branch of the company – organizational unit of a company – registered branch
The Civil Code (Act No. 89/2012 Coll., as amended) replaced the term “organisational unit” with the new term “branch”. Therefore, the term “branch” cannot be found in the legislation anymore. However, if a branch is registered in the Commercial Register, it is a “registered branch”.
A branch is an independent unit of the parent company (founder) located in the Czech Republic with its own economic and functional independence. It does some of the founder’s business activities, expands its market presence and communicates with customers, business partners and government authorities. A foreign legal entity (or natural person) can do business in the Czech Republic through a registered branch. Many large foreign companies such as banks, insurance companies, telephone operators, etc. in the Czech Republic are registered branches of companies abroad. However, even smaller businesses can register a branch.
A branch is therefore established by a decision of its founder – usually a foreign company. The name usually includes the founder’s name (but this is not mandatory) and has the mandatory addition “organisational unit” or “branch” (if registered in the Commercial Register). The advantage is that no share capital needs to be created when setting up a registered establishment, as it remains the property of its founder, and the registered branch does not have its own statutory body, but must have its own head of branch. The head of a branch does not have the same extensive duties and rights as members of the statutory bodies of a company, and his position is therefore different. The head of the branch is responsible to the founder for its proper operation and also for compliance with the regulations. It is therefore important to choose the manager with due care. It can also be a person who holds a position in the foreign legal entity (founder). This head of a branch then represents the branch to the outside world within the scope of his or her legal authority, and this power of representation arises at the moment the head of a branch is registered in the Commercial Register – the registration has constitutive effects in this respect.
The process of setting up a registered branch is not particularly complicated, although it is a little more time-consuming than setting up a limited liability company, but the tax advantages and simpler administration than with a separate company may outweigh this in some respects. The first step is for the founder to decide to set up a registered branch. This is followed by registration in the commercial register and obtaining the necessary trade licences. A number of legal documents must be filed, and all actions in the Czech Republic can be taken under representation, e.g. by a lawyer with power of attorney.
The accounting of a registered branch is not explicitly dealt with in any legislation because the accounting rules do not deal with the accounting of internal units and a branch is an internal unit. In practice, therefore, the registered branch, as an accounting unit, is obliged to keep separate accounts and prepare financial statements, but the profit is part of the economic result of the founder. For each tax year, the registered branch is obliged to file a corporate income tax return twice – in the state where it is established and, through its founder, in the state where the founder is tax resident. It is advisable for the branch to draw up an internal directive to regulate accounting issues.
A rather interesting addition is the possibility of appointing more than one head of a branch, which may be very practical for many founders. The head is obliged to represent the registered branch in person. It is therefore not possible for the head of a branch to delegate this power in its entirety to another person – e.g. to grant a power of attorney to another person (manager, lawyer).
Finally, I would like to refer to the ruling of the Supreme Administrative Court of 15 June 2023, in which the court dealt with the question of the right of the trade licensing authority to require a foreign legal entity (founder) with its registered seat in the EU to submit a document on the establishment of a branch in the Czech Republic for the purpose of declaring free trade. In this case, the Supreme Administrative Court concluded that legal entities with their registered office in the EU may thus register a trade (trade licence) in the Czech Republic without being obliged to be registered in the Czech Commercial Register or to establish a branch or registered branch in the Czech Republic. It should be noted that the above applies only to foreign legal entities with their registered seat in another EU Member State, whereas this conclusion cannot be applied to foreign legal entities with their registered seat outside the EU.
The operation or existence of a registered branch ends with its dissolution. In the period between its dissolution and its deletion from the Commercial Register, it is first necessary to obtain the consent of the relevant tax authority to the deletion of the registered branch. The dissolution of a registered branch is therefore much simpler than, for example, the liquidation of a limited liability company.