Policies Towards Foreign Direct Investment
The Czech government actively seeks to attract foreign investment via policies that make the country an attractive destination for companies to locate, operate, and expand. Act No. 72/2000 allows the Czech government to give investment incentives to investors who make new investments or expand their existing investments in the country. CzechInvest, the government investment promotion agency that operates under the Ministry of Trade and Industry, negotiates on behalf of the Czech government with foreign investors. In addition, CzechInvest provides: assistance during implementation of investment projects, consulting services for foreign investors entering the Czech market, support for suppliers, and assistance for the development of innovative start-up firms.
The Czech Republic is a recipient of substantial foreign direct investment (FDI). As a medium-sized, open, export-driven economy, the Czech economy is strongly dependent on foreign demand, especially from the Eurozone. In 2017, almost 80 percent of Czech exports went to fellow EU member states, with more than 60 percent of this volume shipped to the Eurozone and 40 percent to the Czech Republic’s largest trading partner, Germany, according to the Czech Statistical Office. The global economic crisis pulled the Czech Republic into its longest historical recession and highlighted its sensitivity to economic developments in the Eurozone. Since emerging from recession in 2013, the economy has enjoyed some of the highest GDP growth rates of the European Union. In 2015, GDP growth reached 5.3 percent, followed by 2.6 percent in 2016. The 2017 GDP growth rate of 4.6 percent was the second best performing year in the last decade, according to the Czech Statistical Office.
The Czech trade balance has been positive every year since 2005, and in 2016 and 2017 rose substantially, with surpluses of around USD 20.5 billion and USD 18.9 billion, respectively. Export revenues were just over 83.2 percent of GDP in 2016, according to the Czech Statistical Office. The main export commodities are automobiles, machinery, and information and communications technology.
The Czech Republic has no plans to adopt the EUR and instead has taken a wait-and-see approach to taking on the common currency. Economic difficulties in the Eurozone during the global downturn weakened public support for the country’s adoption of the EUR, as did the more recent Greek crisis, and the current government opposes setting a target date for accession.
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 media. The slow pace of the courts is often compounded by judges’ lack of familiarity with commercial or intellectual property law.
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 and shared services toward a more high-tech, services-based, knowledge economy.
Since 1990, the Czech Republic has become one of the leading destinations for FDI in the region. Total foreign investment in the Czech Republic (equity capital + reinvested earnings + other capital) equaled USD 121.9 billion at the end of 2016, compared to USD 116.6 billion in 2015. The increased activity of foreign investors reflects the solid state of the Czech economy and recovery in Europe. Of these, CzechInvest negotiated 76 new investment projects by foreign investors in the Czech Republic in 2016, worth USD 1.95 billion.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign individuals or entities can operate a business under the same conditions as Czechs. Some areas, such as banking, financial services, insurance, or defense equipment have certain limitations or registration requirements, and foreign entities need to register their permanent branches in the Czech Commercial Register. Some professionals, such as architects, physicians, lawyers, auditors, and tax advisors, must register for membership in the appropriate professional chamber. In general, 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. Enterprises are permitted to engage in any legal activity with the previously noted limitations in sensitive sectors. Laws on auditing, accounting, and bankruptcy are in force, including the use of international accounting standards (IAS).
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 for money laundering, transparency, origin of funds, and security purposes. Following the European Commission (EC) September 2017 investment screening proposal, the Czech government is expected to launch expert discussions on developing an investment screening mechanism that would effectively combine the national screening criteria with those newly proposed by the EC.
U.S. investors are not disadvantaged or singled out by any of the aforementioned Czech policies. 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).
Other Investment Policy Reviews
The Czech Republic scores well on recent “doing business” surveys. For example, the World Bank’s Doing Business 2018 Economic Profile and the Economist Intelligence Unit provide further detail on the Czech Republic’s investment climate. More information can be found at http://www.doingbusiness.org/data/exploreeconomies/czech-republic .
Individuals have a number of bureaucratic requirements to set up a business or operate as a freelancer or contractor. The Ministry of Industry and Trade provides an electronic guide on obtaining a business license, presenting step-by-step assistance, including links to related legislation and statistical data, and specifying authorities with whom to work (such as business registration, tax administration, social security, and municipal authorities), available at: https://www.mpo.cz/en/business/licensed-trades/guide-to-licensed-trades/ . The Ministry of Industry and Trade has also established regional information points to provide consultancy services related to doing business in the Czech Republic and EU. A list of contact points is available at: http://www.businessinfo.cz/en/psc.html .
Establishing a business requires visits to various Czech offices and on average takes nine days. The Czech Republic’s Business Register is publicly accessible and provides details on business entities. 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 requirements. The Business Register is publically available at: https://www.czso.cz/csu/res/business_register . The Czech Republic’s Trade Register is an online information system that collects and provides information on entities facilitating small trade and craft-oriented business activities, as specifically determined by related legislation. It is available online at: http://www.rzp.cz/eng/index.html .
The Ministry of Industry and Trade has two organizations that promote trade and investment. CzechTrade supports the development of international trade and cooperation between Czech and foreign entities and offers information and assistance to exporters and investors to facilitate business between Czech and foreign businesses. CzechInvest, established in 1992, seeks to attract foreign investment and develop domestic companies through its services and development programs. The organization also runs a number of EU programs to promote business. The organization also has the mandate to offer investment incentives to foreign investors.
While the government does not restrict domestic investors from investing abroad, the volume of outward investment remains significantly lower than incoming FDI. This is primarily due to the fact that most Czech companies have only gotten to a point in the last few years where they are mature enough and generate sufficient capital to seek out more distant markets like the United States. The Czech government does not incentivize outward investment.