Investors' Guidebook - Edition 2017 by AFI CZ

How to Succeed in the Czech Republic

The Association for Foreign Investment is a non‑governmental, non‑profit organisation established by a group of leading global and regional firms with key competences in supporting new and existing investors in all areas of their activities and actively promoting the Czech Republic as an investment destination of choice. The AFI has been actively assisting investors since 1996 and cooperates closely with the Czech government, CzechInvest Investment and Business Development Agency and all relevant public authorities.

Contact the AFI for more information

How we help investors? TECTURE

Expert support for investors and exporters in all key phases of investment implementation: • Site selection advisory • Comprehensive services related to getting established on the market • Necessary information from all sectors of the economy („doing business“, analyses) • Organisation of investors‘ visits to Czech Republic • Personal consultation

AFI Main Partner

Zdenka Hrabicová Association for Foreign Investment Štěpánská 11, 120 00 Prague 2 Czech Republic phone: (+420) 224 911 750 mobile: (+420) 602 686 597 email: zdenka.hrabicova@afi.cz

AFI Supporting Partners

www.afi.cz

AFI MEMBERS

• Mediation of contacts with business partners and other relevant entities on the market • Facilitation of contact with the public sector, the academic sphere and science and research organisations • Expert support in the area of visas and work permits • M&A advisory, target selections

AFI Partners

INVESTORSâ&#x20AC;&#x2DC; GUIDEBOOK How to Succeed in the Czech Republic Edition 2017

Title:

Investors’ Guidebook: How to Succeed in the Czech Republic

Place and date of issue:

Prague, February 2017

Publisher:

Association for Foreign Investment

Address:

Štěpánská 11, 120 00, Prague 2

Web:

www.afi.cz

Contact e-mail:

iva.fialova@afi.cz

This is the second edition of the publication “Investors’ Guidebook: How to Succeed in the Czech Republic”, which was firstly issued in connection with the AFI’s 20th anniversary at the beginning of 2016. The purpose of this guidebook is to provide newly incoming and existing investors with comprehensive information about investing in the Czech Republic. The authors of the individual articles come mostly from the ranks of AFI members and are leading experts in their respective fields.

Content Forewords 1 Bohuslav Sobotka, Prime Minister of the Czech Republic Kamil Blažek, Chairman, Association for Foreign Investment Karel Kučera, CEO, CzechInvest

4 6 8

The Czech Republic R&D

The Czech Republic – heart of Europe About the country | AFI Ready for business Reasons to invest in the Czech Republic | CzechInvest Prague: A top location for European headquarters Prague headquarters | AFI The top ten facts every investor needs to know about the Czech legal system Legal framework | Kinstellar

Six main things to do first

1. Establish your business Starting a business | Havel, Holásek & Partners 2. Acquire or lease commercial property Commercial properties | CTP 3. Find out more about the labour market Labour market | Grafton Recruitment 4. Get more information about state aid Finance | KPMG Česká republika 5. Protect your intellectual property rights Intellectual property | WEINHOLD LEGAL 6. Navigate through the waters of public affairs Public affairs | PAN Solutions

Finance your investment

Get the best out of European funds EU funding until 2022 | PRK Partners How investment incentives work in the Czech Republic Investment incentives | CzechInvest Finance your future with OPEIC OPEIC 2014-2020 | Businness and Innovation Agency Financing foreign investment in the Czech Republic Banking system and the economy | Erste Corporate Banking

Look into R&D

Industry 4.0 – An opportunity for investors Industry 4.0 | Ministry of Industry and Trade Publicly financed research infrastructure Research infrastructure | Section of Deputy Prime Minister for the Science, Research and Innovation

18 20 22

28 30

34 36

42 44 48

Get more information about properties

Development of industrial zones in the Czech Republic Quality of industrial properties in the Czech Republic | Tebodin Czech Republic Land development in hands of real estate professional Acquisition of land | Panattoni Czech Republic Development The beauty of brownfields Greenfield vs. brownfield investments | ATELIER TSUNAMI Brownfields and public-private sector cooperation Realization of brownfields | Asental Land Sustainable construction in the Czech Republic Brownfields and sustainable construction | Linkcity The time is now: The property market in the Czech Republic has never been better for tenants Leasing of commercial property | White Star Real Estate Keep your business assets safe with real estate risk management Risk management | Aon Risk Solutions

Find your property

60 62 64 66

68 70

Czech commercial property market: confidence, stability, potential 74 Introduction to the Czech property market | 108 AGENCY The rebounding retail market 76 Retail market | CBRE The Czech Republic remains attractive for industrial tenants 78 Industrial and warehouse market | P3 Logistic Parks The best office and where to find it in the Czech Republic 80 Office market | COLLIERS

Permitting and construction

Finance

Properties

First steps

Quick facts about the Czech Republic

How TACR supports science and research Support for R&D investments | Technology Agency of the Czech Republic CzechInvest: Your port of entry for R&D-related investment and more R&D-related investment | CzechInvest

Handle the permit and construction processes

Permitting basics Approval process management | TAKENAKA EUROPE The importance of EIA Environmental impact assessment | AECOM CZ The present and future of building permit process Building permit | Technoprojekt Zoning permit PSG – International Cost planning: The first step Cost planning | PM Group

84 86 88 88 90

Human resources

Hire people

Top sectors for investment

The Czech Republic: Increasing skills in a competitive labour market Labour market | Hays Czech Republic Flexibility for employers Labour law | Konečná & Zacha Being an employer in the Czech Republic Social-security system and payroll accounting | Adecco There are enough candidates, but to recruit them one must offer more and work on HR marketing HR marketing | LMC Why recruitment agencies are superior to social networks Finding management | Advantage Consulting Jobs Employment agencies and recruitment of blue-collar workers in the Czech Republic Finding workers | Hofmann Wizard Understanding shifting motivations as the key to talent management Talent management | REED Manage costs. Invest in talent. How to do both and succeed in today’s environment. HR outsourcing | ManpowerGroup Czech Republic Increased productivity, reduced costs and happier employees Workforce management | Randstad

Automotive 138 CzechInvest Aerospace 138 CzechInvest Advanced engineering 139 CzechInvest Electronics and electrical engineering 139 CzechInvest ICT 140 CzechInvest Nanotechnology 140 CzechInvest Life sciences 141 CzechInvest Nuclear engineering and research 141 JMM CS Defence industry 142 Defence and Security Industry Association Transport and infrastructure 142 Kinstellar Telecommunications 143 Information Technology and Telecommunication Association Business support services 143 CzechInvest Banking 144 Czech Insurance Association Insurance 145 Czech Insurance Association Food sector 146 Ministry of Agriculture Chemical industry 146 Tebodin Czech Republic Energy efficiency services 147 ENVIROS Renewable energy generation 147 CzechInvest Cleantech 148 CzechInvest Water management 148 CzechInvest Hotel and leisure industry 149 PwC Audit

Taxes

The Czech tax environment: Transparent and competitive Tax environment | EY Paying corporate taxes in the Czech Republic Business taxation | PwC Česká republika Paying personal income tax in the Czech Republic Individual taxation | ASB Accounting

Interested in M&A

M&A

Czech M&A – reaching the international standard M&A-related documentation | PwC Legal Making informed investment decisions Financial and tax due diligence | Deloitte Advisory W&I insurance for M&A deals in the Czech Republic W&I insurance | RENOMIA From preparation to operation Technical due diligence | Gleeds Environmental due diligence – A cornerstone of new acquisitions assessment Environmental due diligence | ENVIROS Finding a trustworthy manager in the Czech Republic Nominee services | VISTRA CZECH REPUBLIC AND SLOVAKIA CzechLink: The easy way how to find a strategic partner CzechInvest Helping foreign investors to relocate to the Czech Republic CzechInvest

98 100 102 104 106 108 110

113 114 116 118

121 122 124 126 128 130 132 134 135

Top sectors

Find out more about taxes

137

Dear Readers, I would like to thank the Association for Foreign Investment for preparing and publishing this guidebook designed to provide current and newly arriving investors with comprehensive information about the investment environment in the Czech Republic. We are a country where many things have changed in recent years as far as investment activities are concerned. New investors have come to the Czech Republic both from our traditional European trading partners and from relatively new territories such as China. We particularly appreciate those investors that are bringing high added value and

Source: Office of the Government of the Czech Republic

good employment opportunities to our country and offering potential for research and development. In the Czech Republic, whose economy has the highest proportion of industry among all EU countries, such investments are certainly valued the most, as they help to revitalise and modernise our broad industrial base, while also helping to make “Made in the Czech Republic” a recognised mark of quality and innovation around the world. We want to remain a transparent and stable location for foreign investors. Our ability to achieve this objective is further strengthened by the very good condition of the Czech economy, which achieved record-breaking results in 2016 and brought the added benefit that the Czech Republic now has

a budget surplus. In the coming year, we want to contribute to the further improvement of the investment environment by amending the Investment Incentives Act, which will create conditions enabling especially investments with higher added value. The relatively high level of qualifications of the Czech workforce on the Czech labour market also plays also a significant role. We are continuing to integrate hands-on experience into our education system and to modernise our vocational education system to ensure that we can rely on the presence of home-grown technical experts for generations to come. We strive to approach investors in a responsible manner and with trust in the spirit of partner-

ship. This is why we value examples of an equally reciprocal equal approach – active corporate social responsibility, respect for the principles of sustainable development, and openness to negotiations on working conditions and salary packages. Our vision consists in forming long-term partnerships, as that is the only possible basis for modernisation and development of our country’s industry and economy. Technological modernisation of the industrial sector is the key to the future not only of the Czech Republic but also of the European Union and their competitiveness in the globalised world. Industrial transformation as a result of digitalisation and the shift towards more powerful, cleaner and more

effective Industry 4.0 solutions comprise the driving force behind business and technological success in today’s world. We want to actively help bring about this change and to be its vibrant heart in Europe. We want to remain an open and safe place for those seeking a vital future and development potential for their businesses. This philosophy is shared by the government as a whole and, in particular, by the Ministry of Industry and Trade and the Ministry of Foreign Affair and CzechInvest as main partners for foreign investors in the Czech Republic. I am confident that you will find in this publication numerous examples of the application of this philosophy in practice.

Bohuslav Sobotka

Prime Minister of the Czech Republic

Dear Readers, You are holding a unique publication, second edition of Investors’ Guidebook: How to Succeed in the Czech Republic which was prepared by leading experts from the ranks of member companies of the Association for Foreign Investment. It was first published last year, 2016, on the occasion of the AFI’s twentieth anniversary. The AFI was established on 1 January 1996 as a non-governmental non-profit organisation focused on supporting foreign direct investments, development of the Czech business environment, export of investments and cooperation between companies and the research sphere in the Czech Republic. The association’s members are leading local and

multinational companies that provide a broad spectrum of services for investors on the Czech market. Over the past two decades, the AFI’s members have assisted with nearly every major foreign direct investment in the Czech Republic. Our members are leading companies in their respective fields and have tremendous experience with providing professional services for foreign investors. In conducting our activities, we closely cooperate with CzechInvest, the Ministry of Industry and Trade and other public and private institutions in the Czech Republic and abroad. Unlike governmental institutions, however, we are able to offer a broader range of services thanks to the extensive experience of our members. Besides traditionally strong sectors of the Czech economy (e.g. the au-

tomotive industry, aerospace, life sciences and ICT), we are able to provide services to investors operating in other fields such as energy, defence, banking and financial services, and the hospitality industry. I am very pleased that the Association for Foreign Investment is still thriving twenty years after its establishment. I believe the fact that a group of renowned companies in the areas of consulting, legal services, HR, commercial property and engineering, among other fields, came together with the purpose of cultivating and promoting the local business environment is an exceptional occurrence in the world. This endeavour has resulted not only in the establishment and twenty-year existence of the AFI, but also the publication of this guidebook for investors, which is now

published annually, and which has the purpose of providing incoming and existing investors with clear and comprehensive information on investing in the Czech Republic, while also demonstrating our country’s advanced level of development and its readiness for further investment. I am convinced that this guidebook will serve as a trustworthy source of information that investors will find useful in their strategic decision-making. The Czech Republic is currently enjoying a favourable period for foreign investment. As a member of the European Union, NATO and other major international organisations, the country has established itself as the stable heart of Europe with a developed economy and western-style democracy and society. With its transparent business environment and advanced legal system, it is also consid-

ered to be the most stable and prosperous country of all the post-communist states. Industrial production accounts for 47.3% of the domestic economy, which makes the Czech Republic the most industrialised country in the European Union, with the automotive industry remaining the dominant sector here. In the second quarter of 2016, the country’s gross domestic product grew by 2.6% year on year and unemployment continued to fall. Despite the turbulence that Europe is currently facing, it can be stated that, in most of the relevant indicators for investors, the Czech Republic is truly an island of stability in the middle of Europe and is thus a favourable environment for new foreign investments and expansions of companies already operating here. In addition to positive economic indicators, the country’s appeal to investors is bol-

stered by its strategic location, well-educated and highly skilled workforce, the reputation of Czech engineers and mechanics, and high quality of life. I would also like to highlight the efforts of the current Czech government, which has made support for foreign investment a key priority and thus part of its policy platform. I would like to hereby thank everyone who played a role in creating this publication, as well as all of the current members and partners of the AFI, CzechInvest and all of the non-governmental organisations that have long collaborated with us and helped us to prepare this publication. We highly value your support. This is the second edition of the Investors’Guidebook. We will welcome your feedback, opinions and suggestions on how to improve it.

Kamil Blažek

Chairman, Association for Foreign Investment

Dear Readers, You are holding the second, updated edition of the Investors’ Guidebook, a unique publication that is extraordinary especially in terms of both its content and form. You would search in vain to find a more detailed and precise compendium of all important facts about the Czech Republic and its investment environment than you have here in the Investors’ Guidebook published by the Association for Foreign Investment with support from CzechInvest. Since the 1990s, when both the AFI and CzechInvest were established, the Czech Republic’s investment environment has changed considerably as the country transformed itself from a developing

into a fully developed economy. This transformation was accompanied by a change in the variety of investors that find here a place to develop their business. Whereas in the past, investors were attracted to the Czech Republic by cheap labour and the country’s sufficiency of locations suitable for doing business, today the situation is different, as investors have far greater requirements. When deciding where to place their investments, they consider other, more sophisticated factors. For example, they look at the proximity to universities and secondary schools with courses of learning corresponding to their production programme, as well as other factors relating to their key people, such as the availability of housing and proximity to adequate schools for their children, and connections to science and technology parks, as many investors that began with

only production years ago are now expanding their activities into the area of research and development. Investors look for countries that offer a stable political and economic environment, investment incentives and, of no less importance, a highly skilled workforce in high-tech sectors for both production and development in one place. The Czech Republic fulfils all of these requirements and, as a bonus, it is the sixth safest country in the world and the fourth most popular destination among people working abroad. We are currently contending with a less diverse supply of suitable locations for investors’ projects and we are now seeking further opportunities to expand it. Potential lies in, for example, hitherto unused sites in the Czech Republic’s regions and municipalities. In negotiations with potential investors, the Czech Republic’s high-quality supplier base is one of our

strengths. For investors, it is important to know that they needn’t import components from the other side of the world, as they can have them produced locally by Czech suppliers, often with higher quality. The quality of work done by the Czech people is historically a point of pride. Czech workers are flexible and creative, and they do good work for an affordable price. They are not stopped by unexpected problems, but rather seek out various solutions and, in the end, they know how to cope with situations on their own with minimum input. These qualities are valued especially by American, British and Japanese investors, who have grown so fond of the Czech investment environment that in many cases they have repeatedly expanded their operations in the Czech Republic, increasing production and enlarging their existing factories.

A fundamental factor for investors is whether the environment in which they want to invest is sufficiently stable and – especially in the case of Asian investors – whether their activities will receive the necessary interest and attention from representatives of the government. In this respect, I must gratefully acknowledge that the current Czech government ranks investment support among its priority interests. Personal meetings between leading government officials and representatives of both existing and newly incoming investors significantly help the Czech Republic in the competitive battle for investments, which is clearly apparent in, for example, the inflow of Chinese investments to the Czech Republic, which has more than doubled in the past year. Success in mediating investments lies in two important factors: cooperation and communica-

tion. A number of institutions including ministries, agencies, associations and other organisations are involved in the investment cycle, from initial contact and planning to obtaining the necessary permits and final implementation. I am pleased when the cooperation between them is effective, thus making the process as brief as possible, and when the responsible departments actively work on eliminating barriers hindering the development of investment activities and improvement of the investment environment. We see and reflect the needs of our clients, which brings us closer to them. I believe that in this Investors’ Guidebook you will find everything that you are looking for and, based on the your newfound knowledge, you will decide to place your investment in the Czech Republic. We’re ready when you are!

Karel Kučera CEO, CzechInvest

Did you know?

The Czech Republic

Location

10.5 mil

Economy

Politics

Population

Prague

78.866 km

1.9%

Area

2% 1% 2% Romania USA 4% Bulgaria Poland 4% Germany 8% Russia

4% Foreigners

GDP growth: The gross domestic product increased in the Q3 2016 by 1.9%, year-on-year.

Miloš Zeman President

31st The 31st most competitive country in the world according to the Global Competitiveness Index, 2015 – 2016. The Czech Republic is also among the most competitive countries in the CEE region.

22% Others

Bohuslav Sobotka Prime minister

Industry 12% Vietnam

23% Ukraine

Note: Percentage of foreigners in total population Source: Eurostat, 2012

Government

members

22% Slovakia

96% Czechs

Note: Percentage of foreigners, by citizenship Source: Directorate of Alien Police Service, September 2015

200

members

Recent history

Chamber of Deputies 200 members/4 years

Velvet Revolution

In November and December 1989 the people of Czechoslovakia held a series of non-violent demonstrations against the communist government, which resulted in the regime’s collapse. The leading figure of the events, Václav Havel, was later named the first president of the free, post-communist Czechoslovakia.

1989

0 10 1

Velvet Divorce

The federated Czechoslovakia was divided into the Czech Republic and Slovakia on 1 January 1993 through a bilateral political decision. Due to the peaceful course of the breakup, the event was called the Velvet Divorce.

1993

Accession to NATO

The Czech Republic became a member of NATO in 1999.

1999

years

47.3% Industry’s share in the economy: The Czech Republic is the most industrialised country in the European Union. Industry accounts for 47.3% of the commercial economy.

Quality of life

6th The 6th safest country in the world according to the Global Peace Index 2016.

1st Accession to the EU

The Czech Republic joined the European Union in 2004.

2004

Senate 81 members/6 years

members

years

The 1st happiest country among the newer EU member countries according to World Happiness Report issued by the United Nations, 2016.

4th The Czech Republic is 4th in the world according to Expat Explorer Survey HSBC, 2016.

Quick facts about the Czech Republic

Český Krumlov

The Czech Republic – heart of Europe Basic data Area

78,866 km2

Population

10.5 million

Workforce

5.3 million

Capital

Prague

Language

Czech

Currency

Czech koruna (CZK)

Political system

Parliamentary republic

ocation The Czech Republic is a landlocked country in the middle of Europe. It is bordered by Germany to the west, Poland to the north, Slovakia to the east and Austria to the south. Thanks to its location, which makes it a notional gateway between Western and Eastern Europe, the country is often referred to as the “Heart of Europe”. The Czech Republic is comprised of parts of historical territories which for a significant part of history were the Lands of the Bohemian Crown, namely Bohemia, Moravia and part of Silesia. Administratively, the country is divided into 14 self-governing regions. The capital city, Prague, is also one of the regions. Approximately 10.5 million people live in the Czech Republic. The population of Prague is 1.2 million. With 378,000 inhabitants, Brno is the country’s second most populous city and is the natural centre of Moravia. The main city in Silesia, Ostrava, is the country’s third-biggest with a population of 296,000.

12 | INVESTORS‘ GUIDEBOOK

The Czech Republic’s landscape comprises mainly highlands and rolling hills. Sixty-seven percent of the country’s territory is at an elevation of up 500 m above sea level, 32% in the range from 500 to 1,000 m above sea level and approximately 1% above 1,000 m above sea level. The country’s highest point is Sněžka Mountain in the Krkonoše range (1,603 m above sea level), and its lowest is Hřensko (115 m above sea level). Modern history From the 16th century, the Czech lands were ruled by the Habsburg dynasty, which gradually incorporated the territory into the Habsburg monarchy, later the Austro-Hungarian Empire. In response to Germanification, the Czech national revival began at the end of the 18th century as an effort to restore Czech culture and language and, later, to foster the acquisition of power by Czech political parties. The Czech lands underwent major economic development in the second half of the 19th century. The majority (approximately 70%) of industry in Austria-Hungary at  time was concentrated in the Czech lands.

The Czech Republic’s location within the European Union

Germany

Bohemia Moravia

Ústí n.L. Karlovy Vary

H.K. Region Hradec Králové

Central Bohemia

Plzeň

Prague Prague Region

Poland R&D

Plzeň Region

Silesia

Liberec

Ústí n. L. Region

Pardubice Pardubice Region

Ostrava

Olomouc

Jihlava

Properties

South Bohemia

Moravia-Silesia Olomouc Region

Vysočina Region

Germany

Finance

Liberec Region K.V. Region

First steps

Map of the Czech Republic

The Czech Republic

About the country

Zlín Region Brno

České Budějovice

Zlín Permitting and construction

South Moravia

Slovakia Austria

Top sectors

The president and the government (i.e. the prime minister and cabinet) hold executive power, whereas the government is the supreme executive body. The government is accountable to the Chamber of Deputies. The president, who is elected through direct voting, appoints the justices of the Constitutional Court with the consent of the Senate. Under certain conditions, the president can dissolve the Chamber of Deputies and veto bills. The president also names the prime minister, and other members of the government are named at his suggestion. The Constitutional Court, with 15 justices, is the guarantor of constitutionality, ensures protection of fundamental rights and can repeal laws or provisions of laws. However, it is not part of the system of general courts. The Supreme

M&A

Political system The Czech Republic was established on 1 January 1993 in connection with the dissolution of Czechoslovakia. Since that date, the country has had a constitution according to which it is a parliamentary democracy with a liberal political system based on free competition of political parties and movements. The head of state is the country’s president, whereas the supreme and only lawmaking body is the Parliament of the Czech Republic. Parliament is a bicameral body composed of the Chamber of Deputies and the Senate. The Chamber of Deputies has 200 members elected every four years on the basis of proportional representation. The Senate’s 81 members serve six-year terms, with two-round majority elections held for one-third of seats every two years.

Taxes

saw Pact countries crushed the reform movement known as the Prague Spring. The Velvet Revolution, which began on 17 November 1989, overthrew the communist regime and enabled the return of democracy and restoration of free enterprise. Václav Havel became the first president of the free, post-communist Czechoslovakia. On 1 January 1993, the Czechoslovak Federative Republic was dissolved through a bilateral political agreement, the result of which was the establishment of two independent successor states: the Czech Republic and Slovakia. The Czech Republic was gradually accepted into Western European political structures, joining NATO in 1999 and the European Union in 2004. It has been part of the Schengen Area since 2007.

Human resources

At the end of the First World War, Czechoslovakia was established through the joining of the Czech lands with the geographically and linguistically close Slovak nation. Tomáš Garrigue Masaryk was elected the first president of Czechoslovakia. During the interwar period from 1918 to 1938, Czechoslovakia became the last remaining democracy in Central Europe and enjoyed a rich industrial heritage and high quality of life. The Communist Party of Czechoslovakia seized power in February 1948. The country became a totalitarian state and part of the Eastern Bloc. The structures of civil society, free association and economic life were suppressed. The end of the 1950s saw the start of a gradual liberalisation, which came to an end on 21 August 1968, when an invasion by the Soviet Union and other War-

Court is the highest body in civil and criminal justice as well as in the area of administrative adjudication. Economics The Czech Republic is a developed country with a market economy. According to a number of economic, social and political indicators, it ranks among the world’s most advanced countries. Since 2005, the Czech Republic has been part of the group of the thirty most advanced countries according to the World Bank, to whose budget it has become a contributor. The country is considered to have the most stable and most prosperous economy of all post-communist states. According to Eurostat, it was the fifteenth richest country of the European Union in 2015 in terms of per-capita GDP based on purchasing power parity. Of the new EU members, it was the most successful of the new EU members. A Eurostat report from 2015 states that the Czech Republic is also the most industrialised country in European Union. Industrial production accounts for 47.3% of the commercial economy, which is more than in the other member states. In 2014, 28% of all Czech employees worked in industry. More than half of Czech industrial production is exported. The most important branch of Czech industry is vehicle manufacturing, including motorcycles and trailers, which has more than doubled in the past decade. The other main pillars of Czech industry are the mechanical-engineering, metals, chemical and food sectors. The energy, construction and consumer-goods industries are also important components of the Czech economy. The unemployment rate in the Czech Republic has remained relatively low

over the long term and below the average of developed countries. Germany is the country’s biggest foreign trade partner. The Czech Republic’s currency is the koruna. Due to a foreign exchange intervention carried out by the Czech National Bank, the koruna-euro exchange rate is stable at approximately CZK 27.5/EUR

Share of industry in EU economies 33.0

Finland

The Czech Republic is a member of these organisations

United Nations

European Union

NATO

Organisation for Economic Cooperation and Development

World Trade Organisation

International Monetary Fund

World Bank

Council of Europe

Organisation for Security and Cooperation in Europe

European Customs Union

Schengen Agreement

Visegrad Group

31.7

29.1

32.5

Latvia

31.0

41.7

Lithuania

24.8

26.5

Ireland

45.0

Netherlands

Poland

40.2

29.6

Germany

Belgium

47.3

14.4

26.4

Czech Republic

34.5

Luxembourg

44.2

Romania

42.8

Slovenia

45.9

Hungary

37.9 Italy

37.7

40.5

Bulgaria

Croatia

29.3

1.9%

Inflation (11/2016)

0.5%

Unemployment rate (10/2016)

3.9%

Average gross monthly wage (Q3/2016)

CZK 27,220 (approx. EUR 1008)

14 | INVESTORS‘ GUIDEBOOK

39.9

Slovakia

Austria

France

33.0

GDP growth (year-on-year, Q3/2016)

Source: Czech Statistical Office, Ministry of Finance, 2016

Estonia

Denmark

Portugal

Economy of the Czech Republic

33.7

Sweden

Spain

28.3

Greece Note: Share of industry in the commercial economy, total (value-added in the costs of production factors, in %) Source: Eurostat, 2015

The Czech Republic’s national debt is low in comparison with that of other EU member countries. The development and current state of the country’s finances are also judged favourably in comparison with other European countries.

Moody´s

Fitch

Czech Republic

AA-

A+

Slovak Republic

A+

Poland

BBB+

A-

Russia

BB+

Ba1

BBB-

Bulgaria

BB+

Baa2

BBB-

Romania

BBB-

Baa3

BBB-

Hungary

BBB-

Ba1

BBB-

Infrastructure The Czech Republic has a well-developed network of motorways and expressways. The motorway network is under construction and is

Motorway network in the Czech Republic

Public international airport

Ústí n.L. Karlovy Vary

National holidays in the Czech Republic New Year’s Day, Restoration Day of the Independent Czech State

28 September

Czech Statehood Day

Varies

Good Friday, Easter Monday

28 October

Independent Czechoslovak State Day Den

1 May

Labour Day

17 November

Struggle for Freedom and Democracy Day

Hradec Králové Plzeň

Prague Pardubice

Ostrava

Human resources

1 January

Permitting and construction

Liberec

Source: Czech National Bank, 2016

Properties

Standard and Poor´s

R&D

Country

constantly being refurbished. The most significant motorway in the Czech Republic is the D1 joining Prague and Brno with Ostrava and Poland (toward Katowice). In 2015, completion works began on the D1 motorway’s next-to-last section, which should be finished within four years. Construction of another section of the D11 motorway is set to begin in 2017 with the purpose of connecting Hradec Králové and the Polish border. Another motorway under construction is the D3 linking Prague to České Budějovice and Austria; the D3 will follow the route of the E55 backbone international motorway. The country’s motorways that have already been completed are the D2 connecting Brno and Slovakia (toward Bratislava)

Finance

Investment risk rating

In August 2011, Standard & Poor’s raised its rating of the Czech Republic by two places, from A to AA-, which is the fourth-best possible rating. At present, it can be stated that the Czech economy is in very good condition. The country’s gross domestic product increased by 1.9% year on year in the third quarter of 2016. In the same period, gross value added increased by 1.6% year on year. The unemployment rate has also fallen, specifically to 3.9% in October 2016.

First steps

1. Upon accession to the European Union in 2004, the country committed to adopting the single European currency. Minister of Finance Andrej Babiš announced in February 2014 that the earliest possible date for adoption of the euro would be in 2020.

The Czech Republic

About the country

Olomouc Taxes

Jihlava

Brno

České Budějovice

Victory in Europe Day

24 December

Christmas Eve

5 July

Day of Slavic Missionaries Cyril and Methodius

25 December

Christmas Day

6 July

Jan Hus Day

26 December

St. Stephen’s Day

Zlín M&A

8 May

Top sectors

Note: Status as at 19 September 2016 Source: Road and Motorway Directorate of the Czech Republic, 2016

Travel distances from Prague (flights per week | flight time, h:m)

Oslo 11 | 2:00

Travel distances from Prague (km | driving time, h:m) Hamburg 640 | 6:00

Stockholm 19 | 1:50 Helsinki 24 | 2:05

Dublin 12 | 2:30

Amsterdam 880 | 8:00

Warsaw 681 | 7:00

Moscow 61 | 2:35 Brussels 901 | 8:30

London 80 | 2:00 Beijing 2 | 9:00

Seoul 8 | 9:55 Madrid 13 | 3:00

Rome 23 | 1:45

Paris 1,030 | 9:45

Vienna 330 | 3:30

Istanbul 26 | 2:40

Source: Vaclav Havel Airport Prague, 2016

and the D5 connecting Prague, Plzeň and Germany (toward Nuremberg). A record amount of goods was transported on Czech roads and motorways at the beginning of 2015. According to statistics from the Ministry of Transport, the volume of transported goods increased by 11% over the same period of the previous years. Rail transport also increased, with the volume of transported goods rising by 5%. Together with road transport, rail transport in the Czech Republic makes up the backbone of the domestic transportation system while also serving for international transit. With 9,458 km of track, the Czech Republic has the densest rail network in Europe. The corridor routes of the nationwide lines leading to the European rail

Budapest 529 | 5:00

Munich 380 | 4:00 Bratislava 337 | 3:00

Milan 860 | 8:45

Dubai 18 | 6:00

16 | INVESTORS‘ GUIDEBOOK

Berlin 340 | 3:45

Zagreb 700 | 7:15 Source: Google Route Planner, 2016

system for long-distance and transit service cover 1,329 km. The Railway Infrastructure Administration is the administrator and operator of the absolute majority of railway infrastructure in the Czech Republic. The biggest rail transporter is Czech Railways, whose subsidiary, ČD Cargo, is the fifth-biggest rail freight operator in Europe. The rail freight market has been liberalised; liberalisation of the passenger transport is ongoing. The Czech Republic is connected to the EuroCity international rail network, while some international connections are covered by SuperCity trains, for which the busy Prague-Ostrava line is a core route. Czech Railways operates on the same routes as the high-speed Pendolino trains. Other private railway companies also provide passenger transport.

The Czech Republic has public international airports in Brno, Karlovy Vary, Ostrava, Pardubice and Prague. Václav Havel Airport in Prague is the most important Czech airport and is also the biggest airport among the new EU member countries. Its operator is the company Prague Airport. Václav Havel Airport annually handles more than twelve million passengers carried by approximately 60 airline companies connecting Prague on direct routes to roughly 140 destinations around the world. Five freight carriers also operate out of Prague’s airport and dozens of other companies provide charter services. Czech Airlines is the country’s flagship carrier. Population According to the latest census conducted in 2011, the Czech Republic’s population is 10.5 million.

In terms of the mix of nationalities residing here, the country’s population is relatively homogenous, as approximately only 4% of inhabitants are foreigners. Data from the Czech Statistical Office for September 2015 show that the largest number of foreigners living the Czech Republic are Ukrainians (23%), followed by Slovaks (22%), Vietnamese (12%) and Russians (8%). Other foreign nationals living in the Czech Republic include Poles (4%), Germans (4%), Bulgarians (2%), Romanians (2%) and Americans (1%), while citizens of all other countries account for 22% of the total. In 2011, there were 2.2 million religious followers in the Czech Republic, with Christians comprising the majority. Roman Catholics were the largest religious group in 2011.

The Czech Republic First steps

Railway transit corridors in the Czech Republic Dresden

Finance

Děčín Ústí n.L. Nürnberg Cheb

Prague

Česká Třebová

Plzeň

Ostrava

R&D

Pardubice Katowice Krakow

České Budějovice

Přerov

Brno

Properties

Olomouc

Žilina

Permitting and construction

Břeclav Linz

Wien

Bratislava

Source: Railway Infrastructure Administration, 2016

Human resources Taxes M&A Top sectors

Karlštejn

Ready for business

Dancing House, Prague

The Czech Republic is one of the fastest growing economies in Europe with the most favourable long-term macroeconomic indicators such as per-capita GDP or public debt. The country has been a regional industrial leader for more than a century and is one of the most successful CEE countries in terms of attracting foreign direct investments.

Attractiveness of the Czech Republic Top investment destinations according to a survey of German companies with operations in the Czech Republic

Czech Republic

Slovakia

Poland

China

Estonia

Slovenia

Latvia

Lithuania

Hungary

Romania

Source: DTIHK 2015

18 | INVESTORS‘ GUIDEBOOK

ccording to the Czech National Bank, of the Czech Republic has received a total of EUR 89 billion worth of FDI since 1993. The largest amount of FDI flows from Germany. According to a survey carried out by the Czech-German Chamber of Commerce, 92% of German companies with operations in the Czech Republic are satisfied with the location and would select the country for their investment again. They consider Czech Republic the most attractive location in the CEE region for many reasons, such as its proximity to Germany, EU membership, productivity and motivation of local employees, quality and availability of local suppliers and relatively low labour costs and skilled workforce. The Global Competitiveness Index ranks the Czech Republic thirty-first out of 140 countries worldwide and first in the region. Strategic location One of the factors that make the Czech Republic extremely attractive for foreign investors is its good access to the European market. The country’s convenient location in the middle of Europe makes it possible to reach all European capitals very quickly. Together with EU membership, this makes the country a perfect gateway to the single European market of more than 508 million consumers. Given the fact that the Czech Republic is at the crossroads of European trade, advanced transport infrastructure was naturally developed here. The Czech Republic is ranked among the world’s most advanced countries in terms

of transport-network density and several projects involving modernisation and extension of the network are currently underway. Stable and transparent business environment A stable political situation, well-developed private sector, effective legal environment and healthy banking system with a strong and independent central bank are the key features of a society in which business can be conducted effectively and safely. The Czech Republic’s open investment climate has been a key element in the country’s transition, which is reflected in its investment rating from international credit-rating agencies, putting it equal with Japan or Taiwan and opening the door to early membership in the OECD. The Czech Republic is a fully fledged parliamentary democracy and one of the most advanced new members of the European Union, which it joined in 2004. Its currency, the koruna, is fully convertible and extremely stable. Under Czech law, foreign and domestic entities are treated identically in all areas, from protection of property rights to investment incentives. The government does not screen any foreign investment projects, with the exception of those in the defence and banking sectors. The tax system offers the lowest rates in Europe (the corporate and personal income-tax rates are 19% and 15%, respectively) and has remained stable over the long term; the last change of the corporate income-tax rate was a reduction in 2010. Educated and a skilled workforce The Czech Republic combines an outstanding level of general education with strong science and

The Czech Republic is among the most competitive countries in the CEE region 6 5

5.76

5.68

5.61

5.53

5.45 4.69

4.49

4.25

4.28

4.22

2 1

Slo va kia

Slo ve nia

Hu ng ar y

Po lan d

Fin lan d

Ge rm an y

Un ite dS tat es

Sin ga po re

Sw itz er lan d

Re Cz pu ech bli c

such as biotechnology and software development. Czech employees are very loyal, hardworking and precise. The local workforce is considered to be very reliable and stable.

Singapore

New Zealand

Canada

Czech Republic

Switzerland

Norway

Austria

Sweden

Bahrain

Germany

Source: HSBC Expat Explorer Survey 2016

M&A Top sectors

www. czechinvest.org

Taxes

Eva Jungmannová Head of the Strategic Projects and New Technologies Section CzechInvest eva.jungmannova@czechinvest.org

Country

Human resources

Well-developed infrastructure Not only transport infrastructure, but also the energy distribution and telecommunications networks contribute to the creation of an ideal environment for doing business. Energy supplies are very stable with some of the lowest prices in the region. Both the electricity and gas markets are fully liberalised without any regulation in which competition is feasible. Only activities of a monopoly nature continue to be regulated. The Czech Republic’s energy infrastructure is among the most efficient and adequately supplied in the region, as the country has some of the largest gas reserves in the EU. The Czech telecommunications market – one of the most highly developed and most liberalised in Central and Eastern Europe – is distinguished by the growth of demand for data, internet and other communication services. The country’s advanced fibre-optic network is part of the European backbone and is being further developed. No exclusive

Rank

Permitting and construction

engineering disciplines. The availability of technically educated graduates at a fraction of the cost of western labour makes the country especially advantageous for manufacturing and R&D-oriented companies. In the academic year 2015/2016, nearly 330,000 students were enrolled in the country’s 76 universities. Roughly one-third of Czech university students study economics and finance, while more than 90,000 students are enrolled in technical programmes. Because the Czech Republic is a relatively small country, studying foreign languages is a necessity. According to the latest STEM survey, more than 72% of Czechs have knowledge of at least one foreign language (predominantly English or German); this figure rises above 90% for those in management positions. Emphasis has long been placed on secondary education in the Czech Republic, which is reflected in the fact that, the country’s population has the largest share of people who have reached the upper secondary education in the OECD. The Czech Republic has strong technological potential thanks to its pool of well-educated science workers and its skilled workforce, which have given rise to a number of rapidly growing industries

The Czech Republic is the fourth most popular destination for expatriates

Properties

Source: World Economic Forum, Global Competitiveness Report 2015-2016

1st place - Switzerland (GCI - 5.76) 31st place - Czech Republic (GCI - 4.69) 140th place - Guinea (GCI - 2.84)

Quality of Life The Czech Republic has the highest quality-of-life index in the region according to the Mercer Quality of Living Survey 2015, which ranks it first among new EU members and 29th globally. The country’s urban centres and beautiful countryside offer countless possibilities for leisure activities for both tourists and locals throughout the year. For expats and their families, larger Czech cities, especially Prague, boast a wide range of housing options that are of high quality yet significantly cheaper than in the majority of European cities. Municipal public transport systems are well managed and efficient, while trains provide a popular and easy way to travel around the country. The Czech Republic is an expat-friendly country with plenty of organisations helping foreigners with everyday issues and organising networking events. Furthermore, in larger cities it is easy to find international schools for children at all grade levels. According to the annual Global Peace Index published by the Institute for Economics

R&D

and Peace, the Czech Republic is among the ten safest countries in the world. The country is close to Western Europe not only geographically, but also in terms of social and cultural values. All those factors contributes to Czech Republic’s ranking as the 4th most attractive country for expats worldwide (HSBC Expat Survey). The Czech Republic’s sustainable business environment and its ability to harness its potential in order to respond to the needs of the global economy have made it an ideal location for investment.

Finance

rights exist in the area of electronic communications and the competition environment is sufficiently robust in the terms of the European Union. The number of users of high-speed internet access is rapidly and constantly growing, and the prices of high-speed internet access are falling. Taking all enterprises into account, the average rate of fixed broadband access in the EU as well as in the Czech Republic was 92% in 2012. In terms of the business-property market, the country is quite advanced with respect to the number of industrial zones and parks as well as office premises.

First steps

Global Competitiveness Index Rankings

The Czech Republic

Reasons to invest in the Czech Republic

Prague: A top location for European headquarters

Prague Castle

Every year Prague is visited by more than four million foreign tourists wanting to see one of the most beautiful cities in the world. What is less obvious to them and others is Prague’s complete readiness to host the CEE headquarters of multinational companies.

Features of Prague and the Czech Republic

1st

The Czech Republic is the sixth safest country in the world 1. Iceland 2. Denmark 3. Austria  4. New Zealand 5. Portugal 6. Czech Republic

9. Japan 10. Slovenia

Source: Global Peace Index 2016

20 | INVESTORS‘ GUIDEBOOK

Prague ranks first among Central European capitals in terms of cost effectiveness (fDi Intelligence, 2016)

4th

The Czech Republic is the fourth most popular destination for expatriates (Expat Explorer 2016)

2 h

Prague is within a two-hour flight of most European cities

The personal income-tax rate 15% in the Czech Republic is only 15% 25

Prague is among the top 25 European Regions of the Future (fDi Intelligence, 2016)

Prague is among the EU regions with the largest share of researchers in total employment

3rd

FDi ranks Prague as the third-best small European Region of the Future in terms of business friendliness

7. Switzerland 8. Canada

Prague is the third-best European city in terms of human resources and lifestyle behind London and Paris (fDi Intelligence, 2016)

he Czech capital is a unique location fusing favourable costs and a sense of culture and tradition with a well-developed private sector, highly skilled workforce and innovation potential. Mixed with its enticing atmosphere and great conditions for expats, this attractive city has become a popular location for the regional headquarters of major multinationals such as Tesco, Ness Technologies and Bell Helicopters and it has been ranked among the top 25 European regions of the future according to fDi Intelligence magazine.. At the centre of the world’s biggest market Prague is very easily accessible from many other places in the world and is within a two-hour flight of most European cities. There are many daily direct flights connecting Prague to the main European business centres, such as London, Amsterdam and Frankfurt, as well as global centres including New York, Toronto, Tel Aviv, Dubai, Seoul and Beijing. The fact that European Union is the largest market in the world makes Prague undoubtedly the top choice for those investors who want to conveniently access the European market or further develop their business in Europe. Strong innovation potential, R&D and a skilled workforce The Czech Republic has strong potential in the area of R&D. The main areas of technological speciali-

sation in the Czech Republic include, but are not limited to, construction and construction technologies, materials engineering, transport technologies, biotechnology, environmental technologies, energy and security. Prague is among the EU regions with the largest share of researchers in total employment (over 1.8 %). “The advanced local R&D infrastructure has a strong, positive impact on Prague’s economic development, as the city is home to nine public universities and the Academy of Sciences, which contribute to the generation of new ideas and innovations of products and services. Many R&D-focused start-ups are also based here and are bringing new energy to the local economy”, says Jan Dobrovský, head of the Strategy and Business Support Unit of the City of Prague. Martin Ježek, Business Development Director at Grafton Recruitment adds: “Prague excels in the CEE region especially in the field of human resources. Thanks to the concentration of tertiary education across disciplines, the city is able to provide the number of specialists required by the private sector. International shared-services centres established in Prague since the beginning of the last decade currently employ thousands of people who can serve as a source of qualified specialists and managers with above-average language skills for newly established headquarters in Prague.” Safe, cultural and expats friendly city Prague offers expatriates truly safe and culturally rich environment and very good municipal infrastructure.

John R. Westby

I really like the unique mixture of Central European history, European culture, and a rapidly changing westernised society.

Jakob Sassersen

I like the small food festivals that take place more or less every week during the summer around Prague.

Kamil Blažek

The AFI works with the City of Prague and other stakeholders to open Prague to new types of investments and to attract more corporate headquarters to our vibrant and pleasant capital.

General Manager, Business Promotion Takenaka Europe

R&D

Associate Vice President MSD IT Global Innovation Centre

Top sectors

www.afi.cz

M&A

Zdenka Hrabicová Team Leader Association for Foreign Investment zdenka.hrabicova@afi.cz

Taxes

Source: Czech Focus, magazine of the Association for Foreign Investment and CzechInvest (Expats Speak section)

Human resources

Chairman of the AFI

Permitting and construction

General Manager NNIT Czech Republic

Properties

Cost effectiveness Although Prague has a well-developed private sector, prices are still significantly lower than in Western Europe. Investors can thus use most necessary resources for very reasonable prices. According to fDi Intelligence, Prague ranks fifth among major European cities and first among Central European capitals in terms of cost effectiveness. With respect to office rents, the price level is the same or lower than the average rate in nearby locations in Central Europe. Compared to other major cities in Europe such as London, Munich, Vienna, Amsterdam and Paris, the rental rate in Prague is 20% to 80% less. The Czech Republic is also very affordable in terms of labour costs, as the average wage here is half the EU average. However, the quality and availability of workers is satisfactory. “Prague has numerous advantages in terms of the availability of human resources, especially in the size and diversity of the local labour market. Prague attracts skilled jobseekers from both other regions of the Czech Republic as well as from abroad. In the past 10-15 years, Prague has become a truly cosmopolitan city, not only because it is a popular tourist destination, but also because it has become the home of many expatriates, especially from other European countries. They have found here an enticing ratio of income, quality of life and cost of living,” says Martin Ježek.

Mikio Tokunaga

The most remarkable thing about Prague is that historical buildings and modern buildings typified by the ‘Dancing House’ create a unique harmony together.

Finance

Open business environment Prague has an open business environment and a well-developed private sector. “The major economic activity in Prague is based on its very strong tertiary and quaternary sectors. Such a structure creates an appropriate environment for HQs, thanks to the direct accessibility of all necessary services and outsourcing for companies of all sizes,” says Jan Dobrovský, head of the Strategy and Business Support Unit of the City of Prague. The Czech Republic’s legal environment forms a good foundation for effective company management, flexible employment

and nimble property management. FDi ranks Prague as a third best small European region of the future in terms of business friendliness. The tax environment in the Czech Republic is stable and offers very good conditions not only for corporations but for expatriates, as well. Jan Linhart, Partner with KPMG ČR describes: “The corporate income-tax rate was set at 19% in 2008 and remains at that low level today. The personal income-tax rate is also very favourable, especially for persons with high incomes and for a significant part of the expatriate population. The personal income-tax rate is only 15%. Expatriates who are sent to work in the CR under the regime allowing them to stay within the social-security system of their home country do not have to pay additional tax in the CR, whereas expatriates from some countries pay only for health insurance.”

First steps

The Czech capital also offers great conditions for families, an effective public transport system and high-quality services in the areas of shopping, dining and entertainment. More than 10% of Prague’s inhabitants are expatriates. Prague is a truly cosmopolitan city with one notable advantage: it is three times cheaper to live here than in London and two times cheaper than in New York (data according to numbeo.com). On the other hand, the Czech Reublic is the sixth safest country in the world according to the Global Peace Index. Prague is generally and rightly perceived as a city with a rich cultural heritage and well-preserved historical centre. But Prague has also a captivating and lively modern cultural environment offering an abundance of concerts, coffee-houses, libraries, theatres, cinemas and museums, as well as film, music, arts and food festivals. Beyond entertainment options, Prague has outstanding municipal infrastructure including green spaces and facilities for sports and outdoor recreation. Family life of expatriates is very easy in Prague thanks to the presence of forty international preschools and elementary and secondary schools. With its highly efficient public transport system it is possible to reach most places in the city within an hour. The high-quality healthcare provided here also deserves mention, as 78% of the city’s residents claim to be satisfied with the level of care they receive (data according to the Prague Institute of Planning and Development). The Czech capital also excels in terms of the availability of premium shopping and services. Numerous luxury brands are present here and residents can enjoy a number of top-level restaurants and bars, including Michelin-starred establishments.

The Czech Republic

Prague headquarters

The top ten facts every investor needs to know about the Czech legal system Investors coming to the Czech Republic naturally have questions about the country’s legal system. Here are the answers. 1. What do I need to know about the Czech legal system? The Czech Republic is an investor-friendly western democracy with a stable and modern legal environment. Czech laws are compatible with EU laws. The Czech Republic is a member of the EU, OECD, WTO, IMF, World Bank, EBRD, UN and NATO. 36th

Czech Republic’s sovereign debt ratings: A1 (Moody’s), AA- (Standard & Poor’s), and A+ (Fitch)

Ease of Doing Business: ranked 36th out of 189

92 92 bilateral investment treaties

22 | INVESTORS‘ GUIDEBOOK

Memberships: EU, OECD, WTO, IMF, World Bank, EBRD, UN and NATO

2. Is the Czech legal system similar to developed European legal systems? Yes. The Czech legal system is based on the civil law system, in particular the Germanic branch of civil law. The legal system is based on written sources of law, namely acts (adopted by Parliament), delegated legislation (adopted by the government or ministries), ratified international treaties and EU law. Most of the areas of the legal system are systematically codified (e.g. in the Civil Code, Criminal Code and Administrative Code). The Czech Republic has a completely new and modern system of private law. The new Civil Code and the new Business Corporations Act became effective on 1 January 2014. These new laws draw their inspiration from the pre-war legal tradition

and from the Austrian, French, German, Italian, Quebec and Swiss civil codes.

3. Are investments in the Czech Republic

protected by any investment protection treaties? Yes. The Czech Republic has signed 92 bilateral investment treaties with, for example, Austria, Germany, China, India, the Netherlands, Russia, the United Kingdom and the United States. The Czech Republic is also a member of the Multilateral Investment Guarantee Agency , which is a member of the World Bank Group and helps to protect foreign investments.

4. Are intellectual property rights protected

in the Czech Republic? Yes. The Czech Republic is a signatory to the Bern, Paris and Universal Copyright Conventions. The Czech legal system protects all forms of property, including patents, copyrights and trademarks.

5. Does the court system work well and are investors’ rights enforceable in the courts? Yes. The Czech courts work well and investors’ rights are enforceable in the courts. The Czech Republic

8. Can I enforce foreign judgments issued by a court based in an EU member state in the Czech Republic? Yes. Foreign judgements issued by EU courts are enforceable subject to the Brussels Regulation and the Hague Convention on Choice of Court Agreements. Can I enforce foreign arbitral awards in the Czech Republic? Yes. Foreign arbitral awards are enforceable subject to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards signed in New York on 10 June 1958.

Common corporate vehicles and structures

Choice of court jurisdiction Attorney/client privilege Contractual limitation of liability Proprietary (in rem) security rights (e.g. pledge, lien, security transfer) Security agent

Single-tier board in joint-stock companies Concern/controlling relationships Different types of shares with different rights

Prohibition of financial assistance/ whitewash procedure

Very small mandatory registered capital of limited liability companies (EUR 0.03 per member – e.g. the minimum amount of registered capital required for a limited liability company with two members is EUR 0.06)

Contractual subordination

Transformations

Reorganisation

Criminal liability of legal entities

Marketability of contracts, receivables and claims

E-identity and e-signature

Parallel debt structure (if governed by foreign law)

Taxes

Kamil Blažek Partner, Kinstellar Chairman, Association for Foreign Investment kamil.blazek@kinstellar.com

Top sectors

www.kinstellar.com

M&A

10. Is the investment risk small in the Czech Republic? Yes. The Czech Republic’s sovereign debt has been given investment grade ratings by the rating agencies Moody’s (A1), Standard & Poor’s (AA-) and Fitch (A+). The Czech Republic is one of the few countries that issues negative yield bonds, which attests to the its excellent creditworthiness. Rating of the Czech Republic: Foreign Currency Long - Term Sovereign Debt Ratings.

Choice of law

Human resources

available in the Czech Republic? Yes. Business in the Czech Republic is conducted by a variety of different entities which are also common in the EU. These include entrepreneurs conducting business on their own (sole traders) and the following types of companies: limited liability companies, joint-stock companies, general commercial partnerships and limited partnerships. Foreign entities can register to conduct business in the Czech Republic via a branch or through participation in a Czech entity under the same conditions as Czech entities. In addition, the following European forms of legal entities are allowed to operate in the Czech Republic: (i) European Economic Interest Grouping, (ii) European Company (Societas Europea) and (iii) European Cooperative Society.

Trusts

Permitting and construction

7. Is alternative dispute resolution available in the Czech Republic? Yes. The most frequent dispute resolution mechanism for parties seeking to avoid litigation in court is arbitration. In the Czech Republic, the parties involved in a dispute usually bring their case to the Czech Republic’s permanent court of arbitration – the Arbitration Court attached to the Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic (the Court of Arbitration, en.soud.cz). The Court of Arbitration is based in Prague. It has its own database of arbitrators (currently numbering more than 300). Most of the arbitrators are lawyers who are practising as attorneys and scholars. Proceedings are usually conducted under the Court of Arbitration’s own rules, unless the parties to a dispute have agreed otherwise. The administrative charges and fees of the arbitrators depend on the value of the dispute. In com-

9. Are the common corporate structures

Contractual freedom

Properties

Yes. The costs connected with litigation usually include (i) direct expenses incurred by parties in connection with court proceedings, (ii) court fees, (iii) the costs of obtaining evidence, (iv) experts’ fees and the costs of translation and interpretation and (v) legal fees. The court fee for a petition claiming a non-monetary fulfilment is CZK 2,000 (approx. EUR 75). Where a monetary claim is brought to court, the court fee comprises 5% of the claim. The maximum court fee is CZK 4.1 million (EUR 150,000) for claims amounting to CZK 250 million (approx. EUR 9.1 million) and higher. The general rule is that each party will initially bear its own direct expenses connected to litigation. The court will then rule on the reimbursement of the amounts borne by the parties, depending on who wins the claim. In practice, the party that is successful in litigation is generally awarded all costs reasonably incurred by it in order to successfully bring or defend (as the case may be) the relevant action.

