Czech Republic Investment Climate 200912 October 2009
by Ina Dimireva -- last modified 13 October 2009
The small, open, export-driven Czech economy grew by over six per cent annually from 2005-2007 and the strong growth continued throughout the first three quarters of 2008. Despite the global financial crisis, the conservative Czech financial system has remained relatively healthy. The rate of Czech economic growth, however, began to fall in the fourth quarter of 2008, mainly due to a significant drop in demand for Czech exports in Western Europe. This trend is expected to continue, with many analysts predicting Czech economic growth to completely stagnate in 2009. Both unemployment and inflation are relatively low at 6% and 3.6% respectively.
Openness to Foreign Investment
The Czech Republic has been a recipient of large amounts of foreign direct investment (FDI), which, together with strong export growth, has helped fuel economic growth, created new jobs, raised wages and increased domestic consumption. GDP per capita in 2008 was 80% of the EU average. The Czech Republic's Gross Domestic Product (GDP) increased 6.3% in 2005, 6.8% in 2006, and 6.0% in 2007, and remained strong throughout the first three quarters of 2008 (over 4%). The rate of economic growth, however, began to fall in the fourth quarter of 2008, mainly due to a significant decline in demand for Czech exports in Western Europe. The car industry (which with its suppliers accounts for as much as 20% of Czech manufacturing) has been especially affected. As a small, open export-driven economy, the Czech Republic remains sensitive to economic downturns in Western Europe. Over 80% of Czech exports go to its fellow EU member states, with 30% going to Germany alone. Most analysts are now predicting the economy will stagnate or grow only modestly in 2009.
The Czech crown has appreciated significantly over the past several years, peaking in July 2008. By the end of 2008, however, it had fallen to 2007 levels. The volatility of the Crown vis-à-vis the Euro and US Dollar has prompted calls from the business community for the quick adoption of the Euro. Adopting the Euro, however, has not been a priority of the current government, and Euro adoption is not expected prior to 2013. Inflation spiked in 2008 at 6.8%, partly due to a one-off increase in VAT and excise taxes, before falling to 3.6% at the end of the year. As economic growth slows, inflation is expected to fall to 2% in 2009. Unemployment, which was at a historical low of 5% in mid-2008, has begun to increase as many manufacturers cut production in the face of falling demand, but is not expected to exceed 7% in 2009 (as compared to 7.7% as recently as 2006).
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 so-called "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.
The slow pace of the court system is often compounded by judges' lack of familiarity with commercial or intellectual property cases. Needed reforms of the system for registering companies have been slow in coming, but a new bankruptcy law, which entered into force July 1, 2007, addresses some of these issues. Concerns about corruption have been voiced by foreign and domestic businesses alike. The World Bank's 2006 Anti-Corruption in Transition report ranked the Czech Republic the most corrupt country in Central Europe. According to the report, the Czech Republic is the only country among the eight new Central European EU member states where the situation had worsened in the preceding years. The U.S. Mission in Prague held conferences on transparency (Fall 2007) and judicial reform (Summer 2008).
The right-of-center, pro-business Civic Democrats (ODS) won the greatest number of votes during parliamentary elections in June 2006, but no single party emerged with a majority. A government coalition consisting of ODS, the Christian Democrats (KDU-CSL) and the Green Party (SZ) won a Parliamentary vote of confidence on January 19th, 2007, albeit with a very slim parliamentary majority. The next parliamentary elections are scheduled for 2010. 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.
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. Current legislation offers investment incentives to foreign and domestic firms that invest in the manufacturing sector. The Czech Government is considering similar incentives to support research and development centers and business service centers. 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 memberships in the appropriate professional chamber. These licensing and membership requirements apply equally to foreign and domestic investors.
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 plans to privatize the Ruzyne airport in Prague and Czech Airlines.
Conversion and Transfer Policies
The Czech crown is fully convertible. Imports or exports equal to or exceeding 10,000 Euro (approximately 259,000 Czech crowns or 12,950 USD) in cash, travelers' checks or money orders must be declared at the border.
The U.S.-Czech Bilateral Investment Treaty guarantees repatriation of earnings from U.S. investments. A 15% 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% if the U.S. qualifying shareholder is a company controlling more than 10% of the Czech entity, and 15% otherwise. 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 taking 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 compensating 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 were additional open seasons for claims in 1994 and 1998 respectively but all deadlines for these claims expired on July 8, 1999. In 2000, however, a new law to alleviate some of the property damages during the Holocaust entered into force. It amends the restitution laws allowing the state, subject to certain conditions, to return communal Jewish property, works of art and land illegally seized by the Nazis to entitled Jewish communities and individuals.
Although deadlines for submitting restitution claims are now officially past (note: Czech court decisions have struck down the deadline as it applies to direct restituents and their heirs), 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.
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 still 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 new bankruptcy legislation came into effect July 1, 2007 which should speed up the process. A new, streamlined Commercial Registry process took effect on July 1, 2005. While the new 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 new bankruptcy law addresses 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 new law shortens court proceedings and makes them much more transparent, gives a stronger position to creditors and renders the entire process more efficient. To this end, the new law has been 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.
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. 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 and ICT and Business Support Services Program). Incentives for new manufacturing projects, however, are becoming increasingly more difficult to obtain as the current government is seeking to channel new investments into research and development and business service centers.
