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CZECH REPUBLIC: An Introduction

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Introduction to the Czech Republic - Kocián Šolc Balaštík

The Czech Republic is one of the most successful CEE countries in terms of attracting foreign direct investment. According to the Czech National Bank, a total amount of more than EUR 130 billion worth of FDI has been recorded since 1993. The Czech Republic hosts almost 100,000 foreign companies of all sizes, including such leading multinationals as Volkswagen, Amazon, Honeywell, ABB, Continental, Ford, Nestlé, IBM, DHL, AstraZeneca, Rockwell, Procter & Gamble, Renault, Siemens, and Tyco, all of whom have significant subsidiaries in the Czech Republic.

Formerly a part of the Austro-Hungarian empire, the Czech Republic emerged from forty years of communist rule in 1989 after the peaceful “Velvet Revolution” and became a member of the EU on 1 May 2004. The Czech Republic’s EU membership allows for total free movement of capital, goods, people and services within all EU member states, and its location, geographically within the heart of Europe, is highly convenient from a logistical point of view for access of goods to other EU markets. During 2022, the Czech Republic will hold the presidency of the EU for the second time. The Czech Republic was the first CEE country to be admitted into the OECD and is a member of NATO, the WTO, IMF and EBRD.

In recent years, the Czech Republic has enjoyed very strong and stable economic conditions, with strong growth, moderate interest rates, one of the lowest unemployment rates in Europe and a stable currency. The Czech economy bounced back quickly from the global financial crisis of 2008/2009; the ongoing impact of COVID-19 is still being observed in real time. In 2020, like all countries in the global economy, the Czech Republic was hit by the COVID-19 economic slowdown, nevertheless it suffered less drastic economic effects than other EU members. After growth of 2.3% in 2019, the impact of COVID-19 on the Czech economy led to a GDP contraction of 5.6%, which was still nevertheless a lesser economic contraction than the EU average of −7.4%. Whilst the average unemployment rate in the EU was 7.7% in 2020 as a result of COVID-19, the Czech unemployment rate for 2020 came in at 3.1%.

Industry (with the automotive sector as the largest sector) makes up 32% of GDP, employing 37% of the workforce, whilst services make up approximately 56% of GDP and employ nearly 60% of the workforce. The tech sector is particularly strong in the Czech Republic, with Czech tech companies and entrepreneurs being highly sought after for their innovations. During the COVID-19 slowdown, the main business activity was seen in the areas of e-commerce, IT and technology, data centres, cloud solutions, fintech, real estate and energy. The areas most challenged by the various COVID-19 restrictions and shutdowns have been tourism and hospitality as well as automotive and manufacturing, due to the disruption of supply chains across Europe.

From the start of the COVID-19 crisis in March 2020, the Czech government introduced a variety of business support measures to support employers and business entrepreneurs. These legislative measures are being amended and/or being phased in and out in real time.

Two key areas of legislative change in early 2021 will be of interest to investors in the Czech Republic. A major amendment to the Business Corporations Act came into effect on 1 January 2021 and will impact inter alia distribution of profits and other capital funds, possibility to issue non-voting shares with economic rights only, simplification of the monistic management structure of joint stock companies and liability and remuneration of company directors.

On 1 April 2021, the new Act on Foreign Investment Screening, based on the relevant EU directive, will come into effect. This act is aimed at reviewing investments originating from outside the EU in strategic assets relevant to security and public order in the Czech Republic. Foreign investments which fall within the triggers of the new legislation will be subject to prior approval by the Ministry of Trade and Industry. Thus, alongside potentially needed notifications in respect of economic competition, investors will also need to consider due compliance and representation in matters of the Act on Foreign Investment Screening.

International investors are attracted to investing in the Czech Republic for a variety of strategic reasons. According to the 2019 Global Competitiveness Report published by the World Economic Forum, the Czech Republic ranks 32nd among 141 world economies, placing it at the top of the CEE countries in competitiveness. The Czech Republic has a highly skilled workforce, particularly in technology and engineering. Educational and literacy levels are high, yet wages are still attractively lower in comparison with its “Western” EU neighbours. The standard corporate income tax rate in the Czech Republic is 19% and there are bilateral treaties to prevent double taxation on dividends, interest and royalties with many countries, including all EU countries, the United States, Japan, Australia and Canada and numerous others.

The Czech Republic is a member of the Multilateral Investment Guarantee Agency (MIGA), an international organisation for protection of investments, which is part of the World Bank-IMF group. The country has signed a number of bilateral treaties which support and protect foreign investments, for example with the United States, Germany, the United Kingdom, France, Austria, Switzerland, Italy, Belgium, Luxembourg, the Netherlands, Finland, Norway, Denmark and China.

A range of attractive investment incentives are available to foreign investors in the Czech Republic. The most prevalent in recent years have been incentives for investments in the manufacturing industry, but the range of eligible projects now include business support services, covering shared service centres, software development centres, high-tech repair centres and data centres. As incentives are considered state aid, they are granted in full compliance with EU state aid regulations.

Incentives are provided under the Act on Investment Incentives, and consist of:

- income tax relief for up to ten years for a new company established for an investment project and partial tax relief for up to ten years for an existing company which will be expanding an investment project;
- cash grant for up to 20% of capital investment in certain strategic projects;
- employment subsidies in the form of grants for job creation and training with respect to technology centres (available only in regions with high unemployment rates).

Looking ahead into the rest of 2021, it is anticipated that there may be many interesting restructuring and distressed M&A opportunities for investors as a result of the structural and systemic fallout of the COVID-19 economic impact. Another separate trend in M&A in the Czech Republic that will continue to be strong in 2021 is the generational handover occurring in companies, as family firms are passed on in succession or sale to investors, after 25–30 years of development and establishment on the market. This tier of investment opportunity predominantly concerns medium sized enterprises.