In response to the current situation of the coronavirus pandemic, the Czech government has approved a number of measures aimed at helping economic operators bridge the state of emergency. These are primarily Liberation Package I and II (MoF), the “Antivirus” program (MLSA) and the COVID loan program (MIT and CMGDB). In the following article, we assess not only all these programs, but also the impact of coronavirus on leases, supplier contractual relations as well as the related possibility to claim compensation from the state.
The current pandemic has a significant impact on trade in our country and abroad, and the behaviour of consumers is changing. According to O2 eKasa's company analysis, the largest drop in sales occurred in the following industries:
- Retail of clock, watches and jewellery - 100%
- Manufacture of clothing and sale of footwear - 100%
- Cultural, entertainment and recreational activities - 98%
- Clothing retail - 96%
- Accommodation, catering and hospitality - 96%
On-line sales can be a significant part of the revenue for retail businesses. In the current situation, there are already demonstrable increases, often compared, in terms of sales, with the most successful Christmas sales period and mainly in the segment of groceries, medicine, drugstore, household goods, cosmetics, fashion and entertainment. In e-commerce and retail, many new projects have also emerged in response to the situation, such as the Rohlik.cz online supermarket introduced the Rohlík mini, Suchý Rohlík and Rohlík Bistro projects in recent weeks.
Below, you find an overview of the most important government approved measures related to coronavirus.
The "Antivirus" program
The government approved further proposals by the Minister of Labour and Social Affairs Jana Maláčová (ČSSD) for support of employees and employers under the “Antivirus” program.
The state will compensate companies for lost financial costs paid through the Labour Office of the Czech Republic. This measure will help employers to better manage the current situation and will not be forced to undergo possible redundancies.
So far, the "Antivirus" program in its approved form contains only these two modes:
Mode A - obstacle type:
- In the case of quarantine, the employee receives a wage compensation of 60% of the average reduced earnings.
- In the event of closure or restriction of operations by government decree or emergency measure of the Ministry of Health, the employee receives wage compensation equal to 100% of the average earnings.
- The state provides the Contribution to employers in the amount of 80% of the paid wage compensation, including contributions / up to a maximum of CZK 39,000.
Mode B - obstacle type:
- Obstacles to work on the part of the employer due to quarantine or childcare for a significant number of employees (30% or more of the employer's employees) - the remainder receive 100% of their average earnings.
- Restricting the availability of inputs (raw materials, products, services) necessary for the employer's activity, with the employee receiving a wage compensation of 80% of the average earnings.
- Reducing the demand for services, products and other products of the company, with the employee receiving wage compensation of 60% of the average earnings.
- Contribution to employers is 60% of paid wage compensation, including contributions / up to a maximum of CZK 29,000.
The contribution will be provided specifically for employees who have not been given termination notice by the employer, and are still their employees when they submit reconciliation, with the exception of cases of breach of work obligations pursuant to § 52 g) to h) of the Labour Code.
At the same time, the contribution will be provided only for employees in employment, i.e. not employees working under agreements concluded outside employment or statutory bodies. The program is set to run until April 30, 2020, with an extension to May.
Contributions will be provided to cover costs from March 12, 2020, when the state of emergency was declared. If the Senate approves and the President signs an amendment to the Employment Act, the indebtedness towards public institutions will not be a compulsory term to the contribution.
Nursing allowances
In a state of legislative emergency, a law was passed containing the extension and prolongation of nursing allowances paid to employees. Thus, parents of children aged 10-13, or children older than 10 years dependent on the help of another person, according to the Law on Social Services, are also entitled to nursing care if the facility that cared for them is closed. There is also an extension of the support period for nursing, which will cover the entire period of closure of school facilities.
The law confirms the right to nursing care even when the pre-school facility is closed and even if it was closed based on the decision of the founder. As part of the nursing allowance, parents will be able to take turns more than once, but not within one day. The days of child care will then be marked on the appropriate form; the nursing allowance will be paid to each parent separately on a monthly basis for the days of reported care.
