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. Fair market competition is overseen by the Anti-Monopoly Office (UOHS) http://www.uohs.cz/en/homepage.html . It is a central administrative body entirely independent in its decision-making practice. The scope of competencies of the Office is defined by the Act No 273/1996 Coll., as amended by the Act No 187/1999 Coll. The Office is mandated to create conditions for support and protection of competition and to supervise public procurement and state aid.
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. Laws on auditing, accounting and bankruptcy are in force. These laws include the use of international accounting standards (IAS) for consolidated corporate groups.
A 2014 OECD Country Economic Survey notes that, since joining the EU, the Czech Republic has made progress in improving its inconsistent competition policy and removing bureaucratic barriers that inhibit competition. The competition framework is on par with OECD best practices, but successful prosecution of cartels has rarely happened. The OECD survey is available at: http://www.oecd.org/czech/economic-survey-czech-republic.htm
International Regulatory Considerations
Membership in the EU requires subordination to the unique, supranational law system in which, according to an interpretive declaration of member-state governments appended to the Treaty of Lisbon, “the Treaties and the law adopted by the Union on the basis of the Treaties have primacy over the law of Member States” under conditions laid down in the case law of the Court of Justice. Key principles of EU law include fundamental rights as guaranteed by the Charter of Fundamental Rights and as resulting from constitutional traditions common to the EU’s states; EU law is divided into ‘primary’ and ‘secondary’ legislation. Primary legislation is derived from the consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union and are the basis for all EU action. Secondary legislation, which includes directives, regulations, and decisions, is derived from the principles and objectives set out in the treaties.
Common policies, which are the essence of multinational integration, are based on common legislation. Inherent in the concept of a common policy is its binding force on the member states. The latter must give the common institutions the legal means to implement common policies and to enforce their decisions on all the parties concerned and on their citizens. Hence, common policies are shaped by legal acts agreed upon by the common institutions, implemented by the member states, and/or the common institutions, and controlled by the common institutions. The national laws of the member states are harmonized in a great number of fields in the context of common policies. A special law, based on the treaties, which was formerly called acquis communautaire and now ”acquis of the EU”, is thus built to bring into being common policies, a law that is superimposed and takes precedence over national law, even the constitutional law, of the Member States, whether national legislation predates or postdates European legislation.
Czechoslovakia (a predecessor to the Czech Republic) was a founding member of the GATT in 1947, and the member of the World Trade Organization (WTO). Since the entry of the Czech Republic to the EU in 2004, the Czech Republic is represented in the WTO by the European Commission – an independent body representing all EU members.
Legal System and Judicial Independence
The Czech commercial code and civil code are largely based on the German legal system, which follows a continental legal system where the principle areas of law and procedures are codified. 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.
As of January 1, 2014, the Czech Commercial Code, Act No. 513/1991 Coll. (former Czech Commercial Code), ceased to exist; some areas which were regulated by the former Czech Commercial Code are now governed by the new Czech Civil Code, Act. No. 89/2012 Coll, while other parts have been abolished. The new Czech Act on Business Corporations, Act No. 90/2012 Coll. (Corporations Act) has stepped in to govern those areas which are specifically concerned with trading companies and cooperatives.
Matters related to the Czech Commercial Register are governed by Act No. 304/2013 Coll., on public registers of legal entities and individuals. The new Czech Act on Business Corporations introduced substantial changes to Czech corporate law. Detailed provisions for mergers and time limits on decisions by the authorities on registration of companies are covered, as well as protection of creditors and minority shareholders.
The judiciary is independent, but decisions may vary from court to court. The reason for diverse legislative approaches may well be the fact that the new Civil Code did not only rewrite the system but also introduced new terminology. Consequently, the two substantive laws, the Penal Code and the Civil Code, have been adopted without a new procedural law to explain how the laws should be applied, which would allow courts to proceed according to a clearly outlined jurisdiction. Some observers ascribe the variances to the lack of a procedural law to delineate application of the Penal and Civil Codes.
Laws and 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. The investment agency run by the Ministry of Industry and Trade, CzechInvest, provides assistance and consultation services to investors entering the country.
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 — $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.
An amendment to the law on criminal responsibility of legal entities came into force on December 1, 2016. It expands the responsibility of legal entities, for a wider range of offenses – including libel – than under the old law.
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 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).
Competition and Anti-Trust Laws
The Office for the Protection of Competition (UOHS) is the central authority of state administration responsible for creating conditions that favor and protect competition, supervision over public procurement, and consultation and monitoring in relation to the provision of state aid. The Office is headed by a Chairman, who is appointed by the President of the Czech Republic for a six-year term, http://www.uohs.cz/en/homepage.html .
Expropriation and Compensation
Government acquisition of property is done only for public purposes in a non-discriminatory manner, and in full compliance with international law. The Embassy is aware of just one case of possible alleged expropriation of a U.S. foreign investment.
Potential investors should first ensure 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.
ICSID Convention and New York Convention
The Czech Republic is a signatory and contracting state to the International Centre for Settlement of Investment Disputes (ICSID Convention). It also has ratified the convention on the Recognition and Enforcement of Arbitral Awards (1958 New York Convention). This convention obligates local courts to enforce a foreign arbitral award if it meets the legal criteria. Applications for enforcement of foreign judgments can be made to Czech courts and are determined in accordance with a bilateral recognition treaty, agreement or convention; if one of these does not exist, then it is enforced in a manner which is consistent with Czech law. Judgments rendered in other EU countries are enforceable in accordance with applicable EU regulations.
Investor-State Dispute Settlement
In 1993, the Czech Republic became a member state to the International Centre for Settlement of Investment Disputes (ICSID Convention). The 1993 U.S.-Czech Bilateral Investment Treaty contains provisions regarding the settling of disputes through international arbitration.
International Commercial Arbitration and Foreign Courts
Mediation is admissible in every area of law, except where it is excluded by legislation. Mediation is an option in every nearly every area of law, including family law, commercial law, and criminal law. Mediators can be contracted between the parties to the dispute, and found through such sources as the Czech Mediators Association, the Czech Bar Association, or the Union for Arbitration and Mediation Procedures of the Czech Republic. A number of other non-governmental organizations (NGOs) and entities work in the area of mediation.
Mediation is governed both by Act No 202/2012 on mediation and, in the area of criminal proceedings, by Act No 257/2000 on the Probation and Mediation Service of the Czech Republic. The training of mediators acting within the criminal justice system is ensured by the Probation and Mediation Service; training in the area of non-criminal mediation is offered by a range of bodies and educational institutions.
Directive 2008/52/EC allows those involved in a dispute to request a written agreement arising from mediation be made enforceable. An agreement between the parties to the mediation in a civil case may be submitted to the court for approval in the context of further proceedings. The results of mediation provided in the context of criminal proceedings by the Probation and Mediation Service may be taken into account by the public prosecutor and the court in their decision in a given case.
A new amendment to the bankruptcy law that will come into force on June 1, 2017 includes such provisions as a prohibition of forum shopping (insolvency tourism), restriction of voting rights of the creditors from the debtor’s group, provisions against “bullying” insolvency petitions, and stricter rules for documenting the existence of a claim when filing a creditor’s insolvency petitions. It also sets penalties for bankruptcy administrators of up to CZK five million ($200,000) for serious administrative violations such as failure to state the address of the bankruptcy administrator where the administrator actually executes his activities. The 2017 edition of the World Bank’s Doing Business Report ranked the Czech Republic 26th (compared to 22nd in 2016) for ease of resolving insolvency. Although this represents a drop of four positions compared to last year, it still puts Czech Republic ahead of many fellow EU member states.