. 344/2013 Sb., Part I (entered into force on January 1, 2014)
  • Act on Real Estate Tax, No. 338/1992 Sb., as amended by Act on Changes in Tax Laws, No. 344/2013 Sb., Part I (entered into force on January 1, 2014)
  • Act on Value Added Tax (VAT), No. 235/2004, as amended by Act on Changes of Tax Laws, No. 344/2013 Sb., Part V (entered into force on January 1, 2014)
  • Act on Maternal, Basic, High, Higher Professional, and other University Level Education ("Law on Schools"), No. 561/2004, as most recently amended by Act No. 344/2013 Sb., Part XXXVI  
  • Act on Criminal Responsibility of Juridical Persons ("Law on Criminal Responsibility of Juridical Persons"), No. 418/2011 Sb.
  • Act on Public Registers of Juridical and Natural Persons ("Law on Public Registers"), No. 304/2013 (entered into force on January 1, 2014)

III. Relevant Legal Forms

A. General Legal Forms

As in most civil law countries in Europe, the principal legal forms of not-for-profit organizations (NPOs) in the Czech Republic are associations and foundations. The Czech Republic has several additional forms, including funds, registered institutes, social co-operatives, and public benefit corporations (PBCs).

The Civil Code includes general provisions for the formation, establishment, operation, and termination of any juridical person, as well as for the processes of merging, splitting or making other changes in legal form. It also defines in general the types, rights and responsibilities of governing, supervisory and control bodies of juridical persons. (Civil Code Arts. 15-22, 118-209). For each kind of legal form, there are further specific provisions.

The Civil Code addresses three main categories of legal entities: a) corporations (korporace), b) fundaciae (fundace), and c) registered institutes (zapsaný ústav). The main distinguishing feature of the corporation category is the existence of an active membership. This category includes all commercial companies, including those with a single proprietor, as well as associations of natural or juridical persons established for non-commercial purposes and serving the interests of their members or any public interest. Fundaciae, in contrast, include juridical persons without membership, established to tend to property set aside by their founder(s) to be used for a given purpose. This category includes foundations with a protected endowment (both grant-giving and operational) and funds (without an endowment). The third category, registered institutes, are similar to fundaciae in that they do not have any members, and may be established for the purpose of rendering activities of certain socially or economically beneficial purposes according to the will of their founder(s).

Two additional legal forms – public benefit corporations and social cooperatives – are governed by different laws and may be considered NPOs under certain conditions.

The following sections describe all six legal forms in more detail.

Associations

The new Civil Code of 2014 introduces the Czech term "spolek," which has the meaning of "association" or "society," within a general category of corporations. The association is distinguished as a not-for-profit, non-commercial corporate entity which serves the interests of its members or promotes or acts in support of certain public interests.[6]

Associations [of citizens] that were established according to the Act on the Associating of Citizens (No. 83/1990) are considered to be associations as defined by the new Civil Code. By the end of the year 2015 they must adapt their name to contain words "spolek" or "zapsaný spolek," or add the legal form acronym "z.s." as a suffix. By the end of the year 2016, these "old" associations have to reconcile their bylaws and internal relations with the mandatory provisions of the new Civil Code. Within the same period of time, the highest body of an association (usually the general assembly of its members) may decide instead to change the legal form of the entity to a registered institute or social co-operative (see below).

According to the new Civil Code, associations may also form federations or alliances. For that form – an entity whose members are associations – the Civil Code introduces the Czech term "svaz." As regards the regulations, there is no need to distinguish between "spolek" and "svaz."

Associations are specifically regulated according to Articles 214-307 of the Civil Code. While permitted to engage in both mutual benefit and public benefit activities, associations may not be established for the following purposes: violating the rights of other persons or the laws of the Czech Republic; pursuing military objectives; or interfering with activities reserved to the state. (Civil Code Art. 145)

The Civil Code provides that an association must be established by and remain composed of at least three persons, and that it cannot be established for a purpose that is explicitly commercial. It also mandates that a quorum of the highest governing body and all other bodies of an association shall be formed by an absolute majority of all members of the association or the body, respectively.[7]

Provisions related to associations are generally applicable to other types of corporations, as concerns basic provisions of the private law. However, many types of corporate entities have special laws to regulate them, as is the case of business companies (see the Law on Commercial Corporations); political parties and political movements; trade unions and unions of employers; churches and religious corporations; and vocational chambers and similar legal entities that promote the interests of and enforce rules for certain professions. These special laws either remained in force after the Civil Code entered into force in 2014, or they are considered frozen and not subject to amendment. In the latter case, they do not govern the establishment of new legal entities, but remain a legal basis to regulate existing entities, unless mandatory provisions of the Civil Code or the Law on Commercial Corporations specify otherwise.

Foundations

Foundations (nadace) are asset-based organizations established by legal or natural persons, endowed with a property to be used to serve a socially or economically beneficial purpose. (Civil Code Arts. 206-396) The name of a foundation must include the word "nadace." Foundations must possess and maintain a protected endowment with an equity value of at least 500,000 Czech Crowns (approximately USD 25,000). Foundations may form other assets by collecting donations and must use all their income for the purposes defined in the founders' deed.

The foundation's endowment must be maintained, and the governing and supervisory bodies of the foundation are obliged to care for it and all other assets of the foundation. The endowment should have a potential to generate some income, which is exempt from income tax when used for the publicly beneficial purpose of the foundation and not in violation of the law. Other assets of the foundation (including acquired donations) may be used to pursue statutory purposes, to provide financial support (grants) to third persons, to cover costs of activities otherwise serving the purpose of the foundation, and to cover administrative costs. The foundation has to account for these expenditures separately. (Civil Code Art. 357).

Foundations may also be established for a charitable purpose, including support of a closed or otherwise restricted circle of persons. (Civil Code Art. 306) However, in such a case, the foundation is not considered an NPO, and may not use the income tax benefits (see also Chapter V.A.). It is forbidden to establish foundations exclusively for the purpose of profit making. It is also not allowed to establish a foundation to support political parties and political movements or their activities.

The Board of Directors of a foundation must comprise at least three members. Within the general responsibility of maintaining the endowment and other assets of the foundation within the duty of care, the Board of Directors is entitled to decide upon enhancing or reducing the equity value of the endowment, unless forbidden by the founder(s) in the incorporation document. The Board of Directors of the foundation may decide on enrichment of the endowment, if it follows form the annual balance sheets that it is possible and would not mean the use of assets fixed for a given purpose.[8] (Civil Code Art. 342)

The Board of Directors of the foundation may decide to reduce the registered equity value of the endowment. However, such reduction must not exceed 20% of the endowment value within a period of 5 years, and the sources generated this way must not be used directly or indirectly to cover the administrative expenditures of the foundation. (Civil Code Art. 344)

The Board of Directors of the foundation may also decide to change the legal form of the foundation to that of a fund, if the equity value of the endowment has become lower than the required minimum for a prolonged period of time. This change in legal form requires the approval of the Supervisory Board or the Supervising Officer.

