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SUBJECT: CZECH 2010 INVESTMENT CLIMATE STATEMENT
REF: 09 STATE 124006
2010 INVESTMENT CLIMATE STATEMENT -- CZECH REPUBLIC
Maintaining an open investment climate has been a key element of the
Czech Republic's efforts to strengthen its market economy. As a
member of the European Union, with an advantageous location in the
center of Europe, relatively low cost structure and a well-qualified
labor force, the Czech Republic is an attractive destination for
foreign investment. Prior to its EU accession in 2004, the Czech
government harmonized its laws and regulations with those of the
European Union.
While the Czech financial system remained relative healthy, the
small, open, export-driven Czech economy suffered from a significant
decline in external demand, especially from its main trading partner
Germany. As a result, after three years of over six percent growth,
real GDP increased only 2.3 percent in 2008 and fell an estimated
4.4 percent in 2009, with most of the decline occurring during the
first quarter. GDP growth estimates for 2010 vary from 0.3 percent
(by the Ministry of Finance) to 1.4 percent (by the Czech National
Bank) with the pace of growth expected to slow throughout 2010,
before rebounding in 2011. The average inflation rate fell to 1.0
percent in 2009 (from 6.3 percent in 2008) and is forecast to reach
2.4 percent by the end of 2010. The unemployment rate increased to
9.2 percent by the end of 2009 (8 percent using ILO methodology) and
most analysts expect it to continue to rise throughout most of 2010.
The Czech government continues to offer incentives for certain types
of foreign direct investment. Legally, foreign and domestic
investors are treated equally. Intellectual property rights
violations at open-air markets on the borders of Germany and Austria
remain a bilateral issue, which the Czech government has begun to
address. The U.S. is among the top five investors in the Czech
Republic, according to the Czech National Bank (CNB) and investment
promotion agency CzechInvest. According to the World Bank's 2010
"Doing Business" report, the Czech Republic is the 74th best place
in the world to do business.
Openness to Foreign Investment
The Czech Republic has been a recipient of large amounts of foreign
direct investment (FDI), which, together with strong export growth,
has helped fuel economic growth, created new jobs, raised wages and
increased domestic consumption. GDP per capita in 2008 was 80
percent of the EU average. The Czech Republic's Gross Domestic
Product (GDP) increased 6.8 percent in 2006, and 6.1 percent in
2007, and remained strong throughout the first three quarters of
2008, ending the year with growth of 2.3 percent. The rate of
economic growth, however, began to fall in the fourth quarter of
2008, mainly due to a significant decline in demand for Czech
exports in Western Europe. Real GDP fell precipitously in the first
quarter of 2009, before beginning a modest recovery throughout the
rest of the year. Nevertheless, real GDP is estimated to have
dropped 4.4 percent for all of 2009.
As a small, open export-driven economy, the Czech Republic remains
sensitive to economic downturns in Western Europe, especially in
Germany, which is by far the Czech Republic's largest trading
partner. Over 80 percent of Czech exports go to fellow EU members
with roughly a third going to Germany alone. Estimates for GDP
growth in 2010 range from 0.3 to 1.4 percent with most of the growth
expected early in the year. The Czech crown has appreciated
significantly over the past several years, peaking in July 2008,
before depreciating sharply over the next seven months. The crown
appreciated throughout much of 2009 reaching early 2008 levels by
the end of the year. The volatility of the Crown vis-a-vis the Euro
and U.S. Dollar has prompted calls from the business community for
the quick adoption of the Euro. Adopting the Euro, however, has not
been a priority of recent governments. Moreover, in 2009 the Czech
budget deficit ballooned to an estimated 6.6 percent of GDP, well
above the three percent hurdle required for Euro adoption. Since it
is likely to take at least several years for the Czech government to
bring public finances under control, use of the Euro in Czech
Republic is not expected prior to 2015, at the earliest.
Inflation spiked in 2008 at 6.3 percent, partly due to a one-off
increase in VAT and excise taxes. In 2009, however, average
inflation dropped to only 1.0 percent as a result of the economic
slowdown. Inflation is forecast to reach 2.4 percent be the end of
2010. Unemployment, which was at a historical low of 5 percent in
mid-2008, reached 8.6 percent in November 2009 and is estimated to
peak at over 10 percent in 2010.
