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U.S. Department of State

Diplomacy in Action

2011 Investment Climate Statement - Czech Republic


2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011
Report
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Maintaining an open trade and investment climate has been a key element of the Czech Republic's efforts to strengthen its market economy. As a member of the European Union, with an advantageous location in the center of Europe, relatively low cost structure and a well-qualified labor force, the Czech Republic is an attractive destination for foreign investment. The U.S. has been the fifth largest source of FDI into the Czech Republic since 1993. Prior to its EU accession in 2004, the Czech government harmonized its laws and regulations with those of the European Union.

The Czech economy grew an estimated 2.3 percent in 2010, buoyed by the strong German economic recovery. While the conservative, inward looking Czech financial system has remained relative healthy, the small, open, export-driven Czech economy remains very sensitive to changes in the economic performance of its main export markets, especially Germany. When Western Europe and Germany fell into recession in late 2008, demand for Czech goods plunged, leading to double digit drops in industrial production and exports. As a result, real GDP fell 4.0 percent in 2009, with most of the decline occurring during the first quarter. Real GDP has slowly recovered since, with positive quarter-on-quarter growth starting in the second half of 2009. Estimates for economic growth in 2011 range from 1.2 percent (Czech National Bank) to 2.8 percent (OECD), depending on assumptions regarding growth in Eurozone countries and the impact of Czech government austerity measures.

The Czech economy has not been directly affected by the debt crises of several southern EU states. The government instituted a number of cost cutting measures in late 2010, designed to reign in the budget deficit that had reached 5.9 percent of GDP at the end of 2009, with the goal of reducing the deficit to below 3 percent of GDP by 2013. The budget deficit was roughly 5.2 percent of GDP at the end of 2010, while government debt was expected to reach nearly 40 percent of GDP, well below the Euro accession criteria of 60 percent or below. The average annual inflation rate increased to 1.5 percent in 2010 (from 1.0 percent in 2009). The unemployment rate reached 9.6 percent at the end of 2010, according to the methodology used by the Ministry of Labor and Social Affairs (according to Eurostat's methodology which is used to compare unemployment levels between EU states, the unemployment rate was 7.1 percent in November 2010). The auto industry remains the largest single industry and together with its suppliers accounts, by some estimates, for as much as 20 percent of Czech manufacturing. The Czech Republic produced more than a million cars for the first time in 2010, over 80 percent of which were exported.

The Czech government continues to offer incentives for certain types of foreign direct investment. Legally, foreign and domestic investors are treated equally. Intellectual property rights violations at open-air markets on the borders of Germany and Austria remain a bilateral issue, which the Czech government has begun to address. After almost a 25 percent decline in 2009, U.S.-Czech trade rebounded in the first three quarters of 2010 to reach 2008 levels. The U.S. is the 14th largest trade partner to the Czech Republic, and the 13th largest market for Czech exports. According to the World Bank's 2011 "Doing Business" report, the Czech Republic is the 63rd best place in the world to do business.

Openness to Foreign Investment

The Czech Republic has been a recipient of large amounts of foreign direct investment (FDI), which has helped spur economic growth, create new jobs, raise wages and increase domestic consumption. GDP per capita in 2009 was 82 percent of the EU average.

As a small, open, export-driven economy, the Czech Republic remains sensitive to economic downturns in Western Europe, especially in Germany, the Czech Republic's largest trading partner. Over 80 percent of Czech exports go to fellow EU members with roughly a third (31.5 percent) going to Germany alone. The Czech crown (CZK) has been on a general appreciation trend vis-a vis the Euro and U.S. Dollar since 2001 peaking in mid 2008 before fluctuating widely in 2009. The crown settled down somewhat in 2010, although the crown's relative volatility has prompted calls from some in the business community for the quick adoption of the Euro. The Eurozone's recent economic difficulties, however, have undermined public support for Euro adoption, and the government has opposed setting a target date for adopting the common currency. As a practical matter, the Czech Republic is unlikely to meet all the criteria for Euro adoption until 2015-2016, at the earliest.

