Taxing times see companies putting down roots abroad

Nearly all the staff members are Czech, the factories are in the Czech Republic, and the boss is a Czech citizen - but the company is, officially at least, foreign.

This scenario might sound unusual, but it is by no means rare, because there has been an increase in the number of local companies registering themselves abroad to capitalize on multiple advantages, with lower tax liabilities often highlighted as a key factor.

"The main reason forcing Czech companies to register themselves in countries such as the Netherlands, Cyprus or even the USA is their effort to avoid domestic taxes, mainly withholding tax and corporate tax," says Jiří Šimara of brokerage firm Cyrrus.

According to figures published last month by Czech Capital Information Agency (ČEKIA), there was a 4 percent increase in 2012 in the number of Czech companies with owners registered in countries that are sometimes classed as tax havens. The number reached 12,554, or 3.4 percent of all 366,500 Czech companies.

As a percentage, the number may appear modest. But the effects in terms of lost tax revenue could be vast.

"We estimate the [losses to] the state budget in this way each year come to tens, maybe hundreds of billions of crowns," says Petra Štěpánová, country marketing and PR leader for ČEKIA's parent company, Bismode.

Growth in the numbers registered abroad is slower than in the late 2000s, when the total rose as much as a quarter each year, but the figure nonetheless increased last year, albeit by a modest amount. The Netherlands and Cyprus are the most popular "tax haven" destinations with the ownership of 4,443 and 1,904 Czech firms registered in these countries, respectively.

"In the case of the Netherlands and Cyprus, usually the main reason is [to avoid] the tax on dividends," says Tomáš Pelikan from Terrinvest. "In almost all cases, only the parent company is registered abroad. It means the production will stay in the Czech Republic, and income tax will be paid in the Czech Republic as well."

Companies often register in other countries not merely because they are seeking a tax regime where charges are lower, but also because they want one that is more stable.

Issues other than taxation also play a role. Anonymity of ownership is often a factor and Petr Guth, a partner in Prague-based CEE Tax Management, said there can be greater security in having investments registered abroad.

"Holland secures stronger protection for investors once there's a court case," he said, citing as an example Czech-registered solar power companies where investors "found it difficult to defend their position" when the tax regime changed.

Among the companies to insist taxation was not the prime mover behind a move abroad is the hospital-bed manufacturer Linet, founded more than two decades ago in the village of Želevčice, northwest of Prague, as a subsidiary of Germany's WiBo.

Today, the partner companies employ 800 people, produce tens of thousands of beds a year and export to more than 100 countries. While manufacturing operations remain in the Czech Republic and Germany, for the past two years the business has come under the umbrella of Linet Group SE, headquartered in the Netherlands.

According to Linet Group's CEO, Zbyněk Frolík, the setting up and registering of the holding company in the Netherlands was "a strategic decision" with the aim of supporting the group's business in foreign markets. Having a Dutch address is seen as offering significant marketing advantages.

"It is much easier to get in touch with possible new clients as a Dutch company," he said, saying this was particularly the case when trying to sell to emerging markets.

"Another reason was the relative economic and political stability," he said. "In fact, we still pay taxes in the Czech Republic. We have our production site here, and most of our business activities are realized through Czech units of the holding structure and therefore are subjected to Czech tax law."

He insisted the only tax the company was able to avoid by having the holding company in the Netherlands was a dividend tax.

Another Czech company registered in the Netherlands, Photon Energy, also insists its foreign registration is not linked to taxation. The company, which was founded in 2008 and has around 75 staff, two-thirds based in the Czech Republic, said "more favorable corporate laws" were behind its move abroad.

"In 2010, we started a capital increase; this and other steps are much easier under Dutch law. That is why many of the companies in the Czech stock market have their mothers registered in the Netherlands or Luxembourg," says spokesman Jan Krčmář.

Critics of the current system insist the issue is not simply a question of lower tax rates in certain jurisdictions but generous definitions by those countries of what constitutes, for example, profit and is subject to taxation. This means the actual taxes levied can be lower than might be expected from that country's officially published tax rate.

Whatever the factors are that are driving Czech firms to register themselves overseas, the number is likely to continue to grow both in number and in terms of the range of countries where they are registering.

The number of Czech companies registered in the Netherlands actually fell last year, dropping from 4,501 to 4,443, and Luxembourg saw its numbers drop from 1,192 to 1,173, while the total number of firms registered abroad grew.

Cyprus's popularity increased nearly 12 percent, with 1,904 companies now registered there, while jurisdictions further afield such as Belize, Hong Kong, the Seychelles and the United States also saw their number of registrations from Czech companies grow significantly.

"The Netherlands is still seen as a very prestigious address," Štěpánová says.

"However, in recent years, the costs associated with the registration/service of companies in the Netherlands [have grown], and therefore companies choose cheaper destinations such as Cyprus."

The annual cost of having an offshore company is typically at least 100,000 Kč, according to Guth. Czech firms do not need to have staff abroad as they can hire firms to manage operations there.

"They will run the office. … It's easier to outsource to someone else whose business is to provide administration services," says Guth, adding that costs increase if sales operations are located abroad.

Some of those concerned by the shift overseas say there is little individual European Union governments can do to stem the trend, as regulations prevent them from stopping the movement of capital. The Organisation for Economic Cooperation and Development recently said the international corporate tax system needed to be reworked to account for the rise of multinationals.

Štěpánová says, however, that even under the current system more could be done to prevent companies from registering abroad.

"I believe the authorities do not use the options they have to at least reduce the trend of overseas registration," she says.

Daniel Bardsley can be reached at
business@praguepost.com