Some unfinished elements in the economic transition, such as the
slow pace of legislative and judicial reforms and the uneven
enforcement of contracts by the Czech courts, are continuing
obstacles to investment, competitiveness, and company restructuring.
The Czech government has harmonized its laws with EU legislation
and the "acquis communautaire." This effort has involved positive
reforms of the judicial system, civil administration, financial
markets regulation, intellectual property rights protection, and
many other areas important to investors. While there have been many
success stories involving American and other foreign investors, a
handful have experienced problems, mainly in heavily regulated
sectors of the economy, such as the media and aerospace. Investors
also complain about difficulties in enforcing contractual rights,
including security interests, and the general unpredictability of
the legal system. The slow pace of the courts is often compounded
by judges' lack of familiarity with commercial or intellectual
property cases. Needed reforms of the system for registering
companies have been slow in coming, but a new bankruptcy law, which
entered into force July 1, 2007, addresses some of these issues,
although many judges are still not fully versed in the new law.
Concerns about corruption have been voiced by foreign and domestic
businesses alike. The World Bank's 2006 Anti-Corruption in
Transition report ranked the Czech Republic the most corrupt country
in Central Europe. According to the report, the Czech Republic is
the only country among the eight new Central European EU member
states where the situation had worsened in the preceding years. The
U.S. Mission in Prague held conferences on transparency (Fall 2007)
and judicial reform (Summer 2008). A workshop on public corruption
will be held in the spring of 2010. Other long term challenges
include dealing with a rapidly aging population, an unsustainable
pension and health care system, and diversifying the economy away
from an over-reliance on manufacturing (especially the auto sector)
toward a more high-tech, services-based, knowledge economy.
Measure Year Index Rank
TI Corruption Index 2009 4.9 52
Heritage Economic Freedom 2009 69.4 37
World Bank Doing Business 2010 --- 74
The right-of-center, pro-business Civic Democrats (ODS) won the
greatest number of votes during parliamentary elections in June
2006, but no single party emerged with a majority. A government
coalition consisting of ODS, the Christian Democrats (KDU-CSL) and
the Green Party (SZ) won a Parliamentary vote of confidence on
January 19th, 2007, albeit with a very slim parliamentary majority.
In March 2009, however, the government lost a vote of confidence,
prompting the establishment in May 2009 of a an apolitical, interim
government of technocrats led by former head of the Czech
Statistical Office Jan Fischer, and supported by the Czech
Republic's two largest parties, ODS and the left-of-center Social
Democrats (CSSD). The interim government is expected to remain in
power until a new government can be formed following parliamentary
elections scheduled for May 2010. All mainstream political parties
welcome foreign investment. International businesses have
complained that the relatively weak governments and lack of
political continuity in recent years has complicated firms ability
to make long-term plans.
a. 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.
b. National Treatment
Legally, foreign and domestic investors are treated identically.
Both are subject to the same tax codes and laws. The government
does not differentiate between foreign investors from different
countries, and does not screen foreign investment projects other
than in the banking, insurance and defense sectors. Upon accession
to the OECD, the Czech government agreed to meet (with a small
number of exceptions) the OECD standards for equal treatment of
foreign and domestic investors and limitations on special investment
incentives. The U.S.-Czech Bilateral Investment Treaty contains
specific guarantees of National Treatment and Most Favored Nation
treatment for U.S. investors in all areas of the economy other than
insurance and real estate. (See the section on the Bilateral
Investment Treaty below).
c. Exempted Sectors
According to CzechInvest, the Czech agency tasked with attracting
and facilitating FDI and promoting small and mid-sized enterprises,
all sectors of the Czech economy are open to foreign investment.
Investors in the banking, financial services, insurance and
broadcast media sectors must meet certain licensing requirements.
Some professions, such as architects, physicians, lawyers and tax
advisors, require membership in the appropriate professional
chamber. These licensing and membership requirements apply equally
to foreign and domestic investors.
d. Privatization
According to the Ministry of Finance, more than eighty percent of
the Czech economy is now in private hands after several waves of
privatization of formerly state-owned companies since 1989.
Privatization programs have been open to foreign investors. In
fact, most major state-owned companies have been privatized with
foreign participation. The government evaluates all investment
offers for state enterprises. Non-transparent and unfair practices
have been alleged in connection with some past or planned
privatizations.