R&D

6. Are court fees reasonable?

Does the Czech legal system recognize core legal concepts common in the developed legal systems? Yes!

Finance

parison with other arbitration centres, the Court of Arbitration is one of the least expensive.

First steps

ranked 36th out of 189 countries in the World Bank Ease of Doing Business – Economy Rankings.

The Czech Republic

Legal framework

Did you know? AFI was one of the instrumental organizations for our company when deciding about the final location of our investment project. AFI´s members delivered professional service from key advisory sectors and helped us to understand the local tax/legal/HR/construction environment, which was crucial for making the right decision. This service is definitely worth recommending to any potential investor coming to the Czech Republic.

Petr Pospíšil General Manager External Affairs Nexen Tire

Association for Foreign Investment Where did the AFI hold events in 2016? 4 5 Turkey Denmark

17 Switzerland 8 South Korea

47 China

About the AFI The Association for Foreign Investment (AFI) is a non-governmental, non-profit organisation representing a group of leading global and regional firms actively supporting investors. The AFI focuses on foreign direct investment, export of investments and services, commercialisation of R&D, support for innovative start-up projects and development of the Czech business environment.

1996 40 255 70

80 Others

6 Canada

From which countries do investors turn to the AFI? 45 USA 21 Japan

13 Germany

9 UK

Note: data for the period 2016.

Notable events

Cooperation of the Year awards

Awards for projects conducted jointly by the research and application spheres leading to innovations as well as successful transfers of technologies and knowledge.

Investor of the Year

The Association for Foreign Investment and CzechInvest annually present awards for the most significant investment and business property projects of the previous year.

Investment seminars

In cooperation with CzechInvest and other partners, the AFI regularly organises seminars for investors abroad. In 2015 these seminars were held in, for example, Beijing, Shenyang, Shanghai, Seoul, Paris, Düsseldorf, Madrid, Bilbao, Torino, Washington and New York.

How to reach us +420 224 911 750 www.afi.cz @AFI_czech LinkedIn

when the AFI was established members enquiries from investors (2016) events in the Czech Republic and abroad in 2016

Chairmen of AFI

Tomáš Ctibor

Jan Ámos Havelka

Martin Slabý

Jan Bobek

Kamil Blažek

1996

2000

2005

2008

2010

Six main things to do first

Establish your business The current trend of avoiding overly onerous legal requirements related to starting a business has been strengthened by legislation that come into force on 1 January 2014 with the purpose of, among other things, facilitating the creation of a conducive environment for foreign investors who are considering entering the Czech market.

o incorporate or not? The first question which has to be answered after deciding to do business in the Czech Republic is whether the entity wishes to create a formal (registered) establishment or not. For non-EU entities, this is not a matter of choice. Every non-EU entity that wants to start doing business in the country must either register a branch or found a company. EU entities have two other options: to provide so-called “temporary services” in the meaning of the Directive on the Free Movement of Services, or to provide services or do other business permanently without any establishment. The latter is allowed by the new law and enables EU entities conducting business in the Czech Republic to proceed in a rather informal way. However, the decision not to incorporate could in some aspects have a less positive outcome and in some areas increases the risks of uncertainty, especially in relation to official authorities. Accordingly, registration of an entity is still the optimal course of action. Choosing the most suitable vehicle The relevant laws offer a number of different corporate vehicles for doing business. These can be divided into three basic groups: 1) a branch, 2) unlimited liability companies, namely unlimited liability partnerships and limited liability partnerships, and 3) limited liability companies, namely limited liability companies (“LLC”) and joint-stock companies (“JSC”). Unlimited liability companies do not enjoy much popularity, since all assets of at least one partner are exposed to risk Branch A branch is a good choice for an entrepreneur coming to the Czech market for the first time. This vehicle

26 | INVESTORS‘ GUIDEBOOK

does not have a distinct legal personality and all its assets and debts belong to its founder. No registered capital is required. The founder has to appoint a head of the branch, who is the legal representative of the branch and thus acts on behalf of the branch in all matters. The head of the branch can be a foreign national. The branch can have only one founder, so this vehicle is not suited to investors who wish to run a business together with other parties in the form of a joint venture. Limited liability companies Limited liability companies have their own legal personality. They act via their statutory body, specifically the director, who is authorised to represent the company in all matters. The director and members of all other corporate bodies can be foreign nationals. Limited liability companies can be founded either by a sole founder or by multiple co-founders. Founders, as well as shareholders, can be natural persons or legal entities, Czechs or foreign nationals. The new Czech law provides a wide range of possible arrangements among shareholders who choose to run a company together. LLC An LLC structure is also very popular for starting a business. The minimum registered capital is CZK 1 (approx. EUR 0.04), though it is recommended that a contribution of at least CZK 10,000 (approx. EUR 400) be made to cover, at the very least, the basic costs connected with establishment of the business without running a risk of insolvency. Once the registered capital is fully paid up, the shareholders are not liable for any debts of the LLC. An LLC must have at least one director.

Human resources Taxes M&A Top sectors

www.havelholasek.cz

Post-registration steps After establishment, the entity must register itself with the Tax Office and, if it has employees, with the Social Security Office and a health-insurance company.

Permitting and construction

Ondřej Florián Senior Associate, Havel, Holásek & Partners ondrej.florian@havelholasek.cz

LLC and JSC Establishing an LLC or JSC is slightly different. Firstly, the articles of association must be executed in the form of a notarial deed. The articles of association contain comprehensive information about the company and its representatives, its purpose and scope of business, relationships among the shareholders, types of shares, and the duties and liabilities of the directors. In the case of an LLC, the articles of association also contain information about the shareholders. In the case of a JSC, the identity of the shareholders is hidden, except where the JSC has only one sole shareholder. The registration fees are CZK 6,000 (approx. EUR 240) for LLC registration and CZK 12,000 (approx. EUR 480) for JSC registration.

Properties

Pavel Kvíčala Partner, Havel, Holásek & Partners pavel.kvicala@havelholasek.cz

Branch A branch is established by adoption of a founding deed, i.e. a document signed by the founder containing all of the branch’s basic information: its name, identification of the founder, identification of the head of the branch and the scope of business. The founding deed must be executed in writing. The fees for registering a branch amount to CZK 6,000 (approx. EUR 240).

R&D

The process of corporate vehicle establishment Both branches and the other forms of companies commence their existence by being entered into the Czech Commercial Register. The process of establishment differs depending on the vehicle chosen. The simplest is establishment of a branch establishment, while establishment of a JSC is slightly more complex. For the most part, the whole process can be completed on the basis of a power of attorney without the necessity of the personal presence of the founder. The signatures on such a power of attorney must be notarized and apostilled or they must be superlegalised. Before the application is submitted to the registration court, the entity must apply for a trade license. Obtaining a basic trade license usually takes five business days and costs CZK 1,000 (approx. EUR 40). The entity has to have its registered office located in the Czech Republic. Title to the use of premises must be proven via an affidavit of the owner of the premises. Virtual offices are available in the country.

Once all the necessary documents are collected, it takes usually five business days to enter the new entity into the Commercial Register.

Finance

Establishment of a branch does not require any notarial deed. As a result, a branch is cheaper to establish than a company. In the case of a company, the notarial fees vary according to the amount of registered capital. Notaries public can enter a company directly into the Commercial Register. This can help to speed up the process of establishment, as the registration courts are sometimes congested. Ready-made companies are available. An LLC or JSC can be bought as a readymade company, without any history or previous economic activity. It can then be rearranged according to the requirements of the buyer. Societas Europea – a universal European form of company. A JSC can also be established as a Societas Europea, which is a form of company available in all European Union member countries. However, the minimum registered capital of such an entity is EUR 120,000. The Czech Republic is a leading EU country in the number of incorporated Societas Europea. Extracts from the register of criminal records or certificates verifying the lack of criminal records of directors and branch founders must be submitted. The Trade License Office, registration court or a notary public must verify the suitability of persons who are to be registered as a director and/or founder of a branch (this rule does not apply for company founders and shareholders). Such persons must prove that they have not committed any crime in connection with activities related to establishing an entity. Obtaining such documents can be cumbersome, since some countries do not issue documents of this kind. However, an affidavit making certain assertions and signed by the person in question may be used as an alternative in certain situations. Variety of share rights. The new law allows creation of shares with specific rights regarding, for example, profit distribution, voting rights or limitation of transferability. In the case of an LLC, duties can also be connected to the ownership of shares. A branch does not require a bank account in the Czech Republic. The law does not stipulate any general requirement to open an account with a Czech bank. Because a branch has no registered capital, it can be operated without opening a Czech bank account. A JSC must have a website. Czech law requires JSCs to publish mandatory data in the Czech language via their websites. Both branches and companies are required to keep accounting records. However, only companies have to annually convene their general meeting to approve the annual accounts and decide on the disposition of profits and losses.

JSC For a JSC, the minimum registered capital is CZK 2,000,000 (approx. EUR 80,000). Czech law offers two possible internal corporate structures: dualistic, with at least one director and at least one member of the supervisory board, and monistic, with a sole director and an administrative board; in practice, the sole director and the only member of the administrative board can be same person. Experience shows that branches and LLCs are the most preferred vehicles for starting a business in the country. Once their business grows, some entrepreneurs choose to transform their LLC or branch into a JSC, which is better suited to larger businesses.

First steps

Good things to know

The Czech Republic

Starting a business

Acquire or lease commercial property A wide range of enterprises compete on our market today and the basic factors for success are the same for all: labour, capital and real estate. The correct combination of these three foundations comprises the key know-how of each firm looking to succeed in our ever-changing and globalised world.

hereas labour and capital move relatively freely and adjust quickly to challenges, real estate is an anchor for capital in certain locations, where labour is then recruited. Real estate is a strategic and valuable asset which reflects the nature, A company’s real estate portfolio should always philosophy and values of a company, though balance with its long-term strategic plans and ideally at the same time it can constrain busiallow the company flexibility to adjust their leasehold or ness growth, which in most cases is not freehold strategy based on everyday business requirements. the preference of company shareholders.

The AFI is ready to support you

When real estate adds value to a company, then the business can grow more quickly and growth plans are enhanced. Having an appropriate mix of leasehold and freehold properties in place creates a competitive advantage for companies which view their property portfolios as a key factor in their growth. With its wide range of property solutions, the Czech Republic is a great place for doing business. It is only up to you to choose the location that is most in line with your real estate strategy and we, the members of the Association for Foreign Investment (AFI), are ready to help your business grow!

www.afi.cz 28 | INVESTORS‘ GUIDEBOOK

Having a well thought-out and appropriate real estate strategy in place adds value and supports company growth. Prior to opening a new plant, facility or office, it is advisable for a company to revisit their real estate strategy and define the correct search criteria. Young and dynamic firms with high growth potential often prefer to invest capital in new technologies and look for flexible leaseholds (when company rents a property, as opposed to owning it). On the other hand, well-established companies with stable but lower growth-rates search for freehold properties (when the property is owned rather than leased) as an alternative to other investment opportunities with value-growth potential. Location, location, location… and timing Most real estate experts will tell you that the three most important factors when considering real estate are location, location, location. However these days, the quick companies are the ones that outperform the slow ones, so a fourth factor should be considered: timing. Location and timing are the most important factors to be researched before investing, as they are fundamental

Human resources Taxes M&A Top sectors

www.ctp.eu

Permitting and construction

Jaroslav Kaizr Business Director CTP jaroslav.kaizr@ctp.eu

The real estate balance Costs associated with leasing operational real estate are considered off-balance according to both international and Czech accounting standards, unlike freehold interests, which are reported on-balance. Leases have an immediate positive impact on the loan-to-value ratio and thus allow the company to invest more resources in technology and production equipment. Automotive suppliers such as Johnson Controls, e-commerce operators such as All You Need, and IT and technology firms such as Solar Winds use operating leases of properties as a way of leaving their working capital available to support their further growth. A freehold interest can appreciate as real estate values rise and thus freehold may have a positive impact on the loan-to-value ratio in the longer term. Another great advantage of a freehold property interest is the ability to use it as collateral in financial transactions. Frequently, investment incentives, such as tax breaks, are available in selected regions throughout the Czech Republic and can be applied for short-term wins. Real estate acquisition costs are eligible to be included in the investment threshold for incentives. In the long run, these incentives can be seen as the “icing on the cake”, though they should not have a significant impact on the initial decision-making process with respect to location strategy and whether to go freehold or leasehold.

Properties

Should you buy? Acquiring a freehold interest in a commercial property is more time consuming than leasehold, particularly in the case of a land purchase when due diligence, legal negotiations, permitting procedures and site preparation can take several months or years. The new Civil Code, together with the detailed cadastral information systems, provides an extensive overview of the property available for purchase in the Czech Republic. However, market data on purchase prices of existing buildings is limited, which adds a level of complexity when considering purchasing property. Czech commercial property values are rising and commercial properties have proven to be an excellent investment opportunity among the asset classes. That said, it is clear that a freehold investor should view property not only as an asset

Focusing on your core business Operational costs and property management should also be considered when looking into freehold versus leasehold. This involves not just repairs and regular maintenance, but also investments to improve and upgrade the property and its environs, including landscaping, infrastructure and building management systems to ensure long-term performance and return on the company’s investment. A freeholder has two options: firstly, they can handle essential maintenance and upgrades themselves (an activity that is normally outside of their core business) or hire an external company (with limited knowledge of the building going into the contract) to do so. Many leasehold buildings, particularly those that developers have built to lease, will be offered with a property management service built in to the lease agreement. A developer that

builds to lease has a vested interest in looking after the property in order to ensure maximum returns upon the tenant’s eventual exit.

R&D

Should you lease? Leasing an existing property is the easiest and quickest solution to satisfy most real estate needs. Companies that wish to focus on their core business in a specific location often choose leasehold as the most appropriate strategy, as the onus of building construction and property management fall on the shoulders of a real estate partner. Sometimes, leasing is actually the only way for a company to enter a specific location where land and properties for purchase have become scarce. This is a major limitation for retailers that compete for the most attractive locations in city centres or for manufacturers that require a highly educated workforce with a specific skill set available only in urban areas with good public transport. There is a wide range of available information and market data about the Czech Republic, covering

where business is conducted, but also as an investment with assurance of value appreciation. An excessively specific facility or inferior property management often causes value deterioration over time and results in distress when the property is eventually put up for sale. Fortunately, when an investor is considering a freehold interest and that investor doesn’t have his own project management team, there are plenty of developers and construction companies in the Czech Republic that can step in and provide built-to-own solutions by providing turnkey project management services in locations where land is still available and permitted.

Finance

topics such as rental rates, service charges and utility costs. There are standardised lease conditions and solutions for retailers, wholesalers, producers, logistics companies and service providers in all major Czech cities and main commercial/ industrial areas. Possible leasehold solutions are well documented and available. The A-class office sector is mainly concentrated in Prague, Brno and Ostrava. Office-space users can benefit from higher vacancy rates in these cities when landlords provide flexible lease terms and attractive incentives. Companies such as Lufthansa and DHL, among others, selected the Czech Republic as their ideal location for their shared-services centres and leasing of office space as their ideal real estate solution. Czech industrial developers, such as CTP, have created built-to-suit concepts which can satisfy any specific need, be it heavy duty cranes, paint boxes, controlled-environment laboratories, testing facilities or mezzanines. Such production facilities have been built for companies such as Honeywell, Brembo, ABB and FEI and are often located within the same park or location together with warehouses providing flexible space to lease when a buffer is needed.

First steps

to a company’s success in the region in which they choose to locate their business. Sometimes, leasehold is the only way to acquire a certain preferred location or a property within a certain timeframe; in this case, the company doesn’t need to consider freehold. The same is true if freehold is the only way to achieve the company’s stated objectives; leasehold need not be considered. The Czech economy is continuing its rapid recovery following the global economic downturn, and commercial property values and acquisition prices have risen since 2011. In combination with historically low interest rates, development activity across the country is booming and is supported, in part, by state investments in infrastructure upgrades. This positive trend is somewhat offset by stricter and longer permitting procedures and higher construction costs, resulting in a shortage of sites in attractive locations that are permitted and ready for development. At the same time, rental rates in these locations are stable and on some markets and market segments they have even decreased, making the leasehold scenario affordable.

The Czech Republic

Commercial properties

3 Foreign languages used in Business Services Sector in the Czech Republic 45 % 40 % 35 % 30 % 25 % 20 % 15 % 10 % 5%

En gli sh Ge rm an Fre nc h Po lis h Sw ed ish Du t Hu ch ng ari an Ru ssi an Da nis h Slo va k Sp an ish an Fin d I ni tal sh ian

Source: Grafton Recruitment

30 | INVESTORS‘ GUIDEBOOK

Find out more about the labour market Excellent human resources, a central location and a stable political and economic environment are the main reasons why foreign investors frequently choose the Czech Republic as the country in which to implement their investments. The volume of investments requiring a larger proportion of skilled labour is increasing especially with regard to the high-quality education of the Czech population.

hether this concerns manufacturing enterprises, research institutes or shared services-centres, the Czech Republic is able to offer a high-quality business environment in terms of good location and transport infrastructure, sufficient high-quality workforce and suitable real estate market conditions, as well as the number of supportive government programmes. Companies are flourishing in the heart of Europe The Czech Republic has an indisputable advantage thanks to its central location. Only Poland can compete with regard to location, but it is more frequently the destination of investments requiring a large number of employees. Other Central European countries, such as Slovakia and Hungary, are not serious competition for the Czech Republic, because their transport services (road, rail or air) are not as good. The good news for investors considering locating their business activities in Central Europe is the fact that the countries here demonstrate long-term political and legislative stability, which is why this part of the world is slowly becoming a synonym for nearshoring. Human resources After investors evaluate the location, real estate issues, legislative environment, tax conditions and potential

government support for incoming investments, they begin to discuss human resources, which are the alpha and omega of every successful business project. The costs of people’s work are not the only issue to be addressed; access to workers and, in the case of investments based on intellectual activities, also the educational level, language skills and so-called soft-skills of potential employees are also important. The Czech Republic scores very highly in this regard. It has been considered a traditional industrial country with high-quality industrial schools and universities since the time of the First Republic. Languages skills of Czech workers The summary of requirements which employers in the Czech Republic place on individual positions indicates that good English language skills are considered to be as natural a necessity as professional knowledge. It also indicates that knowledge of another foreign language is frequently a key advantage in more and more fields and can be a decisive factor in the hiring process. This trend is most evident in technical fields such as mechanical engineering, construction, the automotive sector and informatics, while language skills are also becoming increasingly important in finance, banking and administration. Besides English, there is increasing demand for German, and an increasing number of positions are becoming available for speakers of Russian, French and Italian. The business-services segment is somewhat special in this regard, as it frequently requires

How often, in your opinion, should a person change their job / position? 0.5% 5.6% 0,5 % Less than once a year

31.7% 31.7%

Once every 1-2 years

Finance

Meal vouchers Extra holidays (non-statutory exceeding 4 weeks) Christmas party Flexible working hours Company mobile phone for personal use Language courses Refreshments at the office 13th salary/14th salary/regular bonuses Team building and sport activities Home office Possibility to make up work hours Cafeteria/Flexi pass system Company notebook for personal use Pension plan Company internet connection for personal use Professional courses and conferences Company canteen Educational/Training Program Gifts from the employer Fully paid sick leave - Sick days

First steps

What benefits does your current employer provide you with?

The Czech Republic

Labour market

Once every 3-4 years Once every 5-6 years

100

200

300

400

500

600

700

The most frequent reasons for leaving a job are insufficient financial compensation (65%), unsatisfactory interpersonal relationships (47%) and an interesting job offer from another company (38%). Respondents also considered insufficient opportunity for professional growth (34%), the incompetence of a superior (28%) and the monotony of work (21%) to be important reasons for leaving a job. Most survey respondents expressed the belief that it is appropriate to change jobs every six or more years.

Martin Ježek Business Development Director Grafton Recruitment martin.jezek@grafton.cz

Top sectors

www.grafton.cz

The survey also examined benefits in detail, both those offered by employers and those preferred by employees. While employers most frequently provide meal vouchers, holiday leave in excess of that required by law, a Christmas party, flexible working hours and company mobile phones also for private use, employees consider the top five benefits to be language courses, an additional month’s salary and other bonuses, holiday leave in excess of that required by the law, flexible working hours and home office.

M&A

Preferences of Czech employees The mood has been improving in the Czech Republic since 2014. This is indicated by the Grafton Recruitment Agency’s latest survey, which was conducted among 2,286 respondents in August 2016. The main reason for this is the fact that the pay of more than 50% of employees has increased during the past 12 months. Seventy-two percent of respondents are satisfied in their jobs, 40% are not looking for another job and 32% are passively monitoring the situation on the job market in case a better offer appears. The number of satisfied employees has increased by 3% year-on-year and only every fifth employee is unsatisfied in their job according to the survey. Employees are most motivated by financial compensation (74%), whereas the content of their job is the second most important factor (44%), followed by the team of immediate colleagues (32%), opportunities to work on interesting projects (31%), recognition from the superior (22.7%), possibility of career growth (21%) and the opportunity to continue their education (20%). Conversely, the opportunity to travel and recognition from colleagues motivate the fewest people.

Taxes

Czechs are adaptable and compatible In addition to language and professional skills, other aspects considered important by employers are openness, communication skills, charisma and flexibility. Social intelligence, i.e. the ability to talk to people, communicate clearly and listen to others, is also important. It is apparent that Czechs possess these skills and traits in abundance, as they are very adaptable and compatible with a number of cultures. As such, they are able to effortlessly integrate themselves into European, Korean, Japanese and American companies.

Source: Grafton Recruitment

Human resources

less common languages. People who speak these languages are able to negotiate a starting salary up to 15% higher than the norm. According to information from the Grafton Recruitment Agency, Czechs have worked hard on their language skills in recent years. Of the hundreds of thousands of candidates whose language skills were tested last year, approximately one-third of the participating German and English speakers were at an intermediate or advanced level.

30.5%

Permitting and construction

Source: Grafton Recruitment Note: Respondents could select multiple options.

Properties

R&D

Once every 6 and more years

4 32 | INVESTORS‘ GUIDEBOOK

Get more information about state aid

Over the past few years, the Czech Republic has significantly increased its focus on new investments in the form of both greenfield projects and expansions of existing investments. The country currently has the most positive attitude to incoming investors in its history.

nvestors can obtain the following financial benefits: investment incentives – tax holiday + cash grants subsidies from EU funds – cash grants R&D tax credit education tax credit Under certain conditions, investors may be eligible for further subsidies or other forms of investment support at regional and sector levels. All benefits are provided based on the law and transparent rules which are in compliance with EU regulations. The EU rules impose certain limitations on the possibility to grant state aid and determine the ceiling of state aid for particular regions, sector and types of investment, even though state aid is provided directly by the particular member country from its national funds without any requirement for compensation from the EU budget. In most cases, state aid comprises the maximum possible subsidies allowed by the EU. In accordance with a change of the EU rules implemented in 2014, some measures have been redesigned. The EU rules generally became stricter, which to certain extent limits the possibility of individual member countries to grant incentives. The Czech government responded to new rules by drafting an amendment to the Czech Investment Incentives Act which came into force in May 2015. The purpose of this amendment

is to increase the attractiveness of investment incentives for investors and to reduce the impact of the new EU rules. AFI members actively participated in the legislative process. The information below is based on the new legislation. Investment incentives The most significant incentives are: corporate income tax-relief for up to ten years (tax holiday) – available to all qualifying investors employment subsidies in the form of cash grants for job creation and training (available only in regions with high unemployment rates) cash grants for strategic projects (see below) Main conditions The main conditions for granting investment incentives differ based on the supported activity. Manufacturing industry Establishment of a new manufacturing plant or expansion of an existing plant, including its modernisation and diversification of the product portfolio. Technology centres Establishment of a new technology centre or expansion of an existing technology centre.

The Czech Republic

Finance

First steps Top sectors

www.kpmg.cz

The education tax deduction is a new tool introduced in 2014. It allows companies to obtain a special tax deduction for certain costs relating to educational activities for professional training. The deduction covers various activities relating to the education of secondary school or university students on the premises of companies. Companies can also receive a deduction for assets acquired for the purposes of such education.

M&A

Jan Linhart Partner KPMG Česká republika jlinhart@kpmg.cz

Education tax deduction

Taxes

Job creation Cash grants will be provided to an employer creating new jobs in a region where the unemployment rate is more than 25% above the national average or

EU structural funds

Companies performing R&D activities can apply a special tax deduction for this activity. The R&D deduction in fact allows companies to claim internal R&D costs twice: firstly within their profitand-loss account, and secondly as a special tax deduction. Effectively, savings can thus be up to 19% percent of R&D costs. The deduction can be claimed every year and there is no limit on the maximum amount to be claimed.

Human resources

The Czech Republic (excluding Prague) Businesses set up in the Czech Republic can also obtain support from EU structural funds under several operational programmes. EU funds are available mostly in the form of cash grants for investments. There is a broad selection of grants available. However, some of them are available only to existing companies. The most important EU funding programmes support the following types of investments: innovations in production ICT projects

Purchase of construction sites The actual provision of this incentive depends on negotiation with the landowner (the state, region or municipality). The difference between the market price and the actual purchase price is treated as an incentive.

R&D tax allowance

Permitting and construction

Permissible level of state aid and the amount of subsidies The total value of incentives must not exceed the maximum permissible level of state aid. The maximum amount of state aid is based on the rules set by the EU and is set at the level of 25% of eligible costs (investment in land, buildings, machinery and equipment and selected intangible assets), with the exception of, where no incentives can be provided. For technology centres and business support services centres, eligible costs may alternatively comprise the wage costs of employees in newly created jobs within 24 months of the month in which a particular position was filled.

Training and retraining of employees Cash grants for training and retraining employees will be provided to an employer in the form of a partial reimbursement of the costs incurred. Such grants cover 25% of the eligible costs expended on training and retraining employees.

R&D centres energy savings reduction of emission and water pollution precautions Investors will also indirectly benefit from large volumes of EU funding utilised by public authorities for improvement of infrastructure, the education system, healthcare, the environment and many other areas.

Properties

Strategic investments (large projects) Large projects can qualify for strategic investment status. The main benefit of this status is the possibility to obtain larger portion of incentives in cash instead of as tax relief. The amount of a cash grant can reach up to 10% of eligible costs and can be further increased to 12.5% in the case of a project combining a manufacturing site and technology centre. In the case of a strategic investment in the manufacturing industry, the minimum amount invested in fixed assets is CZK 500 million (approx. EUR 18.5 million), of which CZK 250 million (approx. EUR 9.26 million) must be invested in new machinery, and at least 500 jobs must be created. In the case of a strategic investment in the area of technology centres, the minimum amount invested in fixed assets is CZK 200 million (approx. EUR 7.4 million), of which CZK 100 million (approx. EUR 3.7 million) must be invested in new machinery, and at least 100 jobs must be created.

in special economic zones. The cash grant for job creation amounts to CZK 100,000 – 300,000 per new job (approx. EUR 3,700 – 11,100).

R&D

The following conditions apply for all types of investments: Acquisition of assets for the project, including construction works, cannot start before the application for incentives is submitted. The investment must be maintained (in the minimum amount and structure) for at least five years following its completion.

Income-tax relief Calculation Calculation of the tax relief that can be claimed is the only significant area where the treatment of a new company (plant) differs from that of an expanded facility. For a new company, the taxpayer is entitled to full tax relief, excluding tax on net interest income. For an expanded plant, the amount eligible for tax relief is the difference between the tax relief that would be available for a new company and the average of the tax liabilities in the three years immediately preceding the first year in which relief can be claimed. The latter figure is adjusted with reference to industrial inflation and the current tax rate. This formula can be seen as a rough attempt to restrict the amount eligible for tax relief to the additional profits resulting from expansion.

Finance

Business support services centres The investor must establish a new business support services centre or expand an existing business support services centre: shared-services centre software-development centre high-tech repair centre customer-support centre data centre

Protect your intellectual property rights As today’s business market develops at a faster and faster rate and competition between entities is forever growing in all sectors of business, one of the most highly recommended steps in terms of doing business is ensuring the protection of intellectual property rights. Therefore, it is necessary to be familiar with the most common intellectual property rights connected with doing business and to know how to ensure protection of those rights in the Czech Republic.

rademarks

Trademarks are the most common intellectual property rights worldwide. Under Czech law, trademarks are regulated by Act No. 441/2003 Coll., on Trademarks, as amended, according to which a trademark is understood as a designation consisting of words, letters, numerals, colours, drawings or shapes of products or packages which are intended to distinguish the products and services of a particular entities from those of other entities. Scope of a trademark A trademark may be a specific verbal sign executed in either an ordinary font or special graphical font, as well as pictorial signs or any combination thereof with words, three-dimensional signs comprising shapes of products or their containers, combinations of shapes of products or containers with words or drawings, and featuring a colour or any combination of colours. In certain countries it is possible to register olfactory trademarks (e.g. the smell of freshly cut grass has already been registered in China); however, this trend has yet to hit the Czech market.

34 | INVESTORS‘ GUIDEBOOK

Registration of a trademark The most important benefit of registering a trademark lies in the owner’s sole and exclusive right to use such trademark in conjunction with the products or services for which it has been registered. This benefit is coupled with the right to prohibit third parties from unlawful use of the trademark. In order to obtain an ownership title to a Czech trademark, it is necessary to register the trademark with the Czech Trademark Register. An application for registering a trademark may be filed with the Intellectual Property Office (IPO) by any individual or legal entity with legal capacity. In order to initiate the registration process, a fee must be paid together with the application. A filing fee of CZK 5,000 (approximately EUR 185) is charged for registering an individual trademark for three classes of products and services. A fee of CZK 500 (approximately EUR 19) is charged for every additional class should one wish to register a trademark for more than three classes. Once an application has been submitted, the trademark is granted a priority right since the registration process takes about six months (unless a comment or objection is raised against the trademark to be registered). Such right means that the trademark is deemed protected from the filing date until after the registration process has been completed.

M&A Top sectors

www.weinholdlegal.com

Taxes

Martin Lukáš Attorney and partner WEINHOLD LEGAL wl@weinholdlegal.com

As is apparent from the above, the Czech legislation provides fairly strong options for protection of intellectual property rights. Due to this fact, anyone may successfully protect its intellectual property rights if he registers such rights with the Office, and thus do business in the Czech Republic safely (with respect to the intellectual property matters).

Human resources

Copyrights are frequently encountered in, for example, the advertising business, where photos and other copyrighted works are used extensively. The current Czech legislation governing copyrights is Act No. 121/2000 Coll., the Copyright Act, as amended, which came into force on 1 January

Summary

Permitting and construction

Copyrights

Ownership of copyrights Since copyrights are exclusively associated with an author, only a natural person can be an au-

Duration of copyrights In terms of economic rights, the protective period lasts for the life of the author and for an additional 70 years following the author’s death. The 70-year period begins on the first day of the year following the author’s death and thereafter the copyrighted work enters the public domain. In contrast, personal rights are extinguished upon the author’s death.

Properties

Scope of a patent Similarly as in the case of trademarks, certain criteria exist for assessing whether an invention is eligible for a patent in the Czech Republic and are as follows: a) novelty of the invention (on the global scale) b) inventive steps c) industrial applicability d) patent-eligible subject matter In addition to the above, the Patent Act also sets forth the kinds of things that cannot be classified as inventions and cannot be patented, even though such things may be considered inventions. The ineligibility of certain inventions to be patented is primarily due to moral aspects. Such inventions include:

Scope of copyrights Authors’ rights are attributable to the creation of an artistic or scientific work which constitutes the unique product of the author’s creative activity and is expressed in any objectively perceivable way, regardless of the extent, aim or value of such work. Types of work protected under the Copyright Act include: a) literary works expressed either in writing or verbally b) musical works c) choreographic works d) audiovisual works e) architectonic work. A work’s uniqueness requires a certain level of originality. However, it is clear that copying a work would be unacceptable. Moreover, a work that is routine, mechanical and lacking the expression of the author’s creative aspect is also unsatisfactory; an author must convey something personal in his or her work in order for it to be regarded as creative. The following cannot be copyrighted: a) the theme of a work b) a daily report or other information in of itself c) a thought d) mathematical or other formulas, theorems, etc. Official works such as laws, regulations, court decisions, etc. are excluded for obvious reasons.

thor of a copyrighted work, i.e. a company cannot be an author. A copyright has two basic components: personal rights and economic rights. Enforcement of personal rights always remains with the author and cannot be transferred to another person, whereas economic rights may be passed to another person either on the basis of a licence or a statutory provision. Economic rights are also the subject of inheritance. Although copyrights are not registered, a person other than the author cannot use a copyrighted work without the prior consent of the author. As a result, it is also prohibited to publish random photos on the internet without the author’s permission (e.g. posting a random photo on a Facebook profile without the photographer’s consent).

R&D

As in the case of trademarks, inventions can be protected by registering them with the IPO. Protection of an invention takes the form of a patent and the registration process and the patent itself are regulated by Act No. 527/1990 Coll., on Inventions and Improvement Proposals, as amended (Patent Act).

Registration of a patent Again, the process of registering an invention with the Czech Patent Register is carried out by the IPO and an application can be filed by the inventor himself or by an authorised person (i.e. the employer in the event of the business invention). The application must include a description of the invention and, most importantly, the claims for the patent. Such claims must precisely delineate the subject matter for which protection is required and constitute the most important part of the application. As for the duration of the patent, an invention is protected in the Czech Republic for 20 years following the filing date of the application (i.e. the priority date) and its basic effectiveness represents the inventor’s/ owner’s right to prohibit anyone from using it without prior consent (e.g. a licensing agreement). A fee must be paid in order to initiate the registration process. At CZK 1,200 (approximately EUR 45), the registration fee is actually lower than it is for trademarks, and falls to CZK 600 (approximately EUR 22) if the application is submitted by the inventor himself. However, in order for an invention to receive a patent for the entire 20-year period, it is necessary to pay maintenance fees, which increase every year. The total amount of these maintenance fees can be as high as CZK 165,000 (approximately EUR 6,200) over a 20-year period. Due to this exorbitant figure, the vast majority of patents are cancelled prior to the 20-year mark.

2014, and Act No. 89/2012 Coll., the Civil Code, as amended, which contains the relevant provisions pertaining to licensing agreements.

Finance

Patents

a) surgical or therapeutic treatments and diagnostic methods relating to both humans and animals b) inventions whose use is contrary to public order or morality c) plant or animal varieties or essentially biological processes for the production of plants or animals

First steps

During the registration process, the IPO carries out a factual inspection of the subject matter of the registration application. In the event it is ascertained that the sign/trademark contains the elements of an earlier registered trademark or a registration application has already been made by another owner and such elements could cause confusion with the earlier trademark, then the IPO will reject such application on the basis of these grounds. Once the trademark has been successfully registered, the protective period for registered trademarks is ten years following the date of filing the application with the  IPO (thanks to the priority right). However, the protective period may be renewed for an additional ten years should the trademark owner wish to do so. This renewal is connected with the obligation to pay a maintenance fee in the amount of CZK 2,500 (approximately EUR 93). An application for trademark renewal must be submitted no earlier than in the last year of the protective period, but prior to expiry of such period. A renewal application may also be filed within six months after the expiry date for a higher fee. A trademark becomes extinct if a renewal application is not filed.

The Czech Republic

Intellectual property

Navigate through the waters of public affairs A local public affairs agency has insight into the mechanisms of Czech politics, political decision-making processes and distribution of power. Such knowledge enables efficient stakeholder mapping and identification of actors with real influence over specific issues. Public affairs services in the Czech Republic have a very high level of professionalism comparable to the other developed EU countries, especially when offered by established companies. The well-established public affairs agencies in the country are also members of an international public affairs network, which allows them to cooperate internationally if necessary.

ublic affairs services including professional consultancy, lobbying and advocacy of clients vis-à-vis public administration are provided by companies around the world. These services comprise a traditional way of representing and advocating for clients´ interests based on a professional approach, thorough knowledge of the given issue and communication skills. Public affairs is a term that represents a variety of instruments used to influence legislation and the public sector and is a part of the legislative process in most countries. Every potential investor should have professional public affairs services in mind. Taking into account the ever growing amount of legislation in the legislative process, as well as competition, it is crucial to secure a channel that makes it possible for the information that you provide to stand out and reach the right political representatives.

36 | INVESTORS‘ GUIDEBOOK

The most commonly offered services There are a number of instruments that can be used to positively affect legislation so that it does not harm the client’s interests or has a favourable effect on the implementation of the client’s business plans. Usually, a carefully selected combination of services is required to achieve the desired outcome. Legislative monitoring Legislative monitoring involves continuous monitoring of future legislation (acts, regulations, decrees, etc.), which is important for major companies on the market because it allows early identification of legislation that may affect their business activities. A company can achieve the best outcome if it manages to influence the future form of the legislation from the very beginning. Legislative monitoring allows early detection of the intentions of ministries or Parliament and other public administration and local government bodies.

Detailed study of the issue Argumentation Strategy Personnel strategy Timing Approaching key actors – repeated meetings Follow-up Reporting

M&A Top sectors

www.pansolutions.cz

Legislative monitoring

Taxes

Jana Marco Managing Partner PAN Solutions jana.marco@pansolutions.cz

Analysis

Human resources

Lobbying As mentioned above, legislative monitoring is an excellent tool for keeping tabs on the present legal environment and the progress of the drafting of laws, decrees

How a credible public affairs agency works When looking for a public affairs agency, ask for recommendations if you have any local connections, as an established, respected agency should have a good reputation and/or long history. If you open a tender, look at the CVs of key consultants, as they should preferably have experience working with political and public institutions, which gives them firsthand knowledge of the decision-making processes and a network of contacts to rely on in the future. Soft skills, especially communication skills, are also very important when it comes to public affairs, as consultants have to reach out to key actors both directly and indirectly through third parties such as political party colleagues and the media. They also need to be able to communicate a compromise of viewpoints of the client and the key actors. A good public affairs agency should also

Phases of the public affairs process

Permitting and construction

How to get started Monitoring is a great service for any company, as it gives the client a longer reaction time and a partner that can offer strategic and expert consultancy when necessary. Public affairs agencies offer their clients complete factual analysis of a specific issue, taking into account the overall context. Consultancy commonly includes analysis of the risk of particular legislative changes for strategic decision-making involving the client’s future direction. Analysis of the changes in the external social and political environments follows. Lastly, a political audit of threats and opportunities for the client’s strategic decision-making related to changes in the political and social environments is carried out.

What should be addressed in order to cooperate well? First, the client should articulate specific priorities and the preferred outcome, which will be a key point for selecting suitable services. The client should also provide all information necessary for an analysis or preparation for argumentation. Additional materials might have to be prepared in the process. Therefore, it is also helpful to assign communication with the agency to one person representing the client, who will be in regular contact with the other party. Regular meetings of agency representatives with the management of the client are also required in order to evaluate the process and possibly update the goals. If the dialogue and information provided by the client is high-quality and credible, consultants are able to approach key actors, increasing the information outreach in the long term. A credible consultant is also in a much better position when it comes to establishing coalitions necessary to advocate for the client’s interests or reaching a broader consensus with other interest groups in the client’s field of interest.

Properties

Networking An extensive network of contacts and personal relationships enables a local public affairs agency to contact stakeholders and communicate and explain selected information. Contacts can also be used to organise events that make it possible to communicate information to a larger number of people.

Grounds for good cooperation A local public affairs agency can prove to be an invaluable partner, but for the agency to be successful in tackling selected issues, frequent and in-depth cooperation is necessary. Long-term cooperation, based on a close relationship with the client and achieving a win-win situation, is also preferred over a short-term yet more lucrative contract, which may end in disappointment caused by a failure to achieve an immediate result.

Public affairs regulations in the Czech Republic There is a rather large number of companies in the Czech Republic dealing with public affairs activities directly or within other activities. The sphere of public affairs is not subject to legal regulation in the Czech Republic, a fact that is sometimes perceived negatively by the public. Some of the established and successful agencies are members of the Association of Public Affairs Agencies, which was established in May 2012. Members of the association are convinced of the usefulness of public affairs services and the necessity of a high degree of professionalism in public affairs activities. The key objective of the association is to achieve greater transparency and professionalism on the market, which is reflected in its motto Transparency, Professionalism, Openness!

R&D

Government relations Within these activities, a public affairs agency represents the client’s interests in relation to the public administration, ensures continuous communication between the public administration and the client, and communicates the client’s opinions on solutions to executive and legislative issues.

be have a network of experts from various fields such as law, European Structural and Investment Funds, etc.

Finance

Public affairs agencies have been present in the country since the 1990s Public affairs is as common in the Czech Republic as it is in other democratic countries The services of public affairs agencies are not regulated by the law Top agencies in the field abide by the Code of Conduct of the Association of Public Affairs Agencies Well-established public affairs agencies are perceived positively by politicians Membership in an international public affairs network is a feature of a well-established agency

and regulations by the executive and the subsequent discussion thereof in the Chamber of Deputies and Senate of the Czech Parliament. It also includes positive lobbying focused on the final legislation so that it does not stand against the client’s interests or even supports the client’s interests and business objectives. If necessary, a compromise solution is found. The phase of influencing the future form of legislation also includes obtaining supporting information for legislative monitoring and communication aimed at maintaining the current form of the draft.

First steps

Important facts about PA services in the Czech Republic

The Czech Republic

Public affairs

AFI members provide professional services in a broad range of areas Architecture, Engineering & Permitting

Auditing

Construction & Real Estate Development Corporate Finance, M&A & Valuations

Executive Search Tax Services Visa

AFI Your One Stop Shop

Personnel Services & Recruitment

Accounting Real Estate Advisory & Brokerage Strategic Marketing, PR & PA Project & Construction Management

Environmental Consultancy Risk & Insurance Advisory

Legal Advisory

Finance your investment

Get the best out of European funds Critical points The Czech Republic is well prepared to utilise EU investment incentives. However, in order to successfully do so, the following requirements must be fulfilled: I. Regular monitoring of the possibilities for obtaining specific investment incentives, timing, deadlines and the respective conditions; II. Timely communication with the relevant authority (i.e. CzechInvest) regarding the conditions for obtaining investment incentives and formulation of the given project in order to meet those conditions; III. Assurance of project co-financing (assistance of banks and/or other co-financing partners is possible; however, specific conditions for obtaining investment incentives must be fulfilled) IV. Assurance of ongoing fulfilment of the conditions for obtaining investment incentives while the incentives are being drawn down. Generally, the assistance of local advisors experienced in investment incentives and projects in general is recommended in order to ensure smooth and safe implementation of the given investment project.

Operational Programme (OP)

Administrator

Amount

OP Transport

Ministry of Transport

EUR 4.7 billion

Integrated Regional OP

Ministry of Regional Development

EUR 4.6 billion

OP Enterprise and Innovation for Competiveness

Ministry of Industry and Trade

EUR 4.3 billion

OP Research, Development and Education

Ministry of Education, Youth and Sports

EUR 2.8 billion

OP Environment

Ministry of the Environment

EUR 2.6 billion

Rural Development Programme

Ministry of Agriculture

EUR 2.3 billion

OP Employment

Ministry of Labour and Social Affairs

EUR 2.1 billion

OP Technical Assistance

Ministry of Regional Development

EUR 0.22 billion

OP Prague – Growth Pole of the Czech Republic

Prague City Hall

EUR 0.20 billion

OP Fisheries

Ministry of Agriculture

EUR 0.03 billion

40 | INVESTORS‘ GUIDEBOOK

ue to delayed negotiations over the conditions for obtaining aid, these funds will actually be drawn until 2022 or 2023. Operational programmes

The amount allocated from EU funds has been divided into ten operational programmes managed by the relevant administrative authorities.

Operational programmes

Source: www.strukturalni-fondy.cz

The Czech Republic enjoys a high degree of support from the European Union. According to the EU budgetary framework for the Czech Republic, funding of up to approximately EUR 24 billion has been allocated from EU structural funds for the 2014 - 2020 programming period.

Status of drawn-down subsidies from EU funds in the 2007-2013 programming period Previous programming period More than EUR 26 billion was allocated to the Czech Republic in the 2007-2013 programming period (if we calculate the amount per capita, this allocation is one of the highest among Central and Eastern European countries). As at 7 July 2016 support for more than 70,000 projects, amounting to EUR 28.11 billion have been approved. Actual utilisation According to data obtained at the end of 2015, when the Czech Republic had negotiated approx. 95% of the total allocated amount, the country ranked sixth in terms of using allocated funds among Central and Eastern European countries behind Bulgaria, Latvia, Estonia, Lithuania and Poland. The proportion of the total allocated amount

that was actually paid out reached 52%, ranking the Czech Republic fourth behind Estonia, Lithuania and Latvia. Therefore, the Czech Republic has a strong track record with respect to using European funds and is well prepared to utilise investment support in the current and upcoming programming period. Other investment support opportunities in the Czech Republic Investment support in the Czech Republic does not end with the administration and allocation of European subsidies. Beyond European aid, the Czech Republic otherwise supports foreign investment, particularly by means of investment incentives, preparation of industrial zones and other support from governmental agencies such as CzechInvest and CzechTrade. Possibilities of additional project funding from banking institutions Support from banks Considering that EU funding is based on equity financing (i.e. eligible costs are financed only up to a certain amount from the respective fund and partially from the aid recipient’s resources), it is a positive development that banks in the Czech Republic offer products specially designed for additional funding of projects implemented with EU subsidies. These banking products include:

Amount

European Regional Development Fund

EUR 11.94 billion

European Social Fund

EUR 3.43 billion

Cohesion Fund

EUR 6.26 billion

European Agricultural Fund for Rural Development

EUR 2.17 billion

European Maritime and Fisheries Fund

EUR 0.03 billion

Source: www.strukturalni-fondy.cz

Aid intensity in the 2014-2020 programming period

M&A Top sectors

www.prkpartners.com

State aid for research and development projects is increased depending on the size of the enterprise and the sector in which the given project is being implemented – industrial research (50% of eligible costs), experimental development (25%-45% of eligible costs), feasibility study (50% of eligible costs) or support for research infrastructure (50%).

Taxes

Jakub Lichnovský Partner, Attorney PRK Partners jakub.lichnovsky@prkpartners.com

I. for small enterprises – 45% of eligible costs, II. for medium-sized enterprises – 35% of eligible costs, III. for large enterprises – 25% of eligible costs.

Human resources

Private (private-law) entities With respect to other entities not specified in the list above (typically private entities not engaged in public-benefit activities), when determining EU aid intensity support it must be considered whether or not state-aid conditions have been cumulatively fulfilled in the particular case (project). State aid applies in cases where (i) support is provided by the state or from public funds; (ii) support is provided preferentially to certain enterprises or

sectors and is selective; (iii) competition is disrupted (or will be disrupted); and (iv) there is an impact on trade among EU member states. Generally, if the drawing of funds by the recipient does not fulfil state-aid conditions, support at the EU level will reach 85% of eligible costs in less developed regions of the Czech Republic (whereas in Prague the EU aid intensity is 50% of eligible costs). Additional financing from the state budget is generally not allowed. If the drawing of funds by the recipient fulfils stateaid conditions, EU aid intensity is further reduced depending on the size of the enterprise:

Permitting and construction

Public (public-legal) entities If the aid recipient is an organisational unit of the state administration, a state contributory organisation, a legal entity engaged in the management of school and educational facilities, a territorial self-governing unit, the City of Prague including its contributory organisation, a public university, a research organisation or a private entity engaged in public-benefit activities, the following rules apply: EU aid can be used to cover 85% of eligible costs of a project in less developed regions and 50% of the eligible costs of a project in the City of Prague without exception (in addition to that, public entities may use co-financing from the state budget).

Properties

Aid intensity in this programming period differs depending on the aid recipient and on whether state-aid conditions have been fulfilled in the particular case.

I. regularly monitor opportunities to obtain investment incentives; II. communicate in a timely manner with the respective authority (i.e. CzechInvest) with regard to the conditions for obtaining investment incentives and formulate the project in such a manner that it meets stipulated conditions. Before implementing the project, it is recommended to establish and coordinate with a team of local tax, legal and other advisors in order to ensure smooth implementation of the project and coordination with the relevant authorities; III. ensure co-financing of the project (assistance of banks and/or other advisors/co-financiers is possible); IV. while drawing incentives, it is essential to observe the project’s ongoing compliance with the conditions for obtaining investment incentives.

R&D

I. Loans for pre-financing of EU subsidies: These loans offer the possibility of financing to cover the time gap between the immediate need for funds to implement a project and the drawing of a subsidy from EU funds. The interest rate applicable to these products is mostly defined as a floating (variable) interest rate, where the interest is paid on a monthly or quarterly basis and the principal can be repaid monthly, quarterly or within individually agreed timeframes. A loan can be drawn down as either a lump sum or gradually over time, where the draw-down is usually limited by the amount of subsidies (allocated for payment of eligible costs) and conditioned by the submission of a decision on the allocation of subsidies or a subsidy contract. II. Loans for co-financing projects: Loans for co-financing projects serve to finance those project expenses which are not covered by subsidies from EU funds. The interest rate applicable to  these products is also mostly defined as a floating (variable) interest rate (however, some banks also offer a fixed interest rate), where the interest is most often paid on a monthly or quarterly basis, and the principal can be repaid monthly, quarterly or on the dates specified in the repayment schedule. A loan can be drawn down either as a lump sum or gradually over time, where the draw-down is usually limited by the actual costs of the given project that are not covered by subsidies and is conditioned by the submission of relevant documents. III. Loan commitment: Banks also provide loan commitments, enabling aid applicants to provide evidence of full project financing.

Foreign investments enjoy broad support (including financing from EU funds) from administrative authorities in the Czech Republic. Similarly, banks and other entities offer a wide range of products for uninterrupted financing of projects with regard to the schedule for drawing subsidies from EU funds. Nevertheless, it is crucial to correctly grasp and manage, from the project point of view, the process of applying for subsidies from EU funds, so that the drawing of subsidies and project financing is as unproblematic as possible and the related costs are minimised. In particular, it is recommend that the aid applicant take the following steps:

Finance

European structural and investment fund

First steps

General recommendations

European structural and investment fund

The Czech Republic

EU funding until 2022

How investment incentives work in the Czech Republic Investors who place their investments in the Czech Republic can obtain aid in the form of investment incentives, which are provided pursuant to Act No. 72/2000 Coll., on Investment Incentives (as amended on 1 May 2015).

zech and foreign legal entities and natural persons engaged in business can apply for investment incentives. Only a legal entity with its registered office in the Czech Republic can be a recipient of investment incentives. Special industrial zones Special industrial zones are the existing and prepared zones that offer the most attractive investment incentives. These zones were proposed by the Ministry of Industry and Trade and approved by the Czech government. At present there are three approved special industrial zones in the Czech Republic: Ostrava-Mošnov, Most-Joseph and Holešov.

Supported areas Manufacturing industry introduction or expansion of production Technology centres construction or expansion of R&D centres Business support services centres start or expansion of the activities of shared-services centres, software-development centres, high-tech repair centres, data centres and customer-support centres (call centres)

42 | INVESTORS‘ GUIDEBOOK

General eligibility criteria For all types of activities, it further applies that the recipient shall not start work on the project (i.e. shall not acquire any assets including orders of machines and equipment and shall not commence construction works) prior to submitting the incentives application to CzechInvest. All the conditions must be fulfilled within three years from the issuance of the Decision to Grant Investment Incentives and the recipient shall retain the assets and created jobs throughout the entire period of utilising state aid, at least for a period of five years. State aid The maximum state-aid intensity in the Czech Republic, with the exception of Prague, is 25% of total eligible costs for large enterprises. State aid is

Forms of investment incentives Corporate income-tax relief for companies for a period of up to ten years. For new companies, this incentive is provided in the form of full tax relief, for existing companies in the form of partial tax relief. Cash grants for job creation provided in regions with high unemployment and in special industrial zones in the amount of EUR 3,700 to EUR 11,100, depending on the region. Exemption from property tax for up to five years in special industrial zones. Cash grants for acquisition of assets provided for strategic investments in the manufacturing industry or technology centres in the amount of up to 10% of eligible investment costs. Cash grants for training and retraining new employees in regions with high unemployment in the amount of 25% to 50% of eligible training and retraining costs, depending on the region.

Manufacturing industry

2-4 half of which in new machinery

Technology centres

0.4 half of which in new technology

20-70 (500 in the case of call centres)

Business support services centres

51%

Number of applications according to selected sectors

Manufacturing industry

20 half of which in new machinery

500

Technology centres

8 half of which in new technology

100 Projects

100 50 0

In the same period, the largest numbers of applications for investment incentives were submitted in the automotive and mechanical engineering sectors. Source: CzechInvest, 2016

Markéta Tomková Head of Financial Support Section CzechInvest marketa.tomkova@czechinvest.org

Top sectors

www.czechinvest.org

M&A

Sample calculation The investor (large enterprise) plans to invest a total amount of EUR 6 million in assets in the manufacturing industry. The investment will be placed in a region with high unemployment. The state-aid intensity is 25% of eligible costs. Therefore, the maximum state-aid ceiling is EUR 1.5 million. The maximum amount of state aid may be drawn in the form of corporate income-tax relief for ten years and cash grants for job creation. Cash grants for train-

150

Taxes

increased by 10% for medium-sized companies and by 20% for small companies.

