International Company Relocation Opportunities: The Czech Republic
A wealthy market economy, the Czech Republic’s exports comprise 80% of its gross domestic product (GDP). Manufacturing is the country’s major economic activity which mainly consists of automobiles and engineering products. It is strongly influenced by export demands from the European region, and as a result, the economic growth is unsustainable and vulnerable to contractions in external demand.
However, the country’s financial system has stayed sound. Two years after the economy fell into recession, the country recovered in 2013, with the gross domestic product (GDP) reaching 4.5% in 2015, followed by 2.3% in 2016, and having a 2.5% increase in 2017, as predicted by the experts.
In late 2013, the CNB bought foreign exchange to fight deflationary pressures. In its forex interventions, the CNB has ended its cap on the currency’s value and set an upper limit for the exchange rate of 27 CZK/1 EUR to revive inflation and to lower import costs from the neighboring Eurozone. In the early 2017, the Czech National Bank has ended its cap on the Crown/Koruna currency’s value at 24 to 25 per dollar.
The CZK or Koruna is a freely convertible currency, so there are no foreign exchange controls affecting the trade in goods. The Czech parliament and the political action of the country’s leader, Prime Minister Bohuslav Sobotka has gained a reputation of having a positive attitude towards further European integration compared to any past Czech parliament. The country was able to meet 4 out of 5 convergence criteria of Maastricht for the introduction of the Euro. However, at the end of 2016, the Czech Republic did not join the 2017’s ERM II (Exchange Rate Mechanisms).
The Republic is contingent on European Union laws and the standards of the OECD for equality between domestic and foreign investors. Its labor law is fairly comparable among developed countries.
The increase in wages and persistent employment growth helped boost the Czech economy in the past years. It has been growing by around 5% every year. In 1992, a treaty between the United States of America and the Czech Republic concerning the reciprocal encouragement and protection of investments was made to stimulate greater economic cooperation between them.
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The post-communist competition law in the country has opened doors for privatization and competition in the market. However, the assemblage of antitrust violations has been ineffective.
Corruption is widespread in the Czech Republic. Currently, the country’s IPR defense is not at its best; even so, it was proven effective in serving penalties for infringement cases. Some western ideas, like CSR (corporate social responsibilities) and free enterprises, have become a trend in Non-Governmental Organizations and in other business communities.
The country has an open and internationally engaged economy. Generally, no limitations are imposed on foreign direct investments. However, there are limitations on certain sectors. It has been a popular destination for multinationals and has attracted high volumes of foreign direct investments because of its geographical location, diverse culture and capacity for innovation.
The Czech Republic has been taking advantage of the European Structural and Investment Funds, whereas these sources have been used in producing high tech and world-class centers. The Czech economy’s principal investors are mostly companies from European Union member states. However, the Czech parliament is currently targeting investment opportunities and more exports from non-European nations, such as South Korea, China, and the U.S.
The Czech Republic is ranked as the 47th least corrupt nation out of 175 countries in 2016’s Corruption Perception Index reported by Transparency International.
The Czech Republic is ranked 27th among 190 economies in the ease of doing business in 2017, reported by the World Bank.
The Czech Republic is ranked 27th among 128 countries and economies in 2016’s Global Innovation Index.
Regulations on Foreign Investments
Provisions on Foreign Businesses: The country benefits from FDIs (foreign direct investments). This country has an open door policy regarding foreign investments, particularly from European countries. Czech Republic records showed 84% of export business was connected to other European member states in 2016.
About 60% of shipments were made to Europe and 32% of them were sent to Germany, its biggest export. The global crisis in the economy was felt in the country as its most challenging situation in its history of trading business performance.
During the early part of 2013, the Czech Republic redeemed their economic stability and was acknowledged as one of EU's highest improvement in Gross Domestic Products. The Czech Republic gained 2.3% in 2016.
In 2015, the country ranked as the 15th richest European Union state member having an average of 87% of the European Union as per GDP capita. Trading industries have been experiencing excellence in terms of their performance each year from 2005 until 2016 which outperformed its statistics, earning up to $20B in surpluses.
The majority of revenues come from the export industry which was 83% of 2015’s Gross Domestic Product. The export industry's main businesses are machineries, Information Technology and vehicles.
The country has observed the business trend in the Europe for over a decade. The economic crisis in most countries was felt and even previous administrations hesitated to provide a forecast on when the country will regain its stability. During the term of PM Sobotka, the government implemented a Fiscal Compact aiming to take control of deficits up to 3% of the GDP, somehow leaning in the Euro’s favor. There was no associated political agenda when the euro was adopted in 2017.
During the economic progress of the Czech Republic, changes in terms of legislation and judicial proceedings were scrutinized because of slow progress. There were difficulties in terms of investments, restructuring of companies and competitiveness in the global market.
The government of the Czech Republic made an effort to pattern their existing laws to that of the EU legislative committee. Their approach was intended to attract investors from different countries by improving their services, whether related to the judiciary, to the financial market, to IP rights, civil and other services associated with foreign or local investors.
In terms of foreign investments, only a few of them have experienced loss, and most of them were part of media companies. The sluggish movement process of judiciary courts was due to a lack of exposure to business or IP cases in the country.
The World Bank released a list of successful countries in terms of Ease in Doing Business, and the Republic slipped one place from 26th to 27th out of 190 countries in 2017. The country ranked 53rd in terms of Small Investors Protection and slipped down 2 notches from its original rank.
Foreign and Local Investors had issues with corruption in their own sectors. Aside from corruption, other concerns were being outdated with technology and there were no opportunities to innovate and improve society with skilled individuals.