On the contrary, the proposals of the opposition parties to adjust the amount of nursing allowance were not accepted, so the amount stays at the original level of 60% of (reduced) average earnings. It is currently the most advantageous for employers that their employees, who would otherwise not be able to do the work anyway, use the nursing allowance to the maximum extent possible and reduce the employer's costs.
Following the coronavirus pandemic and related restrictive measures, the government has approved direct financial aid to self-employed persons (self-employed persons), who are not entitled to common nursing benefits paid under sick leave. A self-employed person will be entitled to a contribution (subsidy) of CZK 424 for each day in quarantine / care of a family member under similar conditions as employees (care for a child under 13 or care for a dependent child under 26, dependent on the help of another person due to closure of school facilities).
In order for a self-employed person to be entitled to a financial allowance for the care of a child / children, another person may not draw the same or a similar compensatory allowance for the same child / children. In addition, other conditions will be applied (business activity as the main source of income, the absence of arrears of taxes and insurance premiums, the applicant is a small or medium-sized entrepreneur). Fulfillment of the conditions will be proved by a solemn declaration. The application is already available on the website of the Ministry of Industry and Trade and self-employed persons can submit it either electronically or by post. The self-employed will be entitled to this "nursing" for the entire period of emergency measures. Due to the regular payment, the application can be submitted every month, starting from March 12, to March 31, 2020, until the end of April this year.
Relief in taxes
As part of the so-called Liberation Tax Package I and II, the Government approved concessions in the area of filing tax returns and paying taxes.
All income taxpayers, who are normally required to file a tax return for 2019 by April 1, 2020, are according to the general waiver of penalties, allowed to file it until by July 1, 2020. The same extension applies to the payment of the tax surcharge.
This measure relieves especially self-employed persons, small and medium-sized companies (without a statutory audit of financial statements) and also high-income employees who are obliged to file a tax return due to solidarity tax increase. At the same time, all taxpayers who pay quarterly or half-yearly income tax advances have been fully waived the advance payment due this June.
A similar general relief was introduced in relation to the real estate acquisition tax. Tax returns, for which the three-month filing period expires between March 31, and July 31, 2020, can be filed without penalty and pay the related tax until August 31, 2020. Practically this applies to transfer real estate for which the transfer of rights benefit of the new owner in the Land Register carried out from December 1, 2019 to April 30, 2020.
Advances for road tax due by law on April 15, 2020 and July 15, 2020 will be possible to reimburse at the latest together with the third advance due on October 15, 2020 without any penalty.
Penalty fines for late filing of an inspection report worth CZK 1,000 (if filed late, but before the tax office sends a call – these were also waived in respect of fines incurred in the period March-July 2020. In other cases, delays in the payment of taxes administered by tax authorities (but not taxes administered by customs, such as excise tax) will be possible to apply for individual waivers of related sanctions. Interest on late payment will be fully waived by the tax authority if the taxpayer demonstrates the link with the emergency measures put in place to prevent a coronavirus pandemic. Under certain conditions, a fine for late filing of the tax return will automatically be waived for the same reason.
Self-employed persons were exempted from the obligation to pay advances for pension insurance and health insurance for the period March - August 2020 (attention - the exception does not apply to sickness insurance if the self-employed voluntarily participates in it). Insurance for this period will not be settled until the insurance overviews in the spring of next year. In addition, for the above six months of 2020, the payment of social and health insurance will be reduced by the amount of insurance premiums from the minimum assessment base, which represents a total relief of up to almost CZK 30,000.
In connection with the general relief in relation to the income tax return, self-employed persons will be able to submit the overviews of insurance for 2019 without any sanctions, within the extended period - until August 3, 2020. It will also be possible to pay supplementary insurance within this extended period without a penalty.
Another relatively significant income tax relief can be expected in the future. This will make it possible to obtain rebates for taxpayers, who will report a tax loss in 2020, due to the fall in financial results.