Application process The process of applying for investment incentives differs depending on whether the investor is undertaking initiating a new investment or an expansion of an existing investment. Abridged single-round process in the case of an expansion of an investment The Decision to Grant Investment Incentives is issued within roughly three months after submission of the application to CzechInvest. The investor can initiate the investment immediately following submission of the application; it is not necessary to wait for issuance of the aforementioned Decision. Extended two-round process in the case of initiating a new investment This process involves the establishment of a new Czech legal entity. The Decision to Grant Investment Incentives is issued within roughly six months following submission of the application to CzechInvest. The investor can start implementing the investment immediately after submitting the application; it is not necessary to wait for issuance of the aforementioned Decision.

200

ve hic le m an uf ac tu rin en gin g ee ru rin bb g er an dp las oth ele e tic ctr ind r ica us le try m ng ch em etalw ine er ica or ing kin la nd gi nd ph arm ust ry a. ind u wo str foo od y di an n du dp str ap y er ind us tex try tile ind IT an us bio ds try tec of tw h no are log de y ve lop m gla en ss t co ind ke us an try m dp an et uf rol ac eu tu m rin g

The investor shall select one option. In the case of an investment in the manufacturing industry, only fixed assets comprise eligible costs.

ing and retraining of employees might be provided above the state-aid ceiling , i.e. as cash in addition to the previously mentioned EUR 1.5 million.

250

Human resources

Two years’ gross wages of employees in newly created positions.

300

Permitting and construction

Long-term tangible and intangible assets, whereas the value of machinery must comprise 50% of eligible costs.

350

Properties

Eligible costs

49%

R&D

Eligibility criteria for strategic investments

Applications for investment incentives

In the period from 1998 to 2016, a total of 1053 Decisions to Grant Investment Incentives were issued on the basis of registered applications. In the period from 1998 to 2016, investors committed to investing almost CZK 820 billion (approx. EUR 30.4 billion) and more than 180,000 new jobs.

Finance

New jobs required

Type of activity

Czech companies

Foreign companies

Investment in assets (EUR million)

First steps

Eligibility criteria

The Czech Republic

Investment incentives

Finance your future with OPEIC Within the framework of the Operational Programme Enterprise and Innovation for Competitiveness for the period 2014–2020, it is possible for applicants to use financial resources from European Union structural funds for co-financing business projects in the manufacturing industry and related services. Funding will be provided in the form of non-returnable subsidies, preferential loans and guarantees. Eligible projects are those that are implemented within the borders of Czech Republic, though outside of Prague.

he Operational Programme Enterprise and Innovation (OPEIC) is the successor of the Operational Programme Enterprise and Innovation, which was implemented in the 2007-2013 programming period. Approximately EUR 4.3 billion has been allocated from the European Regional Development Fund for projects within OPEIC. The programme’s managing authority (Ministry of Industry and Trade) delegates the majority of the implementation tasks to the Business and Innovation Agency (Agentura pro podnikání a inovace – API). The API is a mediating entity basically for grant-based aid and is responsible for communication with aid applicants and recipients. This communication is conducted through ISKP 2014+, an information system for financial aid beneficiaries, which serves for all operational

44 | INVESTORS‘ GUIDEBOOK

programmes at the national level in the 20142020 programming period. Aid recipient Small or medium-sized enterprises are eligible to  receive aid within OPEIC, though in some programmes large enterprises with more than 250 employees can also apply for aid. Projects must be implemented within the Czech Republic, outside the city of Prague (the seat of the company can be located anywhere in the Czech Republic). Aid will be provided in compliance with the individual state-aid rules. Applicants must be registered as income-tax payers within EU countries uninterruptedly for a period of no less than two closed tax periods preceding the date of the submission of the aid application (in the case of related enterprises, the parent company’s account history can be provided). The given company must be

Programme description

Innovation – Innovation Project and Project for Protection of Industrial Property Rights

Support for activities aimed at implementation of innovation

Potential

Support for the creation and development of business properties including related infrastructure, enterprise zones and brownfield regeneration

Training Centres

Support for the creation and development of infrastructure intended for education and development of human resources in businesses

Expansion

Support for dynamically developing small and medium-sized enterprises in the form of subsidiary loans and guarantees

Venture Capital

Financing of entrepreneurial projects of entities entering into business for the first time or after an extended period of inactivity

Support for creation and expansion of infrastructure for companies’ development and innovation activities Support for industrial research and experimental development

Expanded use of renewable and secondary sources of energy

Energy Savings

Reduction of the energy intensity of production

Smart Grids I (Distribution Grid)

Support for deployment of automated, remotely controlled elements in distribution grids

Innovation Vouchers

Support for purchase of consulting, expert and supporting services in the area of innovation from organisations for research and dissemination of knowledge with the objective of initiating or intensifying the innovation activities of small and medium-sized enterprises

Low-Carbon Technologies

Introduction of innovative technologies and pilot projects involving introduction of energy-accumulation, savings and transportation technologies

Infrastructure Services

Support for the establishment, development and operation of science-and-technology parks and technology-transfer centres

Energy Savings in Heat Supply Systems

Refurbishment and development of heat supply systems, primarily heat distribution facilities and introduction and increased efficiency of electricity/heat co-generation systems

Proof of Concept

Support for activities leading to commercialisation of research results through activities involving verification of feasibility

Smart Grids II (Transmission Grid)

Support for construction, reinforcement, modernisation and refurbishment of transmission mains and transformers

High-Speed Internet

Modernisation or expansion of the existing infrastructure for high-speed access to the internet

ICT and Shared Services

Support for new manufacturing technologies, ICT and selected business support services

Technology

Top sectors

Source: CzechInvest, 2016

Support for increasing the number of implemented new bu siness projects of small start-up companies and small and medium-sized enterprises

M&A

Renewable Sources of Energy

Taxes

Support for the creation and development of cooperative branch groupings – clusters, fields of excellence, technology platforms and co-operative projects

Human resources

Cooperation

Permitting and construction

Knowledge Transfer Partnership

Support for establishment of partnerships between small and medium-sized enterprises and organisations for research and dissemination of knowledge for the purpose of transferring knowledge and related technologies and skills

Properties

R&D

Application

projects in enterprises; support for activities aimed at the protection of industrial-ownership rights

Marketing

Increase of small and medium-sized enterprises’ marketing activities in foreign markets; support for participation of manufacturing companies and service providers at foreign trade fairs and expositions

Finance

Programme

First steps

Overview of OPEIC programmes:

The Czech Republic

OPEIC 2014 - 2020

OPEIC 2014 - 2020 registered in the Czech Republic as at the date of the Decision to Provide a Subsidy. Another important criterion is that any project implemented within OPEIC must be implemented in the manufacturing industry, generally in sectors CZ-NACE 10-33. Process of applying for aid and project evaluation Applications for the OPEIC grant programmes are submitted via the MS2014+ internet application, which is only in Czech language. Application can be accessed via mseu.mssf.cz.

I. Successful registration requires a qualified certificate (electronic signature). The first step is to establish a User Account. II. The application includes information about the applicant and the project and the required appendices, particularly the business plan and the specific requirements of the particular programme. With the application, the date on which eligible costs arise is given. From this date, costs expended in connection with the project can be considered as deductible. The applicant can also begin construction works, sign contracts, order goods and services, pay for orders, etc.

III. The applicant and the project will undergo an evaluation of acceptability including an economic evaluation. Projects are evaluated on the basis of clearly defined and publicly known criteria.

46 | INVESTORS‘ GUIDEBOOK

Support in compliance with the guidlines on regional state aid: IV. In the event that the project is approved, a Decision to Provide a Subsidy including the terms and conditions thereof shall be signed by the aid recipient and the Ministry of Industry and Trade.

V. The subsidy will be paid out to you expost on the basis of a submitted application for payment. You will submit the Application for Payment of a Grant in electronic form following completion of a phase of the project or of the entire project in accordance with the Decision to Provide a Subsidy.

The conditions to which the applicant is bound to comply include, in particular: selection of suppliers of orders for which aid will be provided from OPEIC in accordance with previously established regulations assurance of publicity of supported projects in  the form of posters, signs, billboards, etc. during and after implementation of the project in  accordance with the established regulations

Size of enterprise

Aid intensity in 2014-2020

Small

45%

Medium-sized

35%

Large

25%

Source: CzechInvest, 2016

Framework of state aid for research, development and innovation: Type of aid

Small enterprise

monitoring of projects in the sustainability period – continuous evaluation of progress in the supported projects. The period is three years for SMEs and five years for large enterprises (from the date of the last payment).

Large enterprise

Industrial research

70%

60%

50%

Experimental development

45%

35%

25%

Aid for feasibility studies

70%

60%

50%

Aid for construction and upgrading of research infrastructure

50%

Source: CzechInvest, 2016

division of projects into individual phases according to the schedule of works on the basis of previously established conditions (the length of phases is limited by duration and the aid amount)

Medium-sized enterprise

Renata Kořínková Director of Structural Funds Coordination Department Businness and Innovation Agency programy@agentura-api.org www.agentura-api.org

CzechInvest

• Strategic Location in the Heart of Europe

Your Gateway to Success in the Czech Republic

• History of Manufacturing Excellence

• Stable Economy

• Cost-effective and Multilingual Workforce • Strong Presence of Global Companies • Established R&D with Successful Applications • Broad Spectrum of Financial Support • Supportive Business Environment

www.czechinvest.org

CzechInvest Headquarters +420 296 342 579 fdi@czechinvest.org

Financing foreign investments in the Czech Republic Many countries strive to attract foreign direct investment (FDI), as the knowledge brought by multinationals is likely to spill over into domestic industries and increase their productivity. Local governments typically use different investment incentives to support FDI inflow. However, the incentives need to be complemented with liberal exchange control rules, a healthy banking sector and functional financial and capital markets to allow for efficient financing of individual investments. The Czech banking system’s capital adequacy ratios, in % T1 Capital ratio

Total capital ratio

25 20

17.4

17.0

18.5

20.1

18.8 15.2

15 10 5 0

Q2 2015

Q2 2016

Large banks Source: Czech National Bank, Česká spořitelna, 2016

48 | INVESTORS‘ GUIDEBOOK

Q2 2015

Q2 2016

Medium - sized banks

Q2 2015

Q2 2016

Small banks

he Czech Republic has been a member of the European Union since May 2004 and it fully complies with the key principles of free trade and capital flows. Therefore, there are virtually no restrictions or administrative burdens for foreign investors with respect to providing equity contributions or intercompany loans to finance their investments and, conversely, to repatriating profits from their investments through payment dividends or to repaying intercompany loans. The country’s legislation and regulations also permit the utilisation of liquidity management structures and investors can efficiently manage their intragroup funding through all types of local and cross-border target balancing and cash pooling systems. If investors need external funding in the Czech Republic, they will find a very modern, safe and competitive banking sector. There are 44 entities with banking licenses on the Czech market. Two

AFI MembersAFI M AFI AFI Members AFIMembers Members AFI Members AFI Members AFI Members AFI Members AFI Members AFI Members Due to lower initial starting conditions, the degree GDP per capita in purchasing power standards (2015) AFI Members AFI Members AFI Members AFI Members of economic development of the Czech economy AFI Members AFIinMembers 127% measured by GDP perMembers capita purchasing power 125% AFI AFI Members AFI standards is stillMembers somewhat lower than the average AFI AFI AFI Members AFI Members AFI AFI Members Members of theMembers European Union. However, the Czech AFI Members EU average = 100% 91% Finance

87% 77%

77%

69%

68% CMYK

CMYK

CMYK CMYK CMYK

CMYK

Properties

CMYK

CMYK CMYK

CMYK

Austria

Germany

Spain

Czech Republic

Portugal

Slovakia

Poland Pantone

Pantone

Hungary

Pantone Pantone

Pantone

Pantone Pantone

Pantone

Sources: Eurostat, calculation by Česká spořitelna, 2016

The still relatively low general government debt is another advantage of the Czech economy. The share of government debt to GDP is around 41% and is projected to somewhat decline in the coming years thanks to economic growth.

Taxes

pendent monetary policy proved an advantage in the economic crisis and its aftermath. The central bank’s clear strategy of inflation targeting has proven effective in steering inflation expectations in the economy towards healthy levels.

Pantone

Human resources

Pantone

Permitting and construction

Republic, thanks to its higher average growth, has been converging towards EU levels and, in terms of GDP per capita, it has already overtaken several older EU and euro-area member states. The country’s growth potential is expected to remain strong for the foreseeable future. The Czech Republic has benefitted from its membership in the European Union and from its close economic integration with the euro area. The share of trade with the euro area is above 60%; the country’s largest trading partner is Germany, followed by Slovakia. Skilled and competitive labour is one of the comparative advantages of the Czech economy, along with political stability and geographical and cultural proximity to its euro-area trading and business partners. The Czech economy has therefore attracted a sizable regular inflow of foreign direct investment. Close ties with German manufacturing create strong demand for the quality of Czech production and has contributed to rapid technological advances. The Czech economy’s potential is supported by its economic policies. The country’s inde-

R&D

AFI AFIMembers Members Members

The Czech Republic: a converging economy with opportunities

First steps

of these are owned by the Czech state, six are banks with Czech shareholders and the remaining 36 are either branches or subsidiaries of foreign banks. In terms of market share, the local banking sector is quite concentrated on loans and almost 60% of all loans are held by the leading four banks, though this number has been declining slightly from year to year. The Czech banking sector is very safe, with strong liquidity (average loan/deposit ratio of 85% as at 30 June 2016), high capital adequacy (average Tier I capital ratio of 16.8% as at 30 June 2016; see chart) and good asset quality (average share of non-performing loans of 5.0% as at 30 June 2016). As a result, local banks are able and willing to extend financing to all viable foreign investments in the Czech Republic at very competitive prices in domestic and foreign currencies. Local banks offer all types of funding products, from plain vanilla financing (investment loans, working capital financing, overdrafts) through trade, export and asset-based finance (buyer’s credit, factoring, forfaiting, structured trade finance, real estate financing, leasing), to structured finance (club and syndicated loans, acquisition and leveraged finance, project finance), all of which support foreign investment throughout all stages of their lifecycle. Larger investments can be financed through debt and equity capital markets that offer deep and liquid distribution to both domestic and international investors. The Czech Republic boasts the best ratings (S&P: AA-, Moody’s: A1 and Fitch: A+, all of which are stable) of all the CEE countries and its sovereign strength is positively reflected in sought-after corporate issuance in CZK and EUR. Thus, the local capital market has proven to be the most active when compared to its CEE peers. The individual funding instruments are typically used in combination in order to create the optimum capital structure and to minimize financing costs. Corporate issuers can also make use of hedging of the interest-rate and FX risks related to the chosen funding structure. The Czech Republic is an open, export-oriented economy with liberal exchange control regulation, a competitive banking sector and efficient financial and capital markets. As such, it offers a broad range of financing instruments to foreign investors, which can efficiently fund and manage financial flows related to their investments in the Czech Republic.

The Czech Republic

Banking system and the economy

AFI Main partner

www.csas.cz

www.erstecorporatebanking.cz

AFI Partners

AFI partners

Top sectors

Jiří Hájek Director Large Corporates I. Erste Corporate Banking, Česká spořitelna jirihajek@csas.cz

M&A

Michal Skořepa Macro Analyst, Economic and Strategic Research Česká spořitelna mskorepa@csas.cz

Did you know?

Czech discoveries and inventions Electron microscope Tatra Established in 1850, the Czech company Tatra is the third-oldest car manufacturer in the world. One of the world’s oldest factory-made cars is the Tatra Präsident, which was first produced in Kopřivnice in 1897.

Czech physicist Armin Delong introduced the first Czech electron microscope into production in 1949, which later led to the fact that the city of Brno is considered to be the global centre of electron microscopy.

Sugar cubes This common form of sugar was first produced at a sugar mill in the town of Dačice in 1843.

Beer

Robot

The first pilsner-style beer was produced in Plzeň in 1842.

The word “robot” was coined by Czech writer Karel Čapek.

Polarography

Semtex

Physical chemist Jaroslav Heyrovský invented polarography in 1922 and is considered to be the father of electroanalytical chemistry. He received the Nobel Prize for chemistry in 1959.

The plastic explosive is named after Semtín, where it was first manufactured in 1964. The plant was later renamed as Explosia, a subsidiary of Synthesia. Semtex was invented by Czech chemist Stanislav Brebera.

Laws of heredity

Soft contact lenses

Moravian scientist Gregor Mendel discovered the basic laws of heredity and was the first to use biostatic methods in his work, the results of which were initially presented in 1865.

Czech inventor Otto Wichterle designed and produced the first soft contact lenses in 1961.

AIDS drugs

Lightning rod

Drugs developed by Czech chemist Antonín Holý are part of the most effective available medications for fighting AIDS, as well as shingles, viral infections of the ocular mucous membranes and hepatitis B.

lighting rod was invented by Czech inventor Václav Prokop Diviš in 1754.

Screw propeller

Blood types Czech neurologist Jan Jánský discovered the four basic blood types in 1907.

Kaplan turbine In 1910-1912, Czech scientist Viktor Kaplan invented the Kaplan turbine, which became the most significant type of turbine used in large hydropower plants around the world.

The inventor of the maritime screw propeller, Josef Ressel, was from the Czech lands. Ressel had a ship-propulsion system comprising a steam engine and screw of his own design patented in 1827.

Look into R&D

Industry 4.0

Industry 4.0 – An opportunity for investors The willingness to embrace Industry 4.0 is one of the most important conditions for future competitiveness and for the sustainability of the very good results achieved by Czech industry and the country’s economy.

espite all of its successes to date, the Czech Republic is and will continue to be a small, open economy with a tremendous focus on industrial production and exports. Industry accounts for approximately one-third of the country’s gross domestic product, which is practically the highest level among the countries of the European Union. More than two-thirds of Czech exports are delivered to demanding European markets. The Czech Republic also has the lowest unemployment rate in Europe. If the country is to maintain this position, its industrial production must continue to remain competitive. The basic prerequisite for that is to strictly follow the most developed countries that are in the forefront of new trends and technological developments coming, and to promptly respond to challenges emerging in the global industry. The ability to quickly respond and tackle use best scientific research results in practice is of crucial importance. Industry 4.0 as a path to prosperity The Ministry of Industry and Trade, the academic sphere and a number of firms in the Czech Republic perceive the Industry 4.0 as the only way forward not only for the country’s industrial sector, but also for services and the construction industry. The Czech education system thus has and will continue to have an irreplaceable and increasingly important role in ensuring a sufficient number of graduate technical experts from among the graduates of technical colleges to satisfy the growing need for highly skilled technical workers, from engineers to laboratory technicians. The country’s education system must be able

52 | INVESTORS‘ GUIDEBOOK

to adapt itself to the increasingly growing demand for technically educated people with advanced knowledge and skills in the area of IT to meet the requirements of the companies that will put the Industry 4.0 concept in practice. Industry 4.0 as a platform Industry 4.0 is not a “product” that can be bought and used to address the requirements being brought forward by the ongoing technological development referred to as the fourth industrial revolution. We see it rather as a basic concept, a framework or platform, in which industrial and other enterprises are beginning to engage. It is focused on using the latest technologies, but in no case can it be merely and erroneously narrowed down to the topic of digitalisation, as often happens. Digitalisation of production is a necessary condition for communication between production systems, but it is not in itself the core of the process. Decentralised control and autonomous decision-making are far more important. Industry 4.0 as an opportunity Timing is also an important factor for the Czech Republic. There are only a few advanced countries that are systematically developing the Industry 4.0 concept. For example, Germany is a leader in this area and is blazing its own trail forward via its INDUSTRIE 4.0 project. Due to the interconnectedness of the Czech and German economies, this is a source of valuable experience for us. France is developing the INDUSTRIE DU FUTUR, while Italy and the United States are working on their FABRICA INTELLIGENTE and INDUSTRIAL INTERNET concepts, respectively.

Other countries developing Industry 4.0 concepts include Great Britain, the Netherlands, Austria, Sweden, South Korea, Japan and China. The Czech Republic and Industry 4.0 A survey conducted by the Confederation of Industry and the Electrical and Electronic Association of the Czech Republic at the Prepared for Industry 4.0 conference, which was attended by nearly 200 representatives of firms, indicates that more than twothirds of companies see in Industry 4.0 an opportunity to increase labour productivity. They see other benefits in the form of increasing the flexibility and quality of production processes, decreasing energy intensity and consumption of raw materials, and creation of new production and business processes. According to analyses, this should lead to a perhaps 25% reduction of manufacturing costs, while automation of production processes should reduce the number of work-related injuries and improve occupational health and safety. Nearly one-fourth of companies expect Industry 4.0 to address the lack of workers, especially in technical fields. Approximately one-fifth of firms also expect their position on the market to improve.

Jan Mládek Minister of Industry and Trade

What should Czech companies focus on? Industry 4.0 should lead mainly to the inception of individualised mass production, which will allow manufacturers to easily turn out unique products in units for a price that approaches that of series production. This is a question of competitiveness on the global scale. In order for companies on the Czech market to be able to make individualised products for every customer for a favourable price, they need to adopt new technological processes, such as advanced 3D printing, which in turn is generating tremendous demand for materials engineering. It will also be necessary to improve warehouse management, logistics and planning. While these issues represent complicated challenges, they are also opportunities for capable and intelligent people, which the Czech Republic undoubtedly has.

More information about Industry 4.0 in the Czech Republic is available on Ministry of Industry and Trade’s website www.mpo.cz.

Human resources Taxes M&A Top sectors

www.vyzkum.cz

Permitting and construction

Pavel Bělobrádek Deputy Prime Minister for Science, Research and Innovation press.vedavyzkum@vlada.cz

newly integrated infrastructures) are paid from the state budget of the Czech Republic for research, development and innovation on the basis of a government resolution. Continuous evaluation of Projects of Major Research Infrastructures will be carried out in 2017, on the basis of which the financing of such projects will be adjusted in the period from 2020 to 2022. In conclusion, it should be emphasised that excellent research, development and innovation comprise one of the main drivers of economic growth and prosperity, which is apparent to the governments of both developed and developing nations. In this respect, the participation of the corporate sector and private investments in high-quality research and the possibility to jointly reaching decisions on implemented research and development subjects contribute to strengthening the competitiveness of the Czech Republic and the resulting synergistic effects will benefit society as a whole.

Properties

of open access. The operation of such infrastructures is supported from the state budget through specific aid categories – Projects of Major Research Infrastructures, currently under the heading of the Ministry of Education, Youth and Sport. In accordance with the development of the European Research Area and in connection with the activities of the European Strategic Forum for Research Infrastructures (ESFRI) in the form of the ESFRI Roadmap, the Roadmap of Major Research Infrastructures of the Czech Republic was drafted in 2010. The current government updated this roadmap in 2015, which resulted in its expansion to 58 research infrastructures in connection with the results of an international evaluation carried out in 2014 in the form of informed peer review. Of the total of 58 research infrastructures recommended for financing by the international assessment committee, 42 were recommended as high-priority recipients. As of 2016, the operating costs of the research infrastructures integrated into the roadmap (including

R&D

Centre in Ostrava, the BIOCEV Biotechnology and Biomedical Centre in Vestec u Prahy, the SUSEN Sustainable Energy Centre in Řež and the ICRC-FNUSA International Clinical Research Centre at St. Anne’s University Hospital in Brno. Forty-eight research centres (eight European Centres of Excellence and 40 Regional Research and Development Centres) were established, refurbished or expanded in connection with OPRDI in the period from 2007 to 2015 at a cost of more than CZK 42 billion (approx. EUR 1.6 billion). In addition to the state budget, European structural funds are a significant source of financing for the establishment and development of research infrastructures in the period 2014-2020 via the Operational Programme Research, Development and Education in the planned amount of roughly CZK 4.4 billion (approx. EUR 163 million). State funding for support of long-term conceptual development of research organisations together with financing from private sector sources should in large part replace ESIF funding intended for further development of research infrastructures following the end of the 20142020 programming period. The costs associated with implementing particular research and development projects should partially fall within the ordinary operating costs of research infrastructures. In accordance with the legislation in force, the strategically most important elements of the country’s research infrastructure can gain the status of Major Research Infrastructures if they are operated on the principle

Finance

he creation and development of research infrastructures has high priority in the Czech Republic. Outstanding research infrastructures that make it possible to conduct world-class research and development involve the specialised science and research centres that have been established here since 2005 with financial support from the state. Pursuant to the Act on Support for Research, Experimental Development and Innovation, this involves specific and institutional financial tools. The specific funding used to support the country’s research infrastructure in the period from 2005 to 2015 amounted to nearly CZK 100 billion (approx. EUR 3.7 billion), of which more than CZK 43 billion (approx. EUR 1.6 billion) was provided from the state budget. For comparison, total annual state spending on research, development and innovation in 2015 amounted to CZK 26.9 billion (approx. EUR 996 million). From the financial perspective, the dominant fields of research and development in the Czech Republic are the natural, technical and medical sciences. Specific examples of well-established elements of the country’s research infrastructure include major projects from the Operational Programme Research and Development for Innovation (OPRDI), whose total investment costs were in excess of EUR 50 million. Such projects include the ELI Beamlines Laser Centre in Dolní Břežany u Prahy, the Central European Institute of Technology (CEITEC) in Brno, the IT4Innovations National Supercomputing

Expansive modern research infrastructures with a high degree of scientific potential have been built up in the Czech Republic over the past decade. A diverse range of entities have been put into operation, most commonly state-funded research organisations (i.e. universities and public research organisations) which in and of themselves do not possess legal subjectivity. Due to limited public funding, the anticipated substantial reduction of financing from European Structural and Investment Funds after 2020 or, as the case may be, 2023, and the necessity of greater involvement of private investments in the operation and further development of such institutions, this represents a major investment opportunity for the private sector.

First steps

Publicly financed research infrastructure

The Czech Republic

Research infrastructure

Support for R&D investments

How TACR supports science and research The Czech Republic has always been the promised land of innovation, traces of which can be found across all fields of technology, from holograms, nanowires and cybernetics to astrophysics. We are the nation the lightning rod, the propeller and contact lenses were invented and blood groups were first described.

Current TACR programmes BETA2 - public procurement in R&D for the needs of public administration bodies Competence Centres – support for a long-term, sustainable collaboration between research organisations and companies working on a dedicated research agenda EPSILON – replaces the ALPHA programme, based on ministerial strategies and national priorities of applied research GAMMA – support for the commercialisation of the results of applied research and development DELTA – support of international collaboration in applied R&D ZETA – promotion of equalisation of opportunities for young researchers – men and women – when conducting applied research projects ETA – aimed at promote the involvement of social sciences and humanities in R&D&I projects that are beneficial for maintaining and improving the quality of human life and that respond to dynamic social, economic, cultural, technological and globalisation-related changes THETA – R&D&I support in the energy sector with a focus on securing state supervision of nuclear safety, new technologies and long-term technical prospect with focus on key challenges and trends in the energy sector

54 | INVESTORS‘ GUIDEBOOK

zech technical and non-technical universities have a long tradition, which also includes research. There have always been many scientists living in our country who have helped and continue to help change the world for the better. One of them is Jaroslav Heyrovský, who won the Nobel Prize for chemistry. We are a nation of clever solutions and therefore we are constantly investing in the innovation environment for a better future for all. Our country invests 2% of GDP in R&D and over the past seven years we have invested the most in Europe in research infrastructure. This has resulted in our currently having exclusive research capacity on a global level. This is why the Technology Agency of the Czech Republic (TACR) was established, in order to link the worlds of academia and corporate research and development and to support applied research projects and technology transfer. Our projects generate unique products, patents and other results that enable research findings to be quickly applied in practice. We thus contribute to increasing the competitiveness of the Czech economy, which is growing mainly due to domestic and foreign innovative companies. The Technology Agency of the Czech Republic supports hundreds of projects worth many hundreds

of millions of crowns that are related to the principles of Smart Life and create an environment for the progressive development of new methods and technologies needed for implementation of Industry 4.0. This is made possible thanks to eight programmes of TACR, each of which has its own unique function and importance. A key programme for the commercialisation of research results is EPSILON, which supports projects whose results have strong potential for rapid market application, and the GAMA programme, which has important implications for verification of the results of research and development for practical application and commercial exploitation. The Competence Centres programme was established to ensure the growth of the Czech Republic’s competitiveness and to facilitate collaboration between research organisations and customers in the fields of advanced R&D. TACR also addresses

Petr Očko Chairman Technology Agency of the Czech Republic info@tacr.cz www.tacr.cz

the social impact of the changes brought forth by new trends. Therefore, the new ETA programme was established to focus on the involvement of social sciences and humanities in R&D projects that are beneficial for maintaining and improving the quality of human life in response to globalisation and social, economic, cultural and technological changes. We want to involve as many partners as possible with the best ideas and help to change the world for the better. Therefore, we are opening up to the world through, for example, our own DELTA programme of international cooperation and our involvement in TAFTIE, the European network of innovation agencies, which allows us to share the best experience and information from partner agencies that also support research, development and innovation. We are proud that TACR will hold the presidency of TAFTIE for the duration of 2017.

M&A Top sectors

www.czechinvest.org

Taxes

Eva Bartoňová Project Manager for R&D CzechInvest eva.bartonova@czechinvest.org

in research. In this way, CzechInvest bridges the gap between the industrial sector and academia and facilitates dialogue between all the parties involved in research and development. The Czech Republic offers a sea of excellent R&D that is gaining ever greater recognition for its worldclass quality. CzechInvest is continuously charting this sea in order to make it navigable for foreign companies and researchers who want to collaborate on projects with added value. Therefore, if you are interested in sailing off into Czech R&D, do not hesitate to contact the experts at CzechInvest, who will provide to you their services free of charge as part of the Czech government’s business support measures.

Human resources

technology missions to foreign countries, thereby bringing Czech firms and institutions together with partners in particular fields primarily of applied research. Since 2005, nearly 60 outgoing and incoming missions of this kind have been carried out and have resulted in valuable endeavours and projects. The concept of technology missions involves a very hands-on approach, where selected researchers and innovative companies embark on a “door-todoor” roadshow and visit carefully selected foreign partners, thus enabling practical discussion and establishment of new partnerships. CzechInvest then complements these efforts with activities in the Czech Republic, such as local seminars and conferences on relevant technologies and trends

Permitting and construction

navigate through the system of Czech research. The website serves as a gateway to specific domains of R&D, allowing interested parties to find out who the key players of Czech R&D are, see the system’s key documents and become familiar with particular institutions and companies that form the backbone of Czech research. These include, among others, 19 technical universities and universities with STEMM-oriented faculties, the Czech Academy of Sciences with its 54 outstanding institutes, selected research organisations and an overview of new R&D infrastructure comprising eight top-notch European Centres of Excellence and 40 regional R&D centres that are actively building cooperation with international partners and industry. The information about the various entities provided on the website is complemented with relevant news from Czech R&D and calls issued within programmes that financially support international research cooperation. The official partners of the website are the Ministry of Education, Youth and Sports, the Czech Academy of Sciences, the Technology Agency of the Czech Republic and the Ministry of Foreign Affairs of the Czech Republic. Apart from providing information services, CzechInvest also supports the internationalisation of Czech R&D. The agency has a long history of organising

Properties

zechInvest bases its support of research and development on solid analysis of massive amounts of data. The agency makes use of public information about nationally funded R&D activities, analysing the register of research projects and identifying targeted actors. Furthermore, data on international cooperation is also used to track “who does what with whom and where,” as the department commonly refers to its monitoring activities. The data include joint publications with individual countries, participation in Horizon 2020 and other programmes for international cooperation in R&D. CzechInvest also proactively collects its own data, not only through continuous contact with Czech research facilities, but also through a unique catalogue called “Who’s Who in Czech RDI”, a digital collection of profiles of selected firms and research centres that offers a customised presentation of relevant research, including the contact information and a description of the main areas of specialisation and key projects of a given entity. Insight into this wealth of information about Czech R&D can be obtained on the recently launched website www.czech-research.com. CzechInvest created this tool to help foreign investors and other partners

R&D

The website was officially launched by CzechInvest in December 2016. Its main goal is to provide an overview of the Czech R&D system and its important players to foreign investors and other inquirers. The sections of the website cover R&D system, R&D environment, funding, and news and events.

Finance

www.czech-research.com

CzechInvest is a well-known partner of investors coming to the Czech Republic. However, it might be less obvious that it also provides considerable support in the field of research and development. These efforts are concentrated especially at the agency’s R&D department, which provides advice on issues such as funding, the legal and institutional framework, and successful matchmaking for R&D projects. It also organises missions and seminars that cultivate the Czech R&D scene.

First steps

CzechInvest: Your port of entry for R&D-related investment and more

The Czech Republic

R&D-related investment

TEVA Daikin

Novartis

Merck Sharp & Dohme

Foxconn Interpharma (Otsuka Group)

Panasonic

Hyundai Motor Manufacturing Czech

Toyota Peugeot Citroën Automobile

Škoda Auto (Volkswagen Group) GE Aviation

Life sciences

BASF

Pegas Nonwovens

Nano technology & Advanced materials

Spolchemie

Oracle

Tieto

Accenture

Business support services

IBM ABB

Ingersoll Rand

Engineering

Hotel & Leisure

Mandarin Oriental

Infosys

SAP

DHL

ICT

Microsoft

Hilton Hotels

Aerospace

Selected clients of AFI members

Ness Czech

Netsuite

AERO Vodochody

Automotive

Electrical Engineering

AGC

Bell Helicopter (Textron)

Denso

Lonza

FEI Czech Republic

Honeywell

Precision Cast Parts

Zentiva (SanofiAventis)

Bang & Olufsen

Merck Sharp & Dohme

Bosch

Nestlé

Food Sector Banking &10 10 Financial services

Siemens

Black & Decker

Chemical Industry

Pepsi

PPF

Shell

Penta Hotels

Pilsner Urquell Citibank

Raiffeisen BNP Paribas

Barclays

Unilever

Unipetrol Johnson & Johnson

Coca-Cola HBC

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Development of industrial zones in the Czech Republic

The Czech Republic ranks among the European countries with the densest infrastructure connected with industrial production. This is due to the country’s industrial history, which dates back to the time of the Austro-Hungarian Empire. Following the political changes that occurred at the end of the 1980s, development of industrial zones in the Czech Republic took place along two lines, first with support from the state and later on the basis of private capital.

ndustrial zones in the Czech Republic State-supported industrial zones were established after 1998, when their preparation was commenced in accordance with a government decree. Thanks to this programme, the Czech Republic now has more than one hundred industrial zones, including five so-called strategic industrial zones. More than 600 manufacturing companies operate in these zones, whose occupancy rate is over 80%. The key projects implemented in the Czech Republic at the turn of millennium included the electronics plants of Panasonic in Plzeň and Philips in Hranice na Moravě, and the car factories of TPCA in Kolín and Hyundai in Nošovice. These investments spawned more projects connected with the supplier network, logistics and research and development. With respect to the locations of large industrial zones, the most ideal sites are former airports and their immediate surroundings, such as the Plzeň-Bory, Ostrava-Mošnov and Žatec zones, which are characterised by their ideal terrain conditions and good connections with infrastructure. It goes without saying that all three of these zones are operating at practically full capacity. In 2016 the Czech government initiated preparation of four new industrial zones. During the same period when the Czech government initiated support for industrial zones, other zones backed by private financing came into existence with the aim

58 | INVESTORS‘ GUIDEBOOK

of preparing a property-development solution in the form of rental facilities and user-owned buildings. One of the first projects implemented in this way was the D1 East and D1 West industrial park at exit 11 on the PragueBrno motorway. Since then, more than five million square metres of rental industrial space have come on the market and that figure continues to rise. Public vs. private industrial zones For investors coming to the Czech Republic, a deciding factor in choosing a location is often whether a given zone is publicly or privately owned. Both options usually have strengths and weaknesses. In zones prepared by a governmental organisation, it is generally possible to buy land under more favourable price conditions, which can be combined with various other investment incentives. In the case of industrial facilities built by a developer of a private industrial zone, it is sometimes possible to use a pre-arranged building permit and thus accelerate the start of production or other business activities. Both types of zones are technically very similar and, as a general rule, comprise sites that are unified in terms of ownership and well connected to transport infrastructure. Utilities connections are usually located on the boundary of a given industrial zone or on backbone lines within it. Industrial zones are generally located on the outskirts of cities or in proximity to built-up urban

81 10 9

80 14 32

19 21 22 23

33 31

89 3

63 86

53 52

67 79 61

75 74

41 42

5 4

26 30 Prague 29 25 85 28 27

36 34

70 71

59 58

57 56

M&A Top sectors

www.tebodin.com

Taxes

Jan Bobek Business Development Manager CEE Tebodin Former Chairman of the Steering Committee Association for Foreign Investment jan.bobek@tebodin.com

Human resources

Note: Numbers in brackets next to the names of municipalities indicate the total number of supported zones in the given location. Source: CzechInvest

Permitting and construction

Legend: 1 Český Krumlov, 2 Prachatice, 3 Písek, 4 Blatná, 5 Domažlice, 6 Stod, 7 Plzeň (2), 8 Ostrov, 9 Podbořany, 10 Žatec (2) 11 Klášterec nad Ohří, 12 Chomutov (2), 13 Most-Joseph, 14 Lovosice (2), 15 Přestanov, 16 Ústí nad Labem, 17 Rumburk, 18 Liberec, 19 Slaný, 20 Tuchlovice, 21 Kladno, 22 Unhošť, 23 Zdice, 24 Žebrák, 25 Zlatníky-Hodkovice, 26 Poříčany, 27 Zruč nad Sázavou, 28 Kutná Hora (2), 29 Kolín, 30 Velim, 31 Nymburk, 32 Mladá Boleslav, 33 Jičín (2), 34 Hořice, 35 Vrchlabí, 36 Trutnov, 37 Solnice -Kvasiny, 38 Chrudim, 39 Svitavy, 40 Moravská Třebová, 41 Ždírec nad Doubravou (2), 42 Havlíčkův Brod, 43 Pelhřimov, 44 Kamenice nad Lipou, 45 Třebíč, 46 Velké Meziříčí, 47 Žďár nad Sázavou, 48 Bystřice nad Pernštejnem, 49 Blansko, 50 Brno (2), 51 Pohořelice, 52 Mikulov, 53 Velké Pavlovice, 54 Vyškov, 55 Brankovice, 56 Hodonín (2), 57 Staré Město, 58 Zlín, 59 Vsetín, 60 Holešov, 61 Valašské Meziříčí, 62 Hranice, 63 Velká Bystřice, 64 Olomouc (2), 65 Uničov, 66 Šumperk, 67 Mošnov, 68 Paskov, 69 Ostrava (2), 70 Frýdek - Místek (2), 71 Nošovice, 72 Třanovice, 73 Třinec, 74 Český Těšín, 75 Karviná, 76 Krnov, 77 Světlá n. Sázavou, 78 Znojmo, 79 Kopřivnice, 80 Louny, 81 Kadaň, 82 Jihlava, 83 Bílina, 84 Pardubice, 85 Kuřim, 86 Prostějov (2), 87 Hrádek nad Nisou, 88 Litovel, 89 Tábor, 90 Krupka

Properties

Investors occasionally entrust the selection of an industrial zone to a team of professionals focused on different aspects (production, finance, etc.). In such a case, it is good to consider the involvement of a professional consultant that can help to evaluate the strengths and weaknesses of the given location. It is in the investor’s interest to engage a consulting team that does not have a preference in the evaluation of industrial zones owned by the state and those owned by private entities.

17 16

83 15

R&D

Important to know If an investor selects an industrial zone, it is important to have knowledge of certain parameters of the given property as well as its surroundings and related infrastructure. The use of sites within an industrial zone is governed by the urban development plan (so called územní plán), which defines the types of projects that may be implemented in the location as well as the basic parameters of structures, such as their height, and the percentage of the land area on which buildings can be constructed. These conditions can differ in various locations. The investor should thus make an effort to correctly understand the local conditions and acquire a land plot with sufficient size to meet the needs of the project. It is sometimes necessary to install utility lines from the connection point near the industrial zone to the investor’s site, in which case negotiation and conclusion of a utilities contract should be carried out as soon as possible. In this respect, communication

Map of industrial zones supported since 1998

Finance

Certification Today a number of projects in the Czech Republic have “green building” certification, which generally refers to the internationally applied LEED and BREEAM systems. Such certification of industrial zones is somewhat more difficult than in the case of commercial properties, though local conditions and legislation can be employed to bolster the “green” rating of a given project. A good example of this is the Johnson Controls factory in Česká Lípa, which was awarded a LEED Silver certificate. Investor usually has to implement the maximum possible rainwater retention on its land, which is fully in accordance with both certification systems. Another example is the incorporation of public mass transit for employee transport within an investor’s project. There are a number of protected landscape areas, nature preserves and bio-corridors in the vicinity of Czech cities, with respect to which project preparation can include a range of elements that help the project to fit in with the surrounding environment and while also leading to a more favourable certification assessment.

between the investor and the supplier (usually of gas or electricity) regarding offtake phasing is important. At the start of negotiations, an investor may state a general number even though it is not clear that it refers to the total consumption that will be required after several phases of the project and after several years. This can lead to a needless misunderstanding or financial outlay that could be deferred to a later period. For example, in the case of electricity, the investor plays a financial role in connecting its site to the grid. If an investor is planning to dispose of process waste water in the public sewer system, it is necessary to have a good understanding with the operator of the water-management infrastructure. In such a case, the investor must build its own waste-water treatment plant so that the parameters of discarded waste water correspond to the technological capabilities of the municipal water-treatment plant and the quality requirements for water in the watercourse into which the waste water will be expelled. In comparison with Western Europe, the parameters of project assessment with respect to environmental legislation are sometimes less strict and more logical, though attention should be paid to important details when selecting a site for an investment. This applies in the case of, for example, noise pollution (whether from production equipment or vehicle traffic). Unlike in the western part of the EU, the place for measuring noise levels during the day and at night is not the boundary of the site, but rather the nearest residential building. Nevertheless, a new project in a give location should not exceed the permitted limits within the overall noise pollution created by all projects and transport infrastructure in the location. A similar rule applies for air pollution. A land plot should not be located in an undermined area or an area that can be flooded or contaminated or which constitutes an archaeological site.

First steps

areas. Therefore, it is frequently possibly to link a project to the public mass transit system, especially bus routes. Provision of electricity, gas, water, etc. is characterised by a high degree of reliability, so it is not a problem to place in the Czech Republic a manufacturing or other project requiring large volumes of these key utilities.

The Czech Republic

Quality of industrial properties in the CR

Land development in hands of a real estate professional The acquisition of land is not perceived by investors as one

of many other transactions within a particular country. Instead,

investors seek assurance that the land they intend to purchase has the necessary permits for implementation of their project. This assurance can only be granted as long as developers properly address certain key factors, namely land consolidation, land analysis, land preparation and legal aspects.

n general, location can be seen as the key factor with respect to the acquisition of land, followed by potential construction of the given logistics or production facility. Nevertheless, based on the experience of one industrial developer, Panattoni Europe, the crucial point in the decision making process is in most cases the timing of the project. Investors do not ask where the land is located, but they rather prefer to know when construction on the land can begin. Because of that, developers and land-acquisition specialists need to take a specific approach, which requires predictability and long-term experience in this field. The best way to explain the rationale mentioned above is to use the example of a manufacturing company which is searching for the most suitable land for construction of its new facility. The investor has provided a commitment to its client that

60 | INVESTORS‘ GUIDEBOOK

the production of goods or component will begin according to the client’s schedule. However, it is essential to point out that in numerous situations the schedule is very tight and the investor must find a trustworthy and experienced partner that will pre-select the best prepared land plot enabling rapid construction so that the investor can the products to the client on time. From time to time the situation can be complicated not only by a tight schedule but also by the clients of the subcontractors, which could require higher production capacity and a larger volume of delivered goods with every new product that is introduced on the market. Therefore, a manufacturing company is in some cases willing to wait nine to twelve months for completion of its facility (though this period can be shorter). Consequently, the producer is faced with a short time period in which various complex processes have to be adopted if the existing facility is to remain in use.

The Czech Republic

Acquisition of land

First steps M&A Top sectors

www.panattoni.cz

Taxes

Jiří Duchoň Acquisition Manager Panattoni Czech Republic Development jduchon@panattoni.com

Of course, a project is not finished without additional paperwork. Therefore, there has to be a “watchdog” which will supervise the contracts and necessary implementation of the terms and conditions that have been agreed throughout the acquisition and permitting process. Agreements with the local and state authorities, the Road and Motorway Directorate and/or neighbouring property owners must be complied with and checked regularly in order to make sure that the conditions are fulfilled within the stipulated timeframe, as most of contracts of this type have limited validity. If the developer fails to comply with the agreed conditions within the time period stipulated in the contract, then no one can guarantee that the other contracting party will comply with the terms once negotiations have been opened for a second time. This can have detrimental effect on the project and result in financial burdens for the developer. The last factor that should be mentioned in relation to land acquisition and site preparation is the importance of openness and establishment of a professional relationship with the communities and the representatives of the cities and suburbs where land plots are located. The investor shall not be viewed by them as an exogenous element, but rather as a partner which can bring benefits to the community.

Human resources

It is a minor miracle if the land for a particular construction project is owned by an entity owner (municipality, legal entity natural person). It can be said that in most cases the developer is faced with consolidation of numerous land plots prior a given site can be offered to an investor. There is also a risk which rises with every additional owner that is party to negotiations about the possible acquisition. This causes a delay with respect to reservation of necessary lands, which in most

Once all the necessary land plots are consolidated, the next step is to analyse the condition of the land and its suitability for construction of the new facility. This is a very complicated activity which should always be outsourced to competent specialists. The land analysis is carried out on three levels. Firstly, the land has to be examined from the technical perspective (suitability for construction, distance from utilities, current use of the land, urban development plan). Secondly, and environmental impact assessment has to be carried out. The last step is to determine whether there are any legal constraints. In the course of land consolidation, the acquisition expert will also undertake to review the zoning plan. It is logical to at first determine the type of activity for which the

The last factor that has to be addressed by the developer is the issue of obtaining consent in relation to the environmental impact assessment and the planning permit for the investor’s project. It is essential to point out that these are two separate procedures which, however, together create a valuable product, thanks to which there is a chance to complete the project and start production on time. It is essential to pay maximum attention to environmental issues from the outset of project preparation. This involves not only noise or dust studies, but also a biodiversity assessment that must be carried in the spring or summer. The granting of a planning permit leads to the conclusion of a purchase contract. The land

4. Law related aspects

Permitting and construction

1. Land consolidation

2. Land analysis

3. Land preparation

consolidation process is completed with the filing of the purchase with the Property Register in favour of the investors.

Properties

All of the above-mentioned factors are part of real estate development, which investors either perform on their own or entrust to an experienced professional. Due to time constraints, investors are willing to cooperate with a development company, which on its own behalf and at its own risk is continuously searching for suitable sites and undertaking other complex related activities, such as land consolidation and/or analysis.

land is most suitable and then to consolidate the land. Before any type of acquisition, it is crucial to analyse in detail the appropriate zoning plan together with all supporting documents. Such analysis will help to avoid unpleasant surprises in, for example, the form of additional requirements from the municipality that must be incorporated into the project documentation before the project can be implemented. Certainly, these types of surprises could result in added costs, which could have an impact on the implementation of the project. It is advisable to always discuss the land-use plan with an official of the municipality where the land is located.

R&D

1. Land consolidation (LOI, FPA) 2. Land analysis (DD) 3. Land preparation (EIA, PP) 4. Law aspects (conditional construction contracts, easements, exchanges)

situations is secured by signing a contract on a future purchase contract. The diversification of the ownership, predominantly within industrial zones, was caused by various reforms that came into force in the past century. The creation of so-called development concepts, which are focused on land acquisition together with predictability applied by the land acquisition expert, can in some circumstances speed up the permitting process and the availability of the land for the investor. This is due to the fact that the investor will then only be offered pre-selected and pre-prepared land plots that fulfil almost all of its requirements, so that the investor does not need to spend time searching for the most suitable site for its project. However, the importance of the permitting process should not be underestimated. It is appropriate to look at every project individually and, in cooperation with specialists, verify that the prearranged permits correspond to the investor’s project.

Finance

These adjustments and the IR implementation can take between 18 and 24 months, which is twice the time provided by the client. It recent years it has been seen that the acquisition of land is not perceived by investors as one of many other ´transactions´ within a particular country. Instead, the investors seek assurance that the land has the necessary permits for implementation of their project. This assurance can only be granted as long as developers properly address the following key factors:

The beauty of brownfields

Ostrava, Vítkovice

The Czech Republic is an advanced industrial country in the heart of Europe with production accounting for more than 40% of the country’s GDP. As in other industrialised countries, the development of Czech industry underwent turbulent development at the beginning of 19th century.

A Examples of successfully regenerated brownfield projects: Dox Centre for Contemporary Art (Prague) Waltrovka (Prague) - office centre and residential project located in one of the biggest former industrial sites in the city Vysocany (Prague) - a former industrial site turned into a multipurpose facility, shopping and social centre, including residential premises and service centres Vítkovice (Ostrava) - gradual transformation of former steelworks into a cultural, social and educational centre Breda (Opava) - shopping and social centre partially utilising refurbished buildings Santovka (Olomouc) - shopping and social centre on a former industrial site located in the city centre

62 | INVESTORS‘ GUIDEBOOK

number of industries emerged, providing new impetus for the development of cities and transportation infrastructure as well as utilisation of watercourses with the associated establishment of new, large production plants, which were complemented by the development of entire residential quarters. Industrial development in general reflected not only the development of industrial production, but also the political and international situation at that time. Situated at the intersection of European trade routes, the Czech Republic was exposed to two world wars and endured a forty-year period of totalitarianism under the former communist regime. Each of these periods was reflected to a significant extent in the development of industrial production. What is now the Czech Republic was once the manufacturing base of the Austro-Hungarian Empire prior to the First World War. Following the establishment of the independent Czechoslovak state, manufacturers such as Baťa, Škoda and ČKD grew into major industrial players. The country initiated the development of its military industrial production capabilities shortly before the World War II, which were subsequently subordinated to the German Wehrmacht during the occupation of Bohemia and Moravia. The country was ruled by a totalitarian communist regime from 1948 to November 1989. The rise of the communist regime brought significant

changes consisting in the abolition of private ownership of production assets, the imposition of central planning and the end of the free market. Natural industrial development was halted in favour of centrally planned production quotas, with priority given to heavy engineering and the defence industry, while the competitive environment was completely eliminated. All of these factors led to the existence of brownfields in the Czech Republic. A number of nationalised manufacturing facilities did not correspond to the concepts of the central planners and thus lost their importance as production was stopped and the buildings slowly deteriorated. The Velvet Revolution in 1989 brought forth a number of important changes. The democratic system was restored together with private ownership of property, the borders were opened and the market economy was reborn. With its democratic and economic revival, the Czech Republic eventually became a member of major international organisations including NATO and the European Union. This fact and the country’s overall stability spurred the establishment of foreign-investment programmes, which are frequently supported by government incentives. Investors entered the country either through acquisition of Czech companies or by building their own production facilities. At the very beginning of the influx of foreign investors, most of projects were situated on greenfield sites.

Increase of competitiveness

immediately available (subject to approval of the intended use)

often in areas of key importance (city centres, industrial zones, etc.)

immediately available (subject to approval of the intended use)

generally easy to reach (roads and other transport infrastructure already in place)

few limitations due to the existing area, services or topography

infrastructure may already be in place (water mains, utilities, etc.) easier to get approval for the intended use (subject to changes in the local zoning plan).

Greenfields -

Brownfields -

utilisation of scarce and limited resources (e.g. land)

possible difficulty and high cost of obtaining the necessary use permit

not in central urban areas or, in some cases, industrial zones

potential persistence of past risks or obligations

cost of site acquisition more likely to be higher compared to a similar-sized brownfield

possible limitations due to the historical layout of the site, topography, etc.

possible difficulty and high cost of obtaining the necessary use permit

usually located within urbanised areas)

Taxes

Increase of attractiveness of the municipality and thus increase of tourism (brownfields are

easy to find (numerous sites in various parts of the country)

Human resources

Decrease of unemployment through job creation

easy to acquire

Permitting and construction

Inflow of foreign direct investments

Brownfields +

Properties

Increase of economic activity in the regenerated area – business and trade

Greenfields +

R&D

Benefits of brownfields regeneration:

Basic comparison of brownfields and greenfields from construction perspective

Finance

bases. However, brownfields are often located in strategic locations and thus offer opportunities for investments in new industries, IT, distribution, sales and leisure activities, as well as public-sector investment. Any such investment can potentially create and maintain a significant number of jobs. Regeneration of brownfields with environmental contamination will also significantly improve the quality of the environment while being of real benefit for all activities in surrounding areas. Utilisation of brownfields should limit the number of greenfield projects, thus leading to less agricultural land being used for construction and fewer high-capacity water and utility connections being built, while contributing to lower requirements for transportation of people, materials and finished products. There are many successfully regenerated brownfield projects with various types of uses throughout the Czech Republic. Other brownfields are still waiting for their new lives to begin. With active support from local governments, regional institutions, investment incentives and investors, brownfield regeneration undoubtedly represents a bright future for the Czech Republic.

