NNEW ACT ON HEALTH INSURANCE

A new Act, No. 187/2006 Coll., on health insurance, came into effect on 1 January 2009. According to its provisions, only an employee whose work incapacity (quarantine) lasted more than 14 calendar days, is entitled to drawing sickness benefits; if his/her sickness lasted a shorter time, he/she has no entitlement to sick-ness benefits. During the first 14 days, the employee, provided his/her employment contract continues to be valid, will be secured by wage (salary) compensation or compensation of remuneration (hereinafter “wage compensation”), to be paid by the employer. Wage compensation is due for working days, in the case of tem-porary work incapacity from the fourth working day, and in the case of quarantine from the first working day. There is no title to compensation after the termination of employment. From the fourth day, wage compensation will amount to 60% of the modi-fied (reduced) average earning. As a new provision, three reduc-tion limits instead of the previous two will apply: for the amount falling within the first reduction limit the compensation will be 90%, for the amount between the first and the second reduction limits it will be 60% and for the amount between the second and third reduction limit 30%. The purpose of this legislation is to raise employers’ interest in shortening the duration of the tempo-rary work incapacity of his employees.A new provision is that only health insurance bodies, and not employers, will be entrusted with the execution of health insur-ance. The employers’ duty will be only registration and reporting, including the handing over of required documents to the district social security administration concerned (OSSZ). Partners and executives of limited liability companies and partners in limited partnerships, who do not carry out the work for the company for which they are remunerated under a regular work contract are no longer parties to health insurance. Employers’ health insurance costs will be compensated by hav-ing their premium rates reduced – instead of the previous 3.3%, in 2009 they will pay only 2.3% (as from 2010, 1.4%). Employers will not only have the premium rate reduced by one percentage point, but, in addition, they will be paying only one-half of the wage com-pensation from their own funds, and will be refunded the other half from the state budget. In 2009, employers will be refunded one-half of the wage compensation which they paid to their employees for the first 14 days of work incapacity, by having the amount concerned deducted from the premium they are required to pay. As from 2010, employers who have more than 50 employees may apply for partici-pation in a system based on the refund of half of the wage compen-sation and an insurance rate higher than 1.4%.The income limit, which is a condition of participation in the health insurance scheme (determining income), will be raised from today’s CZK 400 (EUR 16.04) in the calendar month to CZK 2 000 (EUR 80.19) in the calendar month. At the same time, the deter-mining income will be automatically valorised.

EMPLOYMENT ACT AMENDMENTUnder the new amendment to the Employment Act, which became effective on 1 January 2009, the Czech Republic started issuing green cards for foreigners. The green card is at the same time a long-term residence permit and a work permit tied to a specific

CZECH LEGISLATION CHANGES IN 2009

job. Foreigners may only apply for jobs for which citizens of the Czech Republic or of other EU states or their family members did not apply for 30 days after they became vacant, with the exception of government or municipal officers. If a foreigner loses his/her job without his/her own fault, he/she may find another job within a term of 60 days. If he does not suc-ceed, he/she must leave the country. A list of vacancies open to foreigners will be available in a special central register of the Ministry of Labour and Social Affairs.There are three types of green cards: type A for skilled workers with uni-versity training and key personnel, P

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which are valid for up to three years; type B for those with secondary edu-cation or apprentice training, valid for two years, and type C, also valid for two years, for other workers. The validity of cards type A and B may be prolonged by up to three years; cards type C cannot be prolonged at all. After one year of stay, a green card holder is entitled to apply for a permanent residence permit under current legislation. After 6 months, type A card holders may invite mem-bers of their families to join them, type B card holders may do so after 12

months of stay in the Czech Republic; type C card holders, how-ever, have no such possibility.Only nationals of countries specified on a list formed by the Min-istry of the Interior may seek employment in the Czech Republic. Foreigners may apply for a green card to the Czech embassies in their countries, or, exceptionally, in the Czech Republic to the Min-istry of the Interior. The Ministry will issue the card within 30 days of receiving the application, but there is no legal claim to its being issued. The Ministry of the Interior may refuse to issue the green card, for example, if the applicant is considered a security risk.As regards conditions of agency employment, the amendment provides for the participation of the Ministry of the Interior in granting permis-sions to agencies mediating employment. The Ministry of Labour and Social Affairs must apply to the Ministry of the Interior for consent; from now on, no permission may be issued without its consent. Under the new amendment, the Ministry of the Interior may withdraw the permission given to the agency also if it is unable to support its em-ployment statistics. Another new point is the raising of the level of fi nes which may be imposed on the agencies.

AMENDMENTS TO TAX ACTS AND THE SOCIAL SECURITY INSURANCE ACT

Act No. 2/2009 Coll., amending Act No. 586/1992 Coll., on income taxes, Act No. 593/1992 Coll., on reserves for ascertaining the income tax base, and Act No. 589/1992 Coll. on social security pre-miums and state employment policy contributions were published in the Collection of Laws of the Czech Republic on 1 January 2009, whereby they became effective on that day. Act No. 1/2009 Coll., amending Act No. 33/1992 Coll., on property taxes, also became effective.The most important changes in the Income Tax Act and the Act on Social Security Premiums and Contributions to the State Employ-ment Policy.

CHANGES IN PERSONAL INCOME TAXESThe uniform 15% personal income tax rate remains unchanged (the act on the stabilisation of public budgets envisaged a 12.5% reduc-tion). The maximum assessment base for social security and health insurance premiums in 2009 is CZK 1 130 640 (EUR 45 334.40), so that in 2009, the supergross wage will be calculated only from wages not exceeding that limit.At the same time, as a certain compensation for the unchanged personal income tax rate for 2009, the rate for the calculation of the social security premium payable by the employee has been reduced from 7.9% to 6.5%. In the case of self-employed persons, the rate for the calculation of pension insurance premiums and the state employment policy has been reduced from 29.6% to 29.2%, and in the case of health insurance, which is voluntary for those persons, from 2.4% to 1.4% of the assessment base.In 2009, the level of the tax relief for the taxpayer and for his/her incomeless spouse, i.e. CZK 24 840 (EUR 996), remains the same as in 2008. A new provision, however, is that a spouse whose income in the tax period concerned has not exceeded CZK 68 000 (EUR 2 726.54), is also considered an incomeless spouse. Another new provision is that the calculation of the so-called “supergross” wage, i.e. wage augmented by the theoretical amount of social and health insurance under Czech law, will also apply to employees whose employer is not obligated to pay the premium, i.e. those not liable under the Czech health and social insurance system, for whom the premium is mandatorily paid into the system of another state. The supergross wage will also be calculated in the case of tax non-residents, whose income derived from depend-ent activity is subject to a special tax rate (sportsmen, artists, and members of statutory bodies).

CHANGES IN CORPORATE INCOME TAXIn compliance with the Public Budget Stabilisation Act, the trend to reducing the corporate income tax rate continues. In 2009, the rate will be reduced to 20%.The withholding income tax rate applied to selected incomes of Czech tax non-residents remains the same as in 2008, i.e. 15% (originally the approved reduction was to 12.5%). At the same time, more types of income are considered income derived from a source located on the territory of the Czech Repub-lic in the case of tax non-residents, to which are added sanctions from liabilities paid to those persons by tax residents or perma-nent places of business belonging to tax non-residents located in the Czech Republic (unless otherwise provided for by the particu-lar treaty for the avoidance of double taxation). Simultaneously, as from 1 January 2009, the incomes of tax non-residents derived from the transfer of shares in trading companies or co-operatives based on the territory of the Czech Republic, regardless of who pays those incomes (unless otherwise provided for by the particu-

lar treaty on the avoidance of double taxation) are liable to tax in the Czech Republic. From now on, exemption from tax liability in the case of income of the parent company derived from dividends paid out by the daughter company, income from the transfer of business shares in daughter compa-nies and interest on credits and loans in entities tied by capital has been extended to Norwegian and Icelandic tax residents, under the same condi-tions as those already applying to EU tax residents.The intended narrowing down of the exemption from tax liability of in-come derived from the sale of shares in a daughter real estate company has not been approved. However, in view of the fact that as from 1 Janu-ary 2009 income of tax non-residents from the transfer of shares in trading companies and co-operatives hav-ing their registered offices in the CR, from whatever source the income may be flowing, are also taxable in the CR, that income is exempted from tax liability if it flows into a company which is a tax resident in another EU state. That exemption applies if the conditions applying to such transac-tions carried out by parent companies are met.As from 1 January 2009, the low-cap-italisation rules have been liberalised. Financial costs from credits and loans between tied persons are tax non-de-ductible if the sum of the credits and loans exceeds twice the amount of the debtor’s own capital (three times as much if the credit or loan receiver is a bank). This means that only finan-cial costs from amounts not exceeding that limit are tax deductible. Loans and credits between untied persons have been deleted from the low capi-talisation rules. Financial costs are never a tax de-ductible expense if they flow from credits and loans, where the inter-est or yield, or the fact whether the interest falls due, depend fully or predominantly on the debtor’s profit. Financial costs from credits and loans subordinated to another liability are not a tax deductible expense, either.

Simultaneously, the restriction of the tax deductibility of lease in the case of financial leasing amounting to 1% of the lease has been abolished.

NEW CONDITIONS IN THE PROVISIONS ACT FOR ASCERTAINING THE INCOME TAX BASE

Provisions for the repair of tangible assets under this Act, the creation of which started in the period from 1 January 2009, are a tax allowable expense, if the payer transferred the full amount of the provision to a sepa-rate bank account in a bank having its registered office on the territory of an EU member state, designed exclu-sively for the deposition of provisions thus created before the deadline for making his/her tax return.

PROPERTY TAX ACT AMENDMENTUnder the provisions of the amend-ment which became effective on 1 January 2009, tax exemption for new dwelling houses owned by natural persons or apartments owned by natu-ral persons located in new apartment houses and serving as their permanent residence has been cancelled. If the claim to exemption had arisen before the amendment became effective, the last time the person concerned may claim exemption is in the year 2009.The exemption is also cancelled for buildings in which the heating system has been switched to environmentally friendly fuels. If the claim to exemp-tion had arisen before the amendment became effective, the last time the person concerned may claim exemp-tion is in the year 2012.

VALUE ADDED TAX ACT AMENDMENTThe harmonisation amendment ef-fected by Act No. 302/2008 Coll. provides for several major changes of Act No. 235/2004 Coll. on added value tax (ZDPH). The main changes are the following:For foreign entities, an essential change is the new definition of the “place of business”. The place of busi-ness is a place having a permanent

staff and material equipment with the help of which the taxpayer carries out his/her economic activities. If a foreign entity estab-lishes a place of business in the sense of the VAT Act in the Czech Republic, he/she becomes a VAT payer at that date, regardless of his/her turnover.New provisions concern the place of supply in the case of “intel-lectual services” under section 10 ZDPH, where the tax liability has been transferred from the service provider to the service receiver, meaning the “reverse charge”. In the case of these speci-fied services (consulting, advisory, legal and advertising services, transfer and assignment of copyright, supply of manpower, etc.), if the service receiver is a foreign entity or a tax-liable entity which has its registered office or its place of business outside the Czech Republic, the place of supply shall be the place where the person to whom the service is supplied has his/her registered office or place of business. If, pursuant to this rule, the place of supply is in a third country, but the service is supplied to an entity which is at the same time a VAT payer registered in the Czech Republic, the place of supply will also be transferred back to the Czech Republic, provided that the service is really being used by that entity in the Czech Republic.Newly defined is the date of taxable supply in the case of property transfer, which is now the day on which the property was handed over to the acquirer for use, but not later than the day on which the document stating the commencement of the legal effects of the entry into the land register or the date on which the change of the ownership right was registered was served.Tax liabilities have also been changed in financial leasing, if the leasing contract comprises the lessee’s obligation to acquire the goods or property. In that case, from the VAT point of view, the financial leasing contract is considered a contract of purchase and the lessor is obliged to return the tax on the entire leasing value at the day on which the lessee’s right to use the object of lease arose. Another change concerns the definition of the taxable performance day when the goods are purchased from another member state and when the service is provided by a person registered for tax in an-other member state or a foreign person. From now on, the day of issue of the tax document is the day on which the payer completed in the document issued by the goods supplier or the service provid-er data required by ZDPH. Only after that will the document issued by the goods supplier or service provider become a tax document.Also, in the Value Added Tax area, the special provision requir-ing the re-charging of services has been abolished and the general ZDPH provisions will apply. The claim to tax deduction is no long-er conditional on having the tax document entered in the books.

The information contained in this article is only of general

and informative character.

Specific cases must be consulted with a specialist.

MAGDALÉNA VYŠKOVSKÁ, Tax Adviser

PAVEL JAKAB, Lawyer

PETERKA & PARTNERS v.o.s. advokátní kancelář

e-mail:vyskovska@peterkapartners.com

e-mail: jakab@peterkapartners.com

The average 2008 exchange rate was used for CZK/EUR conversion:

EUR 1 = CZK 24.94

GGENERAL MEETING

The establishment of a company is preceded by a General Meet-ing, at which the founders sign the foundation documents and thus decide the essential matters concerning the future company, such as the company’s name, where it will be based, the subject of business, its registered capital amount, the person or persons who will hold a function in the statutory body, etc. Every company es-tablishment has the form of a notarial deed. The fee for a notarial deed on the establishment of a company depends on the registered capital amount and the number of attachments, and usually ranges between CZK 5 000 and 10 000 (EUR 200.48 and 400.96).

NEXT STEPSSeveral steps, which depend on the kind of the company, must be taken after the first, constituent General Meeting is held and be-fore application for entry in the Commercial Register is submitted.

COMPANY ESTABLISHMENT IN THE CZECH REPUBLICThis article is not intended to deal in detail with the establishment of different kinds of companies in the Czech Republic. It gives general guidelines what steps are to be taken when business is started in the CR.