The country has attracted Foreign Direct Investors in 1990 and has been considered one of the progressive in the European area. In the past, most investments which flowed in the country were related to real estate, automotive, and energy sources. The Czech Republic, Poland, Hungary, and Slovakia managed to entice 70% of the FDI leading to improvements in government sectors and to research and development within the European area.
The Czech Republic has tripled its revenues in 2012, when it came out of the global economic crisis. The total international investments in the country amounted to 116 billion CZK in 2015, in comparison to 2014’s $121 billion.
The impressive growth of foreign investments demonstrated a comeback from the EU market crisis, which was mostly associated with the vehicle industry. At the moment, the country is on the next phase of the FDI process, reported to have been gaining revenues from foreign investments exceeding the amount of reinvestments.
The government has formed a public investment agency in 2016 and was able to acquire over 76 business projects in the country led by foreign businesses, about $2 billion in worth. Most projects were from Germany, the US, the Netherlands, and Austria.
Restrictions on International Relations and Ownership Rights on Private Properties
Foreign investors may enjoy similar provisions to Czech citizens. However, there are some restrictions in terms of registration requisites in banking, media, insurance and finance related services. They need to complete a registration in the Czech business Register for their permanent business addresses.
There is a professional license office which requires physicians, architects, and tax associates to get a membership. This is mandatory for both local and foreign professionals.
Starting with 2012, foreign nationals have the ability to own a property inside the country without any provisions. Even foreign business subsidiaries may acquire properties with no conditions. These rights were given to both local and foreign entities to attract investments which have full security from the government.
Businesses are even allowed to participate in legal activities which were previously denied or had restrictions in certain sectors. Insolvency, Accounting, and Auditing policies are always in effect. These policies are following the international standards for business groups.
Additional Reviews on Investment Policy
The Czech administration went through an investment policy analysis during the time it was joining OECD in 2001. Since then, the Czech government has not submitted to any third party supplementary review of investment policy.
The Economist Intelligence Unit and the 2017 “Doing Business” statistic by the World Bank similarly provided information on the investment climate in the Czech Republic.
Business Facilitation: A website accessible to the public called “Business Register” provides specific aspects of the business system, as distinctly stated by the relevant legislation. These are details such as name, location and business registration number, the definition of business activities, the business owner’s information and shares on equity, etc. Business Register Courts manage the website.
To join the Business Register, a hard copy of an application request may be submitted electronically or through directly at the Public Notary, conditional to meeting the standards for online registration required by law.
Another online information platform, Trade Register, also provides / collects information on bodies running licensed corporate activities.
The Trade and Industry Ministry provides a computerized guide on running licensed business, blow by blow assistance presentation that include links to relevant laws and to analytical data, and identifying authorities to work with (like registration of business, tax administration, municipal authorities and social security).
As stated in the Doing Business Guide 2017 of the World Bank, the Czech government is on the 81st spot in the category “Establishing a Business”. It is ranked 131st in construction permit processing and holds the 31st spot in property registration.
There are two public organizations that are handled by the Industry and Trade Ministry that help promote investments and / or business facilitation:
- The Czech Trade helps in the development of foreign trade and partnerships between the country and foreign bodies. By helping with export activities, the Czech Trade helps boost the Czech industry’s competitiveness.
- The Czech Invest, a subsidiary of M.I.T. founded in 1992 contributes by attracting international investments and helps develop domestic establishments through its development programs and services, along with the international promotion of the country. Czech Invest stands as negotiator between the European Union and Small / Medium scale businesses to ease the implementation of EU’s structural subsidies.
Subsequent to the EC 2003/362 Recommendations, the size of a corporate entity is defined based on the quantity of employees, on the annual turnover volume and on the assets’ volume:
- An MSME has 250 employees or less. The annual turnover is no more than €50 million and its total assets are worth €43 million or less.
- Small Enterprises (SME) have less than 50 employees, and its yearly turnover does not exceed €10 million worth of assets.
- Micro Enterprises employ less than 10 people, and the yearly turnover and the amount of assets is less than €2 million.
The Czech government doesn’t restrict local businessmen from investing internationally even though the outward investment volume is remarkably lower than the incoming FDI, which is an outcome of the Czech investor’s lower purchasing power.
The Trade and Industry Ministry created regional information pointers to equip consultancy services associated with business activities in the EU and in the Czech Republic.
Taxation Treaties and Bilateral Investments Arrangements: A BIT (Bilateral Investment Treaty) is shared between the US and the Czech government. The original agreement was signed in 1992 between the old Czechoslovakia government and the US, and the government adopted the treaty after the breakup with Slovakia in 1993. Subsequent to bargaining with the EU Commission on the conflicts on EU acquis communautaire, the Czech Republic modified the agreement in 2003, including the newcomers in the EU that had US BITs.
Various countries have ratified and signed the agreement with the Republic, while others are working on the ratification process. The Czech government has also formally abolished several treaties – mainly those with new / other member states of the EU, in conferring with the conclusion of the European Union. This stated that, provided the Commission’s recent investment capability within the Lisbon Treaty, the investment agreements among EU member states will now be contradictory with the European Union legislation.
A mutual Czech – U.S Convention on Double Taxation Avoidance has been enforced since 1993. The United States and the Czech government signed a mutual agreement in 2007 that absolves working Americans in the Republic from both U.S. and Czech social security payments. The agreement was reinforced in January 2009, and in 2013, a Supplementary Totalization Arrangement was signed between the two countries amending the initial agreement to mirror the new health insurance law of the Czech Republic.
Transparent Constitutional Framework: In general, ecology, labour, safety, health, and other regulations do not misrepresent or hinder investments. Laws are congruent with a commercial market. The Office of Anti-Monopoly is the principal legal agency that is completely autonomous in its policy-making processes and oversees the equitable competition between markets. The amended Act No.273-1996 by Act No. 187-1999 defines the agency’s sphere of capacities, which includes supervising government aid and public budget, as well as establishing conditions for security and support for competitions.