In 2009, the government began the privatization process for Czech
Airlines (CSA). However, CSA's management sold several of its
assets during the bidding process, making the tender less attractive
to potential bidders. The airline industry's troubles during the
global financial crisis also reduced interest in acquiring CSA. The
result was a single-bidder tender, which the government ultimately
decided to cancel, and CSA's privatization has been postponed
indefinitely. The Parliament also voted for legislation prohibiting
the privatization of Prague's Ruzyne Airport planned for 2010.
Although the President vetoed the legislation, the Parliament is
expected to override the President's veto later this year.
Conversion and Transfer Policies
The Czech crown is fully convertible. Imports or exports equal to
or exceeding 10,000 Euro (approximately 263,000 Czech crowns or USD
14,300) in cash, travelers' checks, money orders, securities or
commodities of high value (such as precious metals or stones) must
be declared at the border.
The U.S.-Czech Bilateral Investment Treaty guarantees repatriation
of earnings from U.S. investments. A 15 percent withholding tax is
charged on repatriation of profits from the Czech Republic. This
tax is reduced under the terms of applicable double taxation
treaties. For instance, under the U.S. treaty, the rate is 5
percent if the U.S. qualifying shareholder is a company controlling
more than 10 percent of the Czech entity, and 15 percent in other
cases. There are no administrative obstacles for removing capital.
The law permits convertibility into any currency. The average delay
for remitting investment returns meets the international standard of
three working days.
Expropriation and Compensation
The Embassy is unaware of any expropriation of foreign investment
since 1989. Government acquisition of property is done only for
public purposes (similar to property condemnation in the United
States for public works projects) in a non-discriminatory manner,
and in full compliance with international law. It is unlikely that
any investor losing property due to a governmental action would not
receive full compensation.
Another issue of concern to foreign investors in the Czech Republic
is restitution. In 1990 and 1991, the federal government of
Czechoslovakia enacted various laws aimed at compensating those
people whose property was confiscated by the communist regime during
the period of 1948-1989. Under the restitution laws, persons have
the right to claim compensation for property taken from them by the
communist government. Most claims for restitution of
non-agricultural property had to be filed by October 31, 1991, and
agricultural property by December 1992. There were additional open
seasons for claims in 1994 and 1998, but all deadlines for these
claims expired on July 8, 1999. In 2000, however, a new law to
alleviate some of the property damages during the Holocaust entered
into force. It amends the restitution laws allowing the state,
subject to certain conditions, to return communal Jewish property,
private works of art and land illegally seized by the Nazis to
entitled Jewish communities and individuals. While the deadline for
claims for land expired in 2001, the claims for art can be filed
indefinitely.
Although deadlines for submitting restitution claims are now
officially past (note: Czech court decisions have struck down the
deadline as it applies to direct restituents and their heirs), it is
nevertheless important that foreigners seeking to invest in the
Czech Republic first ensure that they have clear title to all land
and property associated with potential projects. The process of
tracing the history of property and land acquisition can be complex
and time-consuming, but it is necessary to ensure clear title.
Title insurance is not yet offered in the Czech Republic. Investors
participating in privatization of state-owned companies are
protected from restitution claims through a binding contract signed
with the government.
Dispute Settlement
The Czech commercial code and civil code are largely based on the
German legal system. The commercial code details rules pertaining
to legal entities and is analogous to corporate law in the United
States. The civil code deals primarily with contractual
relationships among parties. When the Czech Republic was formed in
1993, the new Czech government maintained the previous commercial
and civil codes. The laws have been extensively amended since then,
but gray areas still remain. The judiciary is independent, but
decisions may vary from court to court. Commercial disputes,
particularly those related to bankruptcy proceedings, can drag on
for years, though new bankruptcy legislation, which came into effect
July 1, 2007, should speed up the process. A new, streamlined
Commercial Registry process took effect on July 1, 2005. While the
new legislation is an improvement over the previous system, which
placed the registry process entirely in the hands of the courts,
companies report that in practice the process is still quite
time-consuming.
The new bankruptcy law addresses important structural impediments
such as the slow and uneven performance of the courts, weakness of
creditors' legal standing, and the lack of provisions for corporate
restructuring. According to local legal experts, the new law
shortens court proceedings and makes them much more transparent,
gives a stronger position to creditors and renders the entire
process more efficient. To this end, the new law has been given a
more extensive and more accurate structure, the terms it uses have
been made more exact, deadlines have been implemented and a number
of crucial decisions have been passed directly to creditors.