First step: Company business

a) trade registration if the subject of the company business requires a Trade Licence

b) gaining another licence in ac-cordance with special laws, most frequently in medical branches, such as running a private medical establishment.

In general, the entry of a company of any kind in the Commercial Register requires a Trade Licence. The fee for the registration of the company and entry of a trade is CZK 1 000 (EUR 40.10). In order to accelerate its establishment, the company can be entered in the Commercial Reg-

The Commercial Code specifi es four legal forms of commer-

cial enterprises. The provision does not allow an expansion

of the number of legal forms, or the formation of mixed

legal forms. The two forms of personal commercial com-

panies are public company (v.o.s) and limited partnership

company (k.s.). The allowed legal forms of capital com-

mercial enterprises are limited liability company (s.r.o.)

and joint-stock company (a.s.)

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ister without a Trade Licence if the subject of its business is not defined as a trade by the trade law. The most frequent case is the rental of apart-ments and non-residential areas.

Second step: Opening of a bank account

The company opens a bank account, deposits its registered capital, and if the registered capital consists of money deposited by partners, asks the bank for acknowledgment of the de-posit. Money deposit to the company registered capital is the most typical and quickest way. Registered capital can also be formed by non-monetary deposits, but these must be valued by an authorised appraiser, and this slows down the process of company establishment (the appraisal usually takes one or two calendar months, ac-cording to the type of the appreciated property).

APPLICATION FOR ENTRY IN THE COMMERCIAL REGISTER

The application for entry in the Com-mercial Register must be made on the prescribed form, and the signatures of persons acting on behalf of the company must be officially verified. The application is submitted to the court competent at the place where the company is based. Data to be entered in the Commercial Register must be supported by documents. These include:� headquarters – a lease contract or

other approval from the owner of the business premises;

� registered capital – the bank’s acknowledgment of the deposited registered capital;

� certificate of the deposit manager;� copy of the relevant criminal record

according to the citizenship and the alien’s place of permanent resi-dence, most frequently from their home country, and statement on the integrity of persons holding func-tions in the company’s statutory bodies;

� subject of business – excerpt from the Trade Register or another licence or authorisation issued in accordance with special rules, if the trades are registered in the Trade Register, an excerpt in the written form does not have to be presented to the court.

A government stamp must be added to the application to prove that a fee of CZK 5 000 (EUR 200.48) has been paid. The statutory period for entering the company is 5 workdays after the application has been submitted. If the relevant court does not enter the com-pany before the deadline, or does not ask the applicant for comple-tion, the company is regarded as entered. If the data are inaccurate or insufficient, the court requires completion within 10 days. If the requirements are not fulfilled, the application is rejected. The company is entered without personal negotiations, only on the basis of documents. Representation by a lawyer is not compulsory for the submission of application for entry in the Commercial Register or Trade Register, but it is recommended in view of the formal require-ments attached to some documents presented for the entry.

FORMSAll forms needed for the entry of a company in the Commercial Register are available on the websites of the Ministry of Justice. Go to www.justice.cz, click on forms download in the left-hand column, and then on forms for entry into the Commercial Register to find the forms and a list of attachments with instructions how to fill them in faultlessly. All forms can be filled in interactively. The websites are only in Czech and this is a problem for foreign entre-preneurs. However, the documents presented to the court (Com-mercial Register), including all attachments, must be in Czech and documents in a foreign language must have an officially verified translation. Some foreign documents (such as copy of criminal record and excerpt from the Commercial Register) require a spe-cial form of higher verification of the document, confirming the authenticity of the issuing office, which is known as apostila or super-legalisation. This is usually issued by the foreign ministry in the country of origin of the document, or another body competent to do it in the particular country (mediated by the embassies of the different countries in the Czech Republic for a fee).

PAY ATTENTION TO COMPANY NAMEThe company name must not be confusable with the name of another company entered in the Commercial Register, and so the in-tended name must be verified from this point of view. The best way is to look at the Commercial Register available at www.justice.cz.

L A D I S L AV S M E J K A L , Law yer

WHITE and CASE LLP

e-mail:ladislav.smejkal@gmail.com

CZK were converted into EUR by the average exchange rate of the Czech National

Bank for 2008: EUR 1 = CZK 24.94

MORE INFORMATION:www.mpo.cz – Ministry of Industry and Trade www.justice.cz – database of the Commercial Registerwww.mpo.cz/dokument55910.html – trades formswww.rzp.cz – Trade Registerwww.businessinfo.cz/en – websites on business in the CR www.portal.gov.cz – Portal of the public administration of the CR

MMergers and acquisitions were incorporated into the Czech legal framework in the 1990s to enable entrepreneurs to expand or restructure their business activities in the Czech Republic. This provision assumed greater importance especially after accession to the European Union, when the Czech Republic was obliged to implement EU laws and regulations, including legal norms allowing „cross-border mergers“. The merger and acquisition procedures are defined primarily by the Commercial Code, law on takeover bids, law on the transformation of commercial compa-nies and cooperatives, accounting and tax regulations, rules for the protection of economic competition, and by several special provisions that apply to certain sectors, such as banking, insur-ance, and financial services.Foreign natural persons and legal entities are not restricted in the Czech Republic in their right to hold shares in companies and may acquire and sell up to 100% of share in the registered capital of both limited liability companies (s.r.o.) and joint- stock companies (a.s.). They can also operate in companies of other legal forms. The transfer of share in a limited liability company must be entered in the Commercial Register (www.justice.cz).

MERGERS AND ACQUISITIONS IN THE CZECH REPUBLIC

Shares in joint stock companies can be acquired freely, but the shares of certain joint stock companies are registered in the Securities Centre (www.scp.cz) or the central deposi-tory (register of shares which do not exist physically, and their existence and their holders are only recorded in books). The ownership of such shares changes only by means of an entry in the relevant books. When shares are traded on the official secu-rities market (the Stock Exchange or the regulated off-exchange market) in the Czech Republic or another EU member country, the acquirer is duty-bound to notify the company (issuer) and the Czech National Bank (regulatory body) if a specified limit of the share in the company’s voting rights has been exceeded. A buyer who has acquired a controlling stake P

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in the company is duty-bound to offer to purchase the shares of the remaining shareholders.

RIGHT TO BUYOUT SHARESA shareholder who owns 90% or more of the registered capital of a joint-stock company (the majority shareholder) can ask this company to squeeze out the minority sharehold-ers. The transfer of these shares is decided by the General Meeting of this company for a consideration, the amount of which must not be lower than the amount determined in an expert opinion, or another justifica-tion of the consideration if an expert opinion is not required. However, prior consent of the Czech National Bank and justification of the consid-eration amount are required.

PUBLIC BID TO BUY OR EXCHANGE SHARES

When an offer is to be made to more than 100 persons, or when such offer applies to more than 1% of the value

of the issue, it must have the form of a public bid. If the public bid is made because it is mandatory, the consideration amount must be adequate to the value of the shares. If the shares are traded on the regulated market, the bidder must present a draft public con-tract and document the adequacy of the consideration to the Czech National Bank.

TAKEOVER BIDAn investor can present a public take-over bid to the shareholders of joint-stock companies whose shares are traded on the regulated market in the Czech Republic if the bid shows the investor’s inten-tion to take control of the company. The bid must be binding for at least four weeks. If it is longer than 10 weeks, the investor must publish a notice two weeks before expiration. All shareholders must be given equal treatment, and the statutory bodies of the target company are duty-bound to be neutral and inform trade union or-ganisations or other representatives of the employees about the bid. The newly introduced breakthrough rule cancels the limitation on the transferability of shares. During the period of the validity of the bid, the bidder can increase the consideration and prolong the peri-od of its validity. In the period of validity, another person may make a rival bid. A bid to take over a company can be made only with the prior consent of the Czech National Bank. The law on take over bids also defi nes procedures in cases when the target company is based in the Czech Republic, but its shares are traded on a regulated market abroad, or the target company is based abroad, but its securities are traded on the regulated market in the Czech Republic.

COMPULSORY TAKEOVER BIDAn investor who acquires a decisive or higher share in the target company (30%) is duty-bound to present a takeover bid (“compulsory takeover bid”) to all other shareholders of the company whose shares are traded on the regulated market within 30 days. The consideration can have the form of money, shares, or their combination. The consid-eration amount must not be lower than the highest price at which this person acquired the shares in the 12 months before the duty arose. If this price cannot be determined, the amount must be in line with the weighted average of these securities attained on the regulated market in the period of six months before the duty arose.

PURCHASE OF AN ENTERPRISEAn acquisition can have the form of the purchase of an enterprise or its part, by means of which the buyer acquires all rights, rela-tions, assets, and liabilities relating to the running of the business. The transfer contract requires consent of the General Meeting or the partners of the enterprise.

CONTRIBUTION TO A COMPANYThe acquisition of an interest in a company or a share in a joint-stock company can have the form of a financial or non-monetary contribution the subscription of which must be decided by the General Meeting. The registration of such an increase in capital is made by a Commercial Court, and in the case of non-monetary contribution an independent valuation by a person appointed by the court must be submitted.

TRANSFORMATION OF COMPANIES (MERGER, TRANSFER OF ASSETS TO A PARTNER, DEMERGER, AND CHANGE OF LEGAL STATUS)

In Czech legislation, mergers, company demerger, the transfer of assets to a partner, and change of the company’s legal status fall within the category of company transformation. The transforma-tion of a company is also admissible when it is in liquidation or is undergoing insolvency proceedings. Transformations of companies

can be realised as intrastate or cross-border with entities based in a country of the European Union, or another country in the Euro-pean Economic Area. Transformations involving a foreign element are also possible with the use of the so-called European Company (Societas Europea) legal form. The probably most frequent form of transformation is merger either by amalgamation (one of the companies continues its activities, the others cease to exist and their assets and liabilities are transferred to the continuing successor company), or the formation of a new company (all of the companies cease to exist and their assets and liabilities are transferred to a new successor company).Important from the economic point of view is the non-transferabil-ity of possible cumulated tax losses of the ending company to the successor company. This is possible only when the losses were first assessed for the tax period in which the Accession Treaty of the Czech Republic to the EU became valid (i.e. for tax periods as from 1 May 2004). Losses assessed for the preceding taxable periods cannot be carried forward.Mergers take place on the basis of merger contracts, which must be approved by the General Meetings in advance (exceptions are listed). The crucial point of any merger is the determination of the exchange ratios of the shares and possibly other aspects of prop-erty arrangements following the merger. Mergers become legally effective on the day of their entry in the Commercial Register, but from the taxation and accounting points of view the companies operate as a single entity from the merger date, which in fact pre-cedes all steps and decisions on the merger. In certain cases, the merger procedure can be simplified significantly by the agreement of all shareholders or partners. Newly introduced is voluntary purchase of other shares, provided the successor company owns more than 90% of the shares of the ending company. If the merger changes the legal status of the shareholders of one of the com-panies involved, the successor company is in certain cases duty-bound to purchase their shares.Mergers are also possible among companies with different legal status, and they can involve more than two companies.Special provisions apply to cross-border mergers. It is important that the procedures are regulated in a similar manner as in the legal order of the country in which the company involved in the merger is based. Cross-border mergers significantly increase the influence of employees and the organisations representing them.The transfer of assets to a partner is a legal form of company transformation, whereby the shareholder or partner who owns more than 90% of the company’s registered capital may transfer the assets of the company to himself with consent from the Gen-eral Meeting. This carries the duty to provide fair compensation to all other minority shareholders or partners.A company can be demerged (i) by the establishment of new com-panies, (ii) by amalgamation, (iii) by spin-off connected with the formation of new companies, (iv) by spin-off connected with amal-gamation, or combination of options mentioned in either (i) and (ii) or in (iii) and (iv). When the company is demerged by the establish-ment of new companies or by amalgamation, the company being demerged ceases to exist without being liquidated, and in case of the demerger by spin-off, the company does not cease to exist.When the legal status of a company is changed, it does not cease to exist and only changes its internal legal situation and arrangement.

REGULATIONIn the case of mergers and acquisitions, the interests of minority shareholders are protected by the obligation of companies to pro-vide timely information, and in the majority of these transactions by the requirement to obtain the opinion of an independent expert

to establish whether the parameters of the transaction, the price or con-sideration in particular, are fair to the minority shareholders.Mergers and acquisitions in the Czech Republic are also regulated by special legislation. In banking and insurance, for example, prior consent from the competent bodies (the Czech National Bank, the Ministry of Finance) is required for a merger or an acquisi-tion contract concluded by a bank or an insurance company to become effective.

Mergers and acquisitions also fall within

the jurisdiction of the Office for the Pro-

tection of Competition. Its permission is

required

� when the aggregate net turnover of the participants in the transaction exceeded CZK 1.5 billion (approx. EUR 57.7 million) on the market of the Czech Republic in the last ac-counting period, and when the net turnover of at least two of the merg-ing participants exceeded CZK 250 million (approx. EUR 9.6 million) on the market of the Czech Republic in the same period, or

� when the aggregate net turnover of at least one participant in the trans-action exceeded CZK 1.5 billion (approx. EUR 57.7 million) on the market of the Czech Republic in the last accounting period, and when at the same time the worldwide net turnover of another participant also exceeded CZK 1.5 billion (approx. EUR 57.7 million).

The process of mergers and acquisi-tions is always fairly complicated, and the handling of commercial, legal, accounting, and tax matters requires co-operation with experts.

JAROMÍR HOŘEJŠÍ

VLADIMÍR VELEBA

EUGEN OEHM

KPMG Czech Republic, Ltd.

e-mail: jhorejsi@kpmg.cz

Note: The exchange rate CZK 26/EUR 1 was used

to convert Czech crowns into euro.

