The long-awaited European Union services directive — which passed in European Parliament Nov. 15 and will liberalize the services industry — was a victory for entrepreneurs in the Czech Republic who hope that it can help them avoid the nightmare of setting up a business in this country.

On the one hand, the directive will do away with the need to establish a company in the country where business is being done, which could help foreign businesses and entrepreneurs avoid the lengthy process of launching companies in this country. But another of the directive's provisions — that any business operating in the Czech Republic, for example, would need to follow Czech laws — makes it unlikely that Czechs will create businesses abroad simply in order to avoid lengthy domestic legal processes.

"This provision destroyed any of the plans of those who may have considered setting up their companies abroad in order to get out of the reach of the Czech law," said Bedřich Danda, chairman of SME Union Czech Republic (SŽP).

The directive has to be adapted to local laws within three years.

The Commercial Code treats both domestic and foreign enterprises equally, so even if a company will no longer be required to have a site in the Czech Republic, it will have to meet all legal requirements resulting from business and tax laws, say directors of firms that shortcut the process of launching companies here by selling so-called ready-made firms.

But Czech entrepreneurs could still avoid paying Czech taxes by launching their companies abroad, said Michal Sailer, an international tax adviser working at Asset Tax company.

"The Czech Republic is still considered a high-tax jurisdiction, and so Czech companies could try to capitalize on different legislation in the EU in order to reduce their tax burden," Sailer explained.

Tricky law

Experts say that administrative and regulatory conditions, along with the tax burden are the biggest obstacles to the growth of small and midsize enterprises.

Despite the faster procedures for launching businesses and the new EU directive, the demand for ready-made companies is still rising.

"It seems that demand is growing, regardless of the recent directive on liberalization of services," said Josef Jaroš, an executive of Smart Office & Companies, which focuses on selling ready-made firms.

Danda said the EU directive's provision that businesses will have to base their foreign businesses on foreign laws would make life quite difficult for many small entrepreneurs.

"Many Czech workers and entrepreneurs still face a language barrier, and it would be difficult for them to follow foreign laws," Danda said.

Local law firms where entrepreneurs usually seek assistance about such changes are likely to see increased business, but not from their usual clientele, said Daniel Mališ, leading partner at the Prague-based law firm Daniel Mališ & Partners.

"In fact, it is more likely that we receive an increased number of inquiries about the Czech Republic's legal system from abroad," Mališ said. "The reason is that attorneys always focus more on their home law than on legal systems of other EU countries."

Bureaucratic beast

The time it takes to register a business and the amount of paperwork involved has improved, but the Czech Republic still lags behind most EU member states in the amount of administrative procedures needed to launch a new company.

Czechs emerged 74th out of 175 countries worldwide in a World Bank report earlier this fall about the ease of creating a business.

Starting a business here involves 10 procedures, while the average for countries of the Organization for Economic Cooperation and Development (OECD) is around six steps. As a result, it takes 24 days on average to set up a company in the Czech Republic, compared with 16 in other OECD countries.

Economic Chamber President Jaromír Drábek is calling for a more transparent and simple law on doing business.

"Everyone who wants to start a business here should receive a comprehensive list of conditions that they must meet in order to receive a particular license," Drábek said.

The SME Union's Danda agreed.

"Today, one needs to compile numerous papers and stamps, and then run from one government office to another," he said.

In order to simplify the process, the government opened Central Registration Points (CRPs) in August, where entrepreneurs can receive and submit all required information and documents in one place.

Business analysts and experts say, however, that the CRPs still do not work efficiently. Industry insiders say this is because they are understaffed and insufficiently equipped.

"Running among particular offices on one's own is still faster than turning to a CRP," said Smart's Jaroš.

Drábek added it is essential to reduce the amount of requirements for business startups and also to adopt a new comprehensive law on doing business.