First steps

In the intervening years, a number of industrial zones have been established, some of which are still not completely occupied. Industrial zones allowed for the rapid development of the post-revolution automotive industry in particular, as well as all auxiliary industries complemented by rapid development of extensive logistics facilities and shopping centres located conveniently next to the most important transportation routes. In comparison with greenfield investments, regeneration of brownfields is a far more complicated process. The country’s brownfields arose through the long-term disuse of facilities previously used in energy- and labour-intensive industries that are now in decline. As a result of that, brownfields can be found in Czech regions with high unemployment rates and significant social and economic issues. A separate category of brownfields comprises former military facilities that were refurbished and converted for civilian uses following the end of the Cold War. These include, for example, barracks in Nové Město nad Metují and Trutnov, and the Milovice and Ralsko military

The Czech Republic

Greenfield vs. brownfield investments

Unlike greenfield projects, limited claims on agricultural land in line with the principles

of sustainable development principles Mobilisation of private capital Increase in property values within the brownfield site and the surrounding areas

www.atsunami.cz

Top sectors

Positive influence on crime prevention and thus reduction of crime rates

Aleš Krtička Architect ATELIER TSUNAMI akrticka@atsunami.cz

M&A

Improvement of the environment through decontamination of the given site

Brownfields and publicprivate sector cooperation A city’s or region’s focus on refurbishment and development of brownfield sites presents interesting opportunities for investors. Brownfields can be defined as abandoned sites with dilapidating buildings, disused transportation infrastructure and defunct industrial zones. Brownfields have strong potential for future development. In addition to achieving financial targets, regeneration of these sites can typically bring positive social and economic effects to the areas in which they are located.

inancing resources The financing of brownfield redevelopment can be a complicated task, as it usually combines several sources. The obvious option is financing via the private sector through equity investment coupled with institutional financing. Often, however, this needs to be supplemented with aid from various public grant programmes. Some brownfield-regeneration projects are financed exclusively from EU structural funds, while others receive funding from the state budget or from a combination of all those mentioned above. Financial resources can also be obtained from regional and municipal budgets, from central public programmes and through public-private partnerships. Funding acquired from domestic resources originates within the Czech state budget and allocated as subsidies in various programmes (e.g. the Programme to Support of Business Properties and Infrastructure and Programme to Sup-

64 | INVESTORS‘ GUIDEBOOK

port the Modification of Previous Military Sites for Public Use). Resources from structural funds use EU grant programmes, which are administrated in cooperation with the European Commission. The allocated funding is disbursed within operational programmes covering seven-year periods. Private resources mostly comprise funding raised within public-private partnerships (PPPs). This is a form of cooperation between public authorities and the private sector with the aim of securing financing, construction, refurbishment, administration and maintenance of public infrastructure or provision of public services. The lead role is frequently played by the involved business entity, which participates in different phases of the project (proposal, development, implementation, financing). The public partner(s) concentrate on the specific aims the must be achieved in the public interest and with respect to the quality of the supplied services and price policy, and they accept responsibility for fulfilment of these goals. Risks are divided among partners; specific

AFI Members

One of the Czech Republic’s regions with the largest concentration of brownfields is Moravia-Silesia. The Ostrava and Karviná areas contain a number of brownfields whose regeneration is a priority for the municipal and regional governments. These brownfields have an important role in plans for renewal and development, and accordingly have assured financial and political support. As the owner of a large portfolio of land and commercial real estate in Moravia-Silesia, the Asental Group is a partner in regional public-private partnerships. The company often finds itself cooperating on brownfield revitalisation with regional governments and municipalities. This cooperation takes different forms including active participation in the formulation of strategic plans for the use of land affected by previous industrial activity, regional marketing, and/ or public-private partnerships in the development of industrial zones, as well as residential and recreational areas. As an example, Asental presently offers three large development parks, specifically Dukla, Barbora and Frantisek II, each of which is part of a development concept called the Moravian-Silesian Development Zone. These three brownfields are situated in the centre of a geographical triangle created by the cities of Ostrava, Karviná and Havířov, and more than 1.2 million people live within an hour of the sites. These three projects have the potential to create thousands of jobs. As they are located within five minutes of each other, the manufacturers located there are well positioned to support each other’s business with flexible deliveries and combined transport. The Moravian-Silesian Development Zone’s successful development is a key component of the region’s continued growth and prosperity. Cooperation with the public sector helps to assure for future investors and manufacturing companies important support in the form of subsidies and tax incentives for job creation from the municipal, regional and state governments. Pantone

Pantone

Taxes

AFI

M&A Top sectors

www.asental.eu

Human resources

Marcela Tomášková Special Projects Director Asental Land info@asental.eu

Permitting and construction

AFI Partners

Properties

AFI Main partner

R&D

Functional partnership Public-private partnerships can be of vital importance in the regeneration, as the combined efforts of the partners make it possible to achieve objectives that would not be possible if the partners acted separately. There are numerous ways in which such cooperation can work. Partnership is useful and effective especially in cases where there are unsuitable conditions for project implementation by private investors on their own. The main advantage of any PPP is that it can allow earlier and faster infrastructure development with less financial risk for both sides. Infrastructure costs need not be passed on to the end user. PPP projects are successful when there is a clearly defined objective and the partnership is properly structured, transparent, and supported by the public.

CMYK

Example: Moravian-Silesian Region

Finance

Brownfield databases The Czech Republic offers a large number of brownfields. These are owned by municipalities, the government or private investors. Public databases contain listings of brownfields within specific regions and in the country as a whole, and provide information on their location, character, size, previous use and so on. The most significant of these databases is the National Brownfields Database, which is maintained by CzechInvest. Other databases are usually limited to specific regions and are maintained by regional development agencies. Aside from the offer of comprehensive information on various locations, the National Brownfields Database also provides information on possibilities of financing brownfield regeneration, especially from EU structural funds, as well as information on how much aid is available from EU and state resources and the conditions for obtaining grants.

Brownfield revitalisation is often more complicated than construction on a greenfield site, as it adds an additional set of risks. The investor may be faced with the unforeseen complications connected with demolition of structures and elimination of ecological burdens left over from the give site’s previous use, which could delay the site’s refurbishment. On the other hand, there are also advantages to brownfields, as they tend to be well connected to roads and utilities, have existing infrastructure capacity that can be exploited, and are better linked to public transportation networks. Furthermore, brownfield regeneration does not require the removal of property from the agricultural land fund. Typically, for an investor who finds value in some form of public-private partnership, return on investment can be achieved within ten to fifteen years. It is clearly necessary to prepare a qualified study which details expenses in relation to expected revenues over this period from the future sale or lease of the property. The Czech real estate market is still relatively young and volatile, which makes it difficult to estimate the final result. The key attributes of any business plan in such a market include simplicity, speed and ease of the investment activity, which is not something usually offered by brownfields. However, brownfield projects can be successful in the real estate markets, as they offer originality and innovation, which are often advantages in terms of marketing. The growing success of commercial investment in previous brownfield sites and the resulting growth in the number of job opportunities contribute materially to the improvement of local living standards and to positive demographic development. The inhabitants of areas where revitalised brownfield are located, including the young graduates of local universities, are thereby encouraged to stay and build their professional careers there.

CMYK CMYK

First steps

risk assignment is defined on a case-by-case basis according to the partners’ ability to evaluate, control and cope with the risks.

Realization of brownfields

The Czech Republic

AFI AFIMembers Members mbers

AFI Supporting partners AFI Suppo

Sustainable construction in the Czech Republic Sustainable construction is currently a pervasive theme in the work of architects, designers, developers and building companies. In practice, it is possible to encounter various approaches to this issue, from simple monitoring of the relevant legislation to proactive formulation of sustainable solutions. One area of permanently sustainable construction is the regeneration and use of brownfields in new building projects.

he National Brownfields Database administered by CzechInvest offers locations prepared to meet the needs of both domestic and foreign investors. On the one hand, the database aids the revitalisation of abandoned and disused sites and, on the other hand, makes it easier for investors to select the most appropriate places for doing business in the Czech Republic. The database is available to the public at www.brownfieldy.cz and currently contains records of more than 500 brownfield sites that are for sale or for lease, and that number will continue to grow. Within the Operational Programme Enterprise and Innovation for Competitiveness 2014-2020, the Ministry of Industry and Trade is introducing a total of 24 aid programmes. Aid recipients will be able to use funding from these programmes

66 | INVESTORS‘ GUIDEBOOK

for co-financing business projects in the manufacturing industry and related services. The objective of brownfield regeneration is to increase the attractiveness and value of individual sites to the point where they can compete directly with greenfield construction projects. An abundant offer of revitalised sites and assured financing of the cost gap from the public sector will help to reduce the use of land for greenfield investments, which are in contravention of the principles of sustainable development. The primary basis of the brownfields database is the Research Study for Identification of Brownfields, which was conducted by CzechInvest from 2005 to 2007 in all regions of the Czech Republic other than Prague in cooperation with individual regional authorities. The purpose of the study was to find and describe disused and ineffectively used sites and to use the acquired information for pre-

M&A Top sectors

www.linkcity.cz

Taxes

www.linkcity.cz

Human resources

Clément Duclos Deputy CEO Linkcity clement.duclos@linkcity.cz

Permitting and construction

David Labardin Chairman of the Board Linkcity david.labardin@linkcity.cz

Properties

A revolution in development, or a view of the future At present, half the world’s population (i.e. 3.6 billion people) lives in urban agglomerations. It is expected that by 2050 the global population will grow to more than nine billion, of which 6.3 billion will live in cities. By 2025, the number of cities with more than ten million residents will grow from the current twenty to at least 37. Today we are already financing the challenge of building smart cities in a sustainable manner that will ensure a high quality of life both for us and for future generations while also protecting the environment in which we live. In smart cities, digital technologies are being used to improve public services and to make the use of resources more efficient while reducing the impact of human activities on the environment. Smart cities are places where traditional networks and services are becoming much more efficient thanks to digital and telecommunications technologies and bringing forth more benefits for their residents and businesses. However, the concept of smart cities involves much more than the intro-

duction of modern information and communication technologies to improve the use of resources and reduce emissions. It also involves, for example, more efficient public-transport and utilities networks, as well as waste-treatment facilities and better means of lighting and heating buildings. The concept calls for far more active and sensitive administration of cities, safer public spaces and satisfaction of the needs of an aging population. There are no clear rules that strictly define what a smart or sustainable city is. However, we can find throughout the world numerous interesting approaches to sustainable building and rebuilding of cities. In the ideal case, the concept of smart cities could be defined as resting on seven basic pillars: mobility, connectivity, safety, smart networks, the environment, city administration and the social aspect. The Bouygues group has been actively working on bringing the concept of smart cities to life for more than ten years by seeking out new ways of thinking as well as new construction methods and partnerships in fields of human endeavour outside the construction industry. Unique and interesting examples of smart-city projects undertaken by the Bouygues group include the Issy Les Moulineaux suburb of Paris, Brickell City Centre in Miami, Canning Town Centre in London, the Eikenott residential quarter in city, Switzerland, and participation in the ongoing Wise City project in Hong Kong. Closer to us, in the Czech Republic, Linkcity is realizing the mentioned project in Radotín and is preparing a similar project in a brownfield in Prague 6 – Bubeneč.

R&D

How will a new centre look? Prague’s Radotín district is taking inspiration from abroad in its effort to revitalise a site covering nearly three hectares in the vicinity of its train station. The regeneration plan calls for the three-

Partnership and openness: The keys to success of the Better Living concept The success of the Better Living concept depends on partnership with the commissioning party, which in this case is the Radotín district of Prague. With Design & Build projects, which are implemented gradually with the assistance of both involved parties, close cooperation is the decisive factor. Thanks to this, the development company could correctly incorporate the investor’s intentions into the project and thus find the best way to use the given site in the tender. Together with the city, the developer had to work out the initial concept and reconcile the requirements for public infrastructure with the possibilities of commercial development. During its presentation, the project was also consulted with the residents of Radotín, who expressed, for example, interest in transport and parking solutions, to which the developer gave due consideration in conjunction with City Hall and incorporated these solutions into the pro-

ject in order to support its social sustainability. The idea is to formulate an open project in which the creation of public spaces (squares, green spaces) will lead to the proliferation of meeting spots, which are highly important in an urban setting with a strong sense of community. Private buildings are subordinated to this concept, so they are not fenced in and thus do not become enclosed spaces in and of themselves.

Finance

A new approach to using brownfields One of the new ways of revitalising brownfields is the Better Living concept which, as its name implies, involves creating places with improved quality of life for current and future residents. Modern property developers are approaching development projects in a much broader context than previously, at the level of city districts, in connection with other parts of the given city and their functional use for everyday life. Urban brownfields have great potential for the development of this concept. An example of this is London’s Canning Town Centre, the new heart of the city with housing, a community centre, hospital and hotel, complemented with cycling trails and transport infrastructure.

phase construction of a complex project including a broad spectrum of commercial and residential units (row houses and flats) including public infrastructure, green spaces and a new district centre comprising a square and adjoining avenues. On the basis of a contract on cooperation, the developer first prepared a comprehensive project study, drew up the relevant documents and applied for a land-use ruling and building permit. The first phase of construction is to be completed in the first half of year 2017, whereas the second phase is currently under study.

First steps

paring other projects and documentation pertaining to solutions aimed at revitalising such sites. The National Brownfields Database is instrumental in finding the optimal uses for these sites. The database supports investments in the areas of business, housing, recreation and other fields, thus contributing to the health of the environment, as brownfield regeneration gives new life to neglected sites. Cities and towns containing brownfields are seeking sensible uses for them. However, they are also encountering certain restrictions in the form of limited resources for financing regeneration projects. In the past, a number of municipalities sold a part of their holdings with the intention of acquiring the necessary funding. Recently, however, they have changed their approach and city officials are now seeking new ways to turn brownfields into interesting and attractive places for living, often drawing inspiration from abroad.

The Czech Republic

Brownfields and sustainable construction

The time is now: The property market in the Czech Republic has never been better for tenants Signing a lease contract for office, retail or warehouse space represents a significant commitment for any business. The same goes for doing business in the Czech Republic, where the standard international real estate market terms and conditions generally apply when a company leases a business property. Let us review a few of the most important contractual points such as rental level, lease term, incentives, indexation, service charges and security deposit.

ental levels In real estate, one important axiom applies: “location, location, location”. Location, translated into the economic basics of supply and demand, strongly influences rental levels of real estate and the amount the landlord can command and the tenant will pay. Czech landlords do not differ in this regard. Prime locations yield prime rents. The Prague 1 districts of Old Town (Staré město) and New Town (Nové město) consistently generate the highest rents for retail and office units. Currently, prime retail

68 | INVESTORS‘ GUIDEBOOK

units approach the level of EUR 200/m2/month and prime office space goes for over EUR 19/m2/ month. For warehouses, the highest rents have a direct relationship to transport connections. Prague, Plzeň and Brno are the strongest industrial/warehouse hubs due to their excellent highway access and deep labour pools, which translate into the highest rents of around EUR 4/m2/month. In general, landlords in the Czech Republic denominate and charge rents in euros. However, this can vary depending on certain factors. Landlords might also accept payment in Czech korunas at the valid exchange rate.

The Czech Republic

Leasing of commercial property

First steps

Companies can utilise this situation to upgrade their office space while saving on costs at the same time. Consequently, when added up, the incentives on offer today from landlords to tenants can provide significant savings, especially for office tenants.

Taxes M&A Top sectors

www.whitestar-realestate.com

Human resources

Jana Hogg Vojtová Leasing Director White Star Real Estate hogg.jana@whitestar-realestate.cz

Permitting and construction

Service charges Leasing commercial property entails consuming a variety of ancillary services. These services include utilities (electricity, water, heating and

Security deposit Landlords of commercial real estate will always demand some form security deposit, even from the best companies. Many times, the banks financing the property will determine the necessary levels of security deposits. The market standard requires a tenant to provide security at the level of three months’ rent and service charges plus the applicable value added tax. This level of three months can vary depending on the solvency of the specific tenant. Tenants will have the choice of providing this security in the form of a cash deposit or a bank guarantee.

Properties

Indexation Indexation refers to annual adjustments of the rental level generally on the basis of a cost of living index. Landlords seek these adjustments to cope with overall inflation in the economy. Tenants seek to limit this figure so as to control and better forecast costs. The chosen index depends on the specific business. In the Czech Republic, landlords and tenants seem to prefer the Harmonised Index of Consumer Prices (HICP) for the European Union. Landlords might also demand a minimum indexation figure, for example 1.5%. This means that even if statistical agencies report a lower inflation figure, the rent automatically increases by this minimum amount. Tenants might also demand a maximum indexation figure as protection against unforeseen inflationary pressures. Fixed indexation can represent a compromise for both parties.

cooling), security, cleaning of common areas, building reception and general maintenance of the property. The scope and cost of the offered services will vary significantly depending on the class of the property (A, B, C, etc.) and the type of property (office, retail, industrial, residential). For industrial properties, service charges are roughly EUR 1/m2/month. For both office and retail properties, service charges range from EUR 1 to EUR 5/m2/month depending on the quality of the building and the services offered. For retail properties, a marketing fee will also be included on top of the standard service charges. In the best case, the landlord will not add any margin to the individual services and will also provide an annual reconciliation of the service charges on a transparent “open book” basis.

R&D

Incentives Market incentives take a variety of forms. Most commonly, landlords offer “rent free” and “fitout contributions”. Over the past few years, the Czech office market reached extremely high levels of competition among landlords due to a wave of speculative office development. This competitive, tenants’ market has led some landlords to offer to pay tenants’ moving costs as an inducement to select certain projects. Simply stated, “rent free” means the tenant does not pay rent for a certain period of time. For years, the standard level of rent free stood at one month per year of the contract. Thus, for a five year lease the tenant could expect to receive five months rent free. Today, these levels have increased and landlords will sometimes offer two months rent free per year of the contract or more. Some ten-

ants would prefer to simply pay a lower average rent. However, commercial real estate landlords prefer rent free because headline cash flows determine property values. “Fit-Out contribution” refers to the landlord’s investment in improvements for the tenant. Generally, landlords limit contributions to apply to true technical improvements or immovable upgrades, such as floor coverings, partitioning and related infrastructure modifications (HVAC, lighting, etc.). Landlords generally do not allow tenants to apply fit-out contributions towards movable improvements, such as furniture and data cabling. However, due to increasing competition among landlords, certain flexibility and ingenuity have arisen in this regard. Traditionally, fit-out contributions have ranged from EUR 50 to 100 per square meter of leased area based upon a five year lease commitment. Today, some landlords – especially developers – offer “turnkey” fit-outs up to a limit of perhaps EUR 300/m2. This makes sense for a developer, which can simply wrap these costs into their development budget and use the construction company to complete the works. These levels offered by developers have forced landlords of existing projects to increase their contributions as well. This competition among landlords means good deals for tenants. Incentives offered for retail and industrial units differ significantly but generally represent lower savings for tenants. For retail units in the best locations, landlords do not offer any incentives. In less attractive locations, retail tenants might negotiate a rent-free incentive. The same applies for industrial real estate. Industrial tenants can receive fit-out contributions as well, but the landlord will expect to rentalise the contribution (i.e. amortize the cost of the investment over the lease term, possibly even with interest).

Finance

Lease term This depends on the type of business and the desired location. In general, an office tenant will receive the best terms on leases of at least five years. The market requires similar minimums in retail and industrial spaces. If a tenant can commit for more than five years, this can strategically improve their negotiating position. Based on the specific requirements and the level of investment, landlords will commonly require longer lease terms of ten or more years for industrial properties, especially for so-called “build-to-suit” spaces. For retail units in the best locations, tenants may seek longer lease terms so as to secure their location. However, if a tenant cannot or does not want to commit for at least five years, they must factor added cost into their calculations. Basically, landlords demands higher rents and provide fewer incentives in exchange for flexibility.

Keep your business assets safe with real estate risk management The real estate business in the Czech Republic is booming. Following significant progress in 2015, the Czech commercial real estate landscape continued its recovery in 2016. Politically stable, with transparent legislation and a growing economy, the Czech Republic has never been more attractive to international investors, developers and real estate owners across all major global regions and industries. The continuous flow of capital into the country’s real estate market, including from major foreign players, has a strong positive influence on the real estate market’s long-term development and stability. Top five future risks in 2018 Risk Property damage

36% 33%

Economic slowdown/slow recovery Damage to reputation/brand

31%

Increasing competition

31%

Economic slowdown/slow recovery

29% 0%

10%

20% % of respondents

30%

Property damage is projected to increase in importance over the next three years. Source: 2015 Global Risk Management Survey

70 | INVESTORS‘ GUIDEBOOK

40%

he Czech Republic is a good place to safely invest in real estate However, change is a constant in both life and business. Today’s world is changing faster than ever before, constantly creating volatility and uncertainty. The recent recession taught the market an important lesson. There was major long-term distress across the real estate industry with serious implications for owners, developers, managers and investors alike. Environmental and construction exposures, catastrophic modelling, stricter lender requirements and complex requirements involving distressed banks were just some of the issues facing the real estate industry in the recent past. And they can occur again without much warning. Whether you are a real estate investor or a landlord, it is essential that your property-related risks are adequately covered.

To avoid these negative implications in the future, property owners, real estate investors and asset managers can take advantage of using experienced third parties for advice and the ability to drive the market in order to find you a cost-effective deal for your insurance and risk management needs. Insurance broking and consultancy experts develop real estate portfolio insurance for clients with all types of real estate assets across the globe, such as: Multifamily Office Retail Industrial Hospitality Developments/property development The Czech property insurance market offers competitive conditions based on sufficient capacity and fair pricing.

Top ten risks Risk

% of respondents reporting a top 10 risk

Damage to reputation/brand

60%

53%

56%

Property damage

53%

42%

Increasing competition

51%

39%

Asset value volatility

38%

Third-party liability

38%

Capital availability/credit risk

36%

Personal liability of directors and officers

33%

Interest rate fluctuation

33% 0%

70%

12%

68%

24%

79%

41%

13%

72%

20%

50%

100% 0%

Second on the list is economic slowndown/ weak recovery, followed by property damage.

44% 50%

100% 0%

50%

100%

% of respondents

Top sectors

www.aon.cz

M&A

Michal Šrámek Business Director Aon Risk Solutions michal.sramek@aon.cz

retention, limits of liability and other factors. Modelling tools make it possible to estimate possible losses that could be sustained by properties due to catastrophic events such as floods and terrorism. Actuarial analytics provide greater insight into expected losses, using historical trending and development specific to the real estate industry. Whether providing routinely available coverage or specially tailored solutions and coverage enhancements, the risk-management provider always ensure the safety and positive results of your real estate business.

Taxes

pollution risks can result in both direct and indirect losses of significant volume including business interruption losses, relocation- related losses and property devaluation. Well-designed and professionally managed insurance is crucial in cases when help is needed to cover a loss of income in the event that rental units become uninhabitable or a production site is no longer able to produce due to circumstances beyond the investor or landlord’s control. Real-time benchmarking provides the most current information on industry rates, prices, coverage,

Human resources

With customized solutions it is possible to support and help investors and landlords to address environmental exposures. The impact of severe environmental and

53%

Damage to reputation/ brand is ranked as the most challenging risk for the real estate sector.

Permitting and construction

team combines extensive experience in the insurance industry with diverse skills drawn from different areas of the commercial property world. Through strategic investments in people, technology and thought leadership, the specialised broker is committed to delivering best-in-class solutions to real estate businesses. The service model is designed to free up customers’ time so that they can focus on what’s important to their business. What is delivered is a range of both traditional and specialised comprehensive solutions designed for the real estate industry to support customers, including: provision of certificates at the tenant level insurance premium allocations using a certification tool comprehensive broking and risk management services specialist construction insurance solutions for both major development projects and smaller refurbishment projects

56%

Properties

40%

58%

R&D

Regulatory/legislative changes

20%

Finance

Dedication to the real estate industry By managing these risks, insurance inter-mediators offer one of the leading insurance and risk management consultancies in this sector. A dedicated team of specialists is ready to provide customers with advice on all aspects of property and construction insurance. Working in partnership with specialist insurers, loss adjusters, surveyors and solicitors, the management

% with plans in place

Economic slowdown/weak recovery

Source: 2015 Global Risk Management Survey

In the real estate Industry, the most frequent risks that owners, managers and developers face are the following: Damage to reputation/brand Economic slowdown/weak recovery Property damage Increasing competition Regulatory/legislative changes Third-party liability Asset value volatility Capital availability/credit risk Personal liability of directors and officers Interest-rate fluctuations Environmental exposure including risk arising due to historical contamination (brownfields)

% with loss

First steps

However, due to a broad range of risk profiles among insured parties, insurers remain concerned about specific risks in the real estate segment. Efficient and cost-effective real estate insurance solutions start with an accurate assessment of risks and benchmarking against competitors. An experienced insurance partner/broker is always ready to deliver value-added services including: Identification of risks that could impact asset values and revenue, including major gaps or weaknesses in the insured party’s existing insurance programme and unknown or inadequately managed exposures. Development of a comprehensive insurance programme that protects corporate assets, preserves investors’ capital and maintains the anticipated level of earnings. Assurance of the best coverage and terms consistent with the client’s expectations and requirements. Recommendation of actions required to correct deficiencies. Support for the client by means of a comprehensive claims management service.

The Czech Republic

Risk management

Map of the Czech Republic

Motorway network

Liberec

Public international airport

Ústí n.L. Karlovy Vary

Hradec Králové Plzeň

Prague Pardubice

Ostrava Olomouc

Jihlava

Brno

České Budějovice Zlín

Find your property

Czech commercial property market: confidence, stability, potential

Total stock, m2 Total stock 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0

Q1 Q3

2010

2011

2012

2013

2014

2015

2016

Confidence, stability, potential. At first glance, this three-word summary of the Czech commercial real-estate market may seem like an oversimplification. Nevertheless, having a certain perspective is an important aspect in forming an objective approach to evaluating the market. Although some complications are an integral part of the implementation of new projects, it would be a tremendous mistake to overlook the clearly positive development of the Czech real-estate market in the recent years because of them.

Source: 108 AGENCY

Key indicators, m2 New stock

Under construction

600,000

500,000 400,000 300,000 200,000 100,000 0 Q1 Q3

Q1 Q3

2010

2011

2012

2013

2014

2015

Source: 108 AGENCY

74 | INVESTORS‘ GUIDEBOOK

hether we focus on the volume of construction activity, the number of new projects in various stages of completion, the investment activity of domestic and foreign entities or the declining vacancy rate, the values of all these indicators do not leave observers in doubt that the Czech market is unusually strong and highly attractive for investors. It is also necessary to include the local market’s favourable conditions for bank financing, well-developed infrastructure and stable business environment.

Historical perspective: 90s till now Since the early 1990s, investment activity within the country has been primarily focused on the areas of retail and administrative premises. New projects began to arise on greenfield sites and existing buildings were remodelled in order to meet the demands associated with interior-design trends. Further technological development in recent years has brought a new wave of investment in the office property segment focused on innovations, a modern approach to design and efforts to make buildings more environmentally friendly. Projects are being implemented on brownfields, which allow investors to take advantage of the genius loci of such locations while providing the benefits that

Permitting and construction Human resources Taxes M&A Top sectors

www.108agency.cz

Conclusion What conclusions can be drawn from this? The Czech Republic is currently a very interesting location for real-estate investors in the industrial, office and, to some extent, retail segments of the market. Suitable conditions can be found in the Czech Republic for the implementation of major investment projects. In the case of industrial real estate, a very positive feature is the country’s location within the European transport network, as well as its highly skilled workers and advantageous costs compared to developed Western European countries. In retail, we can also count on greater specialisation in connection with market saturation, which is evidenced, for example, by the significant expansion of the Chodov shopping centre in Prague, which upon its completion will provide space for new business entities appearing in the Czech market for the first time.

Properties

Jakub Holec, SIOR Managing Director 108 AGENCY jakub.holec@108agency.cz

cupies the top position within the domestic market in terms of area. With a value of more than EUR 2.5 billion, the P3 transaction will be the largest ever trade in the Czech real-estate market. Investors’ interest in Czech industrial parks has been very strong especially over the past two years, though it is contained primarily by the number of investment opportunities. For example, of the recent transactions, we can mention the entry of Macquaire (M7) to the Czech market through its purchase of the multimodal logistics centre in the Ostrava-Mošnov industrial zone from the developer HB Reavis Group. Strong investment demand is also being generated by private funds, which are largely focused on the sell &leaseback transactions.

R&D

Industrial boom In terms of the dramatic development in the last few years, a very interesting aspect in the investment field is the industrial real-estate market. For an objective comparison, it is important to put the market into context and bear in mind that, from a historical perspective, the Czech warehouse market is still very young, especially compared to that of our western neighbours. While in the Czech Republic the first large-scale warehouses began to appear in the vicinity of the country’s capital in the mid-1990s (in locations such as Rudná and Zličín), in neighbouring Germany similar projects were built in the 1970s. Current development is fully following global trends including environmental certification of modern warehouses, focus on maximum efficiency and also new construction of “big box”projects. To understand the dynamics of the development of the industrial real-estate market in the Czech Republic, the most illustrative indicator is the total area of warehouse space, which totalled 3.4 million square metres at the beginning of 2010, rising to slightly more than 4.5 million square metres by mid-2014 and more than six million square metres at the end of 2016. Moreover, the current development in terms of record low vacancy suggests that a further increase in the total capacity is essential. This is also related to a significant proportion of speculative construction, where more than 40% of all projects are started without previous engagement of tenants. Demand is mainly concentrated in locations near major highways. With the gradual development of the transport infrastructure in the Czech Republic, new investment opportunities are coming to market with the aim of diversifying the offer of properties and creating a viable alternative to heavily developed areas with limited opportunities for further construction (mainly locations on the D1 andD5motorways, specifically Prague, Brno and Plzeň). Currently we are able to observe increased attractiveness particularly of the regions bordering

Germany, mainly Karlovy Vary and Ústí nad Labem, where completely new industrial parks have been built. An example of this is the emerging industrial zone in Cheb, where one of the few “big box” projects, namely the Tchibo logistics centre, is currently under construction. Investors’ interest in the regions mentioned is growing and with the advancing development of the e-commerce industry, we cannot expect a weakening of demand. Those who acquire sufficiently large plots of land with good infrastructure connections in these areas will have ensured a very strong position for themselves in the future. In these locations we can already see investors’ interest in construction of more large-scale logistics centres. The motivation for establishing such centres consists in the very strong connectionsto Germany, in addition to the fact that the Czech Republic provides foreign companies a stable investment environment, good transport links and a skilled workforce with acceptable real wage costs. Ownership structure is interesting aspect to consider in evaluating the Czech industrial real-estate market. From this perspective,the Czech industrial real-estate market can be classified as relatively homogeneous. The successive acquisitions of smaller units have created a group of very powerful companies whose portfolios comprise a decisive share of the Czech market. Still, the on-going consolidations create investment opportunities in a wide range of financial volumes. Therefore, a current important issue is the sale of P3, an international company that ranks among the leaders on the Czech market. Among its activities in the Czech Republic, this developer, whose portfolio includes industrial and logistics parks in nine countries, operates a warehouse facility in Horní Počernice which oc-

Finance

Market saturation: Retail Since the beginning of the new millennium, there has been very intense activity from developers in retail real-estate market in the Czech Republic resulting in healthy market saturation. Trade in retail real estate intensified around 2013 as the impacts of the global financial crisis subsided. Since then, we have annually seen rising interest in the retail sector from both private investors as well as institutional investment funds in the Czech Republic. Currently, we can find several unfinished, smaller-scale projects on the market. The opportunity of the emergence of large commercial zones is now located mainly in the vicinity of newly built transport infrastructure. However, we cannot only praise the strength of the market, as surveys carried out among developers and investors indicate mild concern with respect to the continuing legal uncertainty connected with the regulation and approval of planned projects. However,a vague concept of spatial

development is therefore advantageous particularly for strong investment groups that are willing to take the risk of a longer approval process.

First steps

come with being close to the city centre. In terms of office development, in the past decade strong local investors whose portfolios satisfy even the most demanding criteria have managed to assert themselves in the Czech Republic, while the open, fully competitive market also continues to be accessible for foreign entities. Due to this fact, the Czech Republic and, in particular, the city of Prague has several exceptional projects under development. The goals of these projects are often considerable, not only in terms of the solutions implemented, but also from the perspective of urban planning. An example of this is the proposal of the Central Business District designed by Zaha Hadid Architects, a world-renowned architectural firm. The currently strong interest in administrative and commercial centres can be illustrated with a summary of recently concluded transactions on the Czech market. Whether it is due to last year’s record sale of the Palladium commercial and administrative centre in 2015 or the strong transactions seen in 2016, which include, for example, the sale of the Atrium Real Estate portfolio and the LaSalle Investment Management group’s entry into the market with its purchase of properties Na Příkopě in Prague.

The Czech Republic

Introduction to the Czech property market

The rebounding retail market Before the global economic downturn, which notably affected the retail market, the Czech Republic had one of the most active retail markets in Central Europe. Due to the downturn, development of the retail market slowed considerably until 2011, when growth resumed. The volume of shopping-centre stock reached 2.3 million square metres in Q4 2016.

otal density of 220 m2 of retail space per 1,000 inhabitants places the Czech Republic above the European average. Within Central and Eastern Europe, this figure is the third highest after Poland and Slovakia and significantly above that of the Hungarian and Romanian markets. Few shopping centres are currently under construction or planned. We expect limited development, especially of very large shopping centres, and stronger focus on smaller projects in high-traffic areas. The exception is Prague, which has significantly higher purchasing power and a better economic situation. The strongest demand remains in the city’s prime shopping centres and high streets. Due to the strong competitive environment, diversification of the market is gradually increasing in terms of the retail development projects as well as tenants as well.

Planned shopping-centre development Project

City

Status

Type

Size (m2)

Year

Developer

Aupark Hradec Králové

Hradec Králové

Completed

Medium

20,900

2016

HB Reavis Group

Centrum Chodov

Prague

Very Large

40,700

2017

Unibail Rodamco

Central Jablonec

Jablonec n. N.

Small

11,300

2017

Crestyl

IGY České Budějovice

Č. Budějovice

Small

9,000

2017

CPI

Bořislavka

Prague

Planned

Small

10,000

2018

KKCG

NC Královo Pole

Brno

Planned

Medium

7,600

2018

Bainbridge

Palác Stromovka

Prague

Planned

Small

13,000

2018

Lordship

Nová Palmovka

Prague

On hold

Small

8,000

n/a

Metrostav

Note: UC – Under construction Source: CBRE Research

60 | INVESTORS‘ GUIDEBOOK 76

Supply The Czech retail property market has nearly tripled in size in the past 10 years. The biggest shopping-centre boom was recorded between 2004 and 2008, when almost 1 million square metres of modern shopping-centre space was delivered to the market (38 new projects and eight expansions), of which 40% was located in Prague, 10% in Brno and 8% in Plzeň. Construction declined rapidly after 2008, finally bottoming out in 2011, when only one small shopping centre of 6,400 m2 was opened. Czech retail property development has since recovered and is stable now. Over 100,000 m2 of modern shopping-centre space was added to the market in 2012. During 2013 seven new shopping centres and two expansions with a total area of 162,000 m2 were completed.

This was the largest supply of new, modern retail space since 2008. Apart from two large construction projects in 2013, namely Centrum Černý Most (expansion) in Prague with over 44,000 m2 and Galerie Šantovka in Olomouc with almost 50,000 m2, developers focused on smaller regional projects with less than 10,000 m2. Development in smaller regional cities reflected the need to adapt to the demands of customers who are now less willing to travel for shopping. In 2014, five new shopping centres – OC Lužiny and Quadrio in Prague, Galerie Teplice, Frýda in Frýdek-Místek and Pivovar Děčín – with a total of 78,100 m2 were opened in 2014. In March 2015, only one shopping centre in the Czech Republic was opened in Kladno, namely Central Kladno. One shopping centre, Galerie Přerov, was completed in 2016. Three shopping centres are currently under construction (see the table on left). The biggest delivery is expected in 2017, when Centrum Chodov will open its second phase and become one of the biggest shopping centres in the Czech Republic. The total volume of projects under construction with expected delivery in 2017 amounts to 61,000 m2 of modern retail stock. Demand The situation on the Czech retail market has been relatively stable for the past couple of years. The Czech Republic ranks highly in attractiveness for international retailers in Europe, especially thanks to the high purchasing power of Prague and stable GDP growth. According to a survey conducted among international retailers, the Czech Republic ranked 10th among targeted markets for 2016, which shows that retailers have trust in the local market.

Under construction

Planned

< 100

2,500,000

250,000

2,000,000

200,000

1,500,000

150,000

Olomouc 1,310 m2 p.c.*

Brno 590 m2 p.c.*

Ostrava 620 m2 p.c.*

Zlin 805 m2 p.c.*

Top sectors

www.cbre.cz

M&A

Klára Bejblová Head of Research & Consulting CBRE klara.bejblova@cbre.com

is true secondary and tertiary space. Therefore, prime shopping centres have been able to maintain stable and sustainable rental-rate growth thanks to renegotiations and re-leasing strategies due to a lack of high-quality space. We expect this trend to continue over the next two years. The prime shopping-centre rental rate currently stands at EUR 125/m2/month in Prague and EUR 65/m2/month in the regions, where we expect it to remain stable or decline slightly.

Taxes

Rental rates The high-street rental rate grew until 2008, when it reached the peak of EUR 180/m2 per month. The rate subsequently declined due to the economic downturn remained stable until 2012. The combination of increasing interest in high-street locations in Prague and the lack of available space has put pressure on rents. The prime high-street rent in Prague has been gradually increasing since 2012 and is currently at EUR 215/m2 per month. A continuing slight increase of rents is expected in the coming years. The high-street area with the highest prime rent is on Na Příkopě and Pařížská street. The prime rental rates at other high-street locations in Prague vary somewhat according to the attractiveness of the given area. In comparison with other European capitals Prague is still far from having the most expensive high-street rental rates. For example, in Paris and London prime rents are

in excess of EUR 1,100/m2/month. However, Prague has the highest rent among CEE capitals, which illustrates the strong interest that retailers have in the city. The development of the prime shopping-centre rental rate has been more variable than that of prime highstreet locations. Rent tripled between 2001 and 2008, when it reached its historical peak of EUR 120/m2/month. During the recession, it dropped to EUR 85/m2/month, where it remained until the first half of 2013. While demand for prime space has been growing, the opposite

Human resources

in the Czech Republic (including partial Czech management) can utilise local knowledge and expand further.

*per 1,000 inhabitants Source: CBRE Research

Permitting and construction

20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 1 20 6 17 (f )

Source: CBRE Research

The Czech retail market was very active in terms of new international retailers which entered the market in the 1st half of 2016. We monitored 16 new brands, most of them European luxury brands. We can name fashion retailers such as COS, Pinko, Pietro Brunelli, Cremieux or Stefano Ricci. Moreover from accessories sector Breitling, Michal Negrin or Patek Philippe or Bally from shoes sector. However the most significant entry of this year was the British toy store Hamleys on Na Prikope 14, Prague. The most attractive location for international tenants remain prime High street and shopping centre locations. When entering the Czech market, retailers mostly look for prime shopping centres, which are mostly located in Prague, and high-street locations in Prague. A lot of retailers also consider entering the market through franchising, though it is sometimes difficult to find a suitable partner. Subsequent expansion to the regions is relatively slow and some international retailers do not want to expand to the regions at all, which increases the importance of local retailers. Conversely, international retailers that have developed their operations

Pardubice 510m2 p.c.* Jihlava 565 m2 p.c.*

Ceske Budejovice 780 m2 p.c.*

50,000

Prague 585 m2 p.c.*

Properties

500,000

300 >

Hradec Kralove 955 m2 p.c.*

Karlovy Vary 730 m2 p.c.* Plzen 700 m2 p.c.*

170

Liberec 1,430 m2 p.c.*

R&D

100,000

1,000,000

Usti nad Labem 240 m2 p.c.*

New suply (m2)

Open

Finance

Total stock (m2)

Total stock

Shopping-centre density (m2 per 1,000 inhabitants, Q4 2016)

First steps

Growth of shopping-centre stock as at Q4 2016

The Czech Republic

Retail market

The Czech Republic remains attractive for industrial tenants In terms of investment, industrial properties in the Czech Republic are one of the most attractive commodities on the real estate market at the present time. All recent surveys concerning the construction and letting of industrial facilities indicate increasing tenant interest in this type of real estate. Growing demand on the part of users reduces the vacancy rate, which in turn further boots the appeal of industrial properties to real estate investors. Warehouse/production space under construction in prime locations in Q3/2016

78 | INVESTORS‘ GUIDEBOOK

Location

Square meters

Prague

150,000

Karlovy Vary

95,000

Plzeň

76,000

Ústí nad Labem

39,000

Pardubice

27,000

České Budějvice

24,000

Hradec Králové

22,000

Brno

21,000

Ostrava

19,000

Olomouc

11,000

he industrial real estate market in the Czech Republic is strengthened by several important factors:

1. Location – The Czech Republic’s location in the heart of Europe is ideal for logistics flows to and from Western Europe. 2. Infrastructure – The Czech Republic has an excellent network of roads and railways with numerous connections to neighbouring countries. 3. Skilled workforce – Thanks to its large number of secondary schools and universities specialising in technical and industrial education, the Czech Republic possesses a highly skilled workforce. 4. Low labour costs – Although Czech wages are no longer among the lowest in the EU, the cost of labour in the Czech Republic remains lower than in a number of Western European countries. 5. Political stability – Long-term political and economic stability is an important factor, especially for foreign investors.

6. Investment incentives – The availability of incentives provided by the Czech government and the EU is of key importance in certain industrial zones. Both the national and local governments endeavour to make selected locations more attractive to investors with a view to promoting their development. However, the key factor for the development of industrial properties is their users, i.e. tenants. The level of demand generally reflects two basic factors. The first is the expansion of successful businesses operated by existing tenants. This factor is supported by the current economic situation, as practically all forecasts for the Czech Republic point to GDP growth at an average annual rate of 2.9 % during 20162018, which is one of the highest figures in Europe. The second growth factor is the influx of new investors who are seeking high-quality space for their production and storage operations in the Czech Republic. In this regard, the Czech Republic is currently achieving good results as well.

6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0

2010

2011

2012

2013

2014

2015

2016 H1

Source: P3 Logistic Parks, 2016

M&A Top sectors

www.p3parks.com

Taxes

Tomáš Míček Country Head Czech Republic P3 Logistic Parks tomas.micek@p3parks.com

to customers and meet the specific requirements for the operation of an e-commerce business. An important aspect is the need to have pickup points for end customers. It is therefore likely that industrial parks near large cities will be transformed over the next few years in line with their new function. Logistics operations will move farther away from urban areas and smaller units will be built in suburban locations to serve the needs of light manufacturing and retail. These parks will benefit from public transport connectivity and thus they will comply with sustainable development principles.

Human resources

Production facilities and warehouses for e-commerce For obvious reasons, the traditional role of industrial real estate as a place for creating or enlarging production capacities is of fundamental importance for the economy of every country. Despite being a relatively new business sector, e-commerce is another phenomenon that is gaining more and more importance in influencing the industrial real estate business. The growing volumes of purchases made through e-shops are boosting the demand of e-commerce companies for modern warehouse space. This type of industrial real estate needs to be close

Permitting and construction

Established and new locations Areas near large cities, particularly Prague, Brno, and Plzeň, attract the highest levels of industrial real estate investment. Recently, however, there has been a consistent rise in demand for previously secondary locations. There are several reasons for this, one of which is that there is very limited availability of land where industrial properties can still be built near Prague and Brno. Another important factor is workforce availability, as some of the locations have reached their limits in this respect. It clearly makes no sense to build new industrial and logistics facilities

Prague

Properties

Crossing the threshold of 6 million m2 of total A-class industrial stock All developers in the market are responding to the rising demand. Current statistics from the Industrial Research Forum, whose members include CBRE, Colliers International, Cushman & Wakefield and JLL, show that a total of 51,800 m2 of warehouse space in five industrial parks was completed in the Czech Republic in Q3/2016. Construction of new industrial space reached 318,500 m2 in the first three quarters of 2016. The total stock of modern warehouse and industrial space in the Czech Republic amounted to 6.08 million m2 at the end of Q3/2016.

Czech Republic

R&D

Growing demand has brought about a reduction of the vacancy rate of industrial properties. The average vacancy rate is currently 4.4%, the lowest value in recent years.

Total stock of modern industrial space in the Czech Republic

Finance

The nationwide vacancy rate is 4.4%, having dropped by 128 b.p. since Q3/2015 and by 438 b.p. since Q2/2014. This figure represents 267,520 m2 of modern industrial space ready for immediate occupation. Toward the end of 2016, the vacancy rate in Prague was, at 3.6%, lower than the national average, having dropped by 170 b. p. since Q3/2015.

in a location where future tenants will not be able to recruit staff. As a result, focus is shifting to previously overlooked locations, which offer not only suitable land, but also greater availability of workers. All criteria considered, these locations are becoming increasingly interesting to investors. An example is the first industrial zone in Cheb in the Karlovy Vary region, where the construction of a production facility for the BWI Group, a supplier of vehicle chassis, was completed this year. In addition, construction of a distribution center for Tchibo started earlier this year in the same area. Once completed, this building will be the second largest distribution centre in the country. Another new industrial zone is being developed on eastern outskirts of Prague on the highway to Hradec Králové. The new zone’s first building, which covers an area of 20,000 m2, was completed in May 2016 for the tenants Exiteria and Penny Market; meanwhile, another 40,000 m2 building completed toward the end of 2016 will be taken over by the by French third-party logistics company FM Logistic and other companies. The industrial zone offers additional land with zoning for 94,000 m2 of warehouse and industrial space. The completion of the two buildings within the first year marks the milestone of one-third of the zone’s leasable area having been built up and demonstrates the rapid growth of the market of logistics properties in the Czech Republic. The Moravia-Silesia region is another area on which investors are focusing thanks to the relative abundance of available workers there. Hyundai Mobis is building a factory that will create 1,000 new jobs in the Mošnov industrial zone. Another location with strong potential in northern Moravia is the development zone spread across a triangle delimited by the cities Ostrava, Havířov and Karviná, where Mölnlycke Health Care, a Swedish producer of medical devices, has started construction of a new manufacturing plant. The facility should be in full operation by the middle of 2017 and will provide 290 new jobs. The current situation on the industrial real estate market can be illustrated by the fact that 485,100 m2 of production and warehouse space is currently under construction in the Czech Republic. The location of the new facilities is shown in the following table.

First steps

4,4% Vacancy

The Czech Republic

Industrial and warehouse market

The best office and where to find it in the Czech Republic Vacancy rate in Czech office locations (%)

The Czech Republic provides an attractive environment for various types of occupants of modern offices, from high-level research facilities to simple back-office or shared-services centres where language skills are required. While the typical first choice would be Prague, the smaller regional cities Brno and Ostrava should not be overlooked, as they offer modern office stock and a skilled workforce together with lower overall costs.

30 28 26 24 22 20 18 16 14 12 10

2012/Q4 2013/Q2 2013/Q4 2014/Q2 2014/Q4 2015/Q2 2015/Q4 2016/Q2 Brno (Southern Moravia)

Ostrava-Silesia

Prague

Prime and average headline rents (EUR/m2/month) 20 19 18 17 16 15 14 13 12 11 10

usiness in the Czech Republic is highly concentrated in the country’s capital, Prague. This explains Prague’s dominance in terms of office stock and the fact that the majority of blue chip companies operating in the Czech Republic are located there. Total office stock in Prague stood at 3.24 million m2 at the end of Q3 2016 in comparison with 484,000 m2 in Brno and 208,000 m2 in Ostrava. Brno and Ostrava are the second and third largest cities in the Czech Republic, respectively, in terms of both population and area. Prague office market

Brno/Q4

Prague Prime headline rent

80 | INVESTORS‘ GUIDEBOOK

Average headline rent

Ostrava

Supply Between 2006 and 2015, the Prague office market received 151,000 m2 of new office space per year on average. In that respect, 2016 was an exceptional year, as only 33,000 m2 of offices were completed, the lowest amount in the market’s history. However, strong demand on the market brought vacancy to such a low level that developers felt compelled to put new projects in the pipeline. Nearly 179,000 m2 is due for completion in 2017. Furthermore, 61,000 m2 is already under construction with completion scheduled in 2018.

Approximately 14% of the projects under construction have already been preleased. Take-up/demand Average gross take-up (including renegotiations) in Prague between 2011 and 2015 reached 334,000 m2; in the first three quarters of 2016, gross take-up reached 317,000 m2 and it is very likely that the full year will beat the five-year average. Excluding renegotiations and subleases, the five-year average net take-up was 193,000 m2, whereas net take-up reached 231,000 m2 in the first three quarters of 2016, indicating healthy occupier demand levels. Vacancy After a period of vacancy growth, which begun in 2013 and peaked in Q1 2015 at 17.1%, the office market in Prague has recovered. Since then, the vacancy rate has fallen to 11.7%, partly due to the low number of completions, but mainly because of the high level of demand. With the current level of demand and development, we expect the vacancy rate to stabilize at around 12% for the short to medium term. However, vacancy differs significantly across the stock, with older properties competing with new completions. Because of their age (more than ten-year old), many

3,500

Ostrava

Brno

Prague

3,000

2,000 1,500 1,000

20 16 /H 2

20 16 /H 1

20 15 /H 2

20 15 /H 1

20 14 /H 2

20 14 /H 1

20 13 /H 2

20 13 /H 1

20 12 /H 2

Source: Colliers International / Prague Research Forum

Ostrava office market

Brno office market

Ondřej Vlk Head of Research Colliers International Ondrej.vlk@colliers.com www.colliers.cz

Top sectors

Brno, the second largest city in the Czech Republic, has an established office market and has become popular

Take-up/demand Gross take-up (including renegotiations) reached 32,500 m2 in H1 2016. The relatively young Brno office market has been monitored only since 2012, and since then average annual gross take-up has reached 52,000 m2. With take-up usually being stronger

Stock In H1 2016, the volume of modern office stock in Ostrava reached 208,000 m2. At mid-year, however, there were no new properties under construction, though there were several projects ready for construction once vacancy decreases to sustainable levels.

M&A

Supply Total modern office stock in Brno reached 484,000 m2 in H1 2016. With an additional 56,000 m2 of office space scheduled for completion in H2 2016, the city’s office stock should reach 540,000 m2 by the end of the year. Development has been driven mainly by increased occupier demand and, in 2016, a higher level of completions was expected in Brno than in Prague. In 2016, Brno saw its highest level of completions since 2007, when 75,000 m2 of office space was delivered to the market. For 2017, the new construction has returned to the market average and should reach 28,000 m2.

Taxes

Rents Prime rents have been under pressure in recent years; however, we have not seen any significant shifts. Prime office headline rents remained stable throughout 2016 and ranged between EUR 18.50 and EUR 19.50/m2/ month. The range of inner-city rents remained at EUR 14.50 - EUR 16.50/m2/month, while the outer-city range remained between EUR 13.00 and EUR 14.50/m2/month. The city-wide average rent remained unchanged at EUR 13.20/m2/month. Net effective rents were generally 12%-15% lower than headline rents; however, the level of provided incentives remains property-specific and influenced by multiple factors such as location, new office supply and the prevailing vacancy rate.

In H1 2016, prime headline rents in the Brno office market remained stable at EUR 12.50/m2/month. The city-wide average rent remained unchanged at EUR 10.50/m2/month. The incentive packages for Brno are generally less generous than in Prague; net effective rents are thus 8%-10% below headline rents.

The positive economic development of the Czech economy is the main driver behind demand for office premises. The only downside of the current economic development is the growth in the cost of labour, which could turn off some potential occupants. However, we do not expect any significant shift in vacancies or rental levels and the stability of the office market could be perceived as a potential plus, unlike in neighbouring countries such as Poland, where the strong fluctuation in rental levels creates some uncertainty. From that point of view, the Czech Republic can be considered a safe haven for office locations.

Human resources

mainly as a BPO/SSC/CC destination, though the presence of several universities makes the city suitable for various IT companies and science and development centres.

Prognosis

Permitting and construction

properties in stock are able to compete only with rental prices and lack the latest features of modern office stock. Therefore, we expect to see increased refurbishments of such older properties.

Rents Prime headline rents in the Ostrava office market have remained stable at around EUR 11.50/m2/month since the end of 2013.

Properties

20 12 /H 1

Rents In H1 2016, prime headline rents in the Brno office market remained stable at EUR 12.50/m2/month. The city-wide average rent remained unchanged at EUR 10.50/m2/month. The incentive packages for Brno are generally less generous than in Prague; net effective rents are thus 8%-10% below headline rents.

R&D

500

Vacancy The vacancy rate in Ostrava was 20.3% by mid-year 2016. Although the vacancy rate was relatively high, it was the lowest ever recorded on the market. With zero completions in the pipeline, it is expected that the vacancy rate will further decrease.

Finance

Vacancy At the end of H1 2016, the vacancy rate in Brno decreased to 11.8%, which was decrease of 190 basis points in comparison with the end of 2015. At the same time, it was the lowest vacancy rate recorded on the market since 2012.

