Outsourcing: Czech Republic overview
A Q&A guide to outsourcing in the Czech Republic.
This Q&A guide gives a high-level overview of legal and regulatory requirements on different types of outsourcing; commonly used legal structures; procurement processes; and formalities required for transferring or leasing assets. The article also contains a guide to transferring employees; structuring employee arrangements (including any notice, information and consultation obligations); and calculating redundancy pay. It also covers data protection issues; customer remedies and protections; and the tax issues arising on an outsourcing.
This article is part of the PLC multi-jurisdictional guide to outsourcing. For a full list of contents, please visit www.practicallaw.com/outsourcing-mjg.
Regulation and requirements
Czech law does not specifically regulate outsourcing transactions. Consequently, agreements on outsourcing are structured according to various different contract types provided for by Act No. 513/1991, the Commercial Code, as amended (Commercial Code). Outsourcing agreements are often based on the general provisions of Section 269(2) of the Commercial Code.
A financial services outsourcing?
A business process outsourcing?
An IT outsourcing?
A telecommunications outsourcing?
A public sector outsourcing?
Financial services outsourcing is subject to several separate sets of regulations, in particular under the:
Bank Act (BA).
Act on Collective Investments (ACI).
Payment System Act (PSA).
Capital Market Undertakings Act (CMUA) and its subordinate instruments.
The statutory regulator is the Czech National Bank (CNB), which issues rules and guidance under the BA, ACI, PSA and CMUA. These regulations are precise and detailed, and therefore the description below is simply a framework rather than a full set of terms and conditions.
Outsourcing by an investment company. On the basis of a management contract, for more efficient management of the assets of a collective investment fund, an investment company can entrust its management to a person who has experience with collective investment or investment in assets specified in the statute of the fund and who is:
An investment company.
An investment firm.
A foreign person that has a similar licence for management of client assets and is subject to supervision by the supervisory authority of the country where it has its registered office (the investment company may also entrust an activity connected with collective investment to another person that is authorised to perform such an activity as a business).
The outsourcing can go ahead provided that, among other things (Section 78, ACI):
The CNB has been notified of the outsourcing in advance.
The depositary has been notified in advance and agrees.
The outsourcing does not impede the effective supervision of the investment company.
The statute of the collective investment fund allows for it.
The outsourcing does not prevent the management of the assets of the collective investment fund in the best interest of the investors.
The person managing the assets of the collective investment fund undertakes to comply with the statute of the collective investment fund.
The entrusting of the management of the assets of a collective investment fund does not lead to the danger of a conflict of interests between those of the investment company or the owners of securities issued by the collective investment fund, and those of the person managing the assets of the collective investment fund.
The investment company and the depositary of the collective investment fund are able to continuously control the activities of the person managing the assets of the collective investment fund.
The investment company is able to influence the activities of the person managing the assets of the collective investment fund through its instructions.
An investment company can manage assets in a unit trust of another investment company, or assets of an investment fund that has not concluded a management contract. An investment company can provide services to another investment company, or an investment fund that has not concluded a management agreement, consisting of activities connected with the management of a collective investment fund, among other things (Section 15, ACI):
Keeping the accounts of the collective investment fund.
Providing legal services for the collective investment fund.
Dealing with inquiries and complaints of unit-holders or shareholders of the collective investment fund.
Valuating the assets and liabilities of the collective investment fund and determining the current value of a unit certificate or a share of the collective investment fund.
Outsourcing by an investment firm (broker). An investment firm is a legal person that provides investment services under a licence for the business of an investment firm granted by the CNB. If the investment firm engages another person to carry out significant operations, it must introduce measures to avoid creating undue operational risk.
The investment firm must ensure that significant operational activity conducted by another person is not exercised in a manner that substantially reduces either the:
Quality of the management and control system.
Ability of the CNB to supervise the observance of the investment firm's obligations.
The operations of an investment firm are considered significant if the deficiency may:
Seriously disrupt the prudent provision of investment services or the performance of duties.
Endanger its financial stability.
Represent a change of the assumptions under which the investment firm obtained the CNB's licence.
