Business Guidebook: How to Succeed in the Czech Republic - Edition 2019 by AFI CZ

Edition 2019

How to Succeed in the Czech Republic

How we help investors? Association for Foreign Investment

Expert support for investors and exporters in all key phases of investment implementation:

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

Site selection advisory

Contact the AFI for more information

Šárka Rudová Association for Foreign Investment Štěpánská 11, 120 00 Prague 2 Czech Republic phone: (+420) 224 911 750 mobile: (+420) 602 686 597 email: sarka.rudova@afi.cz

www.afi.cz

Comprehensive services related to getting established on the market Necessary information from all sectors of the economy („doing business“, analyses) Organisation of investors‘ visits to Czech Republic Personal consultation Mediation of contacts with business partners and other relevant entities on the market Facilitation of contact with the public sector, the academic sphere and science and research organisations Expert support in the area of visas and work permits M&A advisory, target selection

AFI Main Partner

AFI Patron

AFI Supporting Partner

BUSINESS GUIDEBOOK How to Succeed in the Czech Republic Edition 2019

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

Content Forewords

Finance

4 6 8 10

Quick facts about the Czech Republic

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

Get more information about properties

Six main things to do first

1. Establish your business Starting a business | Havel & Partners 2. Introduction to the property market in the Czech Republic Commercial properties | JLL 3. Find out more about the labour market Labour market | Grafton Recruitment 4. Get more information about state aid Finance | KPMG Česká republika 5. Protect your intellectual property rights Intellectual property | WEINHOLD LEGAL 6. Moving to the Czech Republic (housing, education and medical costs) Cost of living in the Czech Republic | TIFRA

Development of industrial zones in the Czech Republic 66 Quality of industrial properties in the Czech Republic | Bilfinger Tebodin Czech Republic, s.r.o. Land development in hands of real estate professional 68 Acquisition of land | Panattoni Czech Republic Development The beauty of brownfields 70 Greenfield vs. brownfield investments | ATELIER TSUNAMI Green light for brownfields in the Moravian-Silesian Region 72 Realization of brownfields | Moravian-Silesian Investment and Development Sustainable construction in the Czech Republic 74 Brownfields and sustainable construction | Linkcity Czech Republic Solid Foundations: The maturing Czech property market offers stability and reliability to tenants 76 Leasing of commercial property | White Star Real Estate

Finance your investment

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

Look into R&D

Digital and innovations - An opportunity for investors Digital Czech | Ministry of Industry and Trade The future of the Czech Republic lies in innovation. Czech research attracts firms to collaboration Research infrastructure | Council for Research Development and Innovation

24 26

32 34

Properties

First steps

Andrej Babiš, Prime Minister of the Czech Republic Kamil Blažek, Chairman, Association for Foreign Investment Martin Tlapa, Deputy Minister of Foreign Affairs Silvana Jirotková, CEO, CzechInvest

R&D

The Czech Republic

How TACR supports science and research Support for R&D investments | Technology Agency of the Czech Republic CzechInvest: Your port of entry for R&D-related investment and more R&D-related investment | CzechInvest Large research infrastructures of the Czech Republic Large research infrastructures | Ministry of Education, Youth and Sports Higher education in the Czech Republic Higher education | Ministry of Education, Youth and Sports

38 40

46 48

Permitting and construction

Czech commercial property market: confidence, stability, potential 80 Introduction to the Czech property market | 108 AGENCY Key considerations for the successful planning and realisation of your business premises in the Czech Republic 82 Business premises | Savills Czech & Slovak Republics The Czech Republic remains attractive for industrial tenants 84 Industrial and warehouse market | P3 Logistic Parks The best office and where to find it in the Czech Republic 86 Office market | COLLIERS Retail on the rebound 88 Retail market | CBRE Valuation of property in the Czech Republic 90 Valuation of property | Fučík & partneři, s.r.o. The future of the facility management: Virtual security and technology 92 Security | Mark2 Corporation Czech a.s.

Find your property

Handle the permit and construction processes

Permitting basics Approval process management | TAKENAKA EUROPE Zone permitting and environmental impact assessments EIA and zoning permits | CTP Invest

96 98

Cost planning: The first step Cost planning | PM Group

Hire people

Human resources

The Czech Republic: Increasing skills in a competitive labour market Labour market | Hays Czech Republic Flexibility for employers Labour law | Konečná & Zacha Being an employer in the Czech Republic Social-security system and payroll accounting | Adecco Why recruitment agencies are superior to social networks Finding management | Advantage Consulting Jobs Employment agencies and recruitment of blue-collar workers in the Czech Republic Finding workers | Hofmann Wizard Understanding shifting motivations as the key to talent management Talent management | REED Manage costs. Invest in talent. How to do both and succeed in today’s environment. HR outsourcing | ManpowerGroup Czech Republic Increased productivity, reduced costs and happier employees Workforce management | Randstad Candidates are passive To be successful, you will need to be active Attracting Talent | GoodCall

Taxes

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

Interested in M&A

M&A

Czech M&A – reaching the international standard M&A-related documentation | PwC Legal Making informed investment decisions Financial and tax due diligence | Deloitte Advisory W&I insurance for M&A deals in the Czech Republic W&I insurance | RENOMIA From preparation to operation Technical due diligence | Gleeds Environmental due diligence – A cornerstone of new acquisitions assessment Environmental due diligence | ENVIROS Finding a trustworthy manager in the Czech Republic Nominee services | VISTRA CZECH REPUBLIC AND SLOVAKIA Sourcing and business partnership CzechInvest

103

145 146

104

Top sectors for investment

106

Automotive 150 CzechInvest Aerospace 150 CzechInvest Advanced engineering 151 CzechInvest Electrical Engineering and Electronics 151 CzechInvest Czech industry has great potential to automate production 152 Česká spořitelna ICT 153 CzechInvest Nanotechnology 154 CzechInvest Life sciences 154 CzechInvest Nuclear power and industry 155 Association of Nuclear Veterans Defence industry 155 Defence and Security Industry Association Transport and infrastructure 156 Kinstellar Business support services 156 CzechInvest Hotel and leisure industry 157 PwC Audit Food sector 157 Ministry of Agriculture Banking 158 Czech Insurance Association Insurance 159 Czech Insurance Association Chemical industry 160 Bilfinger Tebodin Czech Republic, s.r.o. Energy efficiency services 160 ENVIROS

108 110 112 114 116 118 120

123 124 126 128

131 132 134 136 138 140 142 144

Top sectors

Find out more about taxes

CzechLink: The easy way to find a strategic partner CzechInvest Visa support provided to foreign investors CzechInvest

100

149

Dear Readers, Creativity represents one of the core values of the Czech Republic and its people, whose ideas and contributions are firmly embedded in many products around the globe, from cybersecurity software to machine tools; from bio- and nanotechnology to water turbines and the automotive and aircraft industries. The list goes on, as the range of local activities is broad and highly diversified. We greatly appreciate the talents of Czechs who help grow many global brands, as well as the companies that have chosen the Czech Republic as the location of their manufacturing facilities, R&D centres, outsourced operations or as their tax seat.

The Czech Republic has long been able to attract a steadily growing inflow of foreign investments thanks not only to its economic and political stability, but also to its perfect combination of a flexible innovative culture and a highly skilled and educated workforce. With an A1 rating from Moody’s Analytics and an A+ from Fitch Ratings, as well as its 13th-place ranking in the global Sustainable Development Goals Index, the country is an island of political and economic stability at the forefront of the CEE region. In short, the Czech Republic is a unique environment for investors. Building on the above-mentioned foundations, it is this government’s top priority to foster further innovation-driven economic and social growth. The recently approved Innovation Strategy of the Czech Republic 2019-2030 is a crucial part of this effort.

Emphasising closer cooperation between local and foreign experts and between the private and public sectors, the Innovation Strategy promotes locally based enterprises and research initiatives, which in turn have the potential to promote growth and development across the whole Czech economy and society. Within the framework of the Innovation Strategy, we see investments as the perfect opportunity for the introduction of new technologies, as well as for the establishment of stable partnerships between the private sector and R&D facilities, where highly skilled employees can contribute to the advancement of their respective areas of interest while also fulfilling their personal and career goals. Considering the significant contributions already made by the Czech Republic, we especially envisage such development

taking place in the fields of Industry 4.0, artificial intelligence, cybersecurity, advanced materials and advanced engineering. In all of these areas, partnerships between universities, research organisations and medium-sized and large companies have previously proven functional, efficient and reliable. I would like to take the opportunity to draw your attention to – among other forms of support for locally conducted R&D – the tax deduction for research and development expenditures. This deduction reduces the corporate income tax for enterprises conducting research in the Czech Republic and, in conjunction with the recently amended Investment Incentives Act, could make the Czech Republic your best choice for investments in developing new technologies. I truly believe that you will see the Czech Republic as the Country for the Future.

Andrej Babiš

Prime Minister of the Czech Republic

Dear Readers, I have the greatest pleasure of bringing you (already!) the fourth edition of a very special publication: Business Guidebook: How to Succeed in the Czech Republic. The Guidebook presents contributions of leading experts in each of their respective fields in the Czech Republic. Our aim is to showcase the Czech Republic as a destination in Europe that provides the ideal mix of good return on investment, reasonable costs, strong ideas, potential for future development, superb human capital and an enthusiastic working environment, and as a place where it is fun to live. The Association for Foreign Investment (AFI) was established on 1 January 1996 as a non-governmental non-profit organisation focused on supporting foreign direct investments, development of the Czech

business environment, export of investments and cooperation between companies and the research sphere in the Czech Republic. The association’s members are leading international and Czech companies that provide a broad spectrum of services for investors on the Czech market, as well as for Czech investors abroad. Over the past two decades, the AFI’s members have assisted with nearly every major foreign direct investment in the Czech Republic. Our members are leading companies in their sectors and have tremendous experience with providing professional services for foreign investors. In conducting our activities, we closely cooperate with CzechInvest, the Ministry of Industry and Trade, the Ministry of Foreign Affairs and other public and private institutions in the Czech Republic and abroad. Unlike governmental institutions, however, we are able to offer a broader range of services thanks

to the extensive experience of our members. Besides traditionally strong sectors of the Czech economy (e.g. the automotive industry, aerospace, life sciences and ICT), we help investors operating in virtually every field of the economy including energy, defence, financial services and the hospitality industry. I am very pleased that the Association for Foreign Investment is still thriving twenty-three years after its establishment. I believe the fact that a group of renowned companies in the areas of business consulting, legal advisory services, HR, commercial property, design and engineering, IT and relocation services, among other fields, came together with the purpose of cultivating and promoting the local business environment is an exceptional occurrence in today’s world. This endeavour has resulted not only in the establishment and the ongoing existence of the AFI, but also the publication of this

guidebook for investors and businesses. I am convinced that this guidebook will serve as a trustworthy source of information that investors will find useful in their strategic decision-making. Now, why do I believe that the Czech Republic is one of the few ideal places to start investing in the developed world? The country is currently enjoying a favourable period for foreign investment. As a member of the European Union, NATO and other major international organisations, we have established ourselves as the stable heart of Europe with a developed economy and western-style democracy and society. With its transparent business environment and advanced legal system, the Czech Republic is also considered to be the most stable and prosperous country of all the post-communist states. Industry accounts for close to 32% of total gross value added, which makes the Czech Republic the most industrialised

country in the European Union, with the automotive industry remaining the dominant sector here. In 2018, the country’s gross domestic product grew by 3% year on year and unemployment continued to fall. Despite the turbulence that Europe is currently facing, I am not afraid to maintain that, in most of the relevant indicators for investors, the Czech Republic is truly an island of stability in the middle of Europe and is thus a favourable environment for both new foreign investments as well as expansions of companies already operating here. In addition to positive economic indicators, the country’s appeal to investors is bolstered by its strategic location, well-educated and highly skilled workforce, the reputation of Czech engineers and mechanics, and high quality of life. The Czech Republic is simply a very nice place to live, raise and educate your children, spend time with your family and grow your business.

I would also like to highlight the efforts of the current Czech government to improve the Czech business environment by supporting SMEs and start-ups. The government is building up a new tradition that is worth mentioning – since 1989, every Czech government, irrespective of its political composition and rhetoric, has been pro-business and pro-investment. Finally, I would like to thank everyone who played a role in creating this publication, as well as all of the current members and partners of the AFI, CzechInvest and all of the non-governmental organisations that have long collaborated with us and helped us to prepare this publication. We highly value your support. This is the fourth edition of the Business Guidebook. We will welcome your feedback, opinions and suggestions on how to improve it. Please get back to me with any ideas or comments on this guidebook or topics covered or not covered by it.

Kamil Blažek

Chairman, Association for Foreign Investment

Dear Readers, For many years, the Czech Republic has been a safe harbour for your investments in the heart of Europe. It is my pleasure that I can say it still continues to be so. Last year, we celebrated the centennial of the foundation of the Czechoslovak state. That gave us an opportunity to reflect. After World War I, Czechoslovakia was one of the most developed nations not only in Europe, but in the world. We had world-class industry. Our products and the Made in Czechoslovakia label became synonyms for quality and innovation. Since 1989, we have been striving to build on our industrial tradition. We became a fully market- and export-oriented economy. The current state of af-

fairs is very satisfactory – the Czech economy is in very good condition and the numbers for 2018 are very promising. Our economic growth was at 3% in 2018 and the unemployment rate is at an alltime low around 3%. In 2018, our exports exceeded CZK 4.2 trillion for the first time in history. It is also worth mentioning that the Czech Republic was the first CEE country to be admitted into the OECD and, according to the World Economic Forum, the Czech Republic is ranked 29th among 140 countries in the Global Competitiveness Index. Nevertheless, potential foreign investors and businesses should investigate and consider many other factors before making their decisions. We continue to enjoy a favourable period for FDI and cross-border business because we succeeded in creating a strong country image and building our brand internationally. I am looking forward

to shifting the presentation of the Czech Republic abroad even more towards technology and innovation with the new brand The Czech Republic: The Country for the Future. We will promote our country as a land of scientific potential and developed industry connected to research in many fields, and as a land of smart, educated and innovative people. The present situation offers a unique starting possibility to raise our competitiveness within the world economy. Our national ambition is to continuously move up in the global value chains and pivot towards more sophisticated and innovative solutions. In short, our aim is to become the innovation leader. I am proud to say that many Czech companies are creating and manufacturing world-class products that are number one in the world. We are proving that we have the potential to pursue this goal.

The Czech Republic is aware of the importance of science and research, which we have placed among our top priorities. As Benjamin Franklin once said, “An investment in knowledge always pays the best interest.” We see the long-term advantages of technical, scientific and research progress as well as the need to continuously support it. In the Czech Republic, there are many top research institutions that are participating in the world’s most prestigious scientific projects and we wish to continue in this direction. To this end, the government’s policy goals include continuation of support for R&D. It is notable that the share of industrial production in GDP has increased considerably since 1995 and the Czech Republic is now the most industrialised country in the EU. We should take advantage of our ongoing industrial tradition, while never failing to keep our eyes on the future.

The Ministry of Foreign Affairs of the Czech Republic has been working hard to build modern and efficient economic diplomacy that will have the capacity to facilitate meaningful cooperation among governmental as well as non-governmental actors. This collaborative environment is helping us to achieve our goals in the field of international business. Our economic diplomacy has better and finer tools than ever. Although it is beyond the scope of this text to mention all of them, I would like to stress that the Ministry of Foreign Affairs appreciates the work of the AFI and CzechInvest. We also work closely with CzechTrade and the Czech Development Agency and we are looking for new synergies in our continuous search for new foreign investments as well as potential business partners.

Martin Tlapa

Deputy Minister of Foreign Affairs

Dear Readers, The Czech Republic has many very successful years behind it in terms of foreign investment, which has significantly aided the restructuring of the country’s industry as a whole, contributed to the cultivation of the domestic business environment, brought in significant technological know-how and, of no less importance, substantially contributed to reducing the unemployment rate in the Czech Republic to its current historically low level, while boosting GDP growth. The Czech Republic wants to build on this development and thus push its entire economy into the next stage of development based on innovation, activation of domestic investments and more intensive involvement of local SMEs in the manufacturing of final products.

However, this definitely does not mean that the Czech Republic has begun to turn its back on foreign investors. We remain convinced that appropriately located foreign investments can bring new economic activities to the Czech Republic and replace investments with low value added. In order for the Czech Republic to maintain its gratifying rate of development in relation to the world’s most highly developed economies, in the future it will attract primarily investors that bring to the country new technologies and know-how, i.e. investors that not only manufacture, but also develop their products here and involve Czech suppliers, researchers, scientists and universities in their activities and can use the potential of our R&D infrastructure. In order for us to continue increasing our country’s competitiveness, we will continue to focus our efforts on supporting Czech firms so that they

can assert themselves with their products and services not only on the domestic market, but also on the global market. Only in this way can they continue to grow and develop and thus be a solid foundation of the Czech economy. Without new impetus, original ideas and a bold approach, every economy will eventually stagnate. Thanks to the nearly ten years of support provided by CzechInvest, numerous Czech start-ups have grown beyond the borders of their country of origin and have established their names on the most advanced foreign markets. We will work to ensure that their ranks continue to grow and that the state continues to provide them with the support they need. For the development of all three of the aforementioned groups, it is necessary to have a suitable business environment. CzechInvest’s physical

presence in every region of the Czech Republic over the past fifteen years is the best prerequisite for the ability to help every region, city and town to create the necessary conditions to bring in the right firms that can find there the ideal environment for their operations. CzechInvest’s unique know-how comprises longstanding knowledge of both the local environment as well as crucial foreign markets. Thanks to that, we provide our services to domestic and foreign partners at a truly high level. Therefore, the government has entrusted CzechInvest with specific tasks and steps ensuing from the Innovation Strategy of the Czech Republic for the period 2019-2030 (The Czech Republic – The Country for the Future). As an agency, we will continue to focus on bringing together the worlds of investment, start-ups and innovation.

Silvana Jirotková CEO, CzechInvest

Did you know?

The Czech Republic

Location

10.6 mil

Economy

Politics

Population

Prague

78.866 km

2.8%

Area

GDP growth: The gross domestic product increased in the Q4 2018 by 2.8%, year-on-year.

Miloš Zeman President

29th The 29th most competitive country in the world according to the Global Competitiveness Index, 2018 – 2019. Zhe Czech Republic is also among the most competitive countries in the CEE region.

2% 3% 2% 3% Romania USA Mongolia Bulgaria

4% Poland 4% Germany 7% Russia

5.2% Foreigners

20% Others

The Czech Republic is the 6th best European country for Startups according to NimbleFins.

Industry

23% Ukraine

Note: Percentage of foreigners in total population Source: Eurostat, 2018

6th

Andrej Babiš Prime Minister

11% Vietnam

Government

members

21% Slovakia

94.8% Czechs

Note: Percentage of foreigners, by citizenship Source: Directorate of Alien Police Service, September 2018

200

37.8% Industry’s share in the economy: The Czech Republic is the most industrialised country in the European Union. Industry accounts for 37.8% of the commercial economy.

members

Recent history

Chamber of Deputies 200 members/4 years

Velvet Revolution

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

1989

Velvet Divorce

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

1993

0 10 1

Accession to NATO

The Czech Republic became a member of NATO in 1999.

1999

Accession to the EU

The Czech Republic joined the European Union in 2004.

2004

years

7th The 7th safest country in the world according to the Global Peace Index 2018.

members Senate 81 members/6 years

Quality of life

years

1st The 1st happiest country among the newer EU member countries according to World Happiness Report issued by the United Nations, 2018.

8th The Czech Republic is 8th world´s most attractive country for manufacturing according to the Cushman & Wakefield, 2019.

Quick facts about the Czech Republic

Český Krumlov

The Czech Republic – Heart of Europe Basic data Area

78,866 km2

Population

10.6 million

Workforce

5.3 million

Capital

Prague

Language

Czech

Currency

Czech koruna (CZK)

Political system

Parliamentary republic

ocation The Czech Republic is a landlocked country in the middle of Europe. It is bordered by Germany to the west, Poland to the north, Slovakia to the east and Austria to the south. Thanks to its location, which makes it a notional gateway between Western and Eastern Europe, the country is often referred to as the “Heart of Europe”. The Czech Republic is comprised of parts of historical territories which for a significant part of history were the Lands of the Bohemian Crown, namely Bohemia, Moravia and part of Silesia. Administratively, the country is divided into 14 self-governing regions. The capital city, Prague, is also one of the regions. Approximately 10.6 million people live in the Czech Republic. The population of Prague is 1.3 million. With 379,000 inhabitants, Brno is the country’s second most populous city and is the natural centre of Moravia. The main city in Silesia, Ostrava, is the country’s third-biggest with a population of 287,000.

14 | BUSINESS GUIDEBOOK

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

The Czech Republic’s location within the European Union

Germany

Bohemia Moravia

Ústí n.L. Karlovy Vary

Plzeň

H.K. Region Hradec Králové

Central Bohemia

Prague Prague Region

Poland R&D

Plzeň Region

Silesia

Liberec

Ústí n. L. Region

Pardubice Pardubice Region

Ostrava

Olomouc

Jihlava

Properties

South Bohemia

Moravia-Silesia Olomouc Region

Vysočina Region

Germany

Finance

Liberec Region K.V. Region

First steps

Map of the Czech Republic

The Czech Republic

About the country

Zlín Region Brno

České Budějovice

Zlín Permitting and construction

South Moravia

Slovakia Austria

Top sectors

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

M&A

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

Taxes

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

Human resources

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

Court is the highest body in civil and criminal justice as well as in the area of administrative adjudication. Economics The Czech Republic is a developed country with a market economy. According to a number of economic, social and political indicators, it ranks among the world’s most advanced countries. Since 2005, the Czech Republic has been part of the group of the thirty most advanced countries according to the World Bank, to whose budget it has become a contributor. The country is considered to have the most stable and most prosperous economy of all post-communist states. According to Eurostat, it was the sixteenth richest country of the European Union in 2018 in terms of per-capita GDP based on purchasing power parity. It was the most successful of the new EU members. A Eurostat report from 2015 states that the Czech Republic is also the most industrialised country in European Union. Industrial production accounts for 37.8% of the commercial economy, which is more than in the other member states. In Q3 2018, 27.3% of all Czech employees worked in industry. More than half of Czech industrial production is exported. The most important branch of Czech industry is vehicle manufacturing, including motorcycles and trailers, which has more than doubled in the past decade. The other main pillars of Czech industry are the mechanical-engineering, metals, chemical and food sectors. The energy, construction and consumer-goods industries are also important components of the Czech economy. The unemployment rate in the Czech Republic has remained rela-

tively low over the long term and below the average of developed countries. Germany is the country’s biggest foreign trade partner. The Czech Republic’s currency is the koruna. Due to a foreign exchange intervention carried out by the Czech National Bank, the koruna-euro exchange rate is currently CZK 25,7/EUR 1. Upon

Share of industry in the EU member states 20.6

Finland

The Czech Republic is a member of these organisations

United Nations

European Union

NATO

Organisation for Economic Cooperation and Development

World Trade Organisation

International Monetary Fund

World Bank

Council of Europe

Organisation for Security and Cooperation in Europe

European Customs Union

Schengen Agreement

Visegrad Group

18.8

26.3

16.4

18.0

Denmark

22.7 Lithuania

14.5

14.8

27.2

Netherlands

Germany

Belgium

31.9

7.2

21.8

Luxembourg

Slovakia

26.7

Romania

27.5

20.6

Slovenia

26.4

Switzerland

Hungary

19.2 Italy

20.7

Croatia

18.1

2.8%

Inflation (12/2018)

2.1%

Unemployment rate (1/2019)

2.2%

Average gross monthly wage (Q4/2018)

CZK 33,840 (approx. EUR 1317)

16 | BUSINESS GUIDEBOOK

26.6

Czech Republic

Austria

13.9

France

Poland

25.7

16.8

18.4

GDP growth (year-on-year, 2018)

Source: Czech Statistical Office, Ministry of Finance, 2018

Estonia

Latvia

Portugal

Economy of the Czech Republic

20.6

Sweden

Norway

24.1

Bulgaria

26.4

Serbia

7.9

Cyprus

Spain

14.6

Greece

10.2

Note: Share of industry in total gross value added in the EU member states, Industry (except construction), in % Source: Eurostat, 2017

Malta

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

Moody´s

Fitch

Czech Republic

AA-

Slovak Republic

A-

A+

Poland

BBB-

A-

Russia

BBB-

Ba1

BBB

Bulgaria

BB+

Baa2

BBB-

Romania

BBB-

Baa3

BBB-

Hungary

BBB-

Baa3

BBB-

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

Motorway network in the Czech Republic

Public international airport

Ústí n.L. Karlovy Vary

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

28 September

Czech Statehood Day

Varies

Good Friday, Easter Monday

28 October

Independent Czechoslovak State Day

1 May

Labour Day

17 November

Struggle for Freedom and Democracy Day

Hradec Králové Plzeň

Prague Pardubice

Ostrava

Human resources

1 January

Permitting and construction

Liberec

Source: Czech National Bank, 2018

Properties

Standard and Poor´s

R&D

Country

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

Finance

Investment risk rating

In August 2011, Standard & Poor’s raised its rating of the Czech Republic by two places, from A to AA-, which is the fourth-best possible rating. At present, it can be stated that the Czech economy is in very good condition. The country’s gross domestic product increased by 5% year on year in the fourth quarter of 2018. In the same period, gross value added increased by 3% year on year. The unemployment rate has also fallen, specifically to 2.2% in January 2019.

First steps

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

The Czech Republic

About the country

Olomouc Taxes

Jihlava

Brno

České Budějovice

Victory in Europe Day

24 December

Christmas Eve

5 July

Day of Slavic Missionaries Cyril and Methodius

25 December

Christmas Day

6 July

Jan Hus Day

26 December

St. Stephen’s Day

Zlín M&A

8 May

Top sectors

Source: Road and Motorway Directorate of the Czech Republic, 2018

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

Oslo 15 | 2:00

Travel distances from Prague (km | driving time, h:m) Hamburg 639 | 5:51

Stockholm 21 | 1:55 Helsinki 24 | 2:15

Dublin 14 | 2:40

Amsterdam 877 | 7:59

Warsaw 683 | 7:01

Moscow 95 | 2:35 Brussels 898 | 8:27

London 87 | 2:00 Beijing 3 | 9:10

Seoul 16 | 10:15 Madrid 23 | 3:05

Rome 28 | 1:50

Paris 1,032 | 9:38

Vienna 330 | 3:40

Istanbul 28 | 2:30

Source: Vaclav Havel Airport Prague, 2018

Brno and Slovakia (toward Bratislava) and the D5 connecting Prague, Plzeň and Germany (toward Nuremberg). The amount of goods transported on Czech roads and motorways in 2018 was 479 235 000 tons according to statistics from the Ministry of Transport. Rail transport increased in 2018 with the volume of transported goods by 2.4%. Together with road transport, rail transport in the Czech Republic makes up the backbone of the domestic transportation system while also serving for international transit. With 9,580 km of track, the Czech Republic has the densest rail network in Europe. The corridor routes of the nationwide lines leading to the European rail system for long-distance and transit service cover 1,402 km.

Budapest 526 | 5:45

Munich 383 | 3:59 Bratislava 328 | 3:26

Milan 884 | 8:50

Dubai 21 | 6:10

18 | BUSINESS GUIDEBOOK

Berlin 347 | 3:29

Zagreb 694 | 7:14 Source: Google Route Planner, 2018

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

and Prague. Václav Havel Airport in Prague is the most important Czech airport and is also the biggest airport among the new EU member countries. It is operator is the company Prague Airport. Václav Havel Airport annually handles almost seventeen million passengers carried by approximately 69 airline companies connecting Prague on direct routes to roughly 171 destinations around the world. Five freight carriers also operate out of Prague’s airport and dozens of other companies provide charter services. Czech Airlines is the country’s flagship carrier. Population According to the latest census conducted in 2011, the Czech Republic’s population is 10.5 million. In terms of the mix of nationalities residing here,

the country’s population is relatively homogenous, as approximately only 5.2% of inhabitants are foreigners. Data from the Czech Statistical Office for 2018 show that the largest number of foreigners living the Czech Republic are Ukrainians (23%), followed by Slovaks (21%), Vietnamese (11%) and Russians (7%). Other foreign nationals living in the Czech Republic include Poles (4%), Germans (4%), Bulgarians (3%), Romanians (3%) and Americans (2%), while citizens of all other countries account for 20% of the total. In 2011, there were 2.2 million religious followers in the Czech Republic, with Christians comprising the majority. Roman Catholics were the largest religious group in 2011.

The Czech Republic First steps

Railway transit corridors in the Czech Republic Dresden

Finance

Děčín Ústí n.L. Nürnberg Cheb

Prague

Česká Třebová

Plzeň

Ostrava

R&D

Pardubice Katowice Krakow

České Budějovice

Přerov

Brno

Properties

Olomouc

Žilina

Permitting and construction

Břeclav Linz

Wien

Bratislava

Human resources

Source: Railway Infrastructure Administration, 2018

Taxes M&A Top sectors

Karlštejn

20 | BUSINESS GUIDEBOOK

Ready for business

Dancing House, Prague

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

Working Abroad Index 3rd best country for expats Czech Republic - 12th most popular destination among people working abroad

Rank 2018

Country

Bahrain

Taiwan

Czechia

Rank 2017

Country

Singapore

Norway

Netherlands

New Zealand

Denmark

Czech Republic

Vietnam

United States

Germany

Poland

Luxembourg

United Kingdom

New Zealand

Source: HSBC Expat Explorer, 2018

22 | BUSINESS GUIDEBOOK

Source: InterNations, 2019

ccording to the Czech National Bank, the Czech Republic has received a total of EUR 115.6 billion worth of FDI since 1993. The largest amount of FDI flows from Germany. According to a survey carried out by the Czech-German Chamber of Commerce, 73% of German companies with operations in the Czech Republic consider the investment climate to be good. The survey shows that the Czech Republic is the most attractive location in the CEE region for many reasons, such as its proximity to Germany, EU membership, productivity and motivation of local employees, quality and availability of local suppliers and relatively low labour costs and skilled workforce. The Global Competitiveness Index ranks the Czech Republic 29th out of 140 countries worldwide and first in the CEE region. Strategic location  One of the factors that make the Czech Republic extremely attractive for foreign investors is its good access to the European market. The country’s convenient location in the middle of Europe makes it possible to reach all European capitals very quickly. Together with EU membership, this makes the country a perfect gateway to the single European market of 508 million consumers. Given the fact that the Czech Republic is at the crossroads of European trade, advanced transport infrastructure was naturally developed here. The Czech Republic is ranked among the world’s most advanced countries in terms of transport-network density and several projects involv-

ing modernisation and extension of the network are currently underway. Stable and transparent business environment A stable political situation, well-developed private sector, effective legal environment and healthy banking system with a strong and independent central bank are the key features of a society in which business can be conducted effectively and safely. The Czech Republic’s open investment climate was a key element in the country’s transition, which is reflected in its investment rating from international credit-rating agencies, putting it on an equal footing with Japan and Taiwan and opening the door to early membership in the OECD. The Czech Republic is a fully-fledged parliamentary democracy and one of the most advanced new members of the European Union, which it joined in 2004. Its currency, the koruna (CZK), is fully convertible and extremely stable. Under Czech law, foreign and domestic entities are treated identically in all areas, from protection of property rights to investment incentives. The tax system offers the lowest rates in Europe (the corporate and personal income-tax rates are 19% and 15%, respectively) and has remained stable over the long term; the last change of the corporate income-tax rate was a reduction in 2010. Educated and a skilled workforce The Czech Republic combines an outstanding level of general education with strong science and engineering disciplines. The availability of graduates educated in technical fields at

The Czech Republic is among the most competitive countries in the CEE region 100 80

83.5

82.8

82.6

82.5 71.2

68.2

66.8

64.3

40 20

Re Slo pu va bli k c Hu ng ar y

Po lan d

Re Cz pu ech bli c

Ja pa n

Sw itz er lan d

Ge rm an y

Sin ga po re

Un ite dS tat es

Source: World Economic Forum, Global Competitiveness Report, 2018

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

Iceland

1.096

New Zealand

1.192

Austria

1.274

Portugal

1.318

Denmark

1.353

Canada

1.372

Czech Republic

1.381

Hungary

1.531

Slovakia

1.568

Poland

1.727

Source: Institute of Economics and Peace, 2018

M&A Top sectors

www. czechinvest.org

Score

Taxes

Veronika Zajícová Head of the Strategic Projects CzechInvest veronika.zajicova@czechinvest.org

Country

Human resources

Well-developed infrastructure Besides the country’s transport infrastructure, its energy distribution and telecommunications networks also contribute to the creation of an ideal environment for doing business. Energy supplies are very stable with some of the lowest prices in the region. Both the electricity and gas markets are fully liberalised without any regulations that would hinder competition. Only activities of a monopolistic nature continue to be regulated. The Czech Republic’s energy infrastructure is among the most efficient and adequately supplied in the region, as the country has some of the largest gas reserves in the EU. The Czech telecommunications market – one of the most highly developed and most liberalised in Central and Eastern Europe – is distinguished by growing demand for data, internet and other communication services. The country’s advanced fibre-optic

Rank 2018

Permitting and construction

a fraction of the cost of western labour makes the country especially advantageous for manufacturing and R&D-oriented companies. In the academic year 2017/2018, nearly 300,000 students were enrolled in the country’s 67 universities. Roughly one-third of Czech university students study economics and finance, while more than 85,000 students are enrolled in technical programmes. Because the Czech Republic is a relatively small country, studying foreign languages is a necessity. According to the latest STEM survey, more than 72% of Czechs have knowledge of at least one foreign language (predominantly English or German); this figure rises above 90% for those in management positions. Emphasis has long been placed on secondary education in the Czech Republic, which is reflected in the fact that the country’s population has the largest share of people who have attained upper secondary education in the OECD. The Czech Republic has strong technological potential thanks to its pool of well-educated science workers and its skilled workforce, which have given rise to several rapidly growing industries such as

Czech Republic – Global Peace Index

Properties

Score 0 – 100 (best) 1 place - United States (GCI - 85.6) 29th place - Czech Republic (GCI - 71.2) st

Quality of life The Czech Republic has the highest quality-of-life index in the region according to the Mercer Quality of Living Survey 2018, which ranks the Czech Republic first among new EU members. The country’s urban centres and beautiful countryside offer countless possibilities for leisure activities for both tourists and locals throughout the year. For expats and their families, larger Czech cities, especially Prague, boast a wide range of housing options that are of high quality yet significantly cheaper than in most other European cities. Municipal public transport systems are well managed and efficient, while trains provide a popular and easy way to travel around the country. The Czech Republic is an expat-friendly country with plenty of organisations helping foreigners with everyday issues and organising networking events. Furthermore, in larger cities it is easy to find international schools for children at all grade levels. According to the annual Global Peace Index published by the Institute for Economics and Peace, the Czech Republic is seventh-safest

R&D

country in the world. The country is close to Western Europe not only geographically, but also in terms of social and cultural values. All of these factors contribute to the Czech Republic’s ranking as the 12th most attractive country for expats worldwide (HSBC Expat Survey 2018). Together with its sustainable business environment and its ability to harness its potential in order to respond to the needs of the global economy, the Czech Republic’s high quality of life is yet another factor making it an ideal investment location.

Finance

85.6

network is part of the European backbone and is being further developed. No exclusive rights exist in the area of electronic communications and the competition environment is sufficiently robust in terms of the European Union. The number of users of high-speed internet access is rapidly and constantly growing and the prices of high-speed internet access are falling. In terms of the business-property market, the country is quite advanced with respect to the number of industrial zones and parks as well as office premises.

First steps

Global Competitiveness Index Rankings

The Czech Republic

Reasons to invest in the Czech Republic

Prague: A top location for European headquarters

Prague Castle

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

10th The Czech Republic is the seventh safest country in the world 1. Iceland 2. New Zealand 3. Austria  4. Portugal 5. Denmark 6. Canada 7. Czech Republic 8. Singapore 9. Japan 10. Ireland

Source: Global Peace Index 2018

24 | BUSINESS GUIDEBOOK

2 h

Prague is the first region in the Small European Regions of the future in terms of human capital and lifestyle (fDi Intelligence, 2018/2019) Prague ranks second among Central European capitals in terms of cost effectiveness (fDi Intelligence, 2018/2019) Prague is within a two-hour flight of most European cities

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

Prague is among the top 25 European Regions of the Future (fDi Intelligence, 2018)

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

2nd

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

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

in the Czech Republic include, but are not limited to, construction and construction technologies, materials engineering, transport technologies, biotechnology, environmental technologies, energy and security. Prague is among the EU regions with the largest share of researchers in total employment (nearly 2%). “The advanced local R&D infrastructure has a strong, positive impact on Prague’s economic development, as the city is home to nine public universities and the Academy of Sciences, which contribute to the generation of new ideas and innovations of products and services. Many R&D-focused start-ups are also based here and are bringing new energy to the local economy,” says Jan Dobrovský, director of the Project Management Department of the City of Prague. Martin Ježek, Business Development Director at Grafton Recruitment adds: “Prague excels in the CEE region especially in the field of human resources. Thanks to the concentration of tertiary education across disciplines, the city is able to provide the number of specialists required by the private sector. International shared-services centres established in Prague since the beginning of the last decade currently employ thousands of people who can serve as a source of qualified specialists and managers with above-average language skills for newly established headquarters in Prague.” A safe, expat-friendly city of culture Prague offers expatriates a truly safe and culturally rich environment and very good municipal infrastruc-

One of the safest cities in the world Prague is one of the safest cities in the world. The Czech Republic is one of the safest European countries and is the seventh-safest destination in the world according to the 2018 Global Peace Index. High quality of life The Czech Republic, especially its capital, is a preferred destination for many relocating companies, individuals and families. It is a modern country with not only good infrastructure and a well-developed business ecosystem, but also a rich history offering a truly broad range of cultural opportunities. Great transport accessibility Thanks to its ideal location in the heart of Europe, Prague is easily accessible to travellers from practically anywhere in the world.

R&D

Location

Prague’s location makes it easy to travel to neighbouring countries and their beautiful cities.

Transport

Public transport is another thing that Prague can be proud of. In comparison with the mass transit systems of other capital cities, it is cheap, efficient and highly integrated. Prague is also a green city that is suitable for walking, as it offers a great number of tourist attractions in a small area.

Experience with hosting GSA Prague is the host city of the GNSS Agency and has thus proven its ability to serve as the home of major international institutions and organisations.

Human resources

Living costs Living costs in Prague are considered to be low and affordable compared to most other European cities. Average rent is EUR 850/month for a 70 m2 apartment.

Permitting and construction

Education Prague has a great selection of international and multi-lingual educational institutions ranging from preschools to universities. Prague is the home of Charles University, which was established in 1348, making it one of the oldest institutions of higher learning in Europe. Furthermore, the best Czech technical university and the Czech Academy of Sciences are both located in Prague.

Properties Taxes

Zdeněk Hřib Mayor of Prague info@praha.eu

M&A

www.praha.eu Top sectors

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

Reasons for relocating to Prague according to Mayor Hřib

Finance

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

management. FDi ranks Prague as the second best small European region of the future in terms of business friendliness. The tax environment in the Czech Republic is stable and offers very good conditions not only for corporations but for expatriates, as well. Jan Linhart, Partner with KPMG ČR describes: “The corporate income-tax rate was set at 19% in 2010 and remains at that low level today. The personal income-tax rate is also very favourable, especially for persons with high incomes and for a significant part of the expatriate population. The personal income-tax rate is only 15%. Expatriates who are sent to work in the Czech Republic under the regime allowing them to stay within the social-security system of their home country do not have to pay additional social security in the Czech Republic, whereas expatriates from some countries pay only for health insurance.”

First steps

ture. The Czech capital also offers great conditions for families, an effective public transport system and high-quality services in the areas of shopping, dining and entertainment. More than 15% of Prague’s inhabitants are expatriates. Prague is a truly cosmopolitan city with whose many notable advantages include the fact that it is one-third cheaper to live here than in London and two times cheaper than in New York (data according to numbeo.com). In addition to that, the Czech Republic is the seventh-safest country in the world according to the Global Peace Index. Though Prague is generally and rightly perceived as a city with a rich cultural heritage and a well-preserved historical centre, it also has a captivating and lively modern cultural environment offering an abundance of concerts, coffeehouses, libraries, theatres, cinemas and museums, as well as film, music, arts and food festivals. Beyond entertainment options, Prague has outstanding municipal infrastructure including green spaces and facilities for sports and outdoor recreation. Family life is very easy for expatriates in Prague thanks to the presence of over forty international preschools and elementary and secondary schools. With its highly efficient public transport system, it is possible to reach the centre of Prague from practically anywhere in the city within half an hour. The high-quality healthcare provided here also deserves mention, as 78% of the city’s residents claim to be satisfied with the level of care they receive (data according to the Prague Institute of Planning and Development). The Czech capital also excels in terms of the availability of premium shopping and services. Numerous luxury brands are present here and residents can enjoy a number of top-level restaurants and bars, including Michelin-starred establishments.

The Czech Republic

Prague headquarters

The top ten facts every investor needs to know about the Czech legal system Investors coming to the Czech Republic naturally have questions about the country’s legal system. Here are the answers. 1. What do I need to know about the Czech legal system? The Czech Republic is an investor-friendly western democracy with a stable and modern legal environment. Czech laws are compatible with EU laws. The Czech Republic is a member of the EU, OECD, WTO, IMF, World Bank, EBRD, UN and NATO. 30th

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

Ease of Doing Business: ranked 30th out of 189

92 92 bilateral investment treaties

26 | BUSINESS GUIDEBOOK

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

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

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

3. Are investments in the Czech Republic

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

4. Are intellectual property rights protected

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

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

Trusts

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

Choice of law

Common corporate vehicles and structures

9. Are the common corporate structures

Security agent

Proprietary (in rem) security rights (e.g. pledge, lien, security transfer)

Concern/controlling relationships Different types of shares with different rights

Prohibition of financial assistance/ whitewash procedure

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

Contractual subordination

Transformations

Reorganisation

Criminal liability of legal entities

Marketability of contracts, receivables and claims

E-identity and e-signature

Parallel debt structure (if governed by foreign law)

Taxes

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

Top sectors

www.kinstellar.com

M&A

in the Czech Republic? Yes. The Czech Republic’s sovereign debt has been given investment grade ratings by the rating agencies Moody’s (A1), Standard & Poor’s (foreign currency: AA-; local currency: AA) and Fitch (AA-). This year’s credit ratings for the Czech Republic are the best since 1993.

Contractual limitation of liability

Single-tier board in joint-stock companies

Human resources

10. Is the investment risk small

Attorney/client privilege

Permitting and construction

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

Choice of court jurisdiction

Properties

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

Contractual freedom

8. Can I enforce foreign judgments issued

R&D

7. Is alternative dispute resolution available

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

Finance

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

The administrative charges and fees of the arbitrators depend on the value of the dispute. In comparison with other arbitration centres, the Court of Arbitration is one of the least expensive.

First steps

ranked 35th out of 189 countries in the World Bank Ease of Doing Business – Economy Rankings.

The Czech Republic

Legal framework

Did you know? We have been cooperating with AFI members for years in a wide range of areas – tax, legal, HR and construction issues. The service they provide us is always on a high professional level that we can rely on and is crucial for such a huge investment project as ours. To a certain extent, the AFI’s members are like our guides helping us to understand the local business environment. I think that the AFI should be the first stop on the way to investing in the Czech Republic.

Association for Foreign Investment Where did the AFI hold events in 2018? 3 Canada 6 Russia 7 Turkey 8 Spain

Ivan Dzido

9 Switzerland

External Affairs Senior Specialist NEXEN TIRE Europe

14 Germany

1996 43 261 59

49 USA

From which countries do investors turn to the AFI?

20 India 20 Japan

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

25 Other

26 South Korea

38 UK

36 China

Note: data for the period 2018.

Notable events

Cooperation of the Year project

The main objective of the project is to raise the profile of the Czech R&D environment and thus support the inflow of new investments and expansion of existing investments in this sector with higher value added.

Regional seminars In cooperation with CzechInvest and other partners, the AFI regularly organises seminars, especially for aftercare clients, in areas such as visas, permits and HR.