Some unfinished elements in the economic transition, such as the slow pace of legislative and judicial reforms and the uneven enforcement of contracts by the Czech courts, are continuing obstacles to investment, competitiveness, and company restructuring. The Czech government has harmonized its laws with EU legislation and the "acquis communautaire." This effort has involved positive reforms of the judicial system, civil administration, financial markets regulation, intellectual property rights protection, and many other areas important to investors. While there have been many success stories involving American and other foreign investors, a handful have experienced problems, mainly in heavily regulated sectors of the economy, such as the media and aerospace. Investors also complain about difficulties in enforcing contractual rights, including security interests, and the general unpredictability of the legal system. The slow pace of the courts is often compounded by judges' lack of familiarity with commercial or intellectual property cases. Reform of the system for registering companies is still needed. A 2007 bankruptcy law addressed some of these issues, although many judges are still not fully versed in the law. Concerns about corruption have been voiced by foreign and domestic businesses alike. Other long term challenges include dealing with a rapidly aging population, an unsustainable pension and health care system, and diversifying the economy away from an over-reliance on manufacturing (especially the auto sector) toward a more high-tech, services-based, knowledge economy.


Measure

Year

Index

Rank

TI Corruption Index

2010

4.6

53

Heritage Economic Freedom

2010

69.8

34

World Economic Forum’s Global Competitiveness Report

2010-2011

4.57

36

World Bank Doing Business

2011

---

63

The Czech Republic is a multi-party, parliamentary democracy with a population of approximately 10.5 million. Legislative authority is vested in the bicameral parliament, consisting of a Chamber of Deputies (Poslanecka snemovna) and Senate (Senat). The president, elected every five years by parliament, is head of state, and appoints a prime minister from the majority party or coalition in the Chamber of Deputies. In February 2008, the bicameral parliament elected Vaclav Klaus as president for a second term. Elections for the Chamber of Deputies were held in May 2010, resulting in a coalition government of three center-right parties -- the Civic Democratic Party (ODS), TOP 09, and Public Affairs (VV) -- led by Prime Minister Petr Necas (ODS). The new government has made fiscal responsibility and combating corruption its main priorities. All mainstream political parties welcome foreign investment.

Organizational Structure of Investments

Foreign investors can, as individuals or business entities, establish sole proprietorships, joint ventures and branch offices in the Czech Republic. In addition, the government recognizes joint-stock companies, limited liability companies, general commercial partnerships, limited commercial partnerships, partnerships limited by shares, and associations. Bearer shares are widely used by Czech companies, often making it difficult to establish the true ownership of firms.

National Treatment

Legally, foreign and domestic investors are treated identically. Both are subject to the same tax codes and laws. The government does not differentiate between foreign investors from different countries, and does not screen foreign investment projects other than in the banking, insurance and defense sectors. Upon accession to the OECD, the Czech government agreed to meet (with a small number of exceptions) the OECD standards for equal treatment of foreign and domestic investors and limitations on special investment incentives. The U.S.-Czech Bilateral Investment Treaty contains specific guarantees of National Treatment and Most Favored Nation treatment for U.S. investors in all areas of the economy other than insurance and real estate. (See the section on the Bilateral Investment Treaty below).

Exempted Sectors

According to CzechInvest, the Czech agency tasked with attracting and facilitating FDI and promoting small and mid-sized enterprises, all sectors of the Czech economy are open to foreign investment. Investors in the banking, financial services, insurance and broadcast media sectors must meet certain licensing requirements. Some professions, such as architects, physicians, lawyers and tax advisors, require membership in the appropriate professional chamber. These licensing and membership requirements apply equally to foreign and domestic investors.

Privatization

According to the Ministry of Finance, more than eighty percent of the Czech economy is now in private hands after several waves of privatization of formerly state-owned companies since 1989. Privatization programs have been open to foreign investors. In fact, most major state-owned companies have been privatized with foreign participation. The government evaluates all investment offers for state enterprises. Non-transparent and unfair practices have been alleged in connection with some past or planned privatizations.

In 2009, the government began the privatization process for Czech Airlines (CSA). However, CSA's management sold several of its assets during the bidding process, making the tender less attractive to potential bidders. The airline industry's troubles during the global financial crisis also reduced interest in acquiring CSA. The result was a single-bidder tender, which the government ultimately decided to cancel, and CSA's privatization has been postponed indefinitely. In early 2010, the Parliament also voted for legislation prohibiting the privatization of Prague's Ruzyne Airport planned for later that year. In late November 2010, the Czech cabinet approved the merger of CSA and Prague´s Ruzyne Airport under a single holding company Czech Aeroholding. No major privatizations are planned for 2011.

