Nonprofit Law in the Czech Republic

Current as of February 2024 | Download print version (in PDF)

This report describes the legal framework governing nonprofit organizations (also known as non-governmental organizations or NGOs) in the Czech Republic, and includes translations of legislative provisions relevant for a foundation or advisor undertaking an equivalency determination of a foreign grantee under IRS Revenue Procedure 92-94.

These reports have been prepared by the International Center for Not-for-Profit Law (ICNL). Please direct corrections and comments to Lily Liu.

We include hyperlinks to the following information, to the extent available:

• Longer country reports analyzing various aspects of local legislation; and
• Texts of local laws that affect the decision whether or not to qualify a grantee (generally in translation, although ICNL and the Council cannot warrant the accuracy of any translation; in addition, legislative excerpts were selected by in-country contacts, and ICNL and the Council cannot warrant that all relevant provisions have been translated).

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. Income 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 four primary forms of not-for-profit organizations (NPOs) provided under the Czech Civil Code:

• Associations (spolek),
• Foundations (nadace),
• Funds (nadační fond) and
• Registered institutes (ústav),

In addition to these forms, there are also social cooperatives (sociální družstvo) as defined in the Law on Commercial Corporations and public benefit corporations (PBCs) (obecně prospěšná společnost), established by the Law on PBCs. The Law on PBCs has been abolished, but existing PBCs are still permitted to operate.

With the exception of social cooperatives, the above legal entities are considered publicly beneficial taxpayers or not-for-profit organizations (NPOs) if their primary activity is not entrepreneurial (i.e. systematically pursuing profit-making), as stated in their incorporation documents, statutes, bylaws, or according to an evaluation by a public authority (Income Tax Law Article 17a (1)). Under certain conditions, social cooperatives may also qualify to claim some benefits granted to NPOs.

B. Tax Laws

Under the Income Tax Law, NPOs are exempt from tax on income from non-commercial activities that do not generate a surplus of revenue over related expenses, provided that certain other conditions are met. NPOs are also exempt from tax on income from state subsidies and similar forms of support from public budgets (Income Tax Law Article 18a (1) (a) and (b)). This exception does not apply to incomes generated from advertisements or membership fees that are not clearly defined in an organization’s statute or bylaws (Income Tax Law Articles 18(a)(2) and 9 (1) (a) (item 2)).

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

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 such income is not used in violation of the Income Tax Law (Income Tax Law Article 19(1)(r)). However, family foundations do not qualify as NPOs because they only serve the founder or persons close to the founder. Thus, such foundations do not qualify for this tax exemption (Income Tax Law Article 17a(2)(f)).

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

NPOs are not generally exempt from VAT on supplies provided to others in pursuit of their statutory activities. However, an NPO’s supply of services and goods may be exempt from the VAT if the NPO has been established for sports, educational, health care, or social care purposes and if it pursues its VAT related activities to raise money to support its statutory purposes. The activities must be necessary to realize the NPO’s statutory purposes and cannot distort economic competition (VAT Law Article 61(f)).

All NPOs are also eligible for an exemption from real property tax on property they own (Real Estate Tax Law Articles 4(1)(f) and (g) (item 8), and 9(1)(f) and (k)). 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 (Income Tax Law Article 19(b)(2)(d)).

II. Applicable Laws

• Constitution of the Czech Republic, Act No. 1/1993, as amended
• The Constitutional List of Freedoms and Rights ("Constitutional Act"), Act No. 2/1993
• Civil Code, Act No. 89/2012 (entered into force on January 1, 2014) as amended
• Law on Commercial Corporations, Act on Business and Cooperates No. 90/2012 (entered into force on January 1, 2014), as amended
• Act on Public Benefit Corporations ("Law on PBCs"), No. 248/1995, as amended [1]
• Act on Public Collections ("Public Collections Law"), No. 117/2001, as amended
• Act on Basic Register of Juridical Persons, Self-Employed Natural Persons and Public Authorities ("Law on Basic Registers"), No. 111/2009, as amended
• Act on Income Tax ("Income Tax Law"), No. 586/1992, as amended [2]
• Act on Real Estate Tax, No. 338/1992, as amended
• Act on Value Added Tax ("VAT Law"), No. 235/2004, as amended
• Act on Maternal, Basic, High, Higher Professional, and other Education ("Law on Schools"), No. 561/2004, as amended
• Act on Higher Education ("Law on Universities"), No. 111/1998, as amended
• Act on Social Services (“Law on Social Services”), No. 108/2006, as amended
• Act on Criminal Responsibility of Juridical Persons ("Law on Criminal Responsibility of Juridical Persons"), No. 418/2011, as amended
• Act on Public Registers of Juridical and Natural Persons ("Law on Public Registers"), No. 304/2013 as amended
• Act on Court Fees ("Law on Court Fees"), No. 549/1991, as amended
• Act on Registration of Real Owners, No. 37/2021, as amended

