Openness To, and Restrictions Upon, Foreign Investment
The Czech Republic has been a recipient of substantial foreign direct investment (FDI), which has helped spur economic growth, create new jobs, raise wages, and increase domestic consumption. As a medium, 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 approximately a third going to Germany alone. GDP per capita in 2011 was 80 percent of the EU average.
The Czech Republic maintains a wait-and-see approach regarding the country’s entry into the Eurozone. Recent economic difficulties in the Eurozone have undermined public support for the Czech Republic’s adoption of the euro, and the government has opposed setting a target date for eliminating the Czech crown and embracing the common currency. Some unfinished elements in the economic transition, such as the slow pace of legislative and judicial reforms, have posed 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. The slow pace of the courts is often compounded by judges' lack of familiarity with commercial or intellectual property cases. In the World Bank’s Ease of Doing Business rankings, the Czech Republic ranks 100th out of 185 economies in “Protecting Investors.”
Both foreign and domestic businesses voice concerns about corruption. Other long term economic challenges include dealing with a rapidly aging population and diversifying the economy away from an over-reliance on manufacturing toward a more high-tech, services-based, knowledge economy.
The Czech Republic is a multi-party, parliamentary democracy with a population of approximately 10.5 million. Legislative authority is vested in a 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, parliament elected Vaclav Klaus for a second term as president. (A new president is scheduled to take office in March 2013.) 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). In May 2012 some members of the Public Affairs Party broke away and formed the Liberal Democratic Party (LIDEM), which subsequently replaced the Public Affairs Party within the governing coalition. The coalition 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. Anonymous bearer shares are widely used by Czech companies, often making it difficult to establish the true ownership of firms.
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).
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.
According to the Ministry of Finance, as a result of several waves of privatization of formerly state-owned companies since 1989, more than 80 percent of the Czech economy is now in private hands. 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 late 2012, the Czech government approved privatizing up to 95.69 percent of the national airline, Czech Airlines (CSA). The Czech government, which hopes to complete the tender in April or May 2013, wants a strong, preferably non-European investor who would help CSA to further develop, and to expand the number of CSA flights to the overseas destinations. The tender process must meet the EU rules, and the final purchase conditions will be subject to approval by the European Commission. The government attempted, unsuccessfully, to privatize the airline in 2009.
TI Corruption Perceptions Index
49 / 54
Heritage Economic Freedom
69.9 / 30
WEFs Global Competitiveness Report
4.51 / 39
Conversion and Transfer Policies
The Czech crown is fully convertible. Imports or exports equal to or exceeding 10,000 Euro (approximately CZK 252,000 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 conversion 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 interest 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 the deadline for filing these claims was 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 was January 1, 1995. In 2000, another law to alleviate some of the property damages suffered during the Holocaust entered into force. It amended the restitution laws allowing the state to return to entitled Jewish communities and individuals, subject to certain conditions, communal Jewish property, private works of art and land illegally seized by the Nazis. 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 still a relatively new concept 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.
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, although bankruptcy legislation, which came into effect July 1, 2007, has accelerated the process somewhat. 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 incorporated some elements designed to increase efficiency.
The Czech Republic in 1993 ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. 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 to 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 are determined in accordance with a bilateral recognition treaty or, if such a treaty does not exist, in a manner otherwise consistent with Czech law. Judgments rendered in other EU countries are enforceable in accordance with applicable EU regulations.
Legal proceedings regarding commercial disputes can last six years or longer for the most complex cases involving multiple appeals. However, many cases reportedly are resolved within one to three years.
New legislation, effective from July 2012, expanded the group of sectors supported by incentives. The Czech Republic now offers incentives to foreign and domestic firms that invest in the manufacturing sector (including expansion of an existing manufacturing investment) or technology and strategic service centers (including research and development centers and business service centers in software development, shared services and high-tech repairs). The package includes relief from corporate taxes for up to ten 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.
For more information contact CzechInvest, at email@example.com, or www.czechinvest.org.
Right to Private Ownership and Establishment
As of mid-2011, U.S. and other non-EU nationals can purchase real property, including agricultural land, in the Czech Republic without restrictions. Czech legal entities, including 100 percent foreign-owned subsidiaries, may own real estate without any limitations. 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.