Conversion and Transfer Policies

The Czech crown is fully convertible. Imports or exports equal to or exceeding 10,000 Euro (approximately CZK 244,000 or USD 13,000) in cash, travelers' checks, money orders, securities or commodities of high value (such as precious metals or stones) must be declared at the border.

The U.S.-Czech Bilateral Investment Treaty guarantees repatriation of earnings from U.S. investments. A 15 percent withholding tax is charged on repatriation of profits from the Czech Republic. This tax is reduced under the terms of applicable double taxation treaties. For instance, under the U.S. treaty, the rate is 5 percent if the U.S. qualifying shareholder is a company controlling more than 10 percent of the Czech entity, and 15 percent in other cases. There are no administrative obstacles for removing capital. The law permits convertibility into any currency. The average delay for remitting investment returns meets the international standard of three working days.

Expropriation and Compensation

The Embassy is unaware of any expropriation of foreign investment since 1989. Government acquisition of property is done only for public purposes (similar to property condemnation in the United States for public works projects) in a non-discriminatory manner, and in full compliance with international law. It is unlikely that any investor losing property due to a governmental action would not receive full compensation.

Another issue of concern to foreign investors in the Czech Republic is restitution. In 1990 and 1991, the federal government of Czechoslovakia enacted various laws aimed at restitution and compensation to those people whose property was confiscated by the communist regime during the period of 1948-1989. Under the restitution laws, persons have the right to claim compensation for property taken from them by the communist government. Most claims for restitution of non-agricultural property had to be filed by October 31, 1991, and agricultural property by December 1992. There was an additional open season for claims in 1998, when the condition for permanent residency of claimants was abolished but deadline for these claims expired on July 8, 1999. In 1994, a law was approved which allowed for restitution or compensation of Jewish private property confiscated by the Nazis in 1939-1945. The deadline for filing claims expired on Jan 1, 1995. In 2000, another law to alleviate some of the property damages during the Holocaust entered into force. It amended the restitution laws allowing the state, subject to certain conditions, to return communal Jewish property, private works of art and land illegally seized by the Nazis to entitled Jewish communities and individuals. While the claims deadline for land expired in 2001, claims for art can be filed indefinitely.

Although deadlines for submitting restitution claims are now officially past, it is nevertheless important that foreigners seeking to invest in the Czech Republic first ensure that they have clear title to all land and property associated with potential projects. The process of tracing the history of property and land acquisition can be complex and time-consuming, but it is necessary to ensure clear title. Title insurance is not yet offered in the Czech Republic. Investors participating in privatization of state-owned companies are protected from restitution claims through a binding contract signed with the government.

Dispute Settlement

The Czech commercial code and civil code are largely based on the German legal system. The commercial code details rules pertaining to legal entities and is analogous to corporate law in the United States. The civil code deals primarily with contractual relationships among parties. When the Czech Republic was formed in 1993, the new Czech government maintained the previous commercial and civil codes. The laws have been extensively amended since then, but gray areas remain. The judiciary is independent, but decisions may vary from court to court. Commercial disputes, particularly those related to bankruptcy proceedings, can drag on for years, though bankruptcy legislation, which came into effect July 1, 2007, has accelerated the process somewhat. A streamlined Commercial Registry process took effect on July 1, 2005. While the legislation is an improvement over the previous system, which placed the registry process entirely in the hands of the courts, companies report that in practice the process is still quite time-consuming.

The 2007 bankruptcy law addressed important structural impediments such as the slow and uneven performance of the courts, weakness of creditors' legal standing, and the lack of provisions for corporate restructuring. According to local legal experts, the law shortened court proceedings and made them much more transparent, gave a stronger position to creditors and rendered the entire process more efficient. To this end, the law was given a more extensive and more accurate structure, the terms it uses have been made more exact, deadlines have been implemented and a number of crucial decisions have been passed directly to creditors.