Foundations may be engaged in entrepreneurial activities, with the condition that such activities may only be auxiliary, and any profit generated must be used to support the main purpose for which the foundation was established.[9] However, the foundation may not become a partner with unlimited liability in a commercial company. (Civil Code Art. 307)

Anyone may conclude a written contract with a foundation to take into custody as its "associated fund" certain property, and to request from the foundation to use this property for a specified purpose related to the statutory purpose of the foundation. The associated fund may bear its own denomination and the contract may include a reasonable charge, for which the foundation provides its custody services. The associated fund must be accounted for and kept separate from other property of the foundation; in case of liquidation it is also treated separately. (Civil Code Arts. 349-352)

Funds

Funds (nadační fond) are also asset-based organizations established by legal or natural persons to pursue a socially or economically beneficial purpose. The name of a fund must include the words "nadační fond."

Funds do not have a minimum endowment requirement. The assets of a fund consist of the founder's initial contribution and later accepted donations, which are not required to yield further income. Funds are prohibited from pledging their assets or otherwise using their property to secure a debt. Any legal act aimed to such a use is considered invalid. On the other hand, the property of a fund may be alienated, if it is in accord with its purpose. It may also be used as a careful investment. Funds may be established for a limited period of time, or until their assets are fully consumed for the purpose defined in their incorporation document. (Civil Code Arts. 398-401)

If explicitly allowed in the incorporating document by the founder(s), the Board of Directors of the fund may decide to change the legal form of the fund to that of a foundation. This requires the prior consent of the Supervisory Board or Supervising Officer. In addition, the creditors of the fund must be given thirty days' notice in order to be able to request sufficient security for their claims. (Civil Code Arts. 399-400)

Registered Institute

The registered institute (registrovaný ústavwas designed as a new legal form with the aim of complementing or eventually replacing the PBC. A registered institute may be established by private or public persons for the purpose of carrying out activities that are socially or economically beneficial and accessible to everyone, under conditions well defined in advance. Like foundations, the registered institute is a non-membership-based organization operating so as to make use of its own personal and material components. It has no ownership relations to any other person and may not distribute its profits to affiliated persons such as members of its governing and supervisory bodies and employees.

Registered institutes may operate a business-oriented firm or be engaged in other auxiliary, profit-bearing economic activity under the condition that such activities do not jeopardize the quality, scope, and accessibility of the services provided in the framework of the institute's statutory (main) activities. Any generated profit must be used exclusively to support of the activity for which the registered institute has been established and to cover administration costs.

Unlike foundations or funds, the statutory body of the registered institute is its Executive Director. The Board of Trustees of a registered institute has an oversight role and guarantees the fulfilment of the purpose for which the institute was established. The Board also has specific rights regarding the alienation of real estate in the registered institute's possession, disposition of owned authorship or industrial rights, establishment of another legal entity, and budgeting and reporting.

With the exception of provisions related to the endowment and equity value, the provisions of the Civil Code that relate to foundations also apply to registered institutes.

Social Co-operative

Title VI of the Law on Commercial Corporations regulates the establishment, operation, termination, and liquidation of co-operatives.[10] It also provides the basis for a special legal form that may be considered an NPO: the social co-operative. (Law on Commercial Corporations Arts. 758-773)  

A social co-operative is defined as a community of at least three persons, which is a legal entity established for the purpose of the mutual support of its members, or support of third persons, or to undertake business pursuits. It is meant to systematically pursue publicly beneficial activities aiming to promote social cohesion, including the provision of workplaces and the integration of handicapped persons into society. (Law on Commercial Corporations Art. 758) The social co-operative is also supposed to make preferential use of local resources according to its seat or location of its operations, particularly in the field of employment development, social services, health care, education, and sustainable regional development. (Law on Commercial Corporations Art. 759)

The name of the social co-operative must contain the words "sociální družstvo." A social co-operative must not change the purpose of its activities in a way that would not be in line with the definition given in the Article 758. Social co-operatives also may not change their legal form – merging or splitting – unless the resulting legal form is also a social co-operative.

A member of the social co-operative may be only a person employed by the social co-operative, working for it as a volunteer, or a person to which the social co-operative provides its services.[11] Every member of the social co-operative is obliged to contribute to the basic property of the social co-operative. Membership in the social co-operative is not transferrable to other persons.

Social co-operatives may engage in entrepreneurial activities. However, a social cooperative is not permitted to: issue bonds or secure liabilities of other persons with its property; participate in commercial activities of other persons or be a part of a contract on silent partnership; or alienate or sublet its branch to a legal person that is not a social co-operative.

The bylaws of the social co-operative may provide that it can distribute the net profit among its members after meeting the requirements of the reserve fund and other internal funds. In such a case, however, it may not distribute more than one-third of the disposable profit. If a social cooperative is terminated, its members have the right to be repaid their initial contribution, or a proportion of it if the liquidation balance is not sufficient. What remains of the liquidation balance must be transferred to another social co-operative or to the community where the social co-operative has its seat.

Public Benefit Corporations (PBCs)

PBCs are NPOs that have no members and render "generally beneficial services" to the public on previously publicized and equal terms and conditions. (Law on PBCs Art. 2) PBCs were originally devised as legal entities for the transformation of state subsidized entities. In practice, PBCs are commonly used as an alternate legal form for foundations created before 1998 that could not meet the endowment requirement for establishing a foundation under the Law on Foundations. Other organizations – such as theatres, hospitals, homes for the elderly, drug rehabilitation clinics, and other kinds of NPOs providing community services – became PBCs after the enactment of the Law on PBCs. Institutes, community centers, and entities providing social, educational, and cultural services also often take the form of PBCs.

