Czech Republic: What Is The Investment Climate In The Czech Republic?

Last Updated: 23 July 1997
Investors expect governments to create a stable political and economic environment and that is exactly what has happened in the Czech Republic the country's level of stability with regard to rapid liberalisation and privatisation, has no parallel in any of the post communist countries. Launched on January 1, 1991, the Czechoslovak economic reform has aimed to re-integrate the national economy with those of the developed world market through privatisation, liberalisation of prices and foreign trade, the establishment of currency convertibility, macro economic stabilisation, and the attraction of foreign direct investment (FDI).

POLITICAL ENVIRONMENT

  • The Civic Democratic Party (ODS) lead by Vaclav Klaus, won the parliamentary elections held in the first weekend of June 1996 with 29.62 % of the vote. President Vaclav Havel appointed Vaclav Klaus Prime Minister for a second term and to form a new coalition government. The new government is based on the same party coalition from the previous government with the Christian Democrats (KDU-ÈSL) and Civic Democratic Alliance (ODA). This is a clear sign of continued confidence in the government's ability to pursue the course of reform leading to the free market and political stability.
  • On June 10 1997 Premier Vaclav Klaus asked the Parliament for a vote of confidence because of some existing economic difficulties. The government of Klaus won the confidence of Parliament in a close vote of 101 - 99.


ECONOMIC ENVIRONMENT

  • The CR's conservative fiscal policies have produced a reliable investment climate with one of the lowest levels of inflation in central and eastern Europe, strong foreign currency reserves, one of the region's lowest foreign debt per capita, and favourable exchange rates. Strict economic policies have sought to achieve a balanced budget, with an independent central bank controlling the money supply.
  • The latest economic measures taken by the Czech government on April 16 and May 28 should improve the present ecomonic situation and contribute to the completion of the country's transformation. The main aim of the measures is to speed up the final stage of the privatization process, make Czech capital market more transparent and improve the conditions for doing business, exports, public finances as well as for the fight with economic criminality.
  • Inflation rates have continued to decrease after the high 20.8% 1993 average inflation rate caused by introduction of the value-added tax (VAT) in January 1993. Average inflation in 1994 dropped to 10 %. The average inflation rate for the year 1995 was 9.1%. The average inflation rate for the year 1996 was 8,8%. Current data - May 97 - 8%, are little increasing is expected.
  • In December 1996 the CR's US$ 1,980 national debt per capita was one of the region's lowest. This low national debt illustrates the Czech government's rejection of such short-term measures as higher borrowing, which has increased national debt in many Western economies.
  • Having already installed the essential legal and institutional framework, the government is now focusing its efforts on reorienting its economy toward the European Community market, which currently represents over 60% of the country's trade.
  • Signalling the country´s return to the international community of advance economies, the Czech Republic joined the OECD on 28 November 1995. As the 26th member, the Czech Republic is the first former European communist country to join the organization of the world´s most advanced economies. Membership will enable the country to participate in political dialogue led by the most advanced market economies regarding social, economic and financial affairs.
  • Such economic policies have led to improved ratings from Moody's Investors' Service and Standard & Poor's, making the Czech Republic the first post-communist country to be rated, Baa1 and A respectively,.
  • The Czech Republic moved to No. 35 in May 1997 on the list of countries rated by the Swiss Institute for Management Development in Lausanne (IMD) in terms of overall competitiveness. Leading the list is the U.S., followed by Singapore and Hong Kong. Hungary sits at No. 36 and Poland at No. 43.
  • According to the American magazine Institutional Investor the Czech Republic is rated as No. 28, Slovenia as 40, Poland as 46 and Hungary 48 from point of view international bankers (as of Spring 1997).



Note: numbers represent scoring system used

Executives were asked, first, in which countries they had already invested and, second, which they considered most attractive for future. Six points were given to each executive's investment or preference, five points to the largest, etc. Source: MPG International / Wall Street Journal, 1996

OPTIONS FOR FDI

  • The inflow of foreign direct investment (FDI) reached almost US$ 7.4 billions by the end of March 1997. (Sources: Czech National Bank, CzechInvest)
  • The most common forms of FDI are:
       joint ventures - to date, joint ventures with recently 
       privatised companies have been the dominant form of foreign 
       investment;
       greenfield investments;
       participation in the privatisation process - although the 
       deadline for submitting projects for the second wave of 
       privatisation has passed, many approved projects have been 
       designed to accommodate future foreign investors.

  • Investors can also acquire equity positions through the Prague Stock Exchange.
  • Czech legislation enables foreign entrepreneurs to conduct business in the CR under the same conditions as Czech entrepreneurs. A foreigner may become either the sole or co-founder of a company, and may also join an existing Czech enterprise. Foreigners who own businesses abroad may also conduct business activities in the CR provided they own a branch office within the CR.
  • According to the Czech Commercial Code, the official forms of business entities accepted by the Commercial Register include: joint-stock company; limited liability company; limited partnership; general commercial partnership( unlimited partnership); co-operative; branch office of a foreign company.
  • There is no upper limit on the level of foreign investment in the CR.