Investment seminars

In cooperation with CzechInvest and other partners, the AFI regularly organises seminars for investors abroad. In 2018 these seminars were held in, for example, Dublin, Paris, Xiamen, Düsseldorf and Munich.

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

when the AFI was established members enquiries from investors (2018) events in the Czech Republic and abroad in 2017

Chairmen of AFI

Tomáš Ctibor

Jan Ámos Havelka

Martin Slabý

Jan Bobek

Kamil Blažek

1996

2000

2005

2008

2010

Six main things to do first

1 30 | BUSINESS GUIDEBOOK

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

o incorporate or not? The first question which has to be answered after deciding to do business in the Czech Republic is whether the entity wishes to create a formal (registered) establishment or not. For non-EU entities, this is not a matter of choice. Every nonEU entity that wants to start doing business in the country must either register a branch or found a company. EU entities have two other options: to provide so-called “temporary services” in the meaning of the Directive on the Free Movement of Services, or to provide services or do other business permanently without any establishment. The latter is allowed by the new law and enables EU entities conducting business in the Czech Republic to proceed in a rather informal way. However, the decision not to incorporate could in some aspects have a less positive outcome and in some areas increases the risks of uncertainty, especially in relation to official authorities. Accordingly, registration of an entity is still the optimal course of action.

does not have a distinct legal personality and all its assets and debts belong to its founder. No registered capital is required. The founder has to appoint a head of the branch, who is the legal representative of the branch and thus acts on behalf of the branch in all matters. The head of the branch can be a foreign national. The branch can have only one founder, so this vehicle is not suited to investors who wish to run a business together with other parties in the form of a joint venture.

Choosing the most suitable vehicle The relevant laws offer a number of different corporate vehicles for doing business. These can be divided into three basic groups: 1) a branch, 2) unlimited liability companies, namely unlimited liability partnerships and limited liability partnerships, and 3) limited liability companies, namely limited liability companies (“LLC”) and joint-stock companies (“JSC”). Unlimited liability companies do not enjoy much popularity, since all assets of at least one partner are exposed to risk.

Limited liability companies Limited liability companies have their own legal personality. They act via their statutory body, specifically the director, who is authorised to represent the company in all matters. The director and members of all other corporate bodies can be foreign nationals. Limited liability companies can be founded either by a sole founder or by multiple co-founders. Founders, as well as shareholders, can be natural persons or legal entities, Czechs or foreign nationals. The new Czech law provides a wide range of possible arrangements among shareholders who choose to run a company together. An LLC structure is also very popular for starting a business. The minimum registered capital is CZK 1 (approx. EUR 0.04), though it is recommended that a contribution of at least CZK 10,000 (approx. EUR 400) be made to cover, at the very least, the basic costs connected with establishment of the business without running a risk of insolvency. Once the registered capital is fully paid up, the shareholders are not liable for any debts of the LLC. An LLC must have at least one director.

Branch A branch is a good choice for an entrepreneur coming to the Czech market for the first time. This vehicle

JSC Limited liability companies have their own legal personality. They act via their statutory body,

Human resources Taxes M&A Top sectors

www.havelpartners.cz

Permitting and construction

David Neveselý Partner, HAVEL & PARTNERS, attorneys-at-law david.nevesely@havelpartners.cz

Properties

Ondřej Florián Partner, HAVEL & PARTNERS, attorneys-at-law ondrej.florian@havelpartners.cz

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

R&D

The process of corporate vehicle establishment Both branches and the other forms of companies commence their existence by being entered into the Czech Commercial Register. The process of establishment differs depending on the vehicle chosen. The simplest is establishment of a branch establishment, while establishment of a JSC is slightly more complex. For the most part, the whole process can be completed on the basis of a power of attorney without the necessity of the personal presence of the founder. The signatures on such a power of attorney must be notarized and apostilled or they must be superlegalised. Before the application is submitted to the registration court, the entity must apply for a trade license. Obtaining a basic trade license usually takes five business days

and costs CZK 1,000 (approx. EUR 40). The entity has to have its registered office located in the Czech Republic. Title to the use of premises must be proven via an affidavit of the owner of the premises. Virtual offices are available in the country. Once all the necessary documents are collected, it takes usually five business days to enter the new entity into the Commercial Register. A branch is established by adoption of a founding deed, i.e. a document signed by the founder containing all of the branch’s basic information: its name, identification of the founder, identification of the head of the branch and the scope of business. The founding deed must be executed in writing. The fees for registering a branch amount to CZK 6,000 (approx. EUR 240). LLC and JSC Establishing an LLC or JSC is slightly different. Firstly, the articles of association must be executed in the form of a notarial deed. The articles of association contain comprehensive information about the company and its representatives, its purpose and scope of business, relationships among the shareholders, types of shares, and the duties and liabilities of the directors. In the case of an LLC, the articles of association also contain information about the shareholders. In the case of a JSC, the identity of the shareholders is hidden, except where the JSC has only one sole shareholder. The registration fees are CZK 6,000 (approx. EUR 240) for LLC registration and CZK 12,000 (approx. EUR 480) for JSC registration.

Finance

Establishment of a branch does not require any notarial deed. As a result, a branch is cheaper to establish than a company. In the case of a company, the notarial fees vary according to the amount of registered capital. Notaries public can enter a company directly into the Commercial Register. This can help to speed up the process of establishment, as the registration courts are sometimes congested. Ready-made companies are available. An LLC or JSC can be bought as a ready-made company, without any history or previous economic activity. It can then be rearranged according to the requirements of the buyer. Societas Europea – a universal European form of company. A JSC can also be established as a Societas Europea, which is a form of company available in all European Union member countries. However, the minimum registered capital of such an entity is EUR 120,000. The Czech Republic is a leading EU country in the number of incorporated Societas Europea. Extracts from the register of criminal records or certificates verifying the lack of criminal records of directors and branch founders must be submitted. The Trade License Office, registration court or a notary public must verify the suitability of persons who are to be registered as a director and/or founder of a branch (this rule does not apply for company founders and shareholders). Such persons must prove that they have not committed any crime in connection with activities related to establishing an entity. Obtaining such documents can be cumbersome, since some countries do not issue documents of this kind. However, an affidavit making certain assertions and signed by the person in question may be used as an alternative in certain situations. Variety of share rights. The new law allows creation of shares with specific rights regarding, for example, profit distribution, voting rights or limitation of transferability. In the case of an LLC, duties can also be connected to the ownership of shares. A branch does not require a bank account in the Czech Republic. The law does not stipulate any general requirement to open an account with a Czech bank. Because a branch has no registered capital, it can be operated without opening a Czech bank account. A JSC must have a website. Czech law requires JSCs to publish mandatory data in the Czech language via their websites. AML & KYC procedures in the process of establishing a company. The founders of companies and branches should be prepared to provide their property (shareholder) structure and identify their ultimate beneficial owner at various points in the establishment process (opening a bank account, having the founding documentation signed on the basis of power of attorney). Ultimate Beneficial Owner Register established in 2018. The Ultimate Beneficial Owner Register was established on 1 January 2018. It is mandatory that beneficial owners of all legal entities be registered therein. Though this register is not publicly accessible, various public authorities and institutions (e.g. banks, notaries, attorneys) have access to it. Both branches and companies are required to keep accounting records. However, only companies have to annually convene their general meeting to approve the annual accounts and decide on the disposition of profits and losses.

specifically the director, who is authorised to represent the company in all matters. The director and members of all other corporate bodies can be foreign nationals. Limited liability companies can be founded either by a sole founder or by multiple co-founders. Founders, as well as shareholders, can be natural persons or legal entities, Czechs or foreign nationals. The new Czech law provides a wide range of possible arrangements among shareholders who choose to run a company together. An LLC structure is also very popular for starting a business. The minimum registered capital is CZK 1 (approx. EUR 0.04), though it is recommended that a contribution of at least CZK 10,000 (approx. EUR 400) be made to cover, at the very least, the basic costs connected with establishment of the business without running a risk of insolvency. Once the registered capital is fully paid up, the shareholders are not liable for any debts of the LLC. An LLC must have at least one director.

First steps

Good things to know

The Czech Republic

Starting a business

Introduction to the property market in the Czech Republic Have you established a new business and are you looking for a property? If so, the Czech Republic is the right choice for you. With an ideal location in the centre of Europe, the Czech Republic is a stable and safe country with a good investment rating, a high level of science and technical education and well-developed infrastructure. Combined with the country’s long-term economic growth, these factors make it attractive for both domestic and foreign investors. In our article, we map the Czech market so that you can get an idea of why and where you should invest in the Czech Republic.

Average Volume of Transactions by Source of Capital Avg. Transaction Total 100

Avg. Transaction Domestic 91.39

90 80

EUR million

70 60

73.1 61.3

60.28

56.61

55.55

50 39.06

40 30

Avg. Transaction International

44.79 31.26

26.21

35.81 27.64

20 10 0

2015

Source: JLL CEE Capital Markets, January 2019

32 | BUSINESS GUIDEBOOK

2016

2017

2018

ommercial property options Among office occupants in Prague, the question of whether to rent or buy commercial premises is fairly simple. Practically all of them prefer to rent and there are several reasons for this. Renting is more flexible, especially for international companies. Leases are usually for five years, after which the given company can respond to the market situation by leasing larger premises or by downsizing. In a few cases, this can also involve a decision to fully depart from the local market. Buying a property for occupation purposes can place certain restrictions on a company. For example, it can tie up a considerable amount of valuable capital that could otherwise be used to grow the core business or to develop new products and services. In terms of liquidity, the ability to sell the property quickly to access the invested capital can often be underestimated and this needs to be carefully planned well in advance. Regarding offices, occupants use scoring matrices of various parameters to select the building of their choice. The key parameters usually do

not change location, quality and number of local amenities, access by public transport and costs, although the last parameter has become somewhat less important as companies see the quality of their offices as an important factor in attracting and retaining their employees in the increasingly competitive labour market. Other decision-making parameters usually include the number of reserved parking spaces, the building’s technical condition and, if the unit is on a single level and surprisingly almost always in Prague, openable windows. In addition to Prague, which is the country’s core office market with 3.5 million m2 of modern office space, other attractive options include Brno, the Czech Republic’s second largest city, which is a university centre and has recently attracted several renowned office occupants, mostly in the IT and business services sectors. As previously mentioned, the Czech Republic is an ideal location to invest. In recent years, the country has continued to enjoy a buoyant real estate investment market attracting both international and domestic investors across all real estate sectors. The underlying strengths of the market are dominated by the country’s strong

Retail

Industrial

Mixed

Residential

Hotels

Shopping Centre yield

Office yield

Industrial Yield

EUR 5,000

10,00%

EUR 4,000

8,00%

EUR 3,000

6,00%

EUR 2,000

4,00%

EUR 1,000

2,00%

2012

2013

2014

2015

2016

2017

2018

0,00%

Source: JLL CEE Capital Markets (January 2019)

M&A Top sectors

www.JLL.cz

Taxes

Mike Atwell Head of Capital Markets for the CEE region and the Czech Republic JLL mike.atwell@eu.jll.com

centage of Czech investment volume increasing from 20% in 2014 to 59% in 2018. This growth of domestic capital is a great symbol of strength for the market, underlining the fact that this market is more diversified and therefore less dependent on international capital than are other CEE markets.

Human resources

Rise of domestic capital Of particular interest in the CEE markets has been the growth of domestic capital in the Czech Republic, which has been seen to a lesser extent in Hungary and not at all in Poland. There has been a marked increase in the presence of Czech domestic capital entering the market with the per-

Permitting and construction

EUR 0

Properties

millions

Office

R&D

Strong occupational market in the office and industrial sectors The office sector is clearly the easiest point of entry into the market, as it displays the highest

Allocation of capital driven by comfortable yield gaps From a general perspective, the possible returns in Central Europe provide a more attractive option compared to Western Europe, with the prime core markets and asset classes tending to show a yield differential of between 150 to 200 basis points. The market offers higher returns than western markets, with prime office yields at 4.50%, prime retail shopping centres would trade at 4.85% with no recent market evidence, and the industrial/ logistics sector is at 5.50% %. These yield levels provide a comfortable yield gap to ten-year government bonds, which further bolsters the region’s appeal. As anticipated, even if we see a marginal increase in interest rates and thus increased cost of borrowing, there would still be a comfortable margin between prime Czech real estate yields and long-term government bonds.

Czech Republic: 2017 - robust volumes with only marginal difference to 2016. Lack of product impacting 2018.

Finance

Solid performance of retail and strong demand The retail sector is dominated by major retail shopping centres in Prague and the regional cities. The prime shopping centres continue to benefit from growth in consumer spending with increasing retail turnover and visitor numbers. The forecast for retail sales growth across the region and in the Czech Republic in particular is 4% per annum and this, combined with strong GDP growth and low unemployment, supports the country’s retail story. Investor demand has always been strong in relation to the prime shopping centres in Prague. However, this interest is somewhat curtailed by very little product coming to market as longterm retail investors have already acquired such assets and will tend to hold on to them for the foreseeable future. A distinctive part of the market is the high-street segment, which is very strong in Prague, with its attractiveness further supported by Prague’s status as a global tourist destination and thus by growing international tourist arrivals.

volumes every year and office properties require the least technical expertise and experience to manage. Prague’s office occupational market is enjoying the lowest vacancy rates in a decade and the highest net absorption since 2008. As a result, there has recently been a decline in incentive packages for incoming tenants and upeard pressure on the prime rents in the best locations. Given that strong demand is expected to persist, we may witness additional rental growth in the short to medium term. The top investment destinations remain in Prague 1, 4, 5 and 8, namely the city centre, Pankrác, Smíchov/Anděl and Karlín, respectively. These locations show the highest level of liquidity and investor interest. Newly developing areas are Holešovice, Smíchovské Nádraží and Jinonice, which are locations to watch in the coming years. The industrial sector is again enjoying a strong occupational market with low vacancy rates and strong occupier demand. There is a shortage of new development in this sector due to limited availability of land and thus increasing pressure on rents resulting in strong investor demand.

First steps

macro-economic position in the region with the highest ratings from agencies such as Moody’s, S&P and Fitch. This gives investors confidence that the country has a strong and stable economic base and positive outlook. Combined with the strong occupational markets across the retail, office and industrial sectors, this strong macro position provides further confidence for investors that, given the correct real estate fundamentals, real estate investments in the Czech Republic will provide solid and long-term secure income with potential for growth. The most prominent and active sectors are office, retail and industrial/logistics. Each of these sectors attracts strong interest from both international and domestic investors.

The Czech Republic

Commercial properties

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

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

34 | BUSINESS GUIDEBOOK

Human resources After investors evaluate the location, real estate issues, legislative environment, tax conditions and potential government support for incoming investments, they begin to discuss human resources, which are the alpha and omega of every successful business project. The costs of people’s work are not the only issue to be addressed; access to workers and, in the case of investments based on intellectual activities, also the educational level, language skills and so-called soft-skills of potential employees are also important. The Czech Republic scores very highly in this regard. It has been considered a traditional industrial country with high-quality industrial schools and universities since the time of the First Republic. Language skills of Czech workers The summary of requirements which employers in the Czech Republic place on individual positions indicates that good English language skills are considered to be as natural a necessity as professional knowledge. It also indicates that knowledge of another foreign language is frequently a key advantage in more and more fields and can be a decisive factor in the hiring process. This trend is most evident in technical fields such as mechanical engineering, construction, the automotive sector and

13th salary/14th salary

Bonuses/rewards

Flexible start/end of working hours

5 weeks’ holiday leave

More than 5 weeks’ holiday leave

Food vouchers/contribution towards meals

Sick days

Source: Grafton Recruitment, 2018

Czechs are adaptable and compatible In addition to language and professional skills, other aspects considered important by employers are openness, communication skills, charisma and flexibility. Social intelligence, i.e. the ability to talk to people, communicate clearly and listen to others,

45 % 40 % 35 % 30 % 20 %

Within a year

Yes, they are

40% 10%

20%

48%

30%

40%

14%

At a later date

5% 0

10%

20%

30%

40%

Source: Grafton Recruitment, 2018

is also important. It is apparent that Czechs possess these skills and traits in abundance, as they are very adaptable and compatible with a number of cultures. As such, they are able to effortlessly integrate themselves into European, Korean, Japanese and American companies. Preferences of Czech employees The mood has been improving in the Czech Republic since 2014. This is indicated by the Grafton Recruitment Agency’s latest survey, which was conducted among 1,123 respondents in August 2018. The main reason for this is the fact that the pay of more than 53% of employees has increased during the past 12 months. The unemployment rate was 3.2% in February 2019 and the number of people without a job fell to 241,000. As a result, Czechs are no longer afraid of losing their jobs and their desire to change jobs is increasing. Up to 33% of survey respondents stated that they would like to change jobs within one month, while another

7% stated that they would like to do so within six months. Employees are most commonly motivated by financial compensation, while the team of immediate colleagues is the second most important factor, followed by the content of their job, personal development, acknowledgement, benefits, meaningfulness of their work, work environment, job satisfaction and the opportunity to continue their education. The most frequent reasons for leaving a job are insufficient financial compensation, desire for a change and insufficient opportunity for career growth. Respondents also considered an unsatisfactory relationship with management, monotony of their work, difficult commute and unsatisfactory relationships with colleagues to be important reasons for leaving a job. The survey also examined benefits in detail. Employees most frequently consider the top benefits to be 13th salary/14th salary/ regular bonuses, housing allowance, company car for personal use, home office and fully paid sick leave.

Taxes

25 %

Within 6 months

18%

33%

Human resources

Foreign languages used in Business Services Sector in the Czech Republic

Neither

Within a month

Permitting and construction

Car also available for personal use

42%

Properties

No, they are not

Within what time scale?

R&D

Individually scheduled working hours The option of occasionally working from home

Are they looking for a new job?

Finance

informatics, while language skills are also becoming increasingly important in finance, banking and administration. Besides English, there is increasing demand for German, and an increasing number of positions are becoming available for speakers of Russian, French and Italian. The business-services segment is somewhat special in this regard, as it frequently requires less common languages. People who speak these languages are able to negotiate a starting salary up to 15% higher than the norm. According to information from the Grafton Recruitment Agency, Czechs have worked hard on their language skills in recent years. Of the hundreds of thousands of candidates whose language skills were tested last year, approximately one-third of the participating German and English speakers were at an intermediate or advanced level.

First steps

Top 10 benefits most desired by candidates

The Czech Republic

Labour market

15 % 10 %

Source: Grafton Recruitment, 2018

www.grafton.cz

Top sectors

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

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

M&A

4 36 | BUSINESS GUIDEBOOK

Get more information about state aid Over the past few years, the Czech Republic has significantly increased its focus on new investments in the form of both greenfield projects and expansions of existing investments.

nvestors can obtain the following financial benefits: investment incentives – tax holiday + cash grants subsidies from EU funds – cash grants R&D tax credit education tax credit Under certain conditions, investors may be eligible for further subsidies or other forms of investment support at regional and sector levels. All benefits are provided based on the law and transparent rules which are in compliance with EU regulations. The EU rules impose certain limitations on the possibility to grant state aid and determine the ceiling of state aid for particular regions, sector and types of investment, even though state aid is provided directly by the particular member country from its national funds without any requirement for compensation from the EU budget. In most cases, state aid comprises the maximum possible subsidies allowed by the EU. In accordance with a change of the EU rules implemented in 2014, some measures were redesigned in 2015. As a result of a public debate on the future priorities of the Czech Republic, the incentives legislation is expected to change during 2019. The new conditions will probably be stricter and the approval process more comprehensive. AFI members are actively participating in the legislative process and actively contributing to the debate.

The information below is based on the legislation valid as of February 2019. Investment incentives The most significant incentives are: corporate income tax-relief for up to ten years (tax holiday) – available to all qualifying investors employment subsidies in the form of cash grants for job creation and training (available only in regions with high unemployment rates) cash grants for strategic projects (see below) Main conditions The main conditions for granting investment incentives differ based on the supported activity. Manufacturing industry Establishment of a new manufacturing plant or expansion of an existing plant, including its modernisation and diversification of the product portfolio. Technology centres Establishment of a new technology centre or expansion of an existing technology centre. Business support services centres The investor must establish a new business support

The Czech Republic

Finance

First steps Top sectors

www.kpmg.cz

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

M&A

Jan Linhart Partner KPMG Česká republika jlinhart@kpmg.cz

Education tax deduction

Taxes

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

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

Human resources

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

EU structural funds

R&D tax allowance

Permitting and construction

Permissible level of state aid and the amount of subsidies

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

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

Properties

Strategic investments (large projects) Large projects can qualify for strategic investment status. The main benefit of this status is the possibility to obtain larger portion of incentives in cash instead of as tax relief. The amount of a cash grant can reach up to 10% of eligible costs and can be further increased to 12.5% in the case of a project combining a manufacturing site and technology centre. In the case of a strategic investment in the manufacturing industry, the minimum amount invested in fixed assets is CZK 500 million (approx. EUR 20 million), of which CZK 250 million (approx. EUR 10 million) must be invested in new machinery, and at least 500 jobs must be created. In the case of a strategic investment in the area of technology centres, the minimum amount invested in fixed assets is CZK 200 million (approx. EUR 8 million), of which CZK 100 million (approx. EUR 4 million) must be invested in new machinery, and at least 100 jobs must be created.

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

Job creation Cash grants will be provided to an employer creating new jobs in a region where the unemployment rate is more than 25% above the national average or in special economic zones. The cash grant for job creation amounts to CZK 100,000 – 300,000 per new job (approx. EUR 4,000 – 12,000).

R&D

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

Income-tax relief

Finance

services centre or expand an existing business support services centre: shared-services centre software-development centre high-tech repair centre customer-support centre data centre

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

rademarks

Trademarks are the most common intellectual property rights worldwide. Under Czech law, trademarks are regulated by Act No. 441/2003 Coll., the Trademark Act, as amended, according to which a trademark is understood as a designation consisting of words, letters, numerals, colours, drawings, shapes of products or its packaging as well as sounds which is capable of (i) distinguishing the products and services of a particular entity from those of other entities, and (ii) being expressed in the Czech Trademark Register in a way, which allows Czech bodies to determine the scope of rights vested in the trademark owner. Scope of a trademark A trademark may be a specific verbal sign executed in either an ordinary font or special graphical font, as well as pictorial signs or any combination thereof with words, three-dimensional signs comprising shapes of products or their containers, combinations of shapes of products or containers with words or drawings and featuring a colour or any combination of colours. In certain countries it is possible to register olfactory trademarks (e.g. the smell of freshly cut grass has already been registered in China); however, even

38 | BUSINESS GUIDEBOOK

though registration of such trademarks is permissible under Czech law, this trend has yet to hit the Czech market. Registration of a trademark The most important benefit of registering a trademark lies in the owner’s sole and exclusive right to use such trademark in conjunction with the products or services for which it has been registered. This benefit is coupled with the right to prohibit third parties from unlawful use of the trademark. In order to obtain an ownership title to a Czech trademark, it is necessary to register the trademark with the Czech Trademark Register. An application for a registration of a trademark may be filed with the Czech Intellectual Property Office (IPO) by any individual or legal entity with legal capacity. In order to initiate the registration process, a fee must be paid together with the application. A filing fee of CZK 5,000 (approximately EUR 195) is charged for registering an individual trademark for three classes of products and services. A fee of CZK 500 (approximately EUR 20) is charged for every additional class should one wish to register a trademark for more than three classes. Once an application has been submitted, the application is granted so-called priority right, which

Copyrights are frequently encountered in, for example, advertising business, where photos and other copyrighted works are used extensively. The current Czech legislation governing copyrights is governed by Act No. 121/2000 Coll., the Copyright Act, as amended, and Act No. 89/2012 Coll., the Civil Code, as amended, which contain relevant provisions pertaining to licensing agreements.

M&A Top sectors

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

Taxes

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

Summary

Human resources

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

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

Permitting and construction

Registration of a patent Again, the process of registering an invention with the Czech Patent Register is carried out by the Czech IPO and an application can be filed either by the inventor himself or by an authorised person (i.e. the employer in the event of the business invention). The application must include a description of the invention and, most importantly, the claims for the patent. The claims must precisely delineate the subject matter for which protection is sought and therefore constitute the most important part of the application. As for the duration of the patent, an invention is protected in the Czech Republic for 20 years following the filing date of the application (i.e. the priority date) and its basic effectiveness represents the inventor’s/ owner’s right to prohibit anyone from using it without prior consent (e.g. a licensing agreement). A fee must be paid in order to initiate the registration process. The registration fee in the amount of CZK 1,200 (approximately EUR 47) is actually lower than the fee for the trademark registration, moreover, if the application is submitted by the inventor himself, the fee is reduced to CZK 600 (approximately EUR 23). However, in order for an invention to receive a patent for the entire 20-year period, it is necessary to pay maintenance fees, which increase in every year of the protection period. The total amount of these maintenance

Scope of copyrights Authors’ rights are attributable to the creation of an artistic or scientific work which constitutes the unique product of the author’s creative activity and is expressed in any objectively perceivable way, regardless of the extent, aim or value of such work. A work’s uniqueness requires a certain level of originality. Types of work protected under the Copyright Act include: a) literary works expressed either in writing or verbally b) musical works c) choreographic works d) audio-visual works e) architectonic work

Properties

Scope of a patent Similarly as in the case of trademarks, certain criteria exist for assessing whether an invention is eligible

In addition to the above, the Patent Act also lists things that cannot be classified as inventions and therefore cannot be patented, even though such things may be considered inventions. The ineligibility of certain inventions to be patented is primarily due to moral aspects. Such inventions include: a) surgical or therapeutic treatments and diagnostic methods relating to both humans and animals b) inventions the use of which is contrary to public order or morality c) plant or animal varieties or essentially biological processes for the production of plants or animals

Copyrights

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

R&D

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

fees can reach up to CZK 169,000 (approximately EUR 6,575) over a 20-year period. Given the fact that the maintenance fees are quite high, the vast majority of patents are cancelled prior to the 20-year mark.

Finance

Patents

for a grant of a patent in the Czech Republic and are as follows: a) novelty of the invention (on the global scale) b) inventive steps c) industrial applicability d) patent-eligible subject matter

First steps

means that the sign in the application is protected from the filing date (unless a comment or objection is raised against the trademark to be registered). The priority rights is granted due to the fact that the registration process takes about six months. During the registration process, the Czech IPO carries out a factual inspection of the subject matter of the registration application. The Czech IPO is entitled to refuse the trademark application only if there is an absolute ground for the refusal of the application, for example if the sign is not distinctive. Since the Czech IPO does not ascertain whether the sign in the trademark application is identical/similar to an earlier registered trademark, owners of the earlier trademarks have to submit their opposition during the registration process in order to prevent registration of the sign as a trademark during this stage of the proceedings. Once the trademark has been successfully registered, it is protected for a period of ten years following the filing date of the application with the Czech IPO (thanks to the priority right). The period of protection may be renewed for additional ten years should the trademark owner wish to do so. This renewal is subject to a maintenance fee in the amount of CZK 2,500 (approximately EUR 97). An application for trademark renewal must be submitted no earlier than in the last year of the protective period, but prior to expiry of such period. A renewal application may be filed within six months after the expiry date at the latest and is subject to a higher fee in the amount of CZK 5,000 (approximately EUR 195). A trademark becomes extinct if a renewal application is not filed within the respective period.

The Czech Republic

Intellectual property

Moving to the Czech Republic (housing, education and medical costs) The Czech Republic has attributes that attract foreign corporate and individual investors – investment incentives, low taxation, strategic location and affordable cost of living. Housing, education and medical costs are all essential considerations that dramatically affect the cost of living and quality of life in any country. So, just how affordable is the Czech Republic? Living expenses in the Czech Republic Public transport

EUR 19.49/month

Gym

EUR 30.79/month

Menu of the day

EUR 4.68

Water 1.5 l

EUR 0.49

Beer

EUR 1.29

Potatoes 1 kg

EUR 0.62

Lunch for two

EUR 23.39

Bread 0.5 kg

EUR 0.85

Coffee

EUR 1.7

Cheese 1 kg

EUR 7.15

TAXI (1 km)

EUR 1.01

Shoes

EUR 85.15

Fuel 1 l

EUR 1.25

Event ticket

EUR 7

Source: Numbeo, March 2019

40 | BUSINESS GUIDEBOOK

ost of living in the Czech Republic Whether you are relocating your headquarters, opening a branch office, setting up a business, starting out as an entrepreneur or a freelance contractor or seeking full-time employment, the cost of living is one of the most important factors in choosing a city and country in which to reside on a long-term basis. Liberal tax policy, low inflation and other factors make the Czech Republic one of the more affordable places to live in Europe. In fact, the Czech Republic offers some important advantages over various Western European countries, which has made it a highly attractive destination for foreign investors. To get a general idea of the living expenses, let’s have a look at the table provided by Numbeo, one of the world’s largest databases focusing on cost-of-living expenses. Despite such affordable prices, according to the Czech Statistical Office, the average gross salary increased in 2018 by 8.5% in nominal terms and 6% in real terms year on year. Currently, the average gross salary stands at the record level of roughly EUR 1,320. The cost of liv-

ing is slowly rising, but not as much as wage growth, which offers some space to upgrade the quality of life in the Czech Republic. According to Numbeo, Prague ranks 250th out of 436 cities in the world in the Cost of Living Index** of 2019. The index is relative to New York City, which means that for New York City, each index should be 100(%). Brno (the Czech Republic’s second largest city) ranks 267th, followed by Ostrava (the country’s third largest city) at 284th out of the same 436 cities. Among 188 European cities, Prague ranks 124th followed by Brno at 129th and Ostrava at 134th. Housing The World Health Organisation is of the opinion that the quality of housing is one of the major determinants of health. The costs of short-term serviced apartments, which can be used as temporary accommodation, vary from EUR 1,000 to EUR 3,000 per month depending on location and the scope of provided services. Therefore, it is important to start searching for long-term housing as soon as possible in order to avoid unnecessary spending on short-term housing.

New York, NY Paris London Munich Berlin Barcelona Vienna Liublana Bratislava Prague Brno Budapest Warsaw

1 Studio flat 2 Two-bedroom flat Ostrava EUR 229 1 2 EUR 565 EUR 375 EUR 666

73.37 69.4 60.20 69.51 54.94 49.23 48.87 45.98 45.56

16 to 19 years old

Higher education – universities

19 and above

Healthcare Provision of high-quality medical care does not affect only health and wellness; it also helps minimise or prevent high and unexpected healthcare costs. According to the 2018 Euro Health Consumer Index (EHCI), the Czech Republic ranks 14th out of 35 countries, followed by the United Kingdom in 16th place and Spain in 19th place. The EHCI is a comparison of European health care systems based on waiting times, results

Timur Zaslavsky Managing Director TIFRA tz@tifra.cz www.tifra.cz

Top sectors

6 to 15 years old

Secondary education – high schools, grammar schools, colleges and training colleges

networks. The latter include the medical facilities such as hospitals, clinics, doctors, emergency rooms and specialists that the insurance provider works with. The average annual price of comprehensive private health insurance varies from approximately EUR 400 to EUR 2,000, depending on the age of insured person, coverage, insurance policy, etc. If you are seeking individualized healthcare, a language you are familiar with, minimal waiting time and differentiated services, you can also register at private medical facilities in the Czech Republic. The annual memberships at such facilities vary from approximately EUR 300 to EUR 800 depending on the facility and the scope of provided services.

M&A

Elementary education

Ostrava EUR 9.700

and generosity with the purpose of introducing open comparisons of the performance of healthcare systems as a tool to improve outcomes and to support patient and physician empowerment. Czech citizens, permanent residents, EU nationals and those contributing to the public healthcare system are entitled to medical care in the Czech Republic (which is funded by mandatory health-insurance contributions). Moreover, there are many private health-insurance plans available for those who need them (e.g. third-country nationals who are not employed in the Czech Republic and thus do not contribute to the public healthcare system). When choosing health insurance, critical factors to consider include coverage ranges and medical provider

Taxes

2 to 5 years old

Average annual tution fee of private international schools/preschools. Brno EUR 8.770

100

Human resources

Preschool education

dures. Although their tuition tends to be quite expensive in comparison with local standards, such schools offer high standards of education, smaller class sizes, first-rate facilities, etc. There is a vast selection of international/private schools and preschools in Prague with different language programmes (e.g. English, German, French, Russian, Japanese, etc.). Major cities such as Brno and Ostrava also have international schools.

Prague EUR 10.940

Permitting and construction

The Czech education system

Source: Numbeo, March 2019

Note: Prices of furnished and unfurnished apartments excl. fees

Education Needless to say, school is very important. It is not only a place for education but also for students to socialise and build a network of peers, which leads to a good physical and mental health. Education at public schools/preschools is free of charge in the Czech Republic, students are required to speak Czech in order to enrol. For expat students who do not speak Czech, international schools/preschools can be a perfect solution. Each school has different admission and enrolment proce-

Properties

42.64 0

Source: Sreality.cz, March 2019

R&D

Brno 1 2

85.86 84.87 Finance

Prague EUR 455 1 2 EUR 1.143

First steps

Cost of living index

Average monthly rental costs

The Czech Republic

Cost of living in the Czech Republic

AFI members provide professional services in a broad range of areas Accounting IT services

Risk & Insurance Advisory

Relocation

Project & Construction Management

Legal Advisory Architecture, Engineering & Permitting Personnel Services & Recruitment

AFI Your One Stop Shop

Strategic Marketing, PR & PA

Facility Management & Security Service

Construction & Real Estate Development

Corporate Finance, M&A & Valuations

Environmental Consultancy

Real Estate Advisory & Brokerage

Executive Search

Tax Services

Auditing Visa

Finance your investment

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

D General recommendations Foreign investments enjoy broad support (including financing from EU funds) from administrative authorities in the Czech Republic. Similarly, banks and other entities offer a wide range of products for uninterrupted financing of projects with regard to the schedule for drawing subsidies from EU funds. Nevertheless, it is crucial to correctly grasp and manage, from the project point of view, the process of applying for subsidies from EU funds, so that the drawing of subsidies and project financing is as unproblematic as possible and the related costs are minimised. In particular, it is recommended that the aid applicant take the following steps: I. regularly monitor opportunities to obtain investment incentives; II. communicate in a timely manner with the respective authority (i.e. CzechInvest) with regard to the conditions for obtaining investment incentives and formulate the project in such a manner that it meets stipulated conditions. Before implementing the project, it is recommended to establish and coordinate with a team of local tax, legal and other advisors in order to ensure smooth implementation of the project and coordination with the relevant authorities; III. ensure co-financing of the project (assistance of banks and/or other advisors/co-financiers is possible); IV. while drawing incentives, it is essential to observe the project’s ongoing compliance with the conditions for obtaining investment incentives.

44 | BUSINESS GUIDEBOOK

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

The amount allocated from EU funds has been divided into ten operational programmes managed by the relevant administrative authorities. Status of drawn-down subsidies from EU funds in the 2007-2013 programming period Previous programming period More than EUR 26 billion was allocated to the Czech Republic in the 2007-2013 programming period (if we calculate the amount per capita, this allocation is one of the highest among Central and Eastern European countries). As at 16 January 2018 support for more than 71,000 projects, amounting to EUR 28.11 billion have been approved. Actual utilisation According to data obtained at the end of 2017, when the Czech Republic had negotiated approx. 96.4% of the total allocated amount, the country ranked sixth in terms of using allocated funds among Central and Eastern European countries behind Bulgaria, Latvia, Estonia, Lithuania and Poland. The proportion of the total allocated amount

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

Amount

Operational Programme (OP)

Administrator

Amount

European Regional Development Fund

EUR 11.94 billion

OP Transport

Ministry of Transport

EUR 4.7 billion

European Social Fund

EUR 3.42 billion

Integrated Regional OP

Ministry of Regional Development

EUR 4.6 billion

Cohesion Fund

EUR 6.14 billion

European Agricultural Fund for Rural Development

EUR 2.31 billion

OP Enterprise and Innovation for Competiveness

Ministry of Industry and Trade

EUR 4.3 billion

European Maritime and Fisheries Fund

EUR 0.03 billion

Ministry of Education, Youth and Sports

EUR 2.8 billion

Youth employment initiative

EUR 0.03 billion

OP Research, Development and Education OP Environment

Ministry of the Environment

EUR 2.7 billion

III. Loan commitment: Banks also provide loan commitments, enabling aid applicants to provide evidence of full project financing. Aid intensity in the 2014-2020 programming period

Ministry of Regional Development

EUR 0.21 billion

Prague City Hall

EUR 0.20 billion

OP Fisheries

Ministry of Agriculture

EUR 0.03 billion

Source: www.strukturalni-fondy.cz, 2019

without exception (in addition to that, public entities may use co-financing from the state budget). Private (private-law) entities With respect to other entities not specified in the list above (typically private entities not engaged in public-benefit activities), when determining EU aid intensity support it must be considered whether or not state-aid conditions have been cumulatively fulfilled in the particular case (project). State aid applies in cases where (i) support is provided by the state or from public funds; (ii) support is provided preferential-

Top sectors

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M&A

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

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

Taxes

Public (public-legal) entities If the aid recipient is an organisational unit of the state administration, a state contributory organisation, a legal entity engaged in the management of school and educational facilities, a territorial self-governing unit, the City of Prague including its contributory organisation, a public university, a research organisation or a private entity engaged in public-benefit activities, the following rules apply: EU aid can be used to cover 85% of eligible costs of a project in less developed regions and 50% of the eligible costs of a project in the City of Prague

OP Technical Assistance OP Prague – Growth Pole of the Czech Republic

Human resources

Ongoing funding A total of EUR 24 billion was allocated for the Czech Republic in the 2014-2020 programming period. As of 22 February 2019, support for more than 196,000 projects, amounting to EUR 15.54 billion, had been approved. The possibility to take advantage of this period of European funds will persist until the end of 2023.

EUR 2.3 billion EUR 2.1 billion

Permitting and construction

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

Ministry of Agriculture Ministry of Labour and Social Affairs

Properties

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

Rural Development Programme OP Employment

R&D

Source: www.strukturalni-fondy.cz, 2019

Finance

European structural and investment fund

First steps

Operational programmes

European structural and investment fund

The Czech Republic

EU funding until 2022

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

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

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

46 | BUSINESS GUIDEBOOK

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

Forms of investment incentives Corporate income-tax relief for companies for a period of up to ten years. For new companies, this incentive is provided in the form of full tax relief, for existing companies in the form of partial tax relief. Cash grants for job creation provided in regions with high unemployment and in special industrial zones in the amount of EUR 3,900 to EUR 11,700, depending on the region. Exemption from property tax for up to five years in special industrial zones. Cash grants for acquisition of assets provided for strategic investments in the manufacturing industry or technology centres in the amount of up to 10% of eligible investment costs. Cash grants for training and retraining new employees in regions with high unemployment in the amount of 25% to 50% of eligible training and retraining costs, depending on the region.

46% New jobs required

Manufacturing industry

2-4 half of which in new machinery

Technology centres

0.4 half of which in new technology

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

Type of activity

Business support services centres

500

Technology centres

8 half of which in new technology

100

Taxes

Zuzana Hetešová Head of the Financial Support Section CzechInvest zuzana.hetesova@czechinvest.org

Top sectors

www.czechinvest.org

M&A

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

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

Pursuant to the draft amendment to Act No. 72/2000 Coll., on Investment Incentives, in future the investment incentives system will focus more on support for projects with high value added. What does that mean? In the case of manufacturing projects, this will lead to stricter conditions for providing investment incentives in the form of testing for high value added reflecting minimum salaries of employees and the ratio of university-educated employees, R&D employees or investment in new technology intended for R&D purposes. Job creation and training grants shall be reduced and the condition requiring creation of 20 new jobs will be repealed. On the other hand, the new system will favour projects involving technology centres and business support services centres, which should receive job creation grants and training grants throughout the Czech Republic, with the exception of Prague. The minimum conditions for small and medium-sized enterprises will be reduced by half. The prepared amendment to the Investment Incentives Act should come into force in the middle of 2019. It is currently in the legislative process and its wording and effective date are subject to change.

Human resources

of total eligible costs for large enterprises. State aid is increased by 10% for medium-sized companies and by 20% for small companies.

years and cash grants for job creation. Cash grants for training and retraining of employees may be provided above the state-aid ceiling, i.e. as cash in addition to the previously mentioned EUR 1.5 million.

Prepared amendment to the Investment Incentives Act

Permitting and construction

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

54%

Properties

20 half of which in new machinery

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

Czech companies

R&D

Manufacturing industry

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

Applications for investment incentives

In the period from 1998 to 2018, a total of 1,204 Decisions to Grant Investment Incentives were issued on the basis of registered applications. In the period from 1998 to 2018, investors committed to investing nearly CZK 908 billion (approx. EUR 35 billion) and creating more than 193,000 new jobs.

Source: CzechInvest, 2018

Eligibility criteria for strategic investments

Eligible costs

Foreign companies

Finance

Investment in assets (EUR million)

First steps

Eligibility criteria

The Czech Republic

Investment incentives

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

he Operational Programme Enterprise and Innovation (OPEIC) is the main financial tool for supporting enterprise and manufacturing industry within the Czech operational programs supported through EU funds. Approximately EUR 4.3 billion has been allocated from the European Regional Development Fund for projects within OPEIC. The programme’s managing authority (Ministry of Industry and Trade) delegates the majority of the implementation tasks to the Business and Innovation Agency (Agentura pro podnikání a inovace – API). The API is a mediating entity basically for grant-based aid and is responsible for communication with aid applicants and recipients. This communication is conducted through ISKP 2014+, an information system for financial aid beneficiaries, which serves for all operational programmes at

48 | BUSINESS GUIDEBOOK

the national level in the 2014-2020 programming period. Aid recipient Small or medium-sized enterprises are eligible to  receive aid within OPEIC, though in some programmes large enterprises with more than 250 employees can also apply for aid. Projects must be implemented within the Czech Republic, outside the city of Prague (the seat of the company can be located anywhere in the Czech Republic). Aid will be provided in compliance with the individual state-aid rules. Applicants must be registered as income-tax payers within EU countries uninterruptedly for a period of no less than two closed tax periods preceding the date of the submission of the aid application (in the case of related enterprises, the parent company’s account history can be provided). The given company must be

Programme description

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

Support for activities aimed at implementation of innovation

Potential

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

Training Centres

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

Expansion

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

Venture Capital

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

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

Expanded use of renewable and secondary sources of energy

Energy Savings

Reduction of the energy intensity of production

Smart Grids I (Distribution Grid)

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

Innovation Vouchers

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

Low-Carbon Technologies

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

Infrastructure Services

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

Energy Savings in Heat Supply Systems

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

Proof of Concept

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

Smart Grids II (Transmission Grid)

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

High-Speed Internet

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

ICT and Shared Services

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

Technology

Top sectors

Source: API, 2018

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

M&A

Renewable Sources of Energy

Taxes

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

Human resources

Cooperation

Permitting and construction

Knowledge Transfer Partnership

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

Properties

R&D

Application

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

Marketing

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

Finance

Programme

First steps

Overview of OPEIC programmes:

The Czech Republic

OPEIC 2014 - 2020

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

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

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

50 | BUSINESS GUIDEBOOK

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

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

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

Size of enterprise

Aid intensity in 2014-2020

Small

45%

Medium-sized

35%

Large

25%

Source: API, 2018

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

Small enterprise

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

Large enterprise

Industrial research

70%

60%

50%

Experimental development

45%

35%

25%

Aid for feasibility studies

70%

60%

50%

Aid for construction and upgrading of research infrastructure

50%

Source: API, 2018

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

Medium-sized enterprise

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

We proudly fulfill the three pillars of the Innovation Strategy of the Czech Republic 2019â&#x20AC;&#x201C;2030: National Start-up and Spin-off Environment Smart Investment Smart Marketing

Financing foreign investments in the Czech Republic Many countries strive to attract foreign direct investment (FDI), as the knowledge brought by multinationals is likely to spill over into domestic industries and increase their productivity. Local governments typically use different investment incentives to support FDI inflow. However, incentives need to be complemented with liberal exchange control rules, a healthy banking sector and functional financial and capital markets to allow for efficient financing of individual investments. The Czech banking system’s capital adequacy ratios, in % T1 Capital ratio 25 20

Total capital ratio 21.1

20.6

Q3 2017

Q3 2018

18.2

17.7

19.6

18.8

15 10 5 0

Q3 2017

Q3 2018

Large banks Source: Czech National Bank, Česká spořitelna, 2018

52 | BUSINESS GUIDEBOOK

Medium - sized banks

Q3 2017

Q3 2018

Small banks

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

The Czech Republic: a converging economy with opportunities GDP per capita in purchasing power standards

Finance

140,000 120,000 100,000

118%

115%

EU average = 100% 86%

R&D

82%

80,000

72%

60,000

71%

65%

64%

63% Properties

40,000 20,000 0

Austria Germany Spain

Czech Portugal Slovakia Poland Hungary Greece Republic

www.csas.cz/eu

www.csas.cz/en/korporace

Top sectors

Jiří Hájek Director Large Corporates I. Česká spořitelna, member of Erste Group jirihajek@csas.cz

M&A

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

The still relatively low general government debt is another advantage of the Czech economy. The share of government debt to GDP is around 33% and is projected to somewhat decline in the coming years thanks to economic growth.