The Czech Republic ratified the Convention on the Settlement of
Investment Disputes between States and Nationals of Other States in
1993. The U.S.-Czech Bilateral Investment Treaty provides for
international arbitration of investment disputes with the state.
The Czech Republic has ratified the New York Convention on the
Recognition and Enforcement of Arbitral Awards. As a signatory of
the latter convention, it is required to uphold binding arbitration
awards in disputes between Czech and foreign parties. However,
arbitration of disputes between two Czech corporations outside the
Czech Republic is not permitted, even if the owners are foreign.
Applications for enforcement of foreign judgments can be made to the
Czech courts and will be determined in accordance with a bilateral
recognition treaty, if any, or otherwise pursuant to the
requirements of Czech law. Judgments rendered in other EU countries
are enforceable in accordance with applicable EU regulations.
Investment Incentives
According to current legislation, incentives are offered to foreign
and domestic firms that invest in the manufacturing sector. The
package for manufacturing projects includes relief from corporate
taxes for up to five years, job-creation grants, re-training grants
and opportunities to obtain low-cost land. Financial grants for
job-creation and/or re-training are provided to those firms
operating in regions where the annual unemployment rate exceeds by
at least 50 percent the national average. A partial tax incentive
is also available for expansion of an existing manufacturing
investment. Research and development centers and business service
centers in software development, shared services and high-tech
repairs can be currently supported through EU structural funds
(Potential Program, Innovation Program, and ICT and Business Support
Services Program).
The Czech Government currently is considering a new incentives
legislative proposal to support research and development and
business service centers through corporate tax relief of up to five
years (i.e. same as for manufacturing). No new incentive
legislation, however, has appeared since 2007. For more information
contact CzechInvest, at incentives@czechinvest.org, or
www.czechinvest.org.
Right to Private Ownership and Establishment
The right of foreign and domestic private entities to establish and
own business enterprises is guaranteed by law in the Czech Republic.
Enterprises are permitted to engage in any legal activity with the
previously noted limitations in some sensitive sectors. Personal
ownership of real estate by non-resident, non-EU foreign individuals
is not permitted, but since January 1, 2002, foreign companies
registered to do business in the Czech Republic and Czech branches
of foreign entities may own real estate, other than agricultural and
forest land. As of May 1, 2009 EU nationals can acquire
non-agricultural real estate without limitation. U.S. and other
non-EU nationals can purchase real property if they comply with
temporary residence requirements. Czech legal entities, including
100 percent foreign-owned subsidiaries, may own real estate without
any limitations. All foreigners will continue to face limitations
on the purchase of agricultural land and forests until at least
April 30, 2011, although the Czech Republic may chose to extend this
until 2014 under certain circumstances.
Protection of Property Rights
Existing legislation guarantees protection of all forms of property
rights, both intellectual and physical. Secured interests in land
(mortgages) and in personal property are permitted. Government
subsidy programs are making mortgage financing more accessible, and
consumers are becoming more used to using both secured and unsecured
forms of credit. According to American lawyers in the Czech
Republic, enforcing judgments and foreclosing security interests in
land and personal property can still be difficult in practice.
Major amendments to the Commercial Code came into force in 2001 that
strengthen protection of creditors and minority shareholders. The
law includes detailed provisions for mergers and places time limits
on decisions by the authorities on registering of companies. New
laws on auditing and on accounting were also enacted. These laws
include the use of international accounting standards (IAS) for
consolidated corporate groups.
The Czech Republic is a signatory to the Bern, Paris, and Universal
Copyright Conventions. In 2001, the government ratified the World
Intellectual Property Organization (WIPO) Copyright Treaty and the
WIPO Treaty on Performances and Phonograms. Domestic legislation
protects all intellectual property rights, including patents,
copyrights, trademarks, and semiconductor chip layout design.
Amendments to the trademark law and the copyright law have brought
Czech law into compliance with relevant EU directives and WTO
Trade-Related Aspects of Intellectual Property Rights (TRIPS)
requirements. Changes to the civil procedure code, effective
January 1, 2001, provide for ex parte search and seizure in
enforcement actions. The Czech Republic increased copyright
protection for literary works from 50 to 70 years, effective
December 1, 2000, and boosted the powers of the customs service and
the Czech Commercial Inspection to seize counterfeit goods. A 2006
amendment to the Law on Civil Procedure made ex-parte search more
accurate, clearer and easier to apply and enforce. The amendment
also makes it easier to define and get back losses caused to owners
by piracy. The new Criminal Code which came into effect January 1,
2010, increased maximum penalties for trade mark, industrial rights
and copyright violations from two to eight years.