The Czech Republic ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States in 1993. The U.S.-Czech Bilateral Investment Treaty provides for international arbitration of investment disputes with the state. The Czech Republic has ratified the New York Convention on the Recognition and Enforcement of Arbitral Awards. As a signatory of the latter convention, it is required to uphold binding arbitration awards in disputes between Czech and foreign parties. However, arbitration of disputes between two Czech corporations outside the Czech Republic is not permitted, even if the owners are foreign. Applications for enforcement of foreign judgments can be made to the Czech courts and will be determined in accordance with a bilateral recognition treaty, if any, or otherwise pursuant to the requirements of Czech law. Judgments rendered in other EU countries are enforceable in accordance with applicable EU regulations.

Performance Requirements and Incentives

According to current legislation, incentives are offered to foreign and domestic firms that invest in the manufacturing sector. The package for manufacturing projects includes relief from corporate taxes for up to five years, job-creation grants, re-training grants and opportunities to obtain low-cost land. Financial grants for job-creation and/or re-training are provided to those firms operating in regions where the annual unemployment rate exceeds the national average by at least 50 percent. A partial tax incentive is also available for expansion of an existing manufacturing investment. Research and development centers and business service centers in software development, shared services and high-tech repairs can be currently supported through EU structural funds (Potential Program, Innovation Program, and ICT and Business Support Services Program, Training Centers Program, and Eco-Energy Program).

The Czech Government currently is considering a new incentives legislative proposal to support research and development and business service centers through corporate tax relief of up to five years (i.e., same as for manufacturing). No new incentive legislation, however, has appeared since 2007. For more information contact CzechInvest, at incentives@czechinvest.org, or www.czechinvest.org.

Right to Private Ownership and Establishment

The right of foreign and domestic private entities to establish and own business enterprises is guaranteed by law in the Czech Republic. Enterprises are permitted to engage in any legal activity with the previously noted limitations in some sensitive sectors. Personal ownership of real estate by non-resident, non-EU foreign individuals is not permitted, but since January 1, 2002, foreign companies registered to do business in the Czech Republic and Czech branches of foreign entities may own real estate, other than agricultural and forest land. As of May 1, 2009 EU nationals can acquire non-agricultural real estate without limitation. U.S. and other non-EU nationals can purchase real property if they comply with temporary residence requirements. Czech legal entities, including 100 percent foreign-owned subsidiaries, may own real estate without any limitations.

On May 1, 2011, the Czech Republic will remove all restrictions on foreign ownership of agricultural land. In November 2010, the government amended the Foreign Exchange Act to remove restrictions on non-residential ownership as permitted by the European Union under the Czech Republic’s accession agreement. However, until May 1, 2011, foreign ownership will remain possible only through a Czech company (Ltd.) or with a valid Czech residency permit. This change applies equally to citizens from the European Union and from third countries. To prevent land speculation, the Czech government plans to amend related legislation to require that agricultural land be actively farmed by the purchaser for at least 36 months. Land speculation is expected to be minimal, as over 90 percent of agricultural land is privately owned, with the State owning approximately 7 percent.

Protection of Property Rights

Existing legislation guarantees protection of all forms of property rights, both intellectual and physical. Secured interests in land (mortgages) and in personal property are permitted. Government subsidy programs are making mortgage financing more accessible, and consumers are becoming more used to using both secured and unsecured forms of credit. According to American lawyers in the Czech Republic, enforcing judgments and foreclosing security interests in land and personal property can still be difficult in practice.

Major amendments to the Commercial Code came into force in 2001 that strengthen protection of creditors and minority shareholders. The law includes detailed provisions for mergers and places time limits on decisions by the authorities on registering of companies. New laws on auditing and accounting were also enacted. These laws include the use of international accounting standards (IAS) for consolidated corporate groups.

The Czech Republic is a signatory to the Bern, Paris, and Universal Copyright Conventions. In 2001, the government ratified the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Treaty on Performances and Phonograms. Domestic legislation protects all intellectual property rights, including patents, copyrights, trademarks, and semiconductor chip layout design. Amendments to the trademark law and the copyright law have brought Czech law into compliance with relevant EU directives and WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) requirements. Changes to the civil procedure code, effective January 1, 2001, provide for ex parte search and seizure in enforcement actions. The Czech Republic increased copyright protection for literary works from 50 to 70 years, effective December 1, 2000, and boosted the powers of the customs service and the Czech Commercial Inspection to seize counterfeit goods. A 2006 amendment to the Law on Civil Procedure made ex-parte search more accurate, clearer and easier to apply and enforce. The amendment also makes it easier to define and get back losses caused to owners by piracy. The new Criminal Code which came into effect January 1, 2010, increased maximum penalties for trademark, industrial rights and copyright violations from two to eight years.