Taxes

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

Human resources

Sources: Eurostat, calculation by Česká spořitelna, 2017

Permitting and construction

Due to lower initial starting conditions, the degree of economic development in the Czech Republic measured by GDP per capita in purchasing power standards is still somewhat lower than the European Union average. However, the Czech Republic, thanks to its higher average growth, has been converging towards EU levels and, in terms of GDP per capita, it has already overtaken several older EU and euro-area member states. The country’s growth potential is expected to remain strong for the foreseeable future. The Czech Republic has benefitted from its membership in the European Union and from its close economic integration with the euro area. The share of trade with the euro area is around 65%; the country’s largest trading partner is Germany, followed by Slovakia. Skilled and competitive labour is one of the comparative advantages of the Czech economy, along with political stability and geographical and cultural proximity to its euro-area trading and business partners. The Czech economy has therefore attracted a sizable regular inflow of foreign direct investment. Close ties with German manufacturing create strong demand for the quality of Czech production and have contributed to rapid technological advances. The Czech economy’s potential is supported by its economic policies. The country’s independ-

First steps

licenses on the Czech market (as at January 2019). Two of these are owned by the Czech state while most of the remaining 48 institutions are either branches or subsidiaries of foreign banks. In terms of market share, the local banking sector is quite concentrated on loans and roughly 63% of all loans are held by the leading four banks (as at September 2018). The Czech banking sector is very safe, with strong liquidity (average loan/deposit ratio of 77% as at December 2018), high capital adequacy (average Tier I capital ratio of 18.3% as at September 2018; see chart) and good asset quality (average share of non-performing loans to resident and non-resident clients of 3.3% as at September 2018). As a result, local banks are able and willing to extend financing to all viable foreign investments in the Czech Republic at very competitive prices in domestic and foreign currencies. Local banks offer all types of funding products, from plain vanilla financing (investment loans, working capital financing, overdrafts) through trade, export and asset-based finance (buyer’s credit, factoring, forfaiting, structured trade finance, real estate financing, leasing), to structured finance (club and syndicated loans, acquisition and leveraged finance, project finance), all of which support foreign investments throughout all stages of their lifecycle. Larger investments can be financed through debt and equity capital markets that offer deep and liquid distribution to both domestic and international investors. The Czech Republic boasts the best ratings (S&P and Fitch: AA-, Moody’s: A1, all of which are stable) of all the CEE countries and its sovereign strength is positively reflected in sought-after corporate issuance in CZK and EUR. Thus, the local capital market has proven to be the most active when compared to its CEE peers. The individual funding instruments are typically used in combination in order to create the optimum capital structure and to minimise financing costs. Corporate issuers can also make use of hedging of the interest-rate and FX risks related to the chosen funding structure. The Czech Republic is an open, export-oriented economy with liberal exchange control regulation, a competitive banking sector and efficient financial and capital markets. As such, it offers a broad range of financing instruments to foreign investors, which can efficiently fund and manage financial flows related to their investments in the Czech Republic.

The Czech Republic

Banking system and the economy

Did you know?

Czech discoveries and inventions Electron microscope electron microscope into production in 1949, which later led to the fact that the city of Brno is considered Established in 1850, the Czech company Tatra to be the global centre of electron microscopy. is the third-oldest car manufacturer in the world. One of the world’s oldest factory-made cars is the Tatra

Tatra

Sugar cubes produced at a sugar mill in the town of Dačice in 1843.

Beer

Robot

in Plzeň in 1842.

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

Polarography

Semtex

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

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

Laws of heredity

Soft contact lenses

Moravian scientist Gregor Mendel discovered

Czech inventor Otto Wichterle designed

to use biostatic methods in his work, the results of which were initially presented in 1865.

in 1961.

Lightning rod

AIDS drugs

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

Drugs developed by Czech chemist Antonín shingles, viral infections of the ocular mucous membranes and hepatitis B.

Screw propeller

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

Kaplan turbine In 1910-1912, Czech scientist Viktor Kaplan invented the Kaplan turbine, which became hydropower plants around the world.

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

Look into R&D

Digital Czech

Digital and innovations - An opportunity for investors

The willingness to embrace and support digital and innovation development is one of the most important conditions for future competitiveness and for the sustainability of the very good results achieved by Czech industry and the country’s economy.

he Czech Republic is and will continue to be a small, open economy with a tremendous focus on industrial production and exports. Industry accounts for approximately one-third of the country’s gross domestic product, which is practically the highest level among the countries of the European Union. More than twothirds of Czech exports are delivered to demanding European markets. The Czech Republic also has the lowest unemployment rate in Europe. If the country is to maintain this position, its industrial production must continue to remain competitive. The basic prerequisite for that is to strictly follow the most developed countries that are in the forefront of new trends and technological developments, and to promptly respond to challenges emerging in global industry. The ability to quickly respond to and use the best scientific research results in practice is of crucial importance. Digital Czech Programme In October 2018, the Czech government approved the Digital Czech Programme, which consists of three pillars: e-Government, The Czech Republic in Digital Europe and The Digital Economy and Society. The Ministry of Industry and Trade of the Czech Republic is the guarantor of the programme. The Digital Economy and Society priorities cover a wide range of activities, the most important of which are investments in qualified human resources, support of technology-intensive research and development programmes and high-tech manufacturing and services. The Ministry of Industry and Trade, while promoting Digital Economy and Society, will primarily support a broad range of activities connected with artificial intelligence and the use thereof in industry and business. The ministry will also promote the establishment and improvement of the Digital Innovation Hubs Network and use of its output by small and medium-sized enterprises. Infrastructure for high-performance will facilitate the use

56 | BUSINESS GUIDEBOOK

of the most advanced digital technologies and their regional dissemination to industry and services and blockchain technology and digital single markets will also become an important part of the ministry’s Digital Economy and Society activities. The leading role of artificial intelligence The Czech Republic has begun preparation of the National Artificial Intelligence Strategy (NAIS), which will define specific actions and measures including funding schemes. The Ministry of Industry and Trade is responsible for preparing this important national strategy. In formulating the NAIS, the Ministry of Industry and Trade is building on the Communication on Artificial Intelligence for Europe and Communication on the Coordinated Plan for Artificial Intelligence. The NAIS is scheduled to be presented to the Government of the Czech Republic in April 2019. The artificial-intelligence agenda is included among the priority topics of the future EU multiannual financial framework for the period 2021-2027 (future Horizon Europe framework programme, Digital Europe Programme, etc.). The existence of the NAIS is a prerequisite for the efficient use of these EU instruments. The Czech Republic is interested in bidding to become the location of the pan-European Digital Innovation Hub. Furthermore, construction of a European Centre of Excellence in AI in the Czech Republic is also one of the objectives of the government’s Digital Economy and Society strategy. The primary aim of the Czech Republic in the field of artificial intelligence is to increase the value added of innovative processes and services in industry and services through the use of AI technologies while supporting Czech businesses in mastering technological and economic challenges and opportunities of the digital economy and Industry 4.0. The objectives of the Ministry of Industry and Trade is to ensure growth in the competitiveness of the whole Czech economy in the forthcoming digital era, to strengthen the innovative competence of both industry and

the business sector through the elements, systems and technologies of the digital economy.

to solving problems, independence, self-management, initiative, responsibility and ethics.

Innovations and new technologies as an opportunity Technologies and technological processes have spread to all areas of human life and we can expect this trend to continue in the future. It can be assumed that, in connection with this development, there will be greater demand for system makers and Big Data specialists, who are needed to create systems, as well as experts in robotics, cybernetics and informatics. Engineers, analysts and programmers will need to be able to see beyond the narrow frameworks of their fields and to think across business models, production processes, machinery and data operations. The ability to effectively work with information is closely related to digital literacy, which will be as important in the future as reading, writing and arithmetic are today. Networking will require the ability to collaborate in a complex and multicultural environment. In addition to possessing good social skills, workers will need to be skilled in effective long-distance communication using ICT, integrative thinking, network organisation and cooperation. The key will be the ability to learn throughout one’s life, to actively seek out current industry information and to use new technologies, the internet, social media, etc. Furthermore, there will be increasing emphasis on creative approaches

What should Czech companies focus on? Innovations and new technologies should lead mainly to the inception of individualised mass production, which will allow manufacturers to easily turn out unique products in units for a price which approaches that of series production. Digitalisation of production is a necessary condition for communication between production systems, but it is not in itself the core of the process. Decentralised control and autonomous decision-making are far more important. This is a question of competitiveness on the global scale. In order for companies on the Czech market to be able to make individualised products for every customer for a favourable price, they need to adopt new business models and technological processes, such as advanced robotics and automation systems with algorithms of artificial intelligence. It will also be necessary to improve warehouse management, logistics and planning. While these issues represent complicated challenges, they are also offered opportunities for capable and intelligent people, which the Czech Republic undoubtedly has.

Petr Očko Deputy Minister of Industry and Trade posta@mpo.cz www.mpo.cz

More information about Digital Czech is available on the website of the Ministry of Industry and Trade of the Czech Republic at www.mpo.cz.

industry and industrial exports, which is apparent in research and development. The biggest investor in research in this sector is the carmaker Škoda, which operates a development centre in Mladá Boleslav.

Taxes M&A Top sectors

www.vyzkum.cz

Human resources

Petr Dvořák First Vice-Chairman of the Council for Research Development and Innovation vvi@vyzkum.cz

Permitting and construction

Enticements for foreign scientists Today the Czech Republic has numerous outstanding research infrastructures and science centres, which are beginning to have a significant impact on the quality of research. Initial investments in science centres financed through the Operational Programme Research and Development for Innovation reached the level of more than CZK 30 billion, 85% of which was covered by European Union funding. Currently, the primary objective is not to further expand the number of research infrastructures and centres, but rather to optimise their operation and to focus on support of the best and most effective of them. In order to generate top-level results over the long term, the aim of research centres is to employ outstanding foreign scientists and to be attractive for innovative private firms, which would

play an increasingly greater role in their operation and financing. Research infrastructures would then complementarily provide technological expertise that keeps step with the advanced international environment. Research infrastructures and centres thus offer an opportunity to, for example, establish a consortium with international participation or other forms of collaboration, where larger and smaller firms come together with research institutes and universities. The Innovation Strategy of the Czech Republic 2019-2030: The Country of the Future, which was recently approved by the government, should introduce support for increasing the quality and effectiveness of Czech research and innovation. The Innovation Strategy is a very ambitious document identifying the weaknesses of the Czech system and the means of remedying those weaknesses, as well as the objectives that should eventually be achieved. If it fulfils all of those objectives, the Czech Republic should rank among the global leaders in research and innovation within the next twelve years.

Properties

Effective specialisation Karel Havlíček, Deputy Prime Minister for the economy, Minister of Industry and Trade and Vice-chairman of the Council for Research, Development and Innovation, emphasises that collaboration between firms and research organisations has already become an entirely common occurrence in the Czech Republic. A significant role is played here by a dialogue between firms, researchers and the government regarding the focus of research within the National Innovation Platforms. Representatives of individual sectors of the economy recently began to directly participate in the formulation of common priorities for applied research. Thanks to the Platforms, it was possible to divide the full spectrum of applied research into seven areas of specialisation for which the Czech Republic, due to its industrial tradition and current and future innovations, has the necessary prerequisites for further development: advanced machines, digital economy, 21st century vehicles, advanced medicine, cultural and creative industry, agricultural and the environment, and social challenges. This frequently involves a combination of these priorities. Traditional Czech industry must overcome challenges in the areas of informatics, robotics and cybernetics, and enhance its competitiveness on the international scale through the introduction of new technologies. In this respect, both connection to the digital economy, on which the largest amount of private spending is currently focused, and the cultural and creative industry can be of assistance. The automotive sector has the largest share in Czech

R&D

rilateral cooperation between the business sector, researchers and the government is gradually becoming one of the pillars of the Czech economy. Not only is private spending on research increasing, but public spending is stabilising thanks to medium-term financing prospects. The Czech Republic offers domestic and foreign scientists a high-quality network of science infrastructures whose construction was financed in the past with European funding. In terms of the number and quality of research centres, the Czech Republic is in a leading position in the European Union. A new system of assessing research is gradually being put in place. The system has undergone the first year of implementation and is beginning to positively motivate research organisations. It is characterised by the transition from measuring quantity to assessing the quality of results, the processes connected with research and the strategies of research organisations, which are thus more motivated to collaborate with firms and to engage in international collaboration. Furthermore, Czech diplomacy is being focused on, among other things, communication of the domestic research environment’s advantages abroad. Significant forms of international collaboration that have recently been successfully developed include the involvement of renowned foreign scientists in Czech research institutes. Today, research is a major employer in the Czech Republic. At the end of 2017, roughly 108,000 people were employed in research and development; of those, 55.5% were research workers.

Finance

Innovation in industry and other sectors of the Czech economy is increasingly the driving force of not only numerous firms operating in the Czech Republic, but also research institutes and universities that collaborate with those firms. In this respect, the potential of local research has grown significantly in recent years.

First steps

The future of the Czech Republic lies in innovation. Czech research attracts firms to collaboration

The Czech Republic

Research infrastructure

Support for R&D investments

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

zech technical and non-technical universities have a long tradition, which also includes research. There have always been many scientists living in our country who have helped and continue to help change the world for the better. One of them is Jaroslav Heyrovský, who won the Nobel Prize in Chemistry in 1959 for his discovery and development of polarographic methods of analysis. We are a nation of clever solutions and therefore we are constantly investing in the innovation environment for a better future for all. Our country invests 2% of GDP in research and development and over the past seven years we have invested the most in Europe in research infrastructure. This has resulted in our currently having exclusive research capacity on a global level. Czech industry also continuously invests in R&D and is actively adopting digital models of production with incorporation of AI, IoT and robotic technologies. Though Industry 4.0 is currently a key initiative in the Czech Republic, Czech industry is developing advanced technologies also in other areas including autonomous mobility, clean mobility, cybersecurity and optoelectronics, among other fields. The Technology Agency of the Czech Republic (TACR) established in order to link the worlds of academia and corporate research and development and to support applied research projects and technology transfer. Our projects generate unique products, patents and other results that enable research findings to be quickly applied in practice. We thus contribute to increasing the competitiveness of the Czech economy, which is growing mainly due to domestic and foreign innovative companies. Through TACR programmes, research, commercial and non-profit organisations establish partnerships that generate ideas for the benefit and development of society.

58 | BUSINESS GUIDEBOOK

Our programmes aim to provide support for research, development and innovation that responds to new market opportunities and the needs of society. TACR supports hundreds of projects worth many hundreds of millions of crowns that are related to the principles of Smart Life and create an environment for the progressive development of new methods and technologies needed for implementation of Industry 4.0. This is made possible thanks to nine TACR programmes, each of which has its own unique function and importance. Just to introduce the main support schemes: a key programme for the commercialisation of research results is EPSILON, which supports projects whose results have strong potential for rapid market application, while the GAMA programme has important implications for verification of the results of research and development for practical application and commercial exploitation. Within the ETA programme, we also assist in addressing challenges and exploiting opportunities of the 21st century with the help of social sciences and humanities, including art. The THETA programme focuses on new technologies and key trends in the energy industry. We support young researchers in the ZETA programme and assist them in the implementation of applied research projects. The BETA2 programme is intended for the research needs of the public administration, as it allows ministries and other institutions to carry out research with the aim of improving the functioning of the state. The KAPPA programme is strengthening the development of knowledge based on research by means of international cooperation in the area of applied research between Czech entities and partners from Norway, Iceland and Liechtenstein. And finally, the National Competence Centres programme ensures effective cooperation between research organisations and companies by means of virtual research centres focused on progressive disciplines

that are vital for the growth of the Czech Republic’s competitiveness. We want our support for research and development in the field of innovation to be used by as many partners as possible, helping us to change the world for the better. Therefore, we are opening up to the world through, for example, our DELTA 2 programme of international cooperation and our involvement in TAFTIE, the European network of innovation agencies, which allows us to share the best experience and information from partner agencies that also support research, development and innovation. TACR implements the Seal of Excellence for projects of SMEs selected within the H2020 SME Instrument – Phase 1. Moreover, TACR participates in ERA-NET COFUND schemes (GENDER-NET Plus, CHIST-ERA III, M-ERA. NET 2, EuroNanoMed 3) and is getting involved in three others (ERA MIN, BiodivClim and AquaticPollutants). The aim of TACR is to provide business and research entities with a friendly and effective system of support and to ensure the development and growth of our country’s competitiveness. For this reason, under the working name of Team Czechia, we have teamed up with other bodies of the public administration that provide support to companies across all phases of their life cycle to achieve the maximum innovation potential in the Czech market.

Petr Konvalinka Chairman Technology Agency of the Czech Republic Contact person: Eva Bendlová eva.bendlova@tacr.cz www.tacr.cz

Main TACR programmes BETA2 – programme of R&D public tenders for state administration needs EPSILON – support of projects with results having strong potential for rapid market application GAMA – verification of the results of R&D for practical application and commercial use DELTA 2 – bilateral collaboration in applied research with international partners ZETA – involvement of the young generation of researchers in applied research projects ETA – involvement of social sciences and humanities in projects of technical and non-technical RD&I THETA – support for transformation and modernisation of the energy sector in accordance with strategic materials KAPPA – strengthening the development of knowledge based on research by means of international cooperation in the area of applied research with partners from Norway, Iceland and Liechtenstein National Competence Centres – focus on combining existing centres of excellence for research, development and innovation into larger units, which will significantly contribute to the development of the country’s competitiveness. This programme mainly supports long-term cooperation between the research and application spheres.

M&A Top sectors

www.czechinvest.org

Taxes

Zdeněk Havel Project Manager for R&D CzechInvest zdenek.havel@czechinvest.org

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

Human resources

R&D. The agency has a long history of organising technology missions to foreign countries, thereby bringing Czech firms and institutions together with partners in specific fields, primarily in applied research. Since 2005, more than 60 outgoing and incoming missions of this kind have been carried out and have resulted in valuable endeavours and projects. The concept of technology missions involves a very hands-on approach, where selected researchers and innovative companies along with universities embark on a “door-to-door” roadshow and visit carefully selected foreign partners, thus enabling practical discussion and establishment of new partnerships. CzechInvest then complements these efforts with activities in the Czech Republic, such as local seminars

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

Properties

zechInvest bases its support of research and development on solid analysis of massive amounts of data. The agency makes use of public information about nationally funded R&D activities, analysing the register of research projects and identifying targeted actors. Furthermore, data on international cooperation is also used to track “who does what with whom and where,” as the department commonly refers to its monitoring activities. The data include joint publications with individual countries and participation in Horizon 2020 and other programmes for international cooperation in R&D. CzechInvest also proactively collects its own data, not only through continuous contact with Czech research facilities, but also through a unique internal database of excellent R&D entities in various fields ranging from information technologies through medicine to chemistry and other fields. Moreover, the database of these entities should be made publicly available in the first half of 2019 as part of CzechInvest’s new geographic information system. Insight into this wealth of collected information about Czech R&D can be also found on the website at www.czech-research.com which CzechInvest

R&D

The website was officially launched by CzechInvest in December 2016. Its main goal is to provide an overview of the Czech R&D system and its important players to foreign investors and other interested parties. The sections of the website cover the R&D system, R&D environment, funding, news and events, and a series of articles on key sectors and trends in applied research.

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

Finance

www.czech-research.com

First steps

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

The Czech Republic

R&D-related investment

Large research infrastructures of the Czech Republic

esearch infrastructures’ importance and impact Research infrastructures are one of the key pillars of research, technological development and innovation systems of the EU member states, the European Research Area as a whole and other world macro-regions. They represent the principal backbone for conducting cutting-edge R&D and developing breakthrough innovations, as they bring together unique experimental devices and top-class expertise. Research infrastructures facilitate “frontier” research in fundamental and applied scientific fields, as well as development of state-of-the-art technologies which show the high knowledge intensity and potential for applications in innovative products and services with high value added. Construction of research infrastructures and their upgrades aimed at preserving their world-class level offer tremendous opportunities for enterprises to take part in tenders for such deliveries. Generally, the private sector benefits from research infrastructures from both the economic and knowledge point of view, as it is encouraged to supply research infrastructures with high-tech products and stimulated to use the know-how resulting from R&D carried out in research infrastructures to develop innovative solutions to major socioeconomic challenges. Operation of research infrastructures in line with the principles of the transnational open access policy allows their users from around the world to achieve results that would be difficult to obtain

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by individual researchers and innovators using solely their own institutional capacities. In this respect, research infrastructures increase the efficiency of public spending on research, technological development and innovation by making the most up-to-date technologies available to a broad user community and by preventing research funding organisations from fragmenting resources and duplicating efforts. Policy approach to research infrastructures in the Czech Republic The Czech Republic has responded to the significantly increasing importance of research infrastructures in the European Research Area and worldwide and has taken a number of steps aimed at providing them with a stable legal framework and predictable financial environment. In 2009, Act No. 130/2002 Coll., on Support of Research, Experimental Development and Innovation from Public Funds, introduced a specific legal instrument for financing the large research infrastructures of the Czech Republic and entitled the Ministry of Education, Youth and Sports to become the Czech national policy-maker and public funding provider in this field. The very first edition of the Roadmap of Large Research Infrastructures of the Czech Republic was issued in 2010 and subsequently updated in 2011 and 2015 (the next update is expected in 2019). Currently, the Czech Republic’s road-mapping procedure is fully aligned with the pan-European approach, which is coordinated within the framework of the European Strategy Forum on Research

Human resources Taxes

have significant international overlap and impact. The appointment of Dr. Jan Hrušák as the new ESFRI chairman proves that the Czech Republic is also able to provide extraordinary personalities in the area of policy-making involving research infrastructures. The latest news concerning the large research infrastructures of the Czech Republic is available on the dedicated website at https://www.vyzkumne-infrastruktury.cz/en/.

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opportunities for world-class managers, excellent scientists, skilled technicians and qualified administrators in high-tech fields and attractive international environments. The Czech Republic – and the Ministry of Education, Youth and Sports in particular – has been an active player in the field of research infrastructures. The large research infrastructures of the Czech Republic are networked within the European Research Area and worldwide, and thus

Properties

Pavel DOLEČEK, Ph.D. Deputy Minister for Higher Education, Science and Research Ministry of Education, Youth and Sports pavel.dolecek@msmt.cz

The Extreme Light Infrastructure (ELI) is the world’s leading laser-based research infrastructure and will serve for cutting-edge basic and applied research in physical, chemical, material and medical sciences as well as breakthrough industrial innovations. Construction of three ELI facilities – ELI Beamlines in the Czech Republic, ELI Attosecond in Hungary and ELI Nuclear Physics in Romania – is nearing its completion. The European Research Infrastructure Consortium (ELI-ERIC) will be established in 2019 to manage their operations for the benefit of international academic and industrial users. The three ELI facilities were financed with more than EUR 820 million from national and European Structural and Investment Funds (ESIF) in their host countries. The establishment of ELI-ERIC, which will bring together the countries of the major ELI user communities and enable them to access the world’s most intense and shortest-pulsed lasers for research and innovation, will ensure long-term sustainable operations as well as further technological development of ELI as an international flagship research infrastructure initiative. ELI will provide environments for the collaboration of thousands of leading scientists from around the world and enable hightech industries and innovators to be involved in the development of state-of-the-art technologies. From the macro-economic point of view, ELI facilities situated in Central and Eastern Europe increase cohesiveness within the European Research Area by bridging the innovation divide within the European Union.

R&D

Research infrastructures of the Czech Republic – overview The research and innovation community of the Czech Republic gathers a broad portfolio of knowledge and technical expertise, which has enabled the construction and operation of various large research infrastructures in the fields of the physical sciences and engineering, energy, environmental sciences, biological and medical sciences and social sciences and humanities, supported by an e-infrastructure providing both research infrastructures’ operators and their users with high-quality and adequately scaled ICT services. The large research infrastructures of the Czech Republic follow good-practice examples of user access policies and, therefore, are open to scientists and innovators from both Czech and foreign/ international research organisations. Besides enabling researchers and innovators to carry out experiments of a unique nature and technology level, the large research infrastructures of the Czech Republic also offer great job

EXTREME LIGHT INFRASTRUCTURE – THE “CERN OF LASERS”

Finance

Internationalisation of the research infrastructures of the Czech Republic In recent years, the Czech Republic has been very active in the area of internationalisation of the country’s research infrastructures. Besides being a member state of six international R&D organisations founded under international public law (i.e. CERN, EMBC, EMBL, ESA, ESO and JINR), the Czech Republic has become a member state of 12 European Research Infrastructure Consortia (ERIC) established under the legal framework of the European Union and participates in a number of other

international single-sited, distributed and virtual research infrastructures founded under the national legal frameworks of their host countries, such as the Brookhaven National Laboratory, Fermi National Accelerator Laboratory and the Facility for Antiproton and Ion Research. Czech large research infrastructures are involved in 28 pan-European research infrastructures included in the ESFRI Roadmap 2018, 23 of which are ESFRI Landmarks and five ESFRI Projects. The Czech Republic will also become a member state of the ELI-ERIC organisation, which operates the Extreme Light Infrastructure.

First steps

Infrastructures (ESFRI), including international peer-review assessments and monitoring exercises organised on a regular basis as an expert input for evidence-based political decision-making processes. The Ministry of Education, Youth and Sports has developed a multi-source model of public funding of the large research infrastructures of the Czech Republic by combining state budget expenditures with European Structural and Investment Funds (ESIF) in the most synergic and complementary way. While the operational costs of large research infrastructures are covered by state budget expenditures, their investment costs are funded using EU Cohesion Policy instruments (currently the Operational Programme Research, Development and Education). In a number of cases, these investments have enabled major upgrades of the technological devices of existing large research infrastructures. Brand-new facilities of national, macro-regional and even worldwide importance (ELI Beamlines) have been constructed as well. Furthermore, apart from financing large research infrastructures based in the Czech Republic, the Ministry of Education, Youth and Sports has introduced mechanisms for the participation of Czech large research infrastructures in international facilities located abroad, including in-kind deliveries of experimental devices to those facilities (e.g. European Spallation Source and Jules Horowitz Reactor).

The Czech Republic

Large research infrastructures

Higher education in the Czech Republic The Czech Republic is proud of both the long history and dynamic present of its system of higher education. Charles University, the largest institution of higher education in the Czech Republic, was established in 1348 as the first university in Central and Eastern Europe, making it older than any university in Germany, Austria or the rest of the region.

Percentage of 25-34 years olds with tertiary education 35 30 25 20 15 10 5

19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17

Source: OECD, 2019

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ince then, higher education has spread throughout the country. With its nearly 700 years of academic tradition, the Czech higher-education system consists of more than 60 institutions in over 20 cities, of which 26 are public, 36 private and two state institutions. The Czech Republic is also home to 17 branches of international universities and colleges. At least one institution is located in almost every regional capital, stimulating regional development and providing local industries with good access to skilled labour. A total of 18 universities in the Czech Republic feature in the top 300 institutions and two universities in top ten of the QS EECA University Rankings 2018 – a dedicated ranking of top universities in Emerging Europe and Central Asia – and five of these are included in the QS World University Rankings® 2018. Current trends in Czech higher education Access to higher education has been expanding rapidly over the past two decades in the Czech Republic, delivering a significant boost to the country’s innovation capacity. Currently, there are approximately 300,000 students at public, state and private higher-education institutions. Roughly 88% of students attend public higher-education institutions. Over 50% of students are enrolled in economics, technical and social sciences and humanities study programmes.

Engineering fields are the most popular, accounting for 23% of the new entrants, followed by business and economics with 20% of new entrants. Every year, six to seven thousand new, skilled master’s-level engineers and experts in natural sciences enter the labour market, together with over 300 PhD graduates in the same fields. Among master’s-level graduates in engineering fields, architecture and civil engineering is the most common discipline, followed by significant numbers of professionals in IT, chemical engineering, mechanical engineering and electrical engineering. In addition to traditional disciplines, a substantial number of experts graduate every year from developing and interdisciplinary programmes such as security engineering, process engineering, environment protection, and biotechnology, as well as from programmes teaching various field-specific applications of informatics. Today, the Czech Republic is also a destination with progressively increasing popularity for international studies at higher-education institutions. There are currently about 45,000 foreign students enrolled in full degree programmes, a 19.2% increase since 2010. Over 16,000 students choose to study in the Czech Republic for exchange or short-term study programmes every year. International degree students can choose from 1,000 diverse accredited bachelor, master and doctoral programmes in English

Other engineering and Interdisciplinary fields Architecture and Civil Engineering IT Chemistry Mechanical Engineering Electrical Engineering and Computer Science Transport and Logistics

Share of businesses collaborating with universities in innovation development, by country

2,334

25%

1,810 1,095

20% 15%

817 723

10%

521 500

1000

Finance

1,047

1500

2000

2500

Taxes M&A Top sectors

www.msmt.cz

Accelerator at the University of Economics, the Technology Innovation Transfer Chamber at the Brno University of Technology and Point One at the Czech University of Life Sciences. Spin-offs and technology transfer are further supported by an established network of regional innovation centres and industry associations. Collaboration with industry in teaching and learning received a significant boost from a recent amendment of the Higher Education Act, which opened up a lot more space for professional programmes and promotion of internships. A successful mechatronics programme developed through collaboration between the University of South Bohemia and the German technology giant Robert Bosch GmbH can serve as an example of this development.

Human resources

www.dzs.cz

Tomáš Fliegl Head of Strategy Unit Department of Higher Education Ministry of Education, Youth and Sports tomas.fliegl@msmt.cz

Applied research focused on specific needs of industry is supported extensively by the Technology Agency of the Czech Republic, which was established in 2009. In 2018, more than CZK 23 billion in public subsidies was provided by the agency to universities, public research institutions and private organisations in order to stimulate innovation, technological development and knowledge transfer. The agency’s programmes cover all steps of the innovation chain and a broad range of disciplines, from materials science, transportation and IT to social challenges and public policy. Almost every public university has established its own infrastructure supporting innovative start-ups and projects, such as the INQBAY incubator at the Czech Technical University in Prague, the xPORT Business

Permitting and construction

Ing. Jakub Tesař Head of the Higher Education Department Centre for International Cooperation in Education jakub.tesar@dzs.cz

Source: Eurostat, 2014

Properties

Innovation and collaboration with industry Universities play an important role in research and development. Their success in this field can be seen in, for example, new treatments for cancer and haematological and urological diseases, the development of new construction technologies, advanced materials and cooperation on international projects (e.g. in collaboration with CERN and the Joint Institute for Nuclear Research in Dubna). The Czech Republic has achieved international renown in areas ranging from Egyptology to high-tech fields such as non-woven nanofibers; Nanospider, a unique nanofibre production technology, is now sold all over the world. European Union funds are also helping to further develop the country’s university-based research infrastructure, including the construction of centres of excellence in research focused on the development of laser systems, biomedical and materials science,

energy research and complex mathematical modelling in the natural, medical and technical sciences. The Czech government recently introduced the new Innovation Strategy of the Czech Republic 20192030. With its new strategy titled The Czech Republic: The Country for the Future, the country aims to become an innovation leader in Europe. The Czech Republic’s strong focus on science and innovation is illustrated by current projects of Czech scientists and companies, such as nanotechnological coatings to improve air quality, a system for effective harvesting of water from desert air, capacitors for Mars rovers, operation of the most powerful laser in the world and the emergence of a local superhub for artificial intelligence. The Strategy Framework agreed on by the Academy of Sciences, universities, company representatives, science institutions and ministries includes a complete innovation chain from support of basic research, through applied research and development to industrial applications and support for enterprise innovation.

Slo ve n Au ia str Hu ia ng Cz Be ary ec lg h R ium ep u Ge blic rm a Sw ny ed Slo en ve No nia rw Cr ay oa Lit tia hu an Po ia lan d La tvi Es a to Po nia Ne rtu th ga er l lan ds Sp ain Tu rk Bu ey lga Ro ria m an ia Ita ly

R&D

Source: MŠMT, 2017

and other foreign languages. More than 100 offered programmes are joint or double degree.

First steps

Graduates 2017

The Czech Republic

Higher education

TEVA Daikin

Novartis

Merck Sharp & Dohme

Foxconn Interpharma (Otsuka Group)

Panasonic

Hyundai Motor Manufacturing Czech

Toyota Peugeot Citroën Automobile

Škoda Auto (Volkswagen Group) GE Aviation

Life sciences

BASF

Pegas Nonwovens

Nano technology & Advanced materials

Spolchemie

Oracle

Tieto

Accenture

Business support services

IBM ABB

Ingersoll Rand

Engineering

Hotel & Leisure

Mandarin Oriental

Infosys

SAP

DHL

ICT

Microsoft

Hilton Hotels

Aerospace

Selected clients of AFI members

Ness Czech

Netsuite

AERO Vodochody

Automotive

Electrical Engineering

AGC

Bell Helicopter (Textron)

Denso

Lonza

FEI Czech Republic

Honeywell

Precision Cast Parts

Zentiva (SanofiAventis)

Bang & Olufsen

Merck Sharp & Dohme

Bosch

Nestlé

Food Sector Banking &10 10 Financial services

Siemens

Black & Decker

Chemical Industry

Pepsi

PPF

Shell

Penta Hotels

Pilsner Urquell Citibank

Raiffeisen BNP Paribas

Barclays

Unilever

Unipetrol Johnson & Johnson

Coca-Cola HBC

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Development of industrial zones in the Czech Republic

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

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

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

81 10 9

80 14 32

19 21 22 23

33 31

89 3

46 45

41 42

5 4

26 30 Prague 29 25 85 28 27

36 34

53 52

67 79 61

68 70 71

75 74

59 58

57 56

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www.tebodin.bilfinger.com

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Jan Bobek Business Development Director CEE Bilfinger Tebodin Czech Republic, s.r.o. Former Chairman of the Steering Committee Association for Foreign Investment jan.bobek@bilfinger.com

Human resources

Note: Numbers in brackets next to the names of municipalities indicate the total number of supported zones in the given location. Source: CzechInvest, 2018

Permitting and construction

Legend: 1 Český Krumlov, 2 Prachatice, 3 Písek, 4 Blatná, 5 Domažlice, 6 Stod, 7 Plzeň (2), 8 Ostrov, 9 Podbořany, 10 Žatec (2) 11 Klášterec nad Ohří, 12 Chomutov (2), 13 Most-Joseph, 14 Lovosice (2), 15 Přestanov, 16 Ústí nad Labem, 17 Rumburk, 18 Liberec, 19 Slaný, 20 Tuchlovice, 21 Kladno, 22 Unhošť, 23 Zdice, 24 Žebrák, 25 Zlatníky-Hodkovice, 26 Poříčany, 27 Zruč nad Sázavou, 28 Kutná Hora, 29 Kolín, 30 Velim, 31 Nymburk, 32 Mladá Boleslav (2), 33 Jičín (2), 34 Hořice, 35 Vrchlabí, 36 Trutnov, 37 Solnice -Kvasiny, 38 Chrudim, 39 Svitavy, 40 Moravská Třebová, 41 Ždírec nad Doubravou (2), 42 Havlíčkův Brod, 43 Pelhřimov, 44 Kamenice nad Lipou, 45 Třebíč, 46 Velké Meziříčí, 47 Žďár nad Sázavou, 48 Bystřice nad Pernštejnem, 49 Blansko, 50 Brno (2), 51 Pohořelice, 52 Mikulov, 53 Velké Pavlovice, 54 Vyškov (2), 55 Brankovice, 56 Hodonín, 57 Staré Město, 58 Zlín, 59 Vsetín, 60 Holešov, 61 Valašské Meziříčí, 62 Hranice, 63 Velká Bystřice, 64 Olomouc (2), 65 Uničov, 66 Šumperk, 67 Mošnov, 68 Paskov, 69 Ostrava (2), 70 Frýdek - Místek (2), 71 Nošovice, 72 Třanovice, 73 Třinec, 74 Český Těšín, 75 Karviná, 76 Krnov, 77 Světlá n. Sázavou, 78 Znojmo, 79 Kopřivnice, 80 Louny, 81 Kadaň, 82 Jihlava, 83 Bílina, 84 Pardubice, 85 Kuřim, 86 Prostějov, 87 Hrádek nad Nisou, 88 Litovel, 89 Tábor, 90 Krupka, 91 Velká Bíteš, 92 Nad Barborou

Properties

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

17 16

83 15

R&D

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

Map of industrial zones supported since 1998

Finance

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

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

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

The Czech Republic

Quality of industrial properties in the CR

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

of many other transactions within a particular country. Instead,

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

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

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

The Czech Republic

Acquisition of land

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Taxes

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

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

Human resources

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

4. Law related aspects

Permitting and construction

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

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

3. Land preparation

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

Properties

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

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

R&D

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

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

Finance

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

The beauty of brownfields

Ostrava, Vítkovice

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

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

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

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

Increase of competitiveness

immediately available (subject to approval of the intended use)

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

few limitations due to the existing area, services or topography

generally easy to reach (roads and other transport infrastructure already in place) infrastructure may already be in place (water mains, utilities, etc.) easier to get approval for the intended use (subject to changes in the local zoning plan).

Greenfields -

Brownfields -

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

possible difficulty and high cost of obtaining the necessary use permit

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

potential persistence of past risks or obligations

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

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

possible difficulty and high cost of obtaining the necessary use permit

usually located within urbanised areas) Unlike greenfield projects, limited claims on agricultural land in line with the principles of sustainable development principles Mobilisation of private capital Increase in property values within the brownfield site and the surrounding areas

www.atsunami.cz

Top sectors

Positive influence on crime prevention and thus reduction of crime rates

Aleš Krtička Architect ATELIER TSUNAMI akrticka@atsunami.cz

M&A

Improvement of the environment through decontamination of the given site

Taxes

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

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

Human resources

Decrease of unemployment through job creation

easy to acquire

Permitting and construction

Inflow of foreign direct investments

Brownfields +

Properties

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

Greenfields +

R&D

Benefits of brownfields regeneration:

Basic comparison of brownfields and greenfields from construction perspective

Finance

Utilisation of brownfields should limit the number of greenfield projects, thus leading to less agricultural land being used for construction and fewer high-capacity water and utility connections being built, while contributing to lower requirements for transportation of people, materials and finished products. There are many successfully regenerated brownfield projects with various types of uses throughout the Czech Republic. Other brownfields are still waiting for their new lives to begin. With active support from local governments, regional institutions, investment incentives and investors, brownfield regeneration undoubtedly represents a bright future for the Czech Republic. Yet another important brownfield segment includes vast areas of unused marshalling train yards, railway yards and train stations. These areas are usually very well situated not far from city centres with excellent transportation infrastructure and readily available utilities. Among the most significant examples you may find are the newly commenced property development near Masaryk Railway Station in Prague and the major redevelopment of the Žižkov Rail Freight Terminal, which is under preparation. Furthermore, there is one more project designed for the area near Prague – Smíchov Railway Station. Similar projects are under preparation in many other cities (e.g. Pardubice, Česká Třebová).

First steps

as well as all auxiliary industries complemented by rapid development of extensive logistics facilities and shopping centres located conveniently next to the most important transportation routes. In comparison with greenfield investments, regeneration of brownfields is a far more complicated process. The country’s brownfields arose through the long-term disuse of facilities previously used in energy- and labour-intensive industries that are now in decline. As a result of that, brownfields can be found in Czech regions with high unemployment rates and significant social and economic issues. A separate category of brownfields comprises former military facilities that were refurbished and converted for civilian uses following the end of the Cold War. These include, for example, barracks in Nové Město nad Metují and Trutnov, and the Milovice and Ralsko military bases. However, brownfields are often located in strategic locations and thus offer opportunities for investments in new industries, IT, distribution, sales and leisure activities, as well as public-sector investment. Any such investment can potentially create and maintain a significant number of jobs. Regeneration of brownfields with environmental contamination will also significantly improve the quality of the environment while being of real benefit for all activities in surrounding areas.

The Czech Republic

Greenfield vs. brownfield investments

Green light for brownfields in the Moravian-Silesian Region The Moravian-Silesian Region is generally known as the region with the largest concentration of brownfields in the Czech Republic. This fact is no longer viewed as a problem, but rather as an opportunity to transform such sites into prosperous locations for business, leisure and residential uses.

rownfields can be defined as abandoned sites that were damaged or otherwise encumbered by their previous use. These are predominantly properties containing derelict residential buildings, unused transport-related structures or inoperable industrial complexes. They are often characterised by large dimensions, negative social effects and ecological burdens. To a large extent, brownfields are located in the central built-up areas of cities and towns, where they are aesthetically displeasing and take up space that could be used more effectively. They are also a financial burden for their owners, public or private entities. In many cases, the cost of revitalising a brownfield is an insurmountable obstacle. A registry of more than 600 brownfield sites under private and public ownership is maintained in the region. With the agreement of their owners, these properties are actively offered to investors, who in recent years have expressed increased interest in such abandoned and neglected locations (the offer of brownfields is available at www.invest-msr.com). The regional database of brownfields also serves as a source of information for the National Brownfield Database administered by CzechInvest, with

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connection to the possible drawing of aid from the Ministry of Industry and Trade and the Ministry of Regional Development for regeneration of these underused properties. The Moravian-Silesian Region plays an active role in preparing the conditions of grant titles at the national level and provides current feedback from municipalities that already have prepared projects for revitalisation of their brownfields. Regional institutions are also involved in the RE:START strategic programme, of which brownfield regeneration is one of the priority areas. Increased cooperation between the public and private sectors in the area of brownfields is anticipated in the future. This is due not only to the current parameters of aid programmes involving brownfield regeneration for municipalities when there is the prerequisite of further business use in the case of certain grant titles, resulting in an opportunity for investors in various sectors. A prerequisite for success is accordance between private-sector investment projects and the strategic and land-use plans of the given municipality. This mainly requires active communication from both sides with respect to clarification of priorities, identification of common interests and elimination of, among other things, bureaucratic obstacles in the given location.

The Czech Republic

Realization of brownfields

First steps

The project LUMAT CE89 Implementation of Sustainable Land Use in Integrated Environmental Management of Functional Urban Areas receives support from the INTERREG CENTRAL EUROPE programme and the budget of the Moravian-Silesian Region. Within the LUMAT project, a total of 13 partners (including Moravian-Silesian Investment and Development) from seven European countries will be involved in the integrated management of functional urban areas

R&D

until 2019. A functional urban area can generally be understood as a city and its surroundings, where the given city fulfils the function of a work centre or, better said, a provider of job Properties

opportunities to which area people commute.

M&A Top sectors

www.msid.cz www.invest-msr.com, www.brf-msk.cz

Taxes

Ing. Lenka Tichá Project manager Moravian-Silesian Investment and Development ticha@msid.cz

residents and visitors of the given municipality. The Moravian-Silesian Region remains appealing for foreign investors and developers, as one of its attractions is the broad offer of properties suitable for investment. The region contains 46 industrial zones, which were mostly established on green fields, and 100 development sites without utility connections. In the past year, however, increased interest in brownfields has been registered not only from foreign investors, but also from local firms that are seeking spaces for their further expansion. Investors value an offer that has been tailored to their requirements, assistance in negotiating with property owners and arrangement of visits to selected locations.

