Methods of Relocation
The term corporate relocation encompasses several distinct legal operations that differ in nature, duration, cost and tax profile. Selecting the right method is the first and most consequential strategic decision.
1. Cross-Border Seat Transfer
This is a formalised legal process in which the company preserves its legal continuity and merely changes the jurisdiction whose law governs it. Within the EU, it is regulated by Directive (EU) 2019/2121 (the Mobility Directive); in Czech domestic law, the primary instrument is Act No. 125/2008 Coll., on Transformations of Business Companies and Cooperatives. The key advantage is that all contracts, licences, receivables and liabilities transfer automatically to the entity in its new seat without the need for novation.
Key advantage of a cross-border seat transfer: the company does not dissolve and no new company is created. Legal continuity is preserved. The downside: the process typically takes four to seven months, requires notarial involvement in both jurisdictions and a mandatory three-month creditor protection period during which creditors may seek additional security for their claims.
2. Alternative: New Entity and Liquidation of the Original
A faster, but from a tax perspective significantly riskier, alternative. The company establishes a new entity in the target jurisdiction, transfers assets to it (whether by way of contribution in kind or a sale) and places the original in liquidation. This approach will typically trigger taxation of capital gains on the transferred assets in the departing jurisdiction, both at the level of the company and potentially at the level of its shareholders. Even accumulated tax losses in the originating entity will not prevent the tax authority from assessing unrealised gains on assets.
3. Conversion into a European Company (SE)
A Societas Europaea allows the registered seat to be moved within the EU, subject to statutory conditions being met, without dissolution and reconstitution. However, it requires an independent expert report and notarial review. This route is particularly suited to larger corporate groups where legal continuity and structural clarity are of material value.
Exit Tax: The Largest Hidden Risk
The central tax issue in any relocation is exit tax – the tax levied on unrealised capital gains in assets that leave the original tax jurisdiction as a result of the cross-border transaction. The EU Anti-Tax Avoidance Directive (ATAD I, Directive 2016/1164/EU) obliged all Member States to introduce such a mechanism. The Czech Republic implemented it through Section 23g of Act No. 586/1992 Coll., on Income Taxes (applicable to departures from the Czech Republic).
The principle is deceptively simple: at the moment of the seat or tax residence transfer, a deemed disposal of all the company's assets at fair market value is triggered. The difference between that market value and the tax (book) value of the assets constitutes the taxable base, to which the standard corporate income tax rate applies. In the Czech Republic, that rate currently stands at 21%.
What Is Subject to Taxation?
Exit tax is not limited to tangible assets. Every category of asset that moves outside the original state's tax jurisdiction is caught:
• real property and movable tangible assets (machinery, vehicles, equipment),
• intangible assets: trade marks, patents, software, know-how, databases,
• receivables and financial instruments,
• inventories to the extent that a gain would be realised on their sale,
• goodwill and customer base (particularly where an operating business is being transferred as a whole),
• licences and contractual positions with a realisable market value.
Establishing market value is, in practice, the most complex and most contentious step in the entire process. The tax authority is entitled to challenge the valuation and assess additional tax based on its own determination. Without a robust expert valuation report and thorough supporting documentation, the company is at the mercy of the tax authority's discretion.
Instalment Payment: Relief for Transfers Within the EU/EEA
Both the ATAD framework and Czech domestic law allow a taxpayer relocating within the EU or EEA to apply for payment of exit tax in five equal annual instalments. This relief is not automatic – it must be specifically requested, and the statutory conditions must be met. The instalment arrangement is conditional on the taxpayer remaining current on its tax obligations; if a payment is missed, or if the relevant assets are subsequently disposed of, the entire remaining liability becomes immediately due and payable.
Relocation to a non-EU jurisdiction – the UAE, the United States, the United Kingdom post-Brexit, Singapore and similar destinations – does not attract the instalment option. The full exit tax liability falls due in a single payment in the year of the transfer. This consideration is critical when comparing target jurisdictions and must be factored into the business case for the relocation from the outset.
Permanent Establishment
One of the most common and most costly misconceptions in corporate relocation is the assumption that deregistration from the original commercial register extinguishes all fiscal connections to the original jurisdiction. In reality, the original state may continue to tax the company's income even after relocation if a permanent establishment remains on its territory.