With regard to managerial entities, the Executive Director serves as the PBC's statutory body. He or she must be a natural person without a criminal record. The Executive Director is appointed and recalled by the Board of Trustees. The Board of Trustees is appointed by the PBC's founder(s) and serves to guarantee the integrity of the PBC's assets and other property, as well as the pursuit of the PBC's purposes (Law on PBCs Arts. 12-14) A Supervisory Board oversees the operations of the PBC, its Executive Director, and Board of Trustees; the Supervisory Board reports annually about its findings to these bodies as well as to the founder (Law on PBCs Arts.15-16)

A PBC may provide its statutory services for a fee and may otherwise engage in economic activities if the income generated augments the use of the organization's assets and human resources, without negatively affecting the quality, scope, and availability of the statutory public services it provides. (Law on PBCs Art.17(1)). PBCs may not invest in the entrepreneurial activities of other persons. The Law on PBCs allows a PBC to establish a legal entity without any further conditions except the approval of the Board of Trustees of the PBC. (Law on PBCs Art.13(1d))

PBCs are exempt from property tax on buildings that serve their purposes and from real estate tax if the building is used to advance their purposes.

It is important to note that with the entering into force of the new Civil Code in 2014, PBCs will have to decide within a three year period whether they will continue with the legal form of a PBC or whether they will transform into a registered institute, foundation (if they have sufficient property to satisfy the required endowment equity value), or a fund. The Board of Trustees of the PBC must decide on such a change in legal form, with the consent of the PBC's Supervisory Body.[12]

Those PBCs that decide to continue without changing their legal form shall continue to be regulated by the Law on PBCs. However, no new PBCs may be established after that date.

B. Public Benefit Status

The new Civil Code[13] introduces the notion of a "publicly beneficial juridical person:" an entity with the mission of contributing to the general welfare through its activities, in accordance with its incorporation documents. Such entities must be governed by persons without criminal records. Any property of a publicly beneficial juridical person must originate from lawful transactions and must be reasonably used for a publicly beneficial purpose. (Civil Code Art. 146)

The new Civil Code provides that a publicly beneficial juridical person may register its public benefit status in the public register, pertaining to its given legal form. Once it has done so, it is possible to voluntarily resign the status. A court may also decide on removal of the status upon the proposal of a person proving its legal interest, or without such proposal, if the juridical persons ceases to fulfill conditions for having the status and does not remedy the deficiencies within a reasonable time. (Civil Code Arts. 147-149)

The provisions of the new Civil Code refer to the special law that should define the conditions for public benefit status, but such a law has not yet been passed by the Czech Parliament.[14] Nonetheless, the concept of public benefit remains woven into the Income Tax Law and the Public Collections Law. Under the Income Tax Law, juridical and natural persons may generally deduct from their taxable income donations to a legal entity that is considered an NPO[15] if: 1) the NPO is based in any member state of the European Union, or in Norway or Iceland; and 2) the recipient allocates the received money to certain public benefit activities, such as: science and learning, research and development, culture, schools, police, fire squads, support and protection of young people, protection of animals and their health, social and health care, ecology, humanitarian and charity purposes, religious purposes for registered churches and religious communities, and sports. Assistance for relief in the event of humanitarian and natural disasters is treated similarly. (Income Tax Law Arts. 15(1) and 20(8))

The tax base reduction applies also to foreign legal entities that organize a "public collection." Under the Public Collections Law, "public collection" is limited to collecting contributions in order to promote "public benefit purposes," such as humanitarian and charitable goals, the development of education and learning, physical fitness and sports, the protection of cultural heritage or traditions, and the environment. (Public Collections Law Art. 1) Thus, tax deductibility may depend on how an NPO uses the donation. (See also infra Section V.A.)

IV. Specific Questions Regarding Local Law

A. Inurement

Any profit generated from the main and auxiliary activities of an association may be used exclusively for the association's activities, including covering the costs of its administration. (Civil Code, Art. 216(3)) If an association is terminated, the liquidation balance must be used as set forth in the bylaws of the association. In case of an association with registered public benefit status, the liquidation balance must be used for publicly beneficial purposes.

Likewise, the assets of a foundation or fund must be used in a manner consistent with the purposes and conditions set forth in the organization's governing instruments. (Civil Code Arts. 338 and 398) In addition, the law precludes certain individuals associated with a foundation from receiving grants from the foundation, including: the founder(s), employees, the Supervising Officer, members of the Board of Directors or Supervisory Board or any other foundation body, as well as persons closely related to these individuals. (Civil Code Art. 353) There are no legal barriers for members of foundation bodies to receive reimbursement for their services to the foundation, but they should not be directly employed by it. There are no legal limitations on what compensation may be offered. As regards the fund, the new Civil Code does not specify any additional limits with regard to the members of its bodies, nor does it refer to the mandatory application of provisions related to foundations.[16]

Any profit generated by a registered institute must be used exclusively to cover the costs of activities for which the registered institute has been established, as well as administration costs. The institute's incorporation document of may include provisions allowing for the compensation of members of institute bodies for their services to the registered institute. In absence of such provisions, however, it is assumed that membership is honorary. However, the Executive Director is entitled to fair remuneration and the Board of Trustees decides on the value or the manner in which the remuneration is determined. (Civil Code Art. 414)

The social co-operative may distribute up to 33% of its disposable profit among its members, unless the bylaws of the social co-operative provide otherwise. Additionally, before such distribution, the reserve and other internal funds of the social co-operative, if any, must be used. (Law on Commercial Corporations, Art. 766)

The employees of public benefit corporations, on the other hand, may be appointed to the PBC's Board of Trustees, though they may not comprise more than one-third of its members. The members of the Board of Trustees and the Supervisory Board may be regularly compensated for services rendered to the PBC. (Law on PBCs, Arts. 9(a)-14) Nevertheless, the law prohibits the use of a PBC's profit for the benefit of its founders, members of its management bodies, or employees. (Law on PBCs, Art. 2(1)(c)) The salary of the Executive Director and sum of the PBC's compensations to the members of the boards must be reported as a part of the mandatory Annual Report. (Law on PBCs, Art. 21(1)(f))

B. Proprietary Interest

In general, it holds for all NPOs as defined above (with the exception of the social co-operative) that they may act as founders of other legal entities, unless otherwise specified in the law. The Civil Code explicitly prohibits the use of profit generated by the economic activities of associations, foundations, funds, registered institutes for anything other than for supporting the purpose(s) for which these organizations were established, and to cover administrative costs. The same rule applies for PBCs. However, no NPO mentioned in this paragraph may become a partner with unlimited liability to a commercial corporation. This limits the choice of legal entities that NPOs may establish on their own to: other NPOs, companies with limited liability, and share-holding companies.

Foundations, funds, registered institutes, and PBCs are legal entities not belonging to the category of corporationsand so, by definition, there is no natural nor juridical person that may claim proprietary interests to the property contributed, acquired, generated or otherwise taken into possession of the entity.[17]

In general, it also holds that any donor providing monetary or non-monetary donation or other contribution to a legal entity may do so under contract, in which it is specified the manner and/or purpose of the use of the donated or contributed assets. Such contracts may specify the conditions under which the donated or contributed assets must be returned to the original owner in cases of misuse or inability to properly use such assets. Therefore, the NPOs might have liabilities to individual donors or contributors and in case of termination such claims must be taken into account.