IIn 2008, investments in research and development and in strategic services in the Czech Republic for the first time predominated over production projects. This was revealed by the statistics prepared by CzechInvest Agency, which helps domestic and foreign investors in the Czech Re-public realise their business plans. As many as 213 investment projects were prepared in the past year with its assistance; 76 of those projects are concerned with research and development, 58 with services, and 79 with production. After realisation, they will give employment to 14 606

INVESTMENTS IN 2008: SERVICES FOR THE FIRST TIME SURPASS PRODUCTION

people, including nearly four thousand university graduates. The investments will be worth close on two billion dollars.“The Czech Republic is situated literally in the centre of Europe, and if companies want to succeed here, they have a unique oppor-tunity of investing in top technologies and in research, so as to be able to offer their customers the highest quality on a continuous basis. At the same time, CzechInvest is in a position to acceler-ate this development, thanks to support drawn from national and European resources,” says Alexandra Rudyšarová, the appointed Managing Director of CzechInvest Agency.

Type of investment Number JobsAmount of investment

(EUR million)

Production 859 168 219 24 747.75

Shared services 168 28 446 793.22

Technological centres 166 5 796 386.33

Total 1 193 202 461 25 927.31

I N V E S T M E N T P R O J E C T S M E D I AT E D B Y C Z E C H I N V E S T A G E N C Y B E T W E E N 1 9 9 3 A N D 2 0 0 7

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IBM IN PRAGUEAn excellent example of investment made in 2008 is that of IBM. IBM has been present in the Czech Republic since the 1990s, its core business being software development. The outstanding experience the company had in employing Czech programmers and the business environment it encountered in the Czech Repub-lic were largely responsible for its decision last year to relocate the management of the entire IBM group for Central and Eastern Europe from Vienna to Prague. “The Czech Republic has clearly reached a new phase in attracting new investments and in build-ing a knowledge-based economy – after investment in produc-tion, money is pouring into the service sector on a large scale,” adds Rudyšarová. “In past years, a number of really large inves-tors came to regions with the highest unemployment rates. After their good initial experience, many of them entrusted their Czech branches with original research and development. It is worth mentioning that a large part of those investments would not have been possible, or at least they would not have arrived so quickly, if the investors had not previously tried out the Czech Republic in production. There are many examples: Panasonic, Denso, Bang & Olufsen, to name just a few.” In 2008, the list of new investors was enlarged with the addition of, for example, eBay, which opened a marketing and analyti-cal centre for Europe in Prague; another company, Regus, which rents offices and related services in 70 countries across the world, is moving the complete administration of its financial and other shared services to Prague. The most important expansion projects include, for example, large investments in top-standard drug production by IVAX, based in North Moravia. Two more companies, EXBIO and CPN, are pre-paring to set up a centre for research and development in pharma-ceutical and biotechnologies; Rokospol, a company manufacturing paints containing nano-particles, is setting up a technological centre in South Moravia.

SOFTWARE DEVELOPERS AT THE HEADThe largest number of new investment projects involves software development. Software projects account for a full 21% of total new investments. Customarily, the second most important sector for new investments was engineering, now the automotive industry, a traditional investment champion, has dropped to third position with 28 investment projects. There is a long list of new or expand-ing software developers in the Czech Republic - AVG in Brno, TeLogic in Liberec, and IT Systems in České Budějovice – among many others. The dominant share of such companies in the total number of new projects is further evidence of how dramatically the structure of investors is changing,” Rudyšarová says and continues: “Only a few years ago, the car industry held an unas-sailable position in terms of investment activity, now its position is comparable not with another industry, but with the service sector.”

RESEARCH IS BOOSTED BY SUBSIDIES

“While in 2007 research and develop-ment and services accounted for only 32% of all investment projects, in 2008 the share of this sector is a full 63%. Top-standard equipment for software development is of neces-sity cheaper than the construction of a new manufacturing plant. In addition, according to our statistics, most companies investing in services rent the buildings and equipment they need for their business, and their initial investments are lower due to those savings, “ Rudyšarová says.In 2008, companies in the Czech Republic which decided to invest in research and development, can make full use of support from the EU Business and Innovation Operational Programme. In addition, investment incentives for investors investing in production have become a widely used opportunity.

CZECHINVEST – INVESTMENT AND BUSINESS PROMOTION AGENC Y

CzechInvest Agency was established in 1992. One year later, it medi -ated the first investment project for the Czech Republic, and since then it has participated in 1 193 invest-ment projects worth CZK 647 billion (EUR 25.94 billion). More than 202 460 people have found employ-ment, in stages, in projects medi-ated by CzechInvest. Thousands of additional jobs have been created in related projects.

CZECHINVEST

www.czechinvest.org

CZK were converted into EUR by the average

exchange rate of the Czech National Bank for

2008: EUR 1 = CZK 24,94

Number of projects

Amount of investment

(EUR million)

Amount of investment

(USD million)Jobs

Jobs for university graduates

Production 79 1 056.88 1 565.16 7 255 356

Services 58 61.11 94.94 6 601 3 114

Research and development 76 77.75 113.95 750 481

Total 213 1 195.74 1 774.05 14 606 3 951

Y E A R 2 0 0 8 : T Y P E O F A C T I V I T Y P U R S U E D B Y T H E M E D I AT E D I N V E S T M E N T P R O J E C T S

TThe legal framework of investment incentives in the Czech Republic is established primarily by Act No. 72/2000 Coll., on Investment Incen-tives and Amendment of Certain Acts, as amended, which became effective on 1 May 2000. The main purpose of the aforementioned law is to establish types of investment incentives and the range of entities authorised to submit the intent to apply for investment in-centives, and to describe the adminis-trative proceedings between applicants for investment incentives and the relevant administrative bodies.CzechInvest, an agency subordinated to the Ministry of Industry and Trade of the Czech Republic, is the sole organisation that may submit appli-cations for investment incentives to governing bodies and that handles the agenda connected with incentives and manages the development of the entire system of investment support in the Czech Republic.The total amount of state aid provided within investment incentives must not, throughout the period in which it may be drawn upon, exceed a set percent-age of eligible costs, i.e. costs which may be supported pursuant to the law. The maximum permissible intensity of state aid is 40% of eligible costs in most regions of the Czech Republic. Exceptions are some territorial units in the south-west of the Czech Repub-lic, where the maximum intensity is 36% (up to 2010), and 30% (from 2011 to 2013), and in particular the territo-rial unit of Prague, which was eligible for investment incentives only until the end of 2008. In the case of small and medium-sized enterprises where eligible costs do not exceed EUR 50 million, the total permissible intensity of state aid is increased by 20% for small enterprises and 10% for medium-sized enterprises. In the manufacturing industry, the maximum permissible intensity of state aid depends also on the branch according to the classification of economic activities, in which the applicant for investment incentives

SYSTEM OF INVESTMENT INCENTIVES IN THE CZECH REPUBLIC is engaged. While in the chemical and pharmaceutical industries, manufacture of machinery and equipment, electrical and optical instruments or transport equipment, applicants can obtain the ceil-ing amounting up to 100% of the value of state aid, in the areas of e.g. the food, textile, or glass industries, the ceiling for state aid is set at 75%.

SYSTEM OF INVESTMENT INCENTIVES IN THE CRThe amount and the basic conditions for obtaining investment in-centives in the manufacturing industry are set below:

MANUFACTURING INDUSTRYInvestment incentives for the manufacturing sector include the fol-

lowing types of investment incentives:

� income tax relief (may be claimed in five consecutive taxation periods),

� transfer of land with technical facilities at a specially reduced price,

� tangible support for the creation of new jobs, � tangible support for the re-training or training of employees,� transfer of plots of land owned by the state at a specially reduced

price. Investors that can apply for investment incentives in the manufac-turing industry are those operating in the manufacturing industry and launching a new production or expanding an existing produc-tion, and investing a minimum of CZK 50 million, 60 million, or 100 million (EUR 1.9 million, 2.3 million, or 3.8 million) in land, buildings, machinery, licences and know-how. The mini-mum amount of investment depends on the unemployment rate in the region where the investment is made. At least a half of the given amount must be funded from the applicant’s own equity. In addition, the granting of investment incentives is conditional on the share of machinery in the total value of the investment, which must account for at least 60% and must not be manufactured more than two years before its acquisition. These conditions must be met within three years of the date of the granting of investment in-centives, and the recipient of investment incentives is duty-bound to maintain the investment for at least five years since meeting the conditions. Tangible support for the creation of new jobs can amount up to CZK 50 000 (EUR 1 900) per a newly created job in areas where the un-employment rate for the past two closed half-year periods prior to the date of submitting the investment intent is at least 50% higher than the average unemployment rate in the Czech Republic. If the recipients of investment incentives decide to re-train or train their employees, they can be granted tangible support for employee re-training or training within the investment incentives. This sup-port can be granted only in areas where the unemployment rate for the past two closed half-year periods prior to the date of submitting the investment intent is at least 50% higher than the average unem-ployment rate in the Czech Republic. Support granted on this basis may not exceed 35% of the overall expenses incurred in connection with the re-training or training of employees.

PROCEDURES FOR GRANTING INVESTMENT INCENTIVESThe investment incentives applicant is first obligated to submit to CzechInvest his/her intent to apply for investment incentives setting out, among other things, the planned amount of funds for the acquisition of long-term tangible and non-tangible assets (i.e. eligible costs), the anticipated initial and final number of employ-ees, including requirements for their qualifications, or re-training as the case may be, the designated location for implementation of the investment, the requested investment incentives, and other infor-mation as listed in the printed form for the intent to obtain invest-ment incentives. After receiving confirmation of the registration of the intent from CzechInvest, the applicant can commence work on the project and hire new employees. The investments implemented prior to obtaining this confirmation cannot be recognized for the purposes of fulfilment of the minimum investment amount condi-tion or inclusion in the eligible expenses.On the basis of the inves-tor’s intent, CzechInvest shall draft an assessment that will include a proposal for the granting of investment incentives or a proposal for their refusal. The Czech Ministry of Industry and Trade, the Ministry of Labour and Social Affairs, the Ministry of Finance, the Ministry of the Environment, the Office for the Protection of Economic Competition and the municipality on whose territory the investment will be implemented shall subsequently express their standpoint on the aforementioned assessment. Based on the pronouncements of the above-mentioned administra-tive bodies, the Czech Ministry of Industry and Trade will determine the permissible intensity and value of state aid and submit to the applicant an offer for the granting of investment incentives, includ-ing their breakdown into the different types. On the basis of this offer, the applicant will prepare its application for the commitment of investment incentives and will apply through CzechInvest to the Ministry of Industry and Trade, which will issue a decision on the commitment of investment incentives.

THE TIP PROGRAMME – SUPPORT FOR RESEARCH AND DEVELOPMENTBesides investment incentives and support from the Operational Programmes financed from the Structural Funds, applicants can seek state aid within the TIP programme. The objective of the pro-gramme is to support the implementation of industrial research and development from the state budget.The public tenders are called every year, work on project solution is limited to four years, and must be commenced in the year in which the public tender was called.

The amount of aid will be determined in accordance with the Com-

munity Framework on state aid for research and development. In the

case of large enterprises, the following percentages for aid will apply:

� basic research – 100% of the specified costs of research and devel-opment,

� industrial research – 50% of the specified costs of research and development,

� industrial research undertaken in cooperation with other enter-prises or a research organisation – 65% of the specified costs of research and development,

� development – 25% of the specified costs of research and develop-ment,

� development undertaken in cooperation with other enterprises or a research organisation – 40% of the specified costs of research and development.

Aid can be granted only to the project of an applicant that will en-sure at least 50% of the project’s solution with his/her own employ-ees, or to a consortium of applicants whose shares in the project will

be comparable in volume, through one of the applicants.The costs of the acquisition of tangi-ble and intangible property must not exceed 20% of the total eligible costs of the project. Aid will be provided to projects with expected results of solutions that will have practical applications or in which subsequent development will clearly lead to practical application, and also results that will be applicable in other organisations and business entities. The recipient of aid can also be a busi-ness entity in the area of industrial production that proves his/her ability to co-finance the project from their own or foreign sources.

The programme aims at three targets

� new materials and products – es-pecially research and development of new competitive materials and those of so far unknown properties, nanomaterials, with the research and development oriented towards future market needs,

� new progressive technologies – re-search and development of new pro-duction procedures and technologies,

� new information and control systems – research and development of meth-ods and instruments leading to effec-tive planning, assessment of produc-tion processes, and solutions for new and refurbished production premises and production systems, etc.

The condition for granting aid is that

each of the projects undertaken has

reached a certain phase where the

result is:

� a patent or another result protected under special legal regulations,

� a pilot operation, verified technol-ogy, variety, breed,

� a prototype, applied method, func-tional sample, authorised software, usable model,

� specialised maps with expert opinion.

LUKÁŠ PODDANÝ

Ambruz & Dark, advokáti, v.o.s.

e-mail: lukas.poddany@ambruzdark.com

USEFUL LINK:www.czechinvest.org – CzechInvest

DDuring the nearly 20 years since the change of its political system, the Czech Republic has developed into a modern European state. Its econ-omic and legal environment is fully stabilised and is comparable with that in other states of the European Union, of which the Czech Republic is a member.The Czech Republic is aware of the fact that one of the sources of creat-ing values and wealth in society is business and enterprise. It is there-fore working systematically towards the creation of a suitable, simple, transparent, and non-discriminat-ory business environment and its improvement, including the environ-ment for foreign investments, which

EFFICIENT PROTECTION OF INVESTMENTShave become an indispensable and inseparable part of the global economy.

PROTECTION OF FOREIGN INVESTMENTSThe support to foreign investments is provided for by legisla-tion on investment incentives1), which is based on EU law. There are different possibilities of granting support to specific kinds of investment, such as income tax reliefs, transfer of land equipped with technical facilities at a favourable price, material support for the creation of jobs or the requalification of employees2).