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 cooperatives, 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 Articles 15-22 and 118-209). For each 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 (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 take care of the property set aside by their founder(s) to be used for a given purpose. This category includes foundations (nadace) with a protected endowment (both grant-giving and operational) and funds (without an endowment) (nadační fond). The third category, registered institutes (ústav), are similar to fundaciae in that they do not have any members and may be established on a not-for-profit basis for the purpose of rendering activities of certain socially or economically beneficial purposes according to the will of their founder(s). The law treats European political foundations the same as Czech NPO foundations (Income Tax Law Articles 19b (2) and 20 (8)).

Two additional legal forms, public benefit corporations and social cooperatives, may be considered NPOs under certain conditions. However, the law regulating public benefit corporations was abolished, so it is not possible to establish new organizations with this legal form. Social cooperatives are considered commercial corporations with certain features of NPOs, including the kinds of publicly beneficial objectives they pursue.

The following sections describe the legal forms mentioned above in more detail.

Associations

The association (spolek) is a not-for-profit, non-commercial, corporate entity with a minimum number of members, whose interests it serves. Associations cannot pursue entrepreneurship or other profit-generating activities as their main purpose but may pursue auxiliary economic activities that support their main purpose or allow for better usage of property (Civil Code Article 217). Entities established before 2014 as a prior form of association (občanské sdružení) were automatically recognized as an association (spolek) after 2014, but were required to reconcile their bylaws and internal relations the relevant provisions in the Civil Code governing associations.

Associations may also form federations or alliances. For that form—an entity whose members are associations—the Civil Code uses the Czech term "svaz." However, with regards to essential regulations, there is no need to distinguish between "spolek" and "svaz."

Associations are specifically regulated according to Articles 214-302 of the Civil Code. While permitted to engage in both mutual benefit and public benefit activities, associations must not be established for entrepreneurial or other profit-generating activities (Civil Code Article 217). Moreover, like other juridical persons, associations cannot be established for activities violating the rights of other persons or the laws of the Czech Republic; activities pursuing military objectives; or activities interfering with those reserved to the state authorities, unless otherwise specified by special laws (Civil Code Article 145).

The Civil Code provides that an association must be established by and remain composed of at least three persons (Civil Code Article 214(1)), and that it cannot be established for a purpose that is explicitly commercial unless such an activity is auxiliary, and its purpose is to support the statutory purpose of the association or to enable more efficient use of its property (Civil Code Article 217).

Foundations

A foundation is an asset-based organization established by natural or legal persons for a socially or economically beneficial purpose (Civil Code Articles 303-305). Any income generated by a foundation’s endowment is exempt from income tax when used for the foundation’s publicly beneficial purpose and not in violation of the law (Income Tax Law Article 19(1)(r)). Other assets of the foundation, including acquired donations, may be used to: pursue statutory purposes; provide financial support to third persons, such as through grants; cover costs of activities otherwise serving the purpose of the foundation; and cover administrative costs. The foundation must account for these expenditures separately (Civil Code Article 357).

Foundations may also be established for a charitable purpose, including to support a closed or limited circle of persons (Civil Code Article 306(1)). However, in such a case, the foundation is not considered an NPO, and does not receive income tax benefits applicable to NPOs. For instance, a family foundation is  a foundation established for the benefit of the founder or persons close to the founder (i.e. family members) (Income Tax Law Article 17a(2)(f)). Family foundations are not considered NPOs and do not qualify for NPO income tax benefits.