2,500

Take-up/demand Gross take-up reached 4,200 m2 in H1 2016, which was a significant decrease in comparison with previous years, and it is unlikely that 2016 will reach the annual average level of demand recorded on the market from 2012 to 2015, which was 20,000 m2.

First steps

in the second half of the year than in the first half, we expect that 2016 could be the most active year in the market’s history. Net take-up, excluding renegotiations and subleases, reached 29,000 m2 for H1 2016, which is equal to or higher than the full-year figures for 2013 and 2014.

Total modern office stock (m2 thousands)

The Czech Republic

Office market

Did you know?

Travel distances from Prague Oslo 11 | 2:00 Hamburg 640 | 6:00

Amsterdam 880 | 8:00

Berlin 340 | 3:45

Stockholm 19 | 1:50

Helsinki 24 | 2:05

Dublin 12 | 2:30

Warsaw 681 | 7:00 flights per week | flight time, h:m

Moscow 61 | 2:35

Brussels 901 | 8:30

km | driving time, h:m London 80 | 2:00

Paris 1,030 | 9:45 Beijing 2 | 9:00

Munich 380 | 4:00 Madrid 13 | 3:00 Rome 23 | 1:45

Vienna 330 | 3:30

Bratislava 337 | 3:00

Istanbul 26 | 2:40

Milan 860 | 8:45 Zagreb 700 | 7:15

Budapest 529 | 5:00

Dubai 18 | 6:00

Seoul 8 | 9:55

Handle the permit and construction processes

Permitting basics If you have a construction project somewhere in the Czech Republic, you should be aware of the approval procedure before starting construction and the inspection procedure for building use and the operation agreement, which is quite strictly governed by the Building Act and other related regulations. Czech laws are progressively updated to reflect construction development, to support investment plans and to promote environmental protection and safety.

Basic and related Czech legislation mentioned in the article Act No. 183/2006 Coll. Building Act Regulation No. 499/2006 Coll. Building Documentation Regulation No. 500/2006 Coll. Land-Use Planning Documentation Regulation No. 503/2006 Coll. Planning and Building Permit Act No. 100/2001 Coll. EIA Act Act No. 76/2002 Coll. IPPC Act Act No. 39/2015 Coll. Act Amending Act No. 100/2001 and Certain Other Acts Act No. 254/2001 Coll. Water Act Act No. 500/2004 Coll. Administative Code

84 | INVESTORS‘ GUIDEBOOK

Stavební zákon Vyhláška o dokumentaci staveb Vyhláška o územně plánovací dokumentaci Prováděcí vyhláška územního a stavebního řízení Zákon o posuzování vlivů na životní prostředí Zákon o integrované prevenci Zákon kterým se mění zákon č. 100/2001 aj. Vodní zákon Správní řád

n order to facilitate the process preceding the start of construction, a large number of building sites with valid land-use plans are prepared throughout the Czech Republic. However, if a plot you are interested in is located in a rural area that is used for a different purpose than construction, an official process to modify the existing land-use plan or prepare a new one can be undertaken. With respect to planning development and interests protected by related regional authorities, you have to negotiate with the city government about arrangement of the land-use plan. The city is the entity that issues for a land-use plan and ensures its preparation and approval procedure, which is composed of several steps including public hearings. An environmental impact assessment (EIA) is the initial phase of each building project even if such project is planned in an area with a valid land-use plan. Apart from verification of the new building’s compliance with the land-use plan, all the environmental aspects have to be evaluated on the basis of the project announcement and related studies. The existing state is compared with the future situation brought about by the new building and its operation. The environmental limits are verified by specialists and approved by the authorities. Not only the relevant authorities but also the general public have to be informed about all the prepared projects and can express their standpoints regard those projects. The type of EIA procedure specified by Environmental Protection Act to be carried out depends on the scope of the building and its planned operation. An under-limit

announcement is a means of approval for small projects with almost zero impact on the environment. Projects having an insignificant impact are negotiated only in the finding procedure, which culminates with a decision on the given projects, the validity of which announced by means of public notification. The full EIA process is necessary in the case of projects that have a negative impact on the environment. In such a case, an EIA statement is issued and has to be incorporated into the announcement of the project and approved by the authorities and the public. In accordance with the most recent amendment of Environmental Protection Act, verification of this statement has to be carried out before a planning permit application can be submitted to Building Authority. The location of a building and its connection to utilities has to be approved in the planning permit procedure, which can take several different forms depending on the scope of the building and the conclusions of the EIA. Regardless of which form the procedure takes, statements of all the relevant authorities and utility providers have to be collected and incorporated into the planning permit documentation. Though the authorities should issue their statements within the period stipulated by the Administrative Code, in complicated cases they have a right to extend the deadline. So the period for issuing statements depends on the authorities’ current capacity and reduction of the processing period thus cannot be generally guaranteed. The Building Authority has to carry out all the procedures within the timeframe stipulated by the Administrative Code, so the total period of the procedure can dif-

company can save you a lot of time and expense by optimising the proposal, securing suitable permit arrangements and incorporating your operational needs directly in the construction in order to guarantee the overall schedule and building costs. Despite all the regulations and general conditions, each permit process is unique due to the purpose of the given building, the impacts of its operation

and its location in the Czech Republic. All these factors can play a significant role in design preparation and the permit procedure, so you should pay close attention to project preparation and consult these aspects with an experienced adviser from the beginning in order to select a suitable plot that is prepared to meet your needs without any special considerations.

Finance

Securing of permits including design preparation and construction Months 1

9 10 11 12 1

9 10 11 12

R&D

EIA Finding procedure

Properties

Planning permit

Announcement

Permitting and construction

Building permit Preparation Construction Operation

Note: General schedule - standard type

M&A

Ladislava Dvořáková Architect, TAKENAKA EUROPE dvorakova@takenaka.cz

Taxes

Source: TAKENAKA EUROPE

Human resources

Petr Koljaděnko Business Development CEE, TAKENAKA EUROPE koljadenko@takenaka.cz www.takenaka.eu

Top sectors

an EIA statement is not required, a building permit can be replaced with a building permit certificate issued by an authorised inspector on the basis of his contract with the investor. The issuance of the certificate is then reported to the Building Authority, which has to issue a public announcement of the certificate’s validity. To simplify the process and reduce the time required for obtaining a permit in uncomplicated cases, Czech legislation makes it possible to carry out a collective planning and building permit procedure or issue a collective planning and building agreement. When an issued building permit comes into force, construction has to be in compliance with the given permit’s conditions and the necessary steps must be taken to ensure that the start and course of the work are conducted in a legal manner. If structural changes are required by the investor or recommended by the builder, a procedure for implementing structural changes before completion of construction can be undertaken in a manner similar to that of the original building permit. In some cases, submission of execution documentation can also be one of the authorities’ conditions. Where the standard statutory time periods are concerned, the legally stipulated time deadlines must be met not only with respect to the permit procedures, but also with respect to the validity of documents whose expiration date is specified in the relevant acts. Likewise, the issued statements and permits precisely set forth their respective periods of validity and deadlines for completion of the permitted works. It is possible to apply for an extension of these deadlines. Following the completion of construction, a final inspection of the building by all the involved authorities has to carried out in accordance with the usage rules set forth in the Building Act and all the conditions of the previous permits and statements. If all conditions are fulfilled, a building use agreement is then issued. Due to this quite complicated permit process, which is composed of several steps and can be carried out in several different ways, it is appropriate to use the services of an experienced design and construction company whose authorised designers and specialists are able to adjust your project according to the Czech regulations and prepare all the necessary documentation so that the permit procedures runs smoothly. Moreover, on the basis of efficient building management knowledge, such a professional

First steps

fer in each city and be influenced by the situation at the given time, despite the stipulated periods for particular steps, which are precisely defined by the Building Act. Apart from the standard planning permit procedure, when the involved parties are informed by letter or publicly displayed notice regarding the type of EIA procedure, a simplified planning permit or planning agreement can be issued in a shorter time. This is possible only if no EIA was required and all the involved parties (the neighbours of the plot in question) have provided their written consent in relation to the project. The other possibility for securing a planning permit is by means of a public contract, which is concluded between the investor and the Building Authority. This document is not prepared by the Building Authority, but rather only reviewed by it, and the participants are involved collectively as the third contract contracting party. After a valid planning permit has been obtained and all the necessary statements collected on the basis of the building permit documentation, a building permit can be applied for. This step is not necessary for the precisely defined group of small and simple buildings with no environmental, public health or safety impacts. A building notice or even no action is required for such buildings. Conversely, for the buildings whose operation causes emissions exceeding limits stipulated by the Integrated Pollution Prevention and Control, a special permit has to be prepared for building permit procedure pursuant to the Integrated Pollution Prevention and Control Act reflecting the best available techniques, which is treated as one of the necessary environmental documents. A procedure completely separate from the building permit is the water treatment permit, which is required by the Water Act. Despite the existence of a collective planning permit for all the buildings on the given plot, some permits are issued by the Building Authority and others by the Environmental Water Treatment Authority. Other that permits pertaining to water management, other special permits are must be obtained from the relevant authorities pursuant to special acts in case of, for example, roads, railways, airports, forests and mining buildings or work in such areas. In a similar manner as in the planning permit stage, the standard building permit procedure can be replaced with the conclusion of a public contract. Furthermore, if

The Czech Republic

Approval process management

The importance of EIA Over the last two decades, the Czech Republic has ranked among the most advanced economies in the world, which makes it one of the most suitable countries for investment projects. One of the indicators showing an economy’s level of development is the approach taken to protection of the environment and public health.

he environmental impact assessment (EIA) is one of the important tools ensuring that the environment and public interests will be protected in the course of any project. In the Czech Republic, the EIA process is regulated by Act No. 100/2001 Coll. and its implementing regulations and other related legislation such as the Act on the Environment, Water Act, Integrated Pollution Prevention and Control Act and the Building Act. Act No. 100/2001 Coll. is based on the relevant European legislation, in particular Council Directive 97/11/ES of 3 March 1997, on the assessment of the effects of certain public and private projects on the environment. This fact implies that project assessment in the Czech Republic resembles that in the other countries of the European Union. According to the official definition formulated by the Ministry of Environment of the Czech Republic, the “process of environmental impact assessment of projects and concepts is based on systematic examination and assessment of their potential impacts on the environment. The aim of EIA is to discover and describe expected impacts of prepared projects and concepts on the environment and public health in all determining respects and to provide a comprehensible evaluation of such impacts. The process is also has the purpose of proposing measures to prevent or mitigate detrimental impacts on the environment.” A slightly “more human” expression of the importance of EIA could read as follows:

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The purpose of EIA is to maintain harmony between man and his environment; to encourage efforts which will prevent or eliminate damage to the environment and biosphere and stimulate the health and welfare of man; to implement a strategy of sustainable development; and to allow officials and all concerned citizens to understand the likely consequences of proposed actions. In other words, the result of the EIA process should be a compromise between the economic interest of the investor and sustainable protection of the environment and public health. Project definition The term “project” or “plan” refers to newly built structures, roads or production facilities, extraction of mineral resources and operations, as well as any changes thereto, i.e. extensions, major technological changes or capacity increases. Any projects outlined in Annex 1 to Act No. 100/2001 Coll. must undergo the EIA process. EIA as part of the approval process EIA is an integral and very significant part of the approval process for investment projects. EIA must take place before approval of an investment project and commencement of implementation. The competent authority (Building Authority) must not approve any project without the EIA process having first been completed.

Description of EIA in the Czech Republic

M&A

Petr Fanta Head of Consultancy Department, AECOM CZ petr.fanta@aecom.com

Taxes

Selection of an expert for processing EIA documentation – The expertise and experience of the person selected to process the EIA documentation and his/her ability to communicate with all involved parties are very important for a smooth assessment process. In the Czech Republic, there is no shortage of high-quality and experienced experts who meet these criteria.

Human resources

Good communication with all involved parties – Good communication between the investor, the expert who will process the documentation, the authorities and the affected public is necessary for an optimum EIA process. It is recommended that the project be discussed in advance with the affected authorities before submitting the documentation and initiating the assessment process. Some comments thus may be incorporated in the documentation in advance, which saves time needed to evaluate such comments during the assessment process.

Permitting and construction

www.aecom.cz Top sectors

EIA is a comprehensive and multidisciplinary process associated with financial and time overhead that should be considered by the investor when planning its project. In the case of less complicated projects (approx. 90% of all projects), the process will take four to eight months; for more complicated and special projects, it may require one year or more. In the case of large-scale and more complicated projects (i.e. projects requiring a full EIA), the assessment process may be extended by an additional five to eight months. In some exceptional and highly complicated cases, it may take several years. In the financial respect, the investor must primarily consider the costs of EIA documentation (including expert studies). For a full EIA, the investor must also pay the costs of preparing an expert opinion. The total costs will depend on the complexity and scope of the project, ranging from several thousand to over forty thousand euros.

Thorough project planning – A project elaborated in great detail will provide relevant information about all substantial aspects of the project to the expert who processes the documentation as well as to the authorities that assess the project. Projects with well-prepared documentation are credible and trustworthy and are generally better accepted both by authorities and the affected public.

Properties

Environmental impact assessment (full EIA) A full EIA primarily involves the obligation to provide an independent expert opinion on the submitted documentation and, in some cases, to conduct public hearing on the project. Similar to the fact-finding procedure, comments from the involved authorities and representatives of the public are considered

Cost and time required

Project location (siting) – For the optimum course of the EIA process, it is of key importance to select a suitable location for the project. Locations intended for the given type of project – e.g. industrial parks – may be best suited to the purpose. A good transport connection and sufficient supplies of energy and raw materials are also important to cover the needs of the project. Locations with the presence of nature and landscape preservation elements, or specially protected species and those near human settlements (the issue of noise and emissions from the operation of the project and induced traffic) and landmarks are not suitable.

R&D

Fact-finding procedure Fact-finding is a procedure wherein the competent authority and all involved administrative authorities and self-governing units will evaluate and assess a given project or plan with respect to its impacts on the environment and public health. Public participation is possible here with the raising of comments. The outcome of this procedure is a statement of the authority as to whether the project (and its placement in the given location) can be approved without any further evaluation (negative conclusion of the fact-finding procedure) or whether further evaluation, often referred to as “a full EIA”, is required (positive conclusion of the procedure).

For the EIA process to run smoothly without any unnecessary delays, the investor needs to follow some basic advice and recommendations:

Finance

Development of EIA documentation The investor will authorise a specialized company or individual to prepare documentation for identifying the environmental and public-health impacts of the project. The content of the documentation and other requisites are defined in Act No. 100/2001 Coll. Documentation for large-scale projects with significant environmental impacts must be prepared by an authorised individual. The list of authorised individuals is available on the website of the Ministry of Environment of the Czech Republic. For such projects, additional expert studies, such as noise and dispersion studies, may be required. Those studies must also be conducted by authorised individuals. The resulting documentation will be submitted by the investor (or its authorised agent) to the competent authority, which may either be the local competent regional authority or, for more complicated matters, the Ministry of Environment of the Czech Republic.

Recommendation to investors

First steps

The EIA process in the Czech Republic consists of the following consecutive steps:

here. The EIA process is concluded with the issuance of a favourable/unfavourable opinion of the relevant authority. An expert opinion is submitted by an authorised individual. This expert and the amount of remuneration paid to him/her pursuant to the Labour Code are determined by the competent authority. However, the costs of the opinion are borne by the investor. A public hearing is a meeting of representatives of the investor, public administrative authorities and the public where the investor must present to the public details of its project/plan and its expected environmental and public-health impacts as well as proposed measures to mitigate the impacts. The investor must also answer any questions raised by the present representatives of the public. The environmental impact assessment process is completed with the issuance of and environmental impact statement, which may be favourable, i.e. the placement of the project/plan in the given location is approved, or unfavourable, i.e. the placement of the project/plan in the given location is rejected. In the case of an unfavourable statement, the investor may submit for assessment a revised project/plan that, for example, uses different, more eco-friendly technology or involves placement of the project in a more suitable location.

The Czech Republic

Environmental impact assessment

The present and future of the building permit process In recent years, a number of positive changes have occurred in the permitting of buildings in the Czech Republic. The most recent major change, which was due to the implementation of Act No. 39/2015 Coll., which amends Act No. 100/2001 Coll., on Environment Impact Assessment, has brought forth new obligations in the process related to compliance with the EIA preconditions, though this change is considered to be positive within the overall context of the changes that have been prepared.

Zoning permit For the purpose to facilitating development of the land in the Czech Republic, local authorities issue regulatory territorial plans stipulating the detailed conditions for land usage. These conditions cover the positioning and spatial arrangement of structures, protection of the given area’s value and character and creation of a favourable environment. In certain cases, it is possible to combine a zoning permit with a building permit in order to accelerate the permitting process. In the Czech Republic, zoning permits generally authorise a construction company to start mobilisation on a land plot for future construction. A zoning permit does not authorise full-scale construction, but rather allows construction of external service lines and preparation of the site with regard to cultivated soil layers (arable land). A zoning permit is valid for two years and is a prerequisite for obtaining a building permit. The statutory period for completing the zoning-permit procedure is 60 to 75 days excluding time needed for EIA, if it is required. Prior to submitting a zoning-permit application, the issue of environmental impact must be addressed and the proposed project must approved in this respect by the relevant regional and state authorities. In principle, there are two possibilities: a fact-finding process with no need for a full EIA Good to know and a full EIA. The first option takes six weeks, Time required 60-75 days while the second may require four to five months. At the project-inception stage, it is recommended Associated EUR 1,000 that the investor select a reputable local provider costs (application fee) of comprehensive design and engineering Validity Two years services in order to enhance the strategic project planning.

Michal Král Head of the Foreign Projects Department PSG – International mkral@psg.cz www.psg.cz

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he adoption of an amendment to Act No. 183/2006 Coll., on Urban Planning and the Building Code (the Building Act), at the end of 2016 or the beginning of 2017, when as many as three processes are expected to be combined into one – EIA, planning permit procedures and the building permit process – will be the most significant change. Thus, investors and the real estate market can enjoy a new standard that is expected to not only accelerate the processes, but also make them cheaper and simpler. The present situation (2015) Upon obtaining consent to place a building in a particular location (Zoning Permit, EIA), the building permit process is a relative easier step in the case of an average investment costing EUR 10 million. A great number of relevant authorities and specialists have issued standpoints on respective project, either

positively or with preconditions, in the previous proceedings. The related subsequent process deals not only with the building’s surrounding in detail, but also with any and all technical aspects of the future construction work and building operation with respect to the structure, ventilation, lighting and water supply, as well as the general impacts on future staff and the environment. At the request of the relevant authorities, the investor (builder) shall attach the following documents to the application: Documentation pertaining to the building-permit application pursuant to Decree No. 499/2006 by Decree No. 62/2013, on Construction Documentation. Documentation comprising standpoints issued by the relevant authorities, institutions, network administrators, etc., and presentation of the ownership title to the land on which the investment project is to be implemented.

Republic still has a rather demanding building-permit process. However, the country is striving to modernise the process, thus making it more efficient, cheaper and, especially, shorter. The proposed changes are expected to come into force at the end of 2016 or early 2017.

M&A Top sectors

www.technoprojekt.cz

Currently, a project with EIA needs from 10 to 12 months. This period will be reduced to 6 to 8 months.

Taxes

Martin Zuštík Managing Director Technoprojekt martin.zustik@technoprojekt.cz

Currently, a project without EIA needs from 6 to 8 months for issuance of the building permit. This period will be reduced to 4-5 months.

Human resources

Conclusion The Czech Republic has a welcoming investment environment. In the present situation, prior to updating of the legal provisions, permits can be obtained for demanding construction projects quite quickly. It always depends on the approach taken in the given local environment. However, it also always depends on the quality of preparation by the investor and its team. The Czech

Therefore, if we consider acceleration of the processes to be a main positive factor in the future changes, then the following anticipated changes can be deduced based on current knowledge:

Permitting and construction

The future situation (2016/2017) The Ministry for Regional Development of the Czech Republic, which is in charge of implementing the Czech government’s 2014 programme declaration in the matter of modernising the building-permit process, has prepared a draft proposal for the complete overhaul of Act No. 183/2006 Coll., the Building Act. The draft proposal makes it possible to retain the current permit method but without the combined process, though in principle it changes the building-permit process by applying a coordinated approach, whereas a combined permit covering all three steps, which are current-

Simultaneously with the amendment to Act No. 183/2006 Coll., an amendment to Act No. 100/2002 Coll. will be implemented (the EIA Act was most recently amended through the implementation of Act No. 39/2015 Coll., which came into force on 1 April 2015). Furthermore, a great number of decrees and related acts (36 in total), such as Decree No. 499/2006, on Construction Documentation, and Decree No. 268/2009, on Technical Requirements for Construction, shall also be amended. The above-mentioned decrees pertain to any and all construction works and sets of structures, with the exception of structures relating to air transport.

By adopting the amendment to the Building Act including settlement of approx. 1,500 principal comments, the Czech Republic will acquire a legal standard comparable to the standards valid in Austria and Germany. This will provided significant impetus for investors and the real estate market. However, it also means that it will be necessary to change the attitudes of investors with respect to taking an active role in the permitting and implementation processes.

Properties

The possibilities afforded by the current legal provisions are not fully utilised by investors. Significant time savings can be achieved through better project presentation, good organisation and cooperation not only in the course of preparing the documentation but also in the course of the relevant proceedings. It is not necessary to be intimidated by the regulations currently in force in the Czech Republic, though it is necessary to find a specialised local company to assist with the process, cooperate actively with the authorities and other relevant bodies, and to be personally engaged in the process. If such an approach is applied, the investor will always get results. In the past 20 years, numerous major investments have been permitted in the Czech Republic, a great number of them to the satisfaction of both the investors and authorities.

The amended principles include the following: Process of arranging changes and updating planning-permit documentation reduced by as much as eight months. Implementation of a coordinated process, which means the planning-permit and building-permit processes in one combined permit. The combined permit with an environment impact assessment will become part of the coordinated process.

Practical tip

R&D

The investor (builder) should also take into account the following information: In addition to the building permit, it is necessary to acquire a permit issued by special building authorities for water management structures, road and railway construction. It is possible to combine the planning and building processes when a particular project is not subject to the EIA process.

Practical tip

ly separate (EIA, planning permit and building permit), within a coordinated process followed by the issuance of a combined permit.

Finance

The following information should be added to the above-mentioned documentation: Prior to submitting the building-permit application, significant construction works are assessed within the IPPC process governed by Act No.76/2002 Coll., on Integrated Prevention and Mitigation of Pollution (which governs, for example, power sources exceeding 50 MW, cement production exceeding 500T/day, etc.) The following terms are supposed for medium-size investments (with investment volume of approx. EUR 10 million) subject to the EIA process: Documentation processing by an authorized person, integration of planning-permit preconditions + EIA 75 days Arrangement of binding standpoints issued by the relevant authorities (approx. 15 bodies analogous to the authorities governing the planning-permit process) - 30 days Additional surveys (radon, geology, corrosion, air pollution, noise), simultaneously with and/or prior to documentation processing - 30 days Issuance of a building permit within - 90 days (30-day public notice, 30-day period for issuance of standpoints, processing and delivery period, 15 days to become finally valid) Generally, obtaining a building permit for an investment with EIA requires four months Fees for particular decisions do not exceed EUR 500; fees for the appropriate building permit can reach the maximum of EUR 1,500

It is possible to engage an authorised inspector for construction works when no EIA is conducted in order to accelerate and simplify the process of issuing standpoints issue on the documentation; such inspector is authorised to check the documentation, application-related matters and the construction permit. The inspector is obligated to register with the building authority.

First steps

Within 30 days prior to submission of the building-permit application, the building-process documentation shall be submitted to the EIA bodies that issued a binding EIA standpoint for the purpose of checking whether the preconditions set forth in the standpoint have been met (coherence stamp).

The Czech Republic

Building permit

Cost planning: The first step No two building projects are the same and clients have varying priorities; this is as true in the Czech Republic as it is in the rest of the world.

he client could be a manufacturer requiring a new facility in which to operate their core business or a developer whose core business is generating return on investment by adding value to an existing asset. Each project is defined by a unique combination of factors and determining what, where, when and how allows us to determine how much. What Most clients who come to the Czech Republic have a precise idea of the scope of their project. Local knowledge will highlight the opportunities for added value through the use of local materials and the tailoring of the design for a given location. Where Some industrial zones have pre-approved permitting processes for appropriate projects, thus enabling commencement of site works in a very short time. Other locations may require a comprehensive planning service including zoning changes and environmental impact assessments. When The timeline of the project is very dependent on its location and the stage that the client has reached in the development of the project documentation. Time constraints may also influence how the project is implemented. How The most common contractual arrangements in the Czech Republic are contracts based on a bill of quantities (BOQ) with a guaranteed maximum price (GMP), engineering, procurement and construction (EPC) and engineering, procurement and construction management (EPCM) contracts.

90 | INVESTORS‘ GUIDEBOOK

Experience in the Czech Republic shows that the following conclusions can be drawn: The EPC/GMP approach reduces risk and the administrative burden for the client by placing responsibility for project delivery with the contractor. The downside of this, however, is that the project costs will be higher, as this risk is factored into the price and it is often not possible to finalise detailed specifications for the works prior to appointment of the contractor. Once the contract is awarded, the contractor controls the detailed design and construction process and will aim for the minimum compliant standards with a natural tendency to select the cheapest subcontractors. With the EPCM approach, the project is divided into several trade packages and the packages are awarded to specialist companies. This system gains time for the design process, thus allowing for the production of more comprehensive project documentation, especially for later packages. This in turn yields benefits for the management of the budget with savings on early packages adding to reserves and potentially allowing for upgrades to the later packages. The downsides here are that more risk lies on the client side and with more contractors to manage, project management is more complex and more expensive. However, the client maintains tighter control over the design and budget, and in our experience the overall costs can be 5% to 10% lower compared with procurement via a general contractor. How much Whatever the procurement route, it is important to maintain control of costs at all stages of the project. Typical cost structure The costs of project implementation can be divided between labour, services and materials (direct costs) and the intrinsic costs associated with the project (indirect costs).

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www.pmgroup-global.com

M&A

Vlastislav Filipi and David Arneil Heads of the Cost and Planning Departments PM Group prague@pmgroup-global.com

Taxes

e) Cash flow Cash flow is calculated in accordance with the construction programme and accounting for the invoicing periods and retention provisions. Retention of up to 10% is typically withheld from interim payments to ensure that the contractor properly fulfils its obligations. Half of the retention (5%) is usually released at handover and the remaining half (5%) is retained during the war-

f) Tracking and cost reporting At each stage of the project, the cost report provides at a glance: The cost of purchased services (the contracted value) A list of items to be purchased (still to buy, including anticipated additional work, omissions, changes

to standards and specifications) The estimated final account (total of contracted value and still to buy) The variance to budget (sum of pluses and minuses) The status of contingency allowances (decreases due to the pluses, increases due to the minuses) An overview of payments for each period (including retention amounts) The adjusted anticipated cash flow for the remaining billing periods (required, for example, for the planning of loan drawdowns)

Human resources

b) Documentation for the planning permit – cost estimate Costs are determined on the basis of composite unit rates applied to measurable building elements (e.g. rate/m2 of roof, external walls, etc.) Historical price data are adjusted for inflation. The reserve at this stage is typically 7%-10%.

d) Control budget The costs are reviewed and agreed by the client and the project team to produce a cost plan in accordance with the client’s requirements. As the project progresses, the control budget provides the means of planning cash flow and tracking actual spending.

ranty period; the second half is often replaced by a bank guarantee. Invoices should be issued within 15 days of the certification date and payment is usually due between 30 and 60 calendar days from the date of issue.

Indirect costs Internal project management Construction and installation insurance Energy Connection charges Rents Taxes and duties Financial expenses Administrative and other fees

Permitting and construction

a) Concept design – initial cost plan At this stage, costs are determined parametrically (usually per square metre of floor area or per cubic metre of building volume, in some cases per functional unit) with contingency allowances for uncertainties, especially in relation to the location (utilities, induced investments, etc.). Historical price data are adjusted for inflation. The reserve at this stage is typically 10%-15%.

c) Documentation for the building permit – budget Costs are determined using a combination of detailed items and composite unit rates. Historical price data are adjusted for inflation. The reserve at this stage is typically 5%-7%.

Construction costs Demolition and remediation Protection of topsoil Replacement of greenery Actual construction of buildings and operational facilities and their associated infrastructure Induced investments Contributions to/from other investors (e.g. for common infrastructure) Indirect costs associated with the location of buildings Safety and fire-protection measures during construction Costs of archaeological research Inspection, testing, certification Initial filling and spare parts

Technology/fit-out costs Production technology Auxiliary construction Connection to utilities networks Special equipment for operation of technology Measurement and control Production management Waste management Licenses and copyrights Furniture fittings and equipment Trial operation

Properties

Cost planning process The development of the cost plan will follow the design process. In the Czech Republic this would typically be as follows:

Optional/additional planning items EIA documentation and process – EUR 5,000 to 30,000 (the main additional cost will be in terms of additional time required, which will depend on the EIA category. Category II: 2-3 months. Category I: 5-8 months. These periods may be incorporated into the design process to some extent.) Supplementary architectural services: interior, lighting, furniture, etc. Costs depend on the scope of the project. Green Building certification (LEED or BREEAM) costs depend on the size and complexity of the project.

IPPC process (Integrated Pollution Prevention and Control), 5-9 months. Costs depend on the type and size of the project.

R&D

Design and engineering works Standard requirements – typically 10%-15% of construction costs Verification of feasibility – due diligence Studies and concept designs Urban planning documentation for securing planning permission Documentation for the building permit and obtaining of building permits Documentation for construction Documentation for tendering

Documentation for implementation Author’s supervision Project management Safety coordination Responsible surveyor Building energy performance certification

Finance

Initial costs Purchase of land Land rental Temporary occupation Easements Exemption from the agricultural land fund Exploratory works on the site Geodetic works Archaeological supervision

First steps

Basic structure of cost categories used in the Czech Republic

The Czech Republic

Cost planning

What expats say about the Czech Republic I really enjoy the wealth of diversity here, which shines through the local architecture, history and citizenry. Also, having made the investment to learn the Czech language, I love using it in both my professional and private life.

The speed of the change in the country still amazes me. I enjoy the openness and friendliness of the Czech people.

Gary Thomas

Christopher Guilds

Executive Director Salmon Software

Director Asset Management Caerus Investment Management

Iris Finger Site Manager PPG Brno Shared Services Centre

I really like the unique mixture of Central European history, European culture, and a rapidly changing westernised society.

For a relatively small country, the Czech Republic punches well above its weight in creative fields, high-tech research and professional services.

John R. Westby Associate Vice President MSD IT Global Innovation Centre

Ben Creighton Associate Director PM Group

Hire people

The Czech Republic: Increasing skills in a competitive labour market Average salary ranges for selected roles, by industry Role

Min.

Max.

Typical

Min.

Manufacturing/automotive

Business services Accounts payable / English + 1 other language

Role

25,000

42,000

The Czech Republic is currently experiencing an economic recovery with a very positive outlook. Being predominantly an export-driven economy, as well as consistently receiving the highest credit ratings in CEE, the country has Max. Typical once again asserted itself as the ideal place for investors.

35,000

Design engineer

30,000

65,000

50,000

25,000

55,000

45,000

Customer service / English + 1 other language

25,000

38,000

33,000

Process engineer/technologist

HR operations / English + 1 other language

28,000

40,000

35,000

Quality engineer

25,000

60,000

45,000

Project manager

45,000

90,000

70,000

Finance and accounting

Construction and property Project manager

35,000

150,000

60,000

Accountant (junior/senior)

22,000

45,000

35,000

Property manager

45,000

85,000

65,000

Financial controller

30,000

90,000

65,000

Site manager

30,000

70,000

40,000

Financial manager

70,000

130,000

100,000

60,000

90,000

70,000

Product manager

70,000

100,000

85,000

Information technology Developer - Java/C++

Life sciences

SAP specialist

60,000

90,000

80,000

Key account manager

60,000

80,000

70,000

Security specialist

40,000

90,000

60,000

Medical advisor

70,000

90,000

80,000

Note: Monthly salary, CZK Source: Hays Czech Republic Salary Guide 2015

94 | INVESTORS‘ GUIDEBOOK

ndustry is generally the driving force of the Czech economy and has the largest share of GDP of the EU countries (47.3%), which makes the Czech Republic the most industrialised country in Europe. The recovery of the Czech economy is also having a positive impact on the labour market. In 2014, the number of vacancy enquiries began rising again and this trend continued in 2015. In a year-on-year comparison of the first six months of both years, the number of open vacancies increased by 40%. From the Hays Global Skills Index, an annual analysis of the labour market issued in co-operation with Oxford Economics, it is apparent that, in comparison with the neighbouring countries, the Czech Republic has relatively high labour-market flexibility thanks to the low volume of restrictions and good interconnection

Taxes M&A Top sectors

www.hays.cz

Human resources

Ladislav Kučera Managing Director Hays Czech Republic kucera@hays.cz

Permitting and construction

Life sciences The Czech Republic is an attractive country for pharmaceutical companies. The country’s EU

Temporary staffing Temporary staffing is still one of the most preferred solutions when flexibility is required. Companies most commonly use flexible forms of employment to limit their headcount and to implement time-limited projects. Companies require specialists in finance, project management, marketing, HR, customer service and administration, most often for a period of six months. Year-long use of temporary staffing is less common. Longer attachments are required primarily for project-management and administrative positions. The Czech Republic still lags behind Western Europe in the use of temporary services for managerial positions. As compared with Germany, the Netherlands, Belgium and the UK, demand for so-called interim managers in the Czech Republic is very low. However, if a company chooses this type of solution for an existing project or situation, this usually concerns interim managers in human resources, finance, IT or manufacturing.

Properties

Manufacturing/technology/development In 2014, about 150 new investments were brought to the Czech Republic and should create 16,700 jobs. The largest number of these investments are in the Moravia-Silesia and Ústí regions and the largest share of them (one-third of the investments) is in the automotive industry. The Czech Republic is the most attractive location for investors in the region. The largest number of job opportunities are being created in manufacturing and demand for both skilled and unskilled workers is rising dramatically. The most attractive areas are those with high unemployment rates, such as northern Moravia and northwestern Bohemia. The areas with the highest concentration of industry are traditionally found along the Plzeň-Prague-Liberec axis and

Finance The position of the finance and accounting sector is currently very strong. The Czech labour market offers an adequate number of experts that are capable of meeting the requirements of growing and newly established companies without any problems. The Czech Republic’s institutions of higher learning produce graduates with advanced theoretical knowledge and it is not a problem for investors to fill even positions requiring experienced specialists and managers. Particularly senior candidates have excellent knowledge of the English language and there has recently been an increase in the number of positions that transcend the country’s borders, so financial managers from the Czech Republic also manage financial teams in the rest of the countries in the region. Thanks to the availability of an adequate number of such experts, the number of projects with a broader scope is increasing in the Czech Republic.

membership and its local regulatory authorities guarantee compliance with European regulations, thus expanding the market for approved products. The Czech Republic is the seat of many large renowned pharmaceutical companies and is for this reason capable of providing all base facilities from trained staff through production resources and supply chains. The educational system is configured very well also with respect to the natural sciences, with more than 7,000 graduates per year in the field of life sciences alone. The pool of skilled junior candidates is thus quite variegated, which to a certain extent is also true of more senior candidates.

R&D

Construction and property There has recently been an enormous recovery in the construction and property sector. Investors and developers are focusing on commercial space, where interest is focused mainly on industrial projects such as logistics centres, warehouse facilities and more complicated production facilities and residential projects. In the case of office space, this mainly concerns renovation and conversion of less attractive building in the Prague city centre. There is strong demand for so-called green, environmentally friendly buildings. There is huge interest in mixed-use projects. Office complexes with retail units and comfortable amenities are standard. The Czech Republic is currently experiencing a construction boom focused primarily on Prague. Of course, this is associated with the creation of new jobs

Information technology IT is one of the most attractive fields in the Czech market. Many renowned companies from various countries are placing their IT centres in the Czech Republic. IT centres in the Czech Republic are located mainly in Prague and Brno. Other frequently encountered facilities are newly established development centres, as well as branches focused on IT support, infrastructure or implementation of new systems. One of the main reasons why companies head for the Czech Republic is finance. In comparison with their counterparts in the rest of Europe and in the United States, Czech IT specialists still get substantially lower salaries. Another reason is the quality and scope of the candidates available on the Czech market. Czech IT workers in many companies have stateof-the-art technology, high-quality base facilities, interesting benefits and growth opportunities.

in South Moravia. Another rapidly developing sector comprises expanding and newly established technology centres, which require highly skilled specialists in the fields of engineering, electronics, chemistry and IT. The primary sources of such specialists are the country’s technical universities, particularly in Prague, Brno, Ostrava, Plzeň and Liberec. Due to employees persistent unwillingness to relocate for job reasons, these big cities are suitable locations of investments in technology centres.

Finance

Business Services The business services market in the Czech Republic continues to grow. In 2014 the Association of Business Services Leaders had more than 150 shared-services centres with more than 55,000 employees on record. The envisaged growth for 2015 is 16%. The Czech Republic is being entered by new investors interested in building new SSCs, and additional processes and activities are being taken over in the case of already existing centres. Potential investors continue to express strong interest in Prague, Brno and Ostrava, though they have recently been encountered in smaller regional cities such as Plzeň and Olomouc. Accounting and finance continue to be predominant activities conducted at SSCs, though IT is not far behind. With respect to the language skills of job candidates, the stongest demand continues to be for those who speak German. The limited number of such candidates on the labour market has resulted in a relatively sharp rise in the wage expectations of the employees that possess these language skills and thus also and artificial rise in wages, in some cases by up to 25%.

and strong demand for experts and specialists in the given field. The development of industrial real estate is focused outside the capital, particularly on industrial areas located on the main traffic arteries with easy access to foreign markets. The Czech Republic has an adequate number of developers that can offer land already furnished with building permits, so construction may be a matter of only a few months.

First steps

of government regulations and the labour market. The market has a relatively large number of candidates that companies require.

The Czech Republic

Labour market

Flexibility for employers The employment legislation in the Czech Republic has evolved over the last two decades from a rigid system of rules into a system of European standard and emphasises the liberalization of the employment relationships. Employment relationships are regulated, in particular, by written labour law (the Labour Code) and, within its framework, by collective agreements and individual employment contracts.

Important employment regulations The main statutes and regulations relating to employment relationships in the Czech Republic are: Act No. 262/2006 Coll., the Labour Code Act No. 89/2012 Coll., the Civil Code Act No. 435/2004 Coll., the Employment Act Act No. 251/2005 Coll., on Labour Inspection Act No. 2/1991 Coll., on Collective Bargaining Act No. 245/2000 Coll., on National Holidays, Significant Days and Rest Days Act No. 198/2009 Coll., on Equal Treatment and Legal Remedies for Protection Against

Discrimination (Anti-Discrimination Act) Act No. 73/2011 Coll., on the Labour Office of the Czech Republic Government Decree No. 567/2006 Coll., on Minimum Wage and the Lowest Levels

of Guaranteed Wage, Definition of a Hazardous Work Environment and Extra Pay for Work in a Hazardous Work Environment Government Decree No. 590/2006 Coll., on the Scope and Extent of Other Important Personal

Impediments to Work

96 | INVESTORS‘ GUIDEBOOK

mployment models The regulations above relate to employees only (not to self-employed persons) and grant employees statutory protection as they are subordinated to the employer and perform work at the employer’s cost and responsibility. Employees perform work for the employer mostly under an employment contract, though in some cases the employment relationship is governed by special arrangements, namely an agreement on performance of work (in Czech dohoda o provedení práce) or agreement on labour activities (in Czech dohoda o pracovní činnosti). All types of employment relationships are regulated by the Labour Code. Under an employment contract, the employee is required to work up to a maximum of 40 hours per week (lower caps are set for specific group of employees working in two- or three-shift operations), while as a rule work time is scheduled over five working days per week. The employee and employer may agree on overtime work of up to eight hours per week on average over a period of 26 consecutive weeks. Relationships under an agreement on performance of work or agreement on labour activities are generally more suitable for less extensive, short-term job assignments where employees’ flexibility with respect to working on specific days is required, while under

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www.konecna-zacha.com

M&A

Radka Konečná Partner Konečná & Zacha praha@konecna-zacha.com

Taxes

mutual agreement between the employer and the employee

Human resources

dissolution or relocation of the employer’s undertaking (or a part thereof) employer’s decision on organisational changes and redundancy of the employee health condition rendering the employee unable to perform work failure of the employee to meet the legal or employ er’s requirements for the performed work breach of the employee’s work obligations (whereas only a serious or gross breach qualifies as a reason for termination) breach of the employee’s obligations in an especially gross manner during the employee’s temporary

An employment relationship may be terminated also in these other ways:

Agreement on performance of office The status of executive directors of legal entities is sometimes confused with an employment relationship, even though the members of executive bodies in the Czech Republic perform their duties under an agreement on performance of office regulated by Act No. 90/2012 Coll., on Business Corporations. Such an arrangement does not fall under the definition of an employment relationship and the provisions of the Labour Code therefore do not apply. An agreement on performance of office must be concluded in writing and approved by the general meeting of the company and include detailed provisions on remuneration; other conditions such as vacation and severance pay, may also be set forth in the agreement.

Permitting and construction

Termination of employment The Labour Code sets out a closed list of grounds on the basis of which an employer may serve a notice of termination to an employee (a notice of termination given without grounds or on the basis of any other grounds will be void):

Disputes Employment disputes mostly relate to termination of employment or compensation for work-related injuries. Claims related to termination of employment may be raised by the employee within two months of the date when the employment relationship should have originally terminated. If the termination of employment is ruled void by the court and the employee insists on further employment, the employment relationship further exists and the employee will be paid remuneration for the period of the dispute.

Properties

Minimum wage, overtime and annual leave The current minimum monthly wage (in 2016) is CZK 9,900 (approx. EUR 370) and the lowest minimum hourly wage is CZK 58.70 (approx. EUR 2.20). The minimum annual paid holiday is 20 working days. An employee performing overtime work is entitled to a premium payment of at least 25% of average earnings for overtime work (or time off in lieu of such premium payment).

The formal requirements for an employee’s dismissal, such as written form and direct delivery of the termination notice to the employee, must be observed. In the case of a less serious breach of the employee’s obligations, the employer is required to issue a written warning to the employee – only after continuance or repeated breach of the employee’s obligations may a termination notice be served. In the case of dismissal of an employee due to employer-related reasons (such as dissolution or relocation of the employer or organisational changes), the employee is entitled to a severance payment in the minimum amount of one, two or three average monthly earnings, depending on the length of employment. An employer and employee may agree on a larger severance payment or severance package. The statutory termination period is two months and commences on the first day of the calendar month following the month in which termination notice was delivered to the employee. Payment in lieu of a notice period is not permissible under Czech law, though the parties may agree on “garden leave” for the duration of the termination period. The employee is then still employed but is not performing work and not required to be present at the place of work, while being entitled to his/her full compensation based on his/her average earnings.

expiration of the employment contract where such contract was concluded for a finite period termination during the trial period by either party without stating a reason immediate termination of the employment by the employer – immediate termination may be used only exceptionally, such as when the employee breaches obligations arising from legal regulations relating to work in an especially gross manner

R&D

type of work place of work date of commencement of work

the employer’s business name and registered seat details of the type of work and the location in which work is to be carried out annual holiday entitlement information on notice periods for termination of employment information on the wage and remuneration system, payment dates, place and method of payment weekly work time and schedule information on any existing collective agreement

unfitness to work (i.e. to stay at home in accordance with a prescribed treatment regimen)

Finance

Terms and conditions of employment All employment relationships must be entered into and governed by a written employment contract. A verbal employment contract is considered void. Employers can be fined by the Labour Inspectorate for not concluding an employment contract in writing. The following conditions must always be agreed upon and defined in an employment contract:

A three-month trial period may be agreed between the parties. Additionally, employees must be acquainted in writing, within one month of commencing the employment relationship, with the following (though these aspects are usually the employment agreement):

First steps

an agreement on performance of work the scope of work may not exceed 300 hours per year and under an agreement on labour activities the scope of work may not exceed 20 hours per week on average over the agreed period (max. 52 weeks). The Labour Code sets for employees only basic obligations resulting from an employment relationship and it is up to the employer to specify such obligations to suit its specific needs – however, conditions cannot set to the employees’ detriment. In order for employees to fulfil their obligations, the employer must provide them with suitable working conditions (e.g. effective organisation of work, provision of protective clothing, provision of tools, etc.). The regulation of relationships under an agreement on performance of work or agreement on labour activities is less rigid and several statutory provisions of the Labour Code do not apply (e.g. severance pay, annual leave, reimbursement of travel expenses and termination of the employment relationship). The regulation of taxation, social security and health insurance under these employment models is essentially the same as in case of an employment relationship under an employment contract. Self-employed persons may be hired to perform work, though such work should not be performed on a regular basis and should not have the characteristics of dependent work – otherwise, it could be re-classified as an employment relationship. If a self-employed person performs work which has characteristics that are defining for a dependant activity (the so-called Švarc system), sanctions of up to CZK 10 million (approx. EUR 370,000) for illegal work can be imposed on both parties by the Labour Inspectorate.

The Czech Republic

Labour law

Being an employer in the Czech Republic Insurance, support and assistance are the ingredients of a just social system for everyone. The responsibility of employers, employees and the social-security administration in the case of unemployment, sickness, disability, care or emergencies in the Czech Republic. What costs must be calculated when hiring employees? Computation of wages and elements thereof, benefits and mandatory contributions in the Czech Republic. Overview of Social Security Benefits

Health insurance

Sickness

Insurance Social-security insurance

Pension

Contribution to the State Employment Policy

Salary-based Benefit

State socialsecurity benefits Not salary-based

Material hardship benefit Assistance Social care benefits

98 | INVESTORS‘ GUIDEBOOK

Bereavement pension

Medical treatment costs Sickness Sickness-related care Monetary maternity support Compensation payment Old-age pension Disability pension Widow/widower pension Orphan pension Unemployment benefit Primary school kit payment Child allowance Social allowance Housing allowance Childbirth payment Funeral payment Parental allowance Carer allowance Housing cost compensation Living cost compensation Extraordinary assistance Disability allowances Social care benefit

ocial-security system The social-security system represents one of the most important areas of social policy in the Czech Republic. In a modern society it is rightfully expected that social policy will ensure, through its social-security system, the prerequisites, conditions, impetus and motivation to develop each individual and thus the prosperity of the whole society. In the Czech Republic the social-security system is implemented through three main tools, namely social-security insurance, state social benefits and social assistance and services. Contributions to social-security insurance are mandatory under the law. By contributing part of their own funds to this financial system, people insure themselves for possible future situations. The basic principle of this system is social solidarity of citizens. With regard to the time period, social-security insurance can be classified as short-term (sickness benefit, maternity benefit and unemployment benefit) and long-term (pension and disability benefits). In compliance with the international classification, Czech social-security insurance is divided into the following systems: sickness insurance, accident insurance, health insurance and pension insurance. In other words, social-security insurance helps people prepare for possible life situations including, for example, unemployment – citizens of the Czech Republic contribute to the Employment Policy Fund, which is actually

an unemployment benefits fund; ill health – citizens contribute to the health-insurance system; short-term disability – citizens pay sickness-insurance contributions; long-term disability – pension-insurance contributions; and work-related accidents – personal-injury insurance. Czech social-security insurance is embedded in several legal regulations, of which the most important are Act No. 589/1992 Coll., on Social Security Premiums; Act No. 155/1995 Coll., on Pension Insurance; Act No. 266/2006 Coll., on Accident Insurance of Employees; Act No. 426/2011 Coll., on Pension Savings; and Act No. 427/2011 Coll., on Supplementary Pension Savings. The Czech Social Security Administration (CSSA) is a state administration body that represents the state in matters involving pension benefits. The function of the CSSA in the Czech social-security system is to regularly collect contributions to the social-security insurance system and the State Employment Policy. The CSSA also pays out retirement and disability pensions, sickness benefits and other benefits should an individual become eligible. Health-insurance contributions fund basic healthcare. All employees and self-employed people as well as individuals without taxable income residing permanently in the Czech Republic are obliged to pay contributions. Part of the insurance is paid by employees themselves and part is paid by their employer. These payments are not sent to the state but rather to health-insurance companies. Health insurance covers medical treatments, medical

Employee

Employer

Health insurance 4.5%

Health Insurance (4.5% / 9%)

CZK 1,485

EUR 55

CZK 0

EUR 0

2.3%

CZK 2,970

EUR 110

CZK 759

EUR 28

Social insurance 0%

Sickness insurance (0% / 2.3%) Pension insurance (6.5% / 21.5%) State employment policy (0% / 1.2%) Social insurance total (6.5% / 25%)

6.5%

CZK 2,145

EUR 79

21.5%

CZK 7,095

EUR 263

CZK 0

EUR 0

1.2%

CZK 396

EUR 15

6.5%

CZK 2,145

EUR 79

25%

CZK 8,250

EUR 306

11%

CZK 3,630

EUR 134

34%

CZK 11,220

EUR 416

CZK 2,070

EUR 77

CZK 2,434

EUR 90

CZK 44,300

EUR 1,641

CZK 44,220

EUR 1,638

Insurance contributions total Insurance contribution (11% / 34%)

Properties

Tax relief Employee relief Children tax relief Children tax relief

Permitting and construction

Income tax Monthly taxable salary Income tax deposit

15%

CZK 6,645

EUR 246

Solidarity tax if income exceeds 100,000 CZK/3,704 EUR

CZK 0

EUR 0

Tax deposit after deduction of tax reliefs

CZK 2,141

EUR 79

Net monthly salary

CZK 27,229

EUR 1,008

Top sectors

www.adecco.com

M&A

Karel Skalník Head of payroll Adecco karel.skalnik@adecco.com

Taxes

Salary cost to the employer

Human resources

Employee benefits The most common benefit provided by employers is meals, usually in the form of meal vouchers or subsidised meals in the company canteen. The maximum value of meal vouchers is not limited by law. For the employee, the employer’s contribution to meals is a non-taxable non-monetary benefit. The value of the meals or vouchers provided by the employer is not included in the salary used to calculate social-security and health-insurance contributions. However, the cost of the benefit can

CZK 33,000 / EUR 1,222

R&D

Salary Since 2008, the so-called super-gross salary has been used in calculating personal income tax and social-security and health insurance contributions. It comprises the employee’s basic salary plus insurance contributions paid by the employer. Net pay is equal to an employee’s gross salary (basic salary, allowances, bonuses and holiday and sickness payments, etc.) for a calendar month minus income tax plus tax credits minus the 11% social-security insurance premium (6.5% of the gross salary) and the health-insurance premium (4.5% of the gross salary).

Example of salary calculation Gross salary (monthly)

Finance

Payroll accounting Payroll accounting is part of employers’ accounting and it is one of the basic sources of information about the financial situation of a company. Payroll accounting includes HR and payroll data, salary calculations, social-security and health-insurance deductions, taxes, garnishing of wages and other individual salary deductions. HR and payroll administration is essential for mandatory reports and summaries sent to social-security bodies, health-insurance companies, the Tax Office, the body responsible for statutory employer insurance, the Labour Office and other institutions. Payroll and HR administration can be outsourced and in the Czech Republic these services are provided by a great number of companies. Payroll outsourcing involved comprehensive HR and payroll administration in compliance with current legislation and related services.

reduce the company’s tax base by up to 55% of the value of the meal or meal voucher, though this amount may not exceed 70% of the current limit on meal allowances, which is CZK 83 (EUR 3) per meal/voucher. Contributions to the employee’s pension fund with a state contribution, supplementary pension insurance and private life assurance are the most common financial benefits. The employer’s contributions are taxfree up to the limit of CZK 50,000 (EUR 1,850) a year. The employer can use these costs to reduce their tax base regardless of the total sum of contributions as long as these contributions are embedded in the company’s collective agreement, internal company directives or in individual employment contracts and agreements. Courses for employees are another very common benefit. These can be profession-related trainings, language courses or other forms of education. For employees such courses and trainings are a great opportunity to gain new knowledge and skills free of charge. The employee is not liable for tax on this benefit, though the employer can use the cost of courses to reduce tax base as long as the provided education relates to the company’s business. Cultural events, sport and holiday contributions can have the form of a Flexi pass, which can be used as a payment method in selected pharmacies, theatres, cinemas, sport facilities, gyms, travel agencies and other businesses. As the name suggests, this pass is a very flexible form of benefit that employees can use as they wish. For the employee, this non-monetary benefit is non-taxable up to the value of CZK 20,000 (EUR 740) per year. Employers pay this benefit from their after-tax income via the Social and Cultural fund, which means that its costs cannot be used as a tax deduction. If the value of the benefit exceeds the limit of CZK 20,000 (EUR 740), the amount over this limit is added to the assessment salary used to calculate social-security and health-insurance contributions. A company car is often provided to employees for both work-related and personal use. In such a case, 1% of the cost of the car is considered to be the employee’s income for every commenced month when the employee uses the car. Companies do not have to deduct write-offs, maintenance costs or road tax, but different conditions apply depending on who pays for the fuel. If the employer pays the entire fuel cost, the value per kilometre of personal use of the car is added to the basic salary used to calculate social-security and health-insurance contributions.