A permanent establishment (PE) is an international tax concept typically defined in the applicable double tax treaty (modelled on Article 5 of the OECD Model Convention). It arises where the company continues to operate a fixed place of business in the original state (an office, warehouse or production facility), or where a dependent agent with authority to conclude contracts on the company's behalf continues to act there.
In practice this means that a manager who, after the company's relocation, continues to work from a Czech office and negotiate contracts may create a Czech permanent establishment for the company – irrespective of where its registered seat formally lies. Income attributable to that permanent establishment would then be taxable in the Czech Republic.
Avoiding the inadvertent creation of a PE requires careful structuring, a redistribution of functions and contractual relationships, and genuine economic substance in the new jurisdiction. A legally impeccable corporate structure alone is insufficient if actual decision-making and day-to-day management remain in the original country.
Place of Effective Management: Where Is the Company Actually Run?
Beyond the permanent establishment question, there is a more fundamental risk: a dispute about the tax residence of the entity itself. The Czech Republic, like most developed states, defines a tax resident not only as an entity whose registered seat is in the Czech Republic, but also as an entity whose place of effective management is located there (Section 17(3) of the Income Taxes Act).
The place of effective management is defined as the location from which the key managerial and commercial decisions necessary for the conduct of the business as a whole are made. If the supervisory board or board of directors formally meets in Dubai, but the members in fact gather in Prague and issue all strategic instructions in a Czech-speaking environment, the Czech tax authority is at risk of characterising the company as a Czech tax resident, with an obligation to tax its worldwide income in the Czech Republic.
VAT: Moving From One Jurisdiction to Another
Relocation of the registered seat has significant VAT implications that must not be overlooked. VAT registration is tied to the place where a taxable person is established or has a fixed establishment. Moving the seat from one EU Member State to another entails:
• cancellation of the VAT registration in the original state and an obligation to file a final VAT return,
• fresh VAT registration in the target state, noting that the deadlines for mandatory registration differ between Member States,
• a potential obligation to account for VAT on assets in respect of which input tax was originally deducted, if those assets are removed from the business sphere or transferred otherwise than in the ordinary course of trade.
For intra-EU transfers, it is also necessary to assess whether the movement of assets within the same legal entity (for instance, as stock transfers or call-off stock arrangements) creates a VAT supply obligation. The rules vary depending on whether a transfer of the right to dispose of goods as owner has occurred.
Relocation to the Czech Republic
It is possible to encounter the reverse scenario: foreign companies relocating to the Czech Republic. The Czech Republic is an attractive jurisdiction for companies from non-EU countries in the CEE region, for businesses serving German-speaking markets, and for entities seeking a stable legal framework at the heart of the EU with full access to the EU single market.
When establishing a presence in the Czech Republic, the following issues require particular consideration:
• Form of entry: cross-border seat transfer, branch office or a newly incorporated Czech entity? Each option carries a distinct tax and administrative profile.
• Double tax treaties: the Czech Republic's treaty network covers more than 90 countries. The applicable treaty must be identified, and its impact on the taxation of dividends, interest, royalties and permanent establishment profits must be assessed.
• Notification requirements: a foreign person registering a branch in the Czech commercial register must satisfy a number of conditions, including the appointment of a branch manager with residence or a permit to reside in the Czech Republic.
• Employment matters: employees become subject to Czech labour law. The change of jurisdiction must be notified to the Czech Social Security Administration (CSSA) and health insurers within eight days of the registration taking effect.
• VAT and other tax registrations: the new entity must register for VAT, road tax (if using motor vehicles in business) and any other applicable levies.
Conclusion
Transferring a company's registered seat or tax residence is a legitimate and lawful business decision. Scenarios in which such transactions are used purely aggressively, with the sole aim of escaping taxation, are becoming increasingly untenable in an environment shaped by the OECD BEPS Action Plan and the EU ATAD I and II Directives. The regulatory landscape has tightened to the point where any relocation without genuine economic substance and a real transfer of functions and risks will be scrutinised and, in all probability, challenged by the tax authority.
A well-conceived relocation, by contrast, will deliver genuine and lasting benefits – but only if it is built on solid legal and tax foundations, with adequate substance in the target jurisdiction and without unplanned exposures in the country of departure. Given the complexity of these issues, it is generally necessary to seek expert legal and tax advice when relocating a company’s registered office.