All state policies and laws are registered prior to entering the force. There are opportunities to consult regarding pending policies, and anyone interested may participate, including foreign companies. The government makes a biannual project of legal and non-legal work available online, together with data regarding draft policies and laws (mostly not available in other languages than Czech).
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Consumer and business organizations, such as the U.S. Chamber of Commerce, as well as other public agencies, may present feedback on state laws and policies. Regulations on bankruptcy, auditing, and accounting are in place, and global accounting guidelines are used for merging commercial entities.
According to a survey of the OECD regarding Country Economics in 2014, the Czech government has reformed its contradictory competition regulations as well as removed organizational obstacles that hinder competition. Its structure is consistent with the best practices approved by the OECD. However, cartels are yet to be successfully prosecuted.
Foreign Legal Issues
Becoming a constituent of the European Union compels a state to adhere to the special, pre-existing legal framework that puts primacy on the ratified laws and treaties of the Union over member states’ laws, as interpreted by member governments, supplemented to the Lisbon Treaty, and subject to the prerequisites established by the judicial court.
The European Union’s law provides critical guidelines classified as either:
- Primary regulations (laws developed from reinforced versions of the Treaty regarding the Workings of the EU and the European Union’s Treaty, which constitutes all EU decisions);
- Secondary regulations (which encompass all decisions, policies, and directives, founded on the treaty’s objectives and guiding principles).
Standard regulations are fundamental to global unification, and are derived from conventional laws. Standard regulations hold an intrinsic power to bind their constituent states, all of which must enable internal organizations to enforce these regulations through all legal channels and impose them on all concerned participants and their people.
Standard regulations, therefore, are determined by the lawful actions accepted amongst conventional agencies, executed by the constituent states, and governed by universal entities. The administrative policies of member countries are integrated in a variety of expertise in relation to conventional laws. “Acquis of the EU”, known formerly as acquis communautaire, is a treaty-based exclusive policy designed to create standard regulations, which overlap and hold primacy over the constituent state’s federal laws, regardless of whether federal policies precede or supersede European laws.
One of the architects of the 1947 GATT is the Czech Republic’s precursor, Czechoslovakia, which was also a constituent of the WTO. The Czech government, since its introduction into the European Union in 2004, has been a delegate in the World Trade Organization by the autonomous European Commission, the agency that represents all constituents of the EU.
Constitutional Framework and Legal Autonomy
The civil and financial code of the Czech Republic is heavily founded on Germany’s constitutional system, which adheres to a universal judicial framework where the fundamental spheres of judicial processes are catalogued. Financial code regulations are in connection to legal bodies and similar to US financial laws. The national law oversees all contractual interactions among entities.
The Czech Republic’s Financial Code has been terminated on New Year’s Day in 2014. The defunct bill and some sectors it governs are currently being directed by the Czech Act No. 89-2012 Coll of the Civil Code, while the others were nullified. The Corporations Act emerged to lead the areas primarily interested in cooperatives and trading entities.
Act No. 304-2013 governs all issues concerning the Commercial Register of the Czech Republic, such as the public registration of citizens and legal companies. The Corporations Act implemented significant changes to the country’s financial laws. They encompass not only the detailed conditions for acquisitions and time limitations on administrative decisions regarding business registrations, but also the security of minority investors and creditors.
The legal system is autonomous but convictions may change depending on the judicial court that handles them. The objective of creating diverse legal approaches may be that the recent Civil Code has not only rewritten the entire structure but has also invented in new terminologies.
Hence, the Civil and Penal Code, two important laws, have been implemented without a systematic law that illustrates how policies are enforced and permits courts to advance based on a detailed jurisdiction. These variances are attributed by some observers to the inadequacy of a systematic law that outlines the enforcement of the Civil and Penal Codes.
International Direct Investments: Policies and Legislations
A new national policy was launched in 2012 by the Czech government. It had introduced changes to existing domestic policies and set in motion the Corporations Act, a new law for financial entities effective New Year’s Day in 2014.
The country’s Bureau of Trade and Industry assists international companies in setting up and operating a foreign-governed commercial entity in the country via their online site. It includes information on how to best navigate through legal prerequisites, directing, and licensing in the European Union market. Czech Invest is an investment firm governed by the Bureau of Trade and Industry that offers consultation and support services to new financiers in the country.
Accountability: The Criminal Code includes criminal accountability-related violations that took effect on New Year’s day in 2010. Punishments include banning transactions, incarceration, and property relinquishment or monetary payment for damages.
Government accountability encompasses federal violations perpetrated by both legal agencies or individuals (or businesspersons as individuals).
A new legislation on the criminal accountability of legal companies has been implemented at the start of 2012, which enumerates a list of violations that legal companies may engage in. A legal company is liable for the conduct of its personnel, management, or of any entity it governs.
A recent data indicates 227 legal actions and convictions of legal companies in 2015. Fraud was the most commonly committed offense, specifically tax fraud, with extortion trailing just behind it, followed by environmental violations, totalling to 115 offenses.
The most common penalty is a fine, ranging from ten-thousand to fifty-thousand CZK, or about four hundred to two-thousand USD. This is followed by a public disclosure of the offense (via the press, television, or the Internet), and banning of transactions. The court ruled in favour of dissolving the entity in thirteen cases.
Beginning with December 2016, the statute on criminal accountability of legal companies was amended, expanding the liabilities and range of violations that may be committed by legal companies, which include libel, in contrast to the previous statute.