First steps

devices, medication, etc. It does not cover some drugs and services that are not part of basic healthcare. These are paid for by patients. The state pays contributions on behalf of children, fulltime students up to the age of 26 and retired people.

The Czech Republic

Social-security system and payroll accounting

There are enough candidates, but to recruit them one must offer more and work on HR marketing In general, the Czech economy is in very good condition, GDP is growing, companies are able to realise larger order volumes and the Czech labour market can offer skilful and appealing people. Despite very high employment, it is relatively easy to obtain a high-quality workforce. These are people who long for better conditions, and their current employers either cannot or do not want to satisfy their needs.

he Czech labour market exhibits certain specific features, to which greater attention must be devoted when entering the local market. These include people’s unwillingness to travel to work and a lower unemployment rate, which are at least to some extent offset by employees’ willingness to change jobs. In general, Czechs do not want to move because of work, and in this respect there is very low mobility here. Great emphasis must be placed on the choice of location in which a new investor wants to do business. On average, Czechs spend 24 minutes commuting to work and the maximum amount of time that people are willing to spend commuting is 45 minutes. When this time is exceeded, employees become frustrated and disinterested. It is primarily a time barrier, but also a financial one. Forty-four percent of Czech employees travel to work by car and less than one-third use public transport (buses, trains, etc.).

100 | INVESTORS‘ GUIDEBOOK

In the first quarter of 2016, the general unemployment rate in the Czech Republic was 4.3% at remains on a downward trend. The preliminary rate for the second quarter is just 3.9% and there are regions where the unemployment rate is even lower. The Czech Republic has the lowest unemployment rate in the European Union. Despite that, one can still find suitable workers among the country’s unemployed and economically inactive people. All that is needed is to create more suitable conditions for them (most importantly part-time work, greater flexibility, retraining and/or education following recruitment). In reality, there are many more people available for recruitment on the market than the employment figures would suggest. The largest group consists of those who are currently employed but are interested in better conditions which would better suit their needs. Thus, there is considerable room for new investors. However, they must actively work on building their brands as employers that will offer applicants opportunities that are interesting enough to be relevant motivators to change jobs.

What salary increase would motivate you to change jobs? 79%

Salary increase 33%

I would go immediately and without a salary increase.

26%

At least 10%

Better work environment

25%

At least 20%

Better people around

23%

At least 30%

Better projects Other reason

14% 9%

9% 28% 30% 21%

At least 40% I would never change jobs for financial reasons.

www.lmc.eu

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Petr Liko HR Marketing Consultant , LMC petr.liko@lmc.eu

M&A

Jaroslav Franta HR Marketing Consultant, LMC jaroslav.franta@lmc.eu

Taxes

people around them (23%), whether colleagues or superiors, are also significant factors. And what is most important? A mere 14% of people declare that, right now, nothing at all could motivate them to change jobs. So 86% of employees can be attracted by various forms of motivators. And what is more, over 62% of employees are open to offers of new work and 10% are even actively searching for job opportunities. When people in the Czech Republic search for a job, the vast majority of them – two-thirds of the employed population – use the internet, primarily job portals, internet search engines, company websites and social networks. Offers in labour offices, the press, classified advertisements, recruitment leaflets and career fairs are far behind. The portals with the highest spontaneous awareness among people are Jobs.cz (known by 74% of the adult population), Prace.cz (60%), Volnamista.cz (14%), Profesia.cz (11%) and Mpsv.cz (9%).

Human resources

Naturally, a higher salary is the greatest motivator (for 79% of people) to change jobs; however, for over half of employees, it becomes interesting only when they stand to gain a pay increase of at least 30% over their current income. This means that it is not enough to merely pay employees more or, more precisely, that overpayment a pay raise would have to be truly considerable. After all, in the context of the European average, Czech employees’ remuneration is below average. So, besides a higher salary, what else motivates people to change jobs? As many as 33% of employees state that it is greater flexibility with respect to working hours or job location. This is where we have to be aware of the unexploited opportunity that this represents, because currently only 6% of jobs offered allow part-time work, only 10% of offers allow working from home and only 22% offer flexible working hours. For 26% of employees, better workplace accessibility and closeness to home are motivators to change jobs, and a better work environment (for 25%) and better

Permitting and construction

Source: Jobsindex, LMC, September 2016

Properties

Nothing at all could motivate me to change jobs.

R&D

Better workplace accessibility and closeness to home

PR on career websites and publish the latest information from the life of the company and its employees. For candidates with higher education, familiarisation with the corporate culture is particularly important. In the Czech Republic, applicants most frequently reach career websites from advertisements on job portals, corporate and product websites, and recruitment campaigns. To date, social networks have not played a major role as a source of candidates. If the required target group of applicants is found on social networks, it is appropriate to support recruitment with a list of jobs directly on the employer’s local corporate or career profile. Support for year-round traffic on career websites is ensured by a suitably chosen communication mix that includes PR articles, highlighting on job portals, banners and online campaigns. In the online area, the costs of employer branding comprise 70%-80% of the employer’s communication budget. Recruitment campaigns, particularly those adopted from abroad, are usually tested on the local target group of applicants and modified according to local customs on the basis of the findings. In general, Czechs are sensitive to and critical of campaigns that someone copied and translated. The same applies to recruitment campaigns, which then fail in what is most important – being able to attract candidates and connect them with employers. When building an employer brand, success is influenced by a suitably formulated employer branding strategy and HR marketing communication, which builds on the identified local employee preferences and the employer’s relevant value offer (employer value propositions).

Finance

Greater flexibility

In the Czech Republic, the first communication from the employer to the candidate is usually in the form of an online job advertisement. One must engage applicants’ interest and make them enthusiastic about working for the specific employer. That is why advertisements do not differ only by information about jobs; great emphasis is also placed on the interesting form and content of the message, which presents the benefits, job description and company itself in the most appealing way possible. There is a general effort to be different from others. It is important that job advertisements are perceived by the target group of applicants as relevant and authentic. They must contain what is interesting to the candidates and what will convince them to change jobs, while also speaking the target group’s language (for example, different forms are suitable for candidates in the areas of finance, retail, automotive and IT). According to current best practices, it pays to leave the creation of basic sets of advertisements to the experts. Such advertisements bring employers a far larger number of responses and a better to choose among candidates. If the advertisement is the first form of contact, career websites (microsites) are the focal-point of information about the employer and the main platform for building the employer’s brand online. Publishing a list of vacancies through advertisements is definitely not enough. A career website serves as the employer’s shop window and should be created with the appropriate care. Modern career websites contain virtual tours or photo galleries, videos (employees, departments), animations and other interactive elements (games, quizzes, etc.) that enhance the candidate’s user experience. Some employers are aware of the importance of active

First steps

What would motivate you to change jobs?

The Czech Republic

HR marketing

Why recruitment agencies are superior to social networks LinkedIn, the largest professional social network in the world, has approximately 300 million registered users. Conversely, the largest Czech recruitment agencies collectively have about 300,000 specialists and managers using their services. Though LinkedIn obviously has vastly superior numbers, the quality of a recruitment agency trumps the social network’s quantity when it comes to finding senior managers or specialists in a particular field.

Advantages of recruitment agencies compared to social networks – conditions in the Czech Republic Personal approach Extensive database of high-quality specialists and managers Search for appropriate candidates Market monitoring HR-marketing campaign preparation Subsequent cooperation with the client company’s senior management Ability to form complete work teams Feedback Satisfaction guarantee or replacement of unsuccessful candidates

102 | INVESTORS‘ GUIDEBOOK

ocial networks differ mainly in their focus. While Facebook is commonly used for sharing entertainment content, LinkedIn brings together professionals from different business sectors and from all around the world. LinkedIn members use the network for various purposes, such as sharing the latest industrial intelligence, engaging in discussions on specialised topics, communicating with specific professional groups, looking for suitable employees and looking for vacant positions. In the Czech Republic recruitment agencies are most preferred According to research conducted by the British company Link Humans, LinkedIn is used by 94% percent of respondents, regardless of their professional discipline. In the Czech Republic, there are approximately 900,000 LinkedIn users, though companies rarely use social networks when looking for new employees. Currently in the Czech Republic, LinkedIn is used mostly by men, who make up 60% of all users. Generally, social networks are used here by younger people aged 25 to 34, with the majority of them working in IT, software services, telecommunications or banking. Companies in the Czech Republic still prefer to use recruitment agencies when searching for new employees. According to a survey conducted by Advantage Con-

sulting, in 71% of cases companies choose recruitment agencies due to the lack of quality CVs submitted directly to companies by potential candidates, to save time in 37% of cases and in 25% of cases because recruitment agencies have greater possibilities to find suitable candidates. The survey also indicates that companies searching for new employees use only Facebook and/or LinkedIn, and ignore other social networks. In the Czech Republic, only 10% of companies search for new employees via social networks. Social networks do not save time and money A five-year forecast published in 2010 predicted that social networks would fully replace Czech recruitment agencies. That prediction has proven to be completely inaccurate, and the workload of recruiters has not decreased. Czech recruiters (companies´ in-house HR staff) cannot make full use of social networks, as they tend not to use them every day and social networking environments change very quickly. It takes long hours not only to learn how to look for candidates via LinkedIn, but also how to communicate with them properly. Added problems arise when a company recruiter contacts a competitor’s employees. If a potential new employee is not approached in a professional manner, the recruiter may cause more harm than good. Certain information about the company may be revealed, such as its difficulties with filling some

The most frequent reasons why companies on the Czech market cooperate with recruitment agency 7%

Insufficient database

Properties

Time saving 16%

45%

Agencies have greater insight into labour market Lack of HR consultants

Human resources

Money saving

Permitting and construction

23% Taxes

Olga Hyklová Owner and CEO Advantage Consulting Jobs hyklova@acjobs.cz

Top sectors

www.acjobs.cz

M&A

A license is crucial Of course, recruitment agencies also use social networks, but they work with them every day and use them only as an additional service, not as a principal resource. It is essential for agencies to purchase the necessary licenses; otherwise, they are not able to find contacts for appropriate senior management candidates. In the Czech Republic, companies should focus mainly on the recruitment agency databases, as reputable agencies provide databases with hundreds of thousands

Watch out for job sites Thanks to the current low unemployment rate in the Czech Republic and the highest number of available jobs in the past six years, job portals are also starting to have problems. They may have a larger number of

job offers, but candidates unfortunately do not respond to them anymore because people currently have almost no need to look for jobs in this way. Especially senior management positions cannot be filled solely through advertisements, as candidates without the necessary qualifications often respond to them. Finally, HR recruiters can discover that no candidate is suitable for a given position. Advertisements often appeal only to jobless people or casual browsers who visit job portals every day. Hardworking, reliable and permanent employees that are sought by most companies do not browse job portals daily, as they are invariably already employed and have no time or inclination to look through job sites.

R&D

Comprehensive services are commonplace While HR professionals have to do everything themselves, from finding a new candidate to conducting interviews, recruitment agencies offer full service covering all aspects of the hiring process. Initially, the agency selects people on the basis of the client company’s defined requirements, then the candidates’ genuine interest is discreetly examined. Suitable candidates are later familiarised with the company itself including its culture and pay conditions. Finally, they are acquainted with the company’s specific conditions and only precisely selected candidates are shortlisted. When it comes to filling senior management positions, HR managers should not be the ones to do it. It appears unprofessional if HR managers influence the selection of the senior managers who ultimately become their bosses. Rather, an HR manager’s role is to maintain the relationship between the agency and the company’s senior management. Quality recruitment agencies provide comprehensive service in the field of human resources, recruitment advice and evaluation of new or present staff. Social networks are not able to meet the client’s requirements. Furthermore, social networks are not able to respond flexibly to the market and changes of working conditions in the country. On the other hand, recruitment agencies know this field very well, as they diligently monitor market trends, focus on particular sectors and pre-select suitable candidates.

of jobseekers. When searching for a senior manager, it is good to find an agency that specialises in senior management. Such an agency does not monitor blue-collar professions, but its database rather contains mainly candidates whose command of at least two languages is very good and whose education is suitable for the given position, or are specialists in the given field.

Finance

The recruitment agency as an equal partner If a company decides to use social networks when looking for employees, this is usually done when specialized IT positions need to be filled, as IT specialists form the largest group of registered users. In the case of searching for senior managers, recruitment agencies are more trustworthy and therefore are used more frequently than social networks. Czech recruitment agencies provide professional services and represent a significant partner for the company it is working for. Recruitment agency services are almost indispensable especially if the company is searching for senior management. The agency’s approach is, of course, individual and always discreet. The services of recruitment agencies are also indispensable for foreign investors coming to the Czech Republic. For new branches, recruitment agencies are able to form complete teams, from junior staff to senior management. In this case, social networks cannot compete with recruitment agencies. Furthermore, recruitment agencies are flexible and respond to companies´ demands immediately. If a company’s senior manager resigns, the recruitment agency is able to replace him or her in a very short time with a new candidate who meets the company’s needs. Senior managers are responsible for recruitment in the company, too, so they also start to cooperate with the agency as a business partner. This is advantageous because they not only know their staff but also know how the agency operates, how flexible it is and how quickly high-quality results can be achieved. Recruitment agencies should therefore become companies’ partners that will not only be able to find senior managers for them but will also help them

to form the rest of their teams and set up the appropriate corporate culture. At the same time, the agency is able to create a marketing and promotional campaign that attracts people to the region. For their own campaigns, many companies often use the same old schemes, e.g. billboards across the country, which are often ineffective.

First steps

vacancies, the nature of its business plans or the kinds of benefits it offers. When recruitment is performed by a recruitment agency, everything is carried out discreetly. Only candidates with genuine interest are then invited to interviews. Furthermore, those companies that believe there are financial savings to be had if they look for new employees through social networks are mistaken. LinkedIn has already become a paid service and its license costs are relatively high, with prices reaching CZK 250,000 (approx. EUR 9,300). In addition, a company’s employees (HR staff) who use this social network have to be paid as well. In cases where LinkedIn is not used every day, it is not worthwhile and it is especially unsuitable for smaller companies.

The Czech Republic

Finding management

Employment agencies and recruitment of blue-collar workers in the Czech Republic The Czech economy is in good shape and should grow by 2.5% in 2016. As an analysis conducted by the Czech Banking Association indicates, the economy’s growth is influenced mainly by household consumption, low unemployment and weak inflation. According to bank analysts, none of the existing external risks such as trade wars, Brexit or declining demand for automobiles has had any obvious effect on the Czech economy and virtually the same economic growth dynamics are expected for next year. Tips on how to recognise a good employment agency: The agency has a clearly defined vision Clear manner of communication and provision of information Long-term presence on the Czech market Compliance with Czech legislation and, ideally, APPS

(Association of Personnel Services Providers) standards

Major sources of applicants for blue-collar jobs: Recommendations by current employees CVs submitted by applicants Internet advertising Labour offices Job portals Cooperation with schools

104 | INVESTORS‘ GUIDEBOOK

ogether with the economic growth in recent years, one can perceive the ongoing reduction of unemployment, which could make it difficult for employers to recruit first-class workers. The Czech economy achieved record-low unemployment in 2016. While the unemployment rate was around 10% in spring 2010, it fell below 5% in late 2016. At present, there are nearly 363,000 jobseekers in the labour market, whereas the number of vacancies was in excess of 140,000 in September 2016. The ratio of vacancies and the unemployed person is constantly decreasing. This fact is a pleasant message for school-leavers and graduates as well as jobseekers over 50 years of age, whose presence in the labour market is gaining greater importance. An analysis of the unemployed indicates that over 50% of them are women and around 5% are school-leavers. Naturally, the distribution of unemployment is far from even in the Czech Republic. Northern Bohemia and Northern Moravia are still among the regions with higher unemployment rates in comparison with the other regions of the country, and the state should thus endeavour to create new jobs in those regions through investment

incentives or by building industrial parks with the appropriate infrastructure. The strongest demand for employees is still apparent in manufacturing, and it still applies that job applicants need not have any specific knowledge or skills for nearly half of the offered positions, where employers mostly require only primary education. On the other hand, jobs for which a university degree is required are scarce, as there are fewer than 4,600 (approximately 3.3% of the total) such positions available. The latest trends in recruitment of blue-collar workers include extended cooperation with employment agencies (not only during the start-up stage, but also during production peaks), a complex system of corporate benefits and special methods of selecting new employees. The role of employment agencies in recruitment The majority of applicants in the Czech labour market are passive (only approximately 10% of applicants actively engage in seeking a several times a week). On the other hand, they are inclined to communicate with employment-agency consultants. There is also an increasing

Plzeň Region 3.29%

Ústí n. L. Region 7.62%

Prague Region 3.40%

Pardubice Region 3.61%

Central Bohemia 4.12%

South Bohemia 3.76%

less than 4.00%

H.K. Region 3.53%

Vysočina Region 4.54%

South Moravia 5.71%

4.01% to 5.00% Olomouc Region 5.45%

MoraviaSilesia 7.14%

Zlín Region 4.53%

5.01% to 6.00% 6.01% to 7.00% 7.01% and above

Properties

Source: Ministry of Labour and Social Affairs of the Czech Republic, 2016

Top sectors

www.hofmann-personal.cz

M&A

Eva Jančaříková Sales and marketing Hofmann Wizard plzen@hofmann-personal.cz

Taxes

New, specific methods of selecting new employees Due to the time required to recruit new employees, a whole range of tests has been implemented recently in the recruitment process. Production workers are tested for manual skills, general knowledge, knowledge of technology and driving skills. Assessment centres

have also become more common. During interviews, applicants often leave the meeting room and during a tour of the production plant their potential supervisors ask them about solutions to various situations. The above facts clearly show that businesses are paying ever greater attention to selection of suitable employees. This is good news, as research shows that the costs of hiring a new employee equal his/her annual pay. It also fortunate that the pressure to increase the efficiency of the recruitment process in the Czech Republic has not resulted in deterioration of employees’ working conditions.

Human resources

centres that issue certificates usable in employees’ future careers. Production plants are often located in industrial parks where there is limited access by mass transport. Therefore, manufacturing companies often offer various transport and/or accommodation contributions.

Permitting and construction

Company benefits structure and successful hiring process In the Czech Republic, company benefits are frequently used as a motivational tool. In recent years, their effect on jobseekers’ decision-making process has increased while wages have gradually ceased to be the main motivational element. Employment agencies can compare the offers of individual firms and are thus able to provide employers with information and advice of how to set up an attractive benefits package to increase recruitment success. The most frequently offered benefits include meal vouchers (55% to 100% of the vouchers’ value is paid by the employer), contributions to social security and health insurance, additional leave and contributions to free-time activities (sports, culture, etc.). Administration of benefits is often implemented using cafeteria plans. A benefit highly valued by employees is support for education and training, which has an invaluable role in manufacturing, where many businesses have their own training

K.V. Region 5.15%

Liberec Region 4.98%

R&D

1. Time savings during the recruitment process – focus on the company’s own personnel 2. Interviews, shortlisting, training, medical examination, provision of protective equipment, administration, wages payroll, etc. 3. The demanding induction training stage is conducted through the agency (cases of false sickness, contingent turnover, dealing with compensation of damage, etc.) 4. Flexibility – quick response time, immediate replacement – often even during the same shift 5. A verifiably productive worker may be accepted as a permanent employee. 6. Nonstop support and services 7. Arrangement of transport/accommodation of employees 8. HR legal consultancy, transfer of know-how 9. Presence of the agency’s representative at the workplace (administrative support, monitoring of workers’ performance, etc.) 10. Possibility to try out workers for a fixed period of time including the possibility of hiring such workers as a permanent employees

Unemployment rate in the regions Unemployment rate among the population aged 15-64 in regions of the Czech Republic as at 30 November 2016

Finance

Added value when cooperating with an employment agency lies primarily in the following facts:

Compared to Western European countries, hiring through agencies in the Czech Republic still has a much lower share of the market. According to the most recent statistics from 2009, the share of companies employing agency employees was 7% (compared to 57% in Belgium and 49% in Denmark). The average length of a temporary assignment for 27% of employees is up to one month, while for 38% of employees it is one to three months and for 35% of employees it exceeds three months. Agency employees assigned to a business are protected by Czech laws and regulations to ensure that their wages are comparable to those of permanent employees. By no means are agency employees paid poorly, nor do they suffer any other disadvantages. The major advantage of agency employees is the possibility of employment for a fixed period of time. This creates a certain reserve protecting businesses against seasonal fluctuations and changes of daily orders. In the financial respect, cooperation with an employment agency involves purchasing services. This is appreciated primarily by foreign companies with relatively strict budget structures. The costs of agency employees are therefore included in services costs and not labour costs. Agency employment is also helpful when dealing with high employee turnover in a business and reduces the costs of recruiting of new employees.

First steps

number of very satisfied employees who do not intend to change jobs. These statistics also apply to blue-collar workers. In the past, recruitment of production workers consisted in publishing job ads and waiting for CVs to roll in. However, it is currently not possible to wait up to six months until the positions are filled through this standard process. The latest trend involves the ever greater use of employment agencies during the start-up stage of companies. Most employment agencies have solid experience with recruiting blue-collar workers and have their own recruitment concepts. In the case of small recruitment operations (up to thirty), workers are ready to work within days; in the case of large recruitment projects (more than 50 employees), an agency’s response time is usually up to six months including possible hiring of workers as permanent employees. A number of businesses regard agencies as the most stable source of permanent employees.

The Czech Republic

Finding workers

Understanding shifting motivations as the key to talent management The competitive market place, rapid development of new technologies and changing employee expectations suggest that a traditional approach to talent management is no longer sufficient. The recruiter’s role in the talent selection and management process has changed. The days when an agency’s expertise lay in reviewing candidates’ experience and knowledge and candidates were mainly driven by salary and working hours are gone. Now more than ever, recruiters are matchmakers between candidates’ motivations and employers’ culture.

mployee motivation Today’s employees are globally minded, socially connected, technologically savvy, highly inventive and driven by a sense of purpose. Employees expect an individual approach from their employers and a tailor-made career-development solution that is specific to their needs. Their motivation to work is not just their remuneration, but also important factors such as the work environment, career development and training opportunities. Successful HR professionals now must create a solid HR strategy and apply the latest methods in order to work effectively with talented candidates, so that they can attract, develop and retain skilled people. It is no longer enough to identify hard, technical skills and the previous experience of the candidate – emphasis must now be placed on motivating employees and satisfying their needs and vision. The focus is therefore on working with employees’ potential

106 | INVESTORS‘ GUIDEBOOK

and developing each individual person. Recruitment expertise has now grown to include identifying these preferences. HR executives across the globe need to create solid strategies and deploy fresh tactics to attract, engage, develop and retain the skills necessary to build effective organisations. The situation is no different in the Czech Republic. We’re witnessing a developing trend in recruitment – employers are now searching more for soft skills in employees rather than for hard or technical skills. On the other hand, employees are no longer interested only in remuneration, but also require a good work-life balance, flexibility, a pleasant work environment, great company culture, career development and training opportunities. Generation Y in the workforce Generation Y is a term used for the generation born in the period from the 1980s to the turn of the new millennium. That is why these individuals are referred

Human resources Taxes M&A Top sectors

www.reedglobal.cz

Permitting and construction

Lenka Hnátková Director REED lenka.hnatkova@reedglobal.com

Properties

Latest trends Since the 2000s, many companies have implemented talent management tools and consulting companies focusing on providing services in this area have been established. Talent management practices in the Czech Republic are more advanced in large international organisations and are comparable to those in Western European countries. The vast majority of international companies have an established performance and succession process that includes talent management tools. They understand the necessity of implementing a career progression and career development plan including sourcing of future employees. These companies tend to be strong in the area of recognising in their ranks and subsequent implementation of talent management tools. These companies see talent management as a comprehensive tool which helps them to work with talented people and employees with strong potential. However, it is fair to say that there is still room for improvement on the Czech market. The past trend

of hiring employees and leaving them to float from one position to another before fully identifying their ultimate motivations could be explained by the fact that implementation of talent management was somehow lacking. Even now, implementation of talent management systems is on a rather small scale. The main reasons for that may be a lack of knowledge pertaining to implementation of talent management or a shortage of personnel or financial resources needed to implement talent management in companies’ HR practices. Talent management has become an important concept and widely debated topic across all business streams and society as a whole. In order for this positive development to persist, it is important that companies remain at the top of their game within the given market. Factors currently threatening companies’ ability to remain competitive include outflow of experienced workers with required skill sets, the simultaneous influx of inexperienced graduates and unrealistic salary expectations. In good times and bad times, the competition for talent never stops. Even in an economically unstable environment, talent management remains a critical issue for top management and is undeniably a top priority for business success. The war for talent sits alongside the race to innovate. HR managers that recognise this and respond accordingly will have an unprecedented opportunity to help themselves and their staff to become leaders in this new world of work. Not only every HR professional, but also every line manager should bear that in mind and remember the importance of an effective talent management strategy at the beginning of the cycle when looking for new employees.

R&D

to as Millennials. People of this generation are highly active, goal oriented and ambitious. However, they also require a favourable work-life balance. They are not willing to sacrifice their personal and family life. Millennials are generally very confident; they are not afraid to question authority and are constantly seeking out new challenges and looking for meaningful work. Millennials typically want to be part of a team, but at the same time they desire a place in the spotlight. While they seek the input and affirmation of others, they also crave attention, feedback, guidance and career progress. They are active on social media, through which they communicate and share new trends. Their connectivity and technological background prove to be valuable assets for companies, reducing the cost of training. However, young people now have a broad selection of opportunities not only to openly communicate and travel, but also to get work experience abroad. They embrace change; flexibility is the new norm. By taking a close look at employees in different age brackets, it becomes apparent that the concept of loyalty is changing increasingly among the members of Generation Y. Workers belonging to this generation are hardworking, though they are also eager to look to the next stage of their career development soon after entering the workforce. Although

Function and benefits of talent management The Czech Republic’s labour market has changed since the first decade of the 21st century. Companies now understand the importance of retaining key employees and implementing the necessary tools to do so. Talent management, which began to be implemented as a concept in 2000, is now considered to be one of the fundamental instruments of human resources management in an organisation. Talent management professionals can rely not only on recruitment agencies’ proficiency in identifying potential employees and the hard and soft skills of candidates, but also in analysing and understanding the needs and motivations of new hires. This is where recruitment agencies provide the link between the two parties, matching employees’ motivations with employers’ talent management schemes. Therefore, talent management is not just about remuneration and benefits. Rather, the key means of maintaining employees’ enthusiasm and commitment to the company include but are not limited to the following: employee motivation, development of career opportunities, creation of an appropriate work environment, a positive corporate culture, recognition of success, respect and the support and attention of management. The main condition for the proper functioning of talent management is support from management, which makes it possible to fully develop and utilise the skills and talents of employees.

Benefits of talent management Without a correctly set-up talent management strategy, companies might easily lose talented employees who may be attracted to other opportunities or approached by other companies. Talent management makes a company attractive and competitive. It helps to retain the most valuable assets – employees. Through talent management, employees are made to feel more appreciated and their level of commitment to the organisation rises accordingly. This in turn helps to increase the company’s efficiency and productivity. The costs of attrition and recruitment of new employees drop as a result.

Finance

• Individuality • Work-life balance • Recognition • Loyalty and stability • Friendly environment • Self-development • Efficiency and balance • Embracing change • Technology savvy and driven

Millennials love change, this does not necessarily mean that they will seek out a new employer. In fact, the opposite may be true, as they may be only looking for more responsibilities or options for their career paths. Taking in to account that in five years Millennials will comprise one-third of the workforce, talent managers should quickly adapt to cover their specific needs. In addressing the new needs of Generation Y, modern companies will need to develop targeted strategies, offering broader career opportunities and more engaging activities. Mentoring, coaching programmes and work-life balance are appreciated by this generation, which is becoming the largest group in the workforce.

First steps

Talent management strategies have to address shifts in candidates’ motivations towards:

The Czech Republic

Talent management

Manage costs. Invest in talent. How to do both and succeed in today’s environment. The economic crisis has changed the employment landscape. A major struggle is the effort to manage operating costs while investing in talent to maximize performance. There is heightened pressure to execute business strategy and meet goals, but the first move most companies make during a recession is to cut costs by reducing their workforce, even though a significant driver of success is human capital, i.e. people.

n fact, according to a study by the Aberdeen Group, 58% of organisations surveyed rated people as having the greatest impact on executing business strategy. This finding isn’t surprising. After all, people produce products, deliver services, process paperwork and communicate with customers. As the business environment begins to improve, organisations will have to develop a more flexible workforce and keep fixed costs low. Many will rely more and more on external talent or contingent workers – temporary employees, contractors, outsourced workers and consultants – to achieve business goals in a more strategic way. Benefits of a contingent workforce The practice of supplementing permanent staff with contingent labour is valuable, as businesses experience the ebb and flow of the marketplace, seasonal highs and lows, or product-specific launches and promotions. During times of economic uncertainty, using a contingent workforce provides you access to skilled and motivated individuals who help you meet your business goals while controlling your costs. When demand drops, the contingent workforce can be reduced, thus insulating your permanent workforce.

108 | INVESTORS‘ GUIDEBOOK

As the Czech economy dynamically grows, market conditions rebound and demand improves, rebuilding your workforce with contingent staff can be a smart strategy. It’s particularly beneficial since many contingent workers can transition to permanent employees, thus reconstructing the workforce with minimal risk as conditions demand. In addition, no matter how well companies prepare for and manage a project, permanent employees have planned or unplanned absences that disrupt the workflow. Skilled contingent staff can quickly step in to perform critical tasks so that work can proceed. They can free up time for your permanent staff to focus on critical tasks while the contingent workers focus on more baseline tasks that are necessary but don’t require high a degree of expertise. A contingent workforce can also be beneficial when a new product or service is launched, requiring new groups of people and/or new skill sets. By partnering with a contingent workforce provider early on, an employer can be sure to have the people that it requires, when and where they are needed and with the appropriate skill sets. The ability to evaluate a worker on the job before formally hiring that person permanently is another great benefit. The best way to get a good understanding of a person’s skills and capabilities is to see that person in action. Observing the individual interacting

Talentism heightens the significance of outsourcing

Standardising workforce improvements Providers supply services that help companies’ workforce planning. They study a company’s total workforce in depth – full-time, contingent and project-based, outsourced talent – to create strategies that standardise and improve processes in the use of contingent workers. The end effect is increased productivity companywide.

Human resources

Bolster employer branding Because they have so much direct contact with employment markets, top RPO providers particularly help define the employer’s brand. Increased efficiency in recruiting and continuous interaction with job candidates enhances a company’s reputation as an employer of choice. This comes as power has shifted to the individual in the ongoing minuet with employers. Workers are boldly determining where and when they want to work rather than simply grabbing the first opportunity. An RPO partner capably managing the employer’s brand can make a difference in securing the best or lesser talents. RPOs should maintain checklists of issues affecting the employer’s brand and methodically address all of them.

Permitting and construction

Elevating expertise Companies count on outsourcing providers to have deep industry and functional knowledge. They ask them to source specific skills and find cultural and technical fits expeditiously. These pressing needs have placed providers in the role of trusted advisors and require them to have more detailed insight into their clients than before. This includes understanding the company’s business strategy, and the skills it needs

Dual benefits Cost savings and quality. Cost savings remain important but this may be a by-product of improved quality. Reducing costs but getting bad candidates is not an option.

Properties

Flexible workforce models As companies seek more innovative, cost-effective ways to manage their workforces, a number are blending contingent and project workers with fulltime staff. An Everest Group report found that nearly one in five companies signing RPO contracts in 2014 incorporated contingent and permanent hires into their staffs. Experts predict that RPO will increasingly provide blended services as companies seek to consolidate their workforce management into fewer, more trusted hands.

now and in the future. It also means adding to its suite of services for finding and managing talent. Some providers even combine them with other HR services.

R&D

A shortage of skills has simultaneously made it imperative for companies to find individuals who can adequately fill roles. In ManpowerGroup’s most recent skills shortage survey, 18% of Czech employers reported difficulties in finding the skills they need. This represents a big opportunity for foreign investors, because Czech employers are nearly the most optimistic in the world (the global average is 38%, while Romania reports 61%, Poland 41% and Slovakia 28%). But finding the right talent is a big challenge everywhere and outsourcing may be the answer.

Finance Taxes

Jiří Halbrštát Marketing and sourcing manager ManpowerGroup Czech Republic jiri.halbrstat@manpowergroup.cz

Top sectors

www.manpowergroup.cz

M&A

Modern outsourcing strategies meet the need for a more agile workforce Human resources outsourcing is transforming how companies manage talent. In most cases, labour market legislation in EU countries limits companies’ flexibility compared to Asia, for example. But the Czech legislation is favourable to different types of outsourcing solutions. It’s still important to reduce costs. But cost savings have become a by-product of superior benefits obtained from outsourcing, such as workforce agility, visibility and control of performance. Companies can focus on improving the hiring of full-time employees via recruitment process outsourcing (RPO). Use of RPO has soared in recent years as Czech companies look for logical places to maximise investments while improving productivity. RPO providers have a unique ability to find the best workers quickly, often in crucial, highgrowth industries and regions. RPO is becoming more

and more popular among new investors in the Czech Republic and the number of users of this solution is increasing every year. Opening a new production facility means building an experienced HR team for a limited period of time, though the new has not yet constructed premises to locate internal staff in the preparation phase. Compared to other Central and Eastern European countries, the Czech Republic has extensive experience with HR outsourcing experience, so investors can find a number of well-established providers. Czech RPO providers are clearly handling traditional elements of recruiting, including sourcing, screening and assessment, with greater efficiency than before. This is partly the result of improvement in technology and a greater understanding of how RPO can benefit an organisation: outsourcing providers can tailor their services in new, more innovative ways. In recent years, RPO providers have assumed a larger role in onboarding (orientation of new hires), employee training and development, and even offboarding (separation of workers). They are increasingly managing the social media that generate communities of potential candidates and help define the employer’s brand. Companies may choose a managed service provider (MSP) to supply and manage their contingency workforce and to manage other outsourcing tasks. MSPs bring new efficiency to the selection and management of providers of outsourcing services and independent contractors. Increasingly, employers are utilising contingent-workforce strategies to provide flexibility. And as the number of contingent workforce sources increases, so do the challenges, such as managing costs, standardising processes and tracking performance. Again, in this area the Czech Republic has unique experience that is not found in other CEE countries. In a world of diminished resources, companies are looking for trusted partners who can help them find more innovative, creative ways to get things done and done fast. In “talentism”, this means accomplishing significant goals with fewer resources. Outsourcing can provide the means of achieving objectives that might otherwise be out of reach, at least in the short term. This isn’t simply because the outsourcing partner can perform specific responsibilities, but rather because of its deep knowledge of the area, function, industry and, most of all, the clients themselves. Outsourcing is a true workforce model for our time, and there are clearly things – important things – that companies aren’t able to do effectively without it.

First steps

with permanent staff and communicating with customers significantly increases the ability to predict success within the team and within the organisation. Employing a contingent worker also helps reduce hiring costs by eliminating the need to advertise, recruit and screen. In an effort to reduce costs, some companies decide to outsource functions that are not core competencies or aligned with key business strategies. In this case, a contingent workforce can easily add value. Partnering with an agency or company skilled at tasks which are secondary to business operations allows the permanent staff to focus on core products and services. The secondary aspects of operations can be performed by outside experts seamlessly and cost efficiently. In addition, there are some cases when former or retired employees can transition to the partner company providing the outsourced solution. This is just one more way to ease the burden of reducing the permanent workforce while retaining the required skill sets and maintaining morale. With the Czech economy improving by 4.4% in 2015 (the most dynamic rate of growth in the EU) and the unemployment rate dropping quickly to the second lowest in Europe, challenges will continue. Businesses have to remain agile. It will be important to evaluate the balance between a permanent and contingent workforce. This allows an organisation to manage costs and invest in the critical talent required to drive the business to higher levels of success.

The Czech Republic

HR outsourcing

Increased productivity, reduced costs and happier employees A committed, professional and cost-efficient workforce is an important factor in the success of any company, especially where there is a large proportion of temporary employees. To ensure that employees have the right work at the right time and at the right place is not an easy task, but it is essential for any company that needs to reduce staff turnover and increase both labour productivity and the quality of work. How to win the war for talent The economic situation in the Czech Republic has improved and the unemployment rate has dropped. Positive changes in economic conditions have created a more competitive environment and attracting good candidates has become harder. People who are looking for work have more options and employers have fewer. Placing ads on job portals or in newspapers is no longer a sufficient means of finding qualified applicants. Many companies have added new tactics to their recruitment strategies. They use employee referrals, social networks like Facebook to post jobs and LinkedIn to search for candidates. Other employers improve their ability to recruit

110 | INVESTORS‘ GUIDEBOOK

by adding extra benefits. They increase wages, give extra vacation or sick days, and provide special medical care and free education programmes and trainings. These benefits serve not only to attract new people but also to keep current employees engaged and to prevent staff turnover. Despite all the innovative strategies, many employers, especially those with high-volume resourcing requirements, have difficulty filling open positions and finding prospective workers. Filling a position takes more time and, as a result, costs more money. The most effective strategies to save both are outsourcing and using temporary workers.

ave you identified an opportunity for improvement in the way your workforce is managed, but you currently need to focus on developing, manufacturing and selling your products? Maybe it’s time to look for onsite recruitment and workforce management support. On the Czech market, there are many HR service providers offering various solutions that help foreign investors to find the right people in the right place at the right time. One of the solutions is Inhouse Services - a concept developed for companies with a high demand for flexible personnel. It helps them improve efficiencies through delivery of onsite workforce solutions, leaving them free to focus on their core business. This model offers complete tailor made solution which brings more flexibility and higher productivity and efficiency together with lower personnel costs The service is specialised in providing a large amount of skilled, flexible labour and is specifically designed to help companies

reduce absenteeism and lost productivity through effective absence management increase worker productivity and satisfaction reduce overtime costs reduce labour and material waste provide labour-market data and economic forecasting

Inhouse Services can be measured by these benefits: total personnel cost savings of 1% to 7% higher delivery speed shorter familiarisation times reduced workload of the personnel department

Inhouse Services can save you money and make your life easier if: you regularly need between 50 and 1,000 flexible employees the number of required employees is subject to strong seasonal fluctuations

Human resources

you manage a large production facility, a call centre or a logistics operation

Permitting and construction

lower personnel costs

Properties

you need to have the right employees available at the right time and at a fair price Taxes

Tomáš Brožek Inhouse Services Director Randstad tomas.brozek@randstad.cz

Top sectors

www.randstad.cz

M&A

Satisfied and qualified employees Inhouse Services makes it possible to employ a scalable workforce that strategically aligns with specific production requirements and changes in the company. Employee performance is improved thanks to the unrelenting focus on quality staffing processes and results. This model creates a high-performance culture that boosts morale and job satisfaction, resulting in higher productivity. All the company’s resourcing needs across both general and specialist functional roles are managed by an onsite strategic partner that carefully chooses qualified and engaged candidates and runs the whole recruitment process with professionalism and well within the given timeframes. In order to anticipate production peaks and have the right number of workers on board at all times, Inhouse Services analyses periodic personnel requirements and translates them into an action plan. A team of onsite specialists takes care of the paperwork, provides information and any training that the workers need, and keeps them motivated. This results in business improvements, cost savings and a truly engaged workforce.

increase workforce retention and reduce attrition

R&D

Tailor-made solutions Inhouse Services does not operate based on a “one size fits all” approach. Each of onsite delivery models is designed specifically around the client’s organisation culture, vision and operational objectives. A dedicated account team works exclusively for one customer and has its workplace onsite directly at the customer’s place of business. These specialists think and act like internal HR employees and can thus respond perfectly to their client’s needs. They cooperate closely with the customer and together they create a talent pool made up of flexible and permanent staff. The pool works in the same way as a reservoir. It compensates perfectly for any over- or under-capacity and brings exactly the right number of motivated and welltrained employees who are available at all times, thus reducing unnecessary personnel costs and lowering the fluctuation rate and absenteeism. The results are higher efficiency and, ultimately, more success. The account team is supported by workforce analysts and other experts in the legal, compliance, health, safety and HR fields. Workforce analysts work with their clients at the operational level in order to truly understand their needs. They don’t just repair

Inhouse Services specialises in providing bespoke workforce management solutions aligned to your business needs and objectives. The module aims to:

Finance

How it works Inhouse Services provides a total workforce management solution aligned to your operational objectives and staffing needs, which can increase the productivity of existing workers, help decrease attrition and absenteeism and generate cost savings. It delivers the complete HR process from recruitment, selection, introduction, planning and management of workers to provision of detailed management reports. The whole service is provided onsite, so all processes can be customised to your specific needs. Onsite managers assimilate into your culture to deliver and retain talent that can truly contribute to you and your business’s success. Working with a strategic onsite partner brings savings by reducing overtime, absenteeism, turnover and idle time, while improving overall workforce utilisation. It also helps to achieve measurable improvements in productivity, quality and operating efficiency.

what is broken; they look closely at why it got broken in the first place and apply innovative solutions to create long-lasting change that will help the client to achieve its strategic goals. The primary focus of this concept is continual improvement according to the client’s needs. When examining the business the workforce analysts first conduct a detailed onsite analysis within the client’s company. They meet with all levels of management and training, H&S and HR teams to gain an understanding of the business. This enables them to recommend relevant actions and activities to drive efficiencies and cost savings. The aim is to identify solutions for the removal of waste, both production and time, and improve efficiencies in the workforce using skills-gap analysis, skills clustering, process improvement, on-boarding and training improvements. Regulatory and quality control with proven cost containment strategies are provided by a team with extensive experience in driving compliance and safety. Every step is carefully planned and ongoing reporting/metrics are provided to rigorously analyse staff utilization.

First steps

with high-volume staffing needs in the logistics, manufacturing, warehouse and contact centre environments.

The Czech Republic

Workforce management

Did you know?

Where Czechs excel

Ultralight aircraft The Czech Republic is among the world leaders in the production of ultralight aircraft and is the third biggest producer in Europe.

Cardiology and heart surgery

Musical instruments

Thanks to the extraordinary development of heart surgery here, the Czech Republic currently ranks among the most advanced European countries in terms of both the number of surgeries performed and the quality of care.

Established nearly 150 years ago, the family-owned Czech company Petrof in Hradec Králové is the biggest European piano manufacturer.

Footwear industry Baťa, a family-owned global footwear and fashion accessory manufacturer and retailer was founded in 1894 in Zlín, Moravia by Tomáš Baťa, his brother Antonín and his sister Anna. Today, the company has a retail presence of over 5000 retail stores in over 70 countries. Baťa has entered the Guinness Book of Records as the largest retailer and manufacturer of shoes in the world.

Automotive industry With more than 1.3 million cars produced in 2015, the Czech Republic is the leading automotive producer in the CEE region. The most significant Czech carmaker is Škoda Auto, which has been in existence for over a century. Czech trams are also well known elsewhere in the world.

Plastic surgery Czech physician František Burian laid the foundations of plastic surgery. In 1939, Czechoslovakia became the first country to recognise plastic surgery as a separate field of medicine.

Nanotechnology In 2003 Oldřich Jirsak developed a reliable method of spinning fibres measuring 200 nanometres in diameter. Based on his patent, the Czech company Elmarco became the first supplier of industrial-scale nanofibre production equipment in 2004.

Defence industry Already in the time of the First Czechoslovak Republic, the country was one of the world’s biggest arms exporters. Nowadays, developed by the Pardubice-based company ERA, the Věra and Tamara passive radar systems are among the best in the world and can detect stealth aircraft.

Cyber security The anti-virus software companies AVG Technologies and AVAST have become a symbol of success for the Czech ICT sector. Each of these companies currently provides protection against cyber threats to more than 200 million users worldwide.

Find out more about taxes

The Czech tax environment: Transparent and competitive The tax system in the Czech Republic is transparent and competitive, and offers a number of interesting opportunities to both domestic and foreign investors.

he current direct and indirect tax system was established more than two decades ago and came into effect on 1 January 1993. Since EU accession on 1 May 2004, the system has undergone a continuous process of harmonisation with European legislation. Parent-subsidiary, interest-royalty and merger directives as well as VAT and excise duty directives were duly incorporated into Czech law. The Czech Republic also has a broad network of double taxation treaties with both EU and non-EU countries. These double taxation treaties are based mainly on the OECD Model Tax Convention. Despite relatively frequent amendments, the tax system gradually developed through changes introduced in connection with fiscal reform in 2008 and as a part of anti-crisis measures in 2011.

In order to attract investments and support the development of activities with high value added, the Czech Republic maintains and actively develops a number of investment incentive schemes. Incentives are provided in the form of, among other things, tenyear tax relief both for new investments and expansion projects, cash grants in the amount of up to 12.5% of capital expenditures for manufacturing and research and development centres, super-deduction of expenses incurred on R&D projects and a property-tax waiver in special industrial zones. These incentives are provided based on the Investment Incentives Act, which means they are transparent, consistent and predictable. The number of national and EU funding programmes supporting activities in, for example, the areas of energy, the environment, R&D and innovation, and employee training are also provided.

Practical tip: Practical tip: Prior to setting up a new legal entity in the Czech Republic, it is worth considering the tax residency of its shareholder(s), as this is important with respect to obtaining tax-exempt status for dividends and capital gains, optimising the financing of the Czech subsidiary (debt vs. equity) and minimising the tax burden with respect to other payments such as royalties.

114 | INVESTORS‘ GUIDEBOOK

Performing a review of the available incentives schemes prior to entering the Czech Republic could help to secure tax savings and/or additional funding. The benefits could be optimised through proper timing and structuring of the investment. Support is available not only for manufacturing but also for R&D centres and business support services centres including shared-services, software-development, high-tech repair, data and call centres.

Top sectors

www.ey.com/CZ

Taxes on electricity, natural gas and solid fuel are payable upon delivery to the final customer with a number of exemptions for industrial and energy production. Production and import of specified consumer goods (such as mineral oils, tobacco products, spirits, beer and wine) are subject to excise duty in the Czech Republic at the lower end of the EU harmonisation requirements.

M&A

Martin Hladký Senior Manager, Tax Services, EY martin.hladky@cz.ey.com

It is possible to obtain a property-tax exemption for up to five years if the particular building/production facility is located in a special industrial zone.

Taxes

Ondřej Janeček Partner, Tax Services, EY ondrej.janecek@cz.ey.com

Practical tip:

Human resources

Although VAT is neutral for most entrepreneurs, the setting-up of internal processes is crucial to prevent potential non-compliance. The Czech tax authorities specifically focus on, for example, documentation supporting intra-community supply outside the territory of the Czech Republic and specific requirements which apply with respect to collecting VAT securing.

Other taxes and duties Several rather immaterial taxes such as property tax, property transfer tax and road tax are applicable in the Czech Republic.

Permitting and construction

As the corporate income tax base is determined in accordance with the Czech Accounting Standards, it is necessary to set up accounting systems that meet the requirements of the Czech Accounting Act. The main permanent differences between Czech tax and the statutory result include thin capitalisation interest, shortages and damages, expenses related to exempt income (such as shareholding costs), representation, penalties and certain employee benefits. The main temporary differences include tax depreciation, provisions and

Taxation of employees The income of residents and non-residents is taxed at a flat rate of 15%. For employment income, this tax rate is calculated based on so-called “super-gross” income, i.e. gross income increased by the employer’s part of the Czech social security and health insurance contributions. A solidarity surcharge of 7% applies to annual gross income from employment and profit from self-employment (business) activities exceeding approximately EUR 48,000 in total. Participation in the Czech social security-system is generally required for individuals who work in the Czech Republic. This can be modified by the application of the EU social-security legislation or respective totalisation agreement. Although the aggregated rates might seem above average (34% for the employer and 11% for the employee, social security capped for high-income employees), the social-security and health-insurance systems cover

Practical tip:

Customs duties As a member of the European Union, the Czech Republic follows EU customs regulations, including the EU tariff nomenclature, customs code and other customs regulations. The transfer of goods into or out of other EU member states is generally not regarded as export or import. Goods imported from third countries into the Czech Republic are subject to import customs duties, excise duties, VAT and other commercial policy measures based on the EU customs tariff.

Properties

The Czech laws governing taxation and investment incentives provide a number of opportunities to decrease the effective tax base. These include deductions of tax losses carried forward over five years, the possibility to suspend tax depreciation in order to accelerate utilisation of tax losses carried forward and claiming of a double deduction of qualifying expenses incurred with respect to R&D projects.

There are number of tax areas where additional certainty could be obtained by applying for an advance ruling. These areas include, among others, transfer pricing, R&D credit, capital vs. operational expenses, withholding tax on royalties, and tax losses carried forward upon reorganisation.

Value added tax For VAT payers performing taxable activities, VAT should not represent an additional cost. Input VAT is credited against the output VAT obligation and a potential refund of excess VAT paid (e.g. in the case of VAT-exempt exports or intra-community supplies) is usually available within 30 day of filing. The Czech Republic implemented Directive 2006/112/EC on the common system of VAT and is thus generally harmonised with the principles applied within the EU.

The Czech tax authorities and Czech courts monitor the decisions of the Court of Justice of the EU in this area as a matter of course.

R&D

Practical tip:

a wide range of state support including high-quality public medical care, pension and disability insurance, sickness insurance and unemployment benefits. Various benefits are provided in order to hire and retain a qualified workforce. Corporate and personal income-tax treatment of these benefits differs with respect to their nature. In some situations, it is possible to use a combination of tax deductibility for the corporation with exemption for personal income-tax purposes.

Finance

Business taxation The corporate income tax rate of 19% has been in place since 2010 after gradually decreasing from 45% in 1993 (certain domestic and foreign investment funds are subject to 5% income tax). Withholding tax is applicable to limited types of payments to non-residents (mainly dividends, interest and royalties); however, exemptions based on the respective EU directives incorporated into the Czech tax law and/or double taxation treaty can be obtained.

reserves. The functional currency is the Czech koruna. Transfer pricing rules are compliant with OECD rules and an advance pricing agreement can be obtained. Reflecting various base erosion and profit shifting initiatives at the EU level, the Czech tax authorities follow the trends and are focusing increasingly on the area of transfer prices and, in particular, the tax deductibility of various intra-group services. Although there is no explicit transfer pricing documentation obligation in the Czech Republic, taxpayers must justify the arm’s-length level of prices agreed with related parties if such taxpayers are subjected to a tax audit. Preparation of standard documentation including a local file addressing the functional and risk profile of the Czech entity, selection of method and a benchmarking analysis should provide sufficient assurance in this area.

First steps

Administration and collection of the individual taxes falls under the General Financial Directorate and its subordinated administrative bodies, the local tax authorities. The Special Financial Authority is responsible for large taxpayers with annual turnover exceeding EUR 74 million (CZK 2 billion). The Supreme Administrative Court, established in 2003, is responsible for dealing with disputes in the tax area and aims to take a consistent approach in such disputes.

The Czech Republic

Tax environment

Paying corporate taxes in the Czech Republic In the past twenty-five years the Czech Republic has come a long way in the area of corporate taxation. Entering the European Union probably had the most significant impact on the Czech tax system and led to the  harmonisation of the basics of the Czech tax system with those of other EU countries. Electronic records of sales In 2016, electronic records of sales were introduced by the Financial Administration as an additional tool for fighting tax evasion and increasing tax collection. The system is being launched in several phases, in each of which a certain group of businesses must begin recording their sales made in cash, by debit/credit card or by similar means. The first phase was launched on 1 December 2016 and the last one will be implemented on 1 March 2018. Some types of business that are regulated otherwise (e.g. banking) are exempt from keeping electronic records of sales. The information regarding a particular sale is automatically transmitted to the Financial Administration’s tax-collection system and a unique fiscal code generated by the information system of the Financial Administration must be printed on each receipt. In the event that a business does not fulfill its obligations in relation to electronic records of sales, the tax authorities may impose a penalty of up to CZK 500,000 (approx. EUR 18,500). In the event of a serious breach of tax-administration requirements, the authorities may close the business and suspend the offending party’s business operations. As in the case of control statements, electronic records of sales have an impact on the internal processes of businesses and increase their administrative burden.

Phases of implementation of electronic records of sales 1 September 2016 1 December 2016 preparatory phase

116 | INVESTORS‘ GUIDEBOOK

accommodation and restaurant services (approx 100,000 businesses)

1 March 2017

1 March 2018

1 June 2018

retail and wholesale other businesses not certain trades and (approx 200,000 mentioned in phase 4 production activities businesses) (approx 150,000 (approx 50,000 businesses) businesses)

orporate income tax Generally speaking, the Czech tax system is now more or less harmonised with tax systems across the EU and OECD. Nevertheless, the Czech Republic has retained its uniqueness and is trying to build a competitive tax environment that will make the Czech Republic attractive for investments and doing business. The Czech corporate income-tax (CIT) system is generally regarded as stable and future changes in tax legislation are mostly predictable. Historically, the CIT rate has exhibited an optimistic downward trend. Over the past 23 years the CIT rate has decreased from the original 45% applied in 1993 to the current 19% applied to corporate income generated by all companies, including branches of foreign companies. As far as we know, the Czech tax authorities are also planning to keep the CIT rate stable on the currently applicable level in the near future. To give a full picture, next to the standard 19% CIT rate there is also a special CIT rate of 5% levied on basic investment funds and a 0% CIT rate applied to pension funds. No national or local taxes on corporate income are applied in the Czech Republic. The Czech Republic does not permit corporate group taxation. Each company in a group is taxed individually. The consolidated corporate tax base only applies for general partners and their shares of the profit of their general partnership.

