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Country Commercial Guides
FY 2000: Czech Republic
CHAPTER VII: INVESTMENT CLIMATE
A. Openness to Foreign Investment
An open investment climate has been a key element of the Czech Republic's economic transition. While the Czech Republic retains many hallmarks of macroeconomic stability, unfinished elements in the transition have hurt the country's short-term growth prospects, competitiveness, and company restructuring. The Czech government has started to take the steps needed to consolidate the transition to a market economy, but these changes in the behavior of the real economy have been slower. The crucial role that foreign investment must play in the transition's next stage -- deeper restructuring of Czech firms -- should create opportunities for U.S. investors.
The Czech Republic's relatively stable political and economic environment and well-qualified labor force make it an attractive place for foreign direct investment. There have been major U.S. investments since 1990, and many American firms continue to look closely at investing directly in the Czech Republic. An initial reluctance to offer an investment incentive package probably lowered the level of potential foreign direct investment (FDI) inflows in the early 1990's, but the government has gradually changed its policy, and in 1998 approved a standard package of incentives for manufacturing investments (see "Performance Requirement/Incentives" below).
B. 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. However, in 1995, the Czech Republic imposed a Czech language requirement for trade licenses needed for most forms of business. This requirement can be fulfilled by a Czech partner.
C. National Treatment
Legally, foreign and domestic investors are treated identically, and both are subject to the same tax codes and other laws. By law, the government does not differentiate between foreign and domestic investors, or between foreign investors from different countries, and does not screen foreign investment projects other than in the banking, insurance and defense sectors. As part of its 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 restrictions on special investment incentives. The government does, however, evaluate all investment offers for those state enterprises still undergoing privatization.
Successive Czech governments have overcome political resistance to foreign investment in certain sensitive sectors. This opposition has come from economic nationalists, as well as managers with an interest in the status quo. Examples include the petrochemical, telecommunications and brewery sectors, and, most recently, the gaming sector. In 1998, Parliament overrode President Havel's veto and strong Czech government objections to approve amendments to the gaming law, which barred foreign investment in the gaming sector and foreign-owned firms from conducting consumer sweepstakes. These provisions violated the U.S.-Czech Bilateral Investment Treaty (BIT), Europe Association Agreement and the Czech Republic's OECD commitments. The government initiated, and Parliament subsequently approved, a new amendment to remove these discriminatory provisions.
D. Exempted Sectors
According to CzechInvest, the Czech agency tasked with attracting FDI, all sectors of the Czech economy are open to foreign investment. Although the Central Bank imposed a ban on new banking licenses following the collapse of several small banks in 1994, the ban was lifted in 1995, and new licenses can be issued on a selective basis. Other industries with licensing requirements include other financial services, insurance companies and broadcast media.
E. Complaints of U.S. Investors
Some U.S. companies have complained of difficult conditions in their pursuit of investments in the course of the privatization process, while others complain of problems in dealings with private Czech companies. Telecommunications and energy projects are often subject to intense lobbying pressure from foreign governments or domestic interests. Non-transparent or unethical practices are not uncommon at the company level.
The government has placed a strong emphasis on rooting out corruption, although practical results have been slow to follow. The OECD Anti-bribery Convention ratification is currently pending in Parliament. American investors interested in starting joint ventures with or acquiring Czech firms have also experienced problems with unclear ownership and lack of information on company finances. Investors complain about the difficulty of protecting their rights through legal means such as a secured interest. In particular, investors have been frustrated by the lack of effective recourse to the court system. The slow pace of the courts is often compounded by judges' unfamiliarity with commercial cases.
American firms seeking investment opportunities in the Czech Republic have also complained about high corporate and employment taxes; instances of a lack of a transparent bidding process; general slowness of decision-making in the government; excessive red tape; inadequate enforcement of intellectual property rights, particularly copyrights; long delays in the privatization process; and the maintenance of higher tariffs against non-European goods, especially the tariff differential in aircraft, automobiles and related spare parts.
F. Conversion and Transfer Policies
The Czech crown is fully convertible for most business purposes. The 1995 foreign exchange act made the Czech crown convertible for all trade transactions and many investment transactions. For example, Czechs are free to make direct investments and purchase real estate abroad. Under the law, the Central Bank and the Finance Ministry can take further steps toward full capital account convertibility by removing controls on outflows of capital.