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 accustomed to using both secured and unsecured forms of credit.
Major amendments to the Commercial Code that strengthen protection of creditors and minority shareholders came into force in 2001. The law includes detailed provisions for mergers and places time limits on decisions by the authorities on registering of companies. Laws on auditing and accounting also are in force. 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. The civil procedure code provides for ex parte search and seizure in enforcement actions. Literary works enjoy copyright protection for from 50 to 70 years. The customs service and the Czech Commercial Inspection have legal authority 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 made it easier to define and recover losses caused to owners by piracy. The 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. 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). Business associations, consumer groups and other non-governmental organizations, including the American Chamber of Commerce, can submit comments on laws and regulations.
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 Investment
All large domestic banks belong to major European banking groups. Most operate conservatively and concentrate almost exclusively on the domestic Czech market. As a result, Czech banks remained relatively healthy throughout recent global financial crises. As of September 30, 2011, the total assets of commercial banks stood at CZK 4.43 trillion (approximately USD 233 billion) according to the Czech National Bank (CNB). 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, banks established a mechanism for sharing credit histories of borrowers.
The Prague Stock Exchange (PSE) is small, with only 14 companies listed. The overall trade volume of stocks dropped from CZK 371 billion (USD 21 billion) in 2011 to CZK 236.5 billion (USD 12.3 billion) in 2012, with an average daily trading volume of CZK 940 million (USD 48.7 million). The PSE index tends to mirror movements in international markets, and the index increased by 14.01 percent in 2012.
In March 2007, the PSE created the Prague Energy Exchange (PXE) to trade electricity in the Czech Republic and Slovakia and, later, Hungary. (The Exchange’s official name now is “Power Exchange Central Europe.”) PXE's goal is to increase liquidity in the electricity market and create a standardized platform for trading energy.
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 CNB as part of a plan to bring all 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 (CSR)
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. CSR Europe, the Czech Business Leaders' Forum, Business for Society, and the Czech Donors Forum encourage their members to engage in CSR activities and to publicize their work in shareholder reports. In addition, since 2000 the Czech Environment Ministry has given the annual Health, Safety and Environment Award 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.
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 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.
Current law makes both giving and receiving bribes criminal acts, regardless of the perpetrator's nationality. Parliament increased prison sentences for bribery in 2011 to up to ten years for officials, and police have been given expanded investigation tools such as wiretap authority to investigate bribery. 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 have been allegations, however, that public officials have at times engaged in corrupt practices with impunity. There has been an increase in prosecutions of high-level public corruption since 2011. However, factors contributing to the difficulty of achieving convictions included the absence of a system for granting immunity to persons willing to testify against co-conspirators; lack of a specialized prosecutorial body; inadequate legislation requiring disclosure of source of assets; use of anonymous bearer bonds; previous lax regulation of public procurement; weak rules governing campaign financing and lobbying activities; and a lack of rules to protect whistleblowers and civil servants from political pressure. New senior leadership in the state prosecutor service in 2011 and 2012 has significantly improved its effectiveness and reduced its susceptibility to political pressure.
The 2006 Conflict of Interest Act obliges legislators, members of the Cabinet, and other selected public officials to make annual asset declarations. However, asset declarations can only be viewed in person based on a written request and often are general and lacking in information. Only assets gained since taking up one’s public function must be reported. The past absence of successful prosecutions of corruption has in turn contributed to public disenchantment and concerns over impunity, despite several recent major convictions.
The Czech Republic ratified the OECD anti-bribery convention in January 2000. According to Transparency International (TI) reports, there is little or no enforcement of the convention in the Czech Republic. TI lists as contributing factors insufficient definition of foreign bribery offenses, jurisdictional limitations, lack of coordination between investigation and enforcement entities, and inadequate whistleblower protection. The Czech Republic introduced criminal liability for legal entities on January 1, 2012. This will lay the groundwork for ratification of the UN Convention Against Corruption (UNCAC), although the parliament has yet to take up this issue.
Allegations of corruption are most commonly connected 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.
