WT/TPR/S/12
Page 26Trade Policy Review
III. TRADE-RELATED ASPECTS OFINVESTMENT POLICIES
1. Upto1989, foreign direct investment (FDI) intotheCzech andSlovak Federal Republic was
negligible, mainly comprising afewprojects inconstruction andreconstruction ofhotels.1Anupsurge
ofFDIstarted withtheintroduction in1991oftheradical market economy reform programme, including
aliberal inward investment régime; thus, whereas in1990FDIamounted toUS$72 million, in1992
itreached US$1 billion. Withcontinued economic advances, FDIintotheCzech Republic isexpected
tobemuch higher in1995thaninanyoftheprevious years. Asaresult, theflowofFDIhasbecome
animportant element inthebalance ofpayments andplays asubstantial rôleinprivatization andrelated
enterprise restructuring. TheGovernment hasnotgranted special incentives forFDI, having taken
theviewthatasoundmacroeconomicenvironmentprovidesthebestincentivesforforeign(anddomestic)
investors.
(1) Legislative Framework forFDI
2. ThebasicrulesonFDIintotheCzech Republic arelaiddown intheCzech Commercial Code.
Under Article 21oftheCode, foreigners "may conduct business activities under thesame conditions
andtothesame extent asCzech persons, unless thelawstipulates otherwise".
3. Under Czech law,foreign entrepreneurs havetherightto:establish jointventures withCzech
investors2;establish anenterprise with100percentownership; andpurchase Czech enterprises in
theprivatization process. Inestablishing theirbusiness undertakings, foreign nationals maychoose
fromamong thefollowing ownership forms: joint-stock company; limited-liability company; ordinary
orlimited partnership; andaco-operative. Mostforeign business ventures taketheformofajoint-stock
orlimited-liability company.
4. Certain restrictions apply withrespect toinward FDI, including: thegranting ofloans by
domestic institutions forlessthanfiveyears; thepurchase ofmore than15percentofthecapital of
existing banks andthestock exchange, which requires thepriorapproval oftheCzech National Bank;
andrestraints onentry intoauditing andengineering services (aminimum equity participation of
60percentbyCzech nationals), anddomestic airtransportation (applications willbeconsidered within
thelimits established byCzech lawsandregulations orrelevant bilateral agreements).
5. Czech lawsandregulations provide guarantees forforeign investors.3Under theCommercial
Code, FDIorrights andinterests inFDI,likedomestic investment, mayonlybeexpropriated inthe
public interest andthenonlyifnoother possibility isavailable tosatisfy public interest. Suchadecision
maybeappealed before thecourts. Intheevent ofexpropriation, compensation istobeprovided without
delay, andmust correspond tothefullvalue oftheextent towhich theproperty isaffected bythe
measure; suchcompensation isfreely transferable abroad inforeign currency. Inaddition, theCzech
Republic hasconcluded bilateral agreements oninvestment protection andtheavoidance ofdouble
taxation withitsmajor investment partners, including France, Germany andtheUnited States, which
together haveaccounted foralmost 70percentofFDIintotheRepublic inthelastfewyears.
1J.Charap andA.Zemplinerova (1994).
2Foreigninvestmentsthatestablishlastingeconomicrelationsinanewlyestablishedorexistingbusinessactivity
areregarded asforeign direct investments according totheForeign Exchange Law.
3ThecommitmentsoftheCzech RepublicundertheUruguayRound'sGeneralAgreemen tofTradeinServices
(GATS) arenoted inChapter II(4)(i) andChapter V(5).TheCzech Republic WT/TPR/S/12
Page 27
(2) Incentives forFDI
6. TheCzech Republic hasconsistently taken theposition thatasound economic andpolitical
environment arethemostimportant investment incentives. Therefore, thenumber ofspecial incentives
provided onlyforforeign investors islimited, withmost incentives applied equally todomestic and
foreign investors.