Repatriation of earnings from U.S. investments is also guaranteed by the U.S.-Czech Bilateral Investment Treaty. There is currently a 25% tax on repatriation of profits from the Czech Republic, which is fairly standard in EU/OECD countries. This level of withholding is reduced under the terms of applicable double taxation treaties. For instance, under the U.S. treaty it is 5% if the U.S. qualifying shareholder is a company controlling more than 10% of the Czech entity, 15% otherwise. There are no administrative obstacles for removing the capital. Convertibility into any currency is permitted by law. The average delay period for remitting investment returns meets the international standard of three working days.
G. Expropriation and Compensation
The Embassy is unaware of any expropriation of foreign investment having taken place since the 1989 Velvet Revolution. Any acquisition of property by the government is now done only for public purposes (similar to property condemnation in the United States for public works projects, for example) in a non-discriminatory manner, and in full compliance with international law. It is likely that any investors losing property due to expropriation would receive compensation. Foreign investors in the Czech Republic are much more likely to encounter the related issue of restitution.
In 1990 and 1991, the federal government of Czechoslovakia enacted various laws aimed at compensating those people and firms whose property had been confiscated by the communist regime during the period of 1948-1989. Under the restitution law, 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 July 8, 1999.
The legal system recognizes preserved interests in property, but, due to the inexperienced and overburdened courts, these rights are often slow to be enforced in practice. Because of the large number of restitution claims submitted, it is imperative 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. While the process of tracing the history of property and land acquisition can be complex and time-consuming, it is the only way to ensure clear title. Title insurance is not yet offered in the Czech Republic. Investors under the privatization process are protected from restitution through the share purchase agreement, a binding contract signed with the government.
H. Dispute Settlement
The Embassy is unaware of any disputes between investors and the government or government agencies involving foreign investments that have already been completed. The threat of a possible dispute in the gaming sector was averted by the government's action to eliminate the discriminatory legislation earlier passed by Parliament (see "Openness to Foreign Investment"). Czechs have a commercial code and a civil code that are based largely on the German 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 the contractual relationships among parties. Most of these laws were promulgated under the former Czechoslovak government, and when the Czech Republic was formed in 1993, the new Czech government maintained the previous commercial and civil codes. Czech law leaves lots of gray areas, and, due to the youth and inexperience of the Czech court system, judicial decision may vary from court to court. Commercial disputes, particularly those related to bankruptcy proceedings, tend to drag on for years. The government does not interfere with the court system.
The need for an improved bankruptcy law remains an important structural impediment. Most observers believe the slow, uneven courts and weakness of creditors' legal standing have hampered the current bankruptcy law from acting as an effective vehicle for corporate restructuring. Members of Parliament and others have called for a bankruptcy law closer to the U. S. Chapter Eleven provisions or "London Rules" for out-of-court settlements to encourage resuscitation of troubled firms. The government is currently drafting an amendment to the law to address these concerns. Presently, there is a three- to four-year backlog in the bankruptcy courts and only a small secondary market for the liquidation of seized assets.
As a member of the New York Convention on the recognition and enforcement of arbitration awards, the Czech Republic is required to uphold 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. With respect to judgments of U.S. or other foreign courts, the rules are less clear.
I. Performance Requirements/Incentives
Investment Incentives: In 1998, the Czech government approved a six-point package of incentives to attract investment. The incentives are offered to foreign and domestic firms that make a $10 million manufacturing investment through a newly registered company. The package includes tax breaks of up to 10 years offered in two 5-year periods; duty-free imports of high-tech equipment and a 90-day deferral of value-added tax payments (VAT); potential for the creation of special customs zones; job creation benefits; training grants; opportunities to obtain low-cost land; and the possibility of additional incentives for secondary investments and production expansion. The investment incentive package has recently been the subject of ministerial disputes between the Ministries of Industry and Trade (anxious to attract as much foreign investment as possible) and Finance (concerned about the budgetary expenditures). In an effort to eliminate these disputes, the Ministry of Industry and Trade hopes to introduce a law detailing the exact responsibilities of government for offering the incentives.
There are currently no performance requirements imposed on foreign firms for establishing, maintaining, or expanding their investments, except in connection with the incentive package described above. These performance requirements generally relate to the amount of investment or hiring of employees if receiving special job-creation grants associated with the incentive package. For more information, contact CzechInvest, Director Mr. Jan Amos Havelka; phone: 420-2-2406-2227; fax: 420-2-2422-1804; address: Politickych veznu 20, 112 49 Praha 1, Czech Republic. The Czech Republic is in compliance with World Trade Organization (WTO) and Trade-related Investment Measures (TRIMS) notifications.
