Investment in the Czech Republic

Reasons for investing in the Czech Republic

Written by Boban Stamenkovic
of
www.etherconsulting.cz

The Czech Republic is located at the geographical heart of Europe and borders with Germany and Austria in the west, and Poland and Slovakia in the east. The republic has a