The social co-operative is essentially defined as a commercial corporation. The proprietary interests of its members to the profit and property of the social co-operative are limited as described in Sections IV.A and IV.C.

C. Dissolution

The Civil Code generally provides for the winding up and final termination of all private juridical persons. (Arts. 168-171 and 185-209)

Associations

For associations, dissolution requires the liquidation of association assets.[18] The relevant body of the association or a court appoints a liquidating officer, who must compile a list of the association's property and make the list available for all members of the association for revision. The liquidating officer sells the association's property only to the extent necessary to pay off the association's debts, and uses the rest of the liquidation balance in accordance with the association's bylaws. Except for registered public benefit status associations, an association may distribute its remaining assets to its members upon dissolution if such distribution is provided for in the association's bylaws. Any attempt to use the liquidation balance of an association with the status of public benefit for other than publicly beneficial purposes is deemed invalid and void. If it is not possible to use the liquidation balance of an association in accordance with its bylaws, the liquidation officer has to offer it to another association with a similar purpose. If that is not possible, the offer goes to the community where the association has its seat. If the community does not accept the offer, it is transferred under the control of the respective regional self-government. The public authorities are obliged to make use of the offered liquidation balance explicitly for a publicly beneficial purpose. (Civil Code Arts. 271-273)

If the association has accepted grants or other contributions from a public budget, the above-mentioned procedure is not applicable, and the liquidating officer shall dispose of the relevant part of the liquidation balance according to the directions of the relevant public authority.[19] (Civil Code Art. 273)

Foundations and Funds

In the event of the termination of a foundation (if it has achieved its purpose) or a fund (in case of impossibility to further fulfill its purpose) the Board of Directors of the foundation or of the fund decides on their termination, and appoints a liquidation officer. Foundations and funds may be also terminated upon the decision of a court, if these entities act in violation of the law, or are not active for more than two years without serious reason, or when it is otherwise impossible to fulfill the purpose for which these entities were established. In such cases the court appoints the liquidation officer. (Civil Code Arts. 376, 377 and 401)

As with associations, the liquidating officer sells the property of the foundation only to the extent necessary to pay off the foundation's debts, and uses the rest of the liquidation balance in accordance with the incorporation document of the foundation. If the incorporation document of a foundation established exclusively for public benefit purposes allows use of the liquidation balance for other than publicly beneficial purposes, such a provision is considered invalid and shall not be applied.[20] If the incorporation document does not define how the remaining liquidation balance should be disposed of, the liquidation officer must offer it to another foundation with similar purpose or upon decision of the Board of Directors to the community, region, or the state, if there is a good reason for it. If that is not possible, the offer goes to the community where the association has its seat. If the community does not accept the offer within two months, the remaining liquidation balance of the foundation shall be transferred to the control of the regional self-government where the foundation has its seat. The public authorities are obliged to make use of the offered liquidation balance explicitly for a publicly beneficial purpose. (Civil Code Arts. 378-380) If the foundation has accepted a purpose-bound subsidy from a public budget, the above-mentioned procedure shall not be applied, and the liquidating officer shall dispose of the relevant part of the liquidation balance according to the directions of the relevant public authority. (Civil Code Art. 381)

In addition, a foundation may, if its incorporation document explicitly allows it, change its legal form by merging with another foundation or with a fund that serves a similar purpose. The resulting legal form must be a foundation. (Civil Code Art. 383) In the case that the equity value of the endowment has fallen not temporarily below the minimal value of CZK 500,000, the Board of Directors of the foundation may decide to change to the legal form to that of a fund. This requires the consent of the Supervisory Board or Supervising Officer. (Civil Code Art. 390)

When explicitly allowed in the incorporation document, the Board of Directors of a fund may decide to change the fund's legal form to that of a foundation. As with foundations, this change requires the consent of the Supervisory Board of Supervising Officer. (Civil Code Art. 399)

Registered Institutes

According to the Civil Code, the provisions for foundations apply to registered institutes as well. (Civil Code Art. 418) That may be interpreted in a simple manner so that it is possible to merge one registered institute with another, or split it into two or more registered institutes. Nevertheless, only future judicial practice will provide more insight into the interpretation of these provisions.

Social Co-operatives

Upon termination of a social co-operative, its members have the right to receive compensation equal in monetary value to the basic contribution they made when entering the social co-operative – or to a proportion of it, if the liquidation balance is not sufficient. What remains of the liquidation balance must be transferred to another social co-operative or to the community where the social co-operative has its seat. (Law on Commercial Corporations Art. 767)

Public Benefit Corporations

The liquidation balance of a public benefit corporation after termination may be transferred only to a PBC identified in the organization's statute, or determined by the Board of Trustees when deciding to terminate the PBC and to liquidate its assets. A PBC's founder(s) must be informed and may act to prevent the termination of the PBC. (Law on PBCs Arts. 7(3) and 8(2)) A PBC's incorporation document may also permit the transfer of a founder's rights to another person. (Law on PBCs Arts. 4(4) and 7(7)) If there is no other PBC willing to acquire the property or liquidation balance, the remaining assets revert to the local government or the state (through the local government where the PBC was registered). (Law on PBCs Art. 9(6-10)) Additionally, in this case, the assets must be allocated to a public benefit activity. However, if the founder is a public entity, the liquidation balance of the PBC must be transferred to the founder, unless the incorporation document issued by the founder(s) identifies another PBC to take over the remaining assets after termination of the PBC. (Law on PBCs Art. 9(7-9))

D. Activities

1. General Activities

Associations may engage in both mutual benefit and public benefit activities. In contrast, funds, registered institutes, PBCs and even social co-operatives are statutorily required to pursue socially or economically beneficial objectives. (Civil Code Arts. 394 and 602; Law on PBCs Art. 2(1); Law on Commercial Corporations Art. 758) Foundations are also statutorily required to pursue socially or economically beneficial objectives; however, they may also be established for charitable objectives addressing the needs of a closed circle of persons.[21] (Civil Code, Art. 306)

In summary, associations, foundations, funds, registered institutes, and PBCs[22] considered NPOs, must not be established for the purpose of undertaking commercial, for-profit, economic activities. (Civil Code Art. 405(1)(b)) Nevertheless, all these may be engaged in auxiliary economic activities under the condition that all profit shall be used exclusively for supporting the statutory purpose or to cover administrative costs.