As the Czech Republic makes it possible for foreign investors to re-alise their investments both indirectly, i.e. by capital partici pation in Czech companies3), and directly, by setting up their own enter-prises or organisational units4), it must see to it that their invest-ments are duly protected.Naturally, besides creating favourable conditions, the Czech Repub-lic guarantees the investors proper and equitable treatment, grants them full legal security, and protects them against all intervention and restriction of their ownership rights. These valid and enforceable ob-ligations of the Czech Republic vis-à-vis foreign investors are secured primarily by bilateral investment protection and support treaties, which the Czech Republic has signed with nearly 80 states.

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After the Czech Republic’s accession to the European Union, its legal regulation of investment protection and support in the form of interna-tional treaties was supplemented with uniform legislation providing for debt collection5), unifi ed rules for the determination of jurisdiction6), simplifi ed procedures for the service of offi cial documents7) and evi-dence proceedings8) and the uniform regulation of European bankrupt-cy proceedings9). Although in the legal sense, they are not legal instru-ments regulating directly foreign investments and their protection as is the case of international investment protection treaties, but are rather a complementary regulation of a purely European character aimed at unifying and simplifying rules for debt collection and the enforcement of claims across EU member states and at unifying court proceedings. This legal “dualism” ensuing from international and European law is supplemented by the rapid “Europeisation” of Czech legislation.

CLAIM ENFORCEMENT IS NOW EASIERIt can be said without exaggeration that cross-border enforcement of claims in the framework of EU member states has never in the past been easier than it is today. Added to the free movement of persons, goods, services, and capital has been the free movement of court judg-ments and offi cial documents. Direct communication between judicial bodies, the possibility of fi ling petitions, applications, and other docu-ments in several European languages and, in particular, the simplifi -cation of legislation governing the enforcement of claims and rights has brought the European national system of justice closer to creditor investors.The Czech Republic now ranks among states which lifted barriers in the area of the “transferability” of judgments of own judicial bodies years ago. From now on, the Czech Republic is handling court judgments passed, for example, in Italy, France, Germany, and other EU mem-ber states, as if they were its own judgments, and vice versa. A Czech judgment is equivalent to any other judgment passed by the court of another member state.The fact that judgments passed in one member state can now be recognised and enforced in other member states without the need for lengthy proceedings, as well as the fact that bankruptcy proceedings spilling into several member states are governed by the same rules not

only makes it easier for creditors to get a good grasp of the situation in the fre-quently intriguing jungle of legal regula-tions, but it also enables law specialists to carry out their profession disregard-ing national borders.In addition, the unifi cation encourages cross-border business activities and in the fi nal analysis helps towards the creation of the single European area. The Czech Republic, as a member of the European Union, participates actively in this process, is its part and continues to be one of its proponents.

ROBERT NĚMEC, ZUZANA TUČKOVÁ

ONDŘEJ ČECH, KAREL JANDUS

PRK Partners s.r.o. advokátní kancelář

e-mail: office@prkpartners.com

1) Act No. 72/2000 Coll., on investment

incentives and on the amendment of certain

acts (Investment Incentives Act), as amended.2) Section 1 para 2 of Act No. 72/2000 Coll., on

investment incentives and the amendment

of certain acts (Investment Incentives Act), as

amended.3) Section 24 of Act No. 513/1991 Coll.,

Commercial Code, as amended.4) Section 21 of Act No. 513/1991 Coll.,

Commercial Code, as amended.5) Regulation (EC) No. 805/2004 of the

European Parliament and of the Council

creating a European enforcement order for

uncontested claims.

Regulation (EC) No. 1896/2006 of the

European Parliament and of the Council

creating European Order for Payment

Procedure.

Regulation (EC) No. 861/2007 of the

European Parliament and of the Council

establishing European Small Claims

Procedure.6) Council Regulation (EC) No. 44/2001

on jurisdiction and the recognition and

enforcement of judgments in civil and

commercial matters.7) Regulation (EC) No. 1393/2007 of the

European Parliament and of the Council

on the service in member states of judicial

and extrajudicial documents in civil and

commercial matters.8) Council Regulation (EC) No. 1206/2001

on cooperation between the courts of the

member states in the taking of evidence in

civil or commercial matters.9) Council Regulation (EC) No. 1346/2000 on

insolvency proceedings. Ph

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TThe current Czech tax system was introduced on 1 January 1993 and is founded on a similar basis as the tax systems of the other EU states. Its parts are the corporate income tax and the personal income tax, with the standard added value tax (VAT) system. The Czech tax system has been frequently amended; vast changes were made in the system in connection with the Czech Republic’s join-ing the EU in May 2004 and later in the framework of the fiscal reform in 2008. More changes are to be expected in 2009.

CORPORATE INCOME TAXThe liability to pay corporate income tax on world income applies to persons other than natural persons having their headquarters or place of business or management in the Czech Republic (i.e. Czech tax residents). The tax liability of persons that are not Czech tax residents only applies to income derived from sources located in the territory of the Czech Republic. These incomes include incomes relating to a permanent place of business in the Czech Republic (e.g. organis ational unit) of an entity that is not a tax resident, income from the sale of property located in the territory of the Czech Republic, income from the transfer of a capital share in a Czech company and other specified types of income (e.g. lease instalments, dividends, interest and licence fees paid by Czech entities). The tax period for corporate income tax payers in the Czech Republic is the calendar year or the financial year. The deadline to file corporate income tax for the calendar year is the 31st March of the following year after the lapse of the tax period. If specific conditions laid down by law are met, the period may be prolonged. In general, the corporate income tax base is the profit/loss shown in the financial statement, modified by various taxable/non-taxable and deductible/non-deductible items.There is no tax consolidation in the Czech Republic. Each enter-prise within a group is liable to tax as a separate legal entity with-out having any claim to setting off its losses against the profits of the other companies within the group. Nevertheless, a type of tax consolidation is possible in the case of general commercial part-nerships or limited partnerships.As a rule, the tax administrator is entitled to check tax returns and assess tax liability in retrospect within three years after the end of the tax period, in which the liability to file the tax return arose. This is a minimum term, which may be prolonged.

WHAT IS MEANT BY PERMANENT PLACE OF BUSINESSCzech legislation defines the meaning of a “permanent place of business” in very general terms. In most cases, a permanent place of business means a place for performing various activities in the territory of the Czech Republic (e.g. the office, point of sale, or building site). If a foreign juristic person operates services in the Czech Republic for more than 6 months during a period of 12 con-secutive calendar months, from the taxation point of view it has es-tablished a permanent place of business. This has to be taken into consideration if workers posted by a foreign entity are employed in the Czech Republic. Another case, where a foreign entity is deemed to have a permanent place of business established in the Czech Re-

WHAT ARE THE RULES FOR THE TAXATION OF FOREIGN INVESTORS?

public, is when a person authorised to make contracts binding on a foreign entity operates in this country.For the purpose of corporate income tax liability, Czech general commer-cial partnerships (v.o.s.) and limited partnerships (k.s.) are considered tax transparent entities. The profits of a general commercial partnership are not tax liable at v.o.s. level, but at the general partner level. In the case of a limited partnership, profits are divided into a part falling under the general partners (tax liable at gen-eral partner level) and a part falling under limited partners (profits are subject to corporate tax at k.s. level). That part of the profits after tax is distributed among limited partners in the form of dividends; dividends are generally liable to a 15% withholding tax. The income of v.o.s. partners or general partners who are not Czech tax residents and do not have their headquarters in another member state of the European Economic Area are subject to a tax rate correspond-ing to the customary income tax rate (for juristic persons 20% in 2009 and 19% from the year 2010).Czech tax legislation has no rules for tax transparent entities established under foreign law. In most cases, the Czech Ministry of Finance assesses transparency on the basis of compari-sons, which means that for Czech tax purposes it applies foreign taxation rules. This area, however, continues to be under discussion.

EU RULESThe Czech Republic has been a mem-ber of the European Union since 1 May 2004. During preparations for joining the EU, the Czech Republic incorporated the following EU direc-tives in its legislation: the Mother/Daughter Company Directive; Direc-

tive on the common system of taxa-tion applicable to mergers, divisions, transfers of assets, and exchanges; Directive on the common system of taxation of interest and licence fees, and Directive on the taxation of sav-ings income in the form of interest payments (which is not covered here).

DIRECTIVE ON THE COMMON SYSTEM OF TAXATION OF MOTHER AND DAUGHTER COMPANIES

In accordance with this directive, the payment of dividends by a Czech company to the benefit of a company, which is a tax resident in another EU member state or Switzerland, Norway, and Iceland, or the payment made to a Czech company by a com-pany which is a resident in another EU member state, is not liable to tax in the Czech Republic, provided it has met certain conditions: the mother company has owned at least 10% of the registered capital of the daughter company for not less than 12 months (the time test may be made later). The payment of dividends between two Czech companies meeting the condi-tions mentioned above is not liable to tax, either. Dividends from companies based in another country with which the Czech Republic has an agreement on the avoidance of double taxation may also be relieved from tax, if simi-lar and other conditions are met. Capital gains generated by a Czech mother company if those gains are related to the transfer of shares in a daughter company which is a tax resident in a country with which the CR has a contract, provided the con-ditions applying to the dividend tax relief are met, are also relieved from the tax burden, besides dividends. Similarly, capital gains generated by the mother company which is a resident in an EU member state, in the case of the transfer of shares in a Czech daughter company, will not be burdened by taxation, provided the conditions applying to the dividend tax relief provisions are met.

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DIRECTIVE ON THE COMMON SYSTEM OF TAXATION OF INTEREST AND LICENCE FEES

Interest and licence fees paid by a Czech company to a company that is a tax resident in another EU member state or Switzerland, Norway, or Iceland will be relieved from tax in the Czech Republic (provided certain conditions are met). Legislation providing for interest tax relief entered into force on 1 May 2004, and legislation relieving licence fees from tax will come into effect on 1 January 2011.

CAPITAL GAINSAs a rule, capital gains are taxed at the customary corporate in-come tax rate (i.e. 20% and 19% for companies and 5% for shares funds, investment and pension funds). Capital gains flowing to Czech non-residents from (i) the sale of shares (securities) by a foreign company to Czech tax payers or Czech permanent places of business and from (ii) the sale of shares (capital interests) of a Czech company regardless of the buyer’s tax residence are con-sidered income derived from sources in the territory of the Czech Republic, and consequently are liable to tax in the CR. Capital gains may be relieved from tax if there exists an agreement on the avoidance of double taxation. Also, capital gains will not be tax liable under provisions as mentioned in the part dealing with the Directive on the common system of taxation of mother and daugh-ter companies.

LOSSES FROM THE SALE OF PROPERTYOnly losses from the sale of certain securities are tax allowable. Losses relating to other securities, e.g. shares that are not re-val-ued to market value, bills of exchange and other assets (such as receivables, land and capital interest in limited liability compa-nies, limited partnerships or cooperatives) cannot be considered tax allowable either in the current or any other tax period.

CARRYING TAX LOSSES FORWARDAs from 2004, tax losses shown in one tax period may be carried forward to the next five tax periods. Tax losses incurred in tax periods, which began before the year 2004, may be carried forward to the next seven tax periods. Carrying losses backward, however, is not possible. There are restrictions to accounting for tax losses (incurred in previous tax periods) as a result of a substantial change in the composition of owners or in the case of a merger.

WITHHOLDING TAX – PAYMENTS TO CZECH TAX NON-RESIDENTSWithholding tax relates to dividends and other income from capital interest (including liquidation balances and settlement amounts), interest and other income flowing from financial in-struments, income from licence fees, income from commercial or technical consulting services provided in the Czech Republic, rent from financial leasing, if paid to tax non-residents, who do not have a permanent place of business in the Czech Republic. A 5% tax rate applies to income from financial leasing and a 15% rate for other types of income. Withholding tax may be reduced on the basis of an agreement on the avoidance of double taxation (see Rules of the European Union above). The Czech Republic adheres to all agreements on the avoidance of double taxation made by the former Czechoslovakia and has itself entered into such agreements with a number of other states.

DEDUCTION OF RESEARCH AND DEVELOPMENT COSTS FROM TAX BASE

In principle, the costs of certain re-search and development projects are tax allowable twice (the first time as deductible costs and the second time as an item reducing the tax base). Further conditions, however, must be met to qualify for such reduction.

INVESTMENT INCENTIVES ACTThe Czech investment incentives system may be used by both foreign and Czech companies. At the time when this article is written, existing investment incentives apply to new production plants and the enlarge-ment of existing production facilities. At the end of 2008, the Czech govern-ment proposed an amendment, which changes significantly the current Investment Incentives Act. According to the draft (approved by the govern-ment in January 2009, but not as yet passed by Parliament), investment incentives will no longer be available to applicants operating in the manu-facturing industry, and will be accord-ed to projects of technological centres and shared services centres. Also, the form of investment incentives will be modified – as before, they will only be available in the form of tax reduction applicable to corporate income. On the other hand, no support will be provided for job creation, requalifica-tion and employee training, or offer-ing land equipped with infrastructure at a favourable price. It is neverthe-less expected that the current draft amendment proposed by the govern-ment will be changed considerably in view of the economic situation. For example, subsidies to branches of industry with high added value (e.g. manufacture of demanding medical instruments) and financial subsidies (instead of tax relief) to technological centres are envisaged.

RENÉ KULÍNSKÝ

Partner to Tax Consultancy Department

Ernst & Young, s.r.o.

e-mail: rene.kulinsky@cz.ey.com

AA new amendment to Act No. 182/2006 Coll., on Bankruptcy and Methods of Its Resolution, came into effect in 2008, replacing the previous Bankruptcy and Composition Act. The new Insolvency Act substantially changes the legal environment, in which debtor’s bank-ruptcy was previously handled in the Czech Republic. Considering the existing economic situ-ation and the growing number of bank-ruptcies, it may be that also some foreign businessmen will have to register their unpaid claims in insolvency proceedings brought against a bankrupt entity who used to be their trading partner in the Czech Republic.The new Insolvency Act places com-pletely new requirements on creditors, in terms of content and form, in connec-tion with the registration of their claims. The non-compliance with the rules may even lead to the loss of the claim for the satisfaction of the registered claim.