Workers' rights in foreign firms do not differ from those in other sectors of the economy (see "Labor"). To date, there are no restrictions on the use of foreign workers in the Czech Republic, although the process of obtaining the required permits may take a few months. However, an amendment to the employment law recently passed by the lower chamber of Parliament could restrict the validity of working permits to 3 years, requiring a mandatory 12-month hiatus outside the Czech Republic before eligibility for a new permit. This regulation should not apply to citizens of countries with which an international treaty ensures reciprocity, or those countries exempted by the government. The embassy is currently seeking clarification of the list of exempted nations, which will likely include all OECD member countries. The U.S. does not currently have a reciprocal employment agreement with the Czech Republic.
J. 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 exceptions noted previously concerning limitations in some sensitive sectors. Personal ownership of real estate by foreign individuals and companies is not permitted. This restriction also applies to Czech branch offices of foreign entities. Czech legal entities, including 100% foreign owned subsidiaries, may own real estate.
Mortgages exist, but, in spite of government subsidy programs, remain limited to those with working capital or property. Despite improved legislation, mortgages are uncommon and foreclosures are difficult to implement. According to U.S. lawyers in the Czech Republic, creating and enforcing security interests remains problematic at best. Investors should be aware that protection of these rights may not be fully assured until there is stricter enforcement and improved legislation.
K. Protection of Property Rights
The Czech Republic is bound to the Berne, Paris, and Universal Copyright Conventions. The government has brought laws for the protection of intellectual property to close to world standard, but enforcement has lagged. Existing legislation guarantees protection of all forms of 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 broad compliance with relevant EU directives and Trade Related Aspects of Intellectual Property Rights (TRIPS). As a result of problems with enforcement and delays in indictments and prosecutions, the U.S. Government has placed the Czech Republic on the Special 301 Watch List. The Embassy continues to work with U.S. industry and Czech government officials to improve enforcement of Intellectual Property Rights (IPR) norms.
Industry complaints have centered on the ineffective and slow prosecution and trial of IPR offenses, which eliminates the deterrent effect even if the initial police action occurs promptly. The Embassy has had an ongoing dialogue with Czech law enforcement and governmental officials as well as industry groups. Results include the formation of an interministerial committee and a law enforcement working group to coordinate the widely dispersed responsibilities for IPR crimes in the Czech government. In addition, the Interior Ministry designated IPR enforcement as one of its top priorities and named IPR coordinators in Prague and regional centers. Both the USG and industry have provided training for officials involved in IPR enforcement. In April 1998, the Embassy sent a group of Czech officials to a regional IPR enforcement training course at the U.S. Government's International Law Enforcement Academy (ILEA) in Budapest. In April 1999, the head of the Industrial Property Office was sent to Washington to meet with his counterparts at the Patent and Trademark Office. In May 1999 an official of the IPR interministerial committee was sent to a training course on IPR protection in Washington.
The Czechs are continuing to harmonize with TRIPS and parliamentary approval is expected on an amendment providing 70 years of copyright protection for literary works, up from the present 50 years. There are also two amendments to expand the tools of IPR enforcement: One, which is in Parliament to be approved in 1999, would boost the powers of the customs service to seize counterfeit goods; the other, still in draft, would allow the Czech Commercial Inspection (COI) to act independently in IPR cases. At present, the COI can only act in conjunction with the police. Also in preparation is a wide-ranging amendment to the criminal code that would double sentences in IPR cases to two years.
There have been a few incidents of proprietary information being misused or, allegedly, passed on to competitors in an effort to increase the competitiveness of a tender and thus possibly raise the bids being offered. Existing legislation on general protection of private information is likely to be difficult to enforce in the courts; however, confidentiality agreements are becoming more common.
L. Transparency of the Regulatory System
The Czech Republic has largely created a free and competitive market. The basic body of legislation that set up the framework for a free market system is the comprehensive commercial code that went into effect in January 1992. The new commercial code replaced approximately 80 assorted codes and regulations, and established the legal framework for most business-to-business activities. This code also brings Czech commercial law into compliance with most European Union commercial norms; harmonization is continuing as EU membership talks proceed. Bureaucratic procedures are not sufficiently streamlined and transparent, which sometimes hampers competitiveness.