The law does not explicitly prohibit political activities for all above mentioned legal forms, since the right to register candidates for election is strictly reserved to political parties and political movements, which are governed by a special law. Foundations and registered institutes may not provide financial support to political parties and political movements, however. (Civil Code Arts. 308(2) and 418)

2. Public Benefit Activities

As discussed above, all forms of NPOs may engage in social and economically beneficial or publicly beneficial activities. By their nature, foundations, funds, registered institutes, social co-operatives and PBCs must pursue only public benefit goals as their primary activity.[23]

The activities of registered institutes and PBCs differ in the following ways: The Law on PBCs requires PBCs to provide generally beneficial services open to the general public, without further defining what the commonly beneficial service is. However, the conditions for providing such services have to be specified in a very concrete manner in the incorporation document of the PBC. (Law on PBCs Art. 2(1)(b)) In contrast, the incorporation document of the registered institute must contain only specifications concerning its socially or economically beneficial objective. (Civil Code Arts. 402 and 405(3)(b)) The Income Tax Law uses a more concrete definition of public benefit activities for the tax treatment of donors and beneficiaries of donations. (See also Section III.B. above and Section V. below)

3. Economic Activities

An association may not be established for the primary purpose of carrying out entrepreneurial or other income-generating economic activities. (Civil Code Art. 217(2)) Besides its main activity, the association may also carry out auxiliary economic activity consisting of entrepreneurship or other income-generating activity, if the objectives of such activities support the association's main activities or enhance use of association property. The profit generated from activities of an association may be used only for the association's activities, including administrative costs. (Civil Code Art. 217(2) and (3))

It is likewise forbidden to establish a foundation for explicit income-generating purposes. Foundations may be engaged in entrepreneurship, when such activity represents only its auxiliary activity and all profit is used only to support the purpose for which the foundation was established. However, such economic activities are forbidden if the founder(s) stipulated as such in the incorporation document of the foundation. A foundation must not become a partner with unlimited liability to a commercial corporation. Violation of these rules may be grounds for the termination of a foundation by a court. (Civil Code, Arts. 306(2) and 307)

A fund may be established for a socially or economically beneficial purpose. Its property is formed of contributions and donations from its founders and donors. It may not be used as a pledge or otherwise to secure debts – any legal act that violates this rule is considered void. However, all property of the fund may be alienated, if it is in the interest of the purpose for which the fund was established. (Civil Code Arts. 394-398) Since there is no explicit mentioning of the right of the fund to take part in any entrepreneurial activities, as there is in the case of the foundation, it may be concluded that such activities are not allowed.[24]

A registered institute may carry out a business enterprise or other auxiliary activity, but it must not jeopardize the quality, scope and accessibility of the services provided by the registered institute, in the framework of its main socially or economically beneficial activity. The registered institute may use any profit only to support the activity for which it was established and to cover its administrative costs. (Civil Code Art.s 402 and 403)

A social co-operative is a type of a commercial corporation that is suitable for carrying out social enterprise. As such, economic activities are one of the main characteristics of this legal form.

Public Benefit Corporations may engage in economic activities so long as these do not jeopardize the quality, scope, and availability of the organization's public benefit services. (Law on PBCs Art. 17(1)) PBCs may establish another juridical person but are not allowed to take part in the entrepreneurial activities of other juridical persons.[25] (Law on PBCs, Art. 17(2)) Any profit earned from economic activities must be used for a PBC's development.

E. Political Activities

Czech law treats NPOs in the same manner as other legal entities, and therefore allows them to support or oppose political candidates and to participate in lobbying and public advocacy activities.

Nothing prohibits associations from engaging in legislative or politically motivated activities. In fact, associations are often very active participants in fiscal decision-making processes and in the areas of environmental and regional development planning.

It is forbidden to establish a foundation for the purpose of supporting political parties or political movements, or for any other participation in activities of political parties and movements. Violation of this rule may be a cause for the court to terminate the foundation. (Civil Code Art. 307(2) and 306(2)) However, foundations are not proscribed from engaging in general legislative and political activities.

In the case of funds, registered institutes, social co-operatives and PBCs, there are no explicit provisions concerning activities related to political parties and movements.

F. Discrimination

The Czech Constitution explicitly prohibits discrimination based on, inter alia, sex, race, skin color, language, religion, political or other persuasion, national or social origin, or belonging to a national or ethnic minority. (Constitutional Act Art. 3(1)) The Civil Code further forbids the establishment of any form of juridical persons to engage in activity that denies or restricts the civil rights of individuals because of their nationality, sex, race, origin, political opinions, or religious affiliation. (Civil Code Art. 145) This clearly precludes, for example, a private school or other educational institution operated as a foundation, registered institute, or PBC, as well as any other subject of the law, from discriminating based on gender, race, ethnicity, or sexual orientation.

G. Control of Organization

Under Czech law, there are no limits on the ability of foreign individuals to found and participate in an NPO of any form.[26] Foreign natural and legal persons are explicitly allowed to establish and participate in the governing bodies of associations, foundations, funds, registered institutes, social co-operatives, and PBCs. (Civil Code Arts. 214, 306, 309, and 402; Law on PBCs Art. 4(2))

The Civil Code limits interlocking control with other organizations in some cases. A foundation may not provide a grant to a person who is a member of its statutory or supervisory body, its employee, or is close to such persons. (Civil Code Art. 353(1)) The foundation generally may not provide a grant to its founder, either: If there are special circumstances that should be taken onto account, such a grant may be provided only after the Board of Directors obtains consent from the Supervisory Board or the Supervising Officer of the foundation. (Civil Code Art.353(2)

Individuals with a management or controlling position in NPOs may be subject to liability if the NPO violates the law.[27]

V. Tax Laws

This section discusses relevant tax legislation, recognizing that taxes may affect the amount of the grant actually flowing to the grantee.

It should be noted that the government of the Czech Republic implemented a broad tax reform after 2010. The main change consists of the introduction of a solidarity tax of an additional 7% from personal incomes that exceed 48 times the minimum wage as valid for the given year. Also, the two existing VAT rates were raised by 1%, to 15% for food products and some health care-related goods and services, including medicaments, and to 21% for other goods and services. These changes remain in force also for the year 2014 and are incorporated into the Act No. 344/2013 Sb., on Changes of Tax Laws - the package of the amendments to tax laws that accompanies the new Civil Code. The amended Income Tax Law abolishes the Law on Donations and the tax on transfer of a real estate, thus making income from donations one of the taxable income categories. The amended Income Tax Law also retains the main tax benefits or taxation conditions for NPOs, such as a possibility to reduce the base for income tax calculation to all NPOs, if they are considered publicly beneficial taxpayers.