It is forbidden to establish foundations exclusively for the purpose of profit-making (Civil Code Article 306(1)). It is also not allowed to establish a foundation to support political parties and political movements or to otherwise participate in their activities (Civil Code Article 306(2)). If a foundation violates these restrictions, a court may order its termination and liquidation of its assets (Civil Code Article 377(1))

Foundations may engage in entrepreneurial activities if such activities are auxiliary and any profit generated is only used to support the main purpose for which the foundation was established (Civil Code Article 307(1)). However, the foundation may not become a partner with unlimited liability in a commercial company (Civil Code Article 307(2)).

Funds

Funds (nadační fond) are 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 any subsequent 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 expended for the purpose defined in their incorporation document (Civil Code Articles 394-401). The Income Tax Law defines a family fund as a fund established for the benefit of the founder or persons close to him (family members in general) (Income Tax Law Article 17(a)(2)(f)). Like family foundations, family funds do not receive income tax benefits and are not considered NPOs.

Registered Institute

The registered institute (ústav) is 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 (Civil Code Articles 402-418). Like foundations, the registered institute is a non-membership-based organization operating to make use of its own personal and material components. It may not distribute its profits to affiliated persons such as members of governing and supervisory bodies and employees. The name of the registered institute must contain the words "zapsaný ústav" or the legal form acronym "z.ú." as a suffix (Civil Code Article 404).

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 activities. Any generated profit must be used exclusively to support the activity for which the registered institute has been established and to cover administration costs (Civil Code Article 403).

With the exception of provisions related to the endowment and equity value, and those specific to the Executive Director and Board of Trustees, the provisions of the Civil Code that relate to foundations also apply to registered institutes (Civil Code Article 418).

Foundations, funds, and registered institutes are exempt from property tax on buildings and from real estate tax, if the building or land is used to advance their purposes.

Social Cooperative

A social cooperative is defined as a community of at least three persons that acts as a legal entity established for the purpose of the mutual support of its members, the support of third persons, or to undertake business pursuits. The name of the social cooperative must contain the words "sociální družstvo" (Law on Commercial Corporations Articles 758 and 759).

Social cooperatives pursue publicly beneficial activities aiming to promote social cohesion. A social cooperative 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 Article 758). A social cooperative must not change the purpose of its activities in a way that would not align with these purposes. Social cooperatives also may not change their legal form—e.g., by merging or splitting—unless the resulting legal form is also a social cooperative (Law on Commercial Corporations Article 760).

Social cooperatives 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 cooperative (Law on Commercial Corporations Article 765).

The bylaws of the social cooperative 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 (Law on Commercial Corporations Article 766). 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 cooperative or to the community where the social cooperative has its seat. (Law on Commercial Corporations Articles 771 and 772).

Public Benefit Corporations (PBCs)

PBCs are NPOs that have no members and provide "generally beneficial services" to the public on previously publicized and equal terms and conditions (Law on PBCs Article 2). PBCs were originally devised as legal entities for the transformation of former state-subsidized entities. Prior to 1998, PBCs were also a common, alternate legal form for foundations that could not meet the endowment requirement for establishing a foundation under the now-abolished 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. The name of the PBC must contain the words "obecně prospěšná společnost" or the legal form acronym "o.p.s." as a suffix (Law on PBCs Article 2(2)).

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 Article 17(1)). The Law on PBCs allows a PBC to establish another non-PBC legal entity, with the approval of the PBC's Board of Trustees (Law on PBCs Article 13(1)(d)).

After the Civil Code entered into force in 2014, existing PBCs had to decide whether to continue with the PBC legal form or transform into a registered institute, foundation, or a fund. PBCs that decided to continue without changing their legal form continue to be regulated by the Law on PBCs. However, no new PBCs were allowed to form after December 31, 2013.

B. Public Benefit Status

The Civil Code provides that a publicly beneficial juridical person may register its public benefit status in the public register (Civil Code Article 146). However, following amendments in 2017, the Code does not further address the criteria for public benefit status or its implications, nor is there a separate law to govern public benefit status.

The Income Tax Law provides that juridical and natural persons may generally deduct from their taxable income donations to a legal entity that is considered an NPO if: 1) the NPO is based in any member state of the European Union, or of the European Economic Area; and 2) the recipient allocates the money received 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 Article 20(8)).