Regulatory Investment Framework: As Individuals or commercial entities, international financiers may build exclusive ownerships, branch offices, and joint ventures in the country. The Republic acknowledges limited accountability entities, joint-stock entities, other forms of business partnerships (general commercial, limited commercial, limited by investments), and unions.
Civil Treatment: Both domestic and foreign financiers are treated fairly by the law. The Czech Republic does not discriminate on the basis of nationality between investors belonging to various countries, and no screening is enforced on foreign commercial activities, with the exception of the defence, insurance, and banking sectors.
After an induction in the OECD, the government conceded to adhere to the agency’s code for equitable treatment of domestic and foreign investors, as well as administer restrictions on certain investment stimulus. The Czech-US Investment Treaty includes precise guarantees of equal treatment, as well as Preferred Nation treatment of American investors across all economic sectors, except real estate and insurance.
Antitrust Laws and Competition
The main force of the accountable state administration for making conditions is the UOHS (The Federal Agency for Safeguarding Competition). It supports and secures rivalry, administration over public acquisition, including discussion and tracking in connection to the supply of help from the state. For a six-year term, the part is directed by an Administrator who is delegated by the Czech Republic’s President.
Seizure and Compensation: Attainment of property by the government is completed just for available functions in a very non-oppressive way. The Consulate is conscious of only one instance of potential charged arrogation of a United States foreign expenditure.
A potential Capitalist should initially guarantee he needs a transparent title to any or to the entire land as well as a proportion related to the potential tasks. Method acting towards discovering the historical backdrop of a property along with land possession can be complicated and tedious.
However, it is important to guarantee a clear deed of conveyance. Title insurance remains a comparatively new idea within the country. Investors partaking in concealment of state-claimed corporations are shielded from compensation interests through a compulsory declaration marked by the administration.
Settlement of Dispute
ICSID Convention along with the NY Convention: The country is a witness and contracting nation towards the (ICSID Convention). In addition, it upholds the tradition of the Acknowledgement and Administration of Arbitration Awards (1958 NY Convention).
This tradition requires a local court of justice to administer a foreign arbitrary award if conformed in the lawful criteria. Functions for social control of outside judgments are often created by Czech’s courts and area unit, and then resolved in correspondence with a mutual recognition written agreement.
In the event one amongst these doesn’t occur, the function is upheld in agreement with the Czech law. Ordinance is rendered in different European Union countries and is permissible in correspondence with applicable European Union laws.
(ISDS) State-Investor Dispute Settlement: The European nation turned into an affiliate category towards the ICSID Convention in 1993. The Czech Republic and United States Bilateral Investment Treaty (BIT) in 1993 contains arrangements with respect to the clearing of questions through worldwide assertion.
Foreign Courts and the International Commercial Arbitration Law: Intervention is acceptable in each region of law, with the exception of where it’s barred by enactment. Intercession is a choice in each law space, including jurisprudence, family law, and the legal code.
Mediators are often condensed between gatherings to a debate, and established through the same origin among the Czech Bar and the Czech Mediators Associations, rather than the Czech Republic Mediations Procedures together with the Union Arbitration (a variety of alternative nongovernmental organizations / NGOs along with other elements’ act in the realm of mediation).
Intercession is ruled through Act No. 202 of 2012 by intervention, and within the space of criminal procedures, through Act No. 257 of 2000 by the Czech Republic’s Service of Mediation and Probation. The Service for Mediation and Probation guarantees the preparation of go between acting inside the criminal equity framework. Preparing in the region of non-unlawful intervention is obtainable by a scope of citizens and academic organizations.
An understanding between gatherings to the intercession in a common case might be suggested to the ordinance for endorsement with regards to promoting procedures. The consequences of interventions provided within the setting of criminal procedures in connection with the Mediation and Probation Service could likewise be mulled over by the general public attorney and also by the ordinance in a given event.
Another adjustment to the laws of bankruptcy, which will materialize on the 1st of June 2017 incorporates such arrangements as a denial of discussion, a limitation of voting privileges of the leasers from the borrower’s gathering, arrangements against “harassing” indebtedness petitions, as well as stricter tenets for recording the presence of a case when documenting a lender’s bankruptcy petition.
It likewise sets punishments for bankruptcy directors of up to 5 million Czech Koruna ($200,000) through the genuine regulatory infringement. For example, inability to express the whereabouts of the liquidation overseer where the chairman really executes his exercises.
Policies in Different Industries
Incentives on Investments: The Czech Republic entices both local and foreign companies to put up businesses in different sectors like manufacturing, research, technology, support services, service offices, etc. The incentives come from the country's government funds and a portion come from EU assistance funds.
The developments of these incentives brought the Czech Republic an expansion of qualified districts from 4 to 14. The government wants to lessen the unemployment rate of affected regions by implementing programs which will attract investors to generate jobs in those areas.
Free Trading Areas: The European Union and the Czech Republic have allowed foreign businesses to make use of commercial and custom-free areas in which products are imported and investors are not obliged to deposit fees. This benefit is applicable to most goods, and charges are only paid when products are brought to the local market.
The Czech Republic is also part of EU's customs community which is single in nature. However, after a few exemptions on taxes, 11 free trade areas did not perform well.
Requirements on Local Data and Performance
Requisites on Performance: Some posts are not informed of the Czech government’s requirements in terms of performance in relation to foreign businesses. However, there are certain exclusions, particularly for those getting incentives from the administration.
Storing Data: Regulating data safekeeping is protected by the European Union's provisions.
Property Rights Security
Real Properties: Properties, like buildings and lands which are in the country, are required to be listed in the Registry of Cadastral. The Registry of Cadastral is the central source of all information regarding real estate properties. This registry includes all information pertaining to measurements of land areas, units of houses, non-residential units, and buildings, which are available to the public.