A. Tax Exemptions

The Income Tax Law generally excludes from income taxation the income of a not-for-profit organization earned in connection with the pursuit of its statutory activities, provided that the income is less than related expenses. Income derived from subsidies and grants provided by the state, regional and communal public budgets, as well as from the budgets of the EU, EU member states, Iceland, and Norway is also exempt from taxation. (Income Tax Law Art. 18(4)(b)). Income from advertisements and facility rentals is subject to taxation, but the income from membership fees as defined in the statutory documents of an association remains exempt from income tax. (Income Tax Law Art. 18(3))

The following juridical persons are subject to the above parameters: "interest associations of juridical persons explicitly not established for income-generating activities, associations, trade unions, political parties and movements, churches and religious congregations, foundations with only publicly beneficial purpose, funds, registered institutes, public benefit corporations, public universities, public research institutions, educational juridical persons, communities, organizational branches of the state, regional governments, state funds, and other subjects defined by law." (Income Tax Law Art. 18(8)). The aforementioned taxpayers are obliged to maintain their accounting records in a way that keeps income and related expenditures that are subject to the income tax separate from income and related expenditures that are exempt.

A special exempt category is also reserved for earnings resulting from economic use of property that is part of the protected endowment of a foundation that is considered a publicly beneficial taxpayer. These yields are fully exempt from income tax if they are used for the purpose of the foundation and not in violation of the law. (Law on Income Tax Art. 19(1)(r))

The Income Tax Law specifically states that NPOs are generally not required to pay income tax on interest on accounts, state subsidies, and other income from their statutory activities, provided that the expenditures exceed the income from the activity. (Income Tax Law Art. 18(4)) Foundations that are considered publicly beneficial taxpayers, funds, registered institutes, PBCs, and other publicly beneficial taxpayers resident in any state of the EU, Iceland and Norway are also exempt from the tax on donations. (Income Tax Law Art. 19a(2b))

Income from profit-yielding economic activities that is related to the statutory purposes of an NPO is subject to a reduced tax. All related income is fully exempt from income tax up to CZK 300,000 (approximately USD 15,000). Total revenues (i.e., income minus related expenses) at the end of the fiscal year that exceed this amount are reduced before taxation by 30% up to CZK 1,000,000 (approximately USD 50,000), or whichever is less, provided that the proceeds are used for statutory activities within three years of accrual and other conditions are met. (Income Tax Law Art. 20(7))[28]

In general, corporate income tax is calculated as 19% of the reduced tax base (income minus related expenses reduced by deductible portions and after applying the 30% reduction discussed above rounded down to thousands).

Income from free-of-charge fulfillments (i.e., grants, subsidies and donations) is deductible from the tax base if received by taxpayers, which according to their incorporation documents, statutes, bylaws, law or according to the decision of a public authority, pursue as their statutory (main) activity only non-commercial, not-for-profit activities (NPOs). These are: foundations (except those, which according to their incorporation documents are serving or acting to support a closed circle of persons), funds, registered institutes and public benefit corporations, registered churches and religious congregations, and political parties. This category also includes associations that pursue, according to their bylaws, a publicly beneficial purpose. However, the exemption shall only be applied if the taxpayer requests it. (Income Tax Law Art. 15(1), 19a(2b) and (3))

Contributions earned through public collections organized in compliance with the Law on Public Collections or received for humanitarian and charitable purposes may be also deducted form the income tax base. (Income Tax Law Art. 19a(2c) and (2d))

B. Deductibility of Charitable Contributions

Donations equal to or higher than CZK 2,000 (approximately USD 100) provided as charitable contributions to communities, regions, branches of state administration, juridical persons with their seat in the Czech Republic, as well as juridical persons organizing public collections organized in compliance with the Law on Public Collections, may be also deducted from the corporate income tax base.[29] In order to qualify for the deduction, the donation must be given to support activities in one or more of the following fields: science and education; research and development; culture; teaching in schools; police; fire prevention and protection; support and protection of young persons; protection of animals and their health; social or health care; ecological, humanitarian, and charitable purposes; religious purposes of registered churches and congregations; physical training and sporting activities; and support of political parties and movements and their activity.

It is not possible to deduct any donation for which the corporate donor or a person affiliated to it receives some benefit. (Income Tax Law Art. 20(8)) 

Violations of the rules of public collections are punishable by fines up to CZK 500,000 (approximately USD 25,000). (Public Collections Law Arts. 25-25(b))

For legal entities, up to 10% of taxable income is deductible from the tax base. NPOs that are exempt from the donation tax may not make use of this tax deduction. (Law on Income Tax Art. 20(8))

Individuals may deduct donations to qualifying NPOs up to 15% of the person's taxable income. However, to qualify for the deduction, the individual must donate an amount that is greater than 2% of his or her taxable income or is at least CZK 1,000. (Law on Income Tax Art. 15(1))

C. Value Added Tax

Under the VAT law as in force from January 1, 2014, the standard VAT rate is 21%. A lower 15% VAT rate is applied to most food products and goods of special importance for health care, social services, and similar activities. The lower VAT rate also applies to certain services, including wheelchair maintenance, water distribution, public transportation, health and social care, the care of children, ill and elderly persons provided in hospices, and several cultural activities. (Law on VAT Art. 47(1))

NPOs are no longer generally exempt from VAT on supplies relating to their statutory purposes. Instead, VAT exemptions are limited to specific activities, including:

  • Income from renting facilities and equipment;
  • Educational services and goods provided and used by registered schools, educational institutions, universities, and accredited vocational training facilities. Similarly exempt are educational and free-time activities provided by state subsidies; organizations and NPOs of youth and children (Law on VAT Art. 57);
  • Health insurance, services and goods provided by licensed entities to patients and persons covered by public health insurance, with some exceptions, including ophthalmology services and pharmaceutical products, but including the transportation of patients by specialized means (Law on VAT Art. 58);
  • Social services provided according to special laws (Law on VAT Art. 59);
  • Provision of services, as compensation for membership fees, to members of: political parties, churches and religious communities, associations of citizens, trade unions, professional chambers and to other juridical persons established for not-for-profit purposes, under the condition that the exemption would not jeopardize market competition (Law on VAT Art. 61(a));
  • Services and goods closely related to the protection and education of children and youth provided by public subjects or juridical persons that were not established for entrepreneurial purposes (Law on VAT Art. 61(b));
  • Rendering of one's personal capacities to churches and similar organizations to undertake activities related to tax-exempt educational and social services (Law on VAT Art. 61(c));
  • Provision of services related to sport and physical training by juridical persons that were not established for entrepreneurial purposes (Law on VAT Art. 61(d));
  • Provision of cultural services and related goods by the regional government, by a community, or by a juridical person established by the Ministry of Culture or juridical persons that were not established for entrepreneurial purposes (Law on VAT Art. 61(e));
  • Provision of services and goods by persons whose activities are exempt for educational, health care and social purposes, provided that such goods are sold and services provided exclusively during activities organized to raise funds for activities for which the organizations have been established, unless such an exemption would jeopardize market competition (Law on VAT Art. 61(f)); and
  • Provision of VAT-exempt services by independent groups of persons with legal personality exclusively to their own members without requesting deduction of paid VAT if these services are indispensable for the purpose of the groups' existence and the exemption would not jeopardize market competition. (Law on VAT Art. 61(g))