Human resources

Among experts in the area of brownfields, there is general agreement that brownfields have the potential to be reused as green spaces, art and shopping centres, recreational complexes and residential sites. Unlike in the United States, where refurbishment of brownfields for subsequent residential use is more prominent, brownfields in the Czech Republic are generally seen by the public in relation to industrial complexes. In the case of long-neglected structures in the built up areas of municipalities, there is currently a tendency toward demolition and conversion of sites into green zones and public spaces. Though this approach does not bring forth the desired economic benefit, it is perceived very positively by

Permitting and construction

ernised. Inclusion of all publicly offered brownfields in the GIS system and subsequent connection with regional map portals are being prepared for this year, which should make searching for information on a given brownfield more efficient. An ordinary user/investor could thus find all necessary information, such as the boundaries and dimensions of a site (previously, only the GPS coordinates of a site’s central point were available), the current ownership structure and restrictions in terms of utilisation according the land-use plan and limitations within the site. An integral part of the brownfield registry in the region is active search for new locations that are suitable for inclusion in the offer in connection with field investigations. In this area, there is room for close cooperation with students at the Technical University of Ostrava. The results of some of the work done by students form a valuable foundation for the further development of brownfields, whether this involves creative proposals for the sites’ future use, comparison of the economic effectiveness of various means of revitalisation or the benefit of regeneration for the region’s overall economic situation. The region is also active in informational activities in the area of brownfields. Annual Brownfield Trips are organised here not only for investors and developers, but also for the general public. The purpose of these one-day events is to visit and learn about several successfully regenerated brownfields and to show locations that are still awaiting regeneration. The registry contains dozens of brownfields that are suitable for development projects. The most common future uses are residential housing and office facilities, though sites suitable for recreation and leisure activities are also offered.

Finance

The issue of effective regeneration of brownfields requires a comprehensive solution in terms of legislation and tax policy, financial support from aid programmes, acceleration of the building- permit process, resolution of problematic ownership issues and monitoring and priority handling of severely contaminated sites, as well as from the information standpoint. Therefore, a draft comprehensive solution for brownfield regeneration, the Action Plan of Brownfield Regeneration for the Moravian-Silesian Region, has been prepared in the region in connection with the international LUMAT project. The Action Plan contains several proposed changes that would lead to making investments in brownfields more financially advantageous in comparison with greenfield construction (e.g. by means of tax relief in a manner similar to investment incentives from CzechInvest), as well as systematic handling of all actions leading to support for the regeneration of brownfields. The region also aims to increase the involvement of the general public in dealing with these often problematic sites. Therefore, a new interactive tool getting the public involved (at www.brf-msk.cz) is being prepared with the purpose of finding sensible future uses and solutions for individual brownfields among both ordinary citizens and experts in the given issue who live near such locations. With support from the LUMAT project, the tool will provide examples of good practice from sites that have already been regenerated, which can serve as a guide for potential investors. This platform will also serve for obtaining information on new brownfields, the projected aims of their revitalisation, and thus more precise steering of grant titles toward their regeneration. The registry of brownfields in the Moravian-Silesian Region is continuously being expanded and mod-

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

he National Brownfields Database administered by CzechInvest offers locations prepared to meet the needs of both domestic and foreign investors. On the one hand, the database aids the revitalisation of abandoned and disused sites and, on the other hand, makes it easier for investors to select the most appropriate places for doing business in the Czech Republic. The database is available to the public at www.brownfieldy.cz and currently contains records of more than 500 brownfield sites that are for sale or for lease, and that number will continue to grow. Within the Operational Programme Enterprise and Innovation for Competitiveness 2014-2020, the Ministry of Industry and Trade is introducing a total of 23 aid programmes. Aid recipients will be able to use funding from these programmes

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

The Czech Republic

Brownfields and sustainable construction

First steps Taxes M&A Top sectors

www.linkcity.cz

Human resources

Clément de Lageneste CEO Linkcity Czech Republic c.delageneste@linkcity.com

Permitting and construction

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

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

Properties

How will a new centre look? Prague’s Radotín district is taking inspiration from abroad in its effort to revitalise a site

Partnership and openness: The keys to success of the Linkcity concept The success of the Linkcity concept depends on partnership with the commissioning party, which in this case is the Radotín district of Prague. With Design & Build projects, which are implemented gradually with the assistance of both involved parties, close cooperation is the decisive factor. Thanks to this, the development company could correctly incorporate the investor’s intentions into the project and thus find the best way to use the given site in the tender. Together with the city, the developer had to work out the initial concept and reconcile the requirements for public infrastructure with the possibilities of commercial development. During its presentation, the project was also consulted with the residents of Radotín, who expressed, for example, interest in transport and parking solutions, to which the developer gave due consideration in conjunction with City Hall and incorporated these solutions into the project in order to support its social sustainability. The idea is to formulate an open project in which the creation of public spaces (squares, green spaces) will lead to the proliferation of meeting spots, which are highly important in an urban setting

with a strong sense of community. Private buildings are subordinated to this concept, so they are not fenced in and thus do not become enclosed spaces in and of themselves.

R&D

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

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

Finance

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

Solid Foundations: The maturing Czech property market offers stability and reliability to tenants Signing a lease contract for office, retail or warehouse space represents a significant commitment for any business. Fortunately, when leasing property in the Czech Republic, tenants will find that standard international real estate terms and conditions have been adopted by many landlords. Let’s review a few of the most important of these and the common practices applied to them in the Czech Republic.

ental levels The age-old real estate axiom “location, location, location” definitely applies: location, subjected to the fundamentals of supply and demand, strongly influences the rental prices that a landlord can demand and that tenants will pay in the Czech Republic. Prime locations, such as the Old Town (Staré město) and New Town (Nové město) districts of Prague 1, achieve the highest rental rates for retail and office units. Currently, prime rents for high-street retail units can exceed EUR 200/m2/month and prime

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office space goes for over EUR 21/m2/month. For warehouses, higher rents have a direct relationship to transport connections. Prague, Plzeň and Brno are the strongest industrial and warehouse hubs due to their excellent highway access and deep labour pools, which translate into rents that can be above EUR 4/m2/month. However, the Czech Republic and its capital city, Prague, offer a broad range of properties where rental rates can be 25% to 50% below the prime rent levels, but still offer good quality and a convenient location. In general, landlords of modern commercial properties in the Czech Republic will denominate and charge rents in euros.

together with interest, over the lease term as an increase to the amount of rent).

Human resources Taxes M&A Top sectors

www.whitestar-realestate.com

Permitting and construction

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

Properties

Service charges Leasing commercial property entails consuming a variety of ancillary services. These services include utilities for the building’s operation (electricity, water, heating and cooling), security, cleaning of common areas, building reception and general maintenance of the property. The scope and cost of the offered services will vary significantly depending on the class of the property (A, B, C, etc.) and the type

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

R&D

Indexation  Indexation refers to annual adjustments of the rent on the basis of a cost-of-living index. Landlords seek these adjustments to cope with overall inflation in the economy. Tenants seek to limit this in order to control and better forecast costs. In the Czech Republic, landlords and tenants seem to prefer the Harmonised Index of Consumer Prices for the European Union. Landlords may require a minimum indexation figure, for example 1.5%, meaning that even if statistical agencies report a lower inflation figure, the rent automatically increases by this minimum amount. Tenants may request a maximum indexation figure as protection against unforeseen inflationary pressures. An advantage to tenants with this inflation-based approach is that Czech leases seldom have rent review provisions and often provide an option for three- to five-year term extensions based on the tenant’s unilateral choice, making rental-rate growth more predictable.

of property (office, retail, industrial, residential). For industrial properties, service charges are roughly EUR 1/m2/month. For both office and retail properties, service charges range from EUR 3 to EUR 5/m2/month depending on the quality of the building and the services offered. Additionally, tenants will be charged for the direct consumption of utilities such as electricity. For retail properties, a marketing contribution is often included on top of the standard service charges in order to ensure promotion of the given shopping centre. In the optimal case, the landlord will not add any margin to the individual services and will also provide an annual reconciliation of the service charges on a transparent “open book” basis. Service charges and the prices of utilities can vary greatly between properties and are something many tenants overlook, as savings on rent could easily be outweighed by a lack of transparency in costs.

Finance

Incentives Market incentives take a variety of forms and change with the times. Most commonly, landlords offer an initial “rent free” period and “fit-out contributions”. At the beginning of this decade, the Czech office market experienced high levels of competition among landlords due to a wave of speculative office development. This, combined with slowing tenant demand, resulted in double-digit vacancy rates for several years. This competitive market tilted the advantage toward tenants, leading some landlords to offer a wide range of inducements, such as reimbursing moving costs and covering existing rent obligations in order to attract them to their projects. In 2017 and 2018, the market experienced increased tenant demand, lower speculative development, absorption of vacancy and a substantial jump in construction prices, all of which have brought incentive levels back to a more balanced state.

The most common incentive is “rent free”, meaning the tenant will not pay rent for a certain period of time. A common level of rent free is one month per year of the lease contract term. Thus, for a fiveyear lease a tenant could receive five months of rent free. This level may increase depending on vacancy and supply in the market. Some tenants may prefer to simply pay a lower average rent, but a landlord of commercial real estate will prefer rent free to reduce cash incentives and maintain higher headline rents, which are used to determine property values. The other common incentive is a “fit-out contribution”, meaning the landlord will pay for leasehold improvements for the tenant. Landlords will generally limit contributions to apply to true technical improvements or immovable upgrades, such as floor coverings, partitioning and infrastructure modifications (HVAC, lighting, etc.) that add value to the property, while avoiding specialised tenant equipment. Landlords generally do not allow tenants to apply fit-out contributions towards movable property, such as furniture and data cabling. Traditionally, fit-out contributions have ranged from EUR 50 to EUR 100 per square meter of leased area based upon a five-year lease commitment. Some landlords, especially those developing a new property, offer “turnkey” fit-outs that may reach as high as EUR 300/m2. This approach is an advantage for developers, because they can more easily wrap these costs into their development budget and use the existing construction company to complete the works. Incentives offered for retail and industrial units differ significantly but generally represent lower savings for tenants. For retail units in the best locations, landlords do not offer any incentives. In less attractive locations, retail tenants might negotiate a rent-free incentive. The same applies for industrial real estate. Industrial tenants can receive fit-out contributions as well, but the landlord will generally “rentalise” the contribution (i.e. amortise the cost of the investment,

First steps

Lease term This varies depending on the business, the property and the location. Generally, an office tenant will receive the best terms on leases of at least five years. Similar minimums will apply in retail and industrial spaces. If a tenant is prepared to commit to a term of more than five years, this can strategically improve their negotiating position. Landlords of industrial properties will often seek longer lease terms of ten years or more, especially for “build-to-suit” spaces, in order to ensure recovery of the related investment. For retail units in the best locations, tenants may seek longer lease terms to secure their location. At the same time, landlords may seek shorter terms to have an opportunity to increase rents once a location becomes established. If a tenant cannot or does not want to commit for at least five years, they must factor the resulting added cost into their calculations, as landlords will demand higher rents and provide fewer incentives in exchange for flexibility and a shorter lease term.

The Czech Republic

Leasing of commercial property

Ostrava’s characteristics this is what the city is like

Skill Ostrava can be confident thanks to its industrial tradition and potential, the technical and technological know-how that has been passed down from generation to generation, its hardworking people and high-quality academic infrastructure.

Education

Professionalism

Five respected universities in the city and its surroundings, nearly 27,000 students from different countries studying a wide variety of disciplines – Ostrava is a true university city.

We understand what you need and what we can offer. The best proof is provided by the confidence of both domestic and foreign investors, as well as renowned rating agencies.

BUSINESS IN

Uniqueness

High life Because work is not everything that matters, the city tries to make life colourful every single day and at any time of night. Irrespective of taste, preferences and interests, everyone can find something they like. Ostrava is a city full of charm and appeal. It astonishes you with its unique atmosphere, originality and creativity.

Passion We never leave you in any doubt about what we really think. Once you get to know us, you can be sure that you will have warm-hearted friends for life.

Blend together a strong will, energy, willingness to learn and diligence and adapt them to modern trends and you get Ostrava.

3 the third-largest city in the Czech Republic and the metropolis of the Moravian-Silesian Region

300,000 population of the city of Ostrava

3 strategic location at the crossroads of three countries (CZ, SK, PL), offering excellent access

EUR 13,126 median gross annual wage in Ostrava (2018)

0 10 1

Václav Palička Ostrava City Authority Head of the Strategic Development Department vpalicka@ostrava.cz +420 599 443 382 www.ostrava.cz

Ostrava

Find your property

Czech commercial property market: confidence, stability, potential

Total stock, m2 Total stock

New stock

8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2011

2012

2013

2014

2015

2016

2017

2018

Source: 108 Agency, 2018

Key indicators, m2 New stock

Under construction

600,000

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

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

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2011

2012

Source: 108 Agency, 2018

80 | BUSINESS GUIDEBOOK

2013

2014

2015

2016

2017

2018

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

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

Permitting and construction Human resources Taxes M&A Top sectors

www.108agency.cz

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

Properties

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

in nine countries, operates a warehouse facility in Horní Počernice which occupies the top position within the domestic market in terms of area. With a value of more than EUR 2.5 billion, the P3 transaction is the largest ever deal in the Czech real-estate market. Investors’ interest in Czech industrial parks has been very strong especially over the past three years, though it is constrained primarily by the number of investment opportunities. Of the recent transactions, for example, we must mention Deka Immobilien’s acquisition of three logistics centres with a total of roughly 430,000 m2 from the real-estate developer CTP. Strong investment demand is also being generated by private funds, which are largely focused on sale-and-leaseback transactions.

R&D

Industrial boom In terms of the dramatic development in the last few years, a very interesting aspect in the investment field is the industrial real-estate market. For an objective comparison, it is important to put the market into context and bear in mind that, from a historical perspective, the Czech warehouse market is still very young, especially compared to that of our western neighbours. While in the Czech Republic the first large-scale warehouses began to appear in the vicinity of the country’s capital in the mid-1990s (in locations such as Rudná and Zličín), in neighbouring Germany similar projects were built in the 1970s. Current development is fully following global trends including environmental certification of modern warehouses, focus on maximum efficiency and also new construction of “big box” projects. To understand the dynamics of the development of the industrial real-estate market in the Czech Republic, the most illustrative indicator is the total area of warehouse space, which totalled 3.4 million square metres at the beginning of 2010, rising to slightly more than 4.5 million square metres by mid-2014 and more than seven million square metres at the end of 2017. Moreover, the current development in terms of record low vacancy suggests that a further increase in the total capacity is essential. This is also related to a significant proportion of speculative construction, where more than 30% of all projects are started without previous engagement of tenants. Demand is mainly concentrated in locations near major highways. With the gradual development of the transport infrastructure in the Czech Republic, new investment opportunities are coming to market with the aim of diversifying the offer of properties and creating a viable alternative to heavily developed areas with limited opportunities for further construction (mainly locations on the D1 and D5 motorways, specifically Prague, Brno and Plzeň). Currently we are able to observe

increased attractiveness particularly of the regions bordering Germany, mainly Karlovy Vary and Ústí nad Labem, where completely new industrial parks are being built. This is illustrated by the 60,000 m2 warehouse facility at the P3 Lovosice Logistics Park, construction of which will begin in the middle of 2019. Due to investors’ rising interest in the aforementioned regions and with the advancing development of the e-commerce industry, we do not expect demand to weaken. Those who acquire sufficiently large plots of land with good infrastructure connections in these areas will have ensured a very strong position for themselves in the future. In these locations we can already see investors’ interest in construction of more large-scale logistics centres. The motivation for establishing such centres consists in the very strong connections to Germany, in addition to the fact that the Czech Republic provides foreign companies a stable investment environment, good transport links and a skilled workforce with acceptable real wage costs. Ownership structure is an interesting aspect to consider in evaluating the Czech industrial real-estate market. From this perspective,the Czech industrial real-estate market can be classified as relatively homogeneous. The successive acquisitions of smaller units have created a group of very powerful companies whose portfolios comprise a decisive share of the Czech market. Still, the on-going consolidations create investment opportunities in a wide range of financial volumes. An example from the recent past is the record sale of the developer P3, an international company that ranks among the leaders on the Czech market. Among its activities in the Czech Republic, this developer, whose portfolio includes industrial and logistics parks

Finance

Market saturation: Retail Since the beginning of the new millennium, there has been very intense activity from developers in retail real-estate market in the Czech Republic resulting in healthy market saturation. Trade in retail real estate intensified around 2013 as the impacts of the global financial crisis subsided. Since then, we have annually seen rising interest in the retail sector from both private investors as well as institutional investment funds in the Czech Republic. Currently, we can find several all new smaller-scale regional projects on the market, as well as a commercial zone of larger scale being prepared in the commercial zone nearby D1 highway in the Prague’s vicinity. However, we cannot only praise the strength of the market, as surveys carried out among developers and investors indicate mild concern with respect to the continuing legal uncertainty connected with the regulation and approval of planned

projects. On the other hand, a vague concept of spatial development is therefore advantageous particularly for strong investment groups that are willing to take the risk of a longer approval process.

First steps

the benefits that come with being close to the city centre. In terms of office development, in the past decade strong local investors whose portfolios satisfy even the most demanding criteria have managed to assert themselves in the Czech Republic, while the open, fully competitive market also continues to be accessible for foreign entities. Due to this fact, the Czech Republic and, in particular, the city of Prague has several exceptional projects under development. The goals of these projects are often considerable, not only in terms of the solutions implemented, but also from the perspective of urban planning. An example of this is the proposal of the Central Business District designed by Zaha Hadid Architects, a world-renowned architectural firm. The currently strong interest in administrative and shopping centres can be illustrated with a summary of recently concluded transactions on the Czech market, including last year’s sale of the Forum Nová Karolina shopping centre in Ostrava and the sale of the Trimaran and City Element administration centres in Prague 4 to Allianz Group, which constituted one of the biggest transactions in Prague. It is also important to mention the growing interest of Asian investors in the Czech property market.

The Czech Republic

Introduction to the Czech property market

Key considerations for the successful planning and realisation of your business premises in the Czech Republic Business premises used to be no more than just a place for work. This has been changing together with technology and the way people think of work and life balance. Coworking, co-living, multifunctional, automated and shared spaces are some of the growing subsectors driven by the changing needs of occupants.

he amenities and facilities on offer are now a key factor for investors making decisions about where they want to open or expand their operations. The digital revolution has the power to seismically change the way a wide range of industries function and real estate is no exception. Not only is the workplace changing as technology allows more flexible and different ways of conducting business, but retail and logistics are also changing very quickly. An investor looking to establish or expand operations should consider all of the above-mentioned factors together with the local property market conditions and regulations and incorporate them into the strategic planning and realisation of its business premises, including the fit-out. When searching for business premises, an investor needs to consider and prepare a project brief that has two main phases: planning and implementation. In the planning stage, it is important to define the spatial and timing needs and prepare an initial list of suitable premises in the target location. At the same time, the project team should meet with the relevant consultants and lawyers

82 | BUSINESS GUIDEBOOK

to discuss the local property market and the legal, technical and health and safety conditions. When selecting the business premises, the project team should assess the various risks connected with the favoured options (usually two or three options) by performing technical and legal due diligence. A concept design then needs to be prepared for the selected premises, including spatial and technology layouts and a preliminary cost plan. For both new and existing premises, the technical due diligence exercise should establish the condition of the premises (more so for existing premises) and their suitability for the planned use. In the implementation phase, it is necessary to prepare the detailed design of the future business premises, taking into consideration the various information gathered in the previous stages. This detailed design documentation forms the basis of the fit-out tender process and the contract for the fit-out works. During the fit-out stage, the investor needs onsite monitoring to check the quality of the works. During the handover process, sometimes before the fit-out is completely delivered, the investor starts to move into the business premises. This is often called the early access period. A list of de-

Planning

• Check an initial space fit • Due diligence report • Planning application documentation

• Health and safety review

• Client’s insurances • Occupier insurances • Use/impact of new materials

• Project management • Architectural design • Cost management • Consultant’s fees agreed

• Assessment of HR issues • Staff communications strategy

• Tender documentation • Working drawings and specification • Elevations detailed space and technology plans • Data infrastructure and utilities/ infrastructure lead-in times • Agree programme plan

• Commissioning • Record Photographs • List of contractors/suppliers • Inspection reports • Consultant sign-off • Statement of completion • Completion of snagging and sign-off process

• Wheelchair access • Lift certification testing

• Fire strategy report • Fire safety report

• Progress communication plan

• Security final assessment • Staff handbook • Space plans

• Consultant/contractor warranties • Fit-out contract • Develop FM strategy

• Fit-out insurances

• Performance bonds • Equipment warranties • Product guarantees • Fit-out review • Move insurance

• Completed warranties • PC (practical completion certificate) • All statutory consents • Certificate of occupation • Final completion statement

• Defects period begins • Warranties commence • Product guarantees commence • Instruct FM/operating and maintenance teams

• Health and safety file (final) • Operating and maintenance manual (final)

• Execute move • Vacate old premises

• FM briefing

• Risk management. Security • Employer’s agent • Building surveyor

accounting or rentalise the fit-out, which means that the investor pays rent to the landlord, who then amortises the fit-out in their own accounting. The method of financing the fit-out is one of the decisions that an investor will need to make.

• IT requirements and go-live dates • Cost centre allocations

Construction Start

• Re-address post, phone numbers/ stationery • Emergency contacts

Move management FM operating plan

Legend: Legal

Technical

Health & Safety

Tenant Information

www.savills.cz

Consultants

General Requirements

Top sectors

Štěpán Smrčka Head of Office Agency Savills Czech & Slovak Republics stepan.smrcka@savills.cz

Executive move Execute vacation of old facility Dilapidations and lease exit

M&A

David Lawn Head of Building & Project Consultancy Savills Czech & Slovak Republics david.lawn@savills.cz

Insurance/Warranties

• Take meter readings • Post occupancy evalution

Taxes

fects is prepared and a remedy period is agreed with the contractor. Putting the premises into use is subject to receiving all necessary permits and approvals. Business negotiations, permitting and construction and fit-out works need to go hand in hand to acquire the premises in time. The commercial real estate market in the Czech Republic, as in other prospering EU countries, can currently be described as a landlord market with low vacancy rates and relatively strong demand. Thus, in some locations, it can take up to 18 months to close a lease on business premises. In the case of a build-to-own scenario, it can take up to 24 months. In build-to-own business premises, part of the fit-out can be leased or financed via a bank. In the case of a build-to-lease scenario, an investor can acquire the fit-out and amortise it in the investor’s

• Health and safety file from landlord before work commences

• PC (Practical completion certificate) • Payments and certificates • Operating and maintenance manuals

Human resources

• Migration and occupation programme – logistics and critical path/milestones • IT requirements

• Roles and responsibilities of teams

• Building contract • Building contract review • Warranty review

Stage 6. Post Fit-out

Permitting and construction

• Property acquisition agent • Relocation consultants • Legal

• Risk assessments

• Conceptual design drawings • Generic space and technology planning • General arrangements drawings. • Architecture and M&E concept design • Preliminary cost plan • Condition surveys: structural, drainage, asbestos, floor loadings, highways, environmental audit • Lift specifications • Lighting standards

Stage 5. Fit-out

Properties

• Heads of terms (inc. rent free, capital contribution, lease period etc) • Meetings programme with different stakeholders, e.g. construction team, agency team, fit-out team, IT providers etc. • Space availability programme

• Initial planning documentation • Agreed lease documents • Draft form of construction contract • Planning consents, building regulations, conditions and sign-off • Draft specification for fit-out

Stage 4. Detailed Design

R&D

• Due diligence report • Building search reports • Client brief document • General description and works • Users brief and space budget • Review of technical specification • Space planning standards

• Pre-contract enquiries • Title search • Landmark environmental search • Utilities searches • Planning history (review planning consent)

Stage 3. Concept Design

Finance

• Draft lease documents • Draft legal provisions for request for proposals (RFP) • Rental agreement

Stage 2. Building Selection

First steps

Stage 1. Inception

Implementation

The Czech Republic

Business premises

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

Warehouse/production space under construction in prime locations in Q4/2018 Location

Square meters

Prague

140,000

Ostrava

105,000

Brno

75,000

Plzeň

56,000

Liberec

28,000

Ústí nad Labem

24,000

Jihlava Source: Industrial Research Forum, 2019

84 | BUSINESS GUIDEBOOK

7,000

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

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

6. Investment incentives – The availability of incentives provided by the Czech government and the EU is of key importance in certain industrial zones. Both the national and local governments endeavour to make selected locations more attractive to investors with a view to promoting their development. However, the key factor for the development of industrial properties is their users, i.e. tenants. The level of demand generally reflects two basic factors. The first is the expansion of successful businesses operated by existing tenants. This factor is supported by the current economic situation, as practically all forecasts for the Czech Republic point to GDP growth at an average annual rate of 2.9% during 2018-2020, which is one of the highest figures in Europe. The second growth factor is the influx of new investors who are seeking high-quality space for their production and storage operations in the Czech Republic. in this regard, the Czech Republic is currently achieving good results as well.

8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0

2011

2012

2013

2014

2015

2016

2017

2018

Source: Industrial Research Forum, 2019

M&A Top sectors

www.p3parks.com

Taxes

Tomáš Míček Managing Director Czech Republic P3 Logistic Parks tomas.micek@p3parks.com

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

Human resources

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

Permitting and construction

Established and new locations Areas near large cities, particularly Prague, Brno, Ostrava and Plzeň, attract the highest levels of industrial real estate investment. Recently, however, there has been a consistent rise in demand for previously secondary locations. There are several reasons for this, one of which is that there is very limited availability of land where industrial properties can still be built near Prague and Brno. Another important factor is availability of labour, as some locations have reached their limits in this respect. It clearly makes no sense to build new industrial and logistics facilities in a location where future tenants will not be able to recruit staff. As a result, focus is shifting to previously overlooked locations, which offer not only suitable land, but also a larger labour pool. All criteria considered,

Prague

Properties

Crossing the threshold of 7.5 million m2 of total A-class industrial stock All developers in the market are responding to the rising demand. Current statistics from the Industrial Research Forum, whose members include CBRE, Colliers International, Cushman & Wakefield and JLL, show that a total of 172,100 m2 of warehouse space was completed in the Czech Republic in Q4/2018. Construction of new industrial space has reached 735,800 m2 in 2018, which represents the highest levels since 2008. The total stock of modern warehouse and industrial space in the Czech Republic amounted to 7.73 million m2 at the end of 2018.

Czech Republic

R&D

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

Total stock of modern industrial space in the Czech Republic

Finance

The nationwide vacancy rate is 4.4%, having increased by 30 b.p. since Q4/2017 and dropped by 59 b.p. since Q4/2016. This figure represents 316,930 m2 of modern industrial space ready for immediate occupancy. At the end of 2018, the vacancy rate in Prague was lower than the national average, at 3.9%, having increased by 39 b.p. since Q4/2017.

these locations are becoming increasingly interesting to investors. An example is the first industrial zone in Cheb in the Karlovy Vary region, where a DHL distribution facility, a production facility for the BWI Group (a supplier of vehicle chassis) and a Tchibo distribution centre, which is currently the second largest distribution centre in the country, have been completed in recent years. Another industrial zone is being developed on the eastern outskirts of Prague on the highway to Hradec Králové. In the last three years, nearly 85,000 m2 of warehouse space was completed in the park. Customers include logistics companies FM Logistic, Ekol Logistics and PST-CLC and retailers Penny Maket and Lidl. The park contains additional land with zoning for 65,000 m2 of warehouse and production space. On the western outskirts of Prague, a 70,000 m2 distribution facility was completed in 2017 for 4PX Express, a logistics service provider for Chinese e-retailer Alibaba. Outside of the Prague area, a new industrial zone is being built in Lovosice in the Ústí nad Labem region in the northern part of the country. This area provides good access to Germany, Poland, and the rest of the Czech Republic, and its above-average unemployment rate suggests good availability of labour. Last year a 30,000 m2 building for FM Logistic was completed and it is expected that this building will be expanded with an additional 60,000 m2 of warehouse space by the end of 2019. This space is available for prospective tenants. The Moravia-Silesia region is another area on which investors are focusing thanks to the relative abundance of available workers there. For example, the industrial zone in Mošnov is popular especially with automotive companies, which have created nearly 3,500 new jobs in the area. Companies like Hyundai Mobis, Mahle Behr, Plakor Czech and Cromodora Wheels have their factories and logistics centres there. Another location with strong potential in north Moravia is the development zone spread across a triangle delimited by the cities Ostrava, Havířov and Karviná, where Mölnlycke Health Care, a Swedish producer of medical devices, completed construction of a new manufacturing plant in 2017, which created 300 jobs. The current situation in the industrial real estate market can be illustrated by the fact that 431,000 m2 of production and warehouse space was under construction in the Czech Republic at the end of 2018. The locations of the new facilities is shown in the following table.

First steps

4.4% Vacancy

The Czech Republic

Industrial and warehouse market

The best office and where to find it in the Czech Republic Vacancy rate in Czech office locations (%) 30 28 26 24 22 20 18 16 14 12 10 8 6 4

Prague Ostrava-Silesia

Brno (Southern Moravia)

2012 Q4

2013 Q2

2013 Q4

2014 2014 Q2 Q4

2015 Q2

2015 Q4

2016 Q2

2016 Q4

2017 Q2

2017 Q4

2018 Q2

2018 Q4

Source: Colliers International/Prague Research Forum/Regional Research Forum, 1/2019

Prime and average headline rents (EUR/m2/month) 22

Average headline rent

Prime headline rent

18 16 14 12 10

Prague

Brno

Source: Colliers International/Prague Research Forum/Regional Research Forum, 1/2019

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Ostrava

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

usiness in the Czech Republic is highly concentrated in the country’s capital, Prague. This explains Prague’s dominance in terms of office stock and the fact that the majority of blue-chip companies operating in the Czech Republic are located there. Total office stock in Prague stood at 3.48 million m2 at the end of 2018, compared with 584,200 m2 in Brno and 215,000 m2 in Ostrava. Brno and Ostrava are the second and third largest cities in the Czech Republic, respectively, in terms of both population and area. Prague office market Supply Between 2008 and 2018, the Prague office market received 136,000 m2 of new office space per year on average. In that respect, 2016 was an exceptional year, as only 33,000 m2 of offices were completed, the lowest amount in the market’s history. Standard supply levels returned in 2017 and continued in 2018 with 156,000 m2 completed. Due to high levels of demand, the vacancy rate was brought down from nearly 17% in 2015 to 5% in 2018, in spite of new supply. The pipeline for 2019 comprises some 214,000 m2, though 50% has already been preleased. An additional 134,000 m2 is al-

ready under construction with completion scheduled in 2020 and 2021. Take-up/demand Average gross take-up (including renegotiations) in Prague between 2015 and 2018 reached 480,000 m2 and has been increasing continuously; in 2018 it reached 519,200 m2. Excluding renegotiations and subleases, the net take-up reached 328,600 m2, which was a 14% decrease year on year, though it was still above the long-term average. Vacancy The Prague office market has recovered following a period of vacancy growth, which began in 2013 and peaked at 17.1% in Q1 2015. Since then, the vacancy rate has fallen continuously to the current 5.1%, mainly due to the high level of demand. With the current level of demand and development, we do not expect the vacancy rate to bounce back above the 7% level in the short to medium term. However, the vacancy rate differs significantly across the stock, with older properties competing with new completions. Because of their age (more than ten years old), many properties in stock can compete only in terms of rental prices and lack the latest features of modern office stock. Therefore, we are starting to see a wave of projects involving

3,500

Brno

Ostrava

Prague

3,000

1,500 1,000 500

Source: Colliers International/Prague Research Forum/Regional Research Forum, 1/2019

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

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Take-up/demand Gross take-up (including renegotiations) reached 61,200 m2 in 2018. Monitoring of the relatively young

Stock In 2018, the volume of modern office stock in Ostrava remained unchanged at 215,000 m2. With zero completions, the market stood below the long-term average and with the pipeline of 5,500 m2 scheduled for 2019, the market will not see significant growth either.

The positive economic development of the Czech economy is the main driver behind demand for office premises. The only downside of the current economic development is the low unemployment rate resulting in labour cost growth, which could turn off some potential occupants while preventing them from growing their businesses. While the vacancy rates in Ostrava and Brno should continue decreasing, as there is a limited pipeline, in Prague the vacancy rate should stabilise. Still, there is room for rents to rise to a certain extent, especially as new projects which are in the pipeline are being positioned above the current prime rental rates.

M&A

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

As the country’s third largest city, Ostrava has a small and slowly growing commercial real estate market. However, in the past years we have recorded an increased level of demand for the city.

Prognosis

Taxes

Brno office market

Supply Total modern office stock in Brno had reached 584,200 m2 by the end of 2018. With additional 60,000 m2 of office space scheduled for completion in 2019, the city’s office stock will exceed 600,000 m2. Development has been driven mainly by increased occupant demand and in 2016 there was a higher level of completions in Brno than in Prague. In 2016, Brno saw its highest level of completions since 2007, when 75,000 m2 of office space was delivered to the market. In 2017, the supply level decreased to 17,300 m2; however, in 2018 the market returned to healthy growth and this year should see the completion of the above-mentioned 60,000 m2, which is more than double the ten-year average completion level. Moreover, there are many new projects in the planning phase.

Ostrava office market

Human resources

Rents Prime rents have been under pressure in recent years, mainly with decreasing vacancy. Therefore, we have recorded the first shift in prime rents in years. Prime office headline rents have grown to EUR 21 and EUR 22/m2/ month. However, there are city centre “trophy assets” where the rental levels significantly exceed this range. Inner-city rents ranged from EUR 15 to EUR 17/m2/ month in 2018, while the outer-city range was between EUR 13.5 and EUR 15/m2/month. The city-wide average remained unchanged at EUR 13.75/m2/month in 2018.] Net effective rents were generally 10-12% lower than headline rents; however, the level of provided incentives remains property-specific and is influenced by multiple factors such as location, new competition and the prevailing vacancy rate.

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

Rents Along with the declining vacancy rate, prime headline rents in the Ostrava office market have increased after a long period of stability to around EUR 12.25/m2/ month.

Permitting and construction

complete refurbishment, where properties are withdrawn from the market, fully renovated with modern features and leased with corresponding rental rates.

Rents Due to the relatively low vacancy rate, prime headline rents in the Brno office market jumped to EUR 15/m2/ month in 2018. The city-wide average rent increased to EUR 12/m2/month. The incentive packages for Brno are generally less generous than in Prague; net effective rents are thus 8%-10% below headline rents.

Properties

20 12 /H 1 20 12 /H 2 20 13 /H 1 20 13 /H 20 2 14 /H 1 20 14 /H 2 20 15 /H 1 20 15 /H 2 20 16 /H 1 20 16 /H 2 20 17 /H 1 20 17 /H 20 2 18 /H 1 20 18 /H 2

Vacancy By the end of 2018, the vacancy rate in Ostrava had reached 11.7%. In a year-on-year comparison, this was a decrease of 150 basis points, reflecting the limited options for companies to take up new space. With a limited pipeline, we expect the vacancy rate to continue decreasing, although at a low pace.

R&D

Vacancy After three years of continuously decreasing vacancy in the city, the average vacancy rate in Brno increased year on year by approximately 340 basis points to 9.6% by the end of 2018. Although vacancy increased, it remains at a healthy level and we do not expect a further significant upswing in the coming months.

2,000

Take-up/demand With zero completions, new options for tenants are limited. Therefore, it comes as no surprise that gross takeup reached 18,800 m2 in 2018, a year-on-year decrease of 8%. In terms of net demand, Ostrava recorded deals totalling some 5,400 m2, an astonishing 65% year-onyear decrease.

Finance

2,500

Brno office market began only in 2012, and since then average annual gross take-up has reached 55,000 m2. Although the gross take-up in Brno was at a record level in 2018, the market recorded approximate 14% decline in terms of net take-up, as there were some large renegotiations.

First steps

Total modern office stock (m2 thousands)

The Czech Republic

Office market

Retail on the rebound The retail sector in the Czech Republic is enjoying a very favourable period with the economy growing robustly and both purchasing power and consumer behaviour also experiencing positive development. The market has become very stable and relatively easy to predict, partly thanks to limited development, as well as more transparent due to the implementation of electronic records of sales.

Shopping centre density < 70

Karlovy Vary 740 sq m p.c.*

Ústí nad Labem 242 sq m p.c.*

150

300 >

Liberec 1,420 sq m p.c.* Hradec Králové 957 sq m p.c.*

Prague 604 sq m p.c.*

Plzeň 790 sq m p.c.*

Pardubice 504 sq m p.c.* Jihlava 563 sq m p.c.*

České Budějovice 871 sq m p.c.*

Source: CBRE Research, Q4 2018

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Ostrava Olomouc 660 sq m p.c.* 1,307 sq m p.c.*

Brno 644 sq m p.c.*

Zlín 804 sq m p.c.*

* Density (sq m/ 1,000 inhabitants) – regional capitals Shopping centres above 5,000 sq m

he volume of shopping-centre stock comprised 2.4 million m2 at the end of 2018. Total density of 228 m2 per 1,000 inhabitants puts the Czech Republic into the group of European countries that have reached optimal market saturation. Within CEE, the density volume in the Czech Republic is the second highest after Slovakia and slightly ahead of Poland with 220 m2 per 1,000 inhabitants, and it is significantly lower on the Hungarian, Romanian and Bulgarian markets. As of February 2019, three shopping centres were under construction and four in the planning stage. We assume limited development especially of very large shopping centres and greater focus on smaller projects at traffic intersections with high footfall and expansion of well-performing schemes. The exception is Prague, which has significantly higher purchasing power and a better economic situation. Moreover, we see a trend of renovation, which has become a necessity for many shopping centres with respect to maintaining or improving their performance and requires considerable investment. Thanks to the good market conditions and rising sales, more owners are willing to incur the costs associated with more extensive renovation and remodelling. The strongest demand remains in Prague’s prime shopping centres and high street. Due to the strong competitive environment, diversification on the market continues in terms of both schemes and tenants. Supply The Czech retail property market has nearly tripled in size in the past ten years. The biggest shopping-centre boom was recorded between 2004

and 2008, when nearly one million square metres of modern shopping-centre space was delivered to the market (38 new projects and eight expansions), of which 40% was located in Prague, 10% in Brno and 8% in Plzeň. Construction declined rapidly after 2008, finally bottoming out in 2011, when only one small shopping centre of 6,400 m2 was opened. Czech retail property development has since recovered and is now stable. Over 100,000 m2 of modern shopping-centre space was added to the market in 2012. During 2013 seven new shopping centres and two expansions with a total area of 162,000 m2 were completed. This was the largest addition of new, modern retail space since 2008. Apart from two large construction projects, namely Centrum Černý Most (expansion) in Prague with over 44,000 m2 and Galerie Šantovka in Olomouc with almost 50,000 m2, in 2013 developers focused on smaller regional projects with less than 10,000 m2. Development in smaller regional cities reflected the need to adapt to the demands of customers who are now less willing to travel for shopping. In 2014, five new shopping centres – OC Lužiny and Quadrio in Prague, Galerie Teplice, Frýda in Frýdek-Místek and Pivovar Děčín – with a total of 78,100 m2 were opened in 2014. In 2015, only one shopping centre, Central Kladno, was opened in the Czech Republic in March. One shopping centre, Galerie Přerov, was completed in 2016. In the first quarter of 2017, Central Jablonec in Jablonec nad Nisou was completed. In the third quarter, the biggest delivery was the second phase of Centrum Chodov, which thus became one of the biggest shopping centres in the Czech Republic. The second opening was 2nd phase of IGY České Budějovice. Only one shopping centre, namely Géčko Ostrava, was open in 2018.

Planned shopping-centre development Size (m2)

Year

Developer

Galerie Na Smetance

Vsetín

Small

6,500

2019

Valatrans

Letná OC

Prague

Small

13,000

2019

Lordship

Bořislavka

Prague

Small

9,600

2020

KKCG

Avion Shopping Park Brno

Brno

Planned

Large

13,200

2020

Inter IKEA Centre Group

Galerie Šantovka

Olomouc

Planned

Large

23,300

2020

Dandreet

Nová Palmovka

Prague

Planned

Small

8,000

2020

Metrostav

New supply

Under construction

2,700,000

250,000

2,400,000 200,000

2,100,000 1,800,000

150,000

1,500,000 1,200,000

100,000

900,000

50,000

300,000 0

20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18

Source: CBRE Research, 2018

Top sectors

www.cbre.cz

M&A

Klára Bejblová Retail Research & Consulting Associate Director CBRE klara.bejblova@cbre.com

able to maintain stable and sustainable rental-rate growth thanks to renegotiations and re-leasing strategies brought about by a lack of high-quality space. The prime shopping-centre rental rate currently stands at EUR 140/m2/month in Prague. We perceive slight pressure on prime rents this year due to good economic results, though rents are always dependent on the given business case. Therefore, we expect somewhat lower rental-rate growth slightly above indexation levels, but not over renting levels.

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reflects retailer’s strong interest in this location. The development of the prime shopping-centre rental rate has been more variable than that of prime high-street locations. Rent tripled between 2001 and 2008, when it reached its historical peak of EUR 120/ m2/month. During the recession, it dropped to EUR 85/m2/month, where it remained until the first half of 2013. While demand for prime space has been growing, the opposite is true of secondary and tertiary space. Therefore, prime shopping centres have been

Human resources

Rental rates The high-street rental rate grew until 2008, when it reached the peak of EUR 180/m2 per month. Due to the subsequent economic downturn, the rate subsequently declined and remained stable until 2012. The combination of increasing interest in high-street locations in Prague and the lack of available space has put pressure on rents. The prime high-street rent in Prague has been gradually increasing since 2012 and is currently at EUR 230/m2 per month. Rents are expected to continue rising slightly in the coming years. The high-street area with the highest prime rent is on Na Příkopě and Pařížská ulice.The prime rental rates at other high-street locations in Prague vary somewhat according to the attractiveness of the given area. In comparison with other European capitals, Prague is still far from having the most expensive high-street rental rates. For example, in Paris and London prime rents are in excess of EUR 1,100/m2/month. However, Prague has the highest rent among CEE capitals, which

600,000

Permitting and construction

street locations in Prague. A lot of retailers also consider entering the market through franchising, though it is sometimes difficult to find a suitable partner. Subsequent expansion to the regions is relatively slow and some international retailers do not want to expand to the regions at all, which increases the importance of local retailers. Conversely, international retailers that have developed their operations in the Czech Republic (including partial Czech management) can utilise local knowledge and expand further.

Properties

Demand The situation on the Czech retail market has been relatively stable for the past couple of years. The Czech Republic ranks highly in attractiveness for international retailers in Europe, especially thanks to the high purchasing power of Prague and stable GDP growth. The macroeconomic results and the stability of the retail market increase retailers’ and interest in entering the Czech Republic. In 2018, Prague ranked second among European cities in terms of new international retailers entering the market. Even though we recorded an annual decrease of 28% on exceptionally strong numbers in 2017, international retailer activity remained strong, as 2018 was the second strongest year in terms of new market entries in recent years. Italy, France and the UK were the most common countries of origin of the European brands that dominated among the incoming retailers (with an 68% share of the total). More than 30% of the new brand were in the luxury and business fashion sector, while 25% were in the mid-range fashion sector. Valentino, My Brand, Frankie Morello, Harmont & Blaine, Hexis, Luca Bertelli, Elisabetta Feanchi, Red Valentino, Christian Louboutin, Wellenstein and Lilou were among the retailers entering the local market. Highly significant in 2018 was the 21% share of F&B retailers, proving that this sector is continuing to boom. Prime high-street and shopping-centre locations remain the most attractive areas for international tenants. When entering the Czech market, retailers mainly look for prime shopping centres, which are mostly located in Prague, and high-

R&D

Note: UC – Under construction, OC - Outlet Centre

Total stock

New supply (m2)

Type

Total stock (m2)

Status

Finance

City

First steps

Growth of shopping-centre stock as at 2018

Project

Source: CBRE Research, 2018

The Czech Republic

Retail market

Valuation of property in the Czech Republic

Buy, sell, wait? The value of property is a quantity that often affects the economic decision-making of investors. Each investor encounters the need to determine the value of assets. That may involve the valuation of real estate, machines, intangible assets and much more. An investor that expands its business to a new country usually faces the need for real-estate valuation. We will therefore take a closer look at real-estate valuation in the Czech Republic.

nvestors face the need for real-estate valuation when deciding whether to buy or lease premises for their businesses. In such a situation, they need to have an estimate of the price of the offered real estate so that they can compare it with the usual price and thus make an informed decision. However, this is not the only situation where property valuation information is important. The investor also encounters the need for valuations of various types of corporate transactions, investment decisions, loan drawdowns, pledges and tax calculations for the acquisition of immovable property, as well as valuations in many other situations. Real-estate registration in the Czech Republic In the Czech Republic, the Cadastre represents the public property register, which includes a list of properties, their descriptions, geometric and location designations, records of ownership and other rights in rem and real-estate restrictions. Extracts from the Cadastre are public instruments and are issued for a fee. Selected basic real-estate informa-

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tion is available free of charge via the Cadastre’s web portal. Information from the web portal is informative only and cannot be used as an official document. The cadastral office must be notified of any change of ownership or other property parameters. Price of real estate There is no universal property price. Each property has several different price categories which vary according to the purpose and the user of the valuation. The market value for the purchase or sale of property may be different from the estimated value for a bank considering financing the purchase of the property or for the purpose of securing the property as collateral for a loan, or from the administrative value for calculating the tax on the acquisition of immovable property. The property price with respect to the purpose and user of the valuation can be determined either by an expert or an appraiser. A licenced expert’s opinion is required in situations as required by law – for example, real estate entered in the registered capital of a company. In other cases, an appraiser in the relevant field is sufficient.