Intellectual property rights (IPR) violations at markets on the borders of Germany and Austria are an issue of concern to U.S. companies and the U.S. government. The markets consist primarily of open-air stalls that sell a variety of trademark and copyright-infringing goods such as clothing, cigarettes and CD/DVD recordings. Starting in 2008, the Czech authorities significantly increased the scope and number of raids, resulting in a significant reduction in the amount of pirated goods openly available. Criminal and administrative penalties applied to IPR violators, however, continue to be infrequent, mild and lacking deterrent value. The Czech authorities have also yet to fully apply many of the legal tools available to them to combat IPR piracy, including the revocation of business licenses. The Embassy will continue to work with U.S. industry and Czech government officials to strengthen enforcement of intellectual property rights.

Transparency of the Regulatory System

Tax, labor, environment, health and safety, and other laws generally do not distort or impede investment. Policy frameworks are consistent with a market economy. All laws and regulations are published before they enter into force. Opportunities for prior consultation on pending regulations exist, and all interested parties, including foreign entities, can participate. A biannual governmental plan of legislative and non-legislative work is available on the Internet, along with information on draft laws and regulations (often only in the Czech language). Comments can be and are made by business associations, consumer groups and other non-governmental organizations, including the American Chamber of Commerce.

However, bureaucracy and unnecessary red tape remain a source of complaints by both domestic and foreign investors. Delays and allegations of corruption are common, especially in government procurement, and are of particular concern to foreign companies operating in the Czech Republic.

A November 2008 OECD peer-review of the Czech Republic confirmed that in content and principle Czech competition policy meets OECD standards. An Act on the Protection of Economic Competition entered into force in 2001, adopting rules consistent with EU competition policy as regards restrictive agreements, abuse of dominant position and merger control.

Efficient Capital Markets and Portfolio Investments

According to the CNB, in 2001 the last state financial institution (non-joint stock companies established prior to 1989) was privatized. The government has more than a 50 percent share of the equity capital in the Czech Export Bank, and a 24 percent share of the equity capital in the Czech-Moravian Guarantee and Development Bank. A significant financial crisis in the late 1990s – prompted by poor banking practices throughout that decade – led to a major restructuring of the banking sector and a significant improvement in government oversight. Currently all large domestic banks belong to major European banking groups, are generally extremely conservative and concentrate almost exclusively on the domestic Czech market. As a result, all Czech banks remained relatively healthy throughout the global financial crisis, making the Czech Republic one of only a few OECD countries not to have had to inject capital into the banking system. As of September 30, 2010, the total assets of commercial banks stood at CZK 4.19 trillion (approximately USD 220 billion), according to the CNB. As of the same date, non-performing loans amounted to 5.65 percent of total credit volume, up from 4.28 percent a year earlier. Foreign investors have access to bank credit on the local market, and credit is generally allocated on market terms. Domestic household borrowing in foreign currencies is negligible. In 2002, the banks for the first time established a mechanism for sharing credit histories of borrowers.

Although the Prague Stock Exchange (PSE) is small (with only 15 companies listed), the overall trade volume of stocks reached CZK 389.87 billion (roughly USD 20.4 billion) in 2010 as compared to CZK 463.86 billion (roughly USD 24.5 billion) in 2009, with an average daily trading volume of CZK 1.55 billion (approximately USD 81 million). The PSE index tends to mirror movements in international markets. The PSE index increased by 9.62 percent in 2010.

In March 2007, the PSE created the Prague Energy Exchange (PXE), which has now renamed itself the Power Exchange Central Europe, to trade electricity in the Czech Republic and Slovakia. PXE's goal is to increase liquidity in the electricity market and create a standardized platform for trading energy. The PXE completed its first trade in July 2007 and its trading volume has increased steadily with a total futures market contract value in 2009 of 1.4 billion Euro.