The tax base reduction applies also to foreign legal entities that organize a "public collection." Under the Public Collections Law, "public collections" are 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 Article 1). Thus, tax deductibility may depend on how an NPO uses the donation. (See also Section V.A.)

IV. Specific Questions Regarding Local Law

A. Inurement

Any profit generated from the main and auxiliary activities of an association must be used exclusively for the association’s activities, including covering the costs of its administration (Civil Code Article 217(2) and (3)).

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 Articles 338 and 398). In addition, the law precludes certain individuals associated with a foundation from receiving grants from the foundation, including 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 Article 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 (Civil Code Article 363 (b) and 369 (b)). There are no legal limitations on what compensation may be offered, if the compensation comprises part of the foundation’s administrative costs (Civil Code Article 338). The Civil Code is silent as to the applicability of these or other provisions with regards to a fund and members of its bodies. However, the Income Tax Law limits access to taxation benefits for founders and persons close to them if the foundation or the fund is considered a family foundation or a family fund.

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 may include provisions allowing for the compensation of members of institute bodies for their services to the registered institute. 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 Article 414). In the absence of provisions on compensation, however, it is assumed that membership is honorary.

A social cooperative may distribute up to 33 percent of its disposable profit among its members, unless the bylaws of the social cooperative set a lesser percentage. Additionally, before such distribution, any reserve or other internal funds of the social cooperative must be fully replenished (Law on Commercial Corporations Article 766).

A public benefit corporation may appoint its employees to the PBC’s Board of Trustees, but the employees may not comprise more than one-third of the Board. The members of the Board of Trustees and the Supervisory Board may be regularly compensated for services rendered to the PBC (Law on PBCs Article 4 (2) (j)). Nevertheless, the law prohibits distributing any of a PBC’s profit for the benefit of its founders, members of its management bodies, or employees (Law on PBCs Article 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 Article 21 (1) (f)).

B. Proprietary Interest

In general, any donor providing monetary or non-monetary contributions to a legal entity may do so under a contract that specifies the manner of use or purpose of the contributions. Such contracts may specify the conditions under which the contributions must be returned to the original owner in cases of misuse or inability to properly use them. Therefore, an NPO might have liabilities to individual donors or contributors.

The association is the only legal owner of its assets and incomes. Its members typically do not have ownership rights to its assets and incomes, though members may retain ownership over assets they contribute to the association if the association’s bylaws so allow. Additionally, donors to the association may revoke and reclaim their donations if this is agreed upon in a donation contract.

Foundations, funds, registered institutes, and PBCs are not considered commercial corporations, so no natural or juridical person may claim proprietary interests in the property contributed, acquired, generated, or otherwise taken into these entities’ possession. However, the Law on Criminal Responsibility of Juridical Persons, as amended by Act No. 368/2016, introduces the notion of a legal entity’s “beneficial owner”, which refers to any natural person who owns or controls a legal person or legal arrangement. For NPOs such as foundations, funds, registered institutes, and PBCs, persons such as those in senior management positions who have decisive influence over the decisions of the entity are typically considered “beneficial owners” (Law on Registration of Beneficial Owners Article 5(a)). [2]

Social cooperatives, by contrast to the above, are essentially defined as commercial corporations. Accordingly, a social cooperative’s members have limited proprietary interests in its profit and property.

Finally, except for social cooperatives, NPOs may found other legal entities unless otherwise specified in the law. However, associations, foundations, funds, and registered institutes may not partner with a commercial corporation with unlimited liability. This limits the choice of legal entities that NPOs may establish on their own to other NPOs (other than PBCs), companies with limited liability, and share-holding companies.

C. Dissolution

The Civil Code generally provides for the winding up and final termination of all private juridical persons (Civil Code Articles 168-173 and 185-209).

Associations

The dissolution of an association requires the liquidation of its assets (Civil Code Articles 269-273). The relevant body of the association or a court appoints a liquidating officer from the association’s statutory body or, if that is not possible, from the association’s members. The liquidating officer must compile a list of the association’s properties 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 dispenses with the rest of the liquidation balance in accordance with the association’s bylaws (Civil Code Article 271). If it is not possible to use the liquidation balance of an association in accordance with its bylaws, the liquidation officer must 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. The public authorities are obliged to use the offered liquidation balance for a publicly beneficial purpose (Civil Code Articles 272(2)).

