Attitude toward Foreign Direct Investment
The Czech Republic is a recipient of substantial foreign direct investment (FDI). As a medium-sized, open, export-driven economy, the Czech Republic is strongly dependent on foreign demand, especially from the Eurozone. In 2014, more than 82 percent of Czech exports went to fellow EU states, with about 60 percent shipped to the Eurozone, and 32 percent to the Czech Republic's largest trading partner, Germany. The recent global economic crisis pulled the Czech Republic into its longest historical recession and highlighted its sensitivity to economic developments in the Eurozone. In early 2013, the economy finally emerged from recession, and has shown moderate growth since then. In 2015, GDP growth reached 4.3 percent.
2014 Czech per capita GDP was 84 percent of the EU average, ranking the Czech Republic 16th wealthiest EU member state. The 2014 economic output placed the Czech Republic not only above all fellow former communist states as well as economically weaker South-Western European countries, but also made it overtake Slovenia for the first time ever. The trade balance has been positive every year since 2005, and in 2014 and 2015 rose substantially, with surpluses of around USD 11.8 billion, and USD 11.94 billion, respectively. Exports comprise nearly 80 percent of the country’s GDP. The main export commodities are automobiles, machinery, and information and communications technology.
Over the past ten years, the Czech Republic has taken a wait-and-see approach regarding the country’s entry into the Eurozone. Recent economic difficulties in the Eurozone weakened public support for the country's adoption of the euro, and previous governments opposed setting a target date for accession. The current government, led by Prime Minister Bohuslav Sobotka (CSSD), has indicated its readiness to adopt the Fiscal Compact, a treaty committing signatories to limit their state budget deficits to 0.5 percent of GDP, and subsequently to adopt the euro. While there has not been significant political momentum toward euro accession in recent years, CSSD at its March 2015 conference expressed support for joining the Eurozone by 2020, though the government opted not to seek to join the Exchange Rate Mechanism (ERM II) in 2016.
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 involved positive reforms of the judicial system, civil administration, financial markets regulation, intellectual property rights protection, and in 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 in the media sector. The slow pace of the courts is often compounded by judges' lack of familiarity with commercial or intellectual property cases. In the 2016 World Bank’ Ease of Doing Business, the Czech Republic ranks 36th overall out of 189 economies (an improvement of eight positions from 2015), and 28th out of 189, in the category of Protecting Minority Investors.
Both foreign and domestic businesses voice concerns about corruption. Other long-term economic challenges include dealing with an aging population and diversifying the economy away from an over-reliance on manufacturing toward a more high-tech, services-based, knowledge economy.
Attitude Toward FDI
Since 1990, the Czech Republic has become one of the leading countries in the Central and Eastern European (CEE) region attracting most of incoming FDI. Though Poland was the leader by total volume of FDI gained, the Czech Republic and Hungary managed to achieve the highest FDI per capita. While in the early years massive volumes of FDI flowed primarily into the Czech automotive, real estate, and alternative energy sectors, in 2010, the Czech Republic, together with its fellow Visegrad Four countries (Slovakia, Hungary, Poland) attracted 70 percent of all FDI headed towards development of services and R&D projects in the CEE region. FDI inflow tripled in 2012 after a sharp drop-off during the economic crisis. 2014 FDI inflow data recorded a year-on-year increase of about 60 percent. The increased activity of foreign investors reflects a gradual recovery of the European market, driven mostly by the automotive industry.
CzechInvest, the government investment promotion agency, has adopted a new strategy to place the Czech Republic among Europe´s ten most attractive investment destinations. The strategy is based on five pillars: enhanced activity abroad; improved service for investors; better coordination of support for small and medium-sized enterprises; emphasis on the use of research and development; and general improvement in communication among FDI-related agencies and institutions. In 2015 CzechInvest negotiated 106 new investment projects in the Czech Republic worth CZK 45 billion (about $1.875 billion). The largest number and value of investments came from the United States, followed by Germany and Taiwan.