Operations that are not significant include legal or other advice, activities associated with billing services, and so on.
Outsourcing by a credit institution. A credit institution is a bank or a credit union. The principles of the outsourcing must be reflected in the internal rules of the credit institution and must meet the strict criteria set out by the BA in Decree No. 123/2007 Coll. (Decree), as well as in the circular issued by the CNB on July 18, 2007 (Circular). These principles apply equally for the outsourcing of activities that are:
Essential, that is, where a defect or failure in its performance would materially impair the performance of the credit institution's obligations.
Among others, the bank should also bear in mind bank secrecy regulations when it intends to use outsourcing.
Where any activity that would otherwise be performed or required to be performed by the credit institution is provided by another person under a contract, the credit institution is not relieved of any of its responsibility for these activities. The credit institution must enter into a contract governing outsourcing in a way that captures its content, accountability and possible enforcement of rights. If it is an essential activity, the CNB must be notified of this in advance.
The credit institution must, in connection with the negotiation or the use of outsourcing, ensure (Section 11, Decree):
The following are not limited:
compliance of the activities subject to outsourcing with the relevant regulations;
control of the credit institution;
information duties towards the CNB;
supervision by the CNB, including activities of the outsourcing provider; and
the audit of financial statements and other verification set out in other legislation.
The prerequisites for the proper and prudent exercise of the credit institution's activities are not jeopardised.
The relationship with the client will not be affected.
The rules for the control of outsourcing activities are established.
The credit institution must perform, among others, the following main responsibilities (Sections I and II, Circular):
Setting up the strategy for use, responsibility, and procedures, before starting the outsourcing.
Periodically examining the use of the outsourcing.
Preparing a proposal to cover the evaluation and operational risks, before starting the outsourcing.
Verifying the licensing, credibility and competence of providers, before starting the outsourcing.
Ensuring adequate risk management, before starting the outsourcing.
Determining who in the credit institution is responsible for the outsourcing's evaluation, before starting the outsourcing.
Outsourcing by a payment institution. A payment institution is a legal entity that is entitled by the CNB to provide financial services, which are, among others, services enabling:
Cash to be placed in a payment account.
Cash withdrawals from a payment account.
All the operations required for operating a payment account and issuing and/or acquiring payment instruments.
The CNB must be notified of outsourcing by the above in advance.
The outsourcing of an essential activity (that is, if a defect or failure in its performance would materially impair the performance of the payment institution's obligations) must not impair (Section 26, PSA):
The management and control system.
The CNB's ability to conduct supervision.
The responsibility of the head persons of the payment institution.
There are no additional regulations relevant to business process outsourcing.
There are no additional regulations relevant to IT outsourcing.
To provide telecommunication services, the would-be provider must notify the Czech Telecommunication Office in advance under Act No. 127/2005 Coll., on Electronic Communications and on Amendment to Certain Related Acts (Electronic Communications Act), as amended. The form Notification of Communication Activity must be accompanied by:
A document from an appropriate financial office, no more than 90 days old, confirming that the business owner is not in arrears with the payment of any taxes, levies, fees, payments, penalties or fines, including the costs of any proceedings, as collected by territorial tax authorities.
An affidavit confirming that the natural person or legal entity is not in arrears with the payment of insurance premiums or penalties on public health insurance, or with the payment of insurance premiums or penalties on social security insurance or contributions to employment policies, except where payment in instalments has been permitted, and in such cases that the entity is not in arrears with the payment of the instalments.
An extract from the Commercial Register or the Trade Register.
Confirmation of the integrity of the natural person, no more than three months old.
Confirmation of the payment of the administrative fee.
Public entities, such as state and municipal authorities, companies financed by the public sector, and certain entities operating in the water, energy, transport, and postal services sectors, must follow specific legislation on public procurement during the procurement process (Act No. 137/2006 Coll., on Public Procurement, and Act No. 139/2006 Coll., on Concessions).
Once the procurement is concluded, the contractual relationship is regulated by the Commercial Code as a standard commercial relationship. However, the suppliers must still take into account that certain limitations, such as those on changes to the contracts or disposing of property, apply.