In 1998 the government created a Securities and Exchange Commission to function as a capital market watchdog. The Commission has made important strides in establishing a regulatory framework for Czech capital markets and enforcing new rules. It has employed a large number of new staff. A new securities law was adopted in 2001 to improve regulation of brokers and dealers. Legislation adopted in 2002 gives the SEC more flexibility in issuing guidelines and requiring reporting of information. In 2006, the SEC moved into the Czech National Bank as part of a plan to bring all of the financial regulators under one roof.

Competition from State-Owned Enterprises (SOEs)

Private enterprises are generally allowed to compete with public enterprises under the same terms and conditions with respect to access to markets, credit and other business operations, although there are frequent accusations that large domestic companies–-including both SOEs and private firms–-use their political clout and connections to gain unfair advantage. State-owned or majority state-owned companies are present in several fields, including the energy, postal service, and transport sectors. The Czech state also owns two small, specialized banks. SOEs do not report directly to ministries but are managed by a Board of Directors and Supervisory Board that generally include representatives of both the government and private sector. SOEs are required by law to publish an annual report and submit their books to independent audit. A list of state-owned or majority state-owned companies is available at:

http://www.mfcr.cz/cps/rde/xchg/mfcr/xsl/fnm_akciove_spolec.html

Corporate Social Responsibility

Corporate Social Responsibility (CSR) is a burgeoning concept in the Czech Republic. Although foreign companies, particularly U.S.-owned businesses, tend to be more active and more vocal about their activities in this area, the trend appears to be spreading slowly to Czech companies as well. CRS Europe and the Czech Business Leaders' Forum encourage their members to engage in CSR activities and to publicize their work in shareholder reports. Since 2005, the Czech Donors Forum has given the prestigious TOP Corporate Giving award each year for highest volume of donations and for corporate giving as a percentage of gross annual profit. In addition, the Czech Environment Ministry has given the annual Health, Safety and Environment Award since 2000 to encourage conservationism and sound environmental practices in the workplace. Since 1997, the Via Foundation has funded over 2,000 community development projects through Czech corporate social philanthropy. Still, only very large Czech companies are vocal about their CSR efforts, and CSR is not a major criterion by which Czechs make investment decisions. For example, the Via Foundation’s annual Via Bona awards recognize local CSR efforts, but most often the winners are major Czech corporations or local international subsidiaries. In a well-publicized recent interview, the Via Foundation’s director criticized high net worth Czechs for their lack of giving back to the community.

Political Violence

The risk of political violence in the Czech Republic is extremely low. There is no history of political violence or terrorism in modern times. Two recent historic political changes -- the "Velvet Revolution" which ended the communist era in 1989 and the division of Czechoslovakia into the Czech Republic and Slovakia in 1993 -- occurred without loss of life or significant violence.

Corruption

Current law makes both giving and receiving bribes criminal acts, regardless of the actor's nationality. Jail sentences have been increased to up to eight years for officials, with stiffer penalties for bribery previously enacted by Parliament. Bribes cannot be deducted from taxes. Law enforcement authorities are responsible for combating corruption. These laws are applied equally to Czech and foreign investors. There are frequent allegations, however, that public officials have at times engaged in corrupt practices with impunity. Political pressure, lack of experience and training in this area among police officers, and ineffective use of investigative tools contribute to the infrequent prosecution of high-level corruption. Although public figures must disclose the state of their finances each year, disclosure of the origin of financial assets is voluntary. The absence of successful prosecutions for corruption (or exoneration by the courts) has in turn contributed to public disenchantment and concerns over impunity reflected in the 2008 Transparency International (TI) survey of managers in 26 countries, which found that the Czech Republic was 24th in terms of political corruption, finishing ahead of only Mexico and Nigeria.

The Czech Republic ratified the OECD anti-bribery convention in January 2000. According to a July 2010 TI report, there is little or no enforcement of the convention in the Czech Republic, with no cases and only four investigations through 2009. TI listed political influence over enforcement actions, inadequate whistleblower protection, and the lack of criminal liability for legal entities as contributing factors. The Czech Republic has not ratified the UN Convention Against Corruption (UNCAC).