NEW RULES FOR CLAIM REGISTRATIONThe essential obligation of each credi-tor seeking at least partial satisfaction of his/her claims in insolvency proceedings is having his/her claim registered. The following rules must be complied with under the new Insolvency Act:� Claims may only be registered on the

approved form in Czech (no other form of claim registration is admitted);

NEW INSOLVENCY ACT IN THE CZECH REPUBLIC� The application must be fully completed and supported by the required

annexes (e.g. contracts, orders, invoices), which may differ depending on the kind of the claim being registered;� In addition to the general essentials, the applicant must state especial-

ly the reason why the claim arose and specify its amount denominated in Czech currency (if the claim is denominated in a foreign currency, it must be converted into Czech currency);

� Claims that have not yet fallen due and contingent or non-pecuniary claims may also be registered (in the case of a non-pecuniary claim, its value must be expressed in money on the basis of an estimate of its value);� In case the claim is secured (e.g. by lien), the creditor must state in the

application whether he/she is seeking the satisfaction of his/her claim on the basis of such security and specify the kind of the security;� In the case of an enforceable claim, the claimant must state in the ap-

plication the circumstances on which the enforceability of the claim is based (e.g. distraint instrument);� Applications must be fi led in duplicate (including annexes) with the

materially competent insolvency court (the claim registration form is available free on the internet at www.insolvencni-zakon.cz);� The signatures on the application must be offi cially verifi ed;� Claims must be registered within the fi xed time limit, which is usu-

ally only 30 days from the publication of the bankruptcy ruling in the insolvency register, which is also available on the Internet, at www.insolvencni-zakon.cz;� If the creditor is a juristic person, a copy of the excerpt from the com-

pany register must also be attached to the application;� If the creditor is represented by an agent, his power of attorney must

also be fi led.

Since documents proving the existence of the claim and its amount (e.g. contract, order, and invoice) must always be attached to the application for the registration of the claim, we recommend that businessmen keep documents relating to each particular trade deal on fi le.Of decisive importance for the satisfaction of the registered claim is whether the claim is secured or not. Secured creditors are not satis-fi ed from the same property of the bankrupt as the other creditors, but directly from assets offered as security (pledge), or from the proceeds of the sale of the assets; if, for example, the registered claim is secured by mortgage, the secured creditor will be satisfi ed directly from the pro-ceeds of the sale of the property, at any time in the course of the bank-ruptcy proceedings.In conclusion it has to be pointed out that usually the creditor will learn about the opening and progress of insolvency proceedings only from the insolvency register, which is available exclusively in electronic form. We therefore recommend clients to watch whether by any chance their trad-ing partners are not fi guring in the insolvency register. If they are, the creditor must apply for the registration of his/her claim to the competent insolvency court according to the rules stated above.

JAKUB ADAM, Partner

e-mail: jakub.adam@wolftheiss.com

PETR J. SYROVÁTKO, Lawyer

e-mail: petr.syrovatko@wolftheiss.com

WOLF THEISS advokáti s.r.o.

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TThe law for the protection of competition includes on the one hand the issues of unfair competition, on the other hand the Competi-tion Law as such. An important role in the maintenance of fair conditions on the market is also played by regulation of state aid and public procurement, which are therefore also included in the wider meaning of the competition law.The protection of competition in the Czech Republic is ensured by the Office for the Protection of Competition (the “Office”), which was entrusted with this activity in three areas comprising the protection of competition in a narrower sense (i.e. the Competi-tion Law itself), provision of state aid and the public procurement. Unfair competition is outside the Office’s competence and is regu-lated by the Commercial Code.

UNFAIR COMPETITION LAWUnfair competition law is governed by the Commercial Code; un-fair competition is behaviour which is in contradiction with good competition morals and is liable to cause injury to other competi-tors or consumers. Persons feeling injured by unfair competition practices used by other entrepreneurs or businessmen must apply to the court; the court may award a judgment not only forbidding such behaviour and ordering the elimination of the wrongful con-dition, but also providing for the compensation of damage and sur-render in cases of unjust enrichment. The competence to supervise in the area of unfair commercial practices has also been entrusted

COMPETITION LAW IN THE CZECH REPUBLIC

to state authorities, for example the Czech Trade Inspection Board, in cases of deceptive sales, practices towards consumers.

COMPETITION LAWIn the narrower sense of the word, competition law involves the legal regulation of coordinated action, i.e. cartel behaviour, unilateral actions of undertakings exercising substantial market power, i.e. abuse of dominant position, as well as mergers, acquisi-tions, and other forms of concen-tration between undertakings. The applicable law in this area is both the Czech competition law, comprised in the Act on the Protection of Competi-tion, and EU law, comprised in the Treaty establishing the European Community (“EU Regulations”). The

competition law is applicable in all areas of economic activity, including sectors subjected to specific regula-tion (e.g. power industry, telecommu-nications, etc.).

ANTITRUST Antitrust laws cover the regulation of prohibited agreements and the abuse of dominant position. Agreement means any coordination between independent undertakings. Prohibited agreements are not only agreements (in the sense of commercial law) between enterprises, but all, even legally unbinding accords indicating the will of the parties to respect them (e.g. “gentleman’s agreements”), and situations where no agreement was made between enterprises (“concerted practices”), but their behaviour is co-ordinated by their certainty as re-gards the future behaviour of the rival company (e.g. horizontal competitors will exchange information about how and when they intend to raise prices, and by using this information they are acting in collusion); decisions of associations of undertakings (various professional chambers, special-inter-est associations, etc.) which lead to the coordination of the behaviour of their members (e.g. rules setting the price their members should charge for their services) are also considered agreements. Prohibited agreements are agreements which lead or could lead to the infringement of economic competition (e.g. price agreements, market division agreements, produc-tion restriction agreements, etc.).Dominant position is the position of a specific undertaking on a specific market, where his market power en-ables him to behave, to a considerable degree, independently of the other competitors or consumers. Market power is assessed on the basis of a number of factors, an important in-

USEFUL REFERENCES:www.compet.cz – Offi ce for the Protection of Competitionhttp://europa.eu.int/comm/competition/index_en.html – European Commissionwww.coi.cz – Czech Trade Inspectionwww.businessinfo.cz – Commercial Code

dication being the share on the relevant market; if the share is less than 40%, it is not, as a rule, considered dominance. Dominant position as such is not prohibited, but its abuse to the detriment of other competitors or consumers (e.g. excessively high prices, dif-ferent business conditions in similar cases, tying unrelated goods and services, etc.).In the Czech Republic, both Czech and EU law is applicable in the antitrust area. EU legislation is only applicable to cases involving an EU element, i.e. behaviour which could have an appreciable effect on trade between EU member states, while Czech law applies to behaviour which cannot have such effects; Czech law is never-theless fully harmonised with EU law, so that the application of either of these two legislations cannot lead to different results. In addition, actions involving an EU element occurring in the territo-ry of the Czech Republic need not be adjudged solely by the Office, but can also be dealt with by the European Commission – but even in this case there will be no difference in the determination of law.

CONCENTRATION OF UNDERTAKINGS IS POSSIBLE UNDER CERTAIN CONDITIONS

Concentration means a long-term change of control, i.e. of the ability of one undertaking to exercise the decisive influence on the activity of an other undertaking; in this sense, concentration means different mergers and acquisitions, as well as other forms of control change (e.g. personal unions). Only concentrations where the annual turnovers of the merging companies exceeded a certain limit laid down by law are subject to reviews by competition supervision bodies; in the case of such concentrations, the merg-ing companies must report their intended merger to the Office in advance and wait for the issue of its decision before taking steps in implementing the merger (e.g. appointing members of the board of directors). If there are no serious concerns of a substantial infringement of competition, especially as regards the institution or strengthening of a dominant position, the Office will permit the merger by its decision. In the opposite case, it will issue a negative decision. Competitors intending to merge may avoid an unfavour-able ruling by proposing certain commitments to the Office to the effect that efficient competition will be maintained (e.g. by the sale of a part of the company); if the Office finds the commit-ments satisfactory, it will permit the merger on condition that the commitments will be met. In the case of a merger of undertakings having especially high turnovers (see Council Regulation (EC) No. 139/2004), the matter will be decided not by the Office, but di-rectly by the European Commission. The rules of its procedure and the criteria to be met are similar to those described above.

MICHAL PETR

Office for the Protection of Competition

e-mail: michal.petr@compet.cz

www.compet.cz

P relevant activities (defined by law) in the gas industry, heat supply, electric power industry, water management, etc. Sector contracting entities award only above-the-threshold contracts and generally are subject to less strict rules for contract awards.

INFORMATION SYSTEM ON PUBLIC CONTRACTS

The information system gathers information on public contracts and concessions in one centre. The system can be viewed at the web address www.isvz.cz, which publishes, among other data, also information on cur-rent award procedures.

AWARD PROCEDUREAn award procedure leads to the award of a public contract, i.e. to the decision of the contracting entity on the selection of the most advanta-geous tender, and the signature of a contract with the winning supplier. In the Czech Republic, the most frequently used procedure is an open procedure, in which the contracting entity invites an unlimited number of suppliers to submit tenders and prove their qualifications. Other types of procedure, namely (i) restricted procedure, (ii) negotiated procedure, and (iii) competitive dialogue allow e.g. the restriction of the number of suppliers who are invited by the contracting entity to submit a tender, and a simplified below-the-threshold procedure.

SUPPLIER QUALIFICATIONSThe purpose of assessing the qualifi-cations is to ensure that the evalua-tion committee will assess and evalu-ate only tenders from suppliers who are capable of complying with the requirements of the public contract. For this end, the contracting entity determines the basic requirements (e.g. that the supplier has no criminal

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WINNING PUBLIC CONTRACTS IN THE CZECH REPUBLICPublic procurement has a considerable economic importance in the Czech Republic, it accounts for 17% of GDP. Awarding of public contracts and concessions in the CR is based on Directives 2004/17/EC and 2004/18/EC of the European Parliament and the Council, and on the national level it is governed by Act No. 137/2006 Coll., on Public Contracts, and by Act No. 139/2006 Coll., on Concession Contracts and Concession Procedure (Conces-sion Act).The above-mentioned laws provide comprehensive legal rules in the area of public procurement in the Czech Republic, especially in relation to new provisions of EC law. The purpose of the Czech legal rules is especially to ensure an economical, effective, and purposeful use of public funds. The Czech public contract market is fully open to foreign suppliers, who can thus tender for any pub-lic contract or concession. The relevant legislation is available free of charge on a website maintained by the Ministry for Regional Development, also in English language (www.portal-vz.cz).

PUBLIC CONTRACTSBased on estimated value, public contracts can be categorised into above-the-threshold, below-the-threshold, and minor contracts. According to subject matter, public contracts can be divided into supplies, services, and construction works. This breakdown of public contracts may be of importance for a more or less formal procedure according to the Act on Public Contracts, its very use, the publication of a contract notice, or the type of award proce-dure. Examples can be minor public contracts that the contract-ing entity is not duty-bound to award on the basis of the Public Contracts Act, but it must observe the principles of transparency, equal treatment, and non-discrimination.

CONTRACTING ENTITYThe Act defines three categories of contracting entities: (i) con-tracting authority, (ii) subsidised contracting entity, and (iii) sector contracting entity. The law stipulates different requirements for the different categories of contracting entities (e.g. differ-ent levels of financial thresholds for the different types of public contracts), and different conditions in the awarding of public contracts. By contracting authority, the law means the Czech Republic, a state contributory organisation, a self-governing territorial unit, or another legal entity. Typically these will be e.g. ministries, other administrative offices, courts of law, municipalities (cities), regions, or city districts.A subsidised contracting entity is a legal or natural person which assigns an above-the-threshold contract for construction works and related services, where more than 50% is covered by funds provided by a contracting authority, whether through another entity or not. Typically this shall be any entity that has received a subsidy from a public authority. A sector contracting entity can be a legal or natural person. These are natural monopolies, i.e. entities engaged in the so-called

record), professional requirements (the relevant registration, e.g. in the Business Register or membership in a professional chamber), economic and financial (e.g. third party liability insurance), and technical qualifica-tion requirements (e.g. a list of refer-ences, i.e. significant deliveries). Foreign suppliers prove compliance with qualification requirements ac-cording to the legal order valid in the country of their registered office or place of business. If no such docu-ment is issued pursuant to the laws of that country, foreign suppliers prove compliance with such portion of the qualifications by an affidavit. Documents confirming compliance with qualification requirements shall be submitted by foreign suppliers in their original language, complete with a certified translation into the Czech language attached.

PPP PROJECTSPPP projects can be implemented in the Czech Republic accord-ing to the Act on Public Contracts (the so-called quasi-conces-sion), or as a concession according to the Concession Act. In both cases, some of the economic risks associated with the use of the subject matter of the PPP project are borne by the supplier. The basic difference between a quasi-concession public contract and a concession is the source of the supplier’s revenue: in the case of concession, it is enjoyment of the executed construction or service pro vided; in a quasi-concession public contract, consideration for the executed construction or service is provided to the supplier primarily by the contracting entity.

SUPERVISION OVER COMPLIANCE WITH THE ACT

Suppliers who believe that their rights have been harmed are free to submit justified objections against such conduct. If the contract-ing entity does not grant the objections, the supplier is entitled to file a complaint with the Office for the Protection of Competition.