On the basis of government approved measures, which will, however, have to be reflected in tax legislation, it will be possible to apply the tax loss retroactively against profits reported in the previous two years (i.e. in case of tax loss for 2020 against tax base for 2018 and 2019. it will be possible to recover a certain amount of income tax paid in the past (by filing an additional tax return for the preceding years) in the spring or summer of next year.
Possibilities of financing operating costs with state support
Another form of aid for entrepreneurs, whose economic activities are limited as a result of the occurrence of Covid-19 and related preventive measures, is/are government loans or commercial loans guaranteed by through COVID program. For the time being, the financial sources released in the programs launched so far, are intended only for applicants belonging to the Small and Medium Enterprise category (less than 250 employees, annual turnover not exceeding EUR 50 million or annual balance sheet total not exceeding EUR 43 million), not large entrepreneurs.
On March 16 the COVID I program was launched, within which it was possible to apply for an interest-free loan for operational financing directly from the state-owned Czech-Moravian Guarantee and Development Bank (CMGDB) in the amount of CZK 500,000 up to CZK 15 million, up to 90% of eligible expenditures, with a maturity of 2 years, including the possibility of deferred repayment for up to 12 months. Given the volume of applications, which during the first week significantly exceeded the allocated five billion crowns and capacity CMGDB, the acceptance of applications to the COVID I program was on March 20, 2020 suspended.
Beginning on April 2, the first round, and on April 20, the second round of submission of applications for the COVID II program was launched, which will run gradually in several waves. CMGDB is the guarantor of commercial loans from CZK 10,000 up to CZK 15 mil., with a maturity of 3 years, up to 80% of the loan principal. CMGDB can also contribute financially to the payment of interest, up to CZK 1 million. A total of CZK 5 billion is allocated to the program, specifically from the EU Structural Funds under the OPPIK, which has an impact on the range of applicants, which is limited to entrepreneurs applying for financing their activities outside the capital city of Prague.
It is necessary to apply for the draw down from your existing or other commercial bank with which CMGDB has concluded an amendment to the co-operation agreement in the EXPANSION program for the provision of COVID II guarantees. It is necessary to fill in the application form including appendices and then ask CMGDB to issue a guarantee and a contribution for interest payments. Detailed instructions on how to apply for a guarantee are published on the CMGDB website. The loan can be used again for operational financing, i.e. specifically for employees’ salary, financing of inventories, payment of supplier invoices or acquisition of small tangible and intangible assets. The second round will follow within a few days.
On April 21, the first round of applications for the COVID Prague program for entrepreneurs and small and medium-sized enterprises in the City of Prague will be launched. The program was prepared by CMGDB in cooperation with the Prague City Hall which allocated CZK 600 million to support Prague entrepreneurs. The program will provide guarantees totalling CZK 1.9 billion and its parameters are the same as COVID II (guarantee amount up to CZK 15 million and 80% of principal, guarantee period of 3 years, financial contribution to pay interest up to CZK 1 million).
The CMGDB is currently preparing another phase of advantageous loan financing for the COVID III program, which will again be aimed at Prague entrepreneurs and within which large companies should also be able to apply for a guarantee. Negotiations are currently underway between the government and commercial banks. Precise information should be released in the coming days, the program should be launched at the turn of April and May.
Relief from administrative burdens in connection with electronic sales registration (EET)
Retailers were obliged to introduce electronic sales records starting March 1, 2017. Originally, the obligation was to keep records of all payments received, regardless of whether they were non-cash or cash payments, only cashless payments were subsequently excluded. However, most retail chains continue to record both cash and card payments, due to less administrative and operational demands in a unified approach within the existing technical solution.
In the accelerated regime, a special one-off law with time-limited effects passed through the legislative approval wheel, which in fact suspends the obligation to register sales for entities falling into all phases of EET, i.e. including retail, for the duration of the emergency and for the following three months from its termination. In practice, this means that entrepreneurs in this period do not have to send sales data, issue EET receipts, or post an information notice about the obligation to record sales at the establishment (at the place of acceptance of payments). Please note, however, that the obligation to issue proof of purchase upon request under the Consumer Protection Act continues to apply.