7. There arenotaxholidays forinvestment intheCzech Republic, andaccording totheauthorities
nochange isanticipated inthenearfuture. Rather, theGovernment intends topursue thepolicy of
decreasing thetaxburden generally. Atpresent, taxconsolidation isnotpermitted byCzech law;
withindividual entities eachtaxed separately.
8. Forallinvestment byeither foreigners ornationals infixed assets, statutory taxdepreciation
periods range from fourto45years.4A10percentinvestment allowance maybeclaimed onmost
newplantandmachinery intheyearofitspurchase, subject toitbeing retained inuseforaminimum
ofthree years. Losses incurred after1January 1993 maybecarried overagainst profits generated
inthefollowing seven years.
9. Profits made byjointventures maybefreely repatriated asdividends, subject toa25percent
withholding tax.Inbilateral agreements ontheavoidance ofdouble taxation thisratehasbeenreduced
withmost OECD countries tobetween 0and15percent. Examples oftheratesofwithholding tax
ondividends provided forinbilateral agreements include: Austria, 10percent; Germany, 15percent
(5percentforaminimum shareholding of25percent); France, 10percent; andtheUnited States,
15percent(5percentforaminimum shareholding of10percent).
10. Ingeneral, relief fromdutyisnotavailable forplantandmachinery imports, evenifimported
asinitial (inkind) capital foralocalsubsidiary ofaforeign parent company. Inaccordance withthe
provisions ofaGovernment Decree made 21July1993, special inward processing relief isavailable
forjointventures withforeign participation inrespect ofmaterials andcomponents imported for
processing andre-export. Thus, jointventures intheCzech Republic withatleast30percentforeign
ownership, equalling notlessthantheequivalent ofUS$1.7 million, areallowed ayear'sexemption
fromcustoms duties onrawmaterials orsemi-processed goods imported through theforeign partner
forfurther manufacturing andre-export, thevalue ofexports mustbeatleastequal tothatoftheimported
components. TheDecree remains inforce untiltheendof1996.
11. Support fromlocalauthorities forinward FDImaybenegotiated. Suchsupport could consist
ofproviding thenecessary infrastructure, forexample, energy, water supply, telecommunications,
butalsotherecruitment ofskilled labour, suitable accommodation forforeign specialists andschooling
fortheirchildren. Insome regions, investors areentitled toreceive grants forevery newjobcreated
(intherange ofKc10,000 to50,000 foreachnewjob).
12. InNovember 1992theGovernment established CzechInvest toassist foreign investors toset-up
intheCzech Republic. Services ofCzechInvest, which aremainly informational andserve toorientate
theforeign investor, particularly withrespect tothestipulations oftheCommercial Code, areprovided
freeofcharge. CzechInvest hasestablished anetwork oflocalrepresentatives throughout thecountry.
4Examples ofdepreciation periods andtheproducts covered are:fouryears forcomputers andautomobiles,
eight years formost machinery andequipment, and45years forbuildings.WT/TPR/S/12
Page 28Trade Policy Review
(3) Scope andStructure ofFDI
13. Theflowofinward FDIbetween 1990and1994totalled about US$3 billion (Table III.1), which
amounted toonefourth oftotalFDIinthecentral andeastern European areaandgavetheCzech
Republic thesecond rankinthisareainterms ofvolume andpercapita ofFDI(Table III.2). Between
1990and1994, themostsuccessful yearinterms ofvolume ofFDIwas1992(US$1 billion), followed
by1994 (US$862 million).
Table III.1
FDIinCzech Republic
(US$ million andpercent)
1992 1993 1994 1990-94
US$m. % US$m. % US$m. % US$m. %
Germany 158.2 15.8 82.0 14.4 417.6 48.4 1,113.0 36.2
United States 289.2 28.8 255.0 44.9 39.4 4.6 651.1 21.2
France 223.9 22.3 34.0 6.0 77.0 8.9 355.6 11.6
Austria 66.2 6.6 55.0 9.7 79.5 9.2 216.6 7.0
Belgium 87.9 8.8 32.0 5.6 n.a. n.a. 188.6 6.1
Switzerland 80.0 8.0 13.6 2.4 39.3 4.6 136.7 4.4
Italy 66.2 6.6 12.0 2.1 n.a. n.a. 92.5 3.0
Netherlands 12.9 1.3 30.0 5.3 n.a. n.a. n.a. n.a.