LENKA KRUTÁKOVÁ, Lawyer

WOLF THEISS advokáti s.r.o.

e-mail: lenka.krutakova@wolftheiss.com

TTrade marks that are capable of being represented graphically and distinguish the goods and services of one undertaking from those of another undertaking can be protected in the Czech Republic as the so-called national trade marks, in accordance with the terms defi ned in Act No. 441/2003 Coll., as amended. The rights to a national trade mark arise by its registration in the Register of trade marks maintained by the Industrial Property Offi ce (IPO - www.upv.cz). A trade mark registration is valid for ten years and the period can be repeatedly extended. The effects of a national trade mark are applicable only to the territory of the Czech Republic. Besides that, trade mark protec-tion effective in the territory of the Czech Republic and some other territories can be acquired on the basis of an international agreement (the Madrid Agreement) or according to the legal rules of the European Union (Regulation on the Community trade mark).

DEFINITION OF NATIONAL TRADE MARKThe Act on Trade Marks (Act No. 441/2003 Coll., as amended) defi nes a trade mark as a sign capable of being represented graphically, par-ticularly in words, including personal names, colours, designs, letters, numerals, the shape of goods or their packaging, provided that such a sign is capable of distinguishing the goods or services of one entity from those of another entity.

SIGNS THAT CANNOT BE PROTECTED AS NATIONAL TRADE MARKSCertain signs shall not be protected, such as those which are devoid of any distinctive character, or those which consist exclusively of signs or indications that may serve, in trade, to designate the kind, quality, quantity, intended purpose or other characteristics of goods and serv-ices, etc. In certain cases (e.g. descriptive designations), protection can be granted if the person submitting the application for a trade mark (trade mark applicant) proves that such a sign has acquired distinctive character in relation to the goods or services of the applicant for which the registration is requested, in consequence of use of the sign in the trade.

HOW TO APPLY FOR A NATIONAL TRADE MARK A national trade mark is acquired by registration in the Register of trade marks maintained by the Industrial Property Offi ce (IPO). Prior use of the sign which constitutes the trade mark is not required as a condition for registration. On the other hand, prior use of an unregis-tered sign by another person may constitute grounds for the refusal of an application for trade mark registration.

REGISTRATION PROCEDURE AT THE IPOThe fi rst step towards the registration of a trade mark in the Register is the submission of an application. The application shall identify the sign that is to be protected as a trade mark, as well as the goods and/or services for which the trade mark is to be registered and protected. As of the date on which the application is fi led, the applicant for a trade mark acquires the right of priority against any third person who later fi les an application for an identical or similar trade mark for identical or similar goods or services. After receiving the application, the IPO conducts a formal examination (examining whether the application satisfi es the formal requirements), and subsequently a substantive examination (examining whether the trade mark is not excluded from protection for reasons enumerated in the law).

PRINCIPLES OF TRADE MARK REGISTRATION IN THE CZECH REPUBLIC

OPPOSITION AND OBSERVATIONS OF THIRD PERSONS AGAINST REGISTRATION

After the examinations have been conducted, the application is published in the IPO Offi cial Journal. Within next three months, persons enumerated in the law (especially proprietors of rights to intangible assets) may fi le opposition to the registration of the sign being ap-plied for as a trade mark in the Register. Besides that, the law stipulates the right of any person to make observations, at any time before the registration, that there is a lawful reason for which the trade mark is excluded from registration in the Register (besides the reasons of opposition). If no opposition or observa-tions are fi led, or if they are unsuccess-ful, the IPO registers the trade mark in the Register.

RIGHTS OF TRADE MARK PROPRIETORS By the registration of a trade mark in the Register, the proprietor acquires the exclusive right to use the trade mark in relation to the goods or services covered by the trade mark. The proprietor of the trade mark may request court protection in a civil action against anyone who uses it during the course of trade, without the proprietor’s consent, any identical sign for identical goods or services or, under specifi ed conditions, also protection against the use of identical or similar signs on identical or similar goods or services, and also on those which are not similar.Within such an action, the proprietor of a trade mark has the right to apply to the court for an order prohibiting the infringement of trade mark rights, demand that the infringement be remedied, and may also claim fi nancial satisfaction such as damages. Besides civil action, the proprietor of a trade mark may also seek protection under the rules of administrative law (customs proceedings, consumer protection, etc.) or criminal law.

CONDITION OF PROPER USE OF TRADE MARKS

The right to submit a trade mark ap-plication is no longer limited to en-trepreneurs whose object of business includes products or services for which the registration of a sign as a trade mark is being sought. Generally, any natural or legal person is thus entitled to apply for a trade mark. However, a registered trade mark must be put to use within fi ve years following the registration. If the proprietor does not start using the trade mark within fi ve years of its registration, or if such use of a trade mark is subsequently suspended for an uninterrupted period of fi ve years, the IPO shall revoke it upon the request of a third person.

DURATION OF PROTECTION, TRANSFER, LICENCE

Protection lasts for a period of ten years from the date of fi ling the application. At the request of the proprietor, the trade mark registration can be renewed repeatedly, always for a period of ten years. The duration of trade mark protection is thus not limited. A trade mark, or a trade mark application, may be transferred (independently from an undertaking) to a third person, in respect of all the goods or services for which it is registered, or only some of them. The right to use a trade mark may be licensed by means of a written licence agreement, again for all or some of the services for which the trade mark is reg-istered. Both the transfer and the licence agreement become effective against third persons upon entry in the Register.

EXTINCTION OF TRADE MARKA trade mark becomes extinct when the period covered by its registration expires or the proprietor surrenders his/her rights to it. In some cases (the reasons are completely enumerated by law), the IPO can revoke a trade mark or de-clare it invalid. Reasons for such action include cases where the trade mark has not been properly used for the period stipulated by law, has become the com-mon name for the products and services, after registration has become liable to mislead the public (trade mark revoca-

tion), or the existence of reasons for which opposition or observations against the registration of a trade mark may be fi led within registration proceedings (declaration of invalidity of a trade mark).

INTERNATIONAL PERSPECTIVEBesides protection on the basis of national trade marks, protection for the Czech Republic and other territories can be acquired also on the basis of an international application within the meaning of the Madrid Agreement concerning the International Registration of Marks or of the Protocol to the Madrid Agreement. On the basis of one internation-al application, the applicant can thus seek protection in more countries of his/her choice than one which are parties to the agreement. As of the day of the Czech Republic’s accession to the EU in 2004, trade marks can also be protected under the terms stipulated in the Council Regula-tion (EC) on the Community trade mark as a Community trade mark effective throughout the European Union.

J A N A B U R Š Í KO VÁ , Lawyer

PRK Partners s.r.o. advokátní kancelář

e-mail: jana.bursikova@prkpartners.com

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TThe year 2009 means for the Czech Republic the closing of the fi rst Operational Programmes (in the case of the CR and 9 other countries which acceded to the EU in 2004, these are Operational Programmes approved for the shortened period of 2004 - 2006, with the possi-bility to draw on the allocated resources up to the end of 2008, and exceptionally the beginning of 2009). At the same time, it also means the need for an accelerated drawing upon a ten times higher volume of resources that are available for the new programme period 2007-2013. It is all the more important to ensure a correct and effective use of these extraordinary resources from the European Union budget because the Czech Republic, too, faces the impact of the worldwide fi nancial crisis and the EU structural funds can be a means to re-start the slowing economic development in the country.

FAVOURABLE RESULTS IN THE USE OF FUNDS For the programme period which is coming to an end, approx. EUR 2.63 billion were allocated from the EU budget to the Czech Repub-lic. Not only will the money be fully used (including the provided national resources), but the objectives of the approved projects, defined in the monitoring indicators, will be fulfilled as well. This is also true about the Operational Programme Industry and Enter-prise, for which a total of EUR 260.8 million was allocated from the European Regional Development Fund, so that, combined with the national resources, a total of EUR 347.8 million was available to entrepreneurs in the country. Not all the enterprises were fully Czech owned, because all entrepreneurs authorised to do business in the Czech Republic’s territory were eligible for allocations from the funds. In terms of implementation, their projects could be targeted at all the regions of the CR except the capital city of Prague (where a separate Single Programming Document for Objective 2 was implemented). The applicants for grants included a number of enterprises with foreign capital whose links with foreign parent companies were often apparent from their business names. Resources from the Operational Programme Industry and En-terprise were basically divided evenly between indirect grants in support of infrastructure projects the results of which were used by a greater number of entities (these included the programmes Prosperity, Real Estate, Training Centres, and Clusters), and programmes aimed at direct support for development projects of individual companies (especially small and medium-sized ones), whether in the form of grants or soft loans. The support was pro-vided to more than 3 600 projects.The European resources helped to build new science and technol-ogy parks at universities, business incubators, centres for technol-ogy transfer and innovation. Several tens of business zones and industrial complexes – often owned by municipalities – have been established or regenerated. The development of requested arti-san skills was promoted by support for the construction of new regional or enterprise training centres. Support from the structural

The Czech Republic ranks among European Union member states where wide possibilities are still open for the use of European Funds, which are designated to reduce economic and social differences between regions, within the framework of the application of the European Cohesion Policy.

COMPANIES SUCCESSFULLY USE EUROPEAN FUNDS

funds helped to establish 12 new clusters. Hundreds of small and medium-sized firms received grants for the purchase of modern technolo-gies, for better marketing of their products in international markets, for steps aimed at improving energy efficiency of production or increasing the use of renewable energy sources. Over 1 500 small and medium-sized enterprises obtained advantageous repayable loans helping to start and develop enterprise in less prosperous regions. However, the greatest value added was brought by grants provided to the implementation of innovations, usually based on the companies’ own research and development in the top branches of Czech industry, including biotechnology and nanotechnology.

NEW OPPORTUNITIES FOR ENTREPRENEURS

After demanding negotiations with the European Commission, the Czech Re-public has been allocated financial re- P

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Allocations from the new Operational Programme are targeted rather at innovation projects including patenting, companies’ own research and development activities, new programmes aimed at the further development of information and communication technologies in companies. However, successful programmes of the past period focused on the acquisition of new technologies, on reducing the energy intensity of production and on the use of al-ternative energy sources, on the promotion of marketing services, including greater support for the participation of Czech entrepre-neurs in trade fairs and exhibitions abroad, are not abandoned either. A large part of the resources is designated for infrastructure projects aimed mainly at a rapid application of new scientific and research findings in production, where a strong synergy exists with the Operational Programme Research and Development for Innovations, being implemented under the aegis of the Ministry of Education, Youth, and Sport. With regard to the financial crisis, a large part of the resources is earmarked also for new financial in-struments, including a guarantee fund, and the Ministry of Indus-try and Trade endeavours to distribute as soon as possible funds earmarked for quality projects that, however, could be gradually released until 2013.

BŘETISLAV GRÉGR

Ministry of Industry and Trade

e-mail: gregr@mpo.cz

www.mpo.cz

The 2008 CNB average exchange rate of 1 EUR = 24.94 CZK has been used to

calculate the EUR amounts

sources from the EU Structural Funds amounting to approx. EUR 26.7 billion for the new 2007-2013 programme period. Within the Operational Pro-gramme Enterprise and Innovations, the Ministry of Industry and Trade can distribute more than EUR 3.5 billion (EUR 3.04 billion from the European Regional Development Fund and EUR 0.54 billion from national co-funding resources), through the CzechInvest implementation agency. 15 support programmes have been launched with separate calls for proposals within the Operational Programme. As of the end of 2008, almost 1 500 grants exceed-ing a total of CZK 7 billion (EUR 0.28 billion) were committed and the first 24 successful projects worth almost CZK 39 million (EUR 1.56 million) were already paid, and more than 200 soft loans and 1 300 bank guarantees were provided, and this situation shows that entrepreneurs are highly interested in this new Operational Pro-gramme as well.

CApproach directives. These areas are thus fully harmonised with EC law. This is an assurance for manufactur-ers that products which comply with the requirements of the respective EC directive will not meet barriers in the Czech Republic, and vice versa. The basis for this are the words “placing products on the market“, which mean at present the market of the Euro-pean Union, because the term Czech market no longer exists. Thus, the specified products already marketed in the EU are considered as products that have been placed on the market in the Czech Republic as well, and no duplicate obligations are thus stipu-lated for the sale of the products in the Czech Republic. Changes in this legal situation occur in the Czech Republic almost exclu-sively by the introduction of new government orders or amendments to orders already in force. They repre-sent mostly the transposition of EC directives or amendments to them

CONFORMITY ASSESSMENT OF SPECIFIED PRODUCTS

CURRENT SITUATION IN THE HARMONISED AREAConformity assessment of specified products in the Czech Republic is governed by legal rules that have not changed substantially since the country’s accession to the European Union. The legal rules are fully compatible with EC law and allow the free movement of goods in the EU single market.The legal rules are based on Act No. 22/1997 Coll., on Technical Requirements for Products and Amendment of Certain Acts, as amended. Of crucial importance for placing products on the mar-ket is section 13, which deals with the duties of manufacturers and importers. In conformity with EC law, this Act provides a general definition of manufacturers placing specified products on the mar-ket, i.e. for example products falling under the EC directives that have been issued on the basis of the so-called New Approach. For the implementation of the Act, the government has issued 33 orders setting the rules for the conformity assessment of the par-ticular groups of products, and other details concerning the mark-ing of products and the conformity assessment area in general, including procedures in providing information in the area of tech-nical regulations, technical documents, and technical standards. Out of the above mentioned number, 27 orders implement the New

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into Czech law. The following changes occurred in this area in 2008:

Two government orders were issued and

are to come into effect

on 29 December 2009:

� Government Order No. 176/2008 Coll. on Technical Requirements for Machinery (2006/42/EC)

� Government Order No. 142/2008 Coll., amending Government Order No. 27/2003 Coll., which sets out technical requirements for lifts, as amended by Government Order No. 127/2004 Coll. (95/16/EC, 2006/42/EC).