VAT must be added to the cost of services and goods and paid to the state by anyone whose turnover exceeds 750,000 CZK (approximately USD 37,500) within the preceding 12-month period of time. (Law on VAT Art. 6(1)) Goods imported by an NPO from other EU member states up to a total value of CZK 326,000 (approximately USD 16,300) within a calendar year are not included in the VAT calculation, with the exception of new cars or goods subjected to the consumption tax. (Law on VAT Art. 2(2b)) Also, any legal entity, including an NPO that accepts certain services from any VAT payer within the EU, must report receipt within 15 days to be identified as a VAT payer. (Law on VAT Arts. 96-97) Taxable services include: consulting, providing legal advice, accounting, data processing and information rendering, translation and interpretation. Services related to the transport of goods from abroad are exempt from VAT.

The penalty for noncompliance with reporting requirements is calculated as 10% of the value of the goods acquired without paying the VAT. The penalty for a regular VAT payer for not registering is calculated as 10% of the total income obtained for taxable activities and imported goods starting from the day of registration obligation until the day when declared as a VAT payer by the tax administrator. (Law on VAT Art. 98)

Under certain conditions, it is possible to apply for a rebate of paid VAT. For example, if an NPO receives a donation or grant from abroad as a part of activities supported by an international agreement, it can request a rebate of VAT paid within 15 months of the VAT payment. The exemption does not include grants provided by the European Union through its regular structural funds programs, with the exception of cross-border assistance. (Law on VAT Art. 81)

D. Property Tax

Real property tax is not imposed on land occupied by buildings belonging to and serving many types of PBOs, including the following: associations, registered institutes, PBCs, schools, museums, art galleries, public libraries, health or social care institutions, foundations, funds, or organizations exclusively engaged in environmental protection. The exemption applies if the buildings support the entities' publicly beneficial purpose(s). (Act on Real Estate Tax Art. 4(1)) Undeveloped plots of land are also exempt from taxation if they belong to a foundation or to a PBC and serve their publicly beneficial purpose(s).

Certain categories of buildings are also exempt from the property tax. These include buildings belonging to associations, registered institutes, PBCs, churches, foundations and funds. Likewise exempt are buildings that house schools, libraries, museums, galleries, archives, health or social services establishments, foundations considered publicly beneficial taxpayers, funds, registered institutes, and associations of handicapped people, if the buildings serve the entity's publicly beneficial purpose or are used exclusively for improving the environment or for religious activities. The basic property tax, calculated from the square meters of either plot or usable surface, was doubled by Act No. 362/2009 (effective January 1, 2010).

The tax on real property transfer has been abolished (effective January 2014).

E. Import Duties

Exemption from customs duties is tied to the nature and purpose of the goods, rather than the type of organization importing them. Goods are exempted from customs duties only if: (i) they are donated; and (ii) there is no equivalent produced in the Czech Republic, or its importation would not jeopardize the interests of Czech producers. Goods eligible for exemption are those used for educational purposes, scientific work (such as equipment and tools), goods to be used to improve the cultural and living standards of handicapped people, goods to be distributed free of charge for charitable purposes, and items to be used by the blind.

Since May 1, 2004, the Czech Republic has been a member of European Union. Therefore, goods imported by an NPO from any other member state of the European Union, up to a total value of EUR 10,000 during a fiscal year, are exempt from import taxation and custom duties.

F. Double Tax Treaties

A double taxation treaty was signed in 1994 between the United States and the Czech Republic. Effective May 1, 2004, all regulation of double taxation between the United States and the European Union applies also to the Czech Republic. After this date, any provision of Czech law conflicting with general EU regulations ceased to be applicable.

 

VI. Knowledgeable Contacts

Petr Pajas, Consultancy,
K Podjezdu 3, 140 00 Praha 4
Czech Republic
pj.pajas@gmail.com

Lenka Deverová, attorney at law
K podjezu 3, 140 00 Praha 4
Czech Republic
lenka@deverova.cz

Jaromír Adamec, auditor
ADAMEC AUDIT, s.r.o.
Sáňkařská 556, Liberec XIX-Horní Hanychov, 460 08 Liberec
Czech Republic
adamec@adamec-audit.cz


Footnotes

[1] The new Civil Code of the Czech Republic, which entered into force on January 1, 2014, abolishes the Law on PBCs. Nevertheless, PBCs may continue to exist and operate according to the Law. New PBCs may not be established, but existing PBCs may either continue their existence, or change their legal form to "registered institute," "foundation," or "fund," as described further in this Note. See also note 3.

[2] Juridical persons established according to special laws (including, e.g., the Educational Juridical Person as established under the Law on Schools or Law on Higher Educational Institutions), are expected to undertake certain specialized activities with more specific and detailed regulations than those contemplated for registered institutes or PBCs. Public universities and public research institutes also have been created using special laws.

[3] The new Civil Code repeals the Law on Associations and essentially replaces it with the provisions of Articles 210-302. In addition, the new Civil Code repeals the Law on Foundations in its essential parts, replacing it with the provisions in Articles 301-401. The new Civil Code also formally repeals the Law on PBCs so that no new PBCs may be established. However, PBCs established before 2014 shall continue to be governed by the provisions of the Law on PBCs after December 31, 2013. Articles 303-305 and 402-418 of the new Civil Code also introduce a new legal form called a registered institute – a legal form designed to replace PBCs. Those PBCs that do not transform into registered institutes (or some other legal form) will remain governed by the frozen Law on PBCs.

[4] The Law on Commercial Corporations introduced the social co-operative as a new legal form.

[5] See note 3.

[6] In order to distinguish this not-for-profit form of a corporation from other forms with commercial activities, the term "association" is used as the closest one to the Czech term "spolek." The formerly-used Czech term "občanské sdružení" was similarly translated as "association of citizens."

[7] This may be a matter requiring adaptation of the bylaws for some associations established before the year 2014.