If requested, data can be retrieved from them. In terms of details regarding ownership titles, the effective date depends on the stipulated date as well as the agreement in writing which is expected to be the same information indicated on the title as per Cadastral's data. The country has reached the 31st place in terms of ease in the registration process according to the World Bank in 2017, about 5 spots higher than its previous place in 2016.
Provisions on Intellectual Property: The Republic is an advocate of IP rights. The country was part of the Universal Copyright Symposium. The Czech government has confirmed the WIPO Copyright Agreement as well as the WIPO Agreement on Phonograms and Performances. The local legislative body ensures security relating to IP rights, including copyrights, patents, trademarks, utility models, and industrial concepts.
Changes associated with laws on trademark and copyrights made the Czech Republic's laws calibrated with the European Union's provisions, as well as with the World Trade Organization's mandates on IP rights requirements. As per the Czech civil code, the government is authorized to take over if there are any concerns that compromise the entity.
For almost 70 years, publishing companies including the authors have experienced protection in terms of their works. Czech customs and their Business Inspection team are tasked to confiscate any fake products.
In 2006, there was a revision of Laws on the Civil Code aimed to make policies easy and quick to implement in the business community. Piracy was one of the concerns, and provisions made enforcers implement their tasks effectively to recover and prevent losses.
In 2010, the Criminal Code took effect. It was intended to increase sanctions relating to trademark issues, violations on copyrights and rights on industries which originally started from 2 to 8 years. Reports of these incidents can be found on the internet.
Statistics also showed Austria and Germany have issues on IP rights violations. This used to be a concern. However, in 2008 the Czech government exerted actions and implemented strong policies for Intellectual Property Rights' sake. The Czech government also addressed piracy on the internet making holding culprits liable by strengthening their cybercrime teams. The Czech administration is still consistently working with the US government in enforcing strict laws on IP rights.
Portfolio Financing and Investment Markets: Portfolio Investments are accessible in the country. The PSE (the Stock Exchange of Prague) is quite small, with fourteen listed entities. Total investments have increased sluggishly in 2015 from 167.9B CZK (about 6.8B USD) to 168.03 CZK the succeeding year, with a daily trading capacity of 666.76 million CZK or 27 million USD.
The Prague Stock Exchange index (PX) has been declining for the past 5 years. It saw a 3.6% decrease in 2016, and its progress is similar to the developments of the Euro Stoxx index, due to its leading drivers: VIG, CEZ, Erste Bank, and Komercni Bank.
The PXE (the Energy Exchange in Prague) was established by the PSE in March of 2007 to market electricity in Slovakia, the CR, and Hungary’s officially named Power Exchange Central Europe. The objective of the PXE is to strengthen electricity’s market liquidity and to launch a systematized framework for energy exchange.
To upgrade the governance of dealers and brokers, a new investment policy was introduced in 2001. Afterwards, 2006 saw the merging of control over financial institutions, pension funds, insurance and capital markets under the National Bank of the Czech Republic.
As the authority supervising the financial industry, the CNB (Czech National Bank) enforces regulations to secure the development of financial entities, retirement and insurance companies, as well as investment firms. The goal is to systematize the regulation, supervision, and whenever necessary, the issuance of penalties for companies that do not comply.
As an information pooling system of credit commitment information of individual and legal investors, the CCR (Central Credit Register) assists in the effective exchange of information between parties of the CCR. These parties are all financial entities and subsidiaries of multinational banks operating in the country and other parties selected through a special administrative law.
The CNB is the chief CCR supervisor and project guarantor for CCR system development. Together with each participant, it is given access to system information and is mandated to update the CCR database monthly.
The initiative was launched with the joint participation of the Banking Association of the Czech Republic. The CCR weighs the feedback of individual financial entities, takes them into consideration, and uses advanced information technology to meet stringent requirements on data security.
Investments and the Financial System
Most large local banks are part of Europe’s banking group and conduct business conservatively. They are almost exclusively focused on the Czech Republic’s local market. Consequently, local banks remain unscathed during the recent worldwide financial crisis. As administered by the CNB, the results of tests conducted regularly to measure the financial sector’s stress levels consistently confirm the excellent health of the country’s financial industry, which averages on an investment competency ratio beyond 17%, a score considered adequate to provide a buffer to a possible economic trauma.
This recently conducted stress test by the Czech National Bank is available publicly and illustrates a significantly tougher criteria in comparison to the ECB (European Central Bank). By the end of 2016, the overall investments of financial entities and banks stand at 5.47Tn CZK, or roughly 225 billion USD, as per the CNB. Multinational financiers are allowed access to the domestic market’s bank credit, which is generally distributed in financial terms. The rate of local household debt via foreign currencies, however, is insignificant.
The 2004-25-EC Directive of the European Union on Merger Bids covers the issue of aggressive mergers.
Remittances and FOREX
FOREX: The Czech Republic’s currency is the Crown, which can be converted fully. Because of the crown’s association with the Euro, the CNB in November 2013 has interceded to diminish the crown in relation to the Euro in order to avoid an economic deflation. It has announced in 2016 that a plan to revert to a common monetary regulation is possible in mid-2017.
Border declaration of exported and imported goods is required, especially merchandise that is equivalent to or goes above ten-thousand euros (13K USD) in money orders, high-value commodities and securities like precious stones and metals, as well as traveller’s checks.
The CNB governs the multinational exchange marketplace and monitors its adherence to foreign exchange laws.
Regulations on Remittance: The treaty on the Czech-US Bilateral Investment secures the recovery of profits from investments made by the United States in the Czech Republic, and all multinational transfers of royalties and profits from investments can be freely conducted.