Prospective suppliers and customers must always ensure that a proposed outsourcing is not subject to additional regulatory requirements in other sectors.
It is not legally required for the customer to carry out due diligence of the proposed supplier. However, it is recommended for the customer to take into account as much information about the supplier as possible, to prevent future mutual disputes.
As outsourcing can be used in a wide variety of sectors and services, the supplier may have to possess a certain licence, or to notify the respective authoritative body, to be able to provide services in certain sectors. These sectors include, among other things:
The customer is not obliged to check or monitor the supplier, nor is the supplier obliged to provide the customer with periodic reports. However, it is highly recommended to set out this obligation in the outsourcing contract.
A change in ownership of intellectual property (patents, trade marks, utility models and industrial designs) must be registered in the respective database administered by the Czech Industrial Property Office (see also Question 7).
Transfer of real estate must meet some formal requirements (that is, be in written form, with both sets of signatures on the same document) and must be registered in the Cadastral Register (see Question 7).
Prior notice to the CNB is required in connection with:
Management of the assets of a collective investment fund by an investment company.
Outsourcing of an essential activity by a credit institution.
Outsourcing by a payment institution.
However, it is recommended to inform the CNB in all cases when the outsourcer is an entity regulated by the CNB.
If the services are subject to the Electronic Communications Act, the service provider must notify the Czech Telecommunication Office at least one week in advance.
Czech law does not seem to be unique in a material way with respect to possible structures available for an outsourcing project; below is a brief description of the most commonly used structures.
This structure represents a direct outsourcing relationship between the customer and the supplier. In the Czech Republic, this usually comprises several separate contracts dealing with specific issues, such as the:
Transfer of assets.
Transfer of staff.
Service to be provided, including its performance indicators, such as service level agreements (SLAs).
The structure is more complex if the customer procures services on behalf of itself and its group companies. Generally, the customer either:
Enters into the outsourcing agreement as an agent on behalf of its group companies.
Includes a third-party rights clause to ensure that its group companies have directly enforceable rights under the contract. However, this structure may represent a rather complex legal relationship in many cases, as all intra-group transactions are generally to be concluded on an arm's-length basis and, in some cases, require the prior consent of the General Meeting and a court-appointed expert appraisal in order to be valid and enforceable.
Under this structure, the customer enters into contracts with various suppliers for separate elements of its requirements or, in some cases, provides part of the services in-house or intra-group. The issues are generally similar to those experienced in a direct outsourcing but, in addition, the customer must ensure smooth co-operation of the individual suppliers and take into account possible warranty-related matters when drafting the contract.
A detailed description of the customer's co-operation under the outsourcing contract is highly advisable in this case. The co-operation duty cannot, in general, be directly transferred to a third person (another supplier); therefore, in most cases, the supplier must ensure that the requirements, including enforcement mechanisms (including, for example, contractual penalties) for the co-operation of the individual suppliers match the necessary co-operation to be provided by the customer.
In addition, this scheme requires additional project management effort in comparison to the direct outsourcing concept.
The customer outsources its processes to an affiliate entity, taking advice from local suppliers on a consultancy basis. This gives the customer direct operational control, and can have tax benefits in appropriate jurisdictions. However, there will be significant upfront set-up costs, and risk cannot be passed to a third-party supplier.
Due to the generally low volume of transactions, there is no typical pattern for procurement processes in private sector outsourcing (outsourcing in the public sector is strictly regulated by the public procurement rules). Nevertheless, a recommendation for the most appropriate process is as follows:
The customer identifies the subject of outsourcing and possible suppliers, and draws up an appropriate set of legal, financial and technical criteria for selecting a supplier. Sometimes the appropriateness of the criteria is tested on a sample of possible suppliers.
Unless the customer approaches the pre-selected supplier directly, it can send out an invitation to tender (ITT) and invite responses. The customer should include in the ITT:
all information that the supplier may need to make a bid, or where this information could be obtained (some information might be made available only on the conclusion of a non-disclosure agreement by the supplier);
a clear and detailed statement of the service requirements; and
if the customer has a clear idea of the contractual relationship, a draft contract that can be commented on by the supplier.