[8] Previously there were strict rules governing the use of foundations' assets, but these have been abolished.

[9] The founder may also exclude, or prohibit, the possibility of entrepreneurial activities in the foundation's incorporation documents.

[10] Act No. 90/2012 Sb. on Business Corporations and Co-operatives (Law on Commercial Corporations) entered into force on January 1, 2014. It replaces the former Commercial Code and a series of related laws.

[11] In the special case that the exclusive activity of the social co-operative is the provision of housing for handicapped persons, then such persons must be members of the social co-operative.

[12] The new Civil Code does not provide any timeframe for such a decision. Accordingly it may be made at any time after January 1, 2014.

[13] Prior to January 2014 and the entry into force of the new Civil Code, it was allowed to establish foundations and funds exclusively to promote "publicly beneficial goals." These goals were defined in the (now abolished) Law on Foundations and indirectly in the Income Tax Law as: development of spiritual values; protection of human rights and other humanitarian values; protection of the environment, cultural monuments and traditions; the development of science, education, physical education, and sports. Similarly, PBCs could be established for the purpose of rendering "publicly beneficial services" to the general public under well-known conditions that were the same for all beneficiaries. (Law on PBCs Art. 2) However, the law does not explicitly define which services are considered to be publicly beneficial. There was no mention of the concept of public benefit in the abolished Law on Associations.

[14] In 2012 and 2013, the Ministry of Justice, in coordination with a group of experts, prepared a Bill on the Status of Public Benefit, which was then open to general discussion. The Bill contained an open list of activities considered publicly beneficial and defined several other legal terms related to the right of a legal entity to apply for recognition of its public benefit status. Entities with the status were to be provided with certain tax and other benefits on a higher level than those without it. Similar provisions were also initially included in amendments to the Income Tax Law. The Bill was passed by a weak quorum in the lower house of the Czech Parliament.

Unfortunately, due to the crisis of the Czech Government in summer of 2013 and following dissolution of the lower house of Parliament, the upper Parliament chamber – the Senate – rejected the Bill. The new Czech government should be formed in early 2014. It may resubmit the Bill on Status of Public Benefit to the new Parliament during 2015. As a result of this development, the amendments of the Income Tax Law related to the new Civil Code were modified so as not to mention the status of public benefit. Moreover, those benefits reserved for juridical persons with registered status of public benefit were abandoned, resulting in a less friendly legal and taxation environment for public benefit NPOs.

[15] Social co-operatives are not considered NPOs for the purpose of exemption from the income tax of free of charge incomes (donations) on the site of the donor. This is expected to change after the adoption of a special Law on Public Benefit Status, since then the social co-operative is expected to be allowed to apply for the status under specific conditions, which will complement the requirements of the Law on Commercial Corporations.

[16] There is an ongoing debate between legal experts about the way in which the new Civil Code should be interpreted with regard to provisions for foundations and those for funds. Both the foundation and fund are legal forms within the category of fundaciae. Accordingly, some argue that the provisions for foundations should be applicable to funds as well. Others argue that if there is no explicit reference to the application of provisions for foundations, they do not automatically apply to funds. In contrast, in provisions that address the registered institute, the Civil Code directly refers to a set of provisions for foundations as applicable to the registered institute.

[17] There is an exception in case of PBCs: If the EU, the Czech Republic or its self-governing administrative units are the source of a contribution to a PBC, the property related to that contribution that forms a part of the liquidation balance must be disposed of according to the directives of the public contributor. (Law on PBCs Art. 9)

[18] Under new private law regulations in force since January 2014, it is no longer possible to dissolve an association without liquidating its assets.

[19] Additional legal regulations for associations and their dissolution are anticipated in the Act on Public Benefit Status, which is expected to pass the Czech Parliament in 2014.

[20] Note that some provisions of the new Civil Code are there to facilitate the use of incorporation documents created before the new Civil Code entered into force. This is mainly the case of foundations and funds established before January 1, 2014, whose incorporations documents may not be simply changed by decisions of statutory or other bodies of the entities themselves.

[21] These foundations (with a closed or circumscribed set of beneficiaries) are excluded from the category of publicly beneficial taxpayers. The same holds true for the social co-operative, which is counted among commercial corporations in spite of the requirements on its publicly beneficial purpose. (Income Tax Law Arts. 17(a)(1) and 2(f))

[22] However, PBCs may not participate in the entrepreneurial activities of other persons. (Law on PBCs Art. 17(2))

[23] To the previous disputes between NPO community and Ministry of Interior concerning the right of association to pursue publicly beneficial objectives addressed to the general public besides the internal activities related to interest of its members, there is available a statement of the expert panel at the Ministry of Justice, confirming the right of association to provide services addressed to beneficiaries outside their membership or to pursue generally important objectives.

[24] See note 16.

[25] This restriction tends to limit the possible establishment of other legal entities to those operating under not-for-profit principles.

[26] The Czech Constitution guarantees that foreign persons (natural and legal) have the same basic political rights under Czech law as Czech citizens (Constitutional Act Art. 42(1)), unless the Constitution or laws specifically limits a right to nationals of the Czech Republic or residents in the Czech Republic or citizens/residents of any member state of the European Union or European Economic Area (sometimes without Switzerland).

[27] In general, juridical persons may be prosecuted for breaking the law and sentenced to penalties, including dissolution, fines, or prohibition for certain criminal acts, including human trafficking; child abuse; bank credit, insurance or grant fraud; participation in organized criminal activities; terrorism; misuse of data in an information system; forgery; damage to the environment and nature; corruption and bribery; illegal employment of foreigners; violence, promotion of or support of hatred against groups of citizens or individuals; and committing genocide and similar acts. (See Law on Criminal Responsibility of Juridical Persons).

[28] A requirement that an NPO has to separately account for profitable and unprofitable activities on occasion means that an NPO has a greater income tax liability (despite the 30% tax base reduction) than a for-profit entity. Unlike a for-profit entity, an NPO cannot offset its earnings from certain activities with losses from all remaining unprofitable activities. That does not hold for registered institutes and PBCs, who are accounting for all incomes and expenditures separating only those related to the main activity, auxiliary economic activity and administration.

[29] Similarly deductible from the corporate tax base are donations equal to or higher then CZK 2,000 (USD 100) provided to natural persons residing in the Czech Republic, who receive a disability pension, or were receiving it before entering the retirement pension, to recipients of support for handicapped person, to children under age dependent on the care of other person according to special regulations, and to health aid, as well as contributions facilitating entering into labor market of such persons. This holds also for providing donations of humanitarian character in case of natural disasters, which happened on the territory of the EU, Norway, and Iceland.