The impact of coronavirus on leases
Commercial leases are a specific area in which landlords and tenants negotiate rights and obligations often differently from the provisions of the Civil Code. The Lessee is obliged to pay the rent and payments for other services related to the lease, provided by the Lessor during the lease period. Delay in the payment of rent is considered a breach of the lease by the lessee and the landlord is in this case entitled to apply the agreed sanctions, in particular to apply the contractual penalty or terminate the lease.
In most lease agreements, certain regulations of the Civil Code, which could benefit the lessee, are also excluded. In particular, a change of circumstance clause, which allows the lease to be terminated prematurely, is often excluded, if there is a change in circumstances that creates a particularly gross disproportion in the rights and obligations of the parties by disadvantaging one of them. Excluded is also the institute of the so-called subsequent impossibility of performance within the meaning of Section § 2006 of the Civil Code, where the obligation of contractual supply ceases due to the fact that the debt has become impossible to fulfill.
Any relief, especially from the payment of rent, can therefore be obtained by opening negotiations with the landlord and making an agreement. The following options can be considered: e.g. an agreement on rent rebates, the so-called rent-free period, or postponement of rent payments with the arrangement of a payment schedule.
In case the leased premises become temporarily unfit for use, the possibility of terminating the lease is agreed in some cases. Usually this will be the case, where the premises are unfit due to the landlord's misconduct or the condition of the building, and not due to the landlord's will (eg a pandemic). However, it depends on the specific negotiated terms and conditions. The notice of termination must be preceded by a written request from the lessee to remedy the defective condition, stating the deadline for rectification.
The Parliament of the Czech Republic is currently discussing proposals, where tenants of flats as well as non-residential premises could, after meeting the conditions, postpone the payment of rent:
Possibility of “deferment” of rent payments for business premises
It applies to the lease and sublease of premises, if the purpose of the lease is the operation of a business or tenancy.
Pursuant to the law, the landlord could not unilaterally terminate the lease during the protection period (according to the wording of the draft law as of December 31, 2020) only because the tenant is in arrears with the payment of rent, if the delay occurred at the relevant time (from March 12, 2020 to June 30, 2020), mainly due to the reduction resulting from the emergency measure during the epidemic.
If the tenant does not pay all debts within the protection period, or if the tenant notifies the landlord that he will not pay the debts even during the protection period, the landlord will be entitled to terminate the lease with a notice period of 5 days.
The tenant would be obliged to submit documents to the landlord within 15 days from the date of the first delay, proving that the delay is the result of a restriction, resulting from an emergency measure during the epidemic, which makes it impossible or significantly difficult for him to run a business.
Possibility of “deferment” of rent for apartments
It applies to the lease and sublease of premises, if the purpose of the lease is to satisfy the tenant's housing needs.
Pursuant to the law, the landlord could not unilaterally terminate the lease during the protection period (according to the wording of the draft law as of the date of preparation of this document until December 31, 2020) only because the tenant is in arrears with the payment of rent if the delay occurred at the relevant time (from March 12, 2020 to July 31, 2020), mainly due to the reduction resulting from the emergency measure during the epidemic.
If the lessee fails to pay all the debts during the protection period, or if the lessee declares that he will not pay the debts, or if it is beyond doubt that the lessee will not pay the debt, the lessor will be entitled to terminate the lease without notice.
In both cases, however, the landlord would be entitled to demand the cancellation of the lease after the abolition of the state of emergency and, at the same time, after circumstance due to which the tenant is unable to pay the rent, if it cannot be fairly required as an example of this situation a situation where the landlord himself would fall into a state of emergency).
We will continue to monitor the state of adoption of laws and inform you if they are passed.