Others 19.0 1.9 54.4 9.6 209.5 24.3 323.3 10.5
Total 1,003.5 100.0 568.0 100.0 862.4 100.0 3,077.4 100.0
n.a. Individual statistic notavailable; included under "Others".
Source: Czech Agency forForeign Investment.
Table III.2
Foreign direct investment inselected economies intransition, 1990-94
(Cumulative totalsince 1988, US$million)
Cumulative total
FDIpercapita
1990 1991 1992 1993 June 1994
Albania 0 0 10 58 82 18
Bulgaria 4 60 101 157 182 17
Croatia 0 0 16 88 127 19
Czech Republic 436 947 1,951 2,519 2,820 242
Hungary 512 1,971 3,442 5,781 6,316 558
Poland 93 210 494 1,074 1,365 28
Romania 0 40 120 207 323 9
Slovakia 28 110 210 354 390 83
Slovenia n.a. 41 152 263 292 130
FYR ofMacedonia 21 59 74 89 96 45
Eastern Europe 1,094 3,438 6,571 10,590 11,993 99
Note: Figures inboldareestimates: zeromeans no,oranegative amount ofinvestment occurred. Percapita figures areinUSdollars.
Source: Economic Commission forEurope.TheCzech Republic WT/TPR/S/12
Page 29
14. Latest reports indicate that1995wasasuccessful yearforFDIintotheCzech Republic; through
end-June, foreign capital increased byUS$0.4 billion.5Portfolio investment inthefirsthalfof1995
increased byUS$0.6 billion.
15. Between 1990and1994, Germany wasthesingle largest source ofinward FDI,with36percent
ofthetotal, followed bytheUnited States (21percent), France (12percent)andAustria (7percent)
(Chart III.1).
16. Thesectoral distribution ofinward FDIindicates thatconsumer goods andtobacco, automotive
industry, construction banks andinsurance andthefoodindustry weretheindustries ofchoice. The
twolargest investments were made byVolkswagen intheSkoda Mladà Boleslav carfactory and
Philip Morris intheCzech tobacco industry.
17. In1992foreigninvestorswereinvolvedintheprivatizationprocessofmorethan200enterprises,
primarily industrial. Privatization projects withforeign participation canbehighly controversial, since
theygenerally concern thebestenterprises intheeconomy. Attheendof1992, privatization projects
withforeign participation represented only1.2percentofallprojects, butforeign participation was
thesource of52percentofallproceeds fromlargescaleprivatization.6BySeptember 1994, theshare
ofprojects withforeign participation increased to3.2percent. TheMinistry ofPrivatization received
315projects recommending thesaleofunitstoforeign investors. More than150ofthemwererejected
becausetheproposedinvestorsdidnotapprovetheconditionsofthetransaction.Bysource,theprincipal
investors intheprivatization process areGermany (30percent), andtheUnited States (25percent),
followed byFrance, Austria, Belgium, Switzerland andItaly.
(4) Czech Direct Investments inForeign Countries
18. Direct investment made byCzech entities inforeign countries wasequivalent toUS$56 million
inthefirsthalfof1994, more thantwice theamount forthefirsthalfof1993. Most oftheinvestment
wasinAustria andSlovakia, followed byUkraine, Turkey andGermany, andwasmainly tosupport
Czech exports andimports. According totheauthorities, outgoing direct investment isfreeof
restrictions.
5Data provided bytheCzech National Bank.
6J.Charap andA.Zemplinerova (1994), pp.32-33.WT/TPR/S/12
Page 30Trade Policy Review