Beyond the commercial code, the most significant legislation passed since 1991 affecting business practices includes the following (bankruptcy law, see VIII.H):
1. The banking law created a legal framework for the establishment of commercial banks that moves banking operations towards European Community standards. Two amendments to the banking code were passed in 1998 by Parliament. One amendment mandated the separation of investment and commercial banking, along the lines of the U.S. Glass-Steagal Act. The second amendment further strengthened the Central Bank supervisory authority and tightened the standards for bank management. A comprehensive new banking law is in preparation.
2. Czech tax codes are generally in line with European Union tax policies. In 1995, the government started to provide for tax write-offs of bad debts, although with considerably less generous treatment of pre-1995 debts. A key remaining bad debt issue centers on refunds or deductions for value-added tax (VAT) collected on bad debts. Wholesale companies are especially hard hit by the lack of VAT refunds because these companies collect VAT contributions for the government based on sales. The Czech government has continued its program of income tax reductions, and as of January 1, 1998, the corporate income tax was lowered from 39% to 35%. The tax rate for the highest tax bracket for personal income tax remains at 40%. Employers' and employees' social insurance contributions are, respectively, 35% and 12.5%.
3. Czech procurement law provides a 10% price advantage for domestic firms, including the Czech subsidiary or branch office of a foreign company. To harmonize the law with EU regulations and make it more enforceable, another amendment is currently under discussion in Parliament.
M. Efficient Capital Markets and Portfolio Investments
Foreign investors have access to credit on the local market, and credit is generally allocated on market terms. In the recent past, however, unhealthy ownership links between banks and companies, and investment funds spawned by voucher privatization led to the issuance of non-competitive loans, hurting the financial health of the banking sector. These unhealthy linkages have also led to a wide dispersion of ownership patterns, the blurring of corporate governance structures, and a lack of industrial restructuring. This, combined with the proliferation of securities markets, lack of regulatory framework for capital markets in general and consequent numerous cases of past financial fraud, led both international and domestic investors to limit their exposure to Czech capital markets. 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 the new rules, but problems remain and confidence is not yet fully restored.
The government retains majority control over the two largest Czech banks, Komercni Banka and Ceska Sporitelna, though it has announced intentions to privatize fully by 2000. The health of the domestic banking sector remains weak as a result of the current severe economic recession, poor payment discipline of many of the banks' clients and non-competitive loans offered in the early 1990s. The government hopes to improve the health of the sector through stricter bank oversight, privatization and improved bankruptcy laws. The estimated total assets of the banking sector in the Czech Republic stood at $10.7 billion as of March 31, 1999. Classified loans amounted to 27.1% of total credit volume at year-end 1998.
Defenses against hostile takeovers are not designed to exclude foreign investors, nor are cross-shareholding arrangements used to discourage foreign investment through mergers and acquisition. Foreign companies have access to industry standards-setting consortia, but access to legislation and regulations in the drafting stage is less transparent.
N. Corruption
The OECD anti-bribery convention, approved by the government, is expected to be ratified by Parliament in 1999. Parliament has already approved some legislation to help fight corruption more effectively through clearer definitions of "bribery" and "public official," and increased penalties. Current law considers both giving and receiving bribes criminal acts, regardless of the nationalities or titles of those involved (accordingly, bribes cannot be deducted from taxes). Proposed changes would increase jail sentences to up to eight years for officials. Legal enforcement authorities are responsible for combating corruption.
While there has been no lack of public accusations of bribery, few cases have reached the prosecution and conviction stage. Allegations of corruption are most pervasive in connection with privatization and government procurement. Proposed amendments to the procurement law and introduction of the OECD Anti-Bribery Convention should help curb illegal activities in this sphere.
O. Bilateral Investment Agreements
The former government of Czechoslovakia signed a bilateral investment treaty with the United States, which came into effect in December 1992. This treaty was carried over by the Czech Republic. Countries that have signed and ratified similar agreements with the Czech Republic include Australia, Austria, Belgium-Luxembourg, Canada, China, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Korea, Norway, Poland, Russia, Slovakia, Spain, Sweden, Switzerland, Thailand and the United Kingdom. Agreements with Israel and Mongolia were ratified and went into effect this year. In the process of signing or ratification are agreements with Bulgaria, Costa Rica, Indonesia, Jordan, Kazakhstan, People's Democratic Korea, Lebanon, Mauritius, Moldavia, Pakistan, Panama, Paraguay, Salvador, South Africa, Uruguay and Yugoslavia. A bilateral U.S.-Czech Taxation Treaty has been in force since 1993.