The impact of coronavirus on supplier contractual relations
Failure to fulfill obligations due to force majeure
The state of emergency can be classified as a case of force majeure, i.e. unforeseeable obstacles, whose occurrence cannot be influenced in any way (however, not everyone can invoke force majeure, especially in the case of contractual relations initiated in the near past, the question of predictability needs to be evaluated). Thus, the requirements of § 2913 (2) of the Civil Code can be fulfilled, according to which a person who breaches contractual obligations (e.g. is in delay with the delivery of goods, provision of services, etc.) can be exempted from this obligation, if he proves that he was prevented from fulfilling that obligation by an "extraordinary unforeseeable and insurmountable obstacle, irrespective of his will". An obstacle may be the lack of supplies, products and other items needed to perform the contract, which our supplier could not supply for the same reasons, the lack of quarantined employees, etc.
Cases of obligation extinguishment due to impossibility to fulfill it
The Civil Code also thinks of a situation, where you commit to performance that becomes impossible after the contract is concluded. In such a case, your obligation due to the impossibility of performance expires and you are not obliged to act under the contract. However, payment is not impossible, if the debt can be met under more difficult conditions, at a higher cost, with the help of another person or after a specified period.
Cases where delays due to coronavirus measures can be regarded as a consequent impossibility of fulfillment are and will generally be rather limited and the use of this institute will be rather rare in the context of rental relationships. However, it always depends on the particular relationship and its contractual regulation.
Similarly, the rule described above applies in a situation where it can only be partially fulfilled. For example, if a contract obliges regular deliveries that you are not able to meet during an emergency, there may be two situations, depending on whether or not continuation of supply is meaningful to the business partner after the obstacle has been removed. It is thus possible to imagine (and Civil Code assumes this option) a partial extinguishment of the obligation or extinguishment of the obligation in the whole scope of future performance (e.g. deliveries).
Resumption of negotiations on contract terms
If there is a substantial change in circumstances between the parties to the contract that creates a particularly gross disparity in the rights and obligations of the parties to the contract, either by disadvantaging one party, disproportionately increasing costs, or disproportionately reducing the value of the subject matter, party to the renewal of negotiations on the contract and hence its parameters.
The circumstance envisaged by § 1765 of the Civil Code would, in the present situation, in particular in most lease relationships, be the 'main weapon' of tenants in order to limit or reduce their regular rent payments. Unfortunately, in the common practice, the requirement to exclude this provision is a frequent condition on the part of the lessor to conclude a contract. In case that the provision is not excluded, it is also essential to assess whether the party could expect a material change in circumstances and whether this occurred after the conclusion of the contract or transpired after the conclusion of the contract.
It is highly advisable to recommend a revision of the contracts in question, as it is no exception that e.g. shopping centers have differently set up and to a large extent individualized contractual relationships with individual tenants, depending on their importance, size or lease period.
The situation with state claims – damage compensation
Compensation according to the Crisis Act
Pursuant to Act No. 240/2000 Coll., On Crisis Management and on Amendments to Certain Acts (the Crisis Act), as amended (“the Crisis Act”), the state is obliged to compensate for damage caused to legal and natural persons in causal connection with crisis measures.
The state's liability and obligation for damage compensation are based on the following prerequisites:
- the existence of a crisis measure;
- damage; and
- the causal link between the crisis measure and the occurrence of damage.
The state can be relieved of the liability for damage if it proves (the burden of proof lies on it) that it was the injured party, who caused the damage.
For this purpose, we recommend recording and storing all relevant materials, invoices and damage in detail, and quantify and record lost profit on an ongoing basis.
Claims for damage compensation will have to be filed in writing with the competent crisis management authority, the Ministry of the Interior, within 6 months from the time the victim became aware of the damage, no later than 5 years after the damage occurred, otherwise the right expires.
Compensation in accordance with the Public Health Act
Considering the fact that the crisis measures have not been implemented on the basis of the Crisis Act since March 23, 2020, but newly under Act No. 258/2000 Coll., On Public Health Protection, as amended (the "Act on Public Health Protection"), it may seem that the Government intends to exclude its liability for damage caused by the Crisis Act as described above.
This means that it is not clear whether the potential damage incurred by March 23, 2020 will need to be recovered under the Crisis Act and the damage incurred since March 24, 2020 will not be recoverable at all, or the damage will need to be recovered under Act No. 82/1998 Coll., for damage caused by an incorrect official decision or procedure, as amended (“State Liability Act for Damage”).