SPECIFIC CZECH LEGAL RULESThe information above aplies to harmonised rules. In the non-harmo-nised area, two government orders are in effect. One is Government

Order No. 173/1997 Coll., which lists selected products that are subject to conformity assessment, as later amended. This order concerns a relatively small number of products, such as amuse-ments which are operated with mobile stands, fire extinguishers, etc. The other regulation is Government Order No. 163/2002 Coll., which lays down technical requirements for selected construction products, as amended by Government Order No. 312/2005 Coll. This regulation concerns only products which do not fall under Government Order No. 190/2002 Coll., where conformity assess-ment forms the basis for the CE marking. These are cases where harmonised standards or a European Technical Approval have not been issued with the relevant directive - government order.Both government orders stipulate the obligations of Czech manu-facturers or importers, i.e. entities that import products from countries which are not members of the European Union. The two government orders are not applied to products “lawfully marketed” in a European Union member state, provided the conditions stipulated in section 13b of Act No. 22/1997 Coll., on Technical Requirements for Products and Amendment of Certain Acts, as amended, have been complied with. This means that the two government orders are not applied to products that have been manufactured or marketed in a member state of the European Union, or have originated in a member state of the European Free Trade Association which is simultaneously a party to the European Economic Area, provided this product conforms to the regulations (documents) described in the above mentioned legal act.

PROSPECTIVE CHANGESWithin the European Union, three documents have been prepared which represent profound changes in the area of conformity as-sessment and marketing of products.� Regulation (EC) No. 765/2008 of the European Parliament and the

Council of 9 July 2008, setting out the requirements for ac-creditation and market surveillance relating to the marketing of products and repealing Regulation (EEC) No. 339/93A

� Decision No. 768/2008/EC of the Euro pean Parliament and the Council of 9 July 2008 on a common framework for the marketing of products, and repealing Council Decision 93/465/EEC

� Regulation (EC) No. 764/2008 of the European Parliament and the

Council of 9 July 2008, laying down procedures related to the ap-plication of certain national technical rules to products lawfully marketed in another member state, and repealing Decision No 3052/95/EC

The legal acts were published in the Czech version in the Offi-cial Journal of the EU on 13 August 2008. They mean profound changes in the general attitude to the areas concerned, and another important step towards overall harmonisation. The most important document in this area to be debated on the European level during 2009 appears to be the proposal for a Regulation of the European Parliament and the Council laying down harmonised conditions for the marketing of construction products. However, it is not expected to become effective in 2009.

VOJTĚCH PETŘÍK

Czech Office for Standards, Metrology, and Testing

e-mail: petrik@unmz.cz

www.unmz.cz

PPRINCIPLES OF SOCIAL SECURITY AGREEMENTS

Social security agreements respect the sovereignty of national social security schemes, and only lay down clear rules to define which particular law will apply to a specific situation. The aim of this regulation is to eliminate potential collisions of different legal systems that may lead to the restriction or elimination of entitle-ments for reasons of citizenship, place of residence, or a shorter period of insurance in a particular country.

APPROACHES DIFFERThe range of the rights ensured by these agreements differs ac-cording to the approaches of the foreign partners. The Czech Republic always strives to cover the broadest possible range of matters, including medical care. For the majority of European countries, however, the participation of foreign persons in the health care system is problematic, to put it mildly, as these coun-tries limit their agreements to “totalising agreements“, which allow only the aggregation of the periods of insurance. This en-ables the insured person to draw partial benefits from the country concerned even for a shorter period of insurance than stipulated by the law. The absence of a health insurance arrangement is a problem, as pension and sickness insurance only in one coun-try leaves the possibility of dual or, on the contrary, no health insurance. The totalising approach is typical for our agreements with overseas countries. Health insurance is not arranged in older agreements – with Canada, Quebec, and Chile, or the new ones – with the USA1), South Korea2), Australia3) and India4), although it is an important factor when the possibility of working abroad is considered. Unique among the “overseas” agreements is the Czech-Japanese agreement. Some 200 Japanese companies operating in the Czech Republic have almost 44 000 employees, and so it is not surprising that the Japanese are striving for an agreement to define rules for their workers’ participation in insurance, including health insur-ance, acknowledgement of the years worked, and export of pension to the country of residence. A breakthrough in a taboo came during negotiations of the agreement. The Japanese party showed enormous interest in having the fam-ily members of Japanese workers living with them in the Czech Republic included in the Czech public health insurance system. The Czech party accepted the request on condition that reciprocity would be ensured in Japanese law directly.

COORDINATION WITHIN EUOn the day the Czech Republic acceded to the European Union, bi-lateral agreements with EU countries became subordinate to Regu-lation No. 1408/71, which co-ordinates the provision of allowances

SOCIAL SECURITY IN CONTEXT OF INTERNATIONAL AGREEMENTSThe Czech Republic is a party to more than 30 valid international agreements on social security. The character of these agreements has been developing signifi cantly since 1948, when the fi rst post-war agreements were concluded.

in sickness, maternity, retirement, industrial accidents and occupational diseases, family allowances, and un-employment benefits.Co-ordination within the EU goes much further than bilateral agree-ments, and allows for the full extent of health care in another member country, and payment for provided health care by the competent insti-tutions directly. Besides migrating workers, the mentioned Regulation also applies to self-employed per-sons, pensioners, family members of workers and pensioners, unemployed persons, and students. The Regula-tion is also effective in countries of the European Economic Area and Switzerland, and as of 2003 applies to nationals of third countries legally residing in a member country and migrating between the EU countries.

PREVENTION OF SOCIAL SYSTEM ABUSE

New are agreements designed to im-prove the co-operation of institutions in the prevention of abuse of social benefits fraud and error and fail-ure to pay insurance premium. It is a frequent practice that a person finds a job in another country than the country of residence. Unfortunately, it is equally frequent that the person does not report the fact and remains registered at the labour exchange office in the country of residence and continues to draw unemployment benefits or other social allowances. The country of residence has only a slight chance to learn about gainful activity abroad, as generally binding norms for these situations are non-existent between countries.Operative exchange of information is of crucial importance, and the only instruments making this possible at present are bilateral agreements on co-operation. The Czech Republic works on them intensively – in the summer of 2008, it signed an agree-

ment on the prevention of the ben-efits fraud with France, a Memoran-dum with the Netherlands has been in force since 1 February 2008, an agreement with Germany is nearing completion, and future agreements with other neighbouring countries should eliminate the risk of the abuse of the Czech scheme.

CONSEQUENCES OF CHANGES IN SICKNESS INSURANCE

The much debated change in the sickness benefit scheme – the in-troduction of wage compensation by the employer from the 4th day of sickness – will be reflected in the entitlements of migrating workers and the duties of employers, both within the EU and in other countries which are parties to agreements. Wage compensation in sickness is a social security benefit and as such falls under the rules of co-ordina-tion, especially the rule of a single applicable legislation, which affects insurance premium payment as well as benefit provision. In view of this, the employer must provide wage compensation in accordance with the legislation of the competent country even if it is not in harmony with the law by which the labour contract is guided, or if the compensation is less advantageous for the employee. The directly applicable regulation just as an international agreement has a su-perior legal force than the national law, and when it is at variance with it, the relevant provisions of the national regulation are not used.

PETRA ŘÍHOVÁ

Ministry of Labour and Social Affairs

www.mpsv.cz

ANETA WOLFOVÁ

Ministry of Health

www.mzcr.cz

1) valid as of 1 January 20092) valid as of 1 November 20083) is subject of intrastate assessment4) has been approved by the Czech Government

and is ready to be signed

TThe world financial and economic crisis had an impact on the Czech labour market. Its reaction to slower economic growth usually comes later so that unemployment increases are yet to be expected. In contrast to most EU countries, the estimate of the Czech economic development does not count with stagnation or re-cession, but only with limited growth in GDP; even a crisis variety counts with growth ranging around 2%.The unemployment rate in the Czech Republic was 6% at the end of 2008 (as it was on 31 December 2007), but the number of avail-able jobs dropped to 91 189. Moreover, the limited production in some sectors (especially the manufacturing and building indus-tries) is causing redundancies. The total number of jobs reported by employers to labour exchanges as being lost at the end of 2008 was 15 480.

CZECH PRESIDENC Y OF EU COUNCILThe priorities in the area of employment and social affairs listed by the Czech Republic for its Presidency of the EU Council in the first half of 2009 include emphasis on free movement of workforce in the EU as a boon to the single European market and competi-tiveness of the whole Union. For this reason, the Czech Republic will strive for the elimination of the provisional measures that limit free movement of workforce, which are still being applied by several EU countries. The other priorities include full use of the labour force potential, increase in its professional and geographic mobility, bigger flexibility of the EU labour market, attention to the employment policy approach to family care of children, provi-sion of social services as an instrument of active social inclusion, and the prevention of social exclusion.

WORK ABROAD FOR CZECH CITIZENSNew labour markets are being gradually opened to citizens of the Czech Republic; the Czech labour market is fully open to all citi-zens of the EU/EEA countries and Switzerland, and new legislation includes measures which simplify the entry of selected workers from third countries. Citizens of the Czech Republic who seek work abroad and employ-ers who seek workers for their enterprises can use, free of charge, the European Employment Service (EURES), which at this time covers 31 EU/EEA countries and Switzerland. A network of almost 700 erudite EURES consultants provides clients with information about vacant jobs in Europe, the living and working conditions in the particular country, and valid legislation.Clients use this system to gain information before they go abroad, and before their planned return to the Czech labour market; more at www.eures.europa.eu, and www.eures.cz.

FOREIGN WORKFORCEStatistics showed that a total of 290 103 foreign nationals were employed in the Czech Republic in November 2008. Of these, 145 785 were citizens of the EU/EEA countries and Switzer land, and the rest came from third countries. Labour offices monitored the situation throughout the country at the end of last year, and found that the redundancies announced by employers would hit severely foreign persons, a large percent-

LABOUR MARKET CHANGES

age of whom would be employees of employment agencies. In order to forestall the need to address the social problems which could emerge in this respect, the Czech Republic is ready for a dia logue and co-operation with third countries in matters of the organis ation of legal migration, pre-vention of illegal migration, and the return of migrants to their countries of origin.To simplify the entry of foreign workers to the Czech labour mar-ket, the Czech Republic introduced, as of 1 January 2009, the system of “Green Card”, a dual document which includes work permit and residence permit. Applicants for the card can be nationals of 12 countries. Green card is granted by the Ministry of the Interior of the Czech Republic. The system is designed to fill up shortages on the Czech labour market. The offer of vacancies for green card holders is published on the websites of the Min-istry of Labour and Social Affairs.The rules for permits issued by labour offices remain in place concurrently in a simplified form. As of 1 January 2009, application for a work permit can be submitted without the em-ployer needing prior consent from the competent labour office.

VĚRA KOLMEROVÁ

Ministry of Labour and Social Affairs

e-mail: vera.kolmerova@mpsv.cz

www.mpsv.cz

MORE INFORMATION AT:www.mpsv.czwww.eures.europa.euwww.eures.czwww.mvcr.cz

TThe common feature of these two kinds of payment is that they are paid to employees according to the complexity, responsibility, and strenuousness of the work, strenuousness of the working condi-tions, performance, and work results. In both cases the principle of equal wages for the same work and for work of the same value must be respected. This principle does not only transpose the re-quirements of EU legislation in this area (Article 141 of EC Treaty and Directive 2006/54/EC of the European Parliament and of the Council of 5 July 2006 on the implementation of the principle of equal opportunities and equal treatment of men and women in matters of employment and occupation) into Czech law, but it is a general rule applied to the work of individual employees in ac-cordance with the demanding character of the work (Section 109 (4) and Section 110 of the Labour Code).The difference between the wage and the salary rests in the nature of payers and the character of legislation. Salaries are paid by em-ployers listed in Section 109 (3) (state authorities, State funds, re-gional and communal authorities and other employers in the area of public services and administration), while wages are paid by all other employers to their employees working under an employ-ment contract, mainly employers who are doing business in the Czech Republic, irrespective of whether they are natural persons, trade companies or other juristic persons. The legislation regulat-ing salaries is very strict and does not give much elbow room for deviation from set rules and it basically restricts the possibility of employers and employees of bargaining about salaries (the space for collective bargaining is strictly limited and individual negotia-tions on salaries are completely excluded). On the other hand, wage negotiations between employees working under an employ-ment contract and their employer are fully liberalised.

MAIN PRINCIPLES GOVERNING THE PAYMENT OF WAGESAccording to the Labour Code (Section 109(1)(2)(4) to Section 121), the wage is money (also payment in kind within the limits of Section 119) paid by the employer to the employee for his/her work. The basis for determining the amount of wages is the con-

WAGES AND SALARIES IN THE CZECH REPUBLIC

tract principle. Wages are agreed in the collective contract, the employ-ment contract or other (unnamed) contracts (Section 113 (1) of the La-bour Code). The employer, however, may stipulate the wage unilaterally to the employees in an internal regula-tion (Section 305), or determine it by a wage assessment (Section 113 (4) of the Labour Code).The Labour Code guarantees employ-ees the right to receive wages for the work they have done. Attached to this right is the employer’s obligation to pay the employees wages according to the complexity, responsibility, and strenuousness of the work, strenu-ousness of the working conditions, performance and work results. As part of the obligatory assessment of the strenuousness of working condi-tions in determining the amount of wages, the Labour Code imposes upon employers the obligation to compen-sate employees for overtime work (Section 114), night work (Section 116), work on holidays (Section 115), on Saturdays or Sundays (Section 118) and in a worsened working environ-ment (Section 117). The Labour Code fixes the amount of the said wage compensations by setting a minimum limit; its specific amount depends on the internal regulation of wages by individual employers.Wage legislation does not restrict the parties to the employment relationship by laying down a binding form of wages (mode of remuneration), nor defi ne the upper limits of the amount of wages. Government Regulation No. 567/2006 Coll. on minimum wages, on the lowest levels of guaranteed wages, on the defi -nition of the worsened working environ-ment and the amount of wage supple-ments for work in a worsened working environment, amended by Government Regulation No. 249/2007, however, sets limits in two different ways, below which the employee’s wage may not drop. These lowest wage categories are the minimum wage and the lowest level of the guaranteed wage.