If the association has accepted grants or other contributions from a public budget, the liquidating officer shall dispose of the relevant part of the liquidation balance according to the directions of the relevant public authority (Civil Code Article 273).

Foundations and Funds

In the event of the voluntary termination of a foundation or a fund, the Board of Directors of the foundation or fund appoints a liquidation officer. Foundations and funds may be also terminated upon the decision of a court, if a) they act in violation of the law; b) they are inactive for more than two years without a serious reason; c) the value of the foundation’s endowment is lower than CZK 500,000 (≈USD 21,250) for more than one year or it does not generate any proceeds; or d) it is no longer possible to fulfill the purpose for which the foundation was established. In such cases the court appoints the liquidation officer (Civil Code Articles 376, 377, 401 and 191 (1)).

As with associations, the liquidating officer must sell the property of the foundation only to the extent necessary to pay off the foundation’s debts and use the rest of the liquidation balance in accordance with the foundation's incorporation document. If the incorporation document of a foundation established exclusively for public benefit purposes allows use of the liquidation balance for a non-publicly beneficial purpose, such a provision is considered invalid and shall not be applied. 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. If that is not possible, the offer goes to the community where the association has its seat. The public authorities are obliged to make use of the offered liquidation balance for a publicly beneficial purpose (Civil Code Articles 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 Article 381).

Registered Institutes

Most of the provisions for foundations apply to registered institutes as well, with the exception of provisions related to the foundation’s endowment (Civil Code Article 418).

Social Cooperatives

Upon termination of a social cooperative, its members have the right to receive compensation equal in monetary value to the basic contribution they made when entering the social cooperative; the compensation may be less than the basic contribution if the liquidation balance is not sufficient. What remains of the liquidation balance must be transferred to another social cooperative, as approved by the general assembly of cooperative members, or to the community where the social cooperative has its seat (Law on Commercial Corporations Article 772).

Public Benefit Corporations

When the Board of Trustees of a PBC decides to terminate the PBC and to liquidate its assets, the PBC’s founder(s) must be informed and may act to prevent the termination (Law on PBCs Article 8(2)). The PBC’s liquidation balance after termination may be transferred only to a PBC identified in the organization’s statute or determined by the Board of Trustees (Law on PBCs Article 4(4)). If there is no other PBC willing to acquire the property or liquidation balance, the local government where the PBC was registered will keep the remaining assets or transfer it to the state. Additionally, in this case, the assets must be allocated to a public benefit activity (Law on PBCs Article 9(6)-(10)). 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 Article 9(6)-(10)).

D. Activities

1. General Activities

Associations may engage in both mutual benefit and public benefit activities that further the associations’ stated purpose (Civil Code Article 306).

Funds, registered institutes and PBCs, are statutorily required to pursue socially or economically beneficial objectives (Civil Code Articles 394 and 402; Law on PBCs Article 2(1)).

Social cooperatives must pursue activities that benefit disadvantaged persons in their local community, namely through supporting job creation, social services, health care, education, housing, as well as broader sustainable development of the social cooperative’s community (Law on Commercial Corporations Article 758).

Foundations are 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 (Civil Code Article 306(1)). However, if this is the case, such foundation is not treated as an NPO.

2.Public Benefit Activities

All forms of NPOs may engage in socially and economically beneficial or publicly beneficial activities. By their nature, foundations, funds, registered institutes, social cooperatives, and PBCs must primarily engage in activities in pursuit of public benefit goals. [3]

The Law on PBCs, for instance, requires PBCs to provide broadly beneficial services that are open to the general public. The Law does not further define what a broadly beneficial service is but requires that the PBC’s incorporation document specify the conditions for providing such services (Law on PBCs Article 2 (1) (b)). Similarly, the incorporation document of the registered institute must contain details concerning its socially or economically beneficial objective, including requiring that the results of its activities be equally accessible to all persons (Civil Code Article 402). The Income Tax Law provides a more concrete definition of public benefit activities for the tax treatment of donors and beneficiaries of donations (Income Tax Law Articles 15 (1) and 20 (8)).

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 Article 217 (1)). The association may, however, carry out an auxiliary economic activity, such as entrepreneurship or other income-generating activity, if the objectives of the activity are to support the association’s main activities or to enable more efficient use of association property. The profit generated from an association’s activities may be used only for the association’s activities, including administrative costs (Civil Code Article 217(2)-(3)).