Intellectual property rights (IPR) violations at markets on the
borders of Germany and Austria are an issue of concern to U.S.
companies and the U.S. government. The markets consist primarily of
open-air stalls which sell a variety of trademark and
copyright-infringing goods such as clothing, cigarettes and CD/DVD
recordings. Starting in 2008, the Czech authorities significantly
increased the scope and number of raids, resulting in a significant
reduction in the amount of pirated goods openly available. Criminal
and administrative penalties applied to IPR violators, however,
continue to be infrequent, mild and lacking deterrent value. The
Czech authorities have also yet to fully apply many of the legal
tools available to them to combat IPR piracy, including the
revocation of business licenses. USTR elevated the Czech Republic
to the Special 301 Watch List in January 2008 due to the extensive
violations occurring at the outdoor markets and the limited response
from the Czech government. The Embassy will continue to work with
U.S. industry and Czech government officials to strengthen
enforcement of intellectual property rights.
Transparency of the Regulatory System
Tax, labor, environment, health and safety, and other laws generally
do not distort or impede investment. Policy frameworks are
consistent with a market economy. All laws and regulations are
published before they enter into force. Opportunities for prior
consultation on pending regulations exist, and all interested
parties, including foreign entities, can participate. A biannual
governmental plan of legislative and non-legislative work is
available on the Internet, along with information on draft laws and
regulations (often only in the Czech language). Comments can be and
are made by business associations, consumer groups and other
non-governmental organizations, including the American Chamber of
Commerce.
However, bureaucracy and unnecessary red tape remain a source of
complaints by both domestic and foreign investors. Delays and
allegations of corruption are common, especially in government
procurement, and are of particular concern to foreign companies
operating in the Czech Republic.
A November 2008 OECD peer-review of the Czech Republic confirmed
that in content and principle Czech competition policy meets OECD
standards. An Act on the Protection of Economic Competition entered
into force in 2001, adopting rules consistent with EU competition
policy as regards restrictive agreements, abuse of dominant position
and merger control.
Efficient Capital Markets and Portfolio Investments
According to the CNB, in 2001 the last state financial institution
(non-joint stock companies established prior to 1989) was
privatized. The government has more than a 50 percent share of the
equity capital or is a controlling shareholder in two banks: The
Czech Export Bank and the Czech-Moravian Guarantee and Development
Bank. A significant financial crisis in the late 1990s--prompted by
poor banking practices throughout that decade--led to a major
restructuring of the banking sector and a significant improvement in
government oversight. Currently all large domestic banks belong to
major European banking groups, are generally extremely conservative
and concentrate almost exclusively on the domestic Czech market. As
a result, all Czech banks remained relatively healthy throughout the
global financial crisis, making the Czech Republic one of only four
OECD countries not to have had to inject capital into the banking
system. As of October 31, 2009, the total assets of commercial
banks stood at CZK 4.05 trillion (approximately 225 billion),
according to the CNB. As of the same date, non-performing loans
amounted to 4.28 percent of total credit volume, up from 2.51
percent a year earlier. Foreign investors have access to bank
credit on the local market, and credit is generally allocated on
market terms. In 2002, the banks for the first time established a
mechanism for sharing credit histories of borrowers.
The Czech securities market has been handicapped by a poor
reputation generated by several years of lax regulation, fraud and
scandals. Although the Prague Stock Exchange (PSE) is small (with
only 13 companies listed for stocks), the overall trade volume of
stocks reached CZK 463.86 billion (USD 25.2 billion) in 2009 as
compared to CZK 852.04 billion (USD 50.1 billion) in 2008, with the
average daily trading volume of CZK 1.86 billion (USD 100 million).
The PSE index tends to mirror movements in international markets.
The PSE index increased by 30.2 percent in 2009.
In March 2007, PSE created the Prague Energy Exchange (PXE)--which
has now renamed itself the Power Exchange Central Europe--to trade
electricity in the Czech Republic and Slovakia. PXE's goal is to
increase liquidity in the electricity market and create a
standardized platform for trading energy. PXE completed its first
trade in July, 2007 and its trading volume has increased steadily
with a total futures market contract value in 2008 of 2.44 Euros
(USD 3.5 billion) and a spot market contract value of Euro 7 million
(USD 10 million). The PXE energy exchange intends to expand as
aggressively as possible in all directions, other than westward.
