Marketplace Czech companies seek benefits of tax havens and foreign locations

11-02-2015 13:22 | Chris Johnstone

Tax havens and tax avoidance are a big issue at European level with rarely a week going by without some scandal about a big business earner paying a pittance in taxes with, or without, the help of certain states. Surprising as it might seem, many Czech companies have also fled from their roots to register elsewhere for fairly pragmatic tax and investment reasons and because of reasons they are not so keen to talk about.

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Foto: ČT24Foto: ČT24 In the Czech Republic it might be argued that some companies are both more Czech, and more equal, than others. For while two decades ago the idea of Czech companies being registered abroad or based in some sun-kissed tax havens might have appeared absurd, the reality is that more and more local firms have and are now going down that road.

In fact, such is the exodus of some major firms that those that have stayed behind to pay Czech tax, such as state-controlled energy giant ČEZ, or the Agrofert agricultural conglomerate of Minister of Finance Andrej Babiš, expressly underline their upstanding tax contributions in their corporate information.

Zdeněk Bakala, photo: YouTubeZdeněk Bakala, photo: YouTube Some of the others, the likes of the PPF company of the Czech Republic’s richest man Petr Kellner; the KKCG empire of oil and gas magnate Karel Komárek, and BXR Group of Zdeněk Bakala, have taken another route. In fact, all three have significant parts of the business empires based in the Netherlands. And in the case of Komárek, while some of his companies have gone Dutch the main mother company is based in Cyprus, a location which often boasts of its bank and corporate secrecy.

Photo: Radio PraguePhoto: Radio Prague According to a survey carried out by the Bisnode consultancy at the end of September last year, the Netherlands tops the league of destinations for Czech companies to relocate outside their homeland with 4,222 firms now registered there. Cyprus comes second with almost 2,100 firms and then Luxembourg third with just over 1,100. Then come a series of more exotic ‘paradise’ locations such as the Seychelles, British Virgin Islands, and Panama. Altogether, its estimated that around 13,000 Czech companies are registered in what might be described as tax havens.

The business weekly Ekonom estimated this year that the Czech state has lost out on around 200 billion crowns in tax income from dividends and perhaps around another 100 billion crowns on top of that from other taxes because of companies being based outside the country.

The Netherlands, photo: Alphathon, Wikimedia CC BY-SA 3.0The Netherlands, photo: Alphathon, Wikimedia CC BY-SA 3.0 Let’s perhaps have a look at the Dutch example first. On basic tax rates, companies pay 20 percent, or a higher 25 percent rate, in the Netherlands and 19 percent in the Czech Republic. So on normal grounds the Netherlands cannot be regarded as a tax haven.

However, the Netherlands is a much more sophisticated tax location which does not, for example, tax dividend earnings abroad and capital gains on the sales of assets. And, in some cases, the losses made in one tax location can be used to write off the gains in another. That can mean a lot to multinational companies such as some of the Czech groups which have set up there. There is also the impression that a Dutch name plaque can help when you are looking to raise money internationally or is a better place to structure some international deals.

There are obviously both push and pull factors working here. Vladimíra Chýská is chairwoman of the Czech Dutch Chamber of Commerce and sees things from both sides of the fence so to speak as a Czech promoting business links with the Netherlands.

She says the Czech Republic is partly to blame if some of its biggest and best companies decide to take their pick from the corporate locations on show internationally. “On the other side, it’s also the problem of the Czech Republic where the system is not so developed and so controlled. And also, if you are a big company and doing business internationally you want to protect your assets and the base in the Czech Republic, it’s still doubtful whether it will be stable later on or if you have some problems. So, I think it would be important to develop the Czech and political system so that it would be more stable.”

Hana Lešenarová, photo: Hana Lešenarová’s ArchivesHana Lešenarová, photo: Hana Lešenarová’s Archives On the other hand, especially during the early flight of Czech companies to fully blown or partial tax havens, the secrecy offered from preying domestic eyes can also be attractive.

Hana Lešenarová is a former Czech journalist who is now an associate director at the German branch of worldwide risks evaluation consultancy Control Risks. The company helps its clients get to the bottom of firms’ sometimes very murky ownership, corporate and political relations with the investigations often coming up against considerable obstacles. “In the past, there has probably been more usage of the offshore structures because of so-called other reasons such as secrecy. Also because if you were a company based elsewhere it was not usually possible to work out if you owned it, and how, and through what person, and whether you have any partners that might possibly be controversial or if maybe you wanted to hide their identity in the first place.

Isle of Man, illustrative photo: Kevin Rothwell, Wikimedia CC BY-SA 2.0Isle of Man, illustrative photo: Kevin Rothwell, Wikimedia CC BY-SA 2.0 “I think that we have also seen in the early stages when Czech businesses started going through the offshores structures that even the biggest groups in the Czech Republic it was not possible to work out how they were owned and through what entities and vehicles.” Now, she says, ownership is often clearer, but secrecy still plays a role in the attraction of such locations.

Pulling back a bit, tax avoidance and tax havens have now shot to the top of the agenda for many European governments and for the European Union itself, although it’s a bit of a delicate issue because many European locations such as the Isle of Man, Dutch Antilles, Malta, and Luxembourg can also be classed as tax havens. Just look for example at the scandal blown up this week about the advice given by the bank HSBC to its rich account holders about how to dodge paying their taxes. That follows on from the recent scandals about big multinationals such as Starbucks were avoiding paying taxes in Britain despite having turnover worth billions of pounds or the covert deals between some big companies and Luxembourg.

Tomáš Zdechovský, photo: The Technological Centre of Hradec Králové ArchivesTomáš Zdechovský, photo: The Technological Centre of Hradec Králové Archives But some say a proposal coming out of the European Parliament, which also has the preliminary support of the legislation drafting European Commission and European Council, could radically change the current situation. It would force the owner or main beneficiary of all EU companies to be revealed wherever they were finally registered. Thus, in theory, there would be no way of hiding behind companies based on exotic islands or behind a wall of hundreds of so called ‘shell’ companies.

Tomáš Zdechovský is a Christian Democrat member of the European Parliament who says the move is vital not just to clamp down on tax avoidance but for other European policies as well. “I know this proposal and I am for it. For me it is very important to make these things transparent. [For example] at the moment we speak about the sanctions between the EU and Russia, but we don’t know what companies are Russian and what companies have other capital. Also, it is very important to have a transparent structure of companies and to know who is the owner and who gets the profits from the company. “

Photo: Barbora KmentováPhoto: Barbora Kmentová Mr. Zdechovský is meantime framing his own proposal about what he calls taxparency, basically tax transparency. He wants to suggest that major multinationals which have so far shirked paying their fair share taxes are encouraged to pay a basic EU level at perhaps 10-12 percent of profits and in return are given a sort of EU label of tax honesty. The Czech MEP says the proposal is being discussed with other political groups and also the European Commission itself.

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