A foundation cannot be established exclusively for profit making purposes; it also cannot be a partner with unlimited liability to a commercial corporation (Civil Code Articles 306 (2) and 307 (2)). However, a foundation may engage in entrepreneurship as an auxiliary activity, and all profit must be used to support the purpose for which the foundation was established; a foundation may take over management of a commercial company under the same conditions.  However, a foundation cannot undertake economic activities if its incorporation document prohibits such activities (Civil Code Article 307(1)).

A fund may be established for an economically or socially beneficial purpose. Its property is formed of contributions and donations from its founders and donors. The fund may not pledge its property or otherwise use it 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,  or used for careful investment purposes (Civil Code Articles 394 and 398). The law does not explicitly provide for the right of funds to take part in entrepreneurial activities, as is the case of  foundations, and as such it may be concluded that such activities are not allowed.

A registered institute may carry out a business enterprise or other economic activity on an auxiliary basis, but any such activity must not jeopardize the quality, scope, and accessibility of the institute's socially or economically beneficial activities. 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 Articles 402 and 403).

A social cooperative 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. [4]

Public Benefit Corporations, similar to registered institutes, may engage in economic activities so long as the activities do not jeopardize the quality, scope, and availability of the organization’s public benefit services (Law on PBCs Article 17 (1)). PBCs may establish another juridical person (other than another PBC) but are not allowed to take part in the entrepreneurial activities of other juridical persons (Law on PBCs Article 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. Accordingly, NPOs are generally allowed to support or oppose political candidates and to participate in lobbying and public advocacy activities. Nevertheless, there may be limitations on particular political activities depending on the NPO’s legal form, as described below. Further, a special law on associating in political parties and political movements (Act No. 424/1991 Sb.) provides some additional constraints, for example reserving to political parties and movements the right to register candidates for elections.

Nothing prohibits associations from engaging in legislative or politically motivated activities. In fact, associations are often active participants in fiscal decision-making processes, environmental and regional development planning, as well as political advocacy.

Foundations and registered institutes may not be established for the purpose of supporting political parties or movements, nor may they provide funding to political parties or movements or otherwise support or participate in their activities (Civil Code Articles 306 (2) and 418). Violations of this rule may be a cause for judicial termination of the foundation or the registered institute (Civil Code Article 172 (1) (a) and 377 (2)). However, neither foundations nor registered institutes are prohibited from engaging in general legislative and political activities.

In the case of funds, social cooperatives, and PBCs, there are no explicit legal 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 Article 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, national or social origin, political opinions, religious affiliation, ethnicity, property, parentage, or other status (Civil Code Article 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

There are no limits on the ability of foreign individuals to found and participate in an NPO of any form. Foreign natural and legal persons are explicitly allowed to establish and participate in the governing bodies of associations, foundations, funds, registered institutes, social cooperatives, and PBCs (Civil Code Articles 214, 309 (2), 396, and 405; Law on PBCs Article 3; Law on Commercial Corporations Article 763).

V. Tax Laws

The basic income tax rate for natural persons is 15 percent of the tax base. Individuals pay a progressive tax of 23 percent for taxable earnings over 36 times the average wage (Income Tax Law Article 16(1)). In general, corporate income tax is calculated as 21 percent of the reduced tax base (income minus related expenses reduced by deductible portions and, if applicable, after applying the 30 percent reduction for publicly beneficial taxpayers, discussed below).

The  VAT rate  is 21 percent for most goods and services, with a lesser 12 percent rate for most food products, health care-related goods, educational tools including books and newsletters, and related services (VAT Law Article 47(1) and Appendices 2 and 3).

A legal entity such as an NPO does not pay income tax on income acquired from an inheritance or bequest (Income Tax Law Article 4(a)and 19b(1)(a) and (2)(b)).