However, the Republic accrues a 15% withholding tax on investment profit recovery, which is decreased based on applicable treaty rules on double taxation. As per the United States treaty, for example, a rate of 5% is imposed if the US investment firm has control of 10% or more on the Czech company, which could reach 15% in other circumstances.
No legal obstacles exist in order to remove investments or capital. Current regulation allows converting currencies. The three-working-day delay average of remitting investment profits satisfies international standards.
Independent Wealth Fund: The Czech Republic does not conduct any independent wealth fund.
Government Owned Establishments
The Finance Ministry manages the right of ownership of government owned establishments or SOEs. Act No. 159 of 2006 covers any possible conflict of interest. The public service law took effect on January 2015 and entrenched measures to avoid political influence on public administrations that include SOE operations.
Private establishments are normally allowed to challenge public enterprises in equal terms and agreements corresponding to access markets, government contracts, credits and alternative business operations, even though there are allegations that big domestic corporations – including both private firms and SOE’s – use their connections and political power to gain biased advantages.
The SOE supply or purchased goods / services come from foreign or private establishments. SOEs is subjected to similar local accounting standards, taxation rules, and policies compared to their private rivals. The government doesn’t provide material benefits in comparison with private institutions.
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Most state owned establishments exist in several vital fields that include energy, information and communication, postal services, and the transport section. The Czech government also possesses interest in 2 small scale banks and insurance companies. The insurance firm and a bank deal with exclusive export financing, and both SOEs and private firms can avail their service.
SOEs are mostly structured like joint-stock enterprises. They don’t report to the ministries directly, but are handled by a statutory body (Directors Board) and by the Supervisory Board, which mainly includes government representatives and labor unions.
They stand as employee representatives, both unions as well as nonunion, as prescribed by the law. Like the joint stock corporations that are privately owned, SOEs must take responsibility for their third party liability, although stockholders are not directly liable for the company’s obligations. SOE is mandated by Czech law to have a published yearly report. Accounting books are disclosed and comply with a separate audit.
SOEs and private establishments execute procurements in line with the Public Procurement Act No 137 of 2006 that is fully compatible with the current EU law regarding Public Procurement. In accordance with the continuing efforts to achieve one rule on public procurement objectives, the EC proposed to enhance the 2004/17/EC Directives on acquiring postal services, water, transport, and energy areas.
The EU Parliament and the EU Council adopted new directives on February 26th 2014. European Union counties need to adopt the new regulation to a national law until April 2016 (with an exception on e-procurement that is given until October 2018).
Recommendations from the OECD on SOE’s Corporate Governance
Being a member of the OECD, the Czech government endorses the OECD’s Corporate Governance Principles and the associated rules on SOE’s Business Governance. SOE is accountable under the same law as private establishments regarding their market activities. The Finance Ministry manages the government’s proprietorship of SOE’s.
The rules covering Corporate Governance are:
- The Criminal Accountability of Legal Entities Bill;
- The Corporate Bill;
- The Civil Code;
- The Capital Markets Bill;
- The Audit Bills;
- Bank resolutions;
- The Money Launder Bill;
- The Public Procurement Bill.
A Management and Administration Code was established in 2004, constructed on the Corporate Governance Principles of the OECD, to structure operation standards for business establishments and their connection with investors, stockholders, auditors, and creditors. As an outcome of numerous succeeding legislative updates, rules of corporate governance are now being developed to replicate current movements in corporate management and administration, also meeting the new rules (that will be) assumed by the European Union, such as the obligatory provision for data collecting.
Courts act autonomously and are professed to be intrusion free. We are unaware of any indication of discriminatory demeanor presented by a law court regarding SOE favoritism.
Shifting to Private Companies
The Finance Ministry of the Czech Republic has confirmed about 90% of the previously government-owned sectors are now managed by private companies, starting from 1989. These projects were offered to foreign businesses.
In addition to this, most sectors which shifted to private companies have support from foreign investors. However, the Czech administration still has the authority to review the impact of proposed investments which affect state-owned enterprises. During these times, there were reports of irregularities in the past and future privatization projects.
In 2013, the administration ratified a turnover of 44% shares in the airline industry to a foreign airline company which is Korean Air. The administration saw an opportunity to take a risk doing business with an Asian company which led to bigger chances of widening different destinations.
The Czech government made sure all provisions set by the European Union were observed and approved by its commission. The administration tried to make Czech Airlines run by a private sector but was not successful. This occurred in 2009.
Travel Service took 34% shares in Czech Airlines in addition to this. Other companies which invested in the same airline industry, like Czech Aeroholding, acquired almost 20% of the share and the Czech Republic Insurance Office (Ceska Pojisovna) took 2.26% of it. At the moment, there are no indications that privatization is in process.
Responsible Business Practices
The idea of having responsible business practices in the country is relatively new. The administration adopted the idea of having corporate social responsibility. This is relevant to implementing fair business practices in the country.
The components of having a responsible business conduct include accountabilities in labor relations, environment, finance, and human rights. The Czech government has also acknowledged the formation of trade unions as well as of private sectors which play a vital part in making Corporate Social Responsibility a success.
In 2014, the administration approved a National Action Project for CSR's benefit. The plan was formed with the help of Non-Government Organizations, private businesses, and was eventually discussed by the Czech's Ministry of Trade and Industry. The National Action Plan's goal is to create basic policies designed to promote and support CSR, emphasizing on the concept that it must still be voluntary.
The Czech government has some sectors which have been supportive of these ideas. In 2015, the Quality Office of the Czech Administration promoted CSR by making national campaigns and by creating a portal where private businesses, the NGOs, other public sectors, and even the locals receive information about CSR in the country. They also took part in some public forums to show their interests are not limited to their mandate but are also committed to social responsibility.