In 1998 the government created a Securities and Exchange Commission
to function as capital market watchdog. The Commission has made
important strides in establishing a regulatory framework for Czech
capital markets and enforcing new rules. It has employed a large
number of new staff. A new securities law was adopted in 2001 to
improve regulation of brokers and dealers. Legislation adopted in
2002 gives the SEC more flexibility in issuing guidelines and
requiring reporting of information. In 2006, the SEC moved into the
Czech National Bank as part of a plan to bring all of the financial
regulators under one roof.
Competition from State-Owned Enterprises (SOEs)
Private enterprises are generally allowed to compete with public
enterprises under the same terms and conditions with respect to
access to markets, credit and other business operations, although
there are frequent accusations that large domestic
companies--including both SOEs and private firms--use their
political clout and connections to gain unfair advantage.
State-owned or majority state-owned companies are present in several
fields, including the energy, postal service, and transport sectors.
The Czech state also owns two small, specialized banks. SOEs do
not report directly to Ministries but are managed by a Board of
Directors and Supervisory Board that generally include both
representatives of the government and private sector. SOEs are
required by law to publish an annual report and submit their books
to independent audit.
Corporate Social Responsibility
Corporate Social Responsibility is a burgeoning concept in the Czech
Republic. Although foreign companies, particularly U.S.-owned
businesses, tend to be more active and more vocal about their
activities in this area, the trend appears to be spreading slowly to
Czech companies as well. CRS Europe and the Czech Business Leaders'
Forum encourage their members to engage in CSR activities and to
publicize their work in shareholder reports. Since 2005, the Czech
Donors Forum has given the prestigious TOP Corporate Giving award
each year for highest volume of donations and for corporate giving
as a percentage of gross annual profit. In addition, The Czech
Environment Ministry has given the annual Health, Safety and
Environment Award since 2000 to encourage conservationism and sound
environmental practices in the workplace. Still, only very large
Czech companies are vocal about their CSR efforts, and CSR is not a
major criterion by which Czechs make investment decisions.
Political Violence
The risk of political violence in the Czech Republic is extremely
low. There is no history of political violence or terrorism in
modern times. Two recent historic political changes--the "Velvet
Revolution" which ended the communist era in 1989 and the division
of Czechoslovakia into the Czech Republic and Slovakia in
1993--occurred without loss of life or significant violence.
Corruption
Current law makes both giving and receiving bribes criminal acts,
regardless of the actor's nationality. Jail sentences have been
increased to up to eight years for officials, with stiffer penalties
for bribery previously enacted by Parliament. Bribes cannot be
deducted from taxes. Law enforcement authorities are responsible
for combating corruption. These laws are applied equally to Czech
and foreign investors. There are frequent allegations, however,
that public officials have at times engaged in corrupt practices
with impunity. Political pressure and ineffective police
investigative tools contribute to the infrequent prosecution of
high-level corruption. Although public figures must disclose the
state of their finances each year, disclosure of the origin of
financial assets is voluntary. The absence of successful
prosecutions for corruption (or exoneration by the courts) has in
turn contributed to public disenchantment and concerns over impunity
reflected in the 2008 Transparency International (TI) survey of
managers in 26 countries, which found that the Czech Republic was
24th in terms of political corruption, finishing ahead of only
Mexico and Nigeria.
The Czech Republic ratified the OECD anti-bribery convention in
January 2000. According to a July 2009 TI report, there is little
or no enforcement of the convention in the Czech Republic, with no
cases and only four investigations through 2008. TI listed
political influence over enforcement actions, inadequate
whistleblower protection, and the lack of criminal liability for
legal entities as contributing factors.
While there has been no lack of public accusations and suspicions of
bribery, only a few cases have reached the prosecution and
conviction stage. Allegations of corruption are most pervasive in
connection with public procurement. Common problems with public
contracts include unclear ownership of companies bidding on public
contracts and a lack of competitive bids. A 2004 government
procurement law, required for EU accession, sought to curb illegal
activities in this sphere by ensuring that public tenders were not
tailor-made for specific businesses. However, according to the TI
chapter in the Czech Republic, the law has failed to reach that
objective. Their research has shown that more than half of public
contracts in the Czech Republic do not comply with the 2004 Public
Procurement Act. TI actively conducts public information campaigns
and has given numerous broadcast and print media interviews on
corruption and bribery cases. Other nongovernmental organizations
in the Czech Republic also focus on corruption issues.
