New restrictions on foreign direct investments (FDIs) in the Czech Republic are expected to be introduced soon, either in the last quarter of 2020 or the first quarter of 2021, with the enactment of a law regarding the screening of FDI. This is in line with EU regulation No. 2019/452, which came into force on 11 October this year.
The important aspects of this law, based on our analysis of the draft currently being discussed in the Czech Parliament, include the following:
Which FDIs are to be screened
FDI screening is expected to apply to all investments made by entities outside of the EU or entities directly or indirectly controlled by entities outside of the EU (i.e. foreign investors) made into Czech businesses or assets where the foreign investor:
- acquires at least 10% voting rights;
- is a member of corporate bodies or boards;
- exercises ownership rights (including over assets and not only shares); or
- has access to sensitive information or technology.
If the FDI could be considered to potentially impact Czech security or public or internal order, the Ministry of Industry and Trade has the authority to initiate screening proceedings at any time within five years from the date the FDI occurred. As security, public and internal order are defined in vague legal terms, affected foreign investors could face some uncertainty as to whether their investment will be screened.
To reduce this uncertainty, foreign investors will be able to consult the Ministry about an investment in advance. If it appears that the FDI poses a threat, the authorities will begin screening proceedings. Otherwise, the foreign investment should be deemed safe.
To carry out FDI into entities and assets deemed by the authorities as critical, typically key national infrastructure, such as companies and assets in the energy, health care, defence, military, transport, IT and communication sectors, the foreign investors must first request approval from the Ministry in a screening proceeding.
A different regime will apply to FDIs into the Czech national media, where prior approval is not required but prior consultation will be mandatory.
The Ministry will lead all FDI screening proceedings and will cooperate with both national and EU authorities. If they ascertain that the FDI will not pose a threat, approval will be given.
If the FDI is considered to pose a threat, the Ministry can negotiate with the foreign investor regarding imposing certain conditions, such as limiting access to sensitive information or curtailing voting rights. The results of the screening and the negotiations will then be submitted to the Czech government.
The government will then assess whether to approve the FDI under these agreed conditions, to ban it, or to impose further requirements on the foreign investor. These could include removing its voting rights completely or requiring it to divest the FDI. The Ministry will then issue a decision in accordance with government guidance.
Penalties for non-compliance and other implications
If a foreign investor breaches its obligations under the new law, it could face sanctions of up to 2% of its global turnover.
Screening proceedings can also apply to FDIs that have already been carried out if the controlling entity of the foreign investor changes after the new law takes effect.
For more information on this draft law, investments in the Czech Republic or Czech corporate and M&A law, contact your regular CMS advisor or local CMS experts.