A. Tax Exemptions

The Income Tax Law introduces a notion of a “publicly beneficial taxpayer”: an entity which, in accordance with its incorporation documents, statute, by-laws, or according to an assessment by a public authority, carries out its statutory activities exclusively in a not-for-profit manner. The Law excludes from this status explicitly commercial corporations, professional chambers and similar organizations that protect the entrepreneurial rights of their members (other than associations, trade, and employer unions), Czech public media, health insurance companies, communities of apartment owners, and foundations and funds that serve persons close to their founders (Income Tax Law Article 17(a)). Publicly beneficial taxpayers are exempt from tax on incomes originating from not-for-profit activities, as well as from subsidies and contributions from public budgets, and other types of income as defined in special laws concerning compensation for property confiscated to churches under communist regimes (Income Tax Law Article 18(a)(1)).

Income earned while pursuing statutory activities: The Income Tax Law generally excludes from income taxation the income of publicly beneficial taxpayers earned in connection with the pursuit of their statutory activities, provided that the income from each individual activity is less than its related expenses (Income Tax Law Article 18(a) (3)). Income of these taxpayers that is derived from subsidies and grants provided by the state, regional and communal public budgets, as well as from the budgets of the EU, EU or European Economic Area member states, is exempt from taxation (Income Tax Law Articles 4(1)(r), 18(a)(1)(b), and 19(b)(2)(b)). The income from membership fees as defined in the statutory documents of an association, trade union, political party or movement, or a professional chamber with voluntary membership, is likewise tax-exempt (Income Tax Law Article 19(1)(a)). However, income from advertisements and facility rentals is subject to taxation (Income Tax Law Article 18a(2)).

Interest on accounts, state subsidies, and income while pursuing statutory activities: The Income Tax Law specifically states that publicly beneficial taxpayers are 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 Article 18a(1)(a)). Foundations and funds that are considered publicly beneficial taxpayers, registered institutes, PBCs, and other publicly beneficial taxpayer resident in any state of the EU or of the European Economic Area are also exempt from the tax on donations (Income Tax Law Article 19b(2)(b)).

Income from economic activities related to statutory purpose: Income from profit-yielding economic activities that are related to the statutory purposes of a publicly beneficial taxpayer is subject to a reduced tax. Up to CZK 300,000 (≈USD 12,750) of related income is fully exempt from income tax. Total revenues at the end of the fiscal year that exceed this amount are reduced before taxation by 30 percent up to CZK 1,000,000 (≈USD 42,500), or whichever is less, provided that the proceeds are used for statutory activities within three years of accrual and other conditions are met. In cases where the taxpayer is a public college, university, PBC, or registered institute acting according to the Law on Universities, the maximum amount that may be deducted is CZK 3,000,000 (≈USD 128,000) (Income Tax Law Article 20(7)).

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

Public collections: 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 from the income tax base (Income Tax Law Article 19b(2)(c) and (d)).

B. Deductibility of Charitable Contributions

Legal entities may deduct up to 10 percent of their corporate income tax base any donations equal to or higher than CZK 2,000 (≈USD 85) to communities, regions, branches of state administration, juridical persons with their seat in the Czech Republic, as well as to juridical persons organizing public collections in compliance with the Law on Public (Law on Income Tax Article 20(8)).. In order to qualify for the deduction, the donation must support activities in one or more of the following fields: science and education; research and development; culture; teaching in schools; police; fire prevention and suppression; 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. However, NPOs themselves may not deduct any donation they are providing from their own property (Income Tax Law Article 20 (8)).

Violations of the rules of public collections are punishable by fines up to CZK 500,000 (≈USD 21,000) (Public Collections Law Article 25).

Individuals may deduct donations to qualifying NPOs of up to 15 percent of the person's taxable income. However, to qualify for the deduction, the individual must annually donate an amount that is greater than 2 percent of his or her taxable income or is at least CZK 1,000 (≈USD 43) (Law on Income Tax Article 15(1)).

C. Value Added Tax

The standard VAT rate is 21 percent. A reduced VAT rate of 12 percent is applied to many food products and goods of special importance for health care, social services and similar activities, and printed books. This 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 Article 47 (1) and Appendices 2 and 3)).