The recent National Action Plan includes the concerns of private and public offices that it may not sustain the longevity of the program. That is why NAP emphasized the significance of taking into consideration longer term environment and social effects when making critical decisions, and not focusing too much on the financial repercussions.
The administration's strict approach contributed to an effective enforcement of laws, particularly in consumer protection, labor rights, human rights, and natural resources preservation to ensure the community is protected from its damaging impacts. Local standards have excellent ratings and are compliant with the requirements of the European Union. If there are any violations of these policies, there is a corresponding sanction and the Czech government is taking it seriously.
Shareholders are guaranteed security by the administration through detailed information on legal aspects, administration, organizational structure, and business management which includes the stakeholders.
It is not mandatory for businesses to disclose data on their CSR or RBC events. On the contrary, these companies are awarded for their advocacies and acknowledged for their humanitarian efforts.
There are several domestic NGOs which oversee and promote CSR projects, like Nadace Via, Business for Society, Business Leaders Symposium, CSR Association, and the Committee on CSR of America's Commerce Chamber. Some NGOs have yearly awards for companies which have shown exemplary performance in terms of awareness and responsibility. They reward them to motivate the businesses to give back to the community.
Several private companies aim to get the prizes which are divided into 12 categories. This event gets the attention of the media, and it benefits the marketing strategy of companies effortlessly. Through these series of events, both medium and small companies have increased the number of applicants, which indicated the CSR is indeed a success in terms of entrepreneurship.
The Czech administration has made strong efforts in encouraging domestic and foreign businesses to comply with the principles set by Responsible Business Conduct in connection with the Policies for Corporate Businesses, as well as the UN's Principles for Human Rights and Businesses. The guidelines set by OECD members were supported by the NCP and the UN's Principles and are still evaluated by the government to have independent regulations before they are enforced.
The Czech government has kept the NCP to ensure it still follows the principles of the OECD started in 2013. The NCP is composed of authorized representatives from different sectors, like organizations of employers, the government, organizations of employees, and some NGOs. It is being monitored by the Ministry of Trade and Industry.
During the latter part of 2016, the NCP organized a significant seminar which emphasized on the mission and the principles set by the OECD. The purpose of the event was to engage each person authorized by unions, businesses, and the government to its provisions, mission, and to be informed of the NCP’s events.
With the help of Norway’s NCP, the Czech administration was able to see the implications of the policies which were in effect in their home country. The NCP of the Czech Republic is proactive and cooperative with their fellow NCPs in sharing their critical experiences, processes and effective practices.
The authorized administration follows the guidelines of Due Diligence at OECD. Recently, the same group is responsible as per the EU Commission's instructions for the entire supply chain. The Ministry of Trade and Industry is enforcing policies which are eventually forwarded to the European Union's legislative body.
In terms of natural gas and oil resources, the Czech Republic has been dependent on its supply from different countries. There were no specific ways to identify and check the expenses incurred by the government for the proposals in developing natural gas, oil and minerals in the country.
The government did not have transparency in releasing information relating to projects in developing the oil, minerals or natural gas industries. The compensation for mining minerals was regulated by the Mining policies. The foreign trade of gas, minerals, and oil did not have any special legal proceedings. They followed the international trading agreement. The country is not a candidate for the EITI and does not comply with EITI standards.
The present constitution prohibits corrupt payments, receipts or solicitations of a private favor for official action notwithstanding the offender’s citizenship. Jail punishments for bribes or misuse of authority can be up to 12 years for officers. The police combats corruption with the use of wiretapping and other tools.
Prosecuting public officials for corruption is usually done by regional prosecutors to guarantee fair law and no bias. The parliament trusts that regional state prosecutors recognize the local situation much better than their associates on the administrative division.
The UOOZ (Organized Crime Investigation Unit) of the State Police, as well as the Unit for Combating Financial Crime and Corruption (UOKFK) is principally responsible for scrutinizing cases of grand corruption. There is no tax deductibility for bribery cases and all laws against corruption are equally implemented to all foreign and local investors. The adjudication process permits authorities to seize and confiscate the proceeds from crime and compensation reassigned to relatives of corrupt public officials.
The present parliament has declared the prioritization of the battle against corruption and the enforcement of anti-corruption laws. It has legalized a revision of the government procurement law and new rules and procedures in public tendering.
Moreover, the legislative assembly is evaluating a new rule on law officers that visualizes a more distinct special counsel. It was subject to the approval of the cabinet before submitting it to the lower legislative assembly on the 2016 Spring Session.
There are 2 more bills on anti-corruption that are presently being contested in the lower legislative assembly: the political party funding bill and financial statement, as well as the disclosure bill.
United Nations Anti-corruption Convention, Organization for Economic Cooperation and Development Convention on Fighting Bribery
A decree presenting criminal responsibility for companies has become effective on the 1st of January 2012. The Czech parliament approved the OECD Convention on Anti-Bribery in the early 2000, as well as the United Nations Anti-corruption Convention (UNCAC) in the early 2014.
There may be no implementation of the Organization for Economic Co-operation and Development Convention in the country based on Transparency International reports. Transparency International has shown an inadequate description of bribery offenses, jurisdiction limits, an absence of coordination among enforcement and investigation entities, insufficient protection to whistleblowers, and absence of awareness that causes the absence of enforcement.
In 2011, the country has become an affiliate of the Open Gov’t Partnership. It accepted the proposed strategy and a Civil Service Act that was planned to prompt a framework enabling open access to info and data publishing.
The State Reconstruction is a new initiative against corruption that was launched in 2013. This coalition of almost 20 locally well-known organizations against corruption has worked together to strengthen the reform against corruption. Organizations have supported the implementation of the Six Strategies to fight Corruption.