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). The incentives legislation is expected to be finalized by June 2009. For more information contact CzechInvest at firstname.lastname@example.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 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. Since May 1, 2004, EU nationals can acquire Czech real estate with some exceptions relating to agriculture land and forests. U.S. and some other nationals can purchase real property if they comply with temporary residence requirements. Czech legal entities, including 100% foreign-owned subsidiaries, may own real estate without any limitations. The Finance Ministry announced in late 2008 that it has drafted a bill under which foreigners from EU and non-EU countries will be able to buy homes in the Czech Republic without any restrictions from 2009. A ban on foreigners buying farmland is expected to stay in place for another two years.
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 on 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.
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 which sell a variety of trademark and copyright-infringing goods such as clothing, cigarettes and CD/DVD recordings. In 2008, Czech authorities significantly increased the scope and number of raids, resulting in a large increase in the amount of pirated goods confiscated. Criminal and administrative penalties applied to IPR violators, however, continue to be infrequent, very 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. USTR elevated the Czech Republic to the Special 301 Watch List in January 2008 due to the extensive violations occurring at the outdoor markets and limited response from the Czech government. 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, 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% share of the equity capital or is a controlling shareholder in two banks: The Czech Export Bank and the Czech-Moravian Guarantee and Development Bank. The banking sector has recovered from the 1998-99 recession, the poor payment discipline of many of the banks' clients, and non-competitive loans offered in the early 1990s. Stricter oversight by the central bank has been imposed. Commercial banks have returned to profitability after posting losses in 1999 and have remained relatively healthy despite the international financial crisis. The Czech Republic was only one of three OECD countries not to have to inject capital into the banking system. As of October 31, 2008, the total assets of commercial banks stood at CZK 4.2 trillion (US$ 221 billion), according to the CNB. As of the same date, non-performing loans amounted to 2.51 % of total credit volume, compared to 3.74% in 2003. Foreign investors have access to bank credit on the local market, and credit is generally allocated on market terms. In 2002, the banks for the first time established a mechanism for sharing credit histories of borrowers.
The Czech securities market has been handicapped by a poor reputation generated by several years of lax regulation, fraud and scandals. However, when the economy thrives the market follows suit, and although the Prague Stock Exchange (PSE) is small (with only 14 companies listed for stocks), the overall trade volume of stocks reached CZK 852.04 billion (USD $50.4 billion) as compared to CZK 1,013 billion (USD$ 50.1 billion) in 2007, with the average daily trading volume of CZK 3.4 billion (USD$178 million). The PSE index tends to mirror movements in international markets. In 2008, the PSE index lost 52.72% of its value.
In March 2007, PSE created the Prague Energy Exchange (PXE) to trade electricity in the Czech Republic. PXE's goal is to increase liquidity in the electricity market and create a standardized platform for trading energy. PXE completed its first trade in July and trading volume has increased steadily with total contract value in 2007 of Euro1.89 billion (USD$ 2.53 billion). The PXE energy exchange intends to expand as aggressively as possible in all directions, other than westward.
In 1998 the government created a Securities and Exchange Commission to function as 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.
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.
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. While the current cabinet approved a multi-page document for confronting corruption, the strategy has yet to be implemented. Investigations suggested that public officials at times engaged in corrupt practices with impunity. Political pressure and ineffective police investigative tools contributed to the infrequent prosecution of high-level corruption. Disclosure of the origin of financial assets is voluntary for public figures. 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. A November 2006 OECD peer-review of the Czech Republic's implementation of the anti-bribery convention found that the Czech government needs to take additional steps, including criminalizing individual bribery and putting in place sanctions for non-compliance.
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 the court-controlled system of company registration and the police. Such allegations have also been raised in the course of privatizations and government procurements. 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 are not awarded in keeping with the 2004 Public Procurement Act. TI actively conducts public information campaigns through distribution of posters and has given numerous broadcast and print media interviews on corruption and bribery cases.
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 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. The full list of agreements including ratification dates can be found on the Ministry of Finance website.
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).
The wide availability of educated, relatively low-cost labor on the doorstep of the more expensive Western European labor market is a major attraction for foreign investors, particularly those looking to invest in manufacturing industries. Wages and benefits have risen to record levels in 2008, but the Czech Republic will still have far lower labor costs in the years ahead than those in Western Europe (although labor costs further to the East will remain even lower, including in new EU countries Romania and Bulgaria). The unemployment rate is 5.3 % (2008 third quarter) nationally, but varies from 2.0% in Prague to 7.5% in the Karlovy Vary region. Unemployment, however, is forecast to reach 7% in 2009 as Czech economic growth in 2009 is expected to be stagnant or very modest. In 2008, the relatively low unemployment rate made it increasingly difficult for many businesses to find skilled and experienced workers, especially in Prague and the surrounding region. This is especially true of employees with Western language skills, IT specialists, and engineers. Various factors, including rigidities in the labor code on overtime and the housing market, 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 workers in sensitive positions (nuclear power plant operators, military, police, etc.). Significant labor unrest remains rare, particularly in the private sector. Public sector unions, notably the rail workers and health workers, have staged strikes when the government tried to limit public sector wage increases. Workers in the Czech Republic have the legal right to form and join unions of their own choosing without prior authorization. Currently, less than 15% of the total labor force is a member of some labor organization. The overall number of union members has fallen sharply since 1991, reflecting the fact that union membership is no longer compulsory. Although union membership has been dropping at a rate of 8% per year, the former Social Democrat (CSSD) led government was responsive to labor concerns and passed a new labor code in parliament that is considered by observers to be 'labor-friendly.' The new 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.
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.
Source: U.S. Department of State