NPOs are not 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 (Law on VAT Article 56(a));
• Educational services and goods provided and used by registered schools, educational institutions, universities, and accredited vocational training facilities. Similarly, exempted are educational and free-time services provided to children and youth by youth-focused NPOs (Law on VAT Article 57 (1)(a) and (2));
• Health insurance, services and goods provided by licensed entities to patients and persons covered by public health insurance. This is subject to certain exceptions (Law on VAT Article 58);
• Social services provided according to the Law on Social Services (Law on VAT Article 59);
• Provision of services, as compensation for membership fees, to members of political parties, churches and religious communities, associations, 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 Article 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 Article 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 Article 61(c));
• Provision of services related to sports and physical training by juridical persons that were not established for entrepreneurial purposes (Law on VAT Article 61(d));
• Provision of cultural services and related goods by a juridical persons that was not established for entrepreneurial purposes (Law on VAT Article 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 Article 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 Article 61(g)).

VAT is added to the cost of services and goods and paid to the state by anyone whose turnover exceeds CZK 2,000,000 (≈USD 85,000) within the preceding 12-month period. Excluded from this rule are persons executing exclusively VAT exempt payments and not requiring VAT rebate (Law on VAT Article 6(1)). Goods imported by an NPO from other EU member states up to a total value of CZK 326,000 (≈USD 14,000) within a calendar year are not included in the VAT calculation, with the exception of new cars or goods subjected to the tax on fuel consumption (Law on VAT Article 2(a)). 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 potential VAT payer (Law on VAT Articles 6(g), 6(h) and 6(i) and Articles 96, 97, and 97(a)). 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 VAT-exempt.

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 Article 81).

D. Property Tax

Real property tax is not imposed on buildings and land occupied by buildings belonging to and serving the following types of public benefit organizations: foundations, funds, registered institutes, and PBCs, as well as trade unions and unions of employers (Act on Real Estate Tax Articles 4(1)(f) and (g) and 9(1)(f)). This applies generally to any land parcel with buildings on it or buildings serving certain purposes, such as: schools; establishments that provide care for children under 3 years of age; museums and art galleries with collections registered by the Ministry of Culture; registered public libraries; licensed health institutions; and social care facilities (Act on Real Estate Tax Articles 4(1)(g) and 9(1)(k)). Similarly exempt are lands serving organizations exclusively engaged in waste management, environmental protection, water management, and energy production (Act on Real Estate Tax Articles 4(1)(h), and 9(1)(m)).

Certain other categories of buildings are also exempt from the property tax. These include buildings belonging to associations of handicapped people, and buildings that are used exclusively for spiritual or religious activities.

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 exempt from customs duties only if (i) they are donated and (ii) there is no equivalent produced in the Czech Republic, or their 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.

The Czech Republic has been a member of the European Union since May 1, 2004. As such, goods imported by an NPO from any other member state of the European Union, up to a total value of CZK 10,000 (≈USD 400) 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 Jan Pajas, Consultancy,
Nad Sarkou 10, 160 00 Praha 6
Czech Republic
pj.pajas@gmail.com

Lenka Deverová, Attorney at Law
K Podjezdu 3, 140 00 Praha 4
Czech Republic
lenka@deverova.cz

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Footnotes

[1] While no new PBCs were allowed to form after the enactment of the new Civil Code of the Czech Republic, Act No. 248/1995 still governs and regulates the activities of PBCs that existed as of December 31, 2013 and opted to keep the PBC legal form. There is no requirement forcing remaining PBCs to change their legal form, though they may do so at any time and change their legal form to a registered institute.

[2] Act No. 418/2011, as amended, introduces the notion of a legal entity’s beneficial owner. For NPOs, where there is no ownership by physical persons with respect to the property of the NPO, the law stipulates that all members of the statutory body of an association, board of trustees of a foundation, or a fund are treated as the beneficial owner. For registered institutes or public benefit corporations, the founder is considered to be the beneficial owner. beneficial owners must be registered in the register of legal persons.

[3] With regard to the disputes between the NPO community and Ministry of Interior concerning the right of associations to pursue publicly beneficial objectives that benefit the general public rather than a specific subset of the public, an expert panel at the Ministry of Justice has confirmed the right of associations to provide services to beneficiaries outside their membership or to pursue generally important objectives.

[4] Article 765 of the Law on Commercial Corporations limits the scope of entrepreneurial activities of social cooperatives. Under the law, social cooperatives are not allowed to issue bonds, fulfill obligations of other persons, become a partner with unlimited liability or a silent partner; nor may they transfer, sell, or lend their enterprise to any entity that is not a social cooperative.