After creating a shortlist based on the evaluation of bids, negotiations may be held, in which more detailed information is provided to the potential suppliers, so that they can specify their bids in more detail, and to discuss commercial, technical and legal aspects of the contract.
Transferring or leasing assets
IP rights and licences?
Real property can be freely acquired by:
Czech legal entities (that is, entities with their registered seats in the Czech Republic).
Non-Czech legal entities with an enterprise or branch located in the Czech Republic who are authorised to conduct business activity (except for agricultural land and forests).
Other non-Czech legal entities cannot acquire real property in the Czech Republic, with the exception of EU nationals.
The acquisition of real property by EU nationals (who are not residents of the Czech Republic) and by companies from EU member states (that are not established, and do not have an enterprise or branch, in the Czech Republic) was limited for a transitional period of five years from the accession to the EU, that is, until 1 May 2009, and in the case of agricultural land is limited for seven years, that is, until 1 May 2011.
Real property registered in the Cadastral Register
Ownership of real property that is subject to registration in the Cadastral Register is acquired (if transferred by an agreement) on its registration in the Cadastral Register. The act of registration is retrospective, as the ownership transfer is deemed effective from the date of filing the registration application.
The following real property is subject to registration in the Cadastral Register:
Land in the form of plots of land;
Buildings connected with land by solid grounds, which are:
granted a registration or evidence number; or
not granted a registration or evidence number, and are not the facility of another building evidenced on the same plot.
Apartments and non-residential premises (as units).
Buildings, apartments and non-residential premises in the phase of construction, which are subject to registration after their construction if the owner or another entitled person requests the registration.
Buildings, apartments and non-residential premises in the phase of construction, which are registered after their construction in relation to the registration of the real rights applying to this real property (for example, easement, mortgage and pre-emption rights).
Other constructions connected to land by solid grounds, if registration is required under the special legislation.
Minor constructions, such as constructions with one above-ground floor, with a built area not exceeding 16 metres squared and a height not exceeding 4.5 metres, which fulfil the supplementary function to the main construction, are not registered in the Cadastral Register. Underground constructions are not subject to registration.
Real property not registered in the Cadastral Register
Ownership of real property that is not subject to registration in the Cadastral Register (if it is transferred by agreement) is acquired on the effective date of the relevant agreement.
IP rights and licences
Transfers of rights to author's works, including licences, do not require any formalities (with the exception of the obligatory written form, where a written form of transfer/licence is required by the contract, and/or when an exclusive licence is granted).
Transfers and licensing of any type of registered industrial property are generally subject to registration with the Czech Intellectual Property Office. Until this registration, the transfer or licence is not effective towards third persons.
Agreements related to the transfer of movable property do not require any formalities (unless transferred as a part of a transferred enterprise).
Based on a contract on sale of a business enterprise, which must be in written form and is covered by the Commercial Code, the purchaser undertakes to assume all tangible, personal and intangible assets constituting business activities and obligations related to the business enterprise. Even debts not shown in the accounting books of the seller are transferred to the purchaser by operation of law. The transfer of assets and liabilities becomes effective as of the date of effectiveness of the contract on sale of the business enterprise. If real estate registered in the Cadastral Register forms part of the business enterprise, the transfer of the ownership to this real estate becomes effective on its registration in the Cadastral Register.
Transfers of rights and obligations from contracts do not require any formalities unless a written form of an assignment/subcontract is required by the corresponding contract. Transfers of obligations generally require the consent of the relevant debtor (obligor).
Also, the prior consent of various corporate bodies may be required, depending on the contract's subject matter, level of materiality, and the individual companies' specific internal regulation.
IP rights and licences?
Generally, relationships based on lease agreements are covered by Act No. 40/1964 Coll., Civil Code (Civil Code). As well as general provisions, there are special provisions in the Civil Code concerning the lease of apartments, and even special Act No. 116/1990 Coll., concerning the lease and sub-lease of non-residential premises.
All leases of apartments or non-residential premises must:
Be concluded in written form.
Contain certain data required by the Civil Code and the Act concerning the lease and sub-lease of non-residential premises.
