Czech Republic

Foreign investment
in the Czech Republic

An excellent choice for foreign direct investment says Jarmila Kubikova of Squire, Sanders & Dempsey

The astronomical clock on the 14th century Old Town Hall in Prague

The Czech Republic has made significant progress in creating a stable and safe environment for investors. Following the fall of communism in 1989, the country went through major changes in terms of economic and legal reforms that brought it more in line with the rest of Europe. It reoriented its trade with the West, redirecting a majority of its exports to what was then the EU-15. Ever since the Velvet Revolution, the Czech Republic has been ruled by democratic parties that have supported the private sector through the privatisation process and encouraged foreign direct investment.

Today the Czech Republic is a constitutional democracy of 10.3 million inhabitants, 1.2 million of whom live in the capital city of Prague. Its legislative body consists of a 200-member Chamber of Deputies (the lower house of Parliament) and an 81-member Senate (the upper house). Executive power is exercised by the prime minister, and the president is elected by parliament for a five-year term.

The country’s geographic position and infrastructure are significant advantages over other countries in Central and Eastern Europe, and most Western European countries as well. Sharing borders with Poland, Germany, Austria and Slovakia, the Czech Republic enjoys a strategic location in the heart of Europe that makes it accessible from both Western and Eastern Europe. Furthermore, its extensive transport and rail infrastructure places the Czech Republic in the centre of the European transit corridor.

According to the Czech Statistical Office, gross domestic product grew by 4.9% in the third quarter of 2005, inflation in January 2006 was low at 2% and unemployment has remained stable over the last few years at 9.2%. GDP per capita in 2004 was CZK 269,450, which is approximately €9,504. In 2005, Germany, Slovakia, Austria, Poland and the UK counted among the Czech Republic’s leading export markets.

On 1 May 2004 the Czech Republic became a member of the European Union. As a pre-condition to EU accession, the government was obliged to harmonise its domestic laws with EU legislation and the so-called acquis communautaire. These changes represent positive reforms in many areas of life including improvement of the judicial system, civil administration reforms, financial markets regulation, intellectual property rights protection, and many other areas important to investors. The Czech Republic now grants national treatment to foreign investors, unless law or bilateral treaty expressly provides otherwise.

The nation’s Commercial Code, Trade Licensing Law and Civil Code are the primary laws that govern establishment of companies in the Czech Republic. The Commercial Code provides for different types of business entities:

• Limited liability company (in Czech spole˘cnost s ru˘cením omezeným, s.r.o.), the most common type;
• Joint-stock company (akciová spole˘cnost, a.s.); or
• Other business entities including general commercial partnerships (ve˘rejná obchodní spole˘cnost, v.o.s.), limited partnerships (komanditní spole˘cnost, k.s.), cooperatives (družstvo), European Company (Societas Europea), and European Economic Interest Grouping.

A foreign entity may also establish a branch or representative office in the Czech Republic or be present in the country as a subsidiary. Generally, various legal documents must be prepared to form a company. A company comes into existence upon its listing in the Commercial Register maintained by the applicable Registry Court. On 1 July 2005 obligatory forms for application to the Commercial Register were issued. The statutory body of a company must apply to the Commercial Register within 90 days from either the date it was founded or the date its trade licenses were issued. The Registry Court is obliged to register the company or deliver another decision within five days (temporary still 10 days), otherwise the registration is considered complete the day following this period.

View of Pražský hrad (Prague Castle)

Foreign investors should be informed about many areas of Czech law, including social security, health insurance, taxes, accounting, labour law, and liquidation or bankruptcy. When it comes to mergers and acquisitions, one of the rules investors should know is described in Section 183b of the Czech Commercial Code as the mandatory takeover bid. This rule holds that if a shareholder, singly or jointly, acquires a holding of voting rights that confers control over a publicly traded target company, a duty exists to make a takeover bid to all shareholders of the target company within 60 days of the acquisition of such controlling interest.

A mandatory takeover bid must not be conditional or contain any restrictions and must state the reasons the takeover bid is being made. A mandatory take over bid cannot be cancelled, and during the period of its effectiveness (which cannot be shorter than four weeks or longer than 10 weeks from the date of its publication) may be altered only to the benefit of the sellers. The securities must be transferred and paid for within 60 days after contracts are concluded between the controlling and minority shareholders.

Real estate markets in the Czech Republic have enormous potential and appear to be of great investor interest. Many kinds of projects are currently under construction in the country, including residential, commercial, retail and logistics or warehouse projects. Another sector ripe for investment is strategic services, which includes headquarter operations, customer care centres, shared service centres, research and development centres, software development, design centres and high-tech repair centers. Investing in high-tech manufacturing sectors could be particularly attractive due to the country’s long industrial history. Other areas with good investment opportunities could include the financial services and tourism sectors. The Czech Republic is becoming a premier European holiday destination due to its culture and architecture.

The Czech Republic has proven solid in terms of economic development. With all of its advantages, as well as a very high percentage of university-educated citizens, the Czech Republic clearly is an excellent choice for foreign direct investment. Jarmila Kubikova is an associate in the corporate transactions and securities regulation practice group in the Prague office of Squire, Sanders & Dempsey L.L.P.

Contact details: Squires, Sanders & Dempsey v.o.s., Václavské náměstí 57/813, 110 00 Prague 1, Czech Republic - Tel: +420 221 662 111 - Fax: +420 221 662 222 - Website: www.ssd.com

 

All pages are copyright of © Roxby Media Ltd - European American Business is a Roxby Media publication.