LADISLAV TRYLČ

Ministry of Labour and Social Affairs

e-mail: ladislav.trylc@mpsv.cz

www.mpsv.cz

CZK have been converted into EUR by the

average exchange rate of the Czech National

Bank for 2008: EUR 1=CZK 24.94

Employee remuneration is regulated comprehensively by the Labour Code (Act No. 262/2006 Coll., Labour Code, as amended). For work carried out under an employment contract, employees are entitled to wages or salaries.

SLOWER GROWTH OF WAGESAt the end of 2008, wages in the Czech Republic began to slow down their growth, reflecting the

global recession. In spite of this, the shortage of specialists with years of practice is continuing.

Average monthly wages (in the 3rd quarter of 2008) amounted to CZK 23 144 (EUR 928). Minimum

wages (the lowest wages employers are obliged to pay their employees) in 2008 were at the level of

CZK 8 000 (EUR 321) a month, or CZK 48.10 (EUR 1.93) an hour.

EMPLOYMENT RELATIONSHIPUsually, the employment relationship is agreed for an indeterminate period of time, unless its duration

was explicitly stated in the employment contract. In the Czech Republic, the trial period is three months.

During that time, both the employer and the employee may cancel the employment relationship in

writing for any reason or without giving reason. The employment relationship may be terminated by

agreement, by giving notice, by immediate cancellation or by cancellation during the trial period; the

employment relationship agreed for a determinate period of time ends with the lapse of the agreed time.

TThe internationalisation of services, a process tending towards broad-ening the use of services in international trade and the strengthening of their position as an important element of international trade, has con-tinued in the past two years, as shown by statistics. Trade in services showed higher year-on-year increases in comparison to the growth of trade in goods on world markets, with the share of services in the world trade turnover also following a rising trend.The favourable growth trends and the volume and structure of services rendered in the Czech Republic, as well as those exported to other countries, are evidence of the fact that services bring also other benefits, in addition to economic advantages. The volume of production and export of services is becoming an indicator of the level of a country’s development, where the level of economic development is projected into social and environmental issues. It is therefore not accidental that in the past year the “services sec-tor” was referred to at various international forums, as well as by a large number of important world powers, as a forward-looking branch, if not a key one.

WITH ITS GDP STRUCTURE, THE CZECH REPUBLIC IS CLOSE TO THE LEVEL OF THE WORLD’S MOST ADVANCED ECONOMIES

An interesting process has taken place in the Czech Republic during the past 10 years, when the development initiated by economic and social changes, technical progress, and the emphasis placed on environmen-tally friendly behaviour became refl ected in the changing structure of the economic environment. Under the infl uence of those changes, the Czech Republic’s economic structure is coming close to that of the most advanced countries.

FREE MOVEMENT OF SERVICESThe growing importance of the serv-ices sector is clearly in evidence in the country’s economy. It can be easily traced in the percentage growth of the market service price index, which in the period from 1993 to 2007 was showing a steadily rising trend, with the exception of the year-on-year decline in 2005 in comparison with 2004; in the last year it even showed a double growth rate in comparison with the first year of the period under review1). The services sector com-prises more than 35% of businesses and helps significantly towards total employment. Employment in services, with the exception of the year 2004, when it dropped by 1%, has been grow-ing steadily.The highest revenues classifi ed by sector are shown by the sub-sectors “other business services”, refuse disposal services, computer and related services, health-related and social services, re-creation, cultural and sporting services, and real-estate services. P

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It can be seen from what has been said here that even if, for the time being, the economic structure of the Czech Republic does not fully correspond to that of the most advanced countries, the share of its services sector of total GDP is steadily in-creasing. This favourable trend is greatly supported by the capital of Prague, which holds an exceptional position as regards the share of the tertiary sector of gross added value. In Prague, the services sector in 2007 accounted for more than 82% of total newly created added value in terms of gross added value created in the tertiary sector, so that Prague’s share exceeds the national level by 23 percent-age points. In the next few years, it will be a chal-lenge for the Czech Republic not only to increase the share of the services sector of total GDP and improve its branch structure, but also to bring services farther away from the centre to more remote regions.

WHAT DOES THE BALANCE OF PAYMENTS SAY?

In 2007, the Czech Republic’s trade in services was worth CZK 627 520 million (EUR 25 161.19 million), of which ex-ports accounted for approximately 54%. Since 2001, the country’s exports of services have increased by approx. 28.5%. This value is relatively optimis-tic, but in comparison with world fi gures the Czech Republic is lagging behind world trends, which are showing con-tinuously growing values. In the period under review, the export of services worldwide increased by approximately 85%. This shows that in Czech foreign trade, the export of services does not hold such an important position as in other countries, and in comparison with world trends the Czech Republic is lagging behind by a large margin. Nevertheless, a positive fact is that the value of Czech service exports has been growing in recent years, and, which is important, it has been growing at a relatively stable rate.Simultaneously, Czech Republic is lag-ging behind world trends as regards the share of its service exports of total

exports (goods and services). In 2007, services accounted for 12.1% of the country’s total exports in comparison with 19% on the global scale (in 1980, the value was 16%).

TERRITORIAL DIVERSIFICATION OF TRADE IN SERVICESThe territorial diversifi cation of service exports is similar to the goods export structure. In both cases, the dominant territory for Czech exports is the EU, which accounts for 80% of Czech service exports. Ranking next are the other European countries, to which 11% of the to-tal value of services is exported, followed by America with 6% and Asia with 3%. The shares of Africa and Australia are negligible. The 10 most important partners of the Czech Republic in the export of services are the following countries (in that order): Germany, Slovakia, the United Kingdom, Russia, the Netherlands, the USA, France, Aus-tria, Italy, and Belgium.As shown above, the services sector is greatly dependent for its exports on the markets of the European Union. This trend corre-sponds to the situation in goods exports, where exports to EU states account for 85% of the Czech Republic’s total goods exports. As the export of services is often accompanied by goods exports, it may be considered optimistic that the share of service exports to EU states is 5% lower than goods exports, which is evidence of growing trends towards territorial diversification in the export of services. Never-theless, although the export of services is less dependent on the EU market than the export of goods, it is desirable to promote co-oper-ation with third countries still further.However, having in mind the liberalisation of services on the EU internal market and the currently very uncertain future of multilateral liberalisation, it is to be expected that the share of exports to EU states will continue to grow.

BRANCH STRUCTURE OF TRADE IN SERVICESWorld trade in services has been growing at a relatively high rate in the past 15 years. Its growth has been accompanied by a change of the structure of traded services to the benefit of “other services”, whose share of total exports currently exceeds 50%. The significance of tourism and transport in international trade, on the other hand, is declining.If we compare this general trend in world exports of services with the situation in the Czech Republic, we shall see that service export trends in the Czech Republic are not that unequivocal. In 2007, the share of “other services” in total exports was 35%. The structure of exports is still dominated by tourism, with a share of 39%, with transport ac-counting for 30%. As the results mentioned above show, it may be said that the Czech Republic has not as yet managed to start off the trend which advanced countries have followed in their service trading for a number of years. Czech providers of services with a higher added value have not so far set a fi rm foot on foreign markets.A positive feature is the fact that the sector is steadily showing consid-erable growth potential, which is the basic prerequisite of the further expansion of service exports to third markets.

M U LT I L AT E R A L T R A D E P O L I C Y D E PA R T M E N T

Ministry of Industry and Trade

www.mpo.cz

The 2008 average exchange rate of the Czech National Bank was used for conversion of

amounts into EUR: EUR 1 = CZK 24.94

1) Market services price index (%) year 1993 = 100.0; 1997 = 122.9; 1998 = 167;

1999 = 173. 8; 2000 =179.4; 2001= 186.4; 2002 = 192.4; 2003= 195.5; 2004 = 200.0;

2005 = 199.2; 2006 = 205.8; 2007 = 209.

TThe banking crisis in 2008 bypassed the Czech Republic; no bank has gone bankrupt and according to the survey of GfK polling agency, at the end of the year more than half of the population showed no worry about their savings, and only less than 6% de-positors took action to secure their money. The onset of economic recession, however, was quite fierce at the end of the year and was also felt in logistics. After all, in the case of a small, open, and strongly export-oriented economy this could not be otherwise. According to the presidents of the Confederation of Industry of the Czech Republic and the Economic Chamber and according to bank analysts, GDP in 2009 will grow at a rate of approximately 1.5% and unemployment will rise to 7%. This is accompanied by declin-ing confidence in the economy – according to data released by the Czech Statistical Office, confidence among businessmen declined by 31% on a year-on-year basis and among consumers by only 11.7%, but in view of the starting process of dismissals, 65% of peo-ple are wary about their future living standards, especially those in medium-sized industrial towns. The first signs of economic revival are to be expected at the beginning of 2010.In a brief survey, participants in the LOG-IN 2008 forum held in Prague last November (450 managers of industrial, trading, transport, forwarding, and logistic companies) singled out the decline in demand (48% of respondents), insecure future (24%), and the CZK exchange rate (17%) as the main current problems. Linked with these problems are rising interest rates and reduced availability of business credits. Despite the pessimistic forecasts for 2009, 45% of the responding participants expected better economic results for their companies than in 2008 and only 19% of them feared worse results, while 42% believed that their companies would somehow survive the recession.

IMPACT ON THE CAR INDUSTRYThe automotive industry was among the first to be hit by the prob-lems mentioned above. Its annual loss is estimated in the order of CZK billions. The automotive industry is the leader of the entire Czech economy, whose development cost the previous govern-ments immense effort – of total investment incentives granted until the year 2008, 44% (CZK 278 billion – EUR 11.15 billion of the total amount of CZK 637 billion – EUR billion 25.54) were accorded for 243 projects to benefit final automobile manufactur-ers and their suppliers. According to a survey conducted by the Automotive Industry Association (SAP), out of 160 companies op-erating in the sector, 110 have dismissed or will dismiss workers. More than 13 500 people in the branch will lose their jobs, includ-ing about 3 100 employed by final manufacturers, mainly agency employees (about 800 regular employees); supplier companies will dismiss 10 430 people (6 900 regular employees). According to expectations, small and medium-sized export oriented companies with narrow product ranges will be hit most heavily by the econ-omic recession in the Czech Republic.The presidents of the Transport Union of the Czech Republic and the Czech Logistics Association, and the chairman of the Associa-tion of Forwarding and Logistics of the Czech Republic are draw-ing attention to the limited capability of small and medium-sized companies to re-structure operatively their production, and to the

ECONOMIC RECESSION AND LOGISTICS IN THE CZECH REPUBLIC: SLOWDOWN OR CHALLENGE?

impact this fact has on the declining demand for transport and warehous-ing services experienced by transport, forwarding, and logistic companies, mainly the medium-sized operators of these services. They have become the victim of the long-term rising of fuel prices, growing pressure for cost reduction on the part of customers, the growing strength of the Czech currency and its fluctuation, and the broadening bans on lorry traffic. Road haulers have not found adequate reac-tion to unfair competition and dump-ing prices, and weak state supervision does not help the situation in any way, either.

DECLINE IN SPECULATIVE CONSTRUCTION

The construction of industrial and logistic premises experienced an unprecedented, even exponential boom in recent years. According to Cushman & Wakefield, CB Richard Ellis, DTZ and King Sturge, demand for new warehouses nearly doubled at the end of the first quarter of 2008, when more than 426 000 sq. m of warehouses and logistic centres were rented. The total area was 2.7 million sq. m. In the third quarter of 2008, developers placed on the market only 8% more warehousing facilities in terms of area than in the second quar-ter of the same year, which is 22% less in comparison with the same period in 2007, but even so the total area was 3.1 million sq. m. Realised demand was 20% lower than in the previ-ous quarter and the lower demand resulted in a higher vacancy rate, which in the course of the first half of the year rose from 11% to 14.3% and in the fourth quarter to 16.7%. Prime rents in warehousing facilities ranged from EUR 4/sq. m in West Bohemia to EUR 5.25/sq. m in Prague and its environs (the average for the

Czech Republic was EUR 4.25/sq. m). Construction starts, except traditional localities, such as Prague and its environs, Plzeň, Brno, and Ostrava, where there is already a shortage of land for new construction and also a labour shortage, declined further during 2008. Speculative construc-tion showed a visible downturn, and as a result of lower demand and greater risk of having capital tied in a vacant property, the unwillingness of banks to grant credits for develop-ment projects that are not financially secured from previous years, or do not have a majority tenant guaran-teed, it may stop completely. According to a survey carried out by DHL Express and CzechTrade in Oc-tober 2008, this situation prompted 20% of Czech export companies to limit or postpone their investments in logistics. On the other hand, 11% of exporters are planning to invest larger sums of money in logistics, 48% of whom will stake on deriving profit from lower logistic costs. This is how some 10% of investors want to prepare for a better economic situ-ation in future and 13% of investors believe that the period of economic recession and lower turnover is the best time for essential changes.

SEEKING NEW WAYSRemarkable is the positive approach of Czech logistic managers, observed by Atoz Event, organiser of the LOG-IN 2008 logistic forum, and the Czech Logistics Association, which organ-ised the SpeedChain international logistic conference, to seeking ways of providing services corresponding to the current difficult conditions, as well as new specific services, com-bined with the effort of managers to focus on the optimisation of logistics, an activity often neglected in periods of company expansion.

PETR PERNICA

Head of the Logistics Department,

Faculty of Business Administration

University of Economics

e-mail: pernica@vse.cz

The 2008 average exchange rate of the Czech

National Bank was used for conversion of

amounts into EUR: EUR 1 = CZK 24.94Ph

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