Bilateral Investment Agreements
The former government of Czechoslovakia signed a bilateral
investment treaty (BIT) with the United States, which came into
effect in 1992. The Czech Republic adopted this treaty in 1993,
after the split with Slovakia. Amendments to the treaty were
approved in 2003 following negotiations involving both the Czechs
and the European Commission designed to meet EU concerns about
perceived conflicts with the EU acquis communautaire. The Czech
government subsequently requested the United States consider further
amendments that would affect the BIT's coverage and dispute
settlement provisions; bilateral discussions are continuing.
To date, 78 countries have signed and ratified similar agreements
with the Czech Republic. Agreements with several other countries
are in the process of ratification. The full list of agreements
including ratification dates can be found on the Ministry of Finance
website:
http://www.mfcr.cz/cps/rde/xchg/mfcr/hs.xsl/
ochrana_investic.html
A bilateral U.S.-Czech Convention on Avoidance of Double Taxation
has been in force since 1993. In 2007 the U.S. and Czech governments
signed a bilateral Totalization Agreement that exempts Americans
working in the CR from paying into both the Czech and U.S. social
security systems. The agreement entered into force on Jan. 1, 2009.
OPIC and Other Investment Insurance Programs
Finance programs of the Overseas Private Investment Corporation
(OPIC), including investment insurance, have been available in the
Czech Republic since 1991. Investors are urged to contact OPIC's
offices in Washington directly for up-to-date information regarding
availability of services and eligibility. The OPIC Info Line (202)
336-8799 offers general information 24 hours a day. Application
forms and detailed information may be obtained from OPIC, 1100 New
York Avenue, NW, Washington D.C. 20527. The Czech Republic is a
member of the Multilateral Investment Guarantee Agency (MIGA).
Labor
The wide availability in the Czech Republic of educated, relatively
low-cost labor on the doorstep of Western Europe has been a major
attraction for foreign investors. While the wage gap continues to
narrow, the Czech Republic will continue to have far lower labor
costs than those in Western Europe for years to come (although labor
costs farther to the East will remain even lower, including in the
newer EU countries Romania and Bulgaria). Unemployment reached a
record low of 5.0 percent in July 2008, and the relatively low level
of unemployment throughout 2008 made it increasingly difficult for
many businesses to find skilled and experienced workers, especially
in Prague and the surrounding region. This was especially true of
employees with Western language skills, IT specialists, and
engineers. By the end of 2009, however, the unemployment rate had
grown to 9.2 percent (roughly 8 percent according to the ILO's
methodology) and was expected to continue to increase throughout
much of 2010. Unemployment varies significantly depending on the
region. Unemployment is lowest in Prague (3.7 percent) and highest
in the Ustecky (13.6 percent), Olomouc (12.2 percent) and
Moravia-Silesia regions (12.1 percent). Various factors, including
rigidities in the labor code on overtime and the housing market,
reduce the mobility of Czech workers within the country.
By law, all workers have the right to strike once mediation efforts
have been exhausted, with the exception of judges, prosecutors,
military, firemen, police and security sources, and workers in
sensitive positions (e.g. nuclear power plant, gas and oil pipeline
operators, and air-traffic controllers). Significant labor unrest
remained relatively rare in 2009, despite significant layoffs
precipitated by the economic downturn. Workers in the Czech
Republic have the legal right to form and join unions of their own
choosing without prior authorization. Currently, about 17 percent of
the total labor force is a member of a labor organization. The
overall number of union members has fallen sharply since 1991,
reflecting the fact that union membership is no longer compulsory.
Although union membership has been dropping at a rate of 8 percent
per year, the former Social Democrat (CSSD) led government was
responsive to labor concerns and passed a new labor code in
parliament that is considered by observers to be "labor-friendly."
The new labor code entered into force January 1, 2007.
The Ministry of Labor and Social Affairs sets minimum wage
standards. The standard workweek is 40 hours. Caps exist for
overtime. Workers are assured 30 minutes of paid rest per work day
and annual leave of at least four weeks per year.