P. 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 InfoLine offers general information 24 hours a day: (202) 336-8799. Application forms and detailed information may be obtained from OPIC, 1100 New York Avenue, NW, Washington D.C. 20527. The Czech Republic is also member of the Multilateral Investment Guarantee Agency (MIGA).
Q. Labor
The wide availability of educated, 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 labor-intensive industries. Wages and benefits, which are only 10-20% of those in Germany, are on the rise, but it is estimated that the Czech Republic will still have lower labor costs in the year 2000 than those found in many neighboring industrialized countries. There are currently no shortages of special labor skills, though foreign investors still cite weaknesses in middle-management levels.
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 have staged strikes in the last year, notably the rail workers' and health workers' unions, as the government tried to limit public sector wage increases. Increased labor activity could occur due to current economic problems and steadily rising unemployment. Workers in the Czech Republic have the legal right to form and join unions of their own choosing without prior authorization. Currently, two-thirds of the workers are members of some labor organization, although the overall number of union members has fallen since 1991.
The Federal Ministry of Labor and Social Affairs sets minimum wage standards. A standard work week of 42.5 hours is recommended by law, but collective bargaining has brought the actual number of hours worked to 40. Caps exist for overtime, and workers are assured at least 30 minutes of paid rest per work day, and annual leave of three to four weeks per year.
R. Foreign-Trade Zones and Free Ports
Czech Republic law permits foreign investors involved in joint ventures to take advantage of commercial or industrial free trade zones into which goods may be imported and later exported without depositing customs duty. This duty need be paid only in the event that the goods brought into the Czech Republic are circulated in the local market. The investment incentive package also calls for duty-free import of high tech goods and the potential to create additional foreign-trade zones.
Currently authorized foreign trade zones in the Czech Republic are located in Cheb, Ostrava, Pardubice, Prague, Zlin, Trinec, Bor u Tachova, Uherske Hradiste and Hradec Kralove. Rules for operations within a commercial or industrial customs-free zone are the same as in the EU.
S. Foreign Direct Investment Statistics
Since 1990, the Czech Republic has attracted $10.9 billion in FDI. Germany is the leading foreign investor, with investments totaling $2.9 billion (26.3 %), followed by the Netherlands, with $1.8 billion (16.2 %), and the U.S., with $1.4 billion (12.5 %). Other major investors include Austria, the UK, France, Cyprus and Italy. In 1998, total FDI amounted to $2.6 billion, up from $1.3 billion in 1997 and $1.4 billion in 1996. The sharp increase of FDI in 1998 is generally attributed to the introduction of investment incentives and currently undervalued prices of some domestic firms due to the ongoing recession. Government officials anticipate FDI will continue to rise in 1999, likely reaching $3 billion in inflows. By sector, in 1990-1998, most FDI flowed into transport and communications ($1.8 billion, or 16.7%), trade, services & real estate ($1.5 billion, or 13.5%) and banks and insurance companies ($1.3 billion, or 11.5%). Other sectors included engineering, food, electronics, chemicals, consumer goods, energy, tobacco and construction.
Czech direct investment abroad totaled $661 million by December 1998. Principal destinations included Slovakia (30.5%) and Germany (12.0%), followed by Seychelles (8.0%), British Virgin Isles (5.8%), Poland (4.1%) and Cyprus (4.0%).
Significant foreign investors:
U.S.
Phillip Morris ($420 mil)
National Energy Corporation, El Paso Energy, NRG Energy ($400 mil)
Pepsi-Cola International ($200 mil)
Ford Motor Company ($115 mil)
E.M. Warburg Pincus & Co. LLC ($110 mil)
Sensomatic Electronics Corp. ($100 mil)
Procter & Gamble ($109 mil)Other
Telsource, The Netherlands/Switzerland ($1.46 bn)
Volkswagen AG, Germany ($900 mil)
IOC, U.S./Netherlands/Italy ($629 mil)
AssiDoman, Sweden ($499 mil)
Deawoo, Korea/Austria ($357 mil)
Glaverbel, Belgium/Japan ($232 mil)
Coca-Cola Amati ($200 mil)
National Power, U.K. ($200 mil)
T Mobil, Germany/Italy ($183 mil)
Siemens, Germany ($170 mil)
Dalkia, France ($160 mil)
Saint Cobain Group, France ($153 mil)
Toray Industries, Japan ($150 mil)
Continental AG, Germany, ($150 mil)
Bass International Brewers ($143 mil)
Linde A.G., Germany ($130 mil)
Dyckerhoff, Germany ($104 mil)
First International Computer, Taiwan ($100 mil)[end of document]
Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