Leased apartments or non-residential premises can be subleased only with the written consent of the lessor. Other immovable property can be subleased without the lessor's special consent, unless the agreement stipulates otherwise.
IP rights and licences
There are no formal requirements for leases related to movable property (unless the movable property is leased as a part of a leased enterprise).
Under the contract, on lease of an enterprise, the lessor undertakes to let its enterprise to the lessee, which the lessee operates independently and manages at its own cost and risk, and from which the lessee derives benefits. The lessee undertakes to pay rent to the lessor. The contract must be in writing and the amount of rent or the method of its determination must be specified in it. A business enterprise cannot be subleased.
To an incoming supplier on an initial outsourcing?
To an incoming supplier on a change of supplier?
Back to the customer on termination of an outsourcing?
When the transferor transfers all, or part, of its business activities, its labour law rights and duties, including employment contracts held between employees and the transferor, pass in full from the transferor to the transferee (Section 338 et seq., Act No. 262/2006 Coll., the Labour Code, as amended) (Labour Code).
Change of supplier
If a change of supplier constitutes a business transfer (see above, Initial outsourcing), the new supplier automatically takes over all the employment relationships that existed with the former supplier as part of this business.
Provided the services are insourced, that is, the company ultimately decides to perform the services itself, it is also possible for relevant employees of the former service provider to be transferred to the company.
If a transfer of employees occurs by operation of law, the transferee must guarantee the same terms and conditions to the transferred employees that they had with the transferor. This also applies to any collective bargaining agreement, which is valid and effective for the duration of its effectiveness. Subsequently, a new collective bargaining agreement can be negotiated and concluded.
Employment agreements can be changed, provided the affected employees consent to this, but not due to, or in connection with, the transaction (that is, EU case law applies). Any non-permitted changes may be invalid and/or unenforceable.
There is a statutory pension system into which contributions are paid each month. The employer deducts this directly from the employee's salary (currently 31.5% of the base salary). This arrangement persists throughout employment, regardless of the transfer of employees. The transferee must notify the relevant authorities (Social Security Administration, and the respective Health Insurance Companies) within eight days of the transfer.
The Czech Republic also has pension funds, legal entities independent of the employer. In practice, employees conclude "supplementary pension insurance agreements" with pension funds, based on which they regularly pay the insurance, and, if payments to a pension fund are provided by the employer in question (as a benefit), the employer contributes to this pension fund. These benefits can be provided based on employment contracts, collective bargaining agreements, or the employer's internal regulations. The employer's contributions to pension funds are also subject to an automatic transfer.
No automatic change in employment terms and conditions occurs due to a transfer (see above, General terms). These can be changed either:
After the terms' expiration (if granted to the employees in their employment agreements or issued internal rules for a definite period of time).
By mutual agreement between the employees and the transferee.
Any other terms of the employment can only be altered with the affected employees' consent, but not due to, or in connection with, the transfer. Following the transfer, a new collective bargaining agreement may be negotiated and concluded.
Neither the transferor nor the transferee can terminate employees due to, or in connection with, the transfer. Employees are entitled to severance payment only if they are terminated due to organisational reasons, which includes the following three statutory grounds (Labour Code):
The employer's undertaking, or its part, is closed down.
The employer's undertaking, or its part, relocates.
The employee becomes redundant by decision of the employer, or the employer's competent body, to:
change the tasks, plant or equipment;
reduce the number of employees to increase labour productivity; or
introduce other organisational changes.
A terminated employee is entitled to a severance payment amounting to at least three times his average monthly gross earnings, unless a higher amount is agreed on in the employment or collective bargaining agreement, or in the internal regulations. This includes all bonuses to which the employee is entitled during the decisive period, that is, the preceding quarter. The average earnings are calculated as of the first day of the month following the decisive period (for example, if the decisive period is 1 January to 31 March 2011, the average earnings are calculated as of 1 April 2011).
The transferee has limited options to change the terms and conditions of employment of the affected employees (see Question 10, General terms). However, the transferee can unilaterally harmonise terms and conditions regulated by internal rules, provided the principle of equal treatment is observed.