In 2011 the Czech government adopted a major public procurement reform bill that addresses some transparency and corruption concerns. The legislation, which came into effect in April 2012, lowers the threshold for the application of procurement rules to one million CZK (USD 55,000). With a few specific exceptions, it also requires more than one bidder for all procurements, as well as publication of tender specification documentation. The law requires bidders to disclose their ownership structure in the bidding process. However, it still contains loopholes that could permit bidders to sub-contract to anonymously-held companies. The law also does not apply to several state-owned enterprises in certain industries, such as energy production.
TI and other nongovernmental organizations actively conduct public information campaigns and give numerous broadcast and print media interviews on corruption and bribery cases.
The Necas government has made combating corruption one of its three main priorities. The Prime Minister has assigned the anti-corruption portfolio to Deputy Prime Minister Karolina Peake, whose office advocated for the legislation to introduce criminal liability for legal entities and is engaged on other anti-corruption initiatives. The government adopted a 58-point National Anti-Corruption Strategy for 2011-2012 that called for legislative and administrative reforms to both limit opportunities for corruption (e.g. campaign finance reform, procurement reform) and improve enforcement (e.g. specialized anti-corruption prosecutors, improved whistleblower protection, enhanced use of wiretaps, undercover and sting investigations). The government has made progress on some of these initiatives, although it often has fallen behind its own timelines. The government is currently deliberating upon the National Anti-Corruption Strategy for 2013-2014.
Bilateral Investment Agreements
Formal discussions to renegotiate the Bilateral Investment Treaty (BIT) began in September 2011 at the request of the Czech government, and these negotiations continue. The former government of Czechoslovakia signed the original BIT with the United States in 1992, and the Czech Republic adopted this treaty in 1993, after the split with Slovakia. Amendments to the treaty, which were designed to meet EU concerns about perceived conflicts with the EU acquis communautaire, were approved in 2003 following negotiations involving both the Czechs and the European Commission.
Several dozen countries have signed and ratified similar agreements with the Czech Republic. Agreements with some countries are in the process of ratification. 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 January 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).
The wide availability in the Czech Republic of an educated, relatively low-cost labor force on the doorstep of Western Europe has been a major attraction for foreign investors. While the wage gap continues to narrow, the Czech Republic likely will continue to have far lower labor costs than those in Western Europe for years to come (although labor costs in newer EU countries such as Romania and Bulgaria, and non-EU countries further east likely will remain even lower). According to the Czech Statistical Office, at the end of November 2012, 67.1 percent of Czechs aged 15-64 were employed, and the general unemployment rate was 8.7 percent. However, unemployment rates vary significantly between regions. The unemployment rate was lowest in Prague (4.4 percent) and highest in Ustecky (13.4 percent). According to Eurostat, at the end of November 2012, the Czech unemployment rate (7.4%) was seventh lowest of the 27 EU member states.
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 officials, and workers in sensitive positions (e.g. nuclear power plant, gas and oil pipeline operators, and air-traffic controllers). A handful of large labor demonstrations have occurred in each of the last few years, usually in protest of government policies. Nevertheless, demonstrations, strikes and worker unrest are relatively rare.
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/Free Ports
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 to 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 these free-trade zones are limited; consequently, their use has waned.
Foreign Direct Investment Statistics
According to the CNB, foreign direct investment (FDI) inflows dropped from CZK 117.3 billion (USD 6.14 billion) in 2010 to CZK 95.64 billion (USD 5.4 billion) in 2011. FDI appeared to accelerate in 2012, with CZK 223.3 billion (USD 11.6 billion) in FDI inflows during the first three quarters of the year, according to preliminary figures. According to World Bank data, FDI as a percentage of Gross Domestic Product was 3.1 percent in 2010 and 2.5 percent in 2011.
Also according to the CNB, the stock of domestic direct investment abroad rose in 2010 by CZK 7.9 billion to reach CZK 279.8 billion (USD 14.9 billion). The national bank credits the increase to reinvested earnings. The Netherlands received the largest amount of these investments (46.5 percent) followed by Slovakia (14.7 percent) and Cyprus (7.9 percent). The CNB says that the stock of foreign investment in the Czech Republic at the end of 2010 totaled USD 128.5 billion, an increase from USD 125.8 billion in 2009. The largest investors were the Netherlands (29.6 percent), Germany (13.7 percent) and Austria (12.9 percent). For tax reasons, 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.