The Public Health Protection Act, on the basis of which extraordinary measures have been issued since 24 March 2020, does not expressly provide for compensation for damages.
It is also questionable, whether the same measure may be promulgated twice, each time under a different law. There could be a situation where in the period from March 16, to March 24, 2020, the damage would be compensated and then no longer, in our opinion such a situation would be manifestly unfair and discriminatory. Moreover, Constitutional Act 110/1998 Coll. on the Security of the Czech Republic, as amended, according to which the government declared an emergency situation, refers only to the Crisis Act and should therefore take precedence over the Public Health Protection Act. Also, according to the wording of the Crisis Act, all organizational or technical measures designed to deal with a crisis situation or to eliminate its consequences are considered to be crisis measures under this Act.
However, if the application of the Public Health Act were really justified, the question would be whether the Ministry of Health of the Czech Republic exceeded its competence when issuing the relevant measures and there would be no possibility of seeking compensation under the State Liability Act.
However, at this point in time, it is not possible to determine with certainty how it will be able to claim damage compensation from the State. As mentioned above, there are two possibilities, namely to proceed in accordance with (i) the Crisis Act or (ii) the State Liability Act.
Insurance contracts and COVID-19
The Czech government has been forced to take many measures against the spread of coronavirus, resulting in a significant reduction, limitation or even complete interruption of business activities. Many companies can now come under financial pressure and will look for various options for compensation for damages incl. insurance. For example, a number of companies have business disruption insurance, but they do not suffer any material damage (fire, etc.) as a result of COVID-19, which is the standard condition of an insured event in property insurance. In the case of standard property insurance schemes with business interruption insurance, in most cases it is unlikely that the pandemic coverage will be insured. Most insurance contracts never intended to insure pandemic damage. This is a risk for which insurers recognize that they cannot afford to insure it. Potential pandemic insurance can be compared to war risk insurance - a type of risk that the world market could not fully insure.
However, the situation is not entirely hopeless, each contract is tailor-made, so it is important to go through it carefully and find out the possibilities. At the same time, it is not possible to say now, how exactly the insurance companies will approach the solution in terms of damage. The situation changes every moment and every client is specific, so it will be shown in the coming days and months how these non-standard cases will be dealt with.
At the same time, we can say that the current situation on the functioning of the insurance industry has not changed anything, but has also brought some improvements. As most institutions now operate remotely, client service has moved to a contactless level, such as email, phone lines, or mobile applications, and works very quickly. Also, many services can be reordered or serviced online without having to visit a branch. Insurance companies are also thinking about the security of their clients - it is now possible to receive green cards for MTPL insurance electronically, both for signed contracts and for example, for fleet insurance of vehicles. Until now, this has only been possible with the payment of insurance, so now people's contact is minimized. And also those who find themselves in a difficult situation, insurers try to accommodate and do everything to make it easier for clients, so it is always a good idea to contact the insurance administrator who has the most up-to-date information and can help you.
Authors:
ASB Czech Republic: Klara Cowan, Jana Pytelkova Svobodova and Nela Paradjina
CEE Attorneys: Martina Schützová and Radka Slaměníková
Renomia: Matthias Charvat
About companies:
ASB Group is a dynamic consulting company operating in key CEE countries: the Czech Republic, Poland, Slovakia and Hungary. It specializes in setting up companies, accounting and reporting, tax consultancy, transaction consultancy, corporate services and, last but not least, management of payroll and HR agenda.
CEE Attorneys, s.r.o. is an international law firm founded in Prague in 2015, with offices in eight European countries and exclusive partners in China, India and Japan. CEE Attorneys is continually expanding into new markets mostly in Central and Eastern Europe, with a goal to cover all European jurisdictions.
RENOMIA is an international company providing insurance, risk management and finance services. It has its own branches in 7 European countries and thanks to its partners it operates practically all over the world.