Employees must not be terminated in connection with the transfer either before or immediately after the transfer. If they are terminated due to the transfer, the termination can be considered void. However, if other labour law conditions for termination are met (for example, if an employee breaches his work obligations or is made redundant), he can be terminated based on these grounds.
In the private sector, there are no services that can only be performed by a local national. In the public sector, Czech or EU citizenship and/or local training/authorisation is occasionally required. These services can therefore only be outsourced to locally trained persons and/or EU citizens (for example, services related to national security, diplomacy, authorised experts and interpreters (regarding which there is an amendment forthcoming)) or they are not outsourced at all (for example, notaries and judges).
It is possible to structure an outsourcing as a secondment, provided the company assigning the employees holds an employment agency licence issued by the Ministry of Labour and Social Affairs. Employees can then be temporarily assigned to a company ("user") based on an agreement on temporary assignment. The assigned employees remain employees of the employment agency. The user can:
Organise the assigned employees.
Check and supervise the assigned employees' work.
Issue the assigned employees with instructions.
The user must ensure adequate working conditions, including health and safety at work. However, the user cannot perform any legal acts toward the assigned employees. This kind of arrangement is uncommon in the Czech Republic.
The Labour Code does not explicitly stipulate an obligation to provide the other party with information regarding the transferred employees. However, since the transferee must ensure that all rights and obligations arising from the employment are observed, the transferee should acquaint itself with all the terms of employment and relevant documents. Therefore, it is common for an agreement between the employers to contain a warrant that the transferor provided the transferee with all relevant information and documents.
Before the transfer, the transferor and transferee must inform and consult with the trade unions about:
The determined or proposed date of transfer.
The reasons for the transfer.
The legal, economic and social impact of the transfer.
Contemplated precautions towards the employees.
If there are no trade unions, then these obligations must be fulfilled towards the work council or each individual employee.
The notification process is not very time-consuming and there do not appear to be any criminal law consequences.
Data protection and data security
Protection of personal data, which is defined as any information relating to an identified or identifiable natural person, is regulated by Act No. 101/2000 Coll., on Protection of Personal Data, as amended, which implements:
Directive 95/46/EC on data protection.
Directive 2002/58/EC on the protection of privacy in the electronic communications sector.
Directive 2000/31/EC on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market.
The supervisory body for compliance is the Office for the Protection of Personal Data (Office).
In relation to outsourcing, the following issues may arise:
Identifying whether the supplier qualifies as a controller or co-controller (which may have an impact on notification requirements to the Office).
The supplier's (processor's) ensuring of the confidentiality of data and other legal requirements.
International transfer of personal data.
Before the contract can specify the obligations concerning data protection, the structure and key arrangement relating to data processing must be clearly set. Depending on whether the supplier provides its services only as a processor or as at least a co-controller, the contractual documentation must deal with appropriate representations and warranties.
For a processing relationship, the customer as a data controller remains fully responsible for data privacy compliance, and the data processing agreement must explicitly state the scope, purpose, period of time for which the agreement is being concluded, and give sufficient guarantees by the data processor for the technical and organisational measures provided to protect the personal data. Any obligations towards data subjects ordinarily fulfilled by the controller, such as notices or complaint handling, must be specifically mentioned in the processing agreement in order to:
Pass these obligations to the supplier.
Be able to prove to the Office that the customer is not omitting any of its statutory duties.
If the supplier acts as a data controller or a co-controller, it must assess whether notification requirements, taking into account the nature and purpose of the processing and the type of data collected/processed, must be fulfilled.
Confidentiality of banking data is protected by Act No. 21/1992 Coll., on Banks. The CNB has adopted rules on outsourcing in the financial sector (see Question 2, Financial services).
Confidentiality of customer data
Suppliers processing customer data, including personal data, are responsible for ensuring confidentiality in the same manner as the customer. In addition, if a processor becomes aware of a breach of law by the controller, the processor must notify the controller without delay and terminate the processing of personal data. If the processor fails to do so, the processor and the data controller may be jointly and severally liable for any damage incurred by the data subject.
Data subjects, in addition to their damage claims, can also request:
The processing of personal data to cease.