M&A Top sectors

www.pwc.com/cz

Taxes

Martin Diviš Partner, PwC Česká republika martin.divis@cz.pwc.com

Human resources

David Borkovec Partner, PwC Česká republika david.borkovec@cz.pwc.com

Permitting and construction

Current tax-administration activities in the area of anti-fraud measures The Czech Republic is active in fighting VAT fraud. As

Control statement The control statement does not replace VAT returns; it is submitted along with them. Its purpose is to support the information provided in VAT returns in order to help the tax administration to detect and prevent tax evasion.

Properties

Value added tax In the area of value added tax, the Czech Republic follows the Council Directive on the common system of VAT. Therefore, the VAT system in the Czech Republic is fully harmonised with the rules of the European Union. There are three VAT rates in the Czech Republic – the standard rate of 21% is applied to the majority of goods and services; the first reduced rate of 15% is applied to, for example, the majority of foodstuffs and non-alcoholic beverages, regular mass transport, accommodation, and construction works related to social housing. The second reduced rate of 10% is applied to certain types of medication, books, newspapers, magazines and products used to produce food suitable for people suffering from coeliac disease. There are also VAT-exempt goods and services, e.g. banking services, rent and supply of immovable property.

R&D

pricing documentation, in practice doing so is strongly recommended, as the taxpayer bears the burden of proof upon an inspection of prices by the tax authorities. Generally, pricing methods as described in OECD guidelines are followed. The consequences of incorrect transfer pricing adjustments may lead to tax exposure and penalties. In the event of uncertainties in the area of transfer pricing, taxpayers may request that the tax authorities issue an advance pricing agreement regarding ongoing or future transactions between related parties.

The control statement contains detailed information which VAT payers already include in their VAT records. This information should provide the tax authorities with large volumes of data that can be used to perform cross-checks and analysis of transactions carried out in the Czech Republic. As a result of such checks, the tax authorities may identify suspicious groups of taxable persons and carousel frauds. Control statements have to be submitted electronically so that the tax authorities process the information automatically and use data-analytic approaches. In order to drive home the importance of the control statement as a tool for fighting tax fraud, strict deadlines and sanctions have been enacted. The deadline for submitting a control statement after a receiving a notice from the tax authorities is only five working days, i.e. VAT payers are obliged to respond in a very short time in the event that they receive such a notice. In the area of sanctions, the amounts are firmly set. The lowest sanction – CZK 1,000 (approx. EUR 37) – will be assessed in the case of late submission of the control statement without prior notice of such delay being provided to the tax authorities. Should the control statement not be submitted even after such notice has been given, the sanction will be CZK 50,000 (approx. EUR 1,850). From July 2016 the sanctions are less strict as they may be partially or fully waived. Furthermore, if the tax administration is seriously impeded by non-submission of the control statement, a sanction of up to CZK 500,000 (approx. EUR 18,500) may be levied. Although the purpose of the control statement is clear and understandable, it increased the administrative burden of every VAT payer in the Czech Republic. So far, companies had to make adjustments in their accounting/tax systems, ensure the training of their employees and implement new internal control systems.

Finance

Investment incentives are available to Czech entities (including Czech subsidiaries of foreign companies) and may cover up to 25% of the costs of planned investments. Incentives include income-tax relief for a period of up to ten years, property-tax relief for up to five years, cash grants for job creation as well as training and retraining of employees, cash grants for capital expenditures, and transfer of land at specially reduced prices. Investment incentives are available in the manufacturing industry and for support of technology centres, business support services centres, data centres, and customer support centres. Apart from investment incentives, companies may also apply for other means of financial support from EU funds. Research and development is also an area supported by the Czech tax system. Up to 100% of specific R&D expenses incurred in a given tax year may be deducted from the tax base as a special tax allowance in addition to applying them as a standard tax-deductible cost. An additional 10% of R&D costs may be applied as an allowance from the difference by which the current year’s qualifying costs exceed those of the previous period. Dividend and interest income is subject to withholding tax of up to 35% in the case of non-treaty/TIEA countries. However, the withholding tax is generally decreased to the basic 15% rate or even lower in the case of an applicable double taxation treaty or under the applicable EU directive. Currently, the Czech Republic is party to more than 87 double taxation treaties. Transfer pricing is increasingly becoming an tax issue in the Czech Republic, which means that prices agreed between related parties have to be set at arm’s length. Although there is no legal requirement to keep transfer

an example, the local reverse-charge VAT regime was introduced for a number of supplies like delivery of gold (2006) and construction works (2012). In 2015 and 2016, the local reverse-charge VAT regime was widened to include goods and services listed in the aforementioned Council Directive such as mobile phones, metals, gaming consoles, tablets, laptops, telecommunication services or electricity and gas supplied to a dealer. Furthermore, in 2013 the concept of the “unreliable VAT payer” was introduced together with joint VAT liability of the recipient of the supply for VAT unpaid by the supplier. Currently, there are more than six thousand names on the “black list” and the rules for joint VAT liability have been made stricter several times since their introduction. For companies that want to avoid being jointly liable for the VAT unpaid by their supplier, the option of splitting the VAT payment was introduced. This means that the recipient of a taxable supply may opt to pay the VAT on the received supply to the account of the Tax Office to which the supplier reports. Pursuant to the VAT Act, a new report called a control statement was introduced on 1 January 2016. This report should be the most effective tool in fighting tax evasion, especially in the case of so-called carousel frauds. All VAT payers had to initially submit the control statement for the period of January 2016 if they rendered a supply with a place of taxable supply in the Czech Republic or if they reported an input VAT deduction in their VAT returns.

First steps

Corporate taxation – what can we expect in the near future? The Czech Republic significantly extended its participation in the automatic international exchange of information about financial accounts for the purposes of tax administration in 2016, when the respective amended national legislation came into force. The Czech Republic should take part in the first automatic exchange of information in 2017. We will see in the upcoming taxable periods how this step will change the Czech and international tax environment and the system of tax inspection.

The Czech Republic

Business taxation

Paying personal income tax in the Czech Republic Czech tax law recognises five types of individual income subject to tax and stipulates specific rules for calculating the partial tax base from each of them. The total tax base of an individual is then represented by the sum of these partial tax bases. The personal income tax rate is a flat 15%. There are also specific tax-base deductions and tax deductions available, provided that the specified conditions are met. Tax news for 2016 Increase of the amount of tax benefits for a second child (from CZK 15,804 to CZK 17,004 per year; approx. from EUR 580 to EUR 630) and for the third and each additional child (from CZK 17,004 to CZK 20,604 per

Example (Entrepreneurship)

year; approx. from EUR 630 to EUR 760). Increase of the

An individual performed the following activities in 2016:

limit of income for getting tax bonuses and/or tax

Provision of tax-advisory services: earned income of CZK 2,400,000 (approx. EUR 88,900), incurred expenses of CZK 270,000 (approx. EUR 10,000) Book-keeping: earned income of CZK 400,000 (approx. EUR 14,800), incurred expenses of CZK 300,000 (approx. EUR 11,000) Teaching: earned income of CZK 500,000 (approx. EUR 18,500), incurred expenses of CZK 270,000 (approx. EUR 10,000)

abatement (from CZK 55,200 to CZK 59,400 per year; approx. from EUR 2,040 to EUR 2,200) Increase of the limit of tax abatement for placing children in preschools (up to CZK 9,900/year per child; approx. EUR 370) Due to the increase of the minimum wage, the amount of tax-exempt pension income was also

With respect to provision of tax-advisory services, claiming the 40% lump-sum standard deduction is more

automatically increased (36 x the minimum wage

advantageous than claiming actual expenses despite their limitation at CZK 800,000 (approx. EUR 29,600).

of CZK 9,900 = CZK 356,400; approx. EUR 13,200)

Book-keeping and teaching are treated together as a regular (non-specific) business activity. In this case, claiming actual expenses should be more advantageous than the lump-sum standard deduction.

The process of transitioning the voluntary pension savings scheme to the second pillar ended in 2015.

Total taxable income: CZK 3,300,000 (approx. EUR 122,200), total claimed expenses:

The process of liquidating pension funds and disburs-

CZK 1,370,000 (approx. EUR 50,700). Partial tax base from entrepreneurship:

ing them to participants began in 2016. This income is

CZK 1,930,000 (approx. EUR 71,500).

recognised as tax exempt.

118 | INVESTORS‘ GUIDEBOOK

ax residency Czech tax residents have a duty to pay tax in the Czech Republic from their worldwide income. An individual is considered a Czech tax resident if he or she has a permanent address in the Czech Republic or spends here at least 183 days in total per year. Should the individual be considered a tax resident in various other countries under those countries’ domestic tax laws, tax residency is assessed in accordance with the relevant double-taxation treaty, if one exists. The tax liability of Czech tax non-residents have in the Czech Republic is limited to their Czech-sourced income only. This mainly refers to: Income from employment activities performed in the Czech Republic Income from providing services in the Czech Republic Income from the sale of real estate located in the Czech Republic or from the sale of shares of Czech companies Income paid by Czech tax residents to the taxpayer in the form of interest, dividends, licence fees, rental payments, etc.

Top sectors

www.asbgroup.eu

M&A

Michala Darebná Tax Manager ASB Accounting mdarebna@asbgroup.eu

Taxes

Other income Any income other than that described above falls within the scope of the partial tax base, e.g. income from the sale of property or movable assets including shares, from occasional activities and leases of movable property, non-monetary income, etc. Expenses related to a particular kind of income may be deducted from the tax base, though only up to the amount of the respective kind of income.

Tax Compliance The obligation of an individual to submit a tax return arises if the individual earns taxable income (not subject to withholding tax) in the annual amount of at least CZK 15,000 (approx. EUR 550). However, if the individual earns employment income, the obligation to file a tax return arises if he or she also derives other taxable income not subject to withholding tax in the total annual amount of at least CZK 6,000 (approx. EUR 220). If the individual earns only employment income, the obligation to file a tax return generally does not arise unless the tax solidarity surcharge is assessed.

Human resources

80% in the case of income from agricultural activities, forestry, water management and craft activities (no more than CZK 1,600,000 – approx. EUR 59,300 – may be deducted as expenses). 40% in the case of income from the activities of lawyers, tax advisors, architects, doctors, artists and certain other professions (no more than CZK 800,000 – approx. EUR 29,600 – may be deducted as expenses). 30% of income from the lease of property included in business assets; however, no more than CZK 600,000 (approx. EUR 22,200) may be deducted as expenses.

All income and expenses are taxable on cash basis. The individual may choose between claiming actually incurred expenses under practically the same rules as an entrepreneur (incl. tax depreciation of fixed assets) or claiming a lump-sum standard deduction. The lump-sum standard deduction is 30% in this case (no more than CZK 600,000; approx. EUR 22,200).

Permitting and construction

Expenses provably incurred in order to achieve taxable business income are basically tax-deductible, though with certain limitations or exceptions. For example, an entrepreneur’s contributions to social security and health insurance, representation costs or penalties assessed by public authorities are treated as tax non-deductible. The value of fixed assets needs to be depreciated over the periods and using the methods as stipulated by the tax law. As an alternative, the individual can claim a lumpsum standard deduction calculated as a percentage of earned income stipulated by law instead of deducting actual expenses. In most cases, a 60% deduction applies (no more than CZK 1,200,000 approx. EUR 44,500 - may be deducted as expenses). There are, however, specific rates for certain kinds of income:

Properties

Employment Employment income is mainly income from performing work based on an employment contract or remuneration of statutory representatives of companies. Except for salary, the partial tax base from employment may also include several taxable benefits (e.g. 1% of the acquisition price of a company car, if such car is used for personal purposes). On the other hand, there are many other in-kind benefits which under certain rules are not subject to tax, e.g. non-monetary contributions for cultural and sports events, healthcare, training facilities, recreational facilities, meal contributions and contributions to pension and life insurance accounts. Personal income tax of 15% is calculated based on the taxpayer’s so-called “super-gross” salary, which is the sum of his/her gross salary and taxable benefits (i.e. employment income) increased by the employer’s social-security and health-insurance contributions in the amount of 34% of the employee’s income. A maximum assessment base applies to social security. For 2016, the limit was set at CZK 1,296,288 (approx. EUR 48,000). No social-security contribution is paid from employment income exceeding this amount. This limit is also observed by the rules for calculation of the tax base, i.e. no tax is calculated from the assessment base for social-security insurance exceeding the limit. However, there is no maximum limit applicable to health insurance. Employment income exceeding the maximum assessment base for social security as described above

Paid expenses in the actual (provable) amount Lump-sum standard deduction

Rental income This category includes income from leases excluding occasional leasing of movable property. The mechanism of calculating the partial tax base (or tax loss) from leases is similar to entrepreneurial income, i.e.:

Calculation of tax liability Prior to calculating the tax liability from the aggregate tax base composed of the partial tax bases as described above, some additional tax-base deductions can be applied if the stipulated conditions are met and the value limits are observed, e.g. deduction of paid mortgage interest, contributions made to a private pension scheme and/or private life insurance account, donations or unutilised tax losses carried forward from previous taxation periods. Tax liability is then calculated as 15% of the aggregate tax base thus reduced. An individual can also apply for tax discounts (tax deductions). The general tax deduction for practically all individuals is CZK 24,840 (approx. EUR 920). There are also other tax deductions (e.g. for students, disabled taxpayers and taxpayers with a low-income spouse), which are applied under the stipulated conditions available to tax residents of the Czech Republic or to tax residents of another EU member state if taxable Czech-sourced income of such a non-resident comprises at least 90% of his or her worldwide income. The tax liability reduced by tax deductions is the final tax liability to be settled with the tax authority.

R&D

Based on the tax domicile of the individual and the type of income, withholding tax of 15% (or less in accordance with the relevant double-taxation) may be applicable. If the income is not subject to withholding tax, it is then part of the general tax base subject to the regular 15% tax rate.

Entrepreneurship The partial tax base (or tax loss) from entrepreneurship is represented by the difference between earned business income and related business expenses. Income is generally taxable on a cash basis. The individual may select the more convenient of the following methods of claiming tax-deductible expenses:

Capital Income Income from capital assets mainly comprises received dividends, interest or income from pension and life insurance policies. Interest income (e.g. from a loan) paid to a tax resident is generally not subject to withholding tax and is thus included in this partial tax base. Other payments are mostly subject to 15% withholding tax and are therefore excluded from further taxation as part of the regular tax base.

Finance

From a dependent activity (employment) From an independent activity (entrepreneurship) From capital assets (interest, dividends, etc.) Rental income Other income

is subject to the so-called “tax solidarity surcharge” of an additional 7%. Excess amounts are subject to the 22% tax rate.

First steps

Types of taxable income The following five general types of income are recognised in relation to individuals:

The Czech Republic

Individual taxation

What expats say about the Czech Republic

The Czech Republic is a country with a lot of beautiful spots and places to visit or to do activities. And whether you go hiking, cycling or even canoeing, you can be sure you will be able to get a good beer.

I enjoy living and working in the Czech Republic.

I have been impressed by the high quality of the workforce in the Czech Republic.

Philippe Michel

Bernard Bauer

General Manager Zodiac Aerospace

Executive Member of the Board of Directors Czech-German Chamber of Industry and Commerce

Mihoko Yamakawa Wife of the Ambassador of Japan to the Czech Republic

Prague is really a nice city to relocate to with a family, as I did. Its medium size makes it very good for easy living, and its numerous green areas, wonderful public transport and safety make the quality of life here quite enjoyable.

Czechs have quickly developed multi-lingual and multicultural skills that help them adapt to all the changes in their society.

Renaud Chevalier Mark Chavez Founder Decapoda

General Manager Legrand

Interested in M&A?

Czech M&A – reaching the international standard Since the Velvet Revolution of 1989, which brought forth a complete change of the political and legal climate in the former Czechoslovakia, the level of knowledge and experience of Czech lawyers drafting and negotiating M&A transactions developed from nearly nothing to a level comparable with that found in other developed countries, whereas Czech M&A practices now mostly follow the Anglo-American model.

he concepts, structures and vocabulary used for many years in Western Europe, Asia and the US are now generally known and accepted by the Czech legal community dealing with transactions. And this is indeed what a foreign investor should expect from its Czech lawyer assisting in any M&A transaction here.

The legislation The completely new Civil Code and Act on Corporations that came into force on 1 January 2014 have each significantly impacted the documentation of M&A transactions. These laws regulate, among other things, M&A sales contracts and now allow much more flexibility in structuring transactions, basically leaving the content of contracts on the sale of shares or assets to the free will of the parties. Given this flexibility, foreign parties may to some extent at least rely on many of the concepts and principles with which they are familiar from their home country even though Czech law may take a different approach to some concepts. Sometimes specific Czech regulatory aspects may also play a significant role, such as with merger clearance requirements or investment incentives-related conditions. Also, in a few specific cases additional consent of the government may be required (e.g. the defence sector and certain critical industries and services).

122 | INVESTORS‘ GUIDEBOOK

Choice of law Czech law allows parties to choose foreign law if there is a foreign element to the transaction (e.g. a  foreign party or certain critical contacts to a foreign jurisdiction). However, clauses dealing with the mechanics of shares endorsement or issuance, the transfer of real estate, various encumbrance- and security-related mechanisms and other issues that are regulated by provisions of Czech law that are deemed to be of a mandatory nature should always be reviewed by an experienced Czech counsel to ensure their enforceability in the Czech Republic. The transactional round The typical transactional process does not differ from what is found in other developed European countries. Thus, it includes the various steps taken in transactions whether structured as a “private sale” or an “auction process”. Most Czech transactional lawyers are generally familiar with terms and concepts such as “teaser”, “information memorandum”, “due diligence”, “preliminary/definite agreements” and “completion/ closing”. There are typically different expectations as to the length and complexity of the transactional documents for a small or midsize transaction with a Czech family-owned business when compared to large corporations owned by foreign investors or large Czech private equity groups. The Czech legal

Taxes M&A Top sectors

www.pwclegal.cz

Human resources

Aleš Terš Senior Associate PwC Legal ales.ters@pwclegal.cz

Asset sales Although share transfers generally prevail over asset deals, many transactions are still structured as asset deals. Here it is important to draw a distinction between the two major types of asset deals recognised under Czech law: (i) the so-called “sale of enterprise” and (ii) sale of selected assets and liabilities (sometimes referred to as “cherry picking”). Note that the use of Anglo-Saxon precedents for these types of contracts is actually less frequent and there is some Czech mandatory legislation that must be taken into account when entering into these transactions.

Permitting and construction

Dispute resolution As for the dispute resolution venue, Czech courts are generally considered to be slower (the process involves multiple hearings and opportunities for rebuttals, while arbitration is a single-instance institution) and less predictable in terms of the outcome expectations. This is probably why a majority of midsize and larger transactions tend to apply arbitration courts as the dispute resolution venue. Both Czech and non-Czech arbitration courts are applied in practice and the most commonly used Czech institution is the Arbitration

Termination or rescission As to the termination or rescission of share or asset deals, in practice these cases (so that the shares or assets are returned in exchange for the already paid consideration) are extremely rare and disputes over acquired assets/shares and the price usually proceed through the agreed dispute resolution mechanism, often including claims for price discounts or damages claims.

Properties

Non-compete Non-compete clauses usually form an important part of SPAs. The purpose of these clauses is to protect the value of the buyer’s investment in the sense that the seller should not compete with the sold business within the agreed scope and territory. Note that various EU competition principles and restrictions (also known as “ancillary restraints” rules) apply and often limit the enforceability of non-compete clauses.

Court attached to the Czech Chamber of Commerce and the Agricultural Chamber, the rules of which may be applied to both domestic and international disputes. Foreign arbitration under the rules of the ICC and the LCIA is also sometimes used, particularly when a potential dispute involves Czech and foreign entities, though the costs related to applying these venues tend to be higher. Another reason why parties often prefer arbitration to regular courts is the fact that arbitration awards are enforceable in more jurisdictions than are court decisions, given the Czech Republic’s membership in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

R&D

Representations and warranties The representations and warranties sections of SPAs are usually very heavily negotiated and this is where good legal advice may help to distinguish among the very important and the less important points and issues, while also taking into account the outcome of the due-diligence review. The length of these provisions may be in the range of only a few lines just basically confirming the ability of the parties to sign the contract to a dozen or more pages of very specific representations dealing with various areas of the  target and its business. Czech sellers usually try hard to limit their liability to a predetermined amount often corresponding to a portion of the total purchase

price. If the SPA is silent on this point, their exposure to possible price discounts or damages claims could potentially be quite extensive. While the exact amount of such limitation is usually subject to lengthy debates, it could end up being anything from 5% to 100% of the price equivalent range. Also the “de-minimis baskets” as the liability trigger thresholds are often subject to discussion and the final amounts usually depend on the type and size of the business in question. The buyer’s warranties are usually much more modest and often reduced to a few basic statements confirming the ability to sign the contract, lack of insolvency circumstances and perhaps the availability of funds related to payment of the agreed price.

Finance

Sale and purchase agreement The sale of shares still generally prevails over the sale of individual assets even if this form means that the buyer also inevitably purchases all the liabilities of the target company – known and unknown. Czech SPAs with less sophisticated parties are often simple and short but may also easily stretch to 30 or more pages in length. This usually depends on several factors, including the size of the transaction, type of the target business, involvement of foreign parties, structure of financing and the skills and ambitions of the legal and other advisors of the parties. It is not rare that in smaller or midsize transactions, sophisticated and extensive transaction documentation may at first be frowned upon. However, by using the appropriate tactics, the counterparty may be ultimately convinced to appreciate its benefits. Regardless of the size of the deal, certain points and issues should always be spelled out in the contract and it is the role of your Czech counsel to convince the other

party and its counsel of the validity of such requirement. The bottom line is that Anglo-Saxon style SPAs have become to a large extent the market standard for sophisticated deals. Given the Anglo-Saxon origin of many of the widely used precedents, it is sometimes difficult to interpret some of the clauses that obviously sought inspiration from legal jurisdictions with a completely different legal background and terminology. For example, the principles of interpretation for contracts governed by Czech law may differ significantly from the common law principles. Typical examples where Czech law may struggle with these concepts would include provisions dealing with the limitation of liability or indemnity provisions. Also, frequently used terms and concepts such as the “best knowledge” qualification in the representations and warranties context or perhaps the concept of representations and warranties as such often do not have an equivalent in Czech law and thus must be very carefully drafted or defined to increase their chances of enforceability. Foreign parties should know that it is not realistic to expect that during the closing-related “money for shares swap” session, the purchase price will be paid exactly on the closing day if the parties have their bank accounts in different Czech banks or even in banks located in different countries. A separate escrow mechanism must be used or one of the parties must agree on the establishment of an interim bank account that would exist only for a limited period of time and would be maintained by the other party’s bank solely for the purposes of the closing-related money transfer.

First steps

community is also generally familiar with the role and content requirements of the various types of “preliminary agreements” such as the “letter of intent” (LOI), “memorandum of understanding” and “heads of terms” and these documents usually address issues such as the nature of the transfer (asset transfer vs. share deal), the purchase price and payment mechanics, the equity vs. debt structure and other major terms. However, it is important to ensure that such preliminary agreements are non-binding as to the key deal provisions, as these documents themselves could be deemed final contracts. On the negotiation side, the incorporation of any controversial terms into the final purchase contract that were missing in the executed LOI is possible, however doing so usually comes at a price. Czech transactions sometime involve exclusivity arrangements aimed at limiting the seller’s ability to negotiate a deal with another prospective buyer until a binding contract is signed. A “breakup fee” payable by the buyer if it walks away from the transaction for no legitimate reason and the deal is not closed for such reason is possible under Czech law, but it is not common. Non-disclosure and confidentiality agreements are very frequently signed, but often difficult to enforce. Shareholder agreements are quite frequent with all the various minority protection rules, options, drag/tag along rights and other universally applied concepts.

The Czech Republic

M&A-related documentation

Making informed investment decisions

Due diligence focus points: Czech privately owned companies Due diligence area

Common issues

Due diligence focus

Impacting

Quality of information

Management reports not prepared in accordance with GAAP

Detailed reconciliations

Decision-making Valuation

Quality of earnings

Standard costing not updated for actual costs Cash accounting FX exposure Owners´ costs Finance lease and factoring costs

WIP adjustments EBITDA normalistaion

Valuation Purchase price

Working capital requirements

Working capital not traced Impact of applying local standards (finance lease, factoring, etc.)

Alternative working capital analysis Working capital normalisation

Valuation Purchase price SPA negotiation

Net debt

Environmental provisions EU subsidies Legal disputes Off-balance sheet contingencies

Net debt definition

Purchase price SPA negotiation

Tax findings

Limited transfer pricing documentation Past reorganistations (substance vs. tax planning) Owners´ costs Alternative employment structures

Risk quantification

SPA warranties and indemnities

124 | INVESTORS‘ GUIDEBOOK

Global merger and acquisition (M&A) activities slew down in FY16 when compared with FY15, which was the most active year since before the global economic crisis took root in 2008. Concerns exist about global political uncertainty surrounding the refugee crisis, the Brexit, ongoing slump in commodity prices and disappointing growth rates in China pose potential risks on the M&A market. However, we see that the global confidence is improving as corporate balance sheets remain flush with cash and central bankers are keeping interest rates low. In the contrary to the global market, Czech M&A market was resilient and we saw an increase in both transaction volume and value in first half of FY16. In such turbulent and unpredictable environment, due diligence and proper evaluation of the transaction risks are becoming increasingly important for successful completion of M&A transactions.

efinitions Due diligence is a common practice in M&A and is usually conducted in the middle of the M&A process chain. Every strategic decision, such as the acquisition of a foreign company, is usually preceded by an assessment of the potential risks and opportunities. To help with the decision-making, most investors use due diligence, which precedes the transaction and has the principal aim of confirming the underlying investment assumptions and identifying and assessing the risks that the transaction might involve. In a multinational and ever more complex business environment, due diligence can support prospective investors in the analysis and assessment of available information in order to make an informed decision and create the best value from a transaction.

There is no single definition of financial and tax due diligence. It can be defined as an investigation designed to assist a purchaser in evaluating the target company. A due diligence adviser undertakes a financial and tax review of the target to provide a clear picture of its financial performance, position and cash flows, tax compliance and exposures, highlighting potential risks and values of the transaction and identifying issues for reflection in a sale and purchase agreement (SPA) and completion accounts. There is no audit “opinion” compared to the statutory audit and the outcome of the due diligence is not a valuation report. Due diligence reports typically provide input for the purchaser for use in the negotiation process, both with regard to price and other terms and conditions that might be included in the SPA.

Transtaction Readiness

also serve well for identifying potential tax savings and assessing the quality of transferable tax attributes (e.g. tax losses).

M&A Top sectors

www.deloitte.cz

Taxes

Peter Smataník Manager, Deloitte Advisory psmatanik@deloitteCE.com

Human resources

Tatiana Balkovicová Director, Deloitte Advisory tbalkovicova@deloitteCE.com

Permitting and construction

Due diligence in the Czech Republic With approximately 10.5 million inhabitants, the Czech Republic is a relatively small market in terms of population; however, it is the most developed among Central European countries. Owing to the market proximity to both Western and Eastern Europe, the Czech Republic offers a wide variety of opportunities to foreign investors. Acquisition due diligence is commonly used in M&A deals in the Czech Republic. To maximise the chances of successfully closing an M&A deal in the Czech Republic, it is necessary to follow several rules in due diligence. Early involvement of advisors will help a potential bidder to receive key information for management decisions prior to submitting an indicative bid to the vendor. In certain industries, involvement of local subject-matter experts is necessary (e.g. energy regulatory experts). Differences between conducting due diligence in the Czech Republic and in overseas markets exist and should be assumed in preparing a transaction roadmap and the scope of due diligence. The table below includes a selection of common issues investors and their advisors face during a due diligence

investigation. Risks can be mitigated when appropriate attention is paid to due diligence during the whole M&A process. Several trends are currently observable in deals on the Czech market. The majority of deals are becoming competitive with a standardised selling process and a VDD report in place. Advisors are often involved on both the selling and buying sides. Such an approach requires the due diligence provider to be involved from the initial stage of the process in order to ensure consistency between different sources of information provided to prospective investors (information memorandum, marketing documents and VDD report). An increasing number of completed deals include insurance of warranties and indemnities. In such a case, a due diligence report is a requirement for a potential insurer. The concluded pricing mechanism includes a higher share of locked box accounts. In this case, a key element is to understand the balance sheet at the locked box date, a definition of ordinary business activities or non-ordinary activities which present potential leakages in the locked box mechanism. According to Deloitte’s Private Equity Survey (May 2016), investor confidence is recovering after its dip in autumn 2015. The index rose by a third to putting sentiment in Central Europe at roughly the level seen a year ago. With the expected recovery, transaction advisory services and particularly financial and tax due diligence are becoming increasingly important for investors willing to convert their positive expectations into successful transactions.

Properties

performance of the business, often with a focus on normalised pro forma EBITDA. In a significant number of transactions, the business will also be valued on a multiple of EBITDA, using a “clean” sustainable EBITDA. For transactions where a discounted cash-flow valuation is used, the investor will similarly want to understand the underlying earnings/operating cash for various evaluation purposes. Understanding what a “normal” level of working capital is and looking into intra-month working capital or cash trends will help the acquirer negotiate pricing and assess what funding facilities they need to put in place with their lenders, if any. A “typical” pricing mechanism will allow for a business to be delivered to the acquirer with a “normal” or “target” level of working capital. There is no fixed definition for calculating normal working capital; therefore, this will be a part of the negotiation process and investors will often ask for assistance in analysing and understanding this. The purpose of the net debt schedule is to provide information on the likely impact of cash, debt and debt-like items (in the target business) on the consideration to be paid for a business. Business valuations are commonly assessed in terms of enterprise value. However, in order to calculate the amount payable to the vendor, the enterprise value is adjusted for net cash/debt (in addition to a working capital adjustment). Under a typical pricing mechanism, the acquirer will pay in full for any cash/cash-like items and get a deduction in full for any debt/debt-like items. The standard tax due diligence investigation focuses more on the historical tax position of the target company with the aim of identifying and quantifying potential tax exposures within tax periods still open for tax audit. On the other hand, tax due diligence might

Integration + Transformation

R&D

Due diligence investigation For the purposes of this article, we will focus on describing acquisition due diligence (ADD). This form of due diligence enables prospective purchasers to confirm the transaction thesis via checking the reported financial condition of the target company. The standard financial due diligence investigation includes assessment of the quality of earnings (historical, current and projected), sustainability of cash flows, working capital requirements and debt position including commentary on potential debt-like or off-balance sheet items. Assumptions underlying the projections of these figures may also be tested. Management reporting will most likely form the basis of analysis for due diligence purposes. Therefore, enquiry about its derivation is necessary to understand how it is tied to the underlying financial records. Furthermore, it is often the case that internal management information may not be GAAP compliant, i.e. management may have already “normalised” the financial information for their definition of one-off items. As such, a common tactic for historical data is to reconcile the management accounts with the statutory accounts. The work in underlying earnings is often referred to as “normalised EBITDA”, “pro forma EBITDA” or “quality of earnings”. The aim of this investigation is to understand the underlying trading

Closing + Integration Strategy

Finance

Generally, there are two types of financial and tax due diligence exercises – acquisition and vendor due diligence. Vendor due diligence (VDD) is performed for the vendor in a transaction that expects a tendering process with multiple potential bidders. VDD enables acceleration of the whole process and gives potential bidders greater comfort from the beginning of the process.

Transtaction Diligence + Execution

First steps

M&A Strategy

The Czech Republic

Financial and tax due diligence

W&I insurance for M&A deals in the Czech Republic Given its location in the heart of Central Europe, the Czech Republic has become something of a hub for overseas investment in the region over the past few years.

he real estate market in Central and Eastern Europe has been a particular area of focus for investors due to the following three key factors: Availability of “dry powder” from institutional and private investors “The search for yields”. With government bonds and stock markets now producing negligent returns, investors are prepared to increase their appetite for perceived risk in order to achieve greater yields. The political situation across Europe following Brexit has seen foreign investors looking for returns in the stable Central European political environment and non-eurozone countries.

Last year, EUR 1.2 billion was invested in the CEE market by private equity funds and an additional EUR 2.75 billion was invested in the Czech real estate market across all asset classes. As investment has flooded into the region, it has brought with it financial instruments derived

126 | INVESTORS‘ GUIDEBOOK

from the US/British M&A market. In this article we will look into the role of insurance in mergers and acquisitions. The article will look at the reasons behind the growth in the use of this product, particularly for deals in CEE. The warranty and indemnity (W&I) market has been in existence for a decade but has only become a staple deal tool in the past four years. In the London market, it is estimated that around 30% of M&A deals now have W&I attached. Increasingly, this product is being used in deals across CEE and in Czech deals in particular. The demand W&I has risen due to a combination of factors, while the cost has decreased to a level where the insurance is seen as a very attractive option. The process has been streamlined, with most London teams having former corporate lawyers underwriting the risk, and awareness of the existence of such insurance has increased, with law firms pushing the option to their clients as a viable deal tool. The insurance could act as a means of compromise in the course of executing a deal, when discussions between the buyer

M&A Top sectors

www.renomia.cz

Taxes

Specific known issues such as tax or litigation may also be covered by the W&I market with a separate policy.

Vojtěch Toman International Department Account Manager RENOMIA vojtech.toman@renomia.cz

Human resources

Statistics show that 11% of policies in EMEA had claims; the most common breaches concern the Financial Statements.

This includes claims: I. for a breach of warranty (general, fundamental, tax) II. under the tax covenant III. under an indemnity in respect of a known issue

RENOMIA works in conjunction with the Lockton Transactional Risks team in London for warranty and indemnity insurance.

Permitting and construction

Buyers can distinguish themselves from others in the tender process and can thus win more deals.

Properties

With W&I, sellers benefit by limiting their liabilities.

The product tends to be particularly attractive in competitive auction processes where sellers are unwilling to provide warranties and indemnities but can still provide a package to prospective buyers, enabling them to bring warranty claims against the insurer rather than the seller. The starting point for the insurer is that the policy sits back to back with the SPA and indemnifies a party to a transaction (buyer, seller or interested party) for financial losses arising out of the sale and purchase agreement.

The W&I market in London and across Europe has increased tremendously in the past few years. More and more insurers are joining the market, resulting in competition in both pricing and coverage positions that customers can benefit from. Markets are now having to look at more complex risks and jurisdictions in order to gain market share. It recently became possible to cover the Czech jurisdiction, which was nearly impossible only a few years ago. As the product becomes more commonly used, claims data is starting to emerge from the market. AIG recently published its claims data, noting a claims on 11% of policies written in EMEA. The most common breaches involved financial statements, tax, contracts, intellectual property, employee and litigation warranties. Interestingly, over 50% of claims arose in the first twelve months of a policy being written. Pricing for W&I policies ranges between 1% and 3% of the limit purchased. When pricing risk, underwriters take into account the quality of due diligence, type of asset, jurisdiction and transaction size. Real estate deals are now being priced as low as 0.75%, whereas IP-heavy software companies would be priced at the higher end of the scale. The majority of claims occur in the first 18 months after completion, though 10% of claims arise more than two years after the given deal has been signed.

R&D

Each policy is bespoke in order to address the issues at hand and implement the requested cover.

The policy fills the “warranty gap” in cases where sellers: I. are not prepared to provide warranties (e.g. PE houses or family sellers), or II. intend to cap their liability at £1/€1/$1 (e.g. real estate transactions), or III. in some cases are unable to give warranties and indemnities (e.g. family sellers or SPVs)

Exclusions from the W&I policy include secondary tax liabilities, transfer pricing, environmental exclusions and construction defects. Increasingly, clients are turning to other insurance markets to cover risks that fall out of the purview of the W&I market. Policies can be held by either the buyer or the seller, but it is far more common for the buyer to hold the policy. The benefit of a buy-side policy is that, in the event of a claim, the buyer will be reimbursed directly by the insurer, rather than the seller, for any covered financial loss under the contract, as a claim that would have been against the seller will now be against the insurer. This gives the buyer certainty that, in the event that any of the warranties that buyer relied upon are not correct or are even fraudulent, the policy will respond (assuming a risk has not been specifically excluded). A seller-side policy would mean the buyer would issue a claim against the seller, who would in turn issue a claim against the policy. This does not give the Seller a “clean exit”, which is one of the main drivers for this type of insurance. From the seller’s perspective, W&I insurance can be used to limit liabilities and mitigate balance-sheet exposure. This allows the seller to exit deals cleanly, free to use the proceeds of the sale without having to reserve funds for any future claims. From the buyer’s perspective, W&I insurance can be used to make a bid more attractive to a prospective seller. It can therefore help a buyer secure a greater number of deals.

Finance

Warranty and indemnity insurance means of compromise in the course of executing a deal, when discussions between the buyer and seller can sometimes come to a deadlock.

and seller can sometimes come to a deadlock. The purpose of W&I insurance is to wrap the transactional risk in a policy so as to eliminate, or at least minimise, the impact of the liability on the parties in a sale and purchase agreement. The scope of coverage is determined by the issues in a particular transaction; therefore, each policy is bespoke in order to address the issues at hand and implement the necessary cover.

First steps

Good to know:

The Czech Republic

W&I insurance

From preparation to operation

When making decisions in the process of preparing and implementing an investment in the Czech Republic, foreign investors have the possibility to use the services of consulting firms connected with resolving various construction-technical and organisational issues. This pertains to both projects involving new construction and those using existing structures (brownfields). At the same time, it involves addressing the broadest range of issues encountered throughout lifecycle of the given project, from preparation to operation. In the Czech Republic, these services are offered to foreign investors based on the past findings and experience of the service providers, as well as the needs of the investors.

he character of provided services is fully dependent on the character of the given project, including its preparation and implementation, and the necessity of alerting the investors to errors arising from lack of understanding of the specific conditions, differences in construction-related legislation and, especially, the necessity of minimising potential risks ensuing from these objective facts. Technical screening For foreign investors, it is necessary to first mention services connected with technical screening of the conditions and surroundings of the future structure. Investors are offered services consisting in collection and assessment of information re-

128 | INVESTORS‘ GUIDEBOOK

quired for taking a definitive decision on the given project’s location. This involves the following measures: Assessment of the proposed location of the structure with respect to urban development documentation and possible risks that could arise in future Assessment of the transportation infrastructure with respect to not only the implementation and operation of the structure, but also to accessibility for employees, work schedules, etc. Assessment of the utilities networks, especially with respect to their long-term operability, quality, capacity, loading, etc.

Step 2: The consulting firm forms a team of specialists according to the agreed requirements with the objective of precisely specifying the preliminary actions to be taken according

Vladimír Bílý Regional Director CEE Gleeds vladimir.bily@gleeds.cz

Top sectors

www.gleeds.com

The process of providing such a type of the Technical Due Diligence services as described above is common practice and is always the result of the initial discussions and the requirements precisely formulated by the investor.

M&A

Preparation and implementation For the actual process of preparing and implementing construction, services of a technical and

Foreign investors often request that consulting firms set up a project-management system and provide a monitoring function. These services are offered with respect to the construction, technical and technological works in every project. A basic function is to recommend an overall concept

The management of the consulting firm submits a final summary report to the investor. Within this report, emphasis is placed on a comprehensive solution for determining the status with a statement of the degree of importance of the determined facts.

Taxes

Foreign investors most commonly request this overview of analytical documents and information from consulting firms. It is natural that most of them are able to prepare it for investors and give answers to other questions pertaining to the construction-technical area. Such documents and information always serve as the foundation for investors’ strategic decision-making with respect to choosing a location for a structure or, as the case may be, using existing structures.

Step 4:

Human resources

Condition of the fire-protection system and assurance of occupational safety including accessibility in the case of extraordinary events

The investor and consulting firm define the objectives and set up the time schedule and organisational assurance. Usually, a representative of the consulting firm explains to the investor all aspects of the agree activities. This also leads to the conclusion of an agreement on cooperation.

The consulting firm’s specialists verify individual areas and prepare partial reports including necessary documentation and recommendations, which include suggestions on how to use or change the determined state of the relevant measures.

Permitting and construction

Condition of the equipment and location of all necessary energy and other sources for flawless and economical operation of the future building

In the Czech Republic, most construction projects are implemented via a general contractor. Investors are therefore offered services related to evaluation of all technical conditions of the project as well as compliance with the requirements ensuing from the construction documentation as negotiated with various public authorities. The assessment of materials for selection of a general contractor makes it possible to alert investors to risks that may arise during the course of construction beyond those set forth in the project documentation and that may lead to legal disputes. A technical audit of the documentation for selection of the contractor carried out by a consulting firm is extraordinarily beneficial for investors. Assistance with the actual selection and evaluation of bids is a natural part of the offered services.

Step 1:

Step 3:

Properties

Determination of the extent to which the current condition of buildings is or is not in accordance with the technical standards and regulations in force

to be taken according to the first step. The necessary contractual relationships are agreed on the basis of this specification.

R&D

Quality of the utilised construction materials from the perspective of the structure’s anticipated service life

Recommendation regarding the specific professional competence of the project manager and formation of management teams. The required technical-organisational skills and experience and preparation of the selection of suitable candidates for individual management and executive positions are considered to be among the necessary prerequisites for ensuring successful project management. Here emphasis is also placed on thorough knowledge of the technical and organisational conditions of construction process in the Czech Republic.

of project management which includes, among other things, the key milestones of the construction project, the basic links between structural and technological works and a statement of significant risk areas. Such a management concept does not replace commonly used control and monitoring mechanisms. The breadth and depth of using these and other TDD-type services are always based on discussions between the investor and the consulting firm. This usually involves adhering to the following process:

Finance

Quality of the given building and individual parts thereof

organisational character are provided so that investors gain the necessary information and recommendations that will facilitate the construction process. Such services include the following:

First steps

Determination of climatic conditions in relation to transport, energy intensity, operating costs and scope of Facility Management services In the event that the investor decides to use offered buildings (a database containing such properties is available at CzechInvest, for example), collected and evaluated documents and information on the following topics can be requested:

The Czech Republic

Technical due diligence

Environmental due diligence – A cornerstone of new acquisitions assessment Environmental due diligence (EDD), i.e. the ecological audit of industrial companies, administrative buildings or undeveloped land plots intended for further development, is an important element in making decisions about new property acquisitions. The demand for EDD services is increasing significantly as the market is developing after a few years of decline. An environmental audit is performed particularly when companies and properties are purchased or sold, or when other business transactions are done and ecological commitments are transferred between the involved parties.

he purpose of EDD is a comprehensive evaluation of the assessed property with respect to possible environmental risks. The audit provides the client with an assessment of whether the property complies with the applicable laws and also provides a calculation of possible risks and the costs of remedial measures. Typical clients requesting EDD services include individual industrial companies and business chains as well as major developers and companies providing facility management services. As there is no specific EDD methodology in place in the Czech Republic and as most acquisitions

130 | INVESTORS‘ GUIDEBOOK

involve foreign investments, most consulting companies provide EDD services according to the E-1527-05 ASTM standard issued by the American Society for Testing and Materials. This approach ensures easy orientation and meeting of foreign investors’ expectations. Environmental due diligence is performed in two stages according to the ASTM methodology. The first EDD stage includes the evaluation of the site according to its compliance with legislative requirements. The current state of the site and all activities taking place there are assessed during the auditor’s actual visit. Based on available information, the following points are assessed:

Phase 2

Review of available documentation existing environmental burdens registered sources of pollution permits and approvals

M&A Top sectors

www.enviros.cz

Taxes

Jan Pavlík Head of the Environmental Division ENVIROS jan.pavlik@enviros.cz

Human resources

Furthermore, all available documentation is reviewed (public registers and databases; documentation at the site). Particular consideration is paid to the assessment of waste, waste water and handling of hazardous materials as well as the amount of produced airborne emissions. Health and safety and environmental considerations are addressed by adopting a site-specific qualitative approach to identify the risk of environmental harm. The guiding principle behind this approach is the attempt to establish connecting

links between sources of hazards via an exposure pathway to a potential receptor. Risk assessment is the process of collating known information on a hazard or set of hazards in order to estimate actual or potential risks to receptors. Receptors may be humans, a water resource, a sensitive local ecosystem or future construction materials. Receptors can be connected with the hazard via one or several exposure pathways (e.g. the pathway of direct contact). Risks are generally managed by isolating or removing the hazard, isolating the receptor or by intercepting the exposure pathway. Without the three essential components of a source (hazard), pathway and receptor, there can be no risk. Thus, the mere presence of a hazard at a site does not mean that there will necessarily be attendant risks.

Permitting and construction

the historical use of the site with emphasis on uncovering old ecological burdens the environmental impact of current activities (waste handling, use and storage of chemicals, technological operations, heating and cooling)

A specific issue in the Czech Republic is the question of old environmental burdens, particularly soil contamination due to industrial activities in the past decades. It is obvious that the issue of old ecological burdens exists in all countries, including those in western Europe. However, gradual steps with clear determination of the involved entities’ responsibility have been taken in these regions in connection with the development environmental responsibility and subsequent work on relevant legislation. The situation in the Czech Republic and other countries of the former Eastern Bloc was complicated by the privatisation of state-owned companies in the 1990s. All known kinds of contamination were registered and so-called ecological agreements were concluded between the new owners and the National Property Fund of the Czech Repub-

Properties

Summary potential risks recommendation for Phase 2 if necessary

the likelihood of an event (probability), which takes into account both the presence of the hazard and receptor and the integrity of the pathway the severity of the potential consequence, which takes into account both the potential severity of the hazard and the sensitivity of the receptor

R&D

If recommended from Phase 1, the following items are sampled and tested: soil and groundwater PCB ACM

Site visit inspection of the site’s maintenance handling of waste, chemicals and hazardous substances presence of bulk storage, ODS and PCB on site

lic at that time – these agreements ensure the allocation of state funds for the removal of the burdens. The ecological agreements agenda was later taken over by the Ministry of Finance of the Czech Republic. Reviewing these facts represents an important step when EDD is performed in companies and it also is the point where EDD works overlap with legal due diligence works at the site in question, and both teams often cooperate. Another interesting specific fact is that a significant part of newly developed industrial zones is situated in brownfields on former military sites that became vacant after the withdrawal of Soviet armed forces from the Czech Republic or due to the reduction of oversized Czech military bases. The second EDD stage is performed in the case that the first stage defines the need of further specialised research that is necessary for making a qualified decision about the environmental state of the site. The most frequently performed activities during the second stage are research of asbestos occurrence, research and analysis of soil and groundwater samples – the most frequent contaminant being oil products (hydrocarbons) or PCBs from the operation of old transformers and the like. We can unambiguously conclude that performing environmental due diligence should be a standard step during acquisitions of properties as it can significantly contribute to the decision-making process as a whole and decrease the costs of remedial measures. The most important approach is to have EDD done by a qualified company that knows the local conditions and all related circumstances.

Finance

Phase 1

By considering where a viable pathway exists which connects a source with a receptor, this assessment will identify where pollutant linkages may exist. If there is no pollutant linkage, then there is no risk. Therefore, only where a viable pollutant linkage is established does this assessment go on to consider the level of risk. Risk should be based on the consideration of both:

First steps

Typical range of EDD

The Czech Republic

Environmental due diligence

Finding a trustworthy manager in the Czech Republic Nominee services are used when a nominee (fiduciary) looks after the assets on someone else’s behalf and acts in their best interest. Such a person is usually nominated based on a contract between the client and a professional provider, which means the nominee is not someone from the client’s staff. In the Czech Republic, these services are provided on a very high level, comparable with the advanced countries of Western Europe.

he trust element The nominee director service, which is probably the most common type of nominee service, is typically provided by independent trust firms or individuals. Clients recruit from various industries and business segments and use this service for different reasons. As the element of trust is of great importance in this relationship (which is why providers of such services are often referred to as “trust firms”), clients tend to look for reputable providers with an excellent track record. Conversely, providers tend to be a bit more selective when taking on new clients than in the case of other services like accounting or payroll.

132 | INVESTORS‘ GUIDEBOOK

A reason for caution is that the director is liable with all his/her personal assets to the shareholders should he not act with due care. This is why a diligent KYC (know-your-client) procedure is performed before accepting a directorship client. Indeed, no director would like to serve and be a key contact to third parties on behalf of a company that is engaged in unethical or even illegal activities or simply has poor corporate governance that could cause non-compliance for which the director could be held accountable. The element of trust must work both ways, however, as the same need for caution applies for clients, too. Because the director has great power within the company and can enter into contracts on behalf of the company, shareholders want to have some-

Regular proactive dialogue with the client and other board directors Review and signing of all contracts to be entered into by the company, cooperation

with the client’s lawyers, tax advisers and other professionals Review and approval of the company’s financial statements, related communication

with the client’s internal and/or external auditors, government authorities, etc. Review of proposed changes to statutory documentation, including the company’s

memorandum and articles of association, prior to the company’s adoption of such changes If the company is an investment fund, review of its offering document and other

materials prior to adoption of such documents Taxes

Tomáš Vinkler Managing Director VISTRA CZECH REPUBLIC AND SLOVAKIA tomas.vinkler@vistra.com

Top sectors

www.vistra.com

M&A

Summary Nominee services are not a magic bullet that eliminates all concerns and problems associated with a new investment. However, if used in the right way and with the right partner, they can save a lot of time and financial resources and add an extra dimension of comfort and corporate governance.

as required by the company’s investment strategy and activities

Human resources

One-off transaction and other reasons – Clients involved in an M&A transaction using a special-purpose vehicle frequently use outsourced directors who know how these transactions work, know other local service providers like lawyers, tax advisers, etc. and are happy to assist the client for a relatively short period of time, for which it would be even more difficult to find a director of decent quality.

Attendance at regular board meetings in person or by conference call as frequently

Permitting and construction

Limited presence in the country – This is typical for inward investors who do not need many people locally and manage their investments in multiple countries from their headquarters abroad. Having a local director with a proven track record who knows local legislation and the business community, can recommend local experts in other service areas and is used to daily operational matters such as how banks, the tax office and other governmental authorities operate saves the client time and resources and is more effective than having an expatriate dealing with these issues in multiple jurisdictions at once.

Employees do not want to do it – As mentioned earlier, directorship services represent certain risks for the directors. A professional provider has many checks and controls together with insurance and since it is a product for these providers, the procedures and processes are well designed and maintained, which makes it safer for the nominee than for someone without this support, as well as more efficient for the client. Without such a setup, the risks for an employee who serves as director, among other things, are not insignificant.

Among other things, the agenda of a director comprises but is not limited to the following:

Properties

Independence and responsibility – Having an independent trust firm with professional indemnity insurance and director and officers liability insurance appropriate to the size of its clients and which can also handle back-office management (accounting, payroll, compliance, etc.) is much more effective than using one’s own employee, who not only has to deal with directorship tasks in addition to his/her primary duties, but may also go on holiday, become ill, leave the company unexpectedly or pursue his/her own interests.

Language barrier – The director must read and sign many corporate documents, many of which can only be in the local language; having a native speaker of the given language is an advantage.

The areas in which a director typically plays an active role vary and the director should be generally aware of all key happenings in the company. Even if it is typically the client who makes business decisions, sets the corporate strategy and instructs the director on execution, the director should check if the tasks are compliant with local legislation and oversee their proper execution.

R&D

Local management and control – If the client has its headquarters abroad, appointing a foreigner as the director of a local company might lead to speculation with respect to where the real management and control are being executed. This risk is mitigated by appointing a professional local director who lives in the same country in which the company is registered.

Cost – It is cheaper to outsource to an experienced local director than to move one’s own full-time employee with the required seniority and experience to a foreign country to serve as a director.

What directors do

Finance

Why and when to use a nominee director Why use a nominee director when many companies use their own staff? Why not use your own people when finding the right provider is not always an easy task? To answer these questions, some commonly cited reasons for choosing this service are provided below.

Level of experience – Sometimes clients have a few employees on the local market, but none with sufficient seniority or experience. Clients then often choose to outsource the directorship service rather than use their own employee who lacks relevant experience and would be distracted from his/her primary work by directorship duties.

First steps

body trustworthy in such a position. Reputable trust firms serve as a sort of guarantor in this relationship, as they have adequate procedures in place ensuring that their directors will act strictly on the client’s instructions only. This means that the client decides what contract to enter into and the director, in cooperation with the client’s lawyers, tax advisers and other professionals, executes the client’s wishes. It is for this reason that clients usually reach out to trust firms for this type of nominee service.

The Czech Republic

Nominee services

CzechLink: The easy way to find a strategic partner CzechInvest’s CzechLink project is intended for Czech companies that are seeking strategic or investment partners. During its four years in existence, CzechLink has supported more than 70 family-owned firms and other companies with conservative financial management.

CzechLink offers a broad portfolio of companies that are actively seeking investors and is a possible way for investors to enter the Czech market though a merger or acquisition.