Foreign-Trade Zones
Czech law permits foreign investors involved in joint ventures to
take advantage of commercial or industrial customs-free zones into
which goods may be imported and later exported without depositing
customs duty. Duties need be paid only in the event that the goods
brought into the free zone are introduced into the local economy.
The investment incentive package also permits duty-free import of
high tech goods and creation of additional foreign-trade zones. Due
to EU accession and the investment incentives offered by the
government, the advantages of using these free-trade zone are
limited and they have waned in popularity.
Foreign Direct Investment
According to the Czech National Bank, the stock of foreign
investment in the Czech Republic from 1993 through 2008 (including
reinvestment of profits) totaled USD 122.3 billion.
Germany and the Netherlands are the leading foreign investors in the
Czech Republic. At the end of 2008, their stock of investment
totaled USD 31.5 billion (25.8 percent of total FDI) and USD 17.7
billion (14.5 percent) respectively, followed by Austria with USD
13.4 billion (11.0 percent), France with USD 7.5 billion (6.1
percent), the United States with USD 6.6 billion (5.4 percent),
Switzerland with USD 6.2 billion (5.1 percent) and Belgium with USD
4.4 billion (3.6 percent). Other major investors included the
United Kingdom, Sweden and Japan. According to Eurostat, the Czech
Republic was ranked third in Central and Eastern Europe in FDI stock
in 2007 (58.8 percent of GDP). The inflow of FDI in 2008 reached
USD 9.12 billion (or 4.48 percent GDP). According to the Ministry
of Industry and Trade, the inflow of FDI for the first three
quarters of 2009 fell 60 percent when compared to the same period in
2008, primarily due to the global economic slowdown. Another recent
trend has been that the bulk of new U.S. foreign investment has come
from companies already well-established in the Czech Republic with
very little originating from first-time investors to the country.
The upswing in investment since 1998 is generally attributed to the
introduction of investment incentives, as well as the Czech
Republic's central location and well-educated and relatively
inexpensive labor force.
By sector, from 1993 through 2008 foreign direct investment stock
was divided into manufacturing (USD 40.2 billion or 32.9 percent of
total FDI), financial services (USD 19.3 billion or 15.8 percent);
real estate and business activities (USD 16.6 billion or 13.6
percent); trade and repairs (USD 10.8 billion or 8.8 percent);
electricity, gas and water (USD 8.4 billion or 6.9 percent);
transportation and telecommunications (USD 6.4 billion or 5.2
percent); construction (USD 1.4 billion or 1.1 percent) and hotels
and restaurants (USD 0.8 million or 0.7 percent). The stock of
Czech direct investment abroad totaled USD 9.3 billion at the end of
2008. The flow of Czech investment abroad was USD 1.9 billion in
2008 alone, with principal destinations of the Netherlands (28.9
percent), Cyprus (13.7 percent), Germany (13.2 percent) and France
(7.3 percent)--0.7 percent of 2008 outward Czech investment flows
went to the United States.
Some of the largest US investments in million USD:
Procter 150
GE Real Estate + Crestyl Group 140
Guardian 70
Tiger Holding Four 45
Honeywell 27.5
Commercial Vehicle Group 27
Donaldson 20.6
Ingersoll Rand 20
GE Aviation 7.8
FEI Company 3.0
JNJ Global Business Services 2.7
Rannoch 2.5
Rockwell Automation 2.0
NovaSoft 0.75
SDE (SW Development Europe) 0.7
Autobaterie 0.5
IBM (amount not available)
eBay (amount not available)
Microsoft (amount not available)
Skype (amount not available)
OnSemiconductor (amount not available)
Other Countries:
Significant foreign direct investments (in USD):
Hyundai Korea 1.2 billion
Toyota/PSA Japan/France 850 million
Volkswagen Germany 710 million
Robert Bosch Germany 361 million
Matsushita Japan 335 million
Nemak Mexico 317 million
Denso Japan 254 million
Daikin Japan 244 million
Panasonic Japan 235 million
LG Philips NL 201 million
DHL UK 190 million
Siemens Germany 179 million
Faurecia France 156 million
Knauf Insulation Germany 131 million
Tivali Israel 131 million
Automotive Lighting Germany 106 million
Kronospan Cyprus 102 million
Teva Israel 55.5 million
Sources of data for this report included the Czech Statistical
Office, the Czech National Bank, CzechInvest, OECD, IMF and Central
European Advisory Group.
THOMPSON-JONES