Personal data to be liquidated.
Service specification and levels
Service level specification is key to customer satisfaction. In absence of any specifically agreed service levels, the supplier must provide services duly and in a timely manner. However, this specification does not provide a sufficient level of security for either party in an outsourcing contract.
Set service levels are usually the basis for key performance indicators, contractual penalties, damage claims and termination rights. They often include:
Reaction times and deadlines for removal of defects.
Standard change requests.
A set procedure for non-performance.
Service level credits give the customer the right to lower fees if the supplier does not perform within the agreed service levels. Usually, certain percentages are deducted from the fees owed, depending on the level and materiality of non-performance.
Charging methods and key terms
Flexible prices are usually based on actual accrued time or other units. This approach is not particularly common, as it does not directly guarantee financial savings for the customer, which is often the main motivation for outsourcing.
Combination of fixed- and flexible-price models
Fixed- and flexible-price models are regularly combined according to the nature of the service. Typically, a fixed price is chosen to provide the basic service, and additional services are charged on a flexible basis.
Both price models often include benchmarking aimed at keeping the price at or under market level for long-term outsourcing contracts.
Charge variation mechanisms
In selected cases, a price variation mechanism is adopted in outsourcing contracts. In most cases, this relates to a phased lowering of unit/fixed price over time as the supplier's initial costs are compensated.
The supplier can also be reimbursed for its initial costs directly. However, this is only the case where either:
The large amount of initial costs would result in less advantageous conditions for the supplier, and therefore a smaller group of possible suppliers to compete in the tender.
The supplier has a strong/unique market position.
Otherwise, customers seem to prefer to spread the reimbursement over a time period.
Adjustment and benchmarking provisions
As the fair market value of the service can change significantly over time, the parties can agree to conduct benchmarking processes. The first instance of benchmarking is usually postponed for several years of the service, to provide the supplier with a sufficient level of certainty and, at the same time, to save costs.
Benchmarking is carried out either:
By asking an expert to provide a professional opinion.
Through a market price comparison with competitors of the supplier.
Benchmarking requires an exact definition of the services and price structures to be compared, and also a negotiation mechanism in case of the non-agreement of either party with the results.
Customer remedies and protections
Statutory warranties apply to a faulty and/or untimely performance of either essential or non-essential obligations. A claimant generally has the right to:
Demand performance and/or compensation or damages (including lost profit).
Rescind the contract in the case of:
non-essential breaches; and
essential breaches not claimed immediately subject to a notification and a grace period).
Terminate the contract (in the case of contracts for an unlimited period of time, unrelated to the other party's breach).
Where there is a termination for non-performance of one element of the outsourcing agreement, the validity of the rest of the contract depends on whether:
The various obligations were meant to be interdependent.
The breach in question would be considered a material breach of the entire contract.
The purpose of the contract itself was frustrated.
Appropriate security methods can include:
A bank guarantee for performance claims or warranty claims.
A parent company guarantee.
Appropriate insurance coverage.
Change request clauses
Change request clauses, including the (fairly common) right to choose to limit the performance under the contract, provide the customer with the necessary level of confidence that it will be given, and will pay for, only the services that it needs.
Specific termination provisions
Contract documentation typically provides for:
More detailed specification of the grounds for termination/withdrawal.
Custom-drafted escalation and termination procedures, including the process of compensation of the parties in the case of contract termination.
The outsourcing contracts provide for contractual penalties linked to the breach of key obligations of either party, including the SLAs.
Warranties, indemnities and insurance
In most cases, the parties negotiate case-specific warranties.
Typical warranties given to the customer (and, at the same time, not implied by law) include:
Warranties concerning the assets and goods necessary for the outsourcing.
Warranties related to the reverse transfer of the transferred assets/staff in the event of termination.
A warranty that the services will be provided with reasonable/best possible skill and care.
A warranty of no change of control of the supplier.
Generally, the parties include indemnification against third-party claims (that is, as a result of breach of IP rights).
The permissibility of the limitation of liability is disputed. Typical provisions include:
Limitation of liability for lost profit.