ACCESS TO CREDITS

  • Foreign entrepreneurs can make use of credits granted by both Czech and foreign banks.
  • As in other countries, interest rates vary according to the duration of credit, and are expected to decrease along with future economic development. Czech banks offer credits for 15 - 25% average interest rate. Short-term interest rates are high as the Czech National Bank (CNB) keeps the liquidity on the market low because of the recent pressure on depreciation of the Czech Crown.
  • The CNB has decided to raise the discount rate from 10.5% to 13.0% and to set up the Lombard rate at 50%.

INVESTMENT PROTECTION

  • The protection of foreign investments is guaranteed through a number of intergovernmental agreements signed by the former Czech and Slovak Federal Republic (CSFR) and approximately 30 other countries; the CR continues to honour all such agreements.

TRADE AUTHORISATION

  • To engage in business, entrepreneurs must apply to the respective Trades Licensing Office for authorisation. This may come as a trade certificate or a trade license, depending on the nature of the business.
  • persons having a domicile or seat outside the CR must also establish a responsible representative to act in compliance with business regulations.

FOREIGN EXCHANGE REGULATIONS

  • On October 1, 1995 full convertibility of the Czech Crown was established by the Foreign Exchange Act. The new law complies with Art. 8 of the International Monetary Fund Charter, a pre-requisite for OECD membership. Restrictions on investing out of the country and borrowing limits have been removed.
  • Since May 28 the Czech Crown (CZK) is theoretically allowed to float freely given abolishing the +/- 7.5% fluctuation band. According to the decision by central bank the Czech Crown will henceforth be linked only to the D-Mark (DEM). The currency basket has was previously made up 65% by the D-Mark and 35% by the US-Dollar.
REPATRIATION OF PROFITS AND CAPITAL

  • Czech foreign exchange regulations and investment protection agreements guarantee the transfer of profits and capital abroad.

TAXATION

  • The current taxation system, introduced in January 1993, includes a value-added tax (VAT) of 5% for services and 22% for goods similar to those in most Western European countries.
  • Businesses in the Czech Republic are subject to a corporate income tax of 39% of tax base. The corporate income tax rate has been consistently reduced over the last several years: it was 45% in 1992, 42% in 1994, 41% in 1995 and 39% in 1996 and 1997. For the next year is expected to be cut down to 35%.
  • Those living in the Czech Republic for at least 183 days in one calendar year are subject to a personal income tax. Tax rates vary according to annual taxable income by employee or tax base by entrepreneur, ranging from 15-40%.
  • Future tax reform will result in a reduction of direct taxes paid by companies as the Czech government aims at shifting the tax burden away from enterprise onto indirect taxation.

PRICES

  • Prices were liberalised in the former CSFR on January 1, 1991. Currently, only 5% of prices are regulated, (i.e. water, energy for households, certain medications and health care equipment, solid fuels).

IMPORT AND EXPORT OF GOODS

  • As a founding member of GATT (the General Agreement on Tariffs and Trade) and WTO (World Trade Organization), the CR applies import duties according to the valid and internationally recognised customs tariff. .
  • Also exempt from import duties are certain selected types of goods, goods not subject to customs clearance (for personal use by diplomats, members of government, etc.), and goods located in customs-free zones and storehouses. Since January 1, 1996, the customs duties on more than two thirds of items listed have been reduced.
  • In terms of Czech government economic correction measures were approved the so-called import deposits, i.e. importers of foodstuffs and consumer goods have to put down a no-interest deposit worth 20% of the imported goods value and its freezing at the determined banks for 180 days. The importer will have to prove to the Customs the putting down of the compulsory deposit as a condition for letting the goods in the country and its releasing into „free circulation".

LABOUR FORCE

  • With an outstanding 1991 literacy rate of 98.9% (according to Census), the Czech workforce is educated, skilled, cost-effective and was ranked the highest in Eastern Europe, surpassing Hungary in measures of managerial skills. According to a 1996 OECD report on education, the CR produces a higher percentage of science and engineering graduates than any other country in the world.
  • Foreign citizens may be employed in Czech companies provided they acquire a work permit from the respective labour office and a residence permit from either the diplomatic or consular office of the CR abroad, or from the Ministry of the Interior in the CR.

For further information contact CzechInvest at Politickych veznu 20,112 49 Prague 1, Czech Republic Phone (420-2) 2422-1540 Fax: (420-2) 2422-1804

NOTE: Although we have made every effort to ensure the reliability of our sources, CzechInvest does not assume responsibility for its accuracy.

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