While there has been no lack of public accusations and suspicions of bribery, only a few cases have reached the prosecution and conviction stage. Allegations of corruption are most pervasive in connection with public procurement. Common problems with public contracts include unclear ownership of companies bidding on public contracts and a lack of competitive bids. The use of bearer shares, which can be used to hide true ownership, is widespread, leading to occasional accusations that some companies winning public contracts may be linked to key politicians and/or government officials. A 2004 government procurement law, required for EU accession, sought to curb illegal activities in this sphere by ensuring that public tenders were not tailor-made for specific businesses. However, according to the TI chapter in the Czech Republic, the law has failed to reach that objective. Their research has shown that more than half of public contracts in the Czech Republic do not comply with the 2004 Public Procurement Act. TI actively conducts public information campaigns and has given numerous broadcast and print media interviews on corruption and bribery cases. Other nongovernmental organizations in the Czech Republic also focus on corruption issues.

The Necas government has made combating corruption one of its three main priorities.

Bilateral Investment Agreements

The former government of Czechoslovakia signed a bilateral investment treaty (BIT) with the United States, which came into effect in 1992. The Czech Republic adopted this treaty in 1993, after the split with Slovakia. Amendments to the treaty were approved in 2003 following negotiations involving both the Czechs and the European Commission designed to meet EU concerns about perceived conflicts with the EU acquis communautaire. The Czech government subsequently requested that the United States consider further amendments that would affect the BIT's coverage and dispute settlement provisions; bilateral discussions are continuing.

To date, 77 countries have signed and ratified similar agreements with the Czech Republic. Agreements with several other countries are in the process of ratification, and the Czech Republic has chosen to abrogate several similar treaties with other third countries. The full list of agreements, including ratification dates, can be found on the Ministry of Finance website:

http://www.mfcr.cz/cps/rde/xchg/mfcr/hs.xsl/ochrana_investic.html

A bilateral U.S.-Czech Convention on Avoidance of Double Taxation has been in force since 1993. In 2007 the U.S. and Czech governments signed a bilateral Totalization Agreement that exempts Americans working in the CR from paying into both the Czech and U.S. social security systems. The agreement entered into force on Jan. 1, 2009.

OPIC and Other Investment Insurance Programs

Finance programs of the Overseas Private Investment Corporation (OPIC), including investment insurance, have been available in the Czech Republic since 1991. Investors are urged to contact OPIC's offices in Washington directly for up-to-date information regarding availability of services and eligibility. The OPIC Info Line (202) 336-8799 offers general information 24 hours a day. Application forms and detailed information may be obtained from OPIC, 1100 New York Avenue, NW, Washington D.C. 20527. The Czech Republic is a member of the Multilateral Investment Guarantee Agency (MIGA).

Labor

The wide availability in the Czech Republic of educated, relatively low-cost labor on the doorstep of Western Europe has been a major attraction for foreign investors. While the wage gap continues to narrow, the Czech Republic will continue to have far lower labor costs than those in Western Europe for years to come (although labor costs farther to the East will remain even lower, including in the newer EU countries Romania and Bulgaria). The unemployment rate reached a record low of 5.0 percent in July 2008 (according to the Ministry of Labor's methodology), after three years of over 6 percent annual economic growth (2005-07). The relatively low level of unemployment throughout 2008 made it increasingly difficult for many businesses to find skilled and experienced workers, especially in Prague and the surrounding region. This was especially true of employees with Western language skills, IT specialists, and engineers. By the end of 2010, however, the unemployment rate had grown to 9.6 percent and most categories of workers were readily available. Unemployment varies significantly depending on the region. Unemployment is far lowest in Prague (4.1 percent) and highest in the Ustecky (13.9 percent), Olomouc (12.5 percent), and Moravia-Silesia regions (12.4 percent). Rigidities in the labor code, a cultural reluctance to relocate, and limited housing stocks in some areas reduce the mobility of Czech workers within the country.