Originally the Czech Republic attracted FDI mainly in the engineering industry. New, large automotive greenfield projects emerged in the northeast and central part of the country. These investments especially benefited from lower labor costs (relative to Western countries), the strong tradition of Czech engineering, as well as a central location.
The structure of FDI has changed in recent years, shifting from manufacturing to other high-technology sectors, such as information and communications technology. The Czech Republic aims to become a destination for investments with high value-added content. Therefore, the Czech Republic focuses on negotiations with investors from the areas of R&D and services, to which it can offer an optimal combination of favorable investment factors, such as a strategic location, and a highly qualified and innovative work force.
Other Investment Policy Reviews
The Czech government underwent an OECD investment policy review in 2001 in the process of joining the OECD. The World Bank's, Doing Business 2016 Economic Profile and the Economist Intelligence Unit likewise provide further detail on the Czech Republic's investment climate.
Laws/Regulations on Foreign Direct Investment
In 2012, the Czech Parliament passed a new Civil Code (effective January 1, 2014), modifications to the existing civil law, and a new regulation for corporations – an Act on Corporations (also effective January 1, 2014).
The Czech Ministry of Industry and Trade maintains a doing business website at www.businessinfo.cz, which aids foreign companies in establishing and managing a foreign-owned business in the Czech Republic, including how to navigate the legal requirements, licensing, and operating in the EU market.
Criminal liability – related offences are included in the new Criminal Code, Act No. 40/2009 Coll., which has been in effect since January 1, 2010. Penalties include imprisonment, a ban on the activity, asset forfeiture or fines.
Administrative liability covers administrative offenses committed by both individuals and legal entities (or individuals as entrepreneurs).
A new law on criminal responsibility of legal entities has been in force since January 1, 2012. It outlines a list of offenses that could be committed by legal entities. A legal entity is responsible for the behavior of its management, personnel and any bodies that fall under its control.
The latest statistics from the Supreme Public Prosecutor show that there were 227 prosecutions of legal entities in 2015. The most frequent crime was fraud – especially tax fraud – followed by extortion and environmental crimes. There were 115 convictions. The most frequent penalty was a fine (from CZK 10,000-50,000 (USD 400-2,000), as well as publishing of the penalty (on the Internet, in the press and on TV), and a ban on activities. In 13 cases the court decided to abolish the company.
Members of Parliament on March 23 approved an amendment to the law on criminal responsibility of legal entities. While it still requires approval by the Senate and the President, it would expand the range of illegal activities for which legal entities – and not just individuals - would face criminal liability.
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.
From a legal standpoint both foreign and domestic investors are treated equally. 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 Organization of Economic Cooperation and Development (OECD), the Czech government agreed to meet (with a small number of exceptions) OECD standards for equal treatment of foreign and domestic investors and implement 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).
Business Register (ObchodnI rejstrik) is a publicly accessible register that provides details on business entities, as specifically stated by related legislation. Such details include: name, address and registration number of the entity; description of its business activities; information on the entity's owners; and details on equity shares. Business Register is administered on a regional basis, by Business Register Courts.
An application for an entry into the Business Register can be submitted in a hard copy, via a direct entry by a Public Notary or electronically, subject to meeting online registration criteria required by law.
The Business Register is available at www.justice.cz.
Trade Register is an online information system that collects/provides information on entities running licensed business activities. www.zivnostensky-rejstrik.cz/.
The Ministry of Industry and Trade provides an electronic guide on doing licensed business, presenting step-by-step assistance, including links to related legislation and statistical data, and specifying authorities to deal with (e.g. as business registration, tax administration, social security, municipal authorities). www.mpo.cz/cz/podpora-podnikani/zivnost-podnikani and www.businessinfo.cz/
By the World Bank 2015 Doing Business Guide, the Czech Republic ranked 93rd in the "Starting a Business” category, 127th in dealing with construction permits, and 37th in registering property.
There exist two public agencies promoting investment and/or facilitating doing business. Both are managed by the Ministry of Industry and Trade.
CzechTrade supports development of international trade and cooperation between Czech and foreign entities. By means of supporting export activities, CzechTrade promotes increased competitiveness of Czech industry. More information is available at www.czechtradeoffices.com/about-czechtrade/.