Setting a specific amount of total damages foreseeable by the parties at the time of the execution of the contract (which is the statutory limit of claimable damages).
All other limitations could be considered null and void, considering the current case law.
The following types of insurance are readily available in the Czech Republic:
Third-party liability, including for professional indemnity risks and fraud.
All of these types of insurance are readily available in the market. All are commonly used, but some are used by a slightly smaller share of clients (for example, business interruption and/or professional indemnity risks insurance).
Term and notice period
Czech law does not impose a minimum or maximum notice period. The supplier and customer can agree on notice periods.
The statutory time frame required for notice periods in the case of withdrawal for a non-material breach must be reasonable (that is, sufficient time to allow the party in breach to remove the breach).
Termination and termination consequences
The statutory grounds for termination are as follows:
Termination for a material breach (no grace period required).
Termination for a non-material breach (grace period required).
Frustration of the purpose of the contract, if specifically agreed by the parties.
Termination of a contract for an unlimited period of time (without reason, subject to three calendar months' prior notice).
Generally, Czech law provides only limited protection of know-how (in comparison to the well-established protection of trade secrets). Therefore, it is highly advisable to specifically agree on the transfer of know-how post-termination.
Either party can also make use of confidentiality agreements and/or of trade secret protection.
Liability, exclusions and caps
See Question 27.
See Question 27.
Transfers of assets to the supplier?
Transfers of employees to the supplier?
Value added tax (VAT) or the equivalent sales tax on the service being supplied?
Other significant tax issues?
Transfers of assets to the supplier
Tax liabilities relating to the transfer of assets to the supplier depend on whether the outsourcing is structured as an asset deal or a share deal.
Asset deal. In an asset deal, the sale of the assets usually affects the customer's income tax liability. Profit from the sale of assets is subject to 19% corporate income tax. If the assets are transferred to an associated enterprise, the purchase price must follow the arm's-length principle.
A real estate transfer tax of 3% arises on real property transfers.
Share deal. In a share deal, the tax implications depend on the customer's legal form and holding period.
If the seller is a Czech joint-stock company, a limited liability company, or a co-operative, the capital gains are exempt if both:
The Czech subsidiary has the legal form of a joint stock company, a limited liability company or a co-operative.
The parent company holds at least a 10% share in the registered capital of the subsidiary for at least 12 months uninterruptedly.
Reorganisation. Transfer of assets on the basis of reorganisation (such as division or spin-off) is usually tax-free.
Transfers of employees to the supplier
The transferee is responsible for the tax responsibilities to the transferred employees.
The employer must withhold income tax, and social security and health insurance contributions, from employees' salaries and transfer them to the respective authorities.
VAT or sales tax
Due to the nature of the services provided by the supplier, VAT usually applies. For the customer, payment for the services or goods being supplied is subject to the applicable rate of VAT. The standard rate is 20%.
If the customer's business is fully taxable, the customer can recover the VAT in full. However, if the customer's business is not fully taxable, the VAT is not fully recoverable. Generally, certain services provided by banks, financial institutions and insurance companies are exempt from VAT. In these cases, the outsourcing can give rise to a significant tax cost, especially in the financial services and insurance industries. The VAT cost can be eliminated by the VAT grouping available in the Czech Republic.
Czech VAT also applies to services. Aside from VAT (see above, VAT or sales tax), there is no significant service tax on an outsourcing in the Czech Republic.
There is no stamp duty in the Czech Republic.
Companies subject to Czech corporate income tax are liable to pay income tax at 19%.
There are no other significant tax issues.
Havel, Holásek & Partners s.r.o.
Qualified. Czech Republic
Areas of practice. M&A/corporate law; IP/IT; media and telecommunications; competition and EU law.
- Advised a mobile telecommunications company on the acquisition of a fixed-line business and related transitional services agreements.
- Advised a public sector hospital on an outsourcing project for the construction and operation of new accommodation facilities.
- Advised a number of state authorities on the outsourcing of IT services.
- Advised a UK telecommunications company on the outsourcing of telecommunication services for its customers in the Czech Republic.
- Advised an international IT company on its bid in connection with a major e-government project.