Structure of Participants (by headcount) 8% < 50

20% 44%

zechLink was initiated in response to the heightened demand among foreign companies for mergers with and acquisition of Czech firms. The purpose of the project is to seek out suitable acquisition targets and to ease foreign investors’ capital entry into Czech companies. CzechLink is most frequently used by manufacturing companies that are considering expanding their activities through an acquisition or joint venture, and investment funds and banks. Czech companies that are seeking a partner or investor through CzechLink must be headquartered in the Czech Republic and have at least a five-year history of operation in the country. They must also be financially healthy (i.e. they must not be in bankruptcy or subject to settlement). CzechLink helps firms to resolve problems with management succession and also provides the possibility to gain a strong partner for expansion. With respect to the project’s conditions, the size of investment targets is in no way limited, though they are usually small and medium-sized enterprises with income ranging from EUR 3 million to EUR 10 million and fewer

51 - 100 101 - 150 150 <

28% Source: CzechInvest, 2015

134 | INVESTORS‘ GUIDEBOOK

Erik Bolebruch Head of the Sourcing Section CzechInvest erik.bolebruch@czechinvest.org www.czechinvest.org

than 150 employees. CzechLink is intended for companies in the manufacturing and ICT industries. Project participants are commonly firms engaged in plastic injection moulding, metalworking and CNC machining for the automotive industry. Furniture and mechanical-engineering firms has also expressed interest in the project. The current list of CzechLink participants is available on CzechInvest’s website. For every firm participating in the project, CzechInvest prepares an information sheet containing a detailed description of the company (ownership structure and legal form; business, technical and purchasing profiles; and a description of the given firm’s primary competition) as well as a financial analysis of the company covering the past five years. The information sheet also serves as a internationally comprehensible presentation of the firm’s results. This sensitive information is provided to investors only after signing a confidentiality agreement with CzechInvest. In the subsequent phase, CzechInvest arranges introductory meetings between potential partners. However, the actual structure of the transaction (financing and management audit) is exclusively at the discretion of the investor and the given firm.

Localisation

Relocating a company to a foreign destination is always a demanding administrative process. In this respect, CzechInvest can assist foreign companies coming to the Czech Republic.

With Welcome Package Without Welcome Package

19%

Taxes

China

As of 1 May 2015, the project also supports the relocation of family members who apply for a visa for the purpose of cohabitation of a family. Individual applications of members of the same family are thus processed jointly.

Human resources

Permitting and construction

Properties

Nationalities using Welcome Package (as of October 2016)

a foreigner is transferred on the basis of a contract to work at a Czech branch while remaining in an employment relationship with the foreign investor, and localisation, whereby the transferred employee enters into an employment relationship with the Czech entity. According to the law, it can take up to 60 days to issue an employee card, whereas within the Welcome Package project this period is guaranteed to be no longer than 30 days from the date of submitting an application at a Czech embassy abroad. Historically the project is most frequently used by investors from the United States, South Korea, China or Ukraine. The applicants are companies such as MSD IT Global Innovation Centre, Amazon, Hisense, Epam Systems etc. Localisation is the preferred method in most cases.

R&D

he agency’s Welcome Package project substantially eases the process of arranging residence permits. Those eligible to register in the project include newly established Czech business entities of foreign investors. The project is intended for statutory bodies, managers and key specialists who need to reside in the Czech Republic for longer than 90 days. The benefit of Welcome Package consists in accelerated issuance of residence visas to foreigners within 30 days following submission of the application to a Czech embassy abroad. Within Welcome Package, companies can use two means of relocating their employees and statutory bodies. These are internal transfer, whereby

Finance

How long is up to 30 days the relocation process with and without Welcome Package? up to 60 days

First steps

96%

Helping foreign investors relocate to the Czech Republic

Internal transfer

The Czech Republic

How do companies use Welcome Package?

Ukraine South Korea US

65%

www.czechinvest.org

Top sectors

Source: CzechInvest, 2016

India

Lucie Říhová Project Manager, AfterCare Department CzechInvest lucie.rihova@czechinvest.org

M&A

Russia

Automotive industry reflects the Czech Republic’s tremendous potential The Czech Republic is experiencing a very favourable period for business and investment, as well as in terms of society-wide development. The country, which has long been very stable and among the safest in the world, currently has the fastest growing economy in Europe. In the third quarter of 2016, the Czech Republic’s gross domestic product grew 2.6% year on year. Industry has played a major role in these positive results, with the automotive sector remaining the driving force behind the economy’s growth. The country benefits from its long industrial tradition together with its strategic location in the heart of Europe, availability of skilled workers and specialists, and sufficient number of suppliers. In comparison with those in neighbouring countries, wages in the Czech automotive sector are still highly competitive. The sector accounts for 23.4% of Czech exports. The total value of automotive production in the Czech Republic is nearly CZK 1 billion. In 2016 the Czech carmaker Škoda Auto celebrated the twenty-fifth anniversary of its privatisation. From today’s perspective, it can be stated that Volkswagen’s investment in the company has proven to be one of the most successful privatisations carried out since the fall of the country’s communist regime. Under the wing of its German parent company, Škoda Auto has achieved tremen-

dous growth in sales of its cars, which regularly place at the top of satisfaction surveys among Czech and foreign customers. Škoda Auto has also been of great benefit to the Czech economy. The positive experience with vehicle manufacturing has attracted other foreign investors to the country and has led to significant development of suppliers. Today other, related sectors are also benefitting from the Czech Republic’s high-quality automotive industry, as advanced technologies have flowed into the country. For example, the TPCA and Hyundai factories as well as the new Škoda Auto plant in Kvasiny are among the most modern automotive production facilities in Europe. I am thoroughly convinced that Czech automotive manufacturing and related investments are an inspiration for other sectors. The quality of the work of Czech engineers is recognised globally. Vehicle manufacturing has been and continues to be indicative of the Czech Republic’s tremendous potential. On the occasion of the twentieth anniversary of the establishment of the Association for Foreign Investment, I would like to wish the Czech Republic and the AFI’s members and partners ongoing stability with respect to the inflow of investments, clients, technologies and knowledge, which will find in the Czech Republic an ideal environment for further development.

Martin Jahn Executive vice president and managing director of Volkswagen Brand, FAW-VW sales company President of the Automotive Industry Association of the Czech Republic AFI Honorary Member Former CEO of CzechInvest (1999-2004)

Top sectors for investment

Automotive

Aerospace

The Czech Republic has a special place among Central European countries. It has a strong industrial tradition dating back to the early 19th century when the Czech lands were the most industrialised part of the Austro-Hungarian Empire. One of the oldest factory-made cars in the world is Tatra Präsident produced in Kopřivnice in 1897. Before the Second World War, many automobile companies were established in the Czech lands, e.g. Tatra (1850), Laurin & Klement (1895, now under the name Škoda Auto, a subsidiary of Volkswagen AG), Karosa (1896, now Iveco Bus, a subsidiary of CNH Industrial), Walter (1902), Praga (1908), Wikov (1918), Aero (1929) and several others. In the 1930s, Czechoslovakia was one of the most motorised countries in Europe, with 14 cars per 1,000 inhabitants in 1936. Even in the period of communism Czech producers like Škoda or Tatra were competitive enough to develop their own cars, which were even exported to western markets. A boom of Czech OEMs came in the 1990s and 2000s when Volkswagen AG acquired Škoda Auto, Toyota and PSA Peugeot Citroën established a joint-venture in Kolín, and Hyundai opened its only European plant near Ostrava. With more than 1.3 million cars manufactured in 2015, the Czech Republic is the biggest producer in Central and Eastern Europe. Carmakers in the Czech Republic manufacture vehicles in all segments, i.e. city cars (Toyota Aygo, Citroën C1, Peugeot 108), superminis (Škoda Fabia), small family cars (Škoda Rapid, Škoda Roomster, Hyundai i30), large family cars (Škoda Octavia, Škoda Superb), SUVs (Škoda Yeti, Hyundai ix35) and MPVs (Hyundai ix20). The Czech automotive sector is characterised not only by OEMs, but also by its robust supplier base. Fifty-six out of 100 global tier-one suppliers have at least one of facility in the Czech Republic. The world’s most renowned global automotive suppliers, particularly those from from Europe, Japan, South Korea and the United States have established operations in the Czech Republic in recent years and are planning further expansions here in the coming years. The automotive sector is crucial for Czech industry, as it accounts for 21% of both total industrial production and exports. It also accounts for 7.5% of the Czech Republic’s GDP while employing 3.1% of the country’s workforce. With 2.7%, the Czech Republic has the largest share of the economically active population employed directly in automotive manufacturing in Europe. The Czech automotive sector has also the highest annual gross value added per employee (EUR 68,400) in the CEE region.

The aerospace sector has been a successfully developing part of the Czech industry since the first airplanes took to the skies over a century ago. Aviation is among the key industries with high added value in the Czech Republic and is among the very best that the country has to offer on the global market. With a long, successful track record in producing various aircraft parts, engines, avionics, hydraulic systems and space technologies, the Czech Republic is well integrated into global supply chains and is also a traditional OEM of multiple civil and military aircraft. Many international companies have chosen the Czech Republic as the location for their expansions. For example, Honeywell has over four thousand employees here working in administration, research and development, and manufacturing. The Czech Republic has thus become one of the company’s key bases in Europe in the field of aerospace and beyond. GE Aviation is another major investor, having placed turboprop-engine centre of excellence in Prague with design, development and production all under one roof. Bell Helicopter also chose Prague for its customisation and delivery centre. The French company Latecoere manufactures aircraft doors and parts thereof for practically all major aircraft OEMs in the world and Zodiac Aerospace’s Galleys Europe facility in Plzeň is the exclusive producer of all galleys for the Airbus A320 family of passenger jets. The light sport aircraft category is among the unique attributes of the Czech aerospace industry. Firms in this segment are headed by very experienced engineers and workers, including former employees of major state-owned aircraft factories. Thanks to this, the Czech Republic has become one of the largest LSA manufacturers in the world. When it comes to space activities, the Czech Republic is not lagging behind. The main focus lies in high-added-value areas such as satellite systems, components and innovation programmes. Prague is the home of the European GNSS Agency responsible for the Galileo navigation system project and the country is also an active member of the European Space Agency. For many years, the Czech Republic’s aviation industry has been among the most competitive in the world and is once again proving that its expertise is valuable on the global market and that Czech companies are ready for the challenges of the 21st century. Join the world’s elite and invest in the Czech Republic!

Richard Schneider Sector Manager for Automotive CzechInvest

Marek Aubrecht Sector Manager for Aerospace CzechInvest

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Advanced engineering Mechanical engineering has a long tradition in the Czech Republic and is the heart of Czech industry. Thanks to the its excellent location in Central Europe and more than a century of experience in the production of automobiles, turbines, machinery and other products, the Czech Republic is an important sales market and extremely attractive country for investors in the engineering segment. The long-term know-how and high level of technical education among the country’s population has attracted renowned international companies involved in manufacturing and, increasingly, activities with higher added value, especially research, development and innovation. Engineering companies employ the largest number of people in all industrial sectors; machinery and vehicle manufacturing, sectors with relatively high added value, account for more than half of Czech exports. Industrial equipment manufacturing is the sector with the largest share of revenue and, together with other industrial segments, contributes significantly to GDP and employment. Official statistics published by the Czech Statistical Office show that, major economic indicators such as sales, turnover, number of units produced, value added, equity and assets have experienced an upswing since declining during the period from 2008-2010. Employment in the engineering sector has been rising since 2011 and the official statistics confirm that the positive trend of the main indicators continued in 2015 and 2016. However, this traditional sector is gradually being disrupted by so-called Fourth Industrial Revolution. The Ministry of Industry and Trade of the Czech Republic announced an official Industry 4.0 initiative in which main vision is to prepare industry for the digital economy, which is transforming the thinking of people involved in the organising and managing industrial production. Ultimately, this trend will have a positive impact on industry and society. The aim is to efficiently get Czech companies involved in customer-supplier chains and customised mass production and, in cooperation with the research sector, to prepare solutions that help them in this effort to improve their position with respect to activities with higher added value in order to maintain their global competitiveness.

Milan Kilík Sector Manager for Advanced Engineering CzechInvest

Electronics and electrical engineering More than anything else, the Czech electronics and electrical engineering sector is based on its long tradition and the extensive skills of its employees. The entire industry accounts for more than 14% of Czech manufacturing output, which makes it the second largest sector in the economy. Over 17,000 companies employ more than 180,000 workers in the sector here. Most of the sector’s output is exported, mainly to markets within the European Union. Since the 1990s the Czech Republic has welcomed numerous investors in various sub-sectors of the electronics industry. The whole sector is growing, particularly due to the current economic boom and the presence of well-known manufacturers. Consumer electronics production is represented by, for example, Panasonic, the largest flat-panel television manufacturer in the Czech Republic. Another great example is electronics contract manufacturer Foxconn, which has two factories here. Bang & Olufsen made its first expansion outside Denmark when it set up its operation in the Czech Republic, which involves not only production of unique audio systems, but also an up a R&D facility. Many electronics companies are also important suppliers to other branches of industry, in particular the automotive and engineering industries. The sharp development of the automotive sector in the Czech Republic and neighbouring countries has attracted a number of automotive electronics suppliers including Siemens, Bosch, Daikin, Tyco and Kostal. Lighting equipment for automobiles is manufactured in the Czech Republic by Hella Autotechnik, Varroc Lightning Systems and Automotive Lightning. With respect to high-value-added products, it is very important to mention that every third electron microscope manufactured in 2014 originated in the Czech Republic. The Brno-based companies FEI, Tescan Orsay Holding and Delong Instruments are not only producers, but also conduct R&D activities with global impact. Other companies, such as ABB and ON Semiconductor, offer good examples of how local know-how in specific fields can be used in high-tech manufacturing and R&D activities as well. The dynamic growth of the electronics industry and great references from investors prove the Czech Republic’s status as a renowned investment destination. The country’s long tradition in the electronics sector, together with its solid educational system and strategic location, has attracted numerous foreign companies in the electronics sector, which are evenly distributed across the entire country.

Martin Kratochvíl Sector Specialist for Electronics and Electrical Engineering CzechInvest

Nanotechnology

ICT The Czech Republic is one of Europe’s top locations for ICT investments. Repeatedly recognised by various researchers, this fact is confirmed by the strong inflow of high-value-added projects of the world’s top ICT companies and is fuelled by the country’s tradition of excellence in technical fields. The list of successful investors in the country includes Skype, DHL, Tieto, Red Hat, SolarWinds, NetSuite and IBM. Furthermore, ICT companies with Czech origins are renowned worldwide for their products, such as antivirus software from AVG Technologies and AVAST protecting millions of computers all over the world. The Czech Republic is traditionally strong especially in the cyber security field, with companies including AVAST and AVG having their roots in Prague and Brno. Both cities are also home to some noteworthy game development studios, such as Bohemia Interactive, Warhorse or 2K Czech. While Google has come to dominate practically every aspect of the ICT sector, from its mobile platform to web search and online maps, it has a more-than-capable competitor in the Czech Republic called Seznam.cz, which stands toe-totoe with the American giant and sometimes even outshines it. Thanks to Seznam.cz, the Czech Republic is the world’s only country using the Latin alphabet where Google is not the clearly dominant provider of web search and other services. Czech universities have quickly adopted the latest trends in the ICT sector and through intense focus on data mining, image and voice recognition, and M2M communication technologies, they are answering the challenges put forth by the development of cloud computing and mobile technologies, thus enabling the creation of new solutions for smart cities and Industry 4.0. The Czech Republic aims to become one of the leading developers of these solutions. Thanks to investments in infrastructure, the Czech regions outside of Prague are gaining attractiveness, especially in the ICT sector. Brno, the second largest city in the Czech Republic, is considered to be the Czech IT hub, where companies’ needs are met by qualified professionals, R&D facilities and institutions and advanced ICT infrastructure. Ostrava has been gaining importance in recent years and is on the path to greater international recognition thanks to projects such as IT4Innovations. Thus it is not surprising that companies such as Tieto have decided to establish their development centres there.

Over the last decade, the area of nanotechnology has attracted more and more attention worldwide with a lot of new promising applications in the fields of medicine, textiles, surface treatment and filtration. The Czech Republic has established its own respectable position in the world of nanotechnology thanks to its industrial tradition, growing state-of-the-art research infrastructure with institutions cooperating on the most prestigious projects, university education offering high-quality PhD programmes and a number of companies developing final products and coming up with many innovative ideas. Current specialisation in the field is the result of decades of research and development, whereas the outstanding findings of Professors Armin Delong and Oldřich Jirsák are arguably the most influential. The former introduced the first electron microscope into production in 1949, which later led to the fact that the city of Brno is considered to be the global centre of electron microscopy thanks to the Czech-based Tescan-Orsay Holding and the American firm FEI, which built the largest microscopy factory in the world in Brno in 2014. In 2003, Professor Jirsák developed a reliable method of spinning fibres measuring 200 nanometres in diameter. Based on his patent, the Czech company Elmarco became the first supplier of industrial-scale nanofibre production equipment in 2004 and allowed other Czech enterprises to process nanofibers in order to produce, for example, membranes for water and air filtration and functional textiles. Apart from those mentioned above, there are still other remarkable fields in which Czech companies are highly competitive on the global scale, including production of monocrystalline materials (CRYTUR), electron lithography for holography applications (IQ Structures), wound healing and tissue regeneration (Contipro), research of nanostructured and cross-linked polymeric materials (SYNPO), and production of nanoparticles for special purposes (Advanced Materials – JTJ). Nanotechnology itself could not exist without robust chemical and textile industries and strong abilities in the area of developing new materials. This vibrant new sector is highly attractive to major foreign companies; current ongoing investments include, for example, Fibertex in nonwoven textiles, Toray in waterless printing technology and AGC in advanced glass, and the group of Saint-Gobain having the Czech Republic as one of its key locations with three branches (Sekurit, Adfors, Isover) investing more than EUR 65 million on expansions only in 2015.

Matouš Kostlivý Sector Manager for ICT CzechInvest

Jiří Fusek Sector Manager for Nanotechnologies & Advanced Materials CzechInvest

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Life sciences The Czech Republic has a rich history of scientific discoveries in life sciences ranging from the laws of heredity laid down by Gregor Johann Mendel, through the invention of soft contact lenses, to groundbreaking antiviral drugs whose principal compounds were developed by Professor Antonín Holý at the Institute of Organic Chemistry and Biochemistry of the Czech Academy of Sciences. The country is particularly strong in biomedical chemistry. Today, the primary areas within which the Czech life-sciences community operates and collaborates internationally are research, development and production of human and veterinary pharmaceuticals, diagnostics, synthetic and fermentation technologies, animal and plant biotechnologies, medical devices and the use of biotechnologies in waste liquidation and environmental protection. Development of the sector is supported by effective patent protection, adoption of GMP, GLP and GCP standards, advanced genetic engineering and the government’s policy goals comprising continuation of support for R&D and acceleration of the transfer of knowledge between the science and business communities. Moreover, the country’s membership in the  European Union guarantees a regulatory framework compatible with all EU countries, which comprise a consumer market of over 500 million customers within a two-hour flight from Prague. Examples of global companies conducting business, R&D and/or manufacturing in the Czech Republic include Teva Pharmaceutical, Zentiva (Sanofi Group), Lonza Biotec, Novartis, Otsuka Pharmaceutical, MSD, Nanotherapeutics, Ferring, Bioveta, Gilead Sciences, Glenmark Pharmaceutical and Beckman Coulter, among others. Due to the demands placed on healthcare systems and the public’s ever increasing expectations with respect to healthcare services, the Czech government set development of new pharmaceutical treatments and diagnostics and human resources development as one of its top priority areas in the long-term direction of research and innovation and used substantial public funding amounting to nearly EUR 2 billion during the last programming period (2007-2013) to strengthen the sector’s research infrastructure in this field. New, state-of-the-art research facilities have been completed around the major university centres in Prague, Brno and Olomouc to complement the existing institutes of the Academy of Sciences of the Czech Republic and universities. The country is home to a number of noteworthy research centres recognised for their high-quality research in molecular biology and genetics, immunology, analytical and pharmaceutical chemistry and biochemistry, oncology, immunology, cardiology, neurology, metabolic diseases and, recently, medical applications of nanotechnologies. Thanks to the introduction of these policy and fiscal measures in combination with the country’s low corporate tax rate (19%) and R&D tax credits and investment incentives, the Czech Republic is an attractive location for both R&D collaboration and manufacturing of pharmaceuticals. Hana Chlebná Head of Sectors Management Section CzechInvest

Nuclear engineering and research The year 2015 marked the sixtieth anniversary of the first steps toward the peaceful use of nuclear energy and the establishment of the Faculty of Technical and Nuclear Physics of the Czech Technical University in Prague and the Nuclear Research Institute, thanks to which the Czech Republic (and the former Czechoslovakia) reached the peak of the nuclear-power industry in all of its aspects – operation of nuclear power plants, research and development, and nuclear engineering and services – as both a supplier and service provider. Strong firms capable of delivering their products in practically the whole supply chain of nuclear facilities have been established and the Czech nuclear-energy sector possesses extraordinarily strong human resources and knowledge potential in all areas, from development to implementation of construction works. In connection with the necessity to continue in the nuclear programme within the National Action Plan for Nuclear Energy, this extraordinary potential is maintained not only through activities related to the operation of the nuclear power plants in Dukovany and Temelín, but also through very extensive works carried out by Czech firms in foreign projects (e.g. Škoda JS for the French firm AREVA in Finland, Nuclear Research Institute Řež for the Turkish nuclear regulator). A number of strong firms in this area have got new owners/investors (e.g. Škoda JS, OT Energy Services, Amec Foster Wheeler Nuclear Slovakia), mainly thanks to their knowledge potential and well established supplier relationships. There has recently been a significant increase in the activities of both mechanical-engineering firms and those that provide services to the nuclear industry, especially with respect to construction of new nuclear power plant units in the Czech Republic as well as in a number of other countries. Companies are aware that in order to obtain contracts, it is necessary to put forth comprehensive solutions and therefore the absolute majority of them are members of specialised associations such as the Czech Machinery Cluster in Ostrava, which is the most significant with 78 firms, of which more than half are active in the nuclear industry, and the Czech Energy Alliance founded at the initiative of Škoda Prague. The actual plan to construct new nuclear units in the Czech Republic is open to a number of solutions. Though the natural choice of builder is ČEZ, which is the biggest electricity supplier on the Czech market, the sources of financing and the related impact on implementation are not currently clear; it is expected that a strong investor will be brought into Czech projects in line with examples of projects undertaken abroad, particularly in Finland and Great Britain. With respect to the indicated willingness to ensure the implementation of local projects with the greatest possible extent of domestic supplies, now is the best time to consider investment opportunities in both the areas of direct financing and improving the qualitative potential of companies operating in the nuclear industry. Jiří Marek Director and Partner JMM CS, President of the Association of Nuclear Veterans

Defence industry The roots of the Czech defence industry reach far into the past, to the period before the First World War. Most of the weapons used by the military of the Austro-Hungarian Empire originated in the Czech lands. During the First World War, the industry developed to such a degree that in 1918 the newly established Czechoslovakia instantly became one of the world’s biggest arms exporters; by 1926 it was the third-biggest exporter with a 15% share of global production, which grew to 25% in 1935. Though the Czech defence industry does not play such a dominant role today as it did between the world wars, it still holds a significant position among global competitors in certain commodities. For example, passive surveillance systems from the company ERA are a Czech invention coveted by global producers. Handguns, ammunition, devices for protection against weapons of mass destruction, information and communication technologies, military vehicles and aerospace technologies are among the Czech products that are successfully exported to countries around the world. Nearly 90% of the total output of the Czech defence industry is intended for export. In comparison with the foreign competition, the Czech defence industry excels primarily in the area of high-tech innovations. Military technologies originating here are very sophisticated, whereas it is always necessary to adapt them to the needs of the customer and its technical requirements, which often involves integration with existing systems. In this case, creativity is highly important and Czechs are masters of applying it. Thanks to thorough care for delivered products throughout their lifecycle, continual modernisation and a willingness to cooperate with local companies in export destinations, Czech defence firms have a strong possibility to beat out their foreign competitors in tenders around the world. Two-thirds of Czech defence companies are small and medium-sized enterprises that, with a few exceptions, are privately owned. This constitutes an ideal environment for foreign investors to find success in the further development of this very interesting industrial sector. Unfortunately, a number of frivolous foreign partners have appeared in the Czech Republic over the past twenty years, which has naturally led Czech owners to occasionally be somewhat suspicious of foreign capital. However, they are receptive to serious investors that can contribute to the development of their companies. And investment in the Czech defence industry is certainly very beneficial for foreign investors in the long term.

Jiří Hynek President Defence and Security Industry Association

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Transport and infrastructure In economic terms, one of the main features of the Czech Republic is that it is a highly industrialised country with advanced manufacturing and engineering capabilities. In terms of the transportation industry and infrastructure, Czechs have the ability, skills and capacity to produce most types of vehicles for road, rail and air transportation. This is valued by a number of international investors that have established operations here, such as Siemens, Bombardier, GE Aviation, Kapsch and Honeywell. However, a lesser known fact about the Czech Republic is that the country has a significant number of manufacturers and research and development facilities focusing on transportation equipment including communication and navigation devices. There are several producers of air navigation radars and other radar equipment for airports and aircraft, as well as for communication in the railway industry. T-CZ, ELCOM and AŽD Praha are only a few of the local companies that compete worldwide in the areas of air navigation systems, radar and railway equipment. Examples of leading domestic producers in the railway industry include Škoda Transportation and Bonatrans, a globally successful producer of rail stock components. Moreover, Prague is the home of the European headquarters of the Galileo Navigation System, which is an independent alternative to the American Navstar GPS and Russian GLONASS systems. The popularity of Czech researchers in this field is evidenced by the recent opening of the R&D center of the major Chinese train manufacturer CRRC in Prague. Both the transport and infrastructure sectors still offer vast opportunities for foreign investors. This is especially true for acquisitions of existing manufacturing and research enterprises in the transportation industry. Many of the players in the sector are still medium-sized, family-owned companies with a long history and established position on markets especially in Eastern Europe and the CIS countries. At the same time, Czech manufacturers have started to supply trains and trams to developed economies such as Germany and the United Kingdom as well as major emerging economies such as China. Another area for investment opportunities is transport infrastructure, particularly construction and development. Despite having a reliable and very dense transport infrastructure serving industrial manufacturers, the Czech Republic needs advanced rail and road infrastructure such as high speed rail connections to major cities in neighbouring countries. The Czech government intends to implement projects that will connect Prague with Berlin, Vienna or Budapest. However, given the high capital requirements, it is expected that such projects would be implemented with the help of foreign partners. In the area of road construction, plans call for roads to be built with the help of public-private partnerships and the involvement of international equity investors. Finally, water transportation infrastructure is an area that requires further investment. A very large project that is currently under expert discussion involves the construction and development of a new waterway connecting the Danube and Odra rivers via Moravia at an estimated cost of more than EUR 3 billion. Kamil Blažek Partner, Kinstellar Chairman, Association for Foreign Investment

Telecommunications The Czech Republic has a strong and internally stratified telecommunications sector that contains small, medium-sized and large enterprises comprising both local affiliates of multinational corporations and purely Czech firms. There are three mobile operators in the Czech Republic, specifically O2, T-Mobile and Vodafone. The entry of a fourth operator to the domestic market has long been a topic of discussion, but it has yet to happen. However, a number of virtual operators have sprung up in recent years, thanks to which the offer of services for consumers has been expanded and calling prices have dropped. Interesting recent events in the telecommunications sector include, for example, the acquisition of GTS Central Europe, which operates a fibre-optic network and data centres in the Czech Republic and Poland, by T-Mobile Czech Republic (part of the Deutsche Telekom Group). In spring 2015, O2 Czech Republic, whose majority owner is Petr Kellner’s PPF group, was divided into two entities: an operator providing services to end-customers (and continuing to use the name O2 Czech Republic) and the company CETIN, which owns and operates infrastructure, i.e. fixed-line networks, mobile-network transmitters and data centres. One of the key current trends in the market is convergence of telecommunications services with other information technologies. A number of companies are thus becoming increasingly oriented toward provision of comprehensive ICT services. A fundamental theme of the present period is the issue of expanding high-speed internet access in order to fulfil the objectives of the EU’s Digital Agenda for Europe strategy, to which the Czech Republic is committed. According to this strategy, the internet access speed should be at least 30 Mb/s for all of the  country’s residents, with at least half of all domestic households having access speeds of up to 100 Mb/s. Within the Operational Programme Enterprise and Innovation for Competitiveness, a total of CZK 14 billion (approx. EUR 0.5 billion) from European funds will be allocated in the coming years to projects involving construction of highspeed networks in the Czech Republic. Among other things, the intention of this is to bring high-speed internet access to so-called white places, mainly rural areas, where there is a lack of the necessary technological infrastructure. This should contribute to business development in such areas and bring forth a range of other positive multiplier effects for the country’s society as a whole. David Stádník ICT analyst ICT UNIE, Information Technology and Telecommunication Association

Business support services Europe, especially the CEE region, is still by far the world’s most popular destination for business services operations. The Czech Republic is one of the leaders in this sector; it is ranked as a top location for specialised business support services according to Dun & Bradstreet Global Reference Solution. The business support services sector includes captive centres as well as business process outsourcing centres and is one of the youngest sectors in the Czech Republic. The first delivery centres were established in the 1990s followed by significant growth since 2000. In the past decade and a half, Czech BSS centres have developed their capabilities and, in terms of the proportion of processes, reflect the structure observed in other CEE countries. Established centres have successfully expanded in terms of headcounts as well as new activities. The most frequently shared services are finance and accounting, IT services and customer support. Rapidly growing shared services include human resources, logistics and legal services. The industry’s growth has accelerated during the past three years and a recent survey indicates that growth will continue at the rate of 20% or higher in the coming year. The PwC SSC survey shows that the Czech Republic has the highest cost savings achieved globally with an average of 32% reported savings on operating costs delivered by Czech BSS centres. According to the Association of Business Service Leaders there are at least 200 SSC/BPO centres employing approximately 75,000 people in the Czech Republic. The list of existing captive and outsourced shared-services centres in the country includes those of companies such as Accenture, ExxonMobil, DHL, IBM, Microsoft, Skype, Monster Technologies, SAP, Tieto, Hewlett-Packard, Computer Associates, Infosys, Red Hat and Honeywell. The Czech Republic’s stable financial and political environment and its close relations with certain Western European countries encourage many western companies to choose it as the location of their CEE operations. The industry is concentrated mainly in the country three biggest cities: Prague, Brno and Ostrava. However some companies chosen smaller cities such as Plzeň, Pardubice, Olomouc and Ústí and Labem. The main reasons for placing SSCs in the Czech Republic are the strong potential of graduates and professionals, especially with regards to IT skills and languages, well-developed infrastructure and available high-quality office space, as well as the country’s cosmopolitan society, which makes it the country an attractive place to live. Eva Jungmannová Head of the Strategic Projects and New Technologies Section CzechInvest

Banking

Marcela Kotyrová Head of the Department Communications and Training Czech Insurance Association Petr Jedlička Team Leader of Actuarial and Analytical Services Czech Insurance Association

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8.2

7.8

7.2

2008

2009

9.2

8.1

2010

9.6

9.0

9.6

5.3

5.8

6.0

6.5

5.0

2011

2012

2013

2014

2015

5.2

5.0

4.0

ROA in %

1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2%

CR 1.5

1.3

1.1

2008

2009

1.4

1.2 0.2

0.1

-0.1

0.0

2010

2011

1.2

2013

1.2 0.3

0.2

0.1

-0.1

2012

1.2

2014

2015

Absolute amount of profit – banking market EU

Neutral economic result 3,000 2,000 1,000 0 -1,000 -2,000

2008

2009

2010

2011

2012

2013

2014

2015

-3,000

profit of banks in the Czech Republic (EUR million)

CR 80,000 60,000 40,000 20,000 0 -20,000 -40,000 -60,000

Development of deposits and loans in the Czech Republic and the EU 4,500,000 4,000,000 3,500,000

3,000,000

3,000,000 2,500,000

2,000,000

2,500,000

1,500,000

2,000,000 1,500,000 1,000,000 500,000 0

loans CR loans Europe 2008

2009

2010

2011

deposits CR deposits Europe 2012

2013

2014

1,000,000 500,000

2015

deposit and loans, EU (EUR million)

Development of deposits and loans in the Czech Republic and the EU In the case of Czech banks, the volume of deposits and loans is still rising, and this growth was not disrupted even by the financial crisis of 2008-2009 and the subsequent economic recession in the Czech Republic. Over the past seven years, the volume of provided loans has grown by 46% while the volume to total deposits of clients in Czech banks has risen by 34%. This favourable development differs from the situation in the EU as a whole, where in the period following 2008 the volume of deposits and loans has fallen, with the total six-year decline reaching 41% in the case of deposits and 22% in the case of loans. Another favourable aspect of the Czech banking sector is that the ratio of provided loans to received deposits is significantly below 100% (topically at the end of 2015 on the level 86%) in the Czech Republic, unlike the situation in the EU generally, where in recent years this ratio has been in excess of 100% and banks have been forced to seek additional sources of financing beyond the traditional business model, which can expose them to greater risk.

ROA comparison

profit (loss) of banks in the EU (EUR million)

High profitability in comparison with the EU In the case of both the ROE (return on equity) and ROA (return on assets) indicators, a comparison of the overall profitability of the Czech banking sector and the situation in the EU as a whole shows that the profitability of the Czech banking sector is significantly higher (even multiple times) than in the EU generally, especially with respect to the ROA indicator, which in the period from 2008 to 2015 (including the financial crisis and subsequent economic recession) ranged from 1.1% to 1.5%, while for the EU this figure did not exceed 0.3% and in some years (2008, 2011 and 2012) the Europe-wide market was even in loss: If we compare the cumulative profits and losses of banks in the EU as a whole for the period 2008-2012, for example, the cumulative profit of the European banking sector reached only EUR 3 billion, whereas the Czech banking sector generated profit in the amount of EUR 10 billion in the same period. The EU banking sector’s cumulative profit rose to EUR 200 billion until 2015, while in the same period the Czech market reported a total profit of EUR 17 billion, i.e. 9% of the EU total, despite having only 0.6% of the total assets of European banks.

10% 8% 6% 4% 2% 0%

Source: EIOPA, Czech National Bank

deposits and loans, Czech Republic (CZK million)

Stability of the Czech banking sector The Czech banking sector exhibits a high degree of stability and capital security, as evidenced by, for example, the ratio of equity to total assets of the banking sector. A comparison of banks in the Czech Republic using (data and statistics from the Czech National Bank) and in the whole European Union (data and statistics from the European Central Bank) shows that banks in the Czech Republic have a significantly higher equity-to-assets ratio (with gradual growth from 7.2% as at 31 December 2008 to 9.6% as at 31 December 2015), which indicates an 8% or 9% ratio of capital adequacy only from the high-quality capital component, whereas in the EU as a whole the ratio of equity to total assets also rose in the observed period (from 4% to 6.5%), but this involved a significantly lower ratio of the high-quality component of capital than in the Czech Republic.

share in %

Equity/total bank assets

Insurance

Solvency ratio (available capital / minimal capital requirement) 400% 350%

Both the banking and the insurance sectors in the Czech Republic are characterised by a strong competitive environment that favours and protects consumers. Competition puts pressure on prices and fosters a larger scope of provided services and innovation. Both sectors have remained profitable and stable even during periods of crisis. Whereas the domestic banking sector has a unique, dominant position in terms of its share in financing the economy in comparison with the situation abroad, the insurance market has significant room for further growth. In the Czech Republic, the combined share of premium billing in GDP is 3.4% for life and non-life insurance in 2015. This figure is approximately double in Western European countries. Consolidation of ownership is ongoing in both markets, which could be seen as presenting an interesting investment opportunity.

300% 250% 200% 150% 100% 50% 0%

CR 2005

2006

Minimum regulatory requirement

2007 2008 2009

2010 2011 2012

2013

2014

Source: EIOPA

Stability of the Czech insurance market The Czech insurance market exhibits a high degree of stability and capital resilience. In comparison with the values for the EU as a whole, the Czech market consistently maintains a substantially higher solvency ratio with comparison to a minimal capital requirement defined by the regulator (solvency ratio for Czech market results approximately 330% of minimal capital requirement that is fully comparable with whole Europe results). During the transition to the new Solvency II regime, no instability of the insurance market is expected and occurred. Czech insurance market prepared for new solvency regime very seriously and carefully. Moreover, market focused great attention on risk management in general and specifically on adequate and prudent setting of technical reserves.

Petr Jedlička Team Leader of Actuarial and Analytical Services Czech Insurance Association

29.1

8.5 7.1

14.1 8.4

5.5

1.9

5.6

0.1

7.2

19.9

16.1

21.4 14.6

20.9 7.5

14.9

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Comparison of ROA in the insurance market – Czech Republic and EU

5.00

1.26 0.72

2.24 0.77

2.59 0.54

2.10 0.16

0.44

3.91 0.60

0.00

2.57

3.59 0.72

0.70

4.40

2.58 0.66

6% 5% 4% 3% 2% 1% 0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: EIOPA

Comparison of average insurance premiums in the Czech Republic and EU Insurance premium in EUR/person

Marcela Kotyrová Head of the Department Communications and Training Czech Insurance Association

Source: EIOPA

Claims performance of non-life insurance The claims ratio in non-life insurance in 2012 and 2013 reached approximately 51% and 58%, with smaller reduction to 54% in 2014, respectively. Despite the existence and gradual increase of the risk of its further growth in this area, these are still significantly lower claims ratio figures than that reached in the Europe-wide market, where this indicator for non-life insurance was approximately 70%-71% in the same period. Even though there is potential for further growth in non-life insurance, the main imbalance in in insurance penetration within population between the Czech Republic and the EU as a whole is seen in the area of life insurance. Potential for further development of the life-insurance market The average annual life-insurance premium in the EU results in approximately EUR 1,200/person. By comparison, this figure for the Czech Republic in 2014 reached EUR 240, as growth of the average life-insurance premium in the country stalled in 2010. The relative importance of life insurance for investment and pension benefits is currently significantly higher in the EU as a whole than in the Czech Republic. There is potential for its further development if there is improvement in the regulatory and self-regulatory sales culture and transparency of life insurance together with an increase in clients’ awareness of the importance of this product both as adequate protection against risks and pension benefits, as well as in terms of investment.

7.1

High profitability in comparison with the EU average In comparison with the EU average, the Czech insurance market’s profitability is significantly higher, exceeding the European average multiple times over in both the ROA (return on asset) and ROE (return on equity) indicators. The Czech insurance market did not suffer a substantial decrease in profits during the financial crisis and recession of 20082009, when profits in the European market as a whole were minimised.

6.4

30% 25% 20% 15% 10% 5% 0%

25.5

Comparison of ROE in the insurance market – Czech Republic and EU

1,200 1,000 800

600 400 200 0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: EIOPA

Food sector Food production and agriculture comprise one of the most promising sectors in the Czech Republic and thus represent a favourable investment opportunity here. Food and beverage production is an important part of the manufacturing industry in the Czech Republic, as it accounts for nearly 4% of GDP on its own and up to 15% in combination with related sectors. Export of food production and agriculture products presented CZK 120.1 billion whilst import presented CZK 151.4 billion in the year 2015. The alliance of food producers and manufactures of food-production technology dates back more than a century and is the key factor in the Czech food sector’s good reputation abroad. The broad structure of the Czech food industry is based primarily on processing of domestic raw materials comprising agricultural primary production of plant and animal origin complemented with other, foreign raw materials. The strongest segments have long been dairy products, meat processing and preservation, other food products and beverages. The Czech Republic has long strived to further improve the food-supply chain and to optimise it for consumers. The Czech Republic is characterised by stable consumption of food products with a high level of qualitative standards. The price level of basic foodstuffs corresponds to the development of neighbouring markets and the availability of food products is high. Food safety remains the government’s priority in this area. The Czech government supports modernisation of production capacities in the food industry and innovative production processes, for which financial resources are drawn from EU structural funds and the national budget. One of the ways to achieve significant improvement in the sector is through foreign direct investments that bring forth not only technical solutions, but also new production- and marketing-management methods. The innovation process is a subject of intense interest in the research sphere and the government is striving to ensure the improvement of the process of putting the results into practice. Food waste issue is an important issue not only in the European as well as in the Czech context. What does the Czech food industry offer? Besides traditional segments such as brewing, wine-making and sugar and ethyl alcohol production, the industry also features modern food production technologies including biotechnology and extrusion technology. Furthermore, the local industry boasts a large number of registered trademarks and a generally high level of protection of intellectual property rights. Consumer protection is also at a high level in line with modern trends. Marian Jurečka Minister of Agriculture of the Czech Republic

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Chemical industry The chemical sector is one of the most important branches of industry in Europe. Eleven of the world’s thirty countries with the largest share of chemical production in GDP are in Europe. The chemical industry in the Czech Republic has more than a 15% share of the country’s manufacturing industry. In terms of revenues, it is the third biggest sector in the Czech Republic. Sales in chemical industry reached 22 billion EUR in 2014. The products of Czech chemical industry include inorganic and organic chemicals, fertilisers, basic petrochemicals, primary-form plastics, synthetic resins, synthetic rubber, paints, dyestuffs and pigments, agrochemicals, pharmaceuticals and cosmetics, soaps and detergents, chemical fibres and explosives. Rubber and plastics represent the biggest share of sales (about 41.5% of 2014 figures), followed by chemicals (31.4%), refined oil products (22%) and pharmaceuticals (5%).The chemical sector’s share in employment is not negligible, as it employs more than 100,000 people, accounting for approximately 2% to 4% of the country’s total workforce. Several Czech chemical plants (Deza, Lovochemie, Precheza, Synthesia) are owned by Agrofert, a domestic holding company focused mainly on fertiliser production, though foreign investors also play a significant role in the local chemical industry. Česká rafinérská is engaged in oil refining owned by Unipetrol (Orlen Group of Poland). The Orlen Group has its own filling-station chain in the Czech market and is the majority owner of two other production complexes, Unipetrol in Litvínov (petrochemicals and refinery products) and Spolana in Neratovice (polymers and fertilisers). The Polish firm also owns another major plant near Prague, Synthos in Kralupy nad Vltavou (synthetic rubber). The Hungarian firm Borsodchem manufacturers base chemicals at its plant in Ostrava in the northeast of the Czech Republic, while Momentive Speciality Chemicals engages in similar production in the west of the country. There are numerous examples of successful foreign investments in the Czech chemical industrial parks, such as those of Cayman Pharma (API production) in the Spolana complex, Eurosupport Manufacturing (catalyser production) and Air Products in the Unipetrol Litvínov complex and Dukol (adhesives production) at the Borsodchem facility. The Czech Republic has tremendous potential as a destination for investments in the chemical industry thanks to its infrastructure and workforce, as well as the space that it has available for such investments.The industry is a crucial supplier of raw materials for a number of downstream domestic industries. It also ranks among the industrial sectors with the highest innovation potential. Jan Bobek Business Development Manager CEE, Tebodin Former Chairman of the Steering Committee, Association for Foreign Investment

Energy efficiency services

Renewable energy generation

Progress in energy management systems is opening up new opportunities for further growth of energy efficiency solutions. Energy efficiency services – either in the form of energy management or in the form of monitoring and targeting (M&T) – lead to the situation in which the costs of implementing an energy management system are soon covered by non-investment measures. Moreover, M&T makes objective and accurate proof of savings possible, which applies to quite complex production processes as well. Use of energy efficiency services can thus be considered a cornerstone of managing of every industrial site. Providers of EE services in the Czech Republic are include companies such as ENVIROS and SEVEn, among others. The development of these systems has led to the creation of the ESCO scheme, which allows enterprises to finance the implementation of energy management systems via a third party, i.e. an energy service company (ESCO). The fact remains that the initial costs are often an obstacle preventing the implementation of modern processes in the field of energy management, even though these costs are low in comparison with the potential savings, which cover the addition of secondary measurement systems, information system software and employee training. Companies focused on ESCO and related services are united in the Association of Energy Service Providers (APES). In addition to ENVIROS and SEVEn, the founders of APES include ESCO companies like ENESA, AB Facility, Siemens and others. APES currently has 27 members. The formulation of the ESCO scheme was enabled by the development of standardised energy management systems. Czech companies that have implemented or are implementing an energy management system via the M&T approach include, for example, Plzeňský Prazdroj, Škoda Auto, Unilever Česká republika, Kovohutě Příbram, Danone Benešov, Koramo Kolín, Mondi Štětí, Vishay Electronic and Eutit Stará Voda. M&T can be implemented in a small enterprise with simple technology or in a building, but its commercial use is best proven in medium-sized and large enterprises with high energy costs (at least CZK 10 million, i.e. approx. EUR 27 million) The system’s good return on investment (usually within a year) is due to the fact that implementation costs are relatively low compared to the achieved savings, which can reach 15% of annual energy costs. Inclusion of energy management principles in the ISO 50001 standard has provided significant support for implementation of energy efficiency services. Besides economic benefits, the relevant legislation allows enterprises to supersede the mandatory energy audit by implementing the standard, and enterprises that have ISO 50001 certification receive bonus points when their applications for aid from EU structural funds in the Operational Programme Enterprise and Innovation for Competitiveness are assessed. ISO 50001 certification is provided by all authorised companies operating on the European market, such TUV, DNV and Bureau Veritas.

Why are renewable source of energy (RSE) so important? The simple answer is that the use of alternative energy is inevitable because reserves of fossil fuels are finite. In addition, the ongoing political instability in many oil-producing regions, rising tension between the haves and have-nots, and growing demand for oil and gas, particularly in China and India, put pressure on the ability to supply fossil fuels. This poses several major problems such as global warming and strategic concerns regarding energy security. In order to live sustainably, the Earth’s natural resources must be used at a rate at which they can be replenished. However, our consumer-driven society is putting pressure on our planet. The only logical response is to adapt to the situation. The Czech Republic did a great deal in abiding by the EU’s strategy for sustainable development that calls for a “Smarter and Cleaner Europe”. The policies that have been and are being adopted are funded both from the EU and national budgets and supporting schemes which create a broad range of opportunities for foreign investors. The Czech Republic provides investors with technical competences and cost effectiveness, which together create favourable conditions for new investments. Besides that, investors are keen to invest in the Czech Republic thanks to the country’s long history of manufacturing in the RSE sector dating back to the invention of the Kaplan turbine and TESLA’s production of solar cells. Other important factors include close ties between universities, industry and research centres (e.g. the Energy Research Centre in Prague and the Alternative Drive Units and Fuels Laboratory in Ostrava), modern technology centres for R&D (e.g. Nupharo Park in Prague, and the Centre of Intelligent Power Engineering in Trinec), numerous clusters and associations and more than ten thousand students enrolled in energy and environment programmes every year.

Jan Pavlík Head of the Environmental Division ENVIROS

Jan Zapletal Sector Manager for Energy & Environment CzechInvest

Czech renewable energy sector case study – Vyncke Vyncke, a renowned family-owned Belgian firm, has been involved with technologies for generating energy from biomass and waste for the past century. In 2012 the company built a modern generating facility in the Czech Republic, where it expanded its operations with the development of new technologies. One of the main motivating factors for expanding the firm in the Czech Republic was the availability of highly qualified specialists, technicians and engineers, thanks to which the company has advanced rapidly in recent years and reached the peak of technological development in its field.

Cleantech

Water management

Support for clean technologies is a way to maintain the volume of energy needed in modern society while reducing harm to the environment caused by the burning of fossil fuels. Although there is no single definition of “cleantech” we could state that the term represents new technologies and related new business models which provide competitive benefits to both investors and customers while offering solutions to global environmental challenges. Thanks to its integrated vision, the Czech Republic has become the leading country in Central and Eastern Europe with comprehensive and prospective investment conditions targeted specifically at clean technologies. In compliance with the EU policy to cut CO2 emissions by 40% in comparison with the level of 1990 by 2030, new technological measures are being developed. Therefore, new installations of heat pumps combined with roof-mounted solar collectors and replacement of obsolete heat source with biomass-fuelled boilers are becoming increasingly common. Increasing energy efficiency in the economy constitutes an important current trend. For example, the Czech Republic ranks among the global leaders in construction of smart buildings, which are designed, built and operated with the objective of being ecologically and socially responsible. An example of smart building is CTP Invest’s Spielberk Tower, which was awarded BREEAM certification at the “excellent” level in 2012. Another example is the AIR House Energy Self-Sufficient Solar Building project carried out by Czech Technical University in Prague in cooperation with major Czech companies. The project won a bronze medal in the Solar Decathlon, an international competition organised by the US Department of Energy. Many foreign direct investments involving clean technologies have been undertaken in the Czech Republic. The Czech Republic has been chosen for example by ABB, one of the world’s leading companies in the area of automation and energy, providing services to industrial companies as well as energy producers and distributors, and AU optronics, which reinforcing its vision and its position as a manufacturer of green products and services.

As Czech climatologist Václav Cílek, once said, “The greatest mineral wealth of any country is not its oil or gold, but its soil and water”. Water is a necessary for the existence of living organisms and the basic raw material for the functioning of the human society. The relative abundance of water in our environment compels us to think a shortage is only a distant possibility. However, in many countries clean water is a great luxury that not everyone can afford. According to current UN statistics, more than a billion people lack access to clean drinking water. The general objective of the Czech Republic in the area of water is to create conditions for sustainable management of the Czech Republic’s water wealth. The main principles of the government’s policy are derived from EU Framework Directive 2000/60/EC on water policy and other directives in the area of water and the renewed EU strategy for sustainable development. The main objective is to apply technologies for reducing the pollution of surface and ground water, improving the quality and supply of drinking water, and technology models for reducing flood risks. The Czech Republic’s policies are focused mainly on renewing and expanding existing capacities, primarily in the area of water treatment and conservation. This includes application of smart water technologies. These efforts are supported by the CREA Hydro & Energy cluster of companies, research institutes and universities which foster the innovation of such products and the whole water-management sector in the Czech Republic. There are several interesting projects focused on water management. For example, the Nupharo campus is designed as a maximally self-sufficient and sustainable complex with its own island water-treatment system which, thanks to its own purifier, is divided into three water circuits: potable water, waste water and rainwater. Funding totalling nearly EUR 0.7 billion is available within the EU operational programmes for environmental policies in which water treatment has been included. One of the main investors in water management in the Czech Republic is SUEZ Environment Group/ONDEO, which has managed, during its 20-year presence in the Czech water market, the entry of ten water companies. After several mergers, the group currently comprises five companies.

Jan Zapletal Sector Manager for Energy & Environment CzechInvest

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Hotel and leisure industry Since the start of the 21st century, the Czech and hotel industry has had its ups and downs. The average daily rate for a Prague hotel room fell from the sky-high CZK 3,700 (approx. EUR 140) in 2001 to CZK 1,700 (approx. EUR 63) during the global economic crisis ten years later. We have been seeing steady recovery of both prices and occupancy since then, with very strong performance both 2015 and 2016. There is still more room for a modest price increase depending on the development of exchange rates as well as the key global macroeconomic performance indicators. Prague is the focal point of the hospitality industry in the Czech Republic because it is not only the Czech capital and the country’s economic and political centre with more than 1.3 million of inhabitants, but it is also the country’s main destination for both tourists and business travellers. The historical centre of Prague has been listed as a UNESCO World Cultural and Natural Heritage site since 1992. TripAdvisor ranked Prague fifth in the world in the 2015 Travellers’ Choice Destination Awards. Prague is also one of the major destinations for business travel and events in Central and Eastern Europe. According to ICCA, Prague was among the ten cities with the largest number of congresses in the world in the first half of 2015. In 2015 the occupancy rate in Prague reached 75%, the highest level since 2007 and an increase of 5 pp compared to 2014. Despite a recent significant increase in performance for Prague hotels, there were no major openings in 2015. Indeed, annual supply growth has been marginal since 2010 and actually declined in 2013. In contrast to the flourishing office and residential development, hotel investment remains modest and aimed at premium downtown and business park locations. At the moment, there is a limited number of new rooms under construction. This supply slump has allowed existing hoteliers to profit from the current RevPAR revival and to recover losses incurred during the credit crunch. As the effect of 2015’s economic brief economic upswing to weaken (accelerated drawing from EU funds, drop in the oil price, fiscal stimulation), Czech GDP growth is expected to slow in 2016 to a forecasted 2.7%. ADR and RevPAR are likely to continue on an upward trajectory; however, 2015’s record growth will be unattainable as last year’s results were elevated by several large events, such as the Ice Hockey World Championship. No significant strengthening of the currency is expected until 2017. Russian demand has declined as the war in Ukraine continues but this headwind has been offset by an increased number of incoming travellers from other European countries, Asia and America. The structure of the hotel business in the Czech Republic is rather fragmented. There are a few local midsize players (e.g. CPI Hotels and Orea Hotels), large international groups (Marriott, IHG, Hilton, Accor and Starwood) and, of course, numerous independent businesses. The picture gets even fuzzier when taking into account combinations of various operating models, such as owned and leased, managed and franchised with key stakeholders – property owners, hotel brands and management companies.

Jan Musil Director PwC Audit

Contact: Association for Foreign Investment Štěpánská 11 120 00 Prague 2 +420 224 911 750 www.afi.cz @AFI_czech LinkedIn

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