By law, all workers have the right to strike once mediation efforts have been exhausted, with the exception of judges, prosecutors, military, firemen, police and security sources, and workers in sensitive positions (e.g. nuclear power plant, gas and oil pipeline operators, and air-traffic controllers). Significant labor unrest remained rare. In September 2010, around 40,000 public sector workers attended a public demonstration in Prague against planned wage cuts. In December 2010, roughly 150,000 public sector workers participated in a day-long strike to protest the government's austerity measures. Approximately 3,800 of the 16,000 doctors employed in state hospitals have also publicly threatened to resign over unmet wage demands. Nevertheless, demonstrations, strikes and worker unrest are relatively rare. Although union membership has been dropping at a rate of 7 percent per year, the former Social Democrat (CSSD) led government was responsive to labor concerns and passed a labor code in parliament that is considered by observers to be "labor-friendly." The labor code entered into force January 1, 2007.

The Ministry of Labor and Social Affairs sets minimum wage standards. The standard workweek is 40 hours. Caps exist for overtime. Workers are assured 30 minutes of paid rest per work day and annual leave of at least four weeks per year.

Foreign-Trade Zones

Czech law permits foreign investors involved in joint ventures to take advantage of commercial or industrial customs-free zones into which goods may be imported and later exported without depositing customs duty. Duties need be paid only in the event that the goods brought into the free zone are introduced into the local economy. The investment incentive package also permits duty-free import of high tech goods and creation of additional foreign-trade zones. Due to EU accession and the investment incentives offered by the government, the advantages of using these free-trade zone are limited, and they have waned in popularity.

Foreign Direct Investment

According to the Czech National Bank, the stock of foreign investment in the Czech Republic on December 31, 2008 totaled USD 113.2 billion, with the Netherlands, Germany and Austria being the largest investors. The Czech National Bank lists the U.S. as the ninth largest foreign investor. For tax reasons, however, most U.S. investments are channeled through subsidiaries in other EU countries, and a considerable portion of Dutch and other EU investment is in fact American. CzechInvest commissioned a study in 2009 on the actual origin of investments that showed the U.S. fifth in terms of foreign direct investment following Germany, the Netherlands, Austria and France.

According to the Ministry of Industry and Trade, the inflow of FDI fell to CZK 52 billion (roughly USD 2.7 billion) in 2009 down from CZK 110 billion in 2008, mainly due to the economic slowdown. The inflow of FDI rebounded to CZK 117 billion (roughly USD 6.2 billion) during the first three quarters of 2010. According to CzechInvest, roughly 30 percent of all FDI since 1993 has been invested in manufacturing. A recent trend has been that new U.S. foreign investment has generally come from companies already well-established in the Czech Republic with very little originating from first-time investors to the country. The upswing in investment since 1998 is generally attributed to the introduction of investment incentives, as well as the Czech Republic's central location and well-educated and relatively inexpensive labor force. The stock of Czech direct investment abroad totaled USD 12.5 billion at the end of 2008, according to the Czech National Bank.

Some of the largest U.S. investments in million USD:

Procter&Gamble

150

GE Real Estate + Crestyl Group

140

Guardian

70

Tiger Holding Four

45

Honeywell

27.5

Commercial Vehicle Group

27

Donaldson

20.6

Ingersoll Rand

20

GE Aviation

7.8

FEI Company

3.0

JNJ Global Business Services

2.7

Rannoch

2.5

Rockwell Automation

2.0

NovaSoft

0.75

SDE (SW Development Europe)

0.7

Autobaterie

0.5

IBM

(amount not available)

eBay

(amount not available)

Microsoft

(amount not available)

Skype

(amount not available)

OnSemiconductor

(amount not available)

Other Countries:
Significant foreign direct investments (in USD):

Hyundai

Korea

1.2 billion

Toyota/PSA

Japan/France

850 million

Volkswagen

Germany

710 million

Robert Bosch

Germany

361 million

Matsushita

Japan

335 million

Nemak

Mexico

317 million

Denso

Japan

254 million

Daikin

Japan

244 million

Panasonic

Japan

235 million

LG Philips

NL

201 million

DHL

UK

190 million

Siemens

Germany

179 million

Faurecia

France

156 million

Knauf Insulation

Germany

131 million

Tivali

Israel

131 million

Automotive Lighting

Germany

106 million

Kronospan

Cyprus

102 million

Teva

Israel

55.5 million

Sources of data for this report included the Czech Statistical Office, the Czech National Bank, CzechInvest, OECD, IMF and Central European Advisory Group.



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