CzechInvest focuses on attracting inward foreign investment as well as on promoting the Czech Republic abroad. CzechInvest acts as an intermediary between the EU and small (SMEs) and medium-sized enterprises (MSMEs) to ease implementation of EU structural funds (subsidies). More information is available at www.czechinvest.org/en/about-czechinvest.
Following the EC 2003/361 Recommendation, the size definition of a business entity is based on the number of employees, volume of annual turnover, and volume of assets.
An MSME employs less than 250 employees, its annual turnover does not exceed Euro 50 million, and the volume of its assets is less than Euro 43 million.
Small enterprises (SMEs) employ fewer than 50 persons with annual turnover as well as volume of assets do not exceed Euro 10 million.
Micro enterprises have fewer than 10 employees. Annual turnover and volume of assets are under Euro 2 million.
Useful information on facilitating doing MSME business is available at www.czechinvest.org/definice-msp.
Industrial production, a key export component, has recovered from the economic downturn of the late 2000s. After a significant decline in 2010, it recorded moderate growth in 2010 and 2011, and stagnated again 2012 and 2013. 2014 industrial production gained almost nine percent, with the automotive industry accounting for a large part of this gain. The 2015 industrial output declined by 2.5 percent. In response to unfavorable economic conditions, the Czech government expanded its export strategy to include markets beyond Western Europe, and reduce its dependence on the automotive, heavy and general industrial equipment sectors.
While the export strategy still includes traditional export destinations in Western Europe, it focuses on twelve additional priority countries: Brazil, China, India, Iraq, Kazakhstan, Mexico, Russia, Serbia, Turkey, Ukraine, the United States, and Vietnam, in addition to another 25 countries of interest. The strategy characterizes chemicals or chemical products as new, promising export commodities.
In response to Russia's illegal annexation of Crimea in early 2014, the EU adopted economic sanctions against Russia, binding on all member states. This resulted in a decrease of approximately 30 percent in Czech exports to Russia in 2015.
The January 2016 implementation of the Joint Comprehensive Plan of Action (JCPOA) and the lifting of some economic sanctions against Iran, has prompted significant interest in the Iranian market by Czech exporters hopeful of revitalizing historically close business relations between the Czech Republic and Iran.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign individuals or entities can operate a business under the same conditions and to the same extent as Czech persons. Some areas, such as banking, financial services, insurance, media, or defense equipment have certain limitations or registration requirements, and foreign entities need to register their permanent branches in the Czech Commercial Register. 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 professionals.
As of early 2012, 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. Laws on auditing, accounting and bankruptcy are in force. These laws include the use of international accounting standards (IAS) for consolidated corporate groups.
According to the Ministry of Finance, as a result of several waves of privatization of formerly state-owned companies since 1989, almost 90 percent of the Czech economy is now in private hands. Privatization programs have been generally 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. Many complainants have alleged non-transparent or unfair practices in connection with past or planned privatizations.
In early 2013, the Czech government approved the sale of a 44 percent stake in the national airline, Czech Airlines (CSA), to Korean Air. The Czech government sought a strong, non-European investor who would help CSA to further develop, and to expand the number of CSA flights to overseas destinations. The tender process met EU rules, and the final purchase conditions were subject to approval by the European Commission. The government had attempted, unsuccessfully, to privatize the airline in 2009. A local private carrier, Travel Service, acquired an additional 34 percent stake in CSA. Czech Aeroholding, an umbrella company which includes a national group of companies operating in air transport and related services, holds a minority stake of 19.74 percent, and the Czech Insurance Company (Ceska Pojistovna) owns 2.26 percent.
Screening of FDI
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.
The Antimonopoly Office (Urad pro ochranu hospodarske souteze) reviews both domestic and international transactions for competition-related concerns, including fair competition, public procurement, and concessions. An Act on the Protection of Economic Competition took effect in 2001, adopting antitrust rules consistent with EU competition policy related to restrictive agreements, abuse of a dominant market position, practices distorting competition, and merger control.