The Czech Republic

Valuation of property

First steps Human resources Taxes M&A Top sectors

www.fucik.cz

Conclusion Real-estate valuation has many specific details and the determination of a property’s value depends on many factors that can affect its price. Proper and correct information about valuation of real-estate is crucial in many situations because incorrect information can lead to erroneous investment or business decisions. Therefore, when the purchase of real estate or another real-estate transaction is being planned and a calculation of the property’s value is needed, we always recommend contacting experts to help you determine the price in the most appropriate way. This will give you relevant information to help you make the right decisions.

Permitting and construction

Milan Pašek Partner, auditor Fučík & partneři, s.r.o. milan.pasek@fucik.cz

Specifics of real-estate valuation In addition to the above-mentioned factors for real-estate valuation, there are also specific situations that influence the value of a property, such as whether the property is operationally necessary or not, whether it is used to carry out the business of the company or whether it is for sale or for future use. These factors affect the method of property valuation. A separate chapter on real-estate valuation is taxes. The basis for calculating tax on the acquisition of immovable property in the Czech Republic is the value of the property. This value can be determined either on the basis of the purchase price or on the basis of a target value according to a decree of the Ministry of Finance or an expert opinion. The rules that apply to prices are determined by the applicable laws.

Properties

Factors influencing the value of real estate The factors affecting the price of real estate, whether in the case of selling or renting, are numerous. The key factor that is common to almost all real estate is location, which plays a key role in determining the price of every property. Location is not only the geographic location of the property, but also the prestige of the locality, transport accessibility and the surroundings of the real estate. Each type of property has specific factors that affect its value. Specific factors that affect land prices are the land area, shape and slope, as well as its orientation. Another important factor is the available ways of using the land, i.e. whether the land is registered as agricultural land, building land, etc., and how difficult it is to change its use (if change is possible at all). When it comes to building land, the presence of utility networks, or the possibility and difficulty of building them, is also important. Land

prices are also affected by various past burdens, especially ecological hazards and pollution from previous industrial use. Specific factors that affect the cost of office buildings are the area of office space and its layout. The price is also influenced by the design of the building, number of parking places and the building’s equipment, such as air conditioning, blinds, distribution of electrical and data networks. In the case of tenant occupancy, a crucial role is played by the building’s occupancy, the tenants’ creditworthiness and the parameters of the signed lease agreements (duration of lease, expiration, penalty for early termination, indexation of rent, etc.). A particular factor for the price of production facilities and warehouses is their construction, including the height of the facility, the number of floors, the load-bearing capacity of the walls and individual floors as well as the possible uses of the facility. Some facilities are closely tied to a single purpose (e.g. refrigeration facilities) and their use for another purpose may be difficult. A specific requirement regarding location is accessibility for freight transport, particularly proximity to motorways or railways. Another important factor influencing the price of production facilities and warehouses is whether and to what extent a part of the facility or warehouse is reserved for office space and whether it is necessary to place the administrative part of the company in a separate building.

R&D

Real-estate valuation methods Several methods are used to determine the value of real estate. When choosing them, it is necessary to reflect the purpose for which the valuation is required. Determination of the market value is most often used for the valuation of a property for the purpose of ownership transfer. The most commonly used methods of calculating market value include the comparative method and methods based on estimation of profit of the cash flows that the property will generate in future (yield methods). The comparative method of pricing property compares the realised prices of a number of similar properties. It is important that this is the price actually realised, not just the offer price. Offered prices tend to be higher than the prices realised, and they are thus not suitable for calculating the value of the given property. This method is also

applicable in practice to determine the usual rental rates. Similar properties are properties with similar parameters, i.e. similar designation, location, size, etc. Use of a close valuation date is also important. The data used must be statistically relevant. For this reason, this method is used particularly for land, production facilities and warehouses, in the case of which enough comparable transactions are available. There are several types of yield methods of property valuation. Their common denominator is the valuation of the benefit deriving from ownership of the property as rent collected by the owner or landlord. The calculation of value may be based on the total annual yield of the property or on the total income accruing to the property owner. In this valuation, it is assumed that the lease relates both to the building and to the land on which it stands.

Finance

The difference between an expert and an appraiser An expert in the relevant field is appointed by the Minister of Justice in accordance with the Act on Experts and Interpreters. There is a strong emphasis on expertise for licensed experts. An appointment of an expert can only be approved after successful completion of demanding professional tests and presentation of sample works. This ensures professional expertise. The register of experts is maintained by the Ministry of Justice. At present, there are 2,469 real-estate experts in the Czech Republic. Unlike an expert, an appraiser works on the basis of a trade license, the acquisition of which is generally tied to his/her prior education. Appraisers often work for banks and other institutions where expert advice is not required by law. Investors often use appraisers to indicatively estimate the property price for a real-estate transaction.

The future of the facility management: Virtual security and technology The Czech Republic is able to offer foreign investors the latest security and facility management technologies. The main goals of implementing automated processes, intelligent humanoids and smart analytics software are cost savings and provision of high-quality services.

ecurity provided by virtual guards, drones and robots The Czech Republic currently has a very low unemployment rate, which is expected to continue in the future. A shortage of qualified people is pushing service providers to complement the human factor with intelligent technologies. One such solution is remote surveillance, which involves the interconnection of the camera system with smart analogue software that can detect a degree of security discrepancy to a certain extent. Camera images also run online on remote monitors watched by operational officers. Thus, there are two lines of surveillance – software and human. Business will recoup the higher initial investment in remote surveillance within a few years depending on the size of the given entity and the number of branches.

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Drones are used for monitoring large areas, for example. In a single minute, a drone is able to carry out a patrol that would take a human guard twenty minutes. In addition to private security agencies, the Police of the Czech Republic also use drones, especially during major training exercises of police units. Images from drones subsequently serve for analysis of the exercises. Drones with gas sensors are used by fire departments to determine the extent and direction of leakage of hazardous fumes. However, the use of drones with cameras is very severely limited by the country’s legislation, particularly the Personal Data Protection Act. Operators of camera-equipped drones must always obtain the consent of the people photographed at large events such as concerts, festivals and sports matches, as well as in any other public area. The ban also applies to the filming of privately owned land.

China

EU28

Asia

2 1,8 1,6 1,4

R&D

1,2 1 Properties

0,8 0,6 0,4 0,2 0

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Top sectors

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M&A

Kateřina Sochorová Business Director Mark2 Corporation Czech a.s. k.sochorova@m2c.eu

access codes, easily locking computers remotely and demanding a ransom. This is opening up a new area of business for insurance companies. Though cyber-risk insurance is a rising trend, it is currently not covered by the EU’s cybersecurity legislation.

Taxes

of repelling modern attacks. Today, IT departments are intensively chasing the current trends. At the same time, new threats are emerging, using increasingly sophisticated viruses with better targeting. Hackers attack employees’ passwords and

Human resources

Source: M2C, Calculations based on IFR and ILO, 2017

Permitting and construction

Preparation for the Internet of Things and cyber-risk insurance Companies in the Czech Republic are preparing for the Internet of Things, which connects data, objects, processes and people through the integration of smart devices in one network. In addition to smart households, the business environment of the Czech Republic is beginning to prepare smart offices as well. This means that the work environment will change to be more pleasant and motivating according to the needs of employees. Devices will monitor themselves and report via the internet when they need maintenance or repairs, thus preventing delays caused by an overlooked malfunction. We can also look forward to Li-Fi, high-speed wireless networking through LEDs. It is obvious that more companies in the Czech Republic should start focusing on cybersecurity. Worldwide, a growing number of new threats arise on the internet every year. Last year, almost one in five small and medium-sized businesses in the Czech Republic lost their data. Businesses in the country have focused primarily on market changes over the past twenty years and the development of cybersecurity has stalled. Companies use obsolete principles that are no longer capable

Robots per 1,000 workers

Finance

Remote reading and energy management represent great savings The latest technologies designed for building management in the Czech market include remote metre reading and general energy management technologies, absorption cooling and pump heating. In particular, drilling is being carried out on new buildings to incorporate pumps that are used for heating on a water-air or ground-water basis. Such buildings are therefore largely self-sufficient in terms of producing their own electricity and heat. Thanks to these technologies, power consumption is far lower. It is estimated that buildings thus equipped are able to cover up to 75% of their electricity and heating needs with their own resources. Remote monitoring connected to intelligent sensors is especially useful for energy leakage monitoring and reduces overall consumption. For example, we can see that some types of cooling have far greater power consumption than others. Standard air-conditioning systems are replaced and we immediately see the result in reduced

consumption. By means of remote surveillance, possible water or gas leaks can be detected. Each building should have at least a basis of security underpinned by remote surveillance. The extent to which remote surveillance is implemented depends largely on how measurement and regulation are designed in the given building. Any existing monitoring can be remotely supervised or reconfigured to allow remote supervision. Monitoring can then be carried out directly on a smartphone or other smart device with the appropriate applications.

First steps

The globally discussed topic of robots is also being addressed in the Czech Republic. Service providers are already introducing trial versions of intelligent humanoids. One such device is a robot specially equipped to protect and secure structures such as data centres, logistics facilities, public buildings and parking garages. Connected to the building’s control system, the robot detects suspicious objects, observes the environment and reports back while conducting patrols. Based on the data thus obtained, a human worker can take further action if needed. Robots patrolling parking lots and collecting parking fees are expected to appear in the near future, as are robots serving as door attendants and tour guides, among other roles.

The Czech Republic

Security

Did you know?

Travel distances from Prague Oslo 15 | 2:00 Hamburg 639 | 5:51

Amsterdam 116 | 1:40

Berlin 347 | 3:29

Stockholm 21 | 1:55

Helsinki 24 | 2:15

Dublin 14 | 2:40

Warsaw 683 | 7:01 flights per week | flight time, h:m

Moscow 95 | 2:35

Brussels 31 | 1:30

km | driving time, h:m London 87 | 2:00

Paris 99 | 1:45 Beijing 3 | 9:10

Munich 383 | 3:59 Madrid 23 | 3:05 Rome 28 | 1:50

Vienna 330 | 3:40

Bratislava 328 | 3:26

Istanbul 28 | 2:30

Milan 884 | 8:50 Zagreb 694 | 7:14

Budapest 526 | 5:45

Dubai 21 | 6:10

Seoul 16 | 10:15

Handle the permit and construction processes

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

Basic and related Czech legislation mentioned in the article Act No. 225/2017 Coll. Amendment Regulation No. 499/2006 Coll. Building Documentation Regulation No. 500/2006 Coll. Land-Use Planning Documentation Regulation No. 503/2006 Coll. Planning and Building Permit Act No. 326/2017 Coll. Amendment Act No. 76/2002 Coll. IPPC Act Act No. 39/2015 Coll. Act Amending Act No. 100/2001 and Certain Other Acts Act No. 254/2001 Coll. Water Act Act No. 500/2004 Coll. Administative Code

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

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

The type of EIA procedure specified by Environmental Protection Act to be carried out depends on the scope of the building and its planned operation. An under-limit announcement is a means of approval for small projects in special protected areas. Projects having an insignificant impact are negotiated only in the finding procedure, which culminates with a decision on the given projects, the validity of which announced by means of public notification. The full EIA process is necessary in the case of projects that have a negative impact on the environment. In such a case, an EIA statement is issued and has to be incorporated into the announcement of the project and approved by the authorities and the public. In accordance with one of the amendments of Environmental Protection Act, verification of this statement has to be carried out before a planning permit application can be submitted to Building Authority. The location of a building and its connection to utilities has to be approved in the planning permit procedure, which can take several different forms depending on the scope of the building and the conclusions of the EIA. Regardless of which form the procedure takes, statements of all the relevant authorities and utility providers have to be collected and incorporated into the planning permit documentation. Though the authorities should issue their statements within the period stipulated by the Administrative Code, in complicated cases they have a right to extend the deadline. So the period for issu-

needs directly in the construction in order to guarantee the overall schedule and building costs. Despite all the regulations and general conditions, each permit process is unique due to the purpose of the given building, the impacts of its operation and its location in the Czech Republic. All these factors can play a significant role in design preparation and the permit procedure, so you should pay close attention to project preparation and consult these aspects with an experienced adviser from the beginning in order to select a suitable plot that is prepared to meet your needs without any special considerations.

R&D

Due to this quite complicated permit process, which is composed of several steps and can be carried out in several different ways, it is appropriate to use the services of an experienced design and construction company whose authorised designers and specialists are able to adjust your project according to the Czech regulations and prepare all the necessary documentation so that the permit procedures run smoothly. Moreover, on the basis of efficient building management knowledge, such a professional company can save you a lot of time and expense by optimising the proposal, securing suitable permit arrangements and incorporating your operational

Finance

Securing of permits including design preparation and construction Months 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Properties

EIA Finding procedure Permitting and construction

Planning permit Announcement Building permit Preparation

Human resources

Construction Operation

Note: General schedule - standard type

Source: TAKENAKA EUROPE

M&A

Ladislava Dvořáková Architect, TAKENAKA EUROPE dvorakova@takenaka.cz

Taxes

Petr Koljaděnko Business Development Manager, Europe koljadenko@takenaka.eu www.takenaka.eu

Top sectors

ment, other special permits must be obtained from the relevant authorities pursuant to special acts in case of, for example, roads, railways, airports, forests and mining buildings or work in such areas. In a similar manner as in the planning permit stage, the standard building permit procedure can be replaced with the conclusion of a public contract. Furthermore, if an EIA statement is not required, a building permit can be replaced with a building permit certificate issued by an authorised inspector on the basis of his contract with the investor. The issuance of the certificate is then reported to the Building Authority, which has to issue a public announcement of the certificate’s validity. To simplify the process and reduce the time required for obtaining a permit in uncomplicated cases, Czech legislation makes it possible to carry out a collective planning and building permit procedure or issue a collective planning and building agreement. When an issued building permit comes into force, construction has to be in compliance with the given permit’s conditions and the necessary steps must be taken to ensure that the start and course of the work are conducted in a legal manner. If structural changes are required by the investor or recommended by the builder, a procedure for implementing structural changes before completion of construction can be undertaken in a manner similar to that of the original building permit. In some cases, submission of execution documentation can also be one of the authorities’ conditions. Where the standard statutory time periods are concerned, the legally stipulated time deadlines must be met not only with respect to the permit procedures, but also with respect to the validity of documents whose expiration date is specified in the relevant acts. Likewise, the issued statements and permits precisely set forth their respective periods of validity and deadlines for completion of the permitted works. It is possible to apply for an extension of these deadlines. Following the completion of construction, a final inspection of the building by all the involved authorities has to be carried out in accordance with the usage rules set forth in the Building Act and all the conditions of the previous permits and statements. If all conditions are fulfilled, a building use agreement is then issued.

First steps

ing statements depends on the authorities’ current capacity and reduction of the processing period thus cannot be generally guaranteed. The Building Authority has to carry out all the procedures within the timeframe stipulated by the Administrative Code, so the total period of the procedure can differ in each city and be influenced by the situation at the given time, despite the stipulated periods for particular steps, which are precisely defined by the Building Act. Apart from the standard planning permit procedure, when the involved parties are informed by letter or publicly displayed notice regarding the type of EIA procedure, a simplified planning permit or planning agreement can be issued in a shorter time. This is possible only if no EIA was required and all the involved parties (the neighbours of the plot in question) have provided their written consent in relation to the project. The other possibility for securing a planning permit is by means of a public contract, which is concluded between the investor and the Building Authority. This document is not prepared by the Building Authority, but rather only reviewed by it, and the participants are involved collectively as the third contract contracting party. After a valid planning permit has been obtained and all the necessary statements collected on the basis of the building permit documentation, a building permit can be applied for. This step is not necessary for the precisely defined group of small and simple buildings with no environmental, public health or safety impacts. A building notice or even no action is required for such buildings. Conversely, for the buildings whose operation causes emissions exceeding limits stipulated by the Integrated Pollution Prevention and Control, a special permit has to be prepared for building permit procedure pursuant to the Integrated Pollution Prevention and Control Act reflecting the best available techniques, which is treated as one of the necessary environmental documents. A procedure completely separate from the building permit is the water treatment permit, which is required by the Water Act. Despite the existence of a collective planning permit for all the buildings on the given plot, some permits are issued by the Building Authority and others by the Environmental Water Treatment Authority. Other than permits pertaining to water manage-

The Czech Republic

Approval process management

Zone permitting and environmental impact assessments Before the building authorities grant approval for any investment project to begin, an environmental impact assessment must be completed. In the Czech Republic, local authorities issue detailed zoning plans and conditions for land usage for the purpose of facilitating and regulating construction and development. These plans are developed with the aim of protecting a given area’s value and character, as well as contributing favourably to the overall environment.

he amendment of the Building Act implemented in January 2018 allows authorities to issue joint EIA, zoning and building procedures, including the possibility of issuing a joint ruling for such procedures, in order to accelerate the permitting process. The total costs depend on the complexity and scope of the project, ranging from several thousand to over EUR 40,000. The costs associated with EIA documentation and expert studies are borne by the investor and, in the case of a full EIA, the investor must also pay the costs of preparing an expert opinion. Zoning permits do not allow full-scale construction, but rather define conditions for gaining building permits and allow commencement of the initial phases, such as creating service lines, testing soil layers and preparing the land itself. A zoning permit is valid for two years and is a prerequisite

98 | BUSINESS GUIDEBOOK

for obtaining a building permit. The statutory period for completing the zoning-permit procedure is 60 to 75 days excluding the time needed for an environmental impact assessment (EIA), if required. The overall time for obtaining the permit itself depends on the nature of the project, its impact on the area and other variables. However, it usually takes 9 to 12 months, including obtaining all relevant statements required to give the permit legal force. Prior to submitting a zoning-permit application, the issue of environmental impact must be addressed and the proposed project must be approved in this respect by the relevant regional and state authorities. At the project-inception stage, comprehensive design and engineering play a major role in ensuring the project’s viability. At this point an application fee of EUR 800 is paid and the EIA process begins. In principle, there are two possibilities: a fact-finding pro-

The four steps in the EIA process in the Czech Republic:

M&A Top sectors

www.ctp.eu

Taxes

Vladimír Müller Project Director Key Account CTP Invest vladimir.muller@ctp.eu

Human resources

Practical advice In order to reduce delays, here are some practical considerations for potential investors. Invest in the planning stage. The more you detail the project with information about all substantial

Permitting and construction

4. Consequences The environmental impact assessment process is completed and the project is either rejected or accepted. In the case of an unfavourable statement, the investor may submit a revised project that may, for example, use more eco-friendly technology or relocate the project to a more suitable location.

Properties

2. Fact-finding procedure The competent authorities and self-governing units evaluate and assess the project with respect to its impacts on the environment and public health. Public participation, questions and comments are possible at this stage. The outcome of this procedure is a statement of the authority as to whether or not the project can be approved without any further evaluation (negative conclusion of the fact-finding procedure) or further evaluation is required, often referred to as a “full EIA” (positive conclusion of the procedure). If the negative conclusion of the fact-finding procedure is granted, the EIA process ends and the pro-

3. Full EIA A full EIA begins and primarily involves the obligation to provide additional details of the impacts of the project on the environment and human health, including an independent opinion of an expert (appointed by the competent authority with costs borne by the investor) on the submitted documentation and a public hearing on the project. Similar to the fact-finding procedure, the investor must reply to public questions at this stage. This usually takes place during a public hearing in which the investor must present details of the project, expected environmental and public-health impacts and proposed measures to mitigate those impacts.

aspects, the easier it will be for the expert who processes your documentation and the authorities who assess it. Projects with well-prepared documentation are credible and trustworthy and are generally better accepted both by the authorities and by the affected public. Location, location, location. Arguably this is one of the keys to ensuring that your project passes the EIA. Locations intended for the given type of project, e.g. industrial parks, are always best suited to the purpose. Needless to say, those locations having solid transportation infrastructure with sufficient supplies of energy and raw materials that cover the needs of your project are preferred over those that may infringe on nature and landscape preservation elements. Communication is key. The better the communication between the investor, the expert who processes the documentation, the authorities and the affected public, the better the chance that your EIA process will run smoothly and quickly. It is recommended that the project be discussed in advance with the affected authorities before submitting the documentation and initiating the assessment process. Some comments thus may be incorporated into the documentation in advance, which saves time needed to evaluate such comments during the assessment process. You should choose your expert wisely. The expertise and experience of the person selected to process the EIA documentation and his/her ability to communicate with all involved parties are very important for a smooth assessment process.

R&D

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

cess of obtaining planning permission can follow. If not, the investor may change the project in order to repeat the fact-finding procedure or decide to continue with a full EIA.

Finance

Environmental impact assessment In the Czech Republic, the EIA process is regulated by Act No. 100/2001 Coll. and its implementing regulations and other related legislation such as the Act on the Environment, Water Act, Integrated Pollution Prevention and Control Act and the Building Act. Act No. 100/2001 Coll. is based on the relevant European legislation, particularly Directive of the European Parliament and of the Council 2014/52/EU of 16 April 2014, on assessment of the effects of certain public and private projects on the environment. According to the official definition formulated by the Ministry of the Environment of the Czech Republic, the “process of environmental impact assessment of projects and concepts is based on systematic examination and assessment of their potential impacts on the environment. The aim of EIA is to discover and describe expected impacts of prepared projects and concepts on the environment and public health in all determining respects and to provide a comprehensible evaluation of such impacts. The process also has the purpose of proposing measures to prevent or mitigate detrimental impacts on the environment.” In general, the purpose of EIA is to maintain harmony between man and his environment; to encourage efforts that will prevent or eliminate damage to the environment and biosphere and stimulate the health and welfare of humanity; to implement a strategy of sustainable development; and to allow officials and all concerned citizens to understand the likely consequences of the proposed actions. In other words, the result of the EIA process should be a compromise between the economic interest of the investor and sustainable protection of the environment and public health.

In practice, the EIA will take into consideration the issues of traffic, pollution, noise, utilities shortages, rain water, waste-water connections, change of agricultural land for industrial use, top-soil removal, landscape disturbance, etc.

First steps

cess with no need for a full EIA and a full EIA. The first option takes six to eight weeks, while the second may require an additional four or five months.

The Czech Republic

EIA and zoning permits

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

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

100 | BUSINESS GUIDEBOOK

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

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www.pmgroup-global.com

M&A

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

Taxes

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

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

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

Human resources

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

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

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

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

Permitting and construction

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

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

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

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

Properties

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

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

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

R&D

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

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

Finance

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

First steps

Basic structure of cost categories used in the Czech Republic

The Czech Republic

Cost planning

What expats say about the Czech Republic

The Czech Republic offers the perfect conditions for enjoying a comfortable family life and having plenty of exciting opportunities at work and in business.

The Czech Republic was once considered Eastern Europe, but in the past ten years, I’ve watched this country surpass many Western European countries in any number of areas, from safety to services to general quality of life.

I enjoy the openness and friendliness of the Czech people.

Bert Hesselink Group Business Development Director CTP Invest

Blake Wittman Iris Finger Site Manager PPG Brno Shared Services Centre

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

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

Mike Jennings

Ben Creighton Associate Director PM Group

The Czech Republic is a great place to have a business. People have very strong technical skills, are motivated at work to do new things, and have great language skills. And the Czech Republic, being the heart of Europe, is close to many other potential markets. I have thoroughly enjoyed living and working here for the last 20 years!

Director Europe GoodCall

Renaud Chevalier General Manager Legrand

Advisory Partner PricewaterhouseCoopers Česká republika s.r.o.

Hire people

Salary levels on selected job roles Sector / position

Min.

Max.

Typical

Developer / Programmer – Java/. NET

60,000

130,000

120,000

IT Programmer / Analyst (Graduate)

35,000

65,000

60,000

SAP Specialist / Consultant

50,000

150,000

100,000

Network Security Engineer

50,000

90,000

80,000

Financial Accountant / 2+ years exp.

38,000

45,000

40,000

Senior Accountant

45,000

60,000

50,000

Finance

Financial Controller / 2 years exp.

45,000

55,000

50,000

100,000

150,000

120,000

Production/Manufacturing Engineer

50,000

70,000

63,000

Quality Engineer

45,000

80,000

64,000

Finance Manager / 5 years exp.

The Czech Republic: Increasing skills in a competitive labour market The Czech labour market has been very dynamic in recent years. Demand for new staff has continued to grow rapidly, resulting in companies looking for different ways to attract new candidates. Although pressure from the market to increase wages has continued, this has been resisted by employers in certain industries.

Engineering / 3-5 years experience

PLC Programmer

40,000

80,000

50,000

R&D Designer / Developer

48,000

80,000

63,000

Project Engineer

40,000

75,000

58,000

Construction & Property Site Manager - General Contractor

40,000

70,000

50,000

Project Manager - Developer

70,000

150,000

100,000

Property Manager

60,000

90,000

70,000

Asset Manager

70,000

150,000

100,000

Business Services - Finance AP/AR Junior

33,000

38,000

35,000

Specialist

35,000

40,000

38,000

Senior

40,000

50,000

42,000

Team Leader

50,000

80,000

60,000

Manager

80,000

130,000

100,000

Source: Hays Czech Republic Salary Guide 2018

104 | BUSINESS GUIDEBOOK

Note: Monthly salary, CZK

he Czech Republic consistently receives high credit ratings in CEE and has once again reasserted itself as an ideal place for investors. The country’s GDP is driven mostly by household consumption due to the strong economy and higher salaries, which have resulted in a greater willingness to spend money. The country’s key competitive advantages include its high-quality education system, population with good language skills and high-quality infrastructure. What is the situation in the various areas of the labour market in 2019? Business services The Business services sector in the Czech Republic has displayed its typical continuous growth in recent years. Existing centres are expanding their

teams and introducing new processes that in turn are creating additional jobs. With the increasing number of processes provided by shared-services centres, there is increasing demand for more experienced job candidates and persistent strong interest in applicants with knowledge of German, French, Dutch, Italian, Spanish and Nordic languages. The popularity and sheer number of small centres with roughly 50-100 employees are rising, especially in Prague. Construction and property Over the past few years, the construction and property market has been undergoing significant consolidation and, with respect to recruitment activities, it is in very good condition. There are many retail projects within the market, with particularly high demand for roles in facility management, expansion and redevelopment. The large number of acqui-

M&A Top sectors

www.hays.cz

Taxes

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

Human resources

Temporary staffing In comparison with the previous year, the market changed significantly in 2018 in the area of temporary jobs, interim projects and part-time positions, as companies require more specialists. The number of project and temporary roles available on the Czech labour market increased by approximately 17%. Companies are more open to these types of positions and candidates also see clear advantages in them. The current demand ratio is approximately 65% of professional positions versus 35% of administrative or other support positions that do not require extensive experience or special skills and abilities. A longer contract duration, potential for contract renewal and the possibility of transitioning to the tribe are great advantages in these cases. The popularity of trainee programmes and student employment was once again confirmed in 2018. The reasons for this are the opportunities afforded to employees in the areas of further education and internal career advancement, as well as preparation of talented people to meet the future needs of employers.

Permitting and construction

Retail and hospitality The retail market went through a significant transformation in 2017, and it also experienced dynamic transformations last year. Expansion of existing companies continued last year, but we also noted the arrival of many new companies in the Czech market. We saw arrivals of premium and luxury brands as well as fast retail businesses. Arrivals of new companies were registered in the food segment in connection with increased demand mainly for organic and fresh grocery products. There was a large increase in demand for sales assistants and store managers. There were many opportunities for senior candidates, including roles with regional overlap, both locally and in Slovakia. Tourism and associated sectors experienced continuous growth for the fifth consecutive year. In comparison with the previous year, tourists spent 10% more nights in accommodation facilities in the Czech Republic in 2018. Both hotel prices and the occupancy rate reached unprecedented highs. According to users of the TripAdvisor website, Prague was the sev-

Properties

Finance The number of positions in the financial sector greatly increased in 2018, as did the willingness of job seekers to change jobs. However, there was a slight slowdown at the end of the year, which looked likely to continue into 2019 and will help the sector to be less challenging in terms of recruitment. We are seeing a steadily growing trend in the number of job opportunities available in accountancy, including payroll positions, with growth also in the area

enth most popular destination in the world last year (ninth place in 2017). Some companies have successfully introduced online orders by means of mobile applications or tablets directly on the premises and in some restaurant chains we can see order panels, which are also attractive for guests. The introduction of these new features allows restaurateurs to achieve higher revenues and orders carried out in electronic form often have higher value compared to the standard way of ordering. It can therefore be assumed that companies’ interest in these technological – and their popularity among customers – will continue to grow in the coming years.

R&D

Engineering and production As expected, the engineering and machinery markets remain strong and growing. Companies are able to offer positions, including narrowly specialised roles, to foreign workers. Therefore, knowledge of a foreign language is becoming commonplace for skilled positions within the manufacturing and – importantly – development environment. Another reason for the requirement of knowing foreign languages – English at the least – is the expansion of foreign companies to the Czech Republic and the ensuing necessity of communication between branches and suppliers. Technician, operator and engineer are the most common positions in this area, especially in the fields of electrical engineering, quality control, design and maintenance. The speed, transparency and attractiveness of recruitment processes is a major point of concern for candidates. The trend is moving towards a single-round recruitment process that covers all aspects necessary for the decision as to whether a given candidate receives an offer over the following days or not. In this context, emphasis is placed also on the overall course of the process. Interviews, which in the past had been extremely stressful for candidates – comparable with a state examination, are therefore becoming more pleasant, less formal meetings that leave a better impression and often give much more information that is essential for candidates’ decision-making.

of financial management. In general, companies are looking for senior experts and managers in accounting and controlling positions, and specifically experts focused on taxation and commercial controlling. Students of finance are increasingly gaining work experience while still attending school. In particular, students in higher grades are well aware of the importance of gaining experience during their studies and are actively addressing this issue. When accepting a job offer, candidates usually consider work-life balance, the possibility of career growth and the location of the job, while the benefit of flexible working hours is also in high demand.

Finance

Information technology In the Czech Republic, the technology sector is one of the most attractive and highly developed areas in the whole of Central and Eastern Europe. New trends are bringing forth new opportunities and demand for qualified experts remains high. It is remarkable that although Prague is exceptionally attractive for various aspects of work, Brno – the second largest city in the country – is not far behind in terms of the number of opportunities, level of wages, attractiveness of employers and the actual positions offered. Brno has a large number of research and technology centres, institutions and specialists. Ostrava is also becoming a popular destination with strong future potential for employers. There is continuing interest in development specialists, whether they are experts in Java or .NET, and QA engineers. The current trend in the segment is the Internet of Things, which is attractive to both employers and candidates. Another area that currently has a real need for IT specialists is cybersecurity, particularly due to new legislation, namely the General Data Protection Regulation. When candidates assess their job offers, they are largely concerned with the benefits that companies offer. They are interested in offers such

as workplace dining facilities, availability of drinking water, contributions to sports activities and corporate childcare. Another important motivator in the recruitment process is IT company branding. It is expected that companies clearly communicate their vision and goals in the IT area, both internally and externally.

First steps

sitions in the past years have resulted in an increased number of vacant positions for specialists in the asset and property management segments. Current expansion management is seen as a strong competitive advantage of companies and we have noticed higher demand for these roles. The industrial property market has experienced a great revival in terms of innovation. We can therefore expect demand for candidates specialising in sustainable buildings to increase in the future. This involves not only project management, but also quality and potential acquisitions or specialists in innovation and technology. A significant shift in the preference of employers toward candidates without relevant experience is now also visible. Work experience – at least during studies – was previously a necessity, but today a genuine interest in the discipline and the necessary minimum of prerequisites in the area of construction and real estate have become major factors.

The Czech Republic

Labour market

Flexibility for employers The employment legislation in the Czech Republic has evolved over the last two decades from a rigid system of rules into a system on the European standard, which emphasises the liberalisation of the employment relationships. Employment relationships are regulated, in particular, by the country´s labour law, collective agreements and individual employment contracts.

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

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

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

Impediments to Work

106 | BUSINESS GUIDEBOOK

mployment models The regulations above apply only to employees (not to self-employed persons) granting them statutory protection as they are subordinated to the employer and perform work at the employer’s cost and responsibility. The vast majority of employees perform work for an employer under an employment contract, although in some cases the employment relationship is governed by special arrangements, namely an agreement to complete a job or an agreement to perform work. All types of employment relationships are regulated by the Labour Code. Under an employment contract, the employee is required to work up to a maximum of 40 hours per week (lower caps are set for specific groups of employees working in multi-shift operations); working hours are usually scheduled over five working days per week. The total overtime work required by the employer may not exceed eight hours per week and 150 hours per calendar year. Upon mutual agreement, the total overtime work may reach up to  eight hours per week on average over a period of 26 consecutive weeks (208 hours per 26 weeks in total). Relationships under an agreement to complete a job or an agreement to perform work are gener-

ally more suitable for less extensive, short-term job assignments where employees’ flexibility with respect to working on specific days is required. Under an agreement to complete a job, the scope of work may not exceed 300 hours per calendar year. Under an agreement to perform work, the scope of work may not exceed 20 hours per week on average over the agreed period (max. 52 weeks). The Labour Code sets only the basic scope of obligations for employees resulting from an employment relationship and it is up to the employer to specify such obligations to suit its specific needs – however, employers cannot exceed certain limits and rules stipulated by the Labour Code. The employer must provide its employees with suitable working conditions so that they are able to fulfil their obligations effectively and safely. Relationships under an agreement to complete a job and an agreement to perform work are less regulated, as several statutory provisions of the Labour Code do not apply to them (e.g. severance pay, vacation time, reimbursement of travel expenses and termination of the employment relationship). In comparison to a relationship under an employment contract, the regulation of taxation, social security and health insurance under these employment models may differ based on monthly earnings.

Top sectors

www.konecna-zacha.com

M&A

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

Taxes

dissolution or relocation of the employer’s business (or a part thereof) redundancy of the employee due to the employer´s decision on organisational changes health condition preventing the employee from performing the given work

Disputes Employment disputes mostly relate to termination of employment or compensation for health issues or work injury. Claims related to termination of employment may be raised by the employee or

Human resources

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

Company executives The status of executives of legal entities is sometimes confused with an employment relationship, even though the members of executive bodies of Czech companies perform their duties under agreements on performance of office regulated by the Act No. 90/2012 Coll., on Business Corporations. An agreement on performance of office must be concluded in writing and approved by the General Meeting of the company. It includes detailed provisions on remuneration and other conditions, such as vacation and severance pay. For two decades, courts ruled that performance of office did not fall under the definition of employment and the provisions of the Labour Code therefore did not apply to such relationships. If a person was an executive and an employee at the same time with respect to the same scope of work, the employment contract was invalid. However, the Constitutional Court of the Czech Republic and the Supreme Court of the Czech Republic have recently ruled that there was no reason to forbid companies and their executives to subordinate their relationship to the Labour Code in some aspects (e.g. vacation, renumeration) while preserving the commercial nature of the relationship.

Permitting and construction

the employer’s business name and registered seat details of the type of work and the location

The current minimum monthly wage (in 2019) is CZK 13,350 (approx. EUR 520) and the lowest minimum hourly wage is CZK 79.80 (approx. EUR 3.12). The minimum annual paid holiday is 20 working days. An employee performing overtime work is entitled to a premium payment of at least 25% of average earnings for overtime work (or time off in lieu of such premium payment).

The formal requirements for an employee’s dismissal, such as written form and direct delivery of the termination notice to the employee, must be observed. In cases of dismissal of an employee due to dissolution or relocation of the employer, organisational changes or health issues or work injury, the employee is entitled to severance pay in the amount stipulated by the Labour Code. The statutory termination period is two months and commences on the first day of the calendar month following the month in which termination notice was delivered to the employee. Payment in lieu of a notice period is not permissible under Czech law, though the parties may agree on “garden leave” for the duration of the termination period. The employee is then still employed but is not performing work and not required to be present at the place of work, while being entitled to his/ her full compensation based on his/her average earnings.

Properties

A trial period may be agreed between the parties in the duration of up to three months for regular employees and up to six months for employees in charge. The parties must agree upon the trial period before or on the date of commencement of work; otherwise it is invalid. Within one month of commencing the employment relationship, employees must be familiarised, in writing, with the following (although this information is usually contained in the employment contract):

mutual agreement of the parties notice of termination immediate termination in specified situations termination of employment during the trial period expiration of an employment contract concluded for a certain period of time other means if the employee is a foreigner or a stateless person

the employer within two months of the date when the employment relationship should have been originally terminated. If the employee insisted on further employment, the employer refused to assign him/ her work tasks and the termination of employment was then ruled void by the court, the employment relationship continues to exist and the employee is entitled to be paid compensation.

R&D

type of work place of work date of commencement of work

Minimum wage, overtime and annual leave An employment relationship can be terminated by:

failure of the employee to meet the legal or employer’s requirements for the given work repeated or continuous breach of the employee´s work obligations, not corrected after receiving a written warning from the employer breach of the employee’s obligations in an especially gross manner during the employee’s temporary incapacity to work

Finance

Terms and conditions of employment All employment relationships must be governed by a written contract. However, the invalidity of an employment contract due to the fact that it is not in a written form can be objected only until the parties commence to exercise their rights and obligations under such employment relationship. Employers can also be fined by the Labour Inspectorate for not entering into an employment contract in writing; the amount of fine can reach up to CZK 10 million (approx. EUR 390,000). The following conditions must always be included in an employment contract:

in which work is to be carried out annual holiday entitlement information on notice periods for termination of employment information on the wage and remuneration system, payment dates, place and method of payment weekly working hours and schedule information on any existing collective agreement

First steps

Self-employed persons may be hired to perform work, though such work should not be performed on a regular basis and should not have the characteristics of dependent work – otherwise, it could be re-classified as an employment relationship. If a self-employed person performs work that has the defining characteristics of a dependant activity (the so-called “Švarc system”), the Labour Inspectorate may impose sanctions of up to CZK 10 million (approx. EUR 390,000) for illegal employment on the employer and up to CZK 100,000 (approx. EUR 4,000) on the employee.

The Czech Republic

Labour law

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

Health insurance

Sickness

Insurance Social-security insurance

Pension

Contribution to the State Employment Policy

Salary-based Benefit

State socialsecurity benefits Non salary-based

Material hardship benefit Assistance Social care benefits

Source: Adecco, 2018

108 | BUSINESS GUIDEBOOK

Bereavement pension

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

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

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

Employee

Employer

Health insurance 4.5%

Health Insurance (4.5% / 9%)

CZK 1,485

EUR 58

CZK 0

EUR 0

CZK 2,145

EUR 83

CZK 2,970

EUR 115

2.3%

CZK 759

EUR 28

21.5%

CZK 7,095

EUR 263

Social insurance 0%

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

6.5%

CZK 0

EUR 0

1.2%

CZK 396

EUR 15

6.5%

CZK 2,145

EUR 83

25%

CZK 8,250

EUR 306

11%

CZK 3,630

EUR 141

34%

CZK 11,220

EUR 416

CZK 2,070

EUR 80

CZK 2,434

EUR 95

CZK 44,300

EUR 1,720

CZK 44,220

EUR 1,717

Insurance contributions total Insurance contribution (11% / 34%) Tax relief Employee relief

Properties

Children tax relief Children tax relief

Permitting and construction

Income tax Monthly taxable salary Income tax deposit

15%

CZK 6,645

EUR 258

Solidarity tax if income exceeds 130,796 CZK/5,080 EUR

CZK 0

EUR 0

Tax deposit after deduction of tax reliefs

CZK 2,141

EUR 83

Net monthly salary

CZK 27,229

EUR 1,057

Salary cost to the employer

Taxes

Source: Adecco, 2018

Human resources

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

Top sectors

www.adecco.com

M&A

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

CZK 33,000 / EUR 1,282

R&D

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

Example of salary calculation Gross salary (monthly)

Finance

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

the company’s tax base by up to 55% of the value of the meal or meal voucher, though this amount may not exceed 70% of the current limit on meal allowances, which is CZK 97 (EUR 3,75) per meal/voucher. Contributions to the employee’s pension fund with a state contribution, supplementary pension insurance and private life assurance are the most common financial benefits. The employer’s contributions are taxfree up to the limit of CZK 50,000 (EUR 1,940) a year. The employer can use these costs to reduce their tax base regardless of the total sum of contributions as long as these contributions are embedded in the company’s collective agreement, internal company directives or in individual employment contracts and agreements. Courses for employees are another very common benefit. These can be profession-related trainings, language courses or other forms of education. For employees such courses and trainings are a great opportunity to gain new knowledge and skills free of charge. The employee is not liable for tax on this benefit, though the employer can use the cost of courses to reduce tax base as long as the provided education relates to the company’s business. Cultural events, sport and holiday contributions can have the form of a Flexi pass, which can be used as a payment method in selected pharmacies, theatres, cinemas, sport facilities, gyms, travel agencies and other businesses. As the name suggests, this pass is a very flexible form of benefit that employees can use as they wish. For the employee, this non-monetary benefit is non-taxable up to the value of CZK 20,000 (EUR 775) per year. Employers pay this benefit from their after-tax income via the Social and Cultural fund, which means that its costs cannot be used as a tax deduction. If the value of the benefit exceeds the limit of CZK 20,000 (EUR 775), the amount over this limit is added to the assessment salary used to calculate social-security and health-insurance contributions. A company car is often provided to employees for both work-related and personal use. In such a case, 1% of the cost of the car is considered to be the employee’s income for every commenced month when the employee uses the car. Companies do not have to deduct write-offs, maintenance costs or road tax, but different conditions apply depending on who pays for the fuel. If the employer pays the entire fuel cost, the value per kilometre of personal use of the car is added to the basic salary used to calculate social-security and health-insurance contributions.

First steps

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

The Czech Republic

Social-security system and payroll accounting

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

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

110 | BUSINESS GUIDEBOOK

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

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

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

Properties

Insufficient database 20%

45%

Time saving Agencies have greater insight into labour market

Money saving

Human resources

Lack of HR consultants

Permitting and construction

23% Source: Advantage Consulting, 2018

Taxes

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

Top sectors

www.acjobs.cz

M&A

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

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

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

R&D

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

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

Finance

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

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

First steps

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

The Czech Republic

Finding management

Employment agencies and recruitment of blue-collar workers in the Czech Republic All employment relationships must be governed by a written contract. A verbal employment contract does not constitute an employment relationship, unless the employee already commenced work. Employers can be fined by the Labour Inspectorate for not concluding an employment contract in writing. The following conditions must always be agreed upon and defined in an employment contract.