Companies from the United States of America were never discouraged from capitalizing in the country despite the prevalent problem with corruption. The procurement reform act of 2012 has dropped the limit for the application of contract standing orders related to procurement with 1 million CZK or $50,000 in value for services, and with 3 million CZK or $150,000 value of construction. However, the Senate eventually revised it by increasing the threshold to 10%.
A company must have more than 1 bidder per procurement and a publication of tender is required and mandated by law. The bidders are also lawfully required to Disclosures on Ownership Structure. However, there are some exemptions to that duty. Businesses from the U.S have noted that inconsistency in competition policies can be a hindrance to investments.
A revision to the rules on the Central Contract Registry was ratified in 2015 and has been effective on July 2016. All regional, national, and local government authorities and corporations are required to make contracts of 50,000 CZK / $2000 or of a higher value.
Security and Political Framework
The country has a very low threat of political ferocity. The democratic government is very sound due to the support of political institutions. Elections have caused peaceful and systematic parliamentary modifications.
Employment and Labor Laws: In the past few years, the Czech labor market has been performing strongly with a solid variation in the demand for skills. The labor force is concentrated in several economic sectors, such as the industrial sector, particularly in machinery.
Overall, the Czech Republic is an export-oriented country and has great demand for professionals, skilled manual workers and those highly qualified in science and engineering. It also has a huge labor demand for qualified and skilled workers in the electronics and IT sectors.
The local labor force offers a set of advantages to foreign investors in accordance to the needs of the market, such as low labor costs, as well as educated and trained workers. The income gap is swiftly rising. There is a massive gap between the incomes of workers in different fields of work due to the economic crisis in the Czech Republic.
Based on 2016’s third quarterly report of the CSO, the labor participation rate for the working age population of 15 years old or above was at 60.1%, while the rate of unemployment was at 4% (the lowest among member countries of the EU). The rate decreased in the 4th quarter reaching 3.6%. However, it varies between Czech regions. The lowest rate of unemployment was 2.3% in Prague and the highest was 6.4% in Moravia-Silesia
Collective Bargaining and Freedom of Assembly / Association
Czech employees have the right to freedom of assembly and association, the freedom to organize and bargain collectively, and also the freedom to strike. Foreign and local workers are allowed to exercise these rights without harassment and without being arrested. The law forbids discrimination against workers because of union activity. However, collective bargaining by public employees is prohibited, unlike in the private sector where it has been completely liberalized. Labor laws permit the freedom to strike but forbid strikes in the service sectors or essential services, particularly in water and electric services, hospitals, the ATC sector, in the nuclear power industry and in the petroleum industry. There are legal restrictions to organizing and bargain collectively for government employees due to wage regulations. In addition, only labor unions can represent workers and non-members legally.
Child labor abolition: An individual under 15 years of age that has not completed compulsory schooling is prohibited from taking employment. However, it is possible for an individual who has reached 15 years of age to enter employment, but only under certain regulations. Some areas are regulated, such as working conditions and hours, whereas employment should not affect worker’s compulsory school attendance. Violators of child labor laws will be fined up to $83,000, and these regulations are being efficiently enforced by the SLBI. So far, there have been no cases reported by the SLBI of violations on this law.
Standard Working Conditions
The average weekly working time has been fixed at 40 hours with 2 days off, including a 30 minute break within the standard 8 hours working time per day. Workers are eligible to annual paid holidays for twenty days. Overtime work may be ordered to a worker, but may not exceed 8 hours / week and 150 hours per year. In excess of this scope, further overtime requires worker’s approval. For overtime work, workers are entitled to extra pay to their salaries of no less than 125% of regular earnings.
Enforcement of a statutory minimum wage was established by the Ministry of Social and Labor Affairs. Recently, the statutory minimum wage was $375 or CZK 9200 and has increased to $403 or CZK 9900.
However, the value of the dollar has declined because Koruna has depreciated against the American dollar. The monthly sustainable cost of the rudimentary needs of an adult worker is $90 per month. The main objective of the State Bureau for Labor Inspections is to effectively implement the statutory minimum wage.
The Czech Parliament sets standards for safety and health at work. Under the Czech labor law, employers are required to secure the worker’s health and safety at work to prevent any safety and health risks.
Overseas private investment corporation: In 1999, The Czech Republic and OPIC have signed an agreement, making the OPIC’s finance program and investment insurance accessible in the country. The offices of OPIC in Washington were contacted by investors for updated information with regards to the availability of eligibility and services.
FDI and the Country’s International Investment Position
The CNB has amended the valuation method of FDI stocks, a revaluation of equity capital stocks across the border from book value to market value. However, for the shares of local companies in FDI and the unquoted shares, the valuation of usage of owned funds at book value remains in place. The Direct Foreign Investment Stock of the United States Foreign was at $4.38 billion in 2014, and later at $1.56 billion due to the impact of the revaluation method.
CNB data and the rankings of the five top destinations and sources of foreign direct investment stock for the International Monetary Fund (IMF) has a difference of around 10-20% of the actual figures of both inward and outward direct investment.
The sources and destination of Czech FDI signify a mix of the main trading partners of the European Union and the favorable tax climate. The Netherlands is the leading nation on FDI net inflows and outflows, and has become a business registration place in the 1990’s for the registration of local and foreign companies in the Czech Republic. For the past few years, the major reason why business registration was in the Netherlands is because of its friendly business tax rate and also to stimulate a swift growth of offshore companies within the Czech Republic.
Although the tax rates for businesses in the Netherlands and the Czech Republic have become almost the same, the Netherlands has maintained its popularity for having large companies. In the same way, Luxembourg also attracts Czech companies. Cyprus has the EU’s most favorable tax system for corporations and individuals, which is currently at 12.5% with no withholding tax. However, an independent examination of the financial record is required and applicable to all businesses.