Tips on how to recognise a good employment agency: The agency has a clear vision Clear manner of communication Long-term presence on the Czech market Compliance with Czech legislation and, ideally, with APPS

(Association of Providers of Personnel Services) standards

Major sources of applicants for blue-collar jobs: Recommendations by the company’s own employees CVs submitted by applicants Labour Offices Job portals Cooperation with schools

112 | BUSINESS GUIDEBOOK

he Czech Republic has been experiencing a declining trend in unemployment since 2010. In 2018, the unemployment rate reached the lowest level in the modern history of the country, with the annual average being 2.9%. The lack of skilled workers is reflected in considerable nominal wage growth, which amounted to 8.5% in 2018, though it is expected to decrease to 7.4% in 2019. At present, the number of jobseekers is around 230,000, whereas the number of vacancies exceeded 320,000 at the end of 2018. This fact is good news for school-leavers and graduates, as well as for jobseekers over the age of 50, whose presence in the labour market is gaining ever greater importance. An analysis of the jobless group indicates that over 50% of the unemployed are women and around 5% are school-leavers. Naturally, the distribution of unemployment is far from uniform in the Czech Republic. North Bohemia and north Moravia are still among the regions of the Czech Republic with the highest unemployment rates, and it is in such regions that the government is striving to create new jobs through investment incentives or by building industrial parks with the appropriate infrastructure. The strongest demand for employees is still found

in the manufacturing industry and it still applies that job applicants need not have any specific knowledge or skills for nearly half of the offered positions, where employers mostly require primary education only. On the other hand, the number of jobs where a university degree is required is significantly lower. The latest trends in blue-collar worker recruitment include extended cooperation with employment agencies (not only during the start-up stage but also during production peaks), a comprehensive system of corporate benefits and special methods of selecting new employees. Role of employment agencies in recruitment The majority of jobseekers in the Czech labour market are passive (only approximately 10% of jobseekers actively engage in a job search several times a week), though they are inclined to communicate with employment agency consultants. There is also an increasing number of very satisfied employees who do not intend to change jobs. These statistical figures also apply to blue-collar jobs. In the past, recruitment of production workers consisted in publishing job ads and waiting for CVs to come in. At present, it is necessary to actively seek out candidates.

Plzeň Region 2.12%

Ústí n. L. Region 4.50%

H.K. Region 2.31%

Prague Region 1.93%

Pardubice Region 2.19%

Central Bohemia 2.64%

South Bohemia 2.38%

Vysočina Region 3.02%

South Moravia 3.86%

Olomouc Region 3.37%

MoraviaSilesia 4.65%

Zlín Region 2.61%

Properties

Source: Ministry of Labour and Social Affairs of the Czech Republic, 2018

Top sectors

www.hofmann-personal.cz

M&A

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

Taxes

New specific methods of selecting employees Due to the time pressure involved with recruiting new employees, a whole range of tests have recently come into use in the selection process. Production workers are tested for manual skills, general knowledge, technical knowledge and driving skills. Assessment centres have become more common, too. In the course of interviews,

applicants often leave the meeting room and are taken on the tour of the production plant, during which they are asked by their future supervisors about solutions to various situations. The above facts clearly show that businesses are paying ever greater attention to selection of suitable employees. This is good news, as research shows that the costs of hiring a new employee is equal to his/her annual pay. It is also good that the demand for greater efficiency in the recruitment process in the Czech Republic fortunately has not resulted in deterioration of employees’ working conditions.

Human resources

plants are often located in industrial parks where there is limited access by mass transport. Therefore, manufacturing companies often offer various forms of transport and accommodation assistance.

Permitting and construction

Compared to Western European countries, hiring through agencies in the Czech Republic still accounts for a much smaller share of the market. In Europe, 2% of the total workforce comprises agency employees. In the Czech Republic, that figure is currently 1%, having increased annually in recent years. In extensive recruitment projects, businesses still more frequently use employment agencies offering the “try & hire” service, where agency

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

K.V. Region 2.93%

Unemployment rate among the population aged 15-64 in regions of the Czech Republic as at 31 December 2018

Liberec Region 3.18%

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1. Time savings during the recruitment process – the employer can focus on its own personnel 2. Interviews, short listing, training, medical examination, provision of protective equipment, administration, wages, etc. 3. The demanding induction training stage is conducted through the agency (cases of fake sickness, contingent turnover, dealing with compensation, damage, etc.) 4. Flexibility – quick response time, immediate replacement – often even during the same shift 5. A verifiably productive worker may be hired as a permanent employee 6. 24/7 support and services 7. Arrangement of transport/accommodation of employees 8. Personnel/legal consultancy, know-how transfer 9. Presence of the agency’s representative at the workplace (administrative support, monitoring workers’ performance, etc.) 10. Possibility of a fixed trial period including the possibility of hiring the given worker as a permanent employee

Unemployment rate in the regions

Finance

When cooperating with an employment agency, added value lies primarily in the following aspects:

employees are hired as permanent staff members after an agreed period of time. This enables companies to identify reliable workers and their human resources departments are spared the administrative burden associated with high employee turnover. Workers from employments agencies assigned to a business are protected by Czech laws and regulations so that their wages are comparable to those of permanent employees. By no means are agency employees paid poorly or suffer any other disadvantages. The major advantage of an agency employee is the possibility of employment for a fixed period of time. Agency-based employment thus creates a certain reserve protecting businesses against seasonal fluctuations, changes of daily orders and lack of staff during the holiday season and summer vacation season. In the financial respect, cooperation with an employment agency involves purchasing of services. This is appreciated primarily by foreign companies with relatively strict budget structures. The costs of agency employees are therefore included in service costs and not labour costs. Agency employment is also beneficial when dealing with a high rate of employee turnover in a business, as it reduces the costs of recruiting new employees.

First steps

The latest trend in this area consists in the ever greater use of employment agencies during the start-up stage of companies. Most employment agencies have solid experience with recruiting blue-collar workers and have their own recruitment concepts. Smaller recruitment projects (ten or more employees) can be carried out in a matter of days, whereas larger recruitment projects (50 or more employees) may take longer. Everything depends on location and the required candidate profiles. A number of businesses regard agency employees as the most stable resource of permanent employees.

The Czech Republic

Finding workers

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

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

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

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www.reedglobal.cz

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Lenka Hnátková Director REED lenka.hnatkova@reedglobal.com

Properties

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

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

R&D

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

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

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

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

are also eager to look to the next stage of their career development soon after entering the workforce. Although Millennials love change, this does not necessarily mean that they will seek out a new employer. In fact, the opposite may be true, as they may be only looking for more responsibilities or options for their career paths. Taking into account that millennials comprise one-third of the workforce, talent managers need to adapt to cover their specific needs. In addressing the new needs of Generation Y, modern companies will need to develop targeted strategies, offering broader career opportunities and more engaging activities. Mentoring, coaching programmes and work-life balance are appreciated by this generation.

First steps

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

The Czech Republic

Talent management

Manage costs. Invest in talent. How to do both and succeed in today’s environment. The current talent shortage has changed the employment landscape. A major struggle is the effort to manage operating costs while investing in recruitment and talent development to maximise performance.

Reasons to use a contingent workforce By using a contingent workforce, employers can: Protect the permanent workforce from work reduction or overload due to natural business cycles Cope with surges in workload volume Diminish risk when rebuilding headcount post-downturn Find quality people on short notice Access specialised expertise for challenging projects that cannot be handled by internal resources Access people with basic skill sets, thus freeing up permanent staff for specialised critical job tasks Respond to changes quickly in order to be more competitive Evaluate new talent without commitment Outsource projects/departments not aligned with core business competencies Re-engage past or retired employees with ease Reduce costs associated with benefits, retirement and taxes, as well as long-term compensation costs

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s the business environment improves, organisations have to develop a more flexible workforce and keep fixed costs low. Many will rely more and more on external talent or contingent workers – temporary employees, contractors, outsourced workers and consultants – to achieve business goals in a more strategic way.

Benefits of a contingent workforce The practice of supplementing permanent staff with contingent labour is valuable as businesses experience the ebb and flow of the marketplace, seasonal lows and highs, or product-specific launches and promotions. During times of economic uncertainty, using a contingent workforce provides you access to skilled and motivated individuals who help you meet your business goals while controlling your costs. When demand drops, the contingent workforce can be reduced, thus insulating your permanent workforce. As the Czech economy grow with the lowest unemployment rate in EU and companies are not able to fill their vacancies, building workforce with contingent staff can be a smart strategy. It is particularly beneficial since many contingent workers can transition to permanent staff, reconstructing your workforce with minimal risk as conditions demand. In addition, no matter how well you prepare for and manage a project, permanent employees have planned or unplanned ab-

sences that disrupt your workflow. Skilled contingent staff can quickly step in to perform critical tasks so the work can proceed. Contingent workers can free up time for your permanent staff to focus on critical tasks while the contingent workers focus on more baseline tasks that are necessary but do not require highly-skilled expertise. A contingent workforce can also be beneficial when a new product or service is launched, requiring new groups of people and/or new skill sets. By partnering with a contingent workforce provider early on, you can be sure to have the people required, when and where you need them – whatever skill sets are required. The ability to evaluate a worker on the job before formally hiring the person permanently is another great benefit. The best way to get a good understanding of skills and capabilities is to see that person in action. Observing the individual in your environment interacting with permanent staff and communicating with customers significantly increases your ability to predict success within the team and within the organisation. Employing a contingent worker also helps reduce hiring costs by eliminating the need to advertise, recruit and screen. In an effort to reduce costs, some companies decide to outsource functions that are not core competencies or aligned to key business strategies. In this case, a contingent workforce can easily add value. Partnering with an agency or company skilled at the tasks secondary to business operations allows your permanent staff

Talentism heightens the significance of outsourcing A shortage of skills has simultaneously made it imperative for companies to find individuals who can adequately fill roles. In ManpowerGroup’s most recent skills shortage survey, 18% of Czech employers reported difficulties in finding the skills they need. Outsourcing may be the answer.

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

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Elevating the expertise: Companies count on outsourcing providers to have deep industry and functional knowledge. They ask them to source specific skills, and find cultural and technical fits expeditiously. These pressing needs have placed providers in the role of trusted advisors and require them to have more detailed insight into their clients than before. This includes understanding the company’s business strategy, and the skills it needs now and in the future. It also means adding to its suite of services for finding and managing talent. Some providers even combine them with other HR services.

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

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

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

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Jiří Halbrštát Marketing and Candidate Sourcing Manager ManpowerGroup Czech Republic jiri.halbrstat@manpowergroup.cz

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www.manpowergroup.cz

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Modern outsourcing strategies meet the need for a more agile workforce Human Resources outsourcing is transforming how companies manage talent. It is still important to reduce costs. But expense savings have become a by-product of superior benefits, such as workforce agility, visibility and control of performance. The best HR outsourcing today creates more nimble workforces to address fast-changing skills needs in a fast-changing business environment. It improves the processes for adding talent and the ability to serve and manage it in ways that lead to higher productivity. It also enhances the employer brand - how a company’s management of its workforce is perceived by the outside world - improving its ability to attract other talent. HR outsourcing has become more varied, sophisticated and a bigger part of companies’ strategies. It encompasses a wider range of areas and offers organisations unprecedented flexibility. Imagine the outsourcing relationship as a corporate backyard. Companies once tossed administrative functions like payroll over the fence, paying the neighbours to manage them. Today, the spectrum of outsourcing options is wide and deep, crossing various models of work and categories of workers. With the right outsourcing partners, companies can mix and match solutions - customising outsourcing to fit their fulltime and contingent workforce needs. At a time when being agile and cost-effective are crucial, companies are seeking outsourcing providers who take over the bulk of one or both, while improving related processes.

Companies can focus on improving the hiring of  fulltime employees via Recruitment Process Outsourcing (RPO). Use of RPO has soared in recent years as companies look for logical places to maximise investments while improving productivity. RPO providers have a unique ability to find the best workers quickly - often in crucial, high-growth industries and regions. RPO providers are clearly handling traditional elements of recruiting, including sourcing, screening and assessment, with greater efficiency than before. This has resulted partly from improvement in technology and a greater understanding of how RPO can benefit an organisation: outsourcing providers can tailor their services in new, more innovative ways. In recent years, RPO providers have assumed a larger role in on boarding - the orientation of new hires - employee training and development, and even off boarding - separation of workers. They are increasingly managing the social media that generates communities of potential candidates and helps define the employer brand. Companies may choose a Managed Service Provider (MSP) to supply and manage their contingency workforce, and manage other outsourcing tasks. MSPs bring new efficiency to the selection and management of providers of outsourcing services and independent contractors. Increasingly, employers are utilising contingent workforce strategies to provide flexibility. And as the number of contingent workforce sources increases, so do the challenges, such as managing cost, standardising processes and tracking performance. In a world of shortened resources, companies are looking for trusted partners who can help them find more innovative, creative ways to get things done – and done fast. In the era of Skills revolution, this means accomplishing significant goals with fewer resources. Outsourcing can provide the means for achieving objectives that might otherwise be out of reach, at least in the short term. This is not simply because the outsourcing partner can perform specific responsibilities but rather because of a deep knowledge of area, function, industry, and most of all, clients themselves. We hear almost daily from the companies we help how much they value us, how outsourcing has evolved into an integral part of their organisations. Clearly, there are things - important things - that companies are not able to do effectively without outsourcing. Outsourcing is a true workforce model for our time.

First steps

to focus on core products or services. The secondary aspects of your operations can be performed by outside experts seamlessly and cost efficiently. The Czech economy has one of most dynamic growth rates in the EU and the country’s unemployment rate is the lowest in Europe. However, the situation can change rapidly. Businesses have to remain agile. It will be important to evaluate the balance between a permanent and contingent workforce. A contingent workforce allows you to seamlessly adjust during the economic recovery by gradually and efficiently rebuilding permanent staff while responding to market demands. This ultimately allows your organisation to manage costs and invest in the critical talent required to drive the business to heightened levels of success.

The Czech Republic

HR outsourcing

Increased productivity, reduced costs and happier employees A committed, professional and cost-efficient workforce is an important factor in the success of any company, especially where there is a large proportion of temporary employees. To ensure that employees have the right work at the right time and at the right place is not an easy task, but it is essential for any company that needs to reduce staff turnover and increase both labour productivity and the quality of work. How to win the war for talent The Czech economy has been growing continuously and though the forecast calls for a slight slowdown in 2019, the country’s growth rate will remain strong and above the Eurozone and EU average. As a result, positive changes in economic. Positive changes in economic conditions have created a more competitive environment and attracting good candidates has become harder. People who are looking for work have more options and employers have fewer. Placing ads on job portals or in newspapers is no longer a sufficient means of finding qualified applicants. Many companies have added new tactics to their recruitment strategies. They use employee referrals, social networks like Facebook to post jobs and LinkedIn to search for candidates.

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

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

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

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

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

Human resources

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

Permitting and construction

lower personnel costs

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

Martin Drlík Inhouse Services Director Randstad martin.drlik@randstad.cz

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www.randstad.cz

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

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

Finance

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

ents at the operational level in order to truly understand their needs. They do not just repair what is broken; they look closely at why it got broken in the first place and apply innovative solutions to create long-lasting change that will help the client to achieve its strategic goals. The primary focus of this concept is continual improvement according to the client’s needs. When examining the business the workforce analysts first conduct a detailed onsite analysis within the client’s company. They meet with all levels of management and training, H&S and HR teams to gain an understanding of the business. This enables them to recommend relevant actions and activities to drive efficiencies and cost savings. The aim is to identify solutions for the removal of waste, both production and time, and improve efficiencies in the workforce using skills-gap analysis, skills clustering, process improvement, on-boarding and training improvements. Regulatory and quality control with proven cost containment strategies are provided by a team with extensive experience in driving compliance and safety. Every step is carefully planned and ongoing reporting/metrics are provided to rigorously analyse staff utilization.

First steps

How it works Inhouse Services provides a total workforce management solution aligned to your operational objectives and staffing needs, which can increase the productivity of existing workers, help decrease attrition and absenteeism and generate cost savings. It delivers the complete HR process from recruitment, selection, introduction, planning and management of workers to provision of detailed management reports. Inhouse service is not limited to the local market only. It can also help you with hiring foreign workers. A professional inhouse partner knows the cultural differences, understands the rules that employers must follow when hiring employees from different countries and will guide you through the whole process. The Inhouse service is provided on-site, so all processes can be customised to your specific needs. Onsite managers assimilate into your culture to deliver and retain talent that can truly contribute to you and your business’s success. Working with a strategic onsite partner brings savings by reducing overtime, absenteeism, turnover and idle time, while improving overall workforce utilisation. It also helps to achieve measurable improvements in productivity, quality and operating efficiency.

The Czech Republic

Workforce management

Candidates are passive To be successful, you will need to be active The labour market has been shifting for decades, but it has taken a massive turn in the past five to ten years. The behaviour of candidates is fundamentally different today than it was in past generations. People’s expectations for the recruitment process are also different and higher than in the past. The solution is to not only accept this, but to embrace it and, ideally, actively participate in it.

Quick Facts: More than 80% of the market is passive. Job descriptions that are 600-800 words have the highest click-to-apply ratios versus longer ones. If your application process takes more than five minutes, you will lose almost half of the candidates. More than 60% of all job searches start on a mobile device. Time-to-fill is a great metric to watch, but more qualitative ones will have a bigger impact. Approaching a candidate directly as the final employer has a much higher success rate than external agencies.

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here are no people! This is a line we have heard for a number of years and we will probably hear it for another few. And while it seems to be true, it is actually not accurate at all. There are lots of people on the market, but most of them already have jobs. Welcome to the world of passive candidates. As the Czech market has been identified by so many world-class companies as the top destination both for their new investments and for continued expansion, opportunities for locals have skyrocketed. The current situation is that the majority (most statistics say 80% or more) of the market is passive – this means that potential candidates have a job and are not actively looking or applying for jobs. This reality is the one that scares many companies and at this point many simply give up or start considering extreme alternatives. But if you look closely, you will realise that there is no need for such great despair because the fact that many people are passive does not mean that they will not consider any changes at all – it simply means that they are not actively approaching companies. Your job is to actively approach them. For the record, there is of course a portion of the market that will absolutely not

move, and luckily for us, that group does not make up more than 10%-15% of the total – these are the ones who are fully engaged and satisfied and will not consider other opportunities. So, the true picture of the talent situation is not bad; it simply requires a different approach than what we have been accustomed for roughly the past decade. Most companies were used to receiving lots of CVs the moment they posted a job and some still do for certain roles. But this should not stop you from going out and cherry-picking the exact talent that you want or, at a minimum, developing a brand and an understanding of the market so that the best talent is attracted to you. After all, there is a reason that Google, which still receives more than 10,000 CVs every week (no, that is not a typo), has a proactive recruitment team of more than a dozen people. So, what can you do in this challenging, yet very attractive market? We would recommend taking five steps to ensure that you are setting yourself up for success when recruiting: Step 1 Promote your authentic brand Before you begin to tell the world why they should join you, you must understand why others have joined you.

Get senior management and hiring managers to lead the process.

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www.goodcall.eu

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Blake Wittman Director GoodCall blake@goodcall.eu

If you have started to implement the above steps and you have a sense for brand, numbers, tools and the people involved, you are well on your way to getting ahead of the competition, but most importantly, you will build a strong foundation for the mid- and long-term market. The companies that take such an approach become the leaders in their industries and have a very healthy flow of outstanding CVs coming to their inbox. They know that candidates do indeed exist, but we have to work a little harder to get them.

Human resources

Step 5 Get the right people involved Regardless of what stage your recruitment maturity is at,

have a look at the stakeholders in the process and see if it goes high enough. Quite often, “hiring managers” turn out to be “hiring delegators” who simply demand CVs but do not actually lead the hiring process. To get their full buy-in, you will probably need someone above the hiring managers. We would recommend starting at the top. Get the top management involved in the whole process from not just understanding, but promoting the EVP and helping to reach out to top talent themselves. The impact this can have is invaluable.

Numbers will show you the way both online and offline.

Permitting and construction

Step 4 Get active As has hopefully been made clear by now, top talent will not always come knocking on your door. So get out there and learn how to approach the people you want. This means sourcing and engaging candidates using the tools that they are used to. Your target market probably is on Facebook and Instagram and LinkedIn. Well, you should be too, at least in some way – perhaps as a company or maybe just your recruiters. At any rate, pro-actively talking to candidates is critical, both for roles that are open now and for the future, when those same people may be more ready to consider a change. But if you wait for them to send their CVs, you will probably be waiting for a while. With so many opportunities being thrown at them, you will need to stand out (hopefully using some of the above ideas) and then stand in front of them perhaps via in-person sourcing at networking events or job fairs, or by means of a video message that you send them on Snapchat. The possibilities are endless.

You will still need to proactively source and engage the market.

Look through your digital footprint and make sure it will convert.

Properties

recruitment functions look at time-to-fill, but we believe there are better, more qualitative metrics, such as quality of hire, that can include retention, satisfaction, referrals and other sub-metrics. But to be better in the future, start analysing your data throughout various points from attraction to retention.

Five key steps to successful recruiting

R&D

Step 3 Know your numbers Which of your job descriptions is read the most? How many visitors did your career page have last month? How many candidates do you need to review in order to hire for your most important roles? These and many more questions should guide you in understanding where you are doing well and where you need more assistance. Most importantly, you can determine where you should spend money and effort. If you cannot measure it, you cannot improve it, so start with a few simple ones. Most

Promote your brand with an authentic EVP.

NEW CHANNELS

Finance

Step 2 Upgrade your digital world Have you looked at your career page lately? Read through your job descriptions and ask yourself if the average millennial would read them to the end. The number of clicks generated from job descriptions is the highest with just 600-800 words and plummets to just single digits as you approach 1,000 or more words. Check the time it takes to apply for a job. As you cross the five-minute barrier, know that you have just lost almost half of the candidates that started the process. And then try everything on your mobile device, all the way to applying and completing the process. Many companies struggle with having an experience that is not just acceptable, but also enjoyable. Today’s talent simply will not accept an experience, and therefore a company, that has not been updated in years. Finally, determine whether you need a microsite (a separate website not linked to your corporate domain) to get the flexibility you need in creating a world-class career page that engages the market and delivers what your audience demands.

Five key steps to successful recruiting

First steps

The message, when you tell it, needs to be authentic; otherwise, it will not resonate with your audience. Start by asking current and new employees why they are in your company. This will give you a sense of what your EVP (Employee Value Proposition) is on the local level. You may have a global EVP, but we would recommend doing some sort of exercise locally to determine how it may differ from your global description. Once you have identified your EVP, prepare a plan and start to tell the market all about it. Use real people, pictures, stories and offices, as this ensures that you will gain the trust of those interacting with your company because they will see the real “you”.

The Czech Republic

Attracting Talent

Did you know?

Where Czechs excel

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

Cardiology and heart surgery

Musical instruments

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

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

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

Automotive industry With more than 1.44 million cars produced in 2018, the Czech Republic is the leading automotive producer in the CEE region. The most significant Czech carmaker is Škoda Auto, which has been in existence for over a century. Czech trams are also well known elsewhere in the world.

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

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

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

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

Find out more about taxes

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

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

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

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

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

Top sectors

www.ey.com/CZ

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

M&A

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

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

Taxes

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

Practical tip:

Human resources

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

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

Permitting and construction

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

Taxation of employees The income of residents and non-residents is taxed at a flat rate of 15%. For employment income, this tax rate is calculated based on so-called “super-gross” income, i.e. gross income increased by the employer’s part of the Czech social security and health insurance contributions. A solidarity surcharge of 7% applies to annual gross income from employment and profit from self-employment (business) activities exceeding approximately EUR 61,300 in total. Participation in the Czech social security-system is generally required for individuals who work in the Czech Republic. This can be modified by the application of the EU social-security legislation or respective totalisation agreement. Although the aggregated rates might seem above average (34% for the employer and 11% for the employee, social security capped for high-income employees), the social-security and health-insurance systems cover

Practical tip:

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

Properties

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

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

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

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

R&D

Practical tip:

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

Finance

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

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

First steps

Administration and collection of the individual taxes falls under the General Financial Directorate and its subordinated administrative bodies, the local tax authorities. The Special Financial Authority is responsible for large taxpayers with annual turnover exceeding EUR 78 million (CZK 2 billion). The Supreme Administrative Court, established in 2003, is responsible for dealing with disputes in the tax area and aims to take a consistent approach in such disputes.

The Czech Republic

Tax environment

Paying corporate taxes in the Czech Republic The Czech Republic has come a long way in the area of corporate taxation. Entering the European Union probably had the most significant impact on the Czech tax system and led to the harmonisation of the basics of the Czech tax system with those of other EU countries. Tax authorities crack down on VAT fraud Given the extent of VAT fraud cases identified in the Czech Republic, the tax authorities are putting more effort into introducing measures to fight VAT fraud. Companies need to be more thorough when doing business with counterparties. The tax authorities have introduced an extensive, though not comprehensive, list of warning signs that each VAT payer should check when dealing with suppliers. Based on the circumstances of a particular case, VAT payers should obtain clarity with respect to at least the following indicators: The supplier was established recently, has no relevant business history and no relevant references or experience in the given sector. It does not have the necessary license or permits for the particular field of activity. The supplier is completely unknown on the market and is managed by persons with no or minimal knowledge and experience in the given field or persons with a background abroad. The business description entered in the Commercial Register does not correspond to the actual economic activities of the business partner. The actual seat of the supplier is different from that officially stated in the VAT register. Services are offered at a price significantly lower than the market price and non-standard business terms are offered. The contract is not in written form and there are no penalty mechanisms. The payment terms required by the supplier are “unusual”, such as payments rendered abroad, payments to another entity’s account, cash payments for significant transactions or payments to an account that is not listed in the VAT register. The supplier does not have a working website or the website does not have enough information about the supplier’s economic activities. It is hard to contact the supplier; for example, only foreign telephone numbers are available, even if it is a Czech supplier. According to the tax authorities, the issues described above may indicate the supplier’s potential to commit fraud, though not necessarily. In this regard, it is recommended that companies periodically conduct a review of their business partners. The results of such reviews can be used as a counter-argument that the VAT payer “knew or should have known” in the event the tax authorities challenge the recovery of input VAT.

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

Investment incentives are available to Czech entities (including Czech subsidiaries of foreign companies) and may cover up to 25% of the costs of planned investments. Incentives include income-tax relief for a period of up to ten years, property-tax relief for up to five years, cash grants for job creation as well as training and retraining of employees, cash grants for capital expenditures, and transfer of land at specially reduced prices. Investment incentives are available in the manufacturing industry and for support of technology centres, business support services centres, data centres, and customer support centres. Apart from investment incentives, companies may also apply for other means of financial support from EU funds. Research and development is also an area supported by the Czech tax system. Up to 100% of specific R&D expenses incurred in a given tax year may be deducted from the tax base as a special tax allowance in addition to applying them as a standard tax-deductible cost. An additional 10% of R&D costs may be applied as an allowance from the difference by which the current year’s qualifying costs exceed those of the previous period. Dividend and interest income is subject to withholding tax of 15% (or 35% in the case of non-treaty/TIEA countries). However, the withholding tax is often decreased based on an applicable double taxation treaty or under the applicable EU directive. Currently, the Czech Republic is party to 86 double taxation treaties.

Top sectors

www.pwc.com/cz

M&A

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

Taxes

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

Human resources

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

Permitting and construction

Current tax-administration activities in the area of anti-fraud measures The Czech Republic is active in fighting VAT fraud. Tax authorities have published non-exhaustive list of criteria that each business should check on its suppliers. For details, please refer to the infobox at the beginning. As an example, the local reverse-charge VAT regime was introduced for a number of supplies like delivery of gold (2006) and construction works (2012). In 2015 and 2016, the local reverse-charge VAT regime was widened to include goods and services listed in the aforementioned Council Directive such as mobile phones, metals, gaming consoles, tablets, laptops, telecommunication services or electricity and gas supplied to a dealer. Most recently the local reverse charge regime was extended to i) the supply of goods provided initially as a guarantee during implementation of the guarantee, II) hiring of staff for construction and assembly work, iii) supply of goods following the cession of the reservation of ownership, iv) mediation of sale of investment gold and v) supply of immovable property in a compulsory sale procedure. The Czech Republic also applies the concept of the “unreliable VAT payer” which comes with joint VAT liability of the recipient of the supply for VAT not paid by the supplier. Currently, there are more than one thousand names on the “black list” and the rules for

Properties

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

and services, e.g. banking services, rent and supply of immovable property.

R&D

Transfer pricing is increasingly becoming an tax issue in the Czech Republic, which means that prices agreed between related parties have to be set at arm’s length. Although there is no legal requirement to keep transfer pricing documentation, in practice doing so is strongly recommended, as the taxpayer bears the burden of proof upon an inspection of prices by the tax authorities. Generally, pricing methods as described in OECD guidelines are followed. The consequences of incorrect transfer pricing adjustments may lead to tax exposure and penalties. In the event of uncertainties in the area of transfer pricing, taxpayers may request that the tax authorities issue an advance pricing agreement regarding ongoing or future transactions between related parties.

detailed information which VAT payers already include in their VAT records. This information should provide the tax authorities with large volumes of data that can be used to perform cross-checks and analysis of transactions carried out in the Czech Republic. As a result of such checks, the tax authorities may identify suspicious groups of taxable persons and carousel frauds. Control statements have to be submitted electronically so that the tax authorities process the information automatically and use data-analytic approaches. In order to drive home the importance of the control statement as a tool for fighting tax fraud, strict deadlines and sanctions have been enacted. The deadline for submitting a control statement after a receiving a notice from the tax authorities is only five working days, i.e. VAT payers are obliged to respond in a very short time in the event that they receive such a notice. In the area of sanctions, the amounts are firmly set. The lowest sanction – CZK 1,000 (approx. EUR 39) – is assessed in the case of late submission of the control statement without prior notice of such delay being provided to the tax authorities. Should the control statement not be submitted even after such notice has been given, the sanction will be CZK 50,000 (approx. EUR 1,960). The sanctions may be partially or fully waived. Furthermore, if the tax administration is seriously impeded by non-submission of the control statement, a sanction of up to CZK 500,000 (approx. EUR 19,600) may be levied. Although the purpose of the control statement is clear and understandable, it increased the administrative burden of every VAT payer in the Czech Republic. So far, companies had to make adjustments in their accounting/tax systems, ensure the training of their employees and implement new internal control systems.

Finance

The Czech Republic has been gradually implementing the OECD- and EU-driven initiatives aimed at introducing various anti-tax avoidance measures and increased transparency. The legislation enabling the automatic international exchange of information about financial accounts for the purposes of tax administration (Common Reporting Standard) has already been implemented, and the first automatic exchange of information took place in 2017. The same applies to Country by Country Reporting. The EU Anti-Tax Avoidance Directive (ATAD) legislation is scheduled to be approved during 2019. The directive imposing on tax payers the obligation to disclose potentially aggressive tax arrangements to tax authorities (DAC6) has not yet been implemented, but it is likely to be introduced in 2019 or 2020. In the area of transfer pricing, unlike in many EU countries, it is currently not mandatory for Czech taxpayers to prepare transfer pricing documentation. However, such an obligation is being considered by the Czech Ministry of Finance.

joint VAT liability have been made stricter several times since their introduction. For companies that want to avoid being jointly liable for the VAT unpaid by their supplier, the option of splitting the VAT payment was introduced. This means that the recipient of a taxable supply may opt to pay the VAT on the received supply to the account of the Tax Office to which the supplier reports. The concept of an “unreliable entity” has been in place for many years. It is an extension of the unreliable VAT payer concept to entities that are not registered as VAT payers. Entities that can be considered unreliable are those that seriously breach the obligations stipulated by the tax authorities, e.g. by charging VAT on invoices while failing to pay VAT to the tax authorities even upon request or by issuing fictitious invoices. Currently, there are nearly two thousand unreliable entities in the Czech Republic. If an unreliable VAT payer deregisters from the VAT system, it automatically becomes an unreliable entity and vice versa. Apart from submission of VAT returns, all VAT payers with relevant transactions need to also submit a report called a control statement. According to statistics and professional experience, this report is a very effective tool in fighting tax evasion, especially in the case of socalled carousel frauds. All VAT payers need to submit the control statement if they render a supply with a place of taxable supply in the Czech Republic or if they report an input VAT deduction in their VAT returns.

First steps

Corporate taxation – what can we expect in the near future?

The Czech Republic

Business taxation

Paying personal income tax in the Czech Republic Czech tax law recognises five types of individual income that are subject to tax and stipulates specific rules for calculating the partial tax base from each of them. The total tax base of an individual is then represented by the sum of these partial tax bases. The personal income tax rate is a flat 15%. There are also specific tax-base deductions and tax allowances available, provided that the specified conditions are met.

For each activity, the maximum limits for lump-sum deductions are set as follows: Lump-sum standard deduction

Maximum limit for deduction as expenses for taxable periods 2018 and 2019 2018

2019 and onwards

60%

not more than CZK 600,000 (approx. EUR 23,300) + tax allowance and benefits*

not more than CZK 1,200,000 (approx. EUR 46,600) + tax allowance and benefits*

80%

not more than CZK 800,000 (approx. EUR 31,100) + tax allowance and benefits*

not more than CZK 1,600,000 (approx. EUR 62,200) + tax allowance and benefits*

40%

not more than CZK 400,000 (approx. EUR 15,500) + tax allowance and benefits*

not more than CZK 800,000 (approx. EUR 31,000) + tax allowance and benefits*

30%

not more than CZK 300,000 (approx. EUR 11,700) + tax allowance and benefits*

not more than CZK 600,000 (approx. EUR 23,400) + tax allowance and benefits*

* tax allowances for a low-income spouse and for children

128 | BUSINESS GUIDEBOOK

ax residency Czech tax residents have a duty to pay tax in the Czech Republic from their worldwide income. An individual is considered to be a Czech tax resident if he or she has a permanent address in the Czech Republic or spends here at least 183 days in total per year. Should the individual be considered a tax resident in other various countries under those countries’ domestic tax laws, tax residency is assessed in accordance with the relevant double-taxation treaty, if one exists. Czech tax residents must report their income earned abroad to the Czech tax authority. They must include such income in the partial tax base reported in the tax return and, depending on the relevant double-taxation treaty, it may either be exempt from taxation or taxed in the Czech Republic (in the latter case, credit for income tax paid abroad may be applied under specific rules). The tax liability Czech tax non-residents have in the Czech Republic is limited to their Czechsourced income only. This mainly refers to:

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

Income from employment activities performed in the Czech Republic Income from providing services in the Czech Republic

Employment Employment income is mainly income from performing work based on an employment contract or remuneration of statutory representatives of companies.

Income from the sale of real estate located in the Czech Republic or from the sale of shares of Czech companies Income paid by Czech tax residents to the taxpayer in the form of interest, dividends, licence fees, rental payments, etc. Types of taxable income The following five general types of income are recognised in relation to individuals: Employment income Business income Income from capital assets (interest, dividends, etc.) Rental income Other income

All income and expenses are taxable on a cash basis. The individual may choose between claiming actually incurred expenses under practically the same rules as those applied to businesses (incl. tax depreciation of fixed assets) or claiming a lump-sum standard deduction. The lump-sum standard deduction is 30% in this case with the maximum limit of CZK 300,000 (approx. EUR 11,700) for the taxable period 2018 and 600,000 (approx. EUR 23,400) for the taxable period 2019.

M&A Top sectors

www.asbgroup.eu

Taxes

Michala Darebná Tax Manager ASB Accounting, s.r.o. mdarebna@asbgroup.eu

Human resources

Calculation of tax liability Prior to calculating the tax liability from the aggregate tax base composed of the partial tax bases as

the individual also earns other taxable income not subject to withholding tax in the total annual amount of at least CZK 6,000 (approx. EUR 230), or the solidarity surcharge is payable on a portion of the individual’s employment income.

Permitting and construction

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

Tax compliance The obligation of an individual to submit a tax return arises if the individual has earned taxable income (not subject to withholding tax) in the annual amount of at least CZK 15,000 (approx. EUR 580). If the individual has earned employment income, the related tax obligations are in most cases settled by the employer and no obligation to file a tax return arises, unless

Properties

Expenses provably incurred in order to achieve taxable business income are basically tax-deductible,

Capital income Income from capital assets mainly comprises received dividends, interest or income from pension accounts and life-insurance policies. Interest income (e.g. from a loan) paid to a tax resident is generally not subject to local withholding tax and is thus included in this partial tax base. Other

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

described above, some additional tax-base deductions can be applied if the stipulated conditions are met and the value limits are observed, e.g. deduction of paid mortgage interest, contributions made to a private pension scheme and/or private life-insurance account, donations or unutilised tax losses carried forward from previous taxation periods. Tax liability is then calculated as 15% of the aggregate tax base thus reduced. An individual can also apply tax allowances. The general annual tax allowances for practically all individuals is CZK 24,840 (approx. EUR 970). There are also other tax allowances (e.g. for students, disabled taxpayers and taxpayers with a low-income spouse), which are applied under the stipulated conditions available to tax residents of the Czech Republic or to tax residents of another EU member state if taxable Czech-sourced income of such a non-resident comprises at least 90% of his or her worldwide income. The tax liability reduced by tax allowances is the final tax liability to be settled with the tax authority.

R&D

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

80% in the case of income from agricultural activities, forestry, water management and craft activities 40% in the case of income from the activities of lawyers, tax advisors, architects, doctors, artists and certain other professions 30% in the case of income from the leasing of property included in business property

payments are mostly subject to 15% withholding tax and are therefore excluded from further taxation as part of the regular tax base.

Finance

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

though with certain limitations or exceptions. For example, a business’s contributions to social security and health insurance, representation costs and penalties assessed by public authorities are treated as tax non-deductible. The value of fixed assets needs to be depreciated over taxable periods and using the methods stipulated by the tax code. Instead of deducting actual expenses, an individual can claim a lump-sum deduction calculated as a percentage of earned income stipulated by law. Using any of the above-mentioned expense deduction methods allows the possibility of tax allowances and tax benefits. An individual additionally has the option of decreasing his/her calculated income tax by deducting a low-income spouse (CZK 24,840; approx. EUR 970) and his/her children: first child CZK 15,204 (approx. EUR 590), second child CZK 19,404 (approx. EUR 760), third and each additional child CZK 24,204 (approx. EUR 940). The amendment to the Income Tax Act came into effect in April 2019, introduces for 2019 and subsequent years changes in the application of the maximum amount of the lump-sum deduction, which is likely to double (thus returning to the 2016 amount). The following overview summarises the lump-sum deductions by activity and also lists their ceilings for the taxable periods 2018 and 2019. In most cases, a 60% deduction applies. There are, however, other rates specific for certain kinds of income:

First steps

Other than the employee’s salary, the partial tax base from employment may also include several taxable benefits (e.g. a monthly addition of 1% of the purchase price of a company car if such car is used for personal purposes). On the other hand, there are many other in-kind benefits which under certain rules are not subject to tax, e.g. non-monetary contributions for cultural and sports events, healthcare, training facilities, recreational facilities, meal contributions and contributions to pension accounts and life-insurance policies. Personal income tax of 15% is calculated based on the taxpayer’s so-called “super-gross” salary, which is the sum of his/her gross salary and taxable benefits (i.e. employment income) increased by the employer’s social-security and health-insurance contributions in the amount of 34% of the employee’s income. A maximum assessment base applies to social security. For the taxable period 2018, the limit was set at CZK 1,438,992 (approx. EUR 56,000). No social-security contribution is paid from employment income over this amount. This limit is also observed by the rules for calculation of the tax base, i.e. no tax is calculated from the assessment base for social-security insurance exceeding the limit. However, there is no maximum limit applicable to health insurance. Employment income exceeding the maximum assessment base for social security as described above is subject to the so-called “tax solidarity surcharge” of an additional 7%. Excess amounts are thus effectively subject to the 22% tax rate.

The Czech Republic

Individual taxation

Where to find ...

Representative offices of the Czech Republic

www.mzv.cz

Interested in M&A?

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

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

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

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

Taxes M&A Top sectors

www.pwclegal.cz

Human resources

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

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

Permitting and construction

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

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

Properties

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

Court attached to the Czech Chamber of Commerce and the Agricultural Chamber, the rules of which may be applied to both domestic and international disputes. Foreign arbitration under the rules of the ICC and the LCIA is also sometimes used, particularly when a potential dispute involves Czech and foreign entities, though the costs related to applying these venues tend to be higher. Another reason why parties often prefer arbitration to regular courts is the fact that arbitration awards are enforceable in more jurisdictions than are court decisions, given the Czech Republic’s membership in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

R&D

Representations and warranties The representations and warranties sections of SPAs are usually very heavily negotiated and this is where good legal advice may help to distinguish among the very important and the less important points and issues, while also taking into account the outcome of the due-diligence review. The length of these provisions may be in the range of only a few lines just basically confirming the ability of the parties to sign the contract to a dozen or more pages of very specific representations dealing with various areas of the  target and its business. Czech sellers usually try hard to limit their liability to a predetermined amount often corresponding to a portion of the total purchase

price. If the SPA is silent on this point, their exposure to possible price discounts or damages claims could potentially be quite extensive. While the exact amount of such limitation is usually subject to lengthy debates, it could end up being anything from 5% to 100% of the price equivalent range. Also the “de-minimis baskets” as the liability trigger thresholds are often subject to discussion and the final amounts usually depend on the type and size of the business in question. The buyer’s warranties are usually much more modest and often reduced to a few basic statements confirming the ability to sign the contract, lack of insolvency circumstances and perhaps the availability of funds related to payment of the agreed price.

Finance

Sale and purchase agreement The sale of shares still generally prevails over the sale of individual assets even if this form means that the buyer also inevitably purchases all the liabilities of the target company – known and unknown. Czech SPAs with less sophisticated parties are often simple and short but may also easily stretch to 30 or more pages in length. This usually depends on several factors, including the size of the transaction, type of the target business, involvement of foreign parties, structure of financing and the skills and ambitions of the legal and other advisors of the parties. It is not rare that in smaller or midsize transactions, sophisticated and extensive transaction documentation may at first be frowned upon. However, by using the appropriate tactics, the counterparty may be ultimately convinced to appreciate its benefits. Regardless of the size of the deal, certain points and issues should always be spelled out in the contract and it is the role of your Czech counsel to convince the other

party and its counsel of the validity of such requirement. The bottom line is that Anglo-Saxon style SPAs have become to a large extent the market standard for sophisticated deals. Given the Anglo-Saxon origin of many of the widely used precedents, it is sometimes difficult to interpret some of the clauses that obviously sought inspiration from legal jurisdictions with a completely different legal background and terminology. For example, the principles of interpretation for contracts governed by Czech law may differ significantly from the common law principles. Typical examples where Czech law may struggle with these concepts would include provisions dealing with the limitation of liability or indemnity provisions. Also, frequently used terms and concepts such as the “best knowledge” qualification in the representations and warranties context or perhaps the concept of representations and warranties as such often do not have an equivalent in Czech law and thus must be very carefully drafted or defined to increase their chances of enforceability. Foreign parties should know that it is not realistic to expect that during the closing-related “money for shares swap” session, the purchase price will be paid exactly on the closing day if the parties have their bank accounts in different Czech banks or even in banks located in different countries. A separate escrow mechanism must be used or one of the parties must agree on the establishment of an interim bank account that would exist only for a limited period of time and would be maintained by the other party’s bank solely for the purposes of the closing-related money transfer.

First steps

community is also generally familiar with the role and content requirements of the various types of “preliminary agreements” such as the “letter of intent” (LOI), “memorandum of understanding” and “heads of terms” and these documents usually address issues such as the nature of the transfer (asset transfer vs. share deal), the purchase price and payment mechanics, the equity vs. debt structure and other major terms. However, it is important to ensure that such preliminary agreements are non-binding as to the key deal provisions, as these documents themselves could be deemed final contracts. On the negotiation side, the incorporation of any controversial terms into the final purchase contract that were missing in the executed LOI is possible, however doing so usually comes at a price. Czech transactions sometime involve exclusivity arrangements aimed at limiting the seller’s ability to negotiate a deal with another prospective buyer until a binding contract is signed. A “breakup fee” payable by the buyer if it walks away from the transaction for no legitimate reason and the deal is not closed for such reason is possible under Czech law, but it is not common. Non-disclosure and confidentiality agreements are very frequently signed, but often difficult to enforce. Shareholder agreements are quite frequent with all the various minority protection rules, options, drag/tag along rights and other universally applied concepts.

The Czech Republic

M&A-related documentation

Making informed investment decisions

Due diligence focus points: Czech privately owned companies Due diligence area

Common issues

Due diligence focus

Impacting

Quality of information

Management reports not prepared in accordance with GAAP

Detailed reconciliations

Quality of earnings

Standard costing not updated for actual costs Cash accounting FX exposure Owners´ costs Finance lease and factoring costs

WIP adjustments EBITDA normalistaion

Valuation Purchase price

Working capital requirements

Working capital not traced Impact of applying local standards (finance lease, factoring, etc.)

Alternative working capital analysis Working capital normalisation

Valuation Purchase price SPA negotiation

Net debt

Environmental provisions EU subsidies Legal disputes Off-balance sheet contingencies

Net debt definition

Purchase price SPA negotiation

Tax findings

Limited transfer pricing documentation Past reorganistations (substance vs. tax planning) Owners´ costs Alternative employment structures

Risk quantification

SPA warranties and indemnities

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Decision-making Valuation

Global merger and acquisition (M&A) activities remained strong in FY18 despite the number of deals falling for the first time since 2010. Global transactional value improved in comparison with the previous year due to the increased number of megadeals closed in FY18. The Czech M&A market showed considerable year-on-year growth in both transaction volume and value in the first half of FY18 and confirmed its leading position in Central and Eastern Europe. In such a dynamic environment, due diligence and proper evaluation of the transaction risks are highly important for successful completion of M&A transactions. Even though concerns about global political uncertainty persist, global confidence remains high and the outlook for FY19 is positive.

&A best practice Due diligence is a common practice in M&A and is usually conducted in the middle of the M&A process chain. Every strategic decision, such as the acquisition of a foreign company, is usually preceded by an assessment of the potential risks and opportunities. To help with decision-making, most investors perform due diligence prior to the transaction to confirm the underlying investment assumptions and to identify and assess the risks that the transaction might involve. In a multinational and ever more complex business environment, due diligence can support prospective investors in the analysis and assessment of available information in making an informed decision and creating the best value from a transaction. There is no single definition of financial, tax and commercial due diligence. It can be defined as an investigation designed to assist a purchaser in evaluating the target company. A due diligence adviser

undertakes a financial, tax and commercial review of the target to provide a clear picture of its financial performance, position and cash flows, tax compliance and exposures, market dynamics and business plan achievability. Advisors also seek to highlight potential risks and values of the transaction and to identify issues to be reflected in a sale and purchase agreement (SPA) and completion accounts. There is no audit “opinion” compared to the statutory audit and the outcome of the due diligence is not a valuation report. Due diligence reports typically provide the purchaser with inputs to be used in the negotiation process, with regard to both price and other terms and conditions that might be included in the SPA. From the procedural point of view, there are two types of due diligence exercises – acquisition and vendor due diligence. Vendor due diligence (VDD) is performed for the vendor in a transaction that expects a tendering process with multiple potential bidders. VDD enables acceleration of the whole process and gives potential bidders greater comfort from the beginning of the process.

Transtaction Readiness

Closing + Integration Strategy

Taxes M&A Top sectors

www.deloitte.cz

Human resources

Lenka Green Manager, Deloitte Advisory lgreen@deloittece.com

Permitting and construction

Peter Smataník Assistant Director, Deloitte Advisory psmatanik@deloitteCE.com

Properties

Making investment decisions in the Czech Republic With approximately 10.5 million inhabitants, the Czech Republic is a relatively small market

in terms of population; however, it is the most developed among Central European countries. Owing to the market proximity to both Western and Eastern Europe, the Czech Republic offers a wide variety of opportunities to foreign investors. Acquisition due diligence is commonly used in M&A deals in the Czech Republic. To maximise the chances of successfully closing an M&A deal in the Czech Republic, it is necessary to follow several rules in due diligence. Early involvement of advisors will help a potential bidder to receive key information for management decisions prior to submitting an indicative bid to the vendor. In certain industries, involvement of local subject-matter experts is necessary (e.g. energy regulatory experts). Differences between conducting due diligence in the Czech Republic and in overseas markets exist and should be assumed in preparing a transaction roadmap and the scope of due diligence. The Due Diligence Focal Points table includes a selection of common issues/ risks investors and their advisors face during a due diligence investigation of a Czech privately owned company. Risks can be mitigated when appropriate attention is paid to due diligence during the whole M&A process. Several trends are currently observable in deals on the Czech market. The majority of deals are becoming competitive with a standardised selling process and a VDD report in place. Advisors are often

involved on both the selling and buying sides. Such an approach requires the due diligence provider to be involved from the initial stage of the process in order to ensure consistency between different sources of information provided to prospective investors (information memorandum, marketing documents and VDD report). In an increasing number of deals, investors conclude insurance of warranties and indemnities. In such a case, a potential insurer will often require a due diligence report for the purpose of evaluating the risks. The concluded pricing mechanism includes a higher share of locked box accounts. In this case, a key element is to understand the balance sheet at the locked box date, a definition of ordinary business activities or non-ordinary activities which present potential leakages in the locked box mechanism. According to Deloitte’s Private Equity Survey (Winter 2018), investor confidence in Central Europe seems to be somewhat cooling down as we enter FY19. Survey respondents hinted at some caution mostly due to political and economic uncertainty, which is fuelled by global political cautiousness rather than regional specifics. The majority of investors still expect the level of M&A activity achieved in the previous year to continue. Central Europe remains a very attractive region for FY19 due to the anticipated GDP growth in the region, available and favourably priced leverage and several interesting targets coming to the market. With the expected dynamics, transaction advisory services and particularly due diligence are becoming increasingly important for investors that are willing to convert their expectations into successful transactions.

R&D

ness to be delivered to the acquirer with a “normal” or “target” level of working capital. There is no fixed definition for calculating normal working capital; therefore, this will be a part of the negotiation process and investors will often ask for due diligence advisors to assist and advise in this matter. The purpose of the net debt schedule is to provide information on the likely impact of cash, debt and debt-like items (in the target business) on the consideration to be paid for a business. Business valuations are commonly assessed in terms of enterprise value, which represents a cash-free and debt-free price of the business. However, the target is usually not delivered to the acquirer in such a state. Therefore, in order to calculate the amount payable to the vendor, the enterprise value is adjusted for the target’s net cash/debt (in addition to a working capital adjustment). Under a typical pricing mechanism, the acquirer will pay in full for any cash/cash-like items and get a deduction in full for any debt/debt-like items. The standard tax due diligence investigation focuses more on the historical tax position of the target company with the aim of identifying and quantifying potential tax exposures within tax periods still open for tax audit. It might also help to identify potential tax savings and assess the quality of transferable tax attributes (e.g. tax losses). The purpose of commercial due diligence is to test investment hypotheses related to the company’s strategy and business model sustainability. Its scope of work typically includes analysis of external factors (market dynamics and trends) and related risks, review of product positioning and the stability of the customer base, assessment of future growth prospects and upsides/downsides of the business plan.

Integration + Transformation

Finance

Due diligence investigation For the purposes of this article, we will focus on describing acquisition due diligence (ADD). The standard financial due diligence investigation includes assessment of the quality of earnings (historical, current and projected), sustainability of cash flows, working capital requirements and debt position including assessment of potential debt-like or off-balance sheet items. Assumptions underlying the projections of these figures may also be reviewed as part of ADD. Management reporting will most likely form the basis of analysis for due diligence purposes. Therefore, enquiry about its derivation is necessary to understand how it is tied to the statutory financial records. Furthermore, it is often the case that internal management information may not be GAAP compliant, i.e. management may have already “normalised” the financial information for their definition of oneoff items. As such, a common tactic for historical data is to reconcile the management accounts with the statutory accounts. Key analysis conducted during financial due diligence focuses on reviewing the target’s historical profitability and is often referred to as “normalised EBITDA”, “pro forma EBITDA” or “quality of earnings”. The aim of this investigation is to understand what the sustainable trading performance of the business is, often with focus on normalised pro forma EBITDA. In a significant number of transactions, the business will also be valued on a multiple of EBITDA, using “clean” sustainable EBITDA. For transactions where a discounted cashflow valuation is used, the investor will similarly want to understand the underlying earnings/operating cash for various evaluation purposes. Understanding what a “normal” level of working capital is and looking into intra-month working capital or cash trends will help the acquirer negotiate proper pricing mechanism and assess what funding facilities they need to put in place with their lenders, if any. A “typical” pricing mechanism will allow for a busi-

Transtaction Diligence + Execution

First steps

M&A Strategy

The Czech Republic

Financial and tax due diligence

W&I insurance for M&A deals in the Czech Republic Given its location in the heart of Central Europe, the Czech Republic has become something of a hub for overseas investment in the region over the past few years.

he real estate market in Central and Eastern Europe has been a particular area of focus for investors due to the following three key factors: Availability of “dry powder” from institutional and private investors “The search for yields”. With government bonds and stock markets now producing negligent returns, investors are prepared to increase their appetite for perceived risk in order to achieve greater yields. The political situation across Europe following Brexit has seen foreign investors looking for returns in the stable Central European political environment and non-eurozone countries.

Last year, EUR 1.2 billion was invested in the CEE market by private equity funds and an additional EUR 2.75 billion was invested in the Czech real estate market across all asset classes. As investment has flooded into the region, it has

136 | BUSINESS GUIDEBOOK

brought with it financial instruments derived from the US/British M&A market. In this article we will look into the role of insurance in mergers and acquisitions. The article will look at the reasons behind the growth in the use of this product, particularly for deals in CEE. The warranty and indemnity (W&I) market has been in existence for a decade but has only become a staple deal tool in the past four years. In the London market, it is estimated that around 30% of M&A deals now have W&I attached. Increasingly, this product is being used in deals across CEE and in Czech deals in particular. The demand for W&I has risen due to a combination of factors, while the cost has decreased to a level where the insurance is seen as a very attractive option. The process has been streamlined, with most London teams having former corporate lawyers underwriting the risk, and awareness of the existence of such insurance has increased, with law firms pushing the option to their clients as a viable deal tool. The insurance could act as

The Czech Republic

W&I insurance

First steps

Good to know:

Top sectors

www.renomia.cz

M&A

Hana Pavelková Senior Specialist Real Estate, M&A, Construction RENOMIA hana.pavelkova@renomia.cz

Taxes

This includes claims: I. for a breach of warranty (general, fundamental, tax) II. under the tax covenant III. under an indemnity in respect of a known issue

Human resources

Statistics show that 11% of policies in EMEA had claims; the most common breaches concern the Financial Statements.

Permitting and construction

Buyers can distinguish themselves from others in the tender process and can thus win more deals.

The product tends to be particularly attractive in competitive auction processes where sellers are unwilling to provide warranties and indemnities but can still provide a package to prospective buyers, enabling them to bring warranty claims against the insurer rather than the seller. The starting point for the insurer is that the policy sits back to back with the SPA and indemnifies a party to a transaction (buyer, seller or interested party) for financial losses arising out of the sale and purchase agreement.

Properties

With W&I, sellers benefit by limiting their liabilities.

The policy fills the “warranty gap” in cases where sellers: I. are not prepared to provide warranties (e.g. PE houses or family sellers), or II. intend to cap their liability at £1/€1/$1 (e.g. real estate transactions), or III. in some cases are unable to give warranties and indemnities (e.g. family sellers or SPVs)

From the buyer’s perspective, W&I insurance can be used to make a bid more attractive to a prospective seller. It can therefore help a buyer secure a greater number of deals. The W&I market in London and across Europe has increased tremendously in the past few years. More and more insurers are joining the market, resulting in competition in both pricing and coverage positions that customers can benefit from. Markets are now having to look at more complex risks and jurisdictions in order to gain market share. It recently became possible to cover the Czech jurisdiction, which was nearly impossible only a few years ago. As the product becomes more commonly used, claims data is starting to emerge from the market. AIG recently published its claims data, noting a claims on 11% of policies written in EMEA. The most common breaches involved financial statements, tax, contracts, intellectual property, employee and litigation warranties. Interestingly, over 50% of claims arose in the first twelve months of a policy being written. Pricing for W&I policies ranges between 1% and 3% of the limit purchased. When pricing risk, underwriters take into account the quality of due diligence, type of asset, jurisdiction and transaction size. Real estate deals are now being priced as low as 0.75%, whereas IP-heavy software companies would be priced at the higher end of the scale. The majority of claims occur in the first 18 months after completion, though 10% of claims arise more than two years after the given deal has been signed.

R&D

Each policy is bespoke in order to address the issues at hand and implement the requested cover.

Specific known issues such as tax or litigation may also be covered by the W&I market with a separate policy. Exclusions from the W&I policy include secondary tax liabilities, transfer pricing, environmental exclusions and construction defects. Increasingly, clients are turning to other insurance markets to cover risks that fall out of the purview of the W&I market. Policies can be held by either the buyer or the seller, but it is far more common for the buyer to hold the policy. The benefit of a buy-side policy is that, in the event of a claim, the buyer will be reimbursed directly by the insurer, rather than the seller, for any covered financial loss under the contract, as a claim that would have been against the seller will now be against the insurer. This gives the buyer certainty that, in the event that any of the warranties that buyer relied upon are not correct or are even fraudulent, the policy will respond (assuming a risk has not been specifically excluded). A seller-side policy would mean the buyer would issue a claim against the seller, who would in turn issue a claim against the policy. This does not give the Seller a “clean exit”, which is one of the main drivers for this type of insurance. From the seller’s perspective, W&I insurance can be used to limit liabilities and mitigate balance-sheet exposure. This allows the seller to exit deals cleanly, free to use the proceeds of the sale without having to reserve funds for any future claims.

Finance

Warranty and indemnity insurance means a compromise in the course of executing a deal, when discussions between the buyer and seller can sometimes come to a deadlock.

a means of compromise in the course of executing a deal, when discussions between the buyer and seller can sometimes come to a deadlock. The purpose of W&I insurance is to wrap the transactional risk in a policy so as to eliminate, or at least minimise, the impact of the liability on the parties in a sale and purchase agreement. The scope of coverage is determined by the issues in a particular transaction; therefore, each policy is bespoke in order to address the issues at hand and implement the necessary cover.

From preparation to operation

When making decisions in the process of preparing and implementing an investment in the Czech Republic, foreign investors have the possibility to use the services of consulting firms connected with resolving various construction-technical and organisational issues. This pertains to both projects involving new construction and those using existing structures (brownfields). At the same time, it involves addressing the broadest range of issues encountered throughout lifecycle of the given project, from preparation to operation. In the Czech Republic, these services are offered to foreign investors based on the past findings and experience of the service providers, as well as the needs of the investors.

he character of provided services is fully dependent on the character of the given project, including its preparation and implementation, and the necessity of alerting the investors to errors arising from lack of understanding of the specific conditions, differences in construction-related legislation and, especially, the necessity of minimising potential risks ensuing from these objective facts. Technical screening For foreign investors, it is necessary to first mention services connected with technical screening of the conditions and surroundings of the future structure. Investors are offered services consisting in collection and assessment of information re-

138 | BUSINESS GUIDEBOOK

quired for taking a definitive decision on the given project’s location. This involves the following measures: Assessment of the proposed location of the structure with respect to urban development documentation and possible risks that could arise in future. Assessment of the transportation infrastructure with respect to not only the implementation and operation of the structure, but also to accessibility for employees, work schedules, etc. Assessment of the utilities networks, especially with respect to their long-term operability, quality, capacity, loading, etc.

Step 2: The consulting firm forms a team of specialists according to the agreed requirements with the objective of precisely specifying the preliminary actions to be taken according

Vladimír Bílý Regional Director CEE Gleeds vladimir.bily@gleeds.cz

Top sectors

www.gleeds.com

The process of providing such a type of the Technical Due Diligence services as described above is common practice and is always the result of the initial discussions and the requirements precisely formulated by the investor.

M&A

Preparation and implementation For the actual process of preparing and implementing construction, services of a technical and

Foreign investors often request that consulting firms set up a project-management system and provide a monitoring function. These services are offered with respect to the construction, technical and technological works in every project. A basic function is to recommend an overall concept

The management of the consulting firm submits a final summary report to the investor. Within this report, emphasis is placed on a comprehensive solution for determining the status with a statement of the degree of importance of the determined facts.

Taxes

Foreign investors most commonly request this overview of analytical documents and information from consulting firms. It is natural that most of them are able to prepare it for investors and give answers to other questions pertaining to the construction-technical area. Such documents and information always serve as the foundation for investors’ strategic decision-making with respect to choosing a location for a structure or, as the case may be, using existing structures.

Step 4:

Human resources

Condition of the fire-protection system and assurance of occupational safety including accessibility in the case of extraordinary events.

The investor and consulting firm define the objectives and set up the time schedule and organisational assurance. Usually, a representative of the consulting firm explains to the investor all aspects of the agree activities. This also leads to the conclusion of an agreement on cooperation.

The consulting firm’s specialists verify individual areas and prepare partial reports including necessary documentation and recommendations, which include suggestions on how to use or change the determined state of the relevant measures.

Permitting and construction

Condition of the equipment and location of all necessary energy and other sources for flawless and economical operation of the future building.

In the Czech Republic, most construction projects are implemented via a general contractor. Investors are therefore offered services related to evaluation of all technical conditions of the project as well as compliance with the requirements ensuing from the construction documentation as negotiated with various public authorities. The assessment of materials for selection of a general contractor makes it possible to alert investors to risks that may arise during the course of construction beyond those set forth in the project documentation and that may lead to legal disputes. A technical audit of the documentation for selection of the contractor carried out by a consulting firm is extraordinarily beneficial for investors. Assistance with the actual selection and evaluation of bids is a natural part of the offered services.

Step 1:

Step 3:

Properties

Determination of the extent to which the current condition of buildings is or is not in accordance with the technical standards and regulations in force.

to be taken according to the first step. The necessary contractual relationships are agreed on the basis of this specification.

R&D

Quality of the utilised construction materials from the perspective of the structure’s anticipated service life.

Recommendation regarding the specific professional competence of the project manager and formation of management teams. The required technical-organisational skills and experience and preparation of the selection of suitable candidates for individual management and executive positions are considered to be among the necessary prerequisites for ensuring successful project management. Here emphasis is also placed on thorough knowledge of the technical and organisational conditions of construction process in the Czech Republic.

of project management which includes, among other things, the key milestones of the construction project, the basic links between structural and technological works and a statement of significant risk areas. Such a management concept does not replace commonly used control and monitoring mechanisms. The breadth and depth of using these and other TDD-type services are always based on discussions between the investor and the consulting firm. This usually involves adhering to the following process:

Finance

Quality of the given building and individual parts thereof.

organisational character are provided so that investors gain the necessary information and recommendations that will facilitate the construction process. Such services include the following:

First steps

Determination of climatic conditions in relation to transport, energy intensity, operating costs and scope of Facility Management services. In the event that the investor decides to use offered buildings (a database containing such properties is available at CzechInvest, for example), collected and evaluated documents and information on the following topics can be requested:

The Czech Republic

Technical due diligence

Environmental due diligence – A cornerstone of new acquisitions assessment Environmental due diligence (EDD), i.e. the ecological audit of industrial companies, administrative buildings or undeveloped land plots intended for further development, is an important element in making decisions about new property acquisitions. The demand for EDD services is increasing significantly as the market is developing after a few years of decline. An environmental audit is performed particularly when companies and properties are purchased or sold, or when other business transactions are done and ecological commitments are transferred between the involved parties.

he purpose of EDD is a comprehensive evaluation of the assessed property with respect to possible environmental risks. The audit provides the client with an assessment of whether the property complies with the applicable laws and also provides a calculation of possible risks and the costs of remedial measures. Typical clients requesting EDD services include individual industrial companies and business chains as well as major developers and companies providing facility management services. As there is no specific EDD methodology in place in the Czech Republic and as most acquisitions

140 | BUSINESS GUIDEBOOK

involve foreign investments, most consulting companies provide EDD services according to the E-1527-05 ASTM standard issued by the American Society for Testing and Materials. This approach ensures easy orientation and meeting of foreign investors’ expectations. Environmental due diligence is performed in two stages according to the ASTM methodology. The first EDD stage includes the evaluation of the site according to its compliance with legislative requirements. The current state of the site and all activities taking place there are assessed during the auditor’s actual visit. Based on available information, the following points are assessed:

Phase 2

Site visit inspection of the site’s maintenance handling of waste, chemicals and hazardous substances presence of bulk storage, ODS and PCB on site

Top sectors

www.enviros.cz

M&A

Jan Pavlík Head of the Environmental Division ENVIROS jan.pavlik@enviros.cz

Taxes

Furthermore, all available documentation is reviewed (public registers and databases; documentation at the site). Particular consideration is paid to the assessment of waste, waste water and handling of hazardous materials as well as the amount of produced airborne emissions. Health and safety and environmental considerations are addressed by adopting a site-specific qualitative approach to identify the risk of environmental harm. The guiding principle behind this approach is the attempt to establish connecting

links between sources of hazards via an exposure pathway to a potential receptor. Risk assessment is the process of collating known information on a hazard or set of hazards in order to estimate actual or potential risks to receptors. Receptors may be humans, a water resource, a sensitive local ecosystem or future construction materials. Receptors can be connected with the hazard via one or several exposure pathways (e.g. the pathway of direct contact). Risks are generally managed by isolating or removing the hazard, isolating the receptor or by intercepting the exposure pathway. Without the three essential components of a source (hazard), pathway and receptor, there can be no risk. Thus, the mere presence of a hazard at a site does not mean that there will necessarily be attendant risks.

Human resources

the historical use of the site with emphasis on uncovering old ecological burdens the environmental impact of current activities (waste handling, use and storage of chemicals, technological operations, heating and cooling)

A specific issue in the Czech Republic is the question of old environmental burdens, particularly soil contamination due to industrial activities in the past decades. It is obvious that the issue of old ecological burdens exists in all countries, including those in western Europe. However, gradual steps with clear determination of the involved entities’ responsibility have been taken in these regions in connection with the development environmental responsibility and subsequent work on relevant legislation. The situation in the Czech Republic and other countries of the former Eastern Bloc was complicated by the privatisation of state-owned companies in the 1990s. All known kinds of contamination were registered and so-called ecological agreements were concluded between the new owners and the National Property Fund of the Czech Repub-

Permitting and construction

Summary potential risks recommendation for Phase 2 if necessary

the likelihood of an event (probability), which takes into account both the presence of the hazard and receptor and the integrity of the pathway the severity of the potential consequence, which takes into account both the potential severity of the hazard and the sensitivity of the receptor

Properties

If recommended from Phase 1, the following items are sampled and tested: soil and groundwater PCB ACM

R&D

Review of available documentation existing environmental burdens registered sources of pollution permits and approvals

lic at that time – these agreements ensure the allocation of state funds for the removal of the burdens. The ecological agreements agenda was later taken over by the Ministry of Finance of the Czech Republic. Reviewing these facts represents an important step when EDD is performed in companies and it also is the point where EDD works overlap with legal due diligence works at the site in question, and both teams often cooperate. Another interesting specific fact is that a significant part of newly developed industrial zones is situated in brownfields on former military sites that became vacant after the withdrawal of Soviet armed forces from the Czech Republic or due to the reduction of oversized Czech military bases. The second EDD stage is performed in the case that the first stage defines the need of further specialised research that is necessary for making a qualified decision about the environmental state of the site. The most frequently performed activities during the second stage are research of asbestos occurrence, research and analysis of soil and groundwater samples – the most frequent contaminant being oil products (hydrocarbons) or PCBs from the operation of old transformers and the like. We can unambiguously conclude that performing environmental due diligence should be a standard step during acquisitions of properties as it can significantly contribute to the decision-making process as a whole and decrease the costs of remedial measures. The most important approach is to have EDD done by a qualified company that knows the local conditions and all related circumstances.

Finance

Phase 1

By considering where a viable pathway exists which connects a source with a receptor, this assessment will identify where pollutant linkages may exist. If there is no pollutant linkage, then there is no risk. Therefore, only where a viable pollutant linkage is established does this assessment go on to consider the level of risk. Risk should be based on the consideration of both:

First steps

Typical range of EDD

The Czech Republic

Environmental due diligence

Finding a trustworthy manager in the Czech Republic Nominee services are used when a nominee (fiduciary) looks after the assets on someone else’s behalf and acts in their best interest. Such a person is usually nominated based on a contract between the client and a professional provider, which means the nominee is not someone from the client’s staff. In the Czech Republic, these services are provided on a very high level, comparable with the advanced countries of Western Europe.

he trust element The nominee director service, which is probably the most common type of nominee service, is typically provided by independent trust firms or individuals. Clients recruit from various industries and business segments and use this service for different reasons. As the element of trust is of great importance in this relationship (which is why providers of such services are often referred to as “trust firms”), clients tend to look for reputable providers with an excellent track record. Conversely, providers tend to be a bit more selective when taking on new clients than in the case of other services like accounting or payroll.

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A reason for caution is that the director is liable with all his/her personal assets to the shareholders should he not act with due care. This is why a diligent KYC (know-your-client) procedure is performed before accepting a directorship client. Indeed, no director would like to serve and be a key contact to third parties on behalf of a company that is engaged in unethical or even illegal activities or simply has poor corporate governance that could cause non-compliance for which the director could be held accountable. The element of trust must work both ways, however, as the same need for caution applies for clients, too. Because the director has great power within the company and can enter into contracts on behalf of the company, shareholders want to have some-

Regular proactive dialogue with the client and other board directors Review and signing of all contracts to be entered into by the company, cooperation

with the client’s lawyers, tax advisers and other professionals Review and approval of the company’s financial statements, related communication

with the client’s internal and/or external auditors, government authorities, etc. Review of proposed changes to statutory documentation, including the company’s

memorandum and articles of association, prior to the company’s adoption of such changes If the company is an investment fund, review of its offering document and other

materials prior to adoption of such documents Taxes

Tomáš Vinkler Managing Director VISTRA CZECH REPUBLIC AND SLOVAKIA tomas.vinkler@vistra.com

Top sectors

www.vistra.com

M&A

Summary Nominee services are not a magic bullet that eliminates all concerns and problems associated with a new investment. However, if used in the right way and with the right partner, they can save a lot of time and financial resources and add an extra dimension of comfort and corporate governance.

as required by the company’s investment strategy and activities

Human resources

One-off transaction and other reasons – Clients involved in an M&A transaction using a special-purpose vehicle frequently use outsourced directors who know how these transactions work, know other local service providers like lawyers, tax advisers, etc. and are happy to assist the client for a relatively short period of time, for which it would be even more difficult to find a director of decent quality.

Attendance at regular board meetings in person or by conference call as frequently

Permitting and construction

Limited presence in the country – This is typical for inward investors who do not need many people locally and manage their investments in multiple countries from their headquarters abroad. Having a local director with a proven track record who knows local legislation and the business community, can recommend local experts in other service areas and is used to daily operational matters such as how banks, the tax office and other governmental authorities operate saves the client time and resources and is more effective than having an expatriate dealing with these issues in multiple jurisdictions at once.

Employees do not want to do it – As mentioned earlier, directorship services represent certain risks for the directors. A professional provider has many checks and controls together with insurance and since it is a product for these providers, the procedures and processes are well designed and maintained, which makes it safer for the nominee than for someone without this support, as well as more efficient for the client. Without such a setup, the risks for an employee who serves as director, among other things, are not insignificant.

Among other things, the agenda of a director comprises but is not limited to the following:

Properties

Independence and responsibility – Having an independent trust firm with professional indemnity insurance and director and officers liability insurance appropriate to the size of its clients and which can also handle back-office management (accounting, payroll, compliance, etc.) is much more effective than using one’s own employee, who not only has to deal with directorship tasks in addition to his/her primary duties, but may also go on holiday, become ill, leave the company unexpectedly or pursue his/her own interests.

Language barrier – The director must read and sign many corporate documents, many of which can only be in the local language; having a native speaker of the given language is an advantage.

The areas in which a director typically plays an active role vary and the director should be generally aware of all key happenings in the company. Even if it is typically the client who makes business decisions, sets the corporate strategy and instructs the director on execution, the director should check if the tasks are compliant with local legislation and oversee their proper execution.

R&D

Local management and control – If the client has its headquarters abroad, appointing a foreigner as the director of a local company might lead to speculation with respect to where the real management and control are being executed. This risk is mitigated by appointing a professional local director who lives in the same country in which the company is registered.

Cost – It is cheaper to outsource an experienced local director than to move one’s own full-time employee with the required seniority and experience to a foreign country to serve as a director.

What directors do

Finance

Why and when to use a nominee director Why use a nominee director when many companies use their own staff? Why not use your own people when finding the right provider is not always an easy task? To answer these questions, some commonly cited reasons for choosing this service are provided below.

Level of experience – Sometimes clients have a few employees on the local market, but none with sufficient seniority or experience. Clients then often choose to outsource the directorship service rather than using their own employee who lacks relevant experience and would be distracted from his/her primary work by directorship duties.

First steps

body trustworthy in such a position. Reputable trust firms serve as a sort of guarantor in this relationship, as they have adequate procedures in place ensuring that their directors will act strictly on the client’s instructions only. This means that the client decides what contract to enter into and the director, in cooperation with the client’s lawyers, tax advisers and other professionals, executes the client’s wishes. It is for this reason that clients usually reach out to trust firms for this type of nominee service.

The Czech Republic

Nominee services

Sourcing and business partnership Are you looking for a suitable supplier or a joint-venture or acquisition partner in the Czech Republic? If so, CzechInvest’s sourcing services are crucial for you.

Number of companies in the database by sector in 2018 151 Energy

189 Aerospace 227 Healthcare, Pharma, Bio 261 Plastics

1017Electronics & Electrical Engineering

354 Materials & Packaging 560 Engineering

873 Automotive

628 Subcontracting Metal

671 ICT

Source: CzechInvest, 2019

Database accesses by country in 2018* 665 Others 117 Spain 184 Turkey 319 Japan

2069 Germany

373 UK 403 Poland

zechInvest’s Sourcing Department CzechInvest established its Sourcing Department 21 years ago with the aim of seeking out suitable Czech suppliers and joint-venture and acquisition partners to ease foreign investors’ start of production in the Czech Republic. Sourcing is frequently used by manufacturing companies that are considering establishing or expanding their manufacturing activities through either a greenfield investment or an acquisition or joint venture. The Sourcing Department’s services are provided free of charge. Supplier market screening In 2018, sourcing specialists prepared 188 market screens of Czech suppliers for 50 clients from 20 countries. The strongest demand for supplier market screening was from Japanese companies, followed by South Korean, U.S. and British firms. Market screens are prepared based on CzechInvest clients’ specifications and contain valuable information such as maps of locations and revenue-per-employee ratio charts of selected suppliers, as well as detailed company profiles comprising information on, for example, quality certificates, specifications of products and technical equipment, major customers, etc.

491 China 1639 France

677 Slovakia

Source: CzechInvest, 2019

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891 Austria

*not including the Czech Republic

Marek Jaskula Head of Sourcing Department CzechInvest marek.jaskula@czechinvest.org www.czechinvest.org

Visit to Czech suppliers Based on the market screens, foreign companies shortlist selected Czech suppliers. Sourcing specialists are prepared to help foreign companies organise visits to selected suppliers and assist them during such visits. Services include formulation of itineraries of business trips in the Czech Republic, interpreting and transport. Sectoral database of suppliers Czech supplier companies as well as companies that are seeking a partner or investor are listed in CzechInvest’s sectoral database of suppliers. The database contains standardised profiles of more than 3,400 Czech manufacturing and ICT companies. Suppliers are classified into ten sectors (automotive, aerospace, engineering, etc.) and further sorted into subcategories. Typical supplier companies are common firms engaged in plastic injection moulding, metalworking, CNC machining, mechanical engineering, etc. Registration in the sectoral database of suppliers is available on CzechInvest’s website and is free of charge. Investors and companies from all over the world use the database to find suppliers or JV partners that best fit their needs and to get an overview of supplier status concerning a specific sector. Nearly 3,400 search entries were made in the database in 2018. The database is used by global companies such as BMW, Boeing, Cisco, Microsoft, IKEA, DHL, Nikon, KPMG, Siemens and Jaguar Land Rover, among many others.

Human resources Taxes

51 - 100

ranging from EUR 1 million to EUR 10 million and have fewer than 150 employees. CzechLink is intended for manufacturing and ICT companies. Project participants are commonly firms engaged in software development, metalworking, plastic injection molding, the automotive sector and the textile industry. The current list of CzechLink participants is available on CzechInvest’s website. For every firm participating in the project, CzechInvest prepares an information sheet containing a detailed description of the given company (i.e. ownership structure, legal form, quality control, products, technology profile, top customers and main competitors, equity offer, etc.), as well as economic indicators of the company covering the past three years. The information sheet also serves as an internationally comprehensible presentation of the firm’s results. This sensitive information is provided to investors only after signing a confidentiality agreement with CzechInvest. Subsequently, CzechInvest arranges introductory meetings between the potential partners. However, the actual structure of the transaction (financing and management audit) is exclusively at the discretion of the investor and the given firm.

Permitting and construction

42%

zechLink was initiated in response to the heightened demand among foreign companies for mergers with and acquisitions of Czech firms. The purpose of the project is to seek out suitable acquisition targets and to facilitate foreign investors’ capital entry into Czech companies. CzechLink is most frequently used by manufacturing companies that are considering expanding their activities through an acquisition, merger or joint venture, as well as by investment funds and banks. Czech companies that are seeking a partner or investor through CzechLink must be headquartered in the Czech Republic and have at least a five-year history of operation in the country. They must also be financially healthy (i.e. they must not be in bankruptcy or subject to settlement). CzechLink helps firms to resolve problems with management succession and provides the opportunity to gain a strong partner for expansion. With respect to the project’s conditions, the size of investment targets is in no way limited, though they are usually small and medium-sized enterprises with income

Properties

< 50

R&D

25%

Finance

Structure of Participants (by headcount)

First steps

CzechInvest’s CzechLink project is intended for Czech companies that are seeking strategic or investment partners, while also offering investors a way to enter the Czech market through a merger, acquisition or joint venture.

The Czech Republic

CzechLink: The easy way to find a strategic partner

101 - 150

25%

Marek Jaskula Head of Sourcing Department CzechInvest marek.jaskula@czechinvest.org

Top sectors

www.czechinvest.org Source: CzechInvest, 2018

M&A

150 <

How do companies use Welcome Package?

5 Internal transfer 52 Localisation

How long is the relocation process up to 45 days with and without up to 90 days Welcome Package?

Quota Welcome Package 100 Quota Fast Track 300

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Visa support provided to foreign investors Relocating a company to a foreign destination is always a demanding administrative process. In this respect, CzechInvest can assist foreign companies coming to the Czech Republic. In addition to tailored consultation, CzechInvest administrates several projects accelerating or enabling relocation.

With Welcome Package Without Welcome Package

elcome Package is project that substantially eases the process of arranging residence permits for key employees of companies coming to the Czech Republic. Those eligible to register in the project include newly established Czech business entities of foreign investors. The project is intended for statutory representatives, managers and key specialists who need to reside in the Czech Republic for longer than 90 days. The benefit of Welcome Package consists in accelerated issuance of residence visas in half the time that it would normally take. According to the law, it can take up to 90 days to issue an employee card, whereas within the Welcome Package project this period should not exceed 45 days from the date of submitting an application at a Czech embassy abroad. This project also supports relocation of employees’ family members who apply for a visa for the purpose of cohabitation of a family. Individual applications of members of the same family are thus processed jointly. Within Welcome Package, companies can use two means of relocating their employees and statu-

tory representatives. These are internal transfer, whereby a foreigner is transferred on the basis of a contract to work at a Czech branch while remaining in an employment relationship with the foreign investor, and localisation, whereby the transferred employee enters into an employment relationship with the Czech entity. In 2018, the project was most frequently used by investors such as Deutsche Telekom Services Europe Czech Republic, Neo Visionaries Czech, Techona, Zensar Technologies Limited and Wargaming, Prague s.r.o.

From November 2017, also statutory representatives of start-ups can be qualified for the project after fulfilling certain criteria. Once a company has been in the Czech Republic for more than two years, the Fast Track project can be used for the same purpose, i.e. to accelerate the procedure of visa issuance for managers, specialists and statutory representatives of foreign companies

The Czech Republic

stands at 19,600 applicants/year.

23%

Costa Rica Argentine

13%

India Brazil Mexico

10%

Israel 21% 8%

Other States System quota: Serbia 2,000 applicants/year,

Others

Source: CzechInvest, 2018

Philippines 1,000 applicants/year.

Process:

Guarantors* Inclusion in the project 5-10 days

*CzechInvest is one of the guarantors together with other business associations

Ministry of Industry and Trade Inclusion in project 5-10 days Ministry of Foreign affairs appointment within 45 days Ministry of the Interior Employee card approval process 60-90 days

Klára Černá Head of AfterCare Section CzechInvest klara.cerna@czechinvest.org

500 applicants/country/year.

Top sectors

www.czechinvest.org

Project Ukraine and India quota

M&A

Ministry of the Interior Employee card approval process 60-90 days

Labour market test 30 days

Taxes

Ministry of Foreign Affairs appointment in approx 100 days

Process:

make appointments at embassies and consulates that are not easily reachable without the project. Prominent employers using this project are mainly in the fields of IT, shared-services centres and technology centres, such as Kiwi.com, CA CZ, SolarWinds Czech and Kiekert s.r.o.

Human resources

Labour market test 30 days

such as Daikin Industries Czech Republic, Koito Czech, Toyota Peugeot Citroën Automobile Czech, Tatra Metalurgie, Yanfeng Czechia Automotive Interior Systems and Adient Czech Republic. The Special Procedures for Highly Skilled Professionals from Ukraine and India project is aimed at employers with at least a two-year history and at least three employees that are seeking to employ highly skilled professionals (typically university graduates) who are Ukrainian or Indian citizens and are of crucial importance for the employer’s business in the Czech Republic. The project helps applicants

Permitting and construction

Mongolia 1,000 applicants/year,

Russia

Properties

increased annually and currently

15%

R&D

of the Ukraine System has been

These systems are aimed at employers with at least a two-years history and at least six employees in the Czech Republic in the areas of manufacturing, services or the public sector that are seeking to employ citizens of Ukraine, Serbia, Mongolia or the Philippines to perform skilled labour. The systems are mainly used by manufacturing companies

Nationalities using Welcome Package (as of December 2018)

Finance

Due to strong demand, the quota

The System of Special Treatment for Skilled Employees from Ukraine project enables future employees from Ukraine to submit their applications at the Visa Center in Lvov. The Other States System for Skilled Employees from Serbia, the Philippines and Mongolia project was introduced in 2018.

First steps

In order to use Fast Track, a company needs to fulfil certain criteria, such as having at least 250 employees and a certain level of turnover, amount of investment and taxes paid. The Fast Track project is used extensively and its annual quota in 2018 was doubled to 300 positions. Companies are using the project to relocate their employees mainly from India, the United States, Russia and Egypt. Since 2016, special projects enabling applicants to get appointments at embassies and consulates that are not easily reachable have been introduced:

The automotive industry, driver of change units. The largest share in total production, 61.6%, was held by ŠKODA AUTO, a member of Volkswagen Group, which manufactured 886,103 vehicles, thus setting a new record. The second and third largest shares of production belonged to Hyundai Motor Manufacturing Czech and Toyota Peugeot Citroën Automobile with 23.7% and 14.7%, respectively. Total passenger-car production grew by 1.66% year on year. Like the final manufacturers, automotive suppliers were also successful last year. The supplier base in the Czech Republic is extraordinarily strong and stable, and it comprises one of the country’s undeniable competitive advantages. The importance of component and accessory suppliers is documented in, among other things, data from the Automotive Industry Association (AutoSAP), a respected professional organisation associating the majority of entities in the automotive sector. In 2018, AutoSAP member companies employed a total of 140,000 people, two-thirds of whom worked for suppliers. Though these companies’ total revenues are lower than those of the final manufacturers, they are still respectable, reaching CZK 460 billion in 2017 (CZK 614 billion in the case of final manufacturers).

The Czech economy has been experiencing an extraordinarily favourable period over the past several years. Its success depends in no small part on the results of the automotive industry, which accounts for nearly one-tenth of the country’s gross domestic product. Good results of final manufacturers and suppliers The Czech automotive industry had its best year in history in 2018. Production of road vehicles, i.e. motor vehicles and trailers, reached 1.4 million

The biggest transformation in history The modern era presents new challenges that are not only unavoidable for the automotive industry, but also have a greater impact on it than on other sectors. The rapid development of technologies, stricter environmental and safety requirements imposed by the European Union and new trends in the social area, e.g. the sharing economy, urbanisation and new ways of working, have the consequence of forcing the automotive industry to undergo the biggest transformation in its history. Many firms see in this a major challenge and opportunity. With the development of electro-

mobility, autonomous driving and connectivity, research capacities are gaining a new impetus and, to a significant extent, a new direction. Today, the automotive industry ranks among the sectors that are leaders in terms of investing in research and development. Whereas the automotive industry accounts for more than one-fourth of industrial production in the Czech Republic, it accounts for one-third of spending on research and development. This is extraordinarily important for the future of the Czech automotive industry, as well as for the whole economy. Challenges and opportunities Key topics affect a number of sectors and automotive manufacturers cannot resolve them alone. Energy, communication and ICT companies must also get involved together with the state administration and local governments. This is already happening in the Czech Republic. New European regulations set ambitious emissions goals for 2025 and 2030, which cannot be fulfilled without a massive shift towards electromobility and zero-emissions vehicles. In connection with this, firms and ministries are counting on an increase of investments in the development of charging infrastructure, education and research and development, as well as accelerated adoption of legislative measures that these rising new trends require. Carmakers are not hesitating. For example, ŠKODA AUTO increased its spending on research and development in 2018 by 46.8% year on year and considers 2019 to be the start of the eMobility era. This year, the company is launching production of an electric version of its Citigo model and a plug-in hybrid Superb. Automotive-industry suppliers are not remaining in the background. Branches of multinational firms such as Valeo and Mecas-ESI are developing and testing systems for the future. In their effort not

to fall out of the new supply chains, many purely Czech firms, including, among others, the sparkplug and sensor manufacturer Brisk Tábor, are also betting on development. No small ambitions New initiatives are coming into being with the involvement of multiple entities, such as the Association for Electromobility, which is focused on promoting topics connected with the rise of electromobility. In cooperation with the government’s Investment and Business Development Agency CzechInvest, the new Innovation Hub is being established. The purpose of this centre is to bring together experts from the automotive industry and the state administration and connect them with global innovation centres with the aim of identifying, testing and putting into operation new solutions for supporting the mobility of all citizens. The Czech Republic has no small ambitions for the future. Domestic firms, particularly those in the automotive industry, have been proving for a number of years that they are able to succeed on global markets. The are considered to be high-quality and reliable. The Czech workforce also has a good reputation, which is true not only of people involved directly in production, but also especially engineers, technicians and IT experts. The automotive industry can offer significant value added. Together with representatives of AutoSAP, the Czech government has signed a Memorandum and Action Plan for the Future of the Automotive Industry and adopted strategic documents pertaining to digitalisation and innovation. By fulfilling the objectives of those documents, the automotive industry has the potential to become a driving force of innovation not only in the Czech Republic, but in Europe as a whole. And I believe it will do just that.

Bohdan Wojnar, Member of the ŠKODA AUTO Board of Management and President of the Automotive Industry Association

Top sectors for investment

Automotive

Aerospace

The Czech Republic has a special place among Central European countries. It has a strong industrial tradition dating back to the early 19th century, when the Czech lands were the most industrialised part of the Austro-Hungarian Empire. One of the oldest factory-made cars in the world is the Tatra Präsident produced in Kopřivnice in 1897. Before the Second World War, many automobile companies were established in the Czech lands, e.g. Tatra (1850), Laurin & Klement (1895, now under the name Škoda Auto, a subsidiary of Volkswagen AG), Karosa (1896, now Iveco Bus, a subsidiary of CNH Industrial), Walter (1902), Praga (1908), Aero (1929) and several others. In the 1930s, Czechoslovakia was one of the most motorised countries in Europe, with 14 cars per 1,000 inhabitants in 1936. A new boom of Czech OEMs came in the 1990s and 2000s when Volkswagen AG acquired Škoda Auto, Toyota and PSA Peugeot Citroen established a joint-venture in Kolín, and Hyundai opened its only European plant near Ostrava. With more than 1.4 million cars manufactured in 2018, the Czech Republic is the biggest producer in Central and Eastern Europe. Carmakers in the Czech Republic manufacture vehicles in all segments, i.e. city cars (Toyota Aygo, Citroen Cl, Peugeot 108, Škoda Citigo), superminis (Škoda Fabia), small family cars (Škoda Rapid, Škoda Scala, Hyundai i30), large family cars (Škoda Octavia, Škoda Superb), SUVs (Škoda Kodiaq, Škoda Karoq, Seat Ateca, Hyundai Tucson) and MPVs (Hyundai ix20). Development and production of buses (Iveco and SOR Libchavy) and trucks (TATRA) are also significant. The Czech automotive sector is characterised not only by OEMs, but also by its robust supplier base. Fifty-five of the top 100 global tier-one suppliers have at least one facility in the Czech Republic. The world’s most renowned global automotive suppliers, particularly those from Europe, Japan, South Korea and the United States, have established operations in the Czech Republic in recent years and are planning further expansions here in the coming years. The automotive sector is crucial for Czech industry, as it accounts for 26% of total industrial production and 24% of exports. While employing 2.8% of the country´s workforce, it accounts for 9% of the Czech Republic’s GDP. Nearly 5,000 R&D employees and annual investments totalling more than CZK 8 billion make the automotive sector a leader in research and development activities in the Czech Republic. The accelerated rise of new technologies will affect traditional vehicle manufacturers and suppliers, and the Czech automotive sector must be ready to adapt to those changes.

The aerospace sector has been a successfully developing part of the Czech industry since the first airplanes took to the skies over a century ago. Aviation is among the key industries with high value-added in the Czech Republic and is among the very best that the country has to offer on the global market. With a long, successful track record in producing various aircraft parts, engines, avionics, hydraulic systems and space technologies, the Czech Republic is well integrated into global supply chains and is also a traditional OEM of multiple civil and military aircraft. Many international companies have chosen the Czech Republic as the location for their expansions. For example, Honeywell has over four thousand employees here working in administration, research and development, and manufacturing. The Czech Republic has thus become one of the company’s key bases in Europe in the field of aerospace and beyond. GE Aviation is another major investor, having placed turboprop-engine centre of excellence in Prague with design, development and production all under one roof. Bell Helicopter also chose Prague for its customisation and delivery centre. The French company Latecoere manufactures aircraft doors and parts thereof for practically all major aircraft OEMs in the world and Zodiac Aerospace’s Galleys Europe facility in Plzeň is the exclusive producer of all galleys for the Airbus A320 family of passenger jets. The light sport aircraft category is among the unique attributes of the Czech aerospace industry. Firms in this segment are headed by very experienced engineers and workers, including former employees of major state-owned aircraft factories. Thanks to this, the Czech Republic has become one of the largest LSA manufacturers in the world. When it comes to space activities, the Czech Republic is not lagging behind. The main focus lies in high value-added areas such as satellite systems, components and innovation programmes. Prague is the home of the European GNSS Agency responsible for the Galileo navigation system project and the country is also an active member of the European Space Agency. For many years, the Czech Republic’s aviation industry has been among the most competitive in the world and is once again proving that its expertise is valuable on the global market and that Czech companies are ready for the challenges of the 21st century. Join the world’s elite and invest in the Czech Republic!

Lukáš Prskavec Sector Manager for Automotive CzechInvest

Erik Bolebruch Sector Manager for Aerospace CzechInvest

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Advanced engineering Mechanical engineering has a great history in the Czech Republic and it is one of the cornerstones of the Czech economy. Thanks to its excellent location in Central Europe and more than a century of experience in the production of automobiles, turbines, machinery and other products, the Czech Republic is an important sales market and extremely attractive country for investors in the engineering segment. The long-term know-how and high level of technical education among the country’s population has attracted renowned international companies involved in manufacturing and, increasingly, activities with higher value-added, especially research, development and innovation. Engineering companies employ the largest number of people in all engineering-related sectors; machinery and vehicle manufacturing, sectors with relatively high value added, account for more than half of Czech exports. Industrial equipment manufacturing is the sector with the largest share of revenue and, together with other industrial segments, contributes significantly to GDP and employment. Official statistics published by the Czech Statistical Office show that major economic indicators such as sales, turnover, number of units produced, value added, equity and assets have experienced an upswing since declining during the period from 2008 to 2010. Employment in the engineering sector has been rising since 2010 and the official statistics confirm that the positive trend of the main indicators continued in 2017 and 2018. However, this traditional sector is gradually being disrupted by the so-called Fourth Industrial Revolution. The Ministry of Industry and Trade of the Czech Republic announced an official Industry 4.0 initiative in which the main vision involves preparing industry for the digital economy, which is transforming the thinking of people involved in the organisation and management of industrial production. Ultimately, this trend will have a positive impact on industry and society. The aim is to efficiently get Czech companies involved in customer-supplier chains and customised mass production and, in cooperation with the research sector, to prepare solutions that help them in this effort to improve their position with respect to activities with higher value added in order to maintain their global competitiveness.

Robert Keil Sector Manager for Advanced Engineering CzechInvest

Electrical Engineering and Electronics Electrical engineering and electronics is a fast-growing sector due to digitisation, miniaturisation and emerging technologies for e-mobility, IoT, energy storage systems (smart grids) and intelligent connectivity. It is the second-largest sector of the Czech economy with a more than 13% share in overall manufacturing output. Over 15,000 companies employ nearly 150,000 workers with a mix of skills. R&D centres dealing with electrical engineering and electronics are gaining importance and form a foundation for high value-added in the future. Since the 1990s, the Czech Republic has welcomed numerous investors in various sub-sectors of the electronics industry. The whole sector is growing, particularly due to the current economic boom and the presence of well-known manufacturers. The consumer electronics segment is represented by, for example, Panasonic, the largest flat-panel television manufacturer in the Czech Republic, which produces state-of-the-art TV receivers enabling not only traditional means of media consumption, but also consumption of on-demand services. Tymphany is the global leader in the design and manufacture of audio systems, producing unique audio products and operating a research and development division in the Ostrava region. Many electronics companies are also important suppliers to other branches of industry, particularly the automotive, healthcare and engineering industries. The sharp development of the automotive sector in the Czech Republic and neighbouring countries has attracted a number of automotive electronics suppliers including Siemens, Bosch, Daikin, Tyco and Kostal. Lighting equipment for automobiles is manufactured in the Czech Republic by Hella Autotechnik, Varroc Lightning Systems and Automotive Lighting. With respect to high value-added products, it is very important to mention that every third electron microscope in the world is originated in the Czech Republic. The Brno-based companies Thermo Fisher Scientific, Tescan Orsay Holding and Delong Instruments are not only producers, but also conduct R&D activities with global impact. Other companies, such as ABB and ON Semiconductor, offer good examples of how local know-how in specific fields can be used in high-tech manufacturing and R&D activities as well. The dynamic growth of the electronics industry and great references from investors prove the Czech Republic’s status as a renowned investment destination. The country’s long tradition in the electronics sector, together with its solid educational system and strategic location, has attracted numerous foreign companies in the electronics sector, which are evenly distributed across the entire country. Petr Vítek Sector Manager for Electrical Engineering and Electronics CzechInvest

Czech industry has great potential to automate production The Czech Republic is a country with a strong industrial tradition. After the establishment of Czechoslovakia in 1918, 70% of the industrial production of the former Austro-Hungarian Empire was located on its territory. During the period of communism, industry was the main sector in the expansion of the economy. Today the Czech Republic is the second most industrialised country in the European Union. The industrial sector accounts for 32% of Czech economic output, which is signficantly more than in neighbouring Germany (26%) or far above the EU average (19.6%). Production of motor vehicles and their components holds the strongest position and dominates Czech industry, accounting for more than a quarter of total industry revenues and one-fifth of total exports from the Czech Republic. Industry 4.0 is on the rise, robotisation of production is accelerating The industrial sector is currently undergoing major changes around the world. A frequently mentioned trend consists in the arrival of digitalisation of production and everything related to concepts such as Industry 4.0, the Internet of Things, big data, predictive maintenance and machine learning. Alongside this, a reduction in the prices of new technology, automated solutions and robotisation of production is occurring worldwide. The result is that the introduction of new robots into production is growing globally. Most of them are in the sectors that are also dominant in the Czech economy, i.e. in the automotive, electrical engineering and metalworking industries.

Gross value added by industry breakdowns (in %, 2017) Industry

Construction

Services

Agriculture, forestry and fishing

100 90 80 70 60 50

Ireland Czechia Slovenia Slovakia Romania Germany Hungary Poland Bulgaria Lithuania Austria Estonia Finland Croatia EU Italy Sweden Portugal Spain Denmark Belgium Latvia Netherlands Greece France UK Malta Cyprus Luxembourg

40 30 20 10 0

Source:: Eurostat, 2017

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The number of robots in the Czech Republic is growing, the potential is still high According to data from the International Federation of Robotics, 119 industrial robots per ten thousand employees were involved in production in the Czech manufacturing industry in 2017, a significant year-on-year increase of 18%. Despite this growth, the Czech manufacturing industry’s level of robotisation is still only one-third that of the advanced industrial nations Germany and Japan and one-sixth that of the global leader, South Korea. Therefore, there is still strong potential for the involvement of robots in the manufacturing sector in the Czech Republic. Effective and attractive labour market The rapid introduction of robotisation and progress in the digitisation of production is therefore essential for Czech manufacturing companies in terms of raising their international competitiveness. Since the beginning of the 1990s, the Czech Republic has been among the European countries in Europe with low unemployment, which still holds true today, as the country currently has the lowest unemployment rate in the EU. This reflects the strong

Employment in high and medium high-technology manufacturing (in % of total economy, 2017) Czechia Slovakia Slovenia Hungary Germany Italy Romania Poland Austria Denmark Finland France Ireland Sweden Belgium Spain Estonia Bulgaria Malta Croatia UK Portugal Netherlands Lithuania Latvia Greece Cyprus Luxembourg 0 Source: Eurostat, 2017

ICT motivation of the Czech people to work, as well as the common sense typical for the key labour market actors. As the economic structure demands, the labour market offers a well-educated, trained and skilled workforce, mostly in technical professions. For example, the share of people employed in high-technology manufacturing in the Czech Republic is highest in the EU. This is an essential condition and also an advantage of Czech industry for further robotisation. The payback period of robots is getting shorter With declining robot prices and the moderate increase in labour costs in the Czech Republic in recent years, automation of operations and robotisation of production are becoming more and more profitable for businesses. For the Czech economy as a whole, this represents a necessary shift from an economic model benefiting from cheap labour to production with high value-added added that relies on high-quality and skilled workers. Planned changes in the state investment incentives system are also moving in this direction, where support will be given to applicants offering more high-skilled positions for educated employees who collaborate on innovation with a research and higher-education institutions. Tailored services thanks to robots In addition to cost effectiveness, industrial robots also have other advantages. They can work 24 hours a day, do not need rest, do not go on strike, can manage handling heavy objects, make fewer mistakes and are more accurate than humans. Thanks to robots, firms can increase the quality of their products, shorten delivery times and provide more flexibility in their production, i.e. supply products and services tailored to the individual requests of clients. Cheaper technology also brings new business models in which, for example, machines are no longer sold, but only rented. On the other hand, there are still many work activities for which automation is not suitable or is too expensive. Companies should thus always pay attention to what a new technology will bring to them and their clients.

Radek Novák Analyst , Economic and strategic research Česká spořitelna

The Czech Republic is one of Europe’s top locations for ICT investments. This fact is confirmed by the strong inflow of high value-added projects of the world’s top ICT companies and is fuelled by the country’s tradition of excellence in technical fields. The list of successful investors in the country includes Microsoft, Skype, SAP, Tieto, Red Hat, SolarWinds, Oracle, IBM, H2O.ai, Cisco, CA Technologies and many more. Besides foreign investors, there are many internationally successful Czech IT companies, such as GoodData, Y Soft, STRV and Seznam.cz, to name just a few. Furthermore, IT companies with Czech origins are renowned worldwide for their products, such as antivirus software from AVAST and network security solutions from Flowmon Networks. Most of the ICT companies operating in the Czech Republic are concentrated in the two largest cities, Prague and Brno. These cities are also home to some noteworthy game development studios, such as Bohemia Interactive, Warhorse Studios, 2K Czech, Madfinger Games, Amanita Design and About Fun, among others. Czech universities have quickly adopted the latest trends in the ICT sector and through intense focus on data mining, image and voice recognition, artificial intelligence, computer graphics and games development, and M2M communication technologies, they are answering the challenges put forth by the development of (not only) cloud computing and mobile technologies, thus enabling the creation of new solutions for smart cities and Industry 4.0. The Czech Republic aims to become one of the leading developers of these solutions. Thanks to investments in infrastructure, the Czech regions outside of Prague are gaining attractiveness, especially in the ICT sector. Brno, the second largest city in the Czech Republic, is considered to be the Czech IT hub, where companies’ needs are met by qualified professionals, R&D facilities and institutions and advanced ICT infrastructure. Ostrava has been gaining importance in recent years and is on the path to greater international recognition thanks to projects such as IT4Innovations. Therefore, it is not surprising that companies like Tieto have decided to establish their development centres there. Overall, the Czech Republic offers an attractive business environment for ICT companies, a well-educated and skilled labour force, highly developed infrastructure, start-up incubators and accelerators, and financial support through EU funds and national investment incentives. Matěj Zahradník Sector Manager for ICT CzechInvest

Nanotechnology

Life sciences

Over the last decade, the area of nanotechnology has attracted more and more attention worldwide with a lot of new promising applications in the fields of medicine, textiles, surface treatment and filtration. The Czech Republic has established its own respectable position in the world of nanotechnology thanks to its industrial tradition, growing state-of-the-art research infrastructure with institutions cooperating on the most prestigious projects, university education offering high-quality PhD programmes and a number of companies developing final products and coming up with many innovative ideas. Current specialisation in the field is the result of decades of research and development, whereas the outstanding findings of Professors Armin Delong and Oldřich Jirsák are arguably the most influential. The former introduced the first electron microscope into production in 1949 which later led to the fact that the city of Brno is considered to be the global centre of electron microscopy thanks to the Czech-based Tescan-Orsay Holding and the American company FEI which built in 2014 in Brno the largest microscopy factory in the world and later in 2016 was FEI acquired by Thermo Fisher Scientific. In 2003, Professor Jirsák developed a reliable method of spinning fibres measuring 200 nanometres in diameter. Based on his patent, the Czech company Elmarco became the first supplier of industrial-scale nanofibre production equipment in 2004 and allowed other Czech enterprises process nanofibres to produce, for example, membranes for water and air filtration, soil treatment, functional textiles and functional cosmetics like nanofibre face masks. Apart from those mentioned above, there are still other remarkable fields in which Czech companies are highly competitive on the global scale, including production of monocrystalline materials (CRYTUR), electron lithography for holography applications (IQ Structures), wound healing and tissue regeneration (Contipro), research of nanostructured and cross-linked polymeric materials (SYNPO), and production of nanoparticles for special purposes (Advanced Materials – JTJ). Nanotechnology itself could not exist without robust chemical and textile industries and strong abilities in the area of developing new materials. This vibrant new sector is highly attractive to major foreign companies; current ongoing investments include, for example, Fibertex in nonwoven textiles, Toray in waterless printing technology and AGC in advanced glass, and the group of Saint-Gobain having the Czech Republic as one of its key locations with three branches (Sekurit, Adfors, Isover) investing more than EUR 65 million on expansions only in 2015. In recent years when e-mobility and battery business is on arise, there is a significant development of unique nano-based technologies in batteries by the Czech company HE3DA, led by Dr. Jan Procházka. We can also see significant progress in printed and smart materials and electronics (such as nanosensors, pocket-lab, 3D printers, etc.).

The Czech Republic has a rich history of scientific discoveries in life sciences ranging from the laws of heredity laid down by Gregor Johann Mendel, through the invention of soft contact lenses, to groundbreaking antiviral drugs whose principal compounds were developed by Professor Antonín Holý at the Institute of Organic Chemistry and Biochemistry of the Czech Academy of Sciences. The country is particularly strong in biomedical chemistry. Today, the primary areas within which the Czech life-sciences community operates and collaborates internationally are research, development and production of human and veterinary pharmaceuticals, diagnostics, synthetic and fermentation technologies, animal and plant biotechnologies, medical devices and the use of biotechnologies in waste liquidation and environmental protection. Development of the sector is supported by effective patent protection, adoption of GMP, GLP and GCP standards, advanced genetic engineering and the government’s policy goals comprising continuation of support for R&D and acceleration of the transfer of knowledge between the science and business communities. Moreover, the country’s membership in the  European Union guarantees a regulatory framework compatible with all EU countries, which comprise a consumer market of over 500 million customers within a two-hour flight from Prague. Examples of global companies conducting business, R&D and/or manufacturing in the Czech Republic include Teva Pharmaceutical, Zentiva, Lonza Biotec, Novartis, Otsuka Pharmaceutical, MSD, Ferring, Bioveta, Gilead Sciences, Glenmark Pharmaceutical and Beckman Coulter, among others. Due to the demands placed on healthcare systems and the public’s ever increasing expectations with respect to healthcare services, the Czech government set development of new pharmaceutical treatments and diagnostics and human resources development as one of its top priority areas in the long-term direction of research and innovation and used substantial public funding amounting to nearly EUR 3 billion during the last decade to strengthen the sector’s research infrastructure in this field. New, state-of-the-art research facilities have been completed around the major university centres in Prague, Brno and Olomouc to complement the existing institutes of the Academy of Sciences of the Czech Republic and universities. The country is home to a number of noteworthy research centres recognised for their high-quality research in molecular biology and genetics, immunology, analytical and pharmaceutical chemistry and biochemistry, oncology, immunology, cardiology, neurology, metabolic diseases and, recently, medical applications of nanotechnologies. Thanks to the introduction of these policy and fiscal measures in combination with the country’s low corporate tax rate (19%) and R&D tax credits and investment incentives, the Czech Republic is an attractive location for both R&D collaboration and manufacturing of pharmaceuticals.

Hana Němcová Sector Manager for Nanotechnologies & Advanced Materials CzechInvest

Hana Chlebná Head of Sectors Management Section CzechInvest

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Nuclear power and industry

Defence industry

The year 2015 marked the sixtieth anniversary of the first steps toward the peaceful use of nuclear energy and the establishment of the Faculty of Technical and Nuclear Physics of the Czech Technical University in Prague and the Nuclear Research Institute, thanks to which the Czech Republic (and the former Czechoslovakia) reached the peak of the nuclear-power industry in all of its aspects – operation of nuclear power plants, research and development, and nuclear engineering and services – as both a supplier and service provider. Strong firms capable of delivering their products in practically the whole supply chain of nuclear facilities have been established and the Czech nuclear-energy sector possesses extraordinarily strong human resources and knowledge potential in all areas, from development to implementation of construction works. In connection with the necessity to continue in the nuclear programme within the National Action Plan for Nuclear Energy, this extraordinary potential is maintained not only through activities related to the operation of the nuclear power plants in Dukovany and Temelín, but also through the expected continuation of development of nuclear power and construction of new nuclear infrastructure. To support the development of nuclear power, the State Energy Strategy and the Action Plan for Nuclear Power Development were approved by the Czech government a few years ago. The government’s decision was related to the start of new nuclear builds, which is expected in 2019, and it outlined not only the schedule and milestones for preparation and construction of new nuclear builds, but also the main conditions for investors and suppliers, as well as ideas for different types of involvement in this project. The possibility of involvement will be open not only to purely financial investors, but also for technology companies and suppliers, enabling them to optimise their participation in the upcoming project. The current plan to construct new nuclear units in the Czech Republic is open to a number of solutions. Though the natural choice of builder is ČEZ, which is the biggest electricity supplier on the Czech market, the sources of financing and the related impact on implementation are not currently clear. Alternatively, it is expected that a strong investor will be brought into Czech projects in line with examples of projects undertaken abroad, particularly in Finland and Great Britain. The idea to continue with nuclear power development includes the construction of two units in Dukovany and two units in Temelín by 2040 and 2060, respectively. This represents an investment of at least CZK 600 billion (EUR 25 billion), which is absolutely the biggest investment in the history the Czech Republic and a major challenge for strong and world-leading companies. With respect to the indicated willingness to ensure the implementation of local projects with the greatest possible extent of domestic supplies, now is the best time to consider investment opportunities in both the areas of direct financing and improving the qualitative potential of Czech companies operating in the nuclear industry.

The roots of the Czech defence industry reach far into the past, to the period before the First World War. Most of the weapons used by the military of the Austro-Hungarian Empire were originated in the Czech lands. During the First World War, the industry developed to such a degree that in 1918 the newly established Czechoslovakia instantly became one of the world’s biggest arms exporters; by 1926 it was the third-biggest exporter with a 15% share of global production, which grew to 25% in 1935. Though the Czech defence industry does not play such a dominant role today as it did between the world wars, it still holds a significant position among global competitors in certain commodities. For example, passive surveillance systems from the company ERA are a Czech invention coveted by global producers. Handguns, ammunition, devices for protection against weapons of mass destruction, information and communication technologies, military vehicles and aerospace technologies are among the Czech products that are successfully exported to countries around the world. Nearly 90% of the total output of the Czech defence industry is intended for export. In comparison with the foreign competition, the Czech defence industry excels primarily in the area of high-tech innovations. Military technologies originating here are very sophisticated, whereas it is always necessary to adapt them to the needs of the customer and its technical requirements, which often involves integration with existing systems. In this case, creativity is highly important and Czechs are masters of applying it. Thanks to thorough care for delivered products throughout their lifecycle, continual modernisation and a willingness to cooperate with local companies in export destinations, Czech defence firms have a strong possibility to beat out their foreign competitors in tenders around the world. Two-thirds of Czech defence companies are small and medium-sized enterprises that, with a few exceptions, are privately owned. This constitutes an ideal environment for foreign investors to find success in the further development of this very interesting industrial sector. Unfortunately, a number of frivolous foreign partners have appeared in the Czech Republic over the past twenty years, which has naturally led Czech owners to occasionally be somewhat suspicious of foreign capital. However, they are receptive to serious investors that can contribute to the development of their companies. And investment in the Czech defence industry is certainly very beneficial for foreign investors in the long term.

Jiří Marek Director and Partner JMM CS Ltd. President of the Association of Nuclear Veterans

Jiří Hynek President Defence and Security Industry Association

Transport and infrastructure

Business support services

In economic terms, one of the main features of the Czech Republic is that it is a highly industrialised country with advanced manufacturing and engineering capabilities. In terms of the transportation industry and infrastructure, Czechs have the ability, skills and capacity to produce most types of vehicles for road, rail and air transportation. This is valued by a number of international investors that have established operations here, such as Siemens, Bombardier, GE Aviation, Kapsch and Honeywell. However, a lesser known fact about the Czech Republic is that the country has a significant number of manufacturers and research and development facilities focusing on transportation equipment including communication and navigation devices. There are several producers of air navigation radars and other radar equipment for airports and aircraft, as well as for communication in the railway industry. T-CZ, ELCOM and AŽD Praha are only a few of the local companies that compete worldwide in the areas of air navigation systems, radar and railway equipment. Examples of leading domestic producers in the railway industry include Škoda Transportation and Bonatrans, a globally successful producer of rail stock components. Moreover, Prague is the home of the European headquarters of the Galileo Navigation System, which is an independent alternative to the American Navstar GPS and Russian GLONASS systems. The popularity of Czech researchers in this field is evidenced by the recent opening of the R&D center of the major Chinese train manufacturer CRRC in Prague. Both the transport and infrastructure sectors still offer vast opportunities for foreign investors. This is especially true for acquisitions of existing manufacturing and research enterprises in the transportation industry. Many of the players in the sector are still medium-sized, family-owned companies with a long history and established position on markets especially in Eastern Europe and the CIS countries. At the same time, Czech manufacturers have started to supply trains and trams to developed economies such as Germany and the United Kingdom as well as major emerging economies such as China. Another area for investment opportunities is transport infrastructure, particularly construction and development. Despite having a reliable and very dense transport infrastructure serving industrial manufacturers, the Czech Republic needs advanced rail and road infrastructure such as high speed rail connections to major cities in neighbouring countries. The Czech government intends to implement projects that will connect Prague with Berlin, Vienna or Budapest. However, given the high capital requirements, it is expected that such projects would be implemented with the help of foreign partners. In the area of road construction, plans call for roads to be built with the help of public-private partnerships and the involvement of international equity investors. Finally, water transportation infrastructure is an area that requires further investment. A very large project that is currently under expert discussion involves the construction and development of a new waterway connecting the Danube and Odra rivers via Moravia at an estimated cost of more than EUR 3 billion.

Europe, especially the CEE region, is still by far the world’s most popular destination for business services operations. The Czech Republic is one of the leaders in this sector; it is ranked as a top location for specialised business support services according to Dun & Bradstreet Global Reference Solution. The business support services sector includes captive centres as well as business process outsourcing centres and is one of the youngest sectors in the Czech Republic. The first delivery centres were established in the 1990s followed by significant growth since 2000. In the past decade and a half, Czech BSS centres have developed their capabilities and, in terms of the proportion of processes, reflect the structure observed in other CEE countries. Established centres have successfully expanded in terms of headcounts as well as new activities. The most frequently shared services are finance and accounting, IT services and customer support. Rapidly growing shared services include human resources, logistics and legal services. The industry’s growth has accelerated during the past three years and a recent survey indicates that growth will continue at the rate of 12% or higher in the coming year. The PwC SSC survey shows that the Czech Republic has the highest cost savings achieved globally with an average of 32% reported savings on operating costs delivered by Czech BSS centres. According to the Association of Business Service Leaders there are at least 290 SSC/BPO centres employing approximately 75,000 people in the Czech Republic. The list of existing captive and outsourced shared-services centres in the country includes those of companies such as Accenture, ExxonMobil, DHL, IBM, Microsoft, Skype, Monster Technologies, SAP, Tieto, Hewlett-Packard, Compu ter Associates, Infosys, Red Hat and Honeywell. The Czech Republic’s stable financial and political environment and its close relations with certain Western European countries encourage many western companies to choose it as the location of their CEE operations. The industry is concentrated mainly in the country three biggest cities: Prague, Brno and Ostrava. However some companies have chosen smaller cities such as Plzeň, Pardubice, Olomouc and Ústí and Labem. The main reasons for placing SSCs in the Czech Republic are the strong potential of graduates and professionals, especially with regards to IT skills and languages, well-developed infrastructure and available high-quality office space, as well as the country’s cosmopolitan society, which makes it the country an attractive place to live.

Kamil Blažek Partner, Kinstellar Chairman, Association for Foreign Investment

Tereza Matulová Project Manager for Strategic Projects CzechInvest

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Hotel and leisure industry

Food sector

Since the start of the 21st century, the Czech and hotel industry has had its ups and downs. The average daily rate for a Prague hotel room fell from the sky-high CZK 3,700 (approx. EUR 140) in 2001 to CZK 1,700 (approx. EUR 63) during the global economic crisis ten years later. We have been seeing steady recovery of both prices and occupancy since then. Occupancy has already exceeded 80%, outperforming Paris, Berlin and Rome. Therefore, rather than intensifying utilisation, there is more room for a modest price increase, which depends on the development of exchange rates as well as the performance of the local and global economy. Prague is the focal point of the hospitality industry in the Czech Republic because it is not only the Czech capital and the country’s economic and political centre with more than 1.3 million of inhabitants, but it is also the country’s main destination for both tourists and business travellers. The historical centre of Prague has been listed as a UNESCO World Cultural and Natural Heritage site since 1992. TripAdvisor ranked Prague eighth in its 2018 World’s Best Travel Destinations. Prague is also one of the major destinations for business travel and events in Central and Eastern Europe. According to ICCA, Prague was among the ten cities with the largest number of events in 2018. Despite the stable and strong performance of Prague hotels, there were no major openings in 2018. Indeed, annual supply growth has been marginal since 2010. In contrast to the flourishing office and residential development, hotel investment remains modest and aimed at premium downtown and business park locations. This supply slump has allowed existing hoteliers to profit from the RevPAR revival and to recover losses incurred in the past. Czech GDP growth is expected to slow in 2019 to a forecasted 2.5%. ADR and RevPAR are likely to continue on an upward trajectory; however, it is will be rather modest due to the absence of large events and the overall economic slowdown. The recent year-on-year growth has been fed by higher local demand resulting from a steep increase of income. However, in absolute terms, the majority of overnight stays come from abroad with Germany leading the crowd. We have been seeing steady growth of demand from Asia for the past several years, e.g. Chinese visitors accounted for more than half a million overnight stays in 2018. The structure of the hotel business in rather fragmented in the Czech Republic. There are a few local midsize players, large international groups and numerous independent owners and operators. The sharing economy, represented mainly by Airbnb, competes with standard short-term accommodation models and providers. It is estimated that Airbnb’s share in Prague’s total overnight stays is around 15%. Representatives of city hall have initiated discussions on regulating the sharing economy.

Food production is one of the traditional industrial sectors in the Czech Republic. The broad structure of the sector is based primarily on processing of domestic raw materials comprising primary agricultural production of plant and animal origin complemented with other foreign raw materials. The main segments have long been dairy products, meat processing and preservation, other food products and beverages. A major part of the sector’s output, especially in leading and large companies, is produced industrially. And digitalisation and automation have been and continue to be introduced into food production. The importance of the sector is due to the fact that food production ensures the feeding of the population, which requires a certain quantity of basic food types for self-sufficiency. Food policy based on food regulations considers food safety to be a priority monitored at the government level. The necessary obligations in this context are mainly placed on food business operators and the relevant supervisory authorities. Food quality is another priority that is gaining importance both in the Czech Republic and in the EU as a whole. Food production and agriculture comprise one of the most promising sectors in the Czech Republic and thus represent a favourable investment opportunity here. The alliance of food producers and manufacturers of food-production technology dates back more than a century and is a key factor in Czech food sector’s good reputation abroad. Food and beverage production accounts for nearly 4% of GDP on its own and up to 15% in combination with related sectors. Online grocery sales have been gaining in importance. The Czech Republic has long striven to further improve the food-supply chain and optimise it for consumers. The range of food is very wide, from fresh products with short consumption times to non-perishable food items. Organic food and farm-raised products are also available. Czech products are characterised by their high level of qualitative standards. Food safety remains the government’s priority in this area. Our government supports modernisation of production capacities in the food industry and innovative production processes, for which financial resources are drawn from EU structural funds and the national budget. One of the ways to achieve significant improvement in the sector is through foreign direct investments that bring forth not only technical solutions, but also new production and marketing methods. The innovation process is a subject of intense interest in the research sphere and the government is striving to ensure the improvement of the process of putting research results into practise. Food waste is an important issue not only in both the Czech and European contexts. Besides traditional segments such as brewing, wine-making and sugar production, the Czech food industry also features modern production technologies including biotechnology and extrusion technology. Consumer protection is also at a high level in line with modern trends. Furthermore, the local industry boasts a large number of registered trademarks and a generally high level of protection of intellectual property rights. In order to ensure the strategic priorities of the Czech Republic, we must improve effective processes, including the use of Industry 4.0, and reduce energy intensity. Sustainable development includes improving the sector’s relationship to the environment.

Jan Musil Director PwC Audit

Miroslav Toman Minister of Agriculture of the Czech Republic

Banking

Petr Jedlička Team Leader of Actuarial and Analytical Services Czech Insurance Association

8.2

7.8

7.2

5.2

2009

2010

4.0

2008

ROA in %

1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2%

9.6

9.0

9.6

9.1

5.0

5.3

5.8

6.0

6.5

2011

2012

2013

2014

2015

CR 1.5

1.3

1.1

6.4

2016

7.9

2017

-0.1

2008

0.2

0.1

2009

2010

EU 1.4

1.2

0.0

2011

1.2

-0.1

2012

1.2

1.3

1.2

0.1

0.2

2013

2014

1.3

0.3

2015

2016

2017

Source: EIOPA, Czech National Bank, 2017

Absolute amount of profit – banking market EU

Neutral economic result 4,000 3,000 2,000 1,000 0 -1,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

profit of banks in the Czech Republic (EUR million)

CR 125,000 100,000 75,000 50,000 25,000 0 -25,000 -50,000

Source: EIOPA, Czech National Bank, 2017

Development of deposits and loans in the Czech Republic and the EU 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0

3,000,000 2,500,000 2,000,000 1,500,000

loans CR loans Europe

deposits CR deposits Europe

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: EIOPA, Czech National Bank, 2017

158 | BUSINESS GUIDEBOOK

9.2

8.1

5.0

1,000,000 500,000 0

deposit and loans, EU (EUR million)

Development of deposits and loans in the Czech Republic and the EU In the case of Czech banks, the volume of deposits and loans is still rising, and this growth was not disrupted even by the financial crisis of 2008-2009 and the subsequent economic recession in the Czech Republic. Over the past eight years the volume of provided loans has grown by 67% while the volume to total deposits of the clients in Czech banks has risen by 48%. This favorable development differs from the situation in the EU as a whole, where in the period following 2008 the volume of deposits and loans has fallen, with the total sixyear decline reaching 35% in the case of deposits and 20% in the case of loans. Another favorable aspect of the Czech banking sector is that the ratio of provided loans to received deposits is significantly below 100 % (topically at the end of 2016 on the level 89%) in the Czech Republic, unlike the situation in the EU generally, where in recent years this ratio has been in excess of 100% (firstly in 2016 the loans to deposits is quite close to 100%) and banks have been forced to seek additional sources of financing beyond the traditional business model, which can expose them to greater risk.

ROA comparison

profit (loss) of banks in the EU (EUR million)

High profitability in comparison with the EU In the case of both the ROE (return on equity) and ROA (return on assets) indicators, a comparison of the overall profitability of the Czech banking sector and the situation in the EU as a whole shows that the profitability of the Czech banking sector is significantly higher (even multiple times) than in the EU generally, especially with respect to the ROA indicator, which in the period from 2008 to 2015 (including the financial crisis and subsequent economic recession) ranged from 1.1% to 1.5%, while for the EU this figure did not exceed 0.3% and in some years (2008, 2011 and 2012) the Europe-wide market was even in loss: If we compare the cumulative profits and losses of banks in the EU as a whole for the period 2008-2012, for example, the cumulative profit of the European banking sector reached only EUR 3 billion, whereas the Czech banking sector generated profit in the amount of EUR 10 billion in the same period. The EU banking sector’s cumulative profit rose to EUR 312 billion until 2016, while in the same period the Czech market reported a total profit of EUR 20 billion, i.e. 6% of the EU total, despite having only 0.65% of the total assets of European banks.

10% 8% 6% 4% 2% 0%

Source: EIOPA, Czech National Bank, 2017

deposits and loans, Czech Republic (CZK million)

Stability of the Czech banking sector The Czech banking sector exhibits a high degree of stability and capital security, as evidenced by, for example, the ratio of equity to total assets of the banking sector. A comparison of banks in the Czech Republic using (data and statistics from the Czech National Bank) and in the whole European Union (data and statistics from the European Central Bank) shows that banks in the Czech Republic have a significantly higher equity-to-assets ratio (with gradual growth from 7.2% as at 31 December 2008 to values above 9% since 2012 that indicates at leats 9% ratio of capital adequacy only from the high-quality capital component, whereas in the EU as a whole the ratio of equity to total assets also rose in the observed period (from 4% to 6.4% as a t 31st December 2016), but this involved a significantly lower ratio of the high-quality component of capital than in the Czech Republic.

share in %

Equity/total bank assets

Insurance

Solvency ratio (available capital / minimal capital requirement) 400% 350%

Both the banking and the insurance sectors in the Czech Republic are characterized by a strong competitive environment that favors and protects consumers. Competition puts pressure on prices and fosters a larger scope of provided services and innovation. Both sectors have remained profitable and stable even during periods of crisis. Whereas the domestic banking sector has a unique, dominant position in terms of its share in financing the economy in comparison with the situation abroad, the insurance market has significant room for further growth. In the Czech Republic, the combined share of premium billing in GDP is 3.4% for life and non-life insurance in 2015. This figure is approximately double in Western European countries. Consolidation of ownership is ongoing in both markets, which could be seen as presenting an interesting investment opportunity.

300% 250% 200% 150% 100% 50% 0%

Minimum regulatory requirement

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: EIOPA, 2018

Stability of the Czech insurance market The Czech insurance market exhibits a high degree of stability and capital resilience. In comparison with the values for the EU as a whole, the Czech market consistently maintained a substantially higher solvency ratio with comparison to a minimal capital requirement defined by the regulator (solvency ratio for Czech market results in a stable way approximately 330% of minimal capital requirement that is just in recent years fully comparable with whole Europe results due to increase of capital adequacy in the whole EU data ). During the transition to the new Solvency II regime, no instability of the insurance market occurred. Czech insurance market prepared for new solvency regime very seriously and carefully. Moreover, market focused great attention on risk management in general and specifically on adequate and prudent setting of technical reserves. Introduction of Solvency II during 2016 affected the figures of the solvency ratio and thus data until 2015 and figures starting after 2016 are not comparable, as the solvency calculation methodology changed significantly.

Potential for further development of the life-insurance market The average annual life-insurance premium in the EU results in 1,100 EUR per person approximately. By comparison, this figure for the Czech Republic in 2015 reached EUR 220, as growth of the average life-insurance premium in the country stalled in 2010. The relative importance of life insurance for investment and pension benefits is currently significantly higher in the EU as a whole than in the Czech Republic. There is potential for its further development if there is improvement in the regulatory and self-regulatory sales culture and transparency of life insurance together with an increase in clients’ awareness of the importance of this product both as adequate protection against risks and pension benefits, as well as in terms of investment.

Petr Jedlička Team Leader of Actuarial and Analytical Services Czech Insurance Association

EU 15

16.2 10.6 7.6

8.5 7.1

14.1 8.4

5.5

19.9 1.9

5.6

16.1

21.4 7.2

0.1

7.5

7.1

14.6

20.9

25.5

29.1

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: EIOPA, 2017

Comparison of ROA in the insurance market – Czech Republic and EU CR 5.00

2.24

2.62

1.53 0.75

1.26 0.72

2.24 0.77

2.59 0.54

2.10 0.16

0.44

3.91 0.60

2.57 0.00

0.72

3.59

4.40

6% 5% 4% 3% 2% 1% 0%

0.70

Claims performance of non-life insurance The claims ratio in non-life insurance in 2012 and 2013 reached approximately 51% and 58% with smaller reduction to 54% in 2014 and 53% in 2015, respectively. Despite the existence and gradual increase of the risk of its further growth in this area, these are still significantly lower claims ratio figures than that reached in the Europe-wide market, where this indicator for non-life insurance was approximately 70%-71% in the same period. Even though there is potential for further growth in non-life insurance (basic difference in non life insurance penetration is connected with minimal share of commercial health insurance in the Czech Republic so far), the main imbalance in insurance penetration within population between the Czech Republic and the EU as a whole is seen in the area of life insurance.

30% 25% 20% 15% 10% 5% 0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: EIOPA, 2017

Comparison of average insurance premiums in the Czech Republic and EU Insurance premium in EUR/person

High profitability in comparison with the EU average In comparison with the EU average, the Czech insurance market’s profitability is significantly higher, exceeding the European average multiple times over in both the ROA (return on asset) and ROE (return on equity) indicators. The Czech insurance market did not suffer a substantial decrease in profits during the financial crisis and recession of 2008-2009, when profits in the European market as a whole were minimized.

Comparison of ROE in the insurance market – Czech Republic and EU

1,200 1,000 800

600 400 200 0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: EIOPA, 2017

Chemical industry The chemical sector is one of the most important branches of industry in Europe. Eleven of the world’s thirty countries with the largest share of chemical production in GDP are in Europe. The chemical industry in the Czech Republic has more than 14% share of the country’s manufacturing industry. In terms of revenues, it is the third biggest sector in the Czech Republic. Sales in chemical industry reached 498 billion CZK in 2017. The products of Czech chemical industry include inorganic and organic chemicals, fertilisers, basic petrochemicals, primary-form plastics, synthetic resins, synthetic rubber, paints, dyestuffs and pigments, agrochemicals, pharmaceuticals and cosmetics, soaps and detergents, chemical fibres and explosives. Rubber and plastics represent the biggest share of sales (about 52 % of 2017 figures), followed by chemicals (28%), and pharmaceuticals (6%).The chemical sector’s share in employment is not negligible, as it employs more than 128,000 people, accounting for approximately 10% of the country’s total workforce. Several Czech chemical plants (Deza, Lovochemie, Precheza, Synthesia) are owned by Agrofert, a domestic holding company focused mainly on fertiliser production, though foreign investors also play a significant role in the local chemical industry. Česká rafinérská is engaged in oil refining owned by Unipetrol (Orlen Group of Poland). The Orlen Group has its own filling-station chain in the Czech market and is the majority owner of two other production complexes, Unipetrol in Litvínov (petrochemicals and refinery products) and Spolana in Neratovice (polymers and fertilisers). The Polish firm also owns another major plant near Prague, Synthos in Kralupy nad Vltavou (synthetic rubber). The Hungarian firm Borsodchem manufacturers base chemicals at its plant in Ostrava in the northeast of the Czech Republic, while Momentive Speciality Chemicals engages in similar production in the west of the country. There are numerous examples of successful foreign investments in the Czech chemical industrial parks, such as those of Cayman Pharma (API production) in the Spolana complex, Eurosupport Manufacturing (catalyser production) and Air Products in the Unipetrol Litvínov complex and Dukol (adhesives production) at the Borsodchem facility. The Czech Republic has tremendous potential as a destination for investments in the chemical industry thanks to its infrastructure and workforce, as well as the space that it has available for such investments.The industry is a crucial supplier of raw materials for a number of downstream domestic industries. It also ranks among the industrial sectors with the highest innovation potential. Jan Bobek Business Development Director CEE Bilfinger Tebodin Czech Republic, s.r.o. Former Chairman of the Steering Committee Association for Foreign Investment

160 | BUSINESS GUIDEBOOK

Energy efficiency services Progress in energy management systems is opening up new opportunities for further growth of energy efficiency solutions. Energy efficiency services – either in the form of energy management or in the form of monitoring and targeting (M&T) – lead to the situation in which the costs of implementing an energy management system are soon covered by non-investment measures. Moreover, M&T makes objective and accurate proof of savings possible, which applies to quite complex production processes as well. Use of energy efficiency services can thus be considered a cornerstone of managing of every industrial site. Providers of EE services in the Czech Republic include companies such as ENVIROS and SEVEn, among others. The development of these systems has led to the creation of the ESCO scheme, which allows enterprises to finance the implementation of energy management systems via a third party, i.e. an energy service company (ESCO). The fact remains that the initial costs are often an obstacle preventing the implementation of modern processes in the field of energy management, even though these costs are low in comparison with the potential savings, which cover the addition of secondary measurement systems, information system software and employee training. Companies focused on ESCO and related services are united in the Association of Energy Service Providers (APES). In addition to ENVIROS and SEVEn, the founders of APES include ESCO companies like ČEZ ESCO, AB Facility, Siemens and others. APES currently has 26 members. The formulation of the ESCO scheme was enabled by the development of standardised energy management systems. Czech companies that have implemented or are implementing an energy management system via the M&T approach include, for example, Plzeňský Prazdroj, Škoda Auto, Unilever Česká republika, Kovohutě Příbram, Danone Benešov, Koramo Kolín, Mondi Štětí, Vishay Electronic and Eutit Stará Voda. M&T can be implemented in a small enterprise with simple technology or in a building, but its commercial use is best proven in medium-sized and large enterprises with high energy costs (at least CZK 10 million, i.e. approx. EUR 27 million) The system’s good return on investment (usually within a year) is due to the fact that implementation costs are relatively low compared to the achieved savings, which can reach 15% of annual energy costs. Inclusion of energy management principles in the ISO 50001 standard has provided significant support for implementation of energy efficiency services. Besides economic benefits, the relevant legislation allows enterprises to supersede the mandatory energy audit by implementing the standard, and enterprises that have ISO 50001 certification receive bonus points when their applications for aid from EU structural funds in the Operational Programme Enterprise and Innovation for Competitiveness are assessed. ISO 50001 certification is provided by all authorised companies operating on the European market, such TUV, DNV and Bureau Veritas. Jan Pavlík Head of the Environmental Division ENVIROS

Title:

Business Guidebook: How to Succeed in the Czech Republic

Place and date of issue:

Prague, March 2019

Publisher:

Association for Foreign Investment

Address:

Štepánská 11, 120 00, Prague 2

Phone:

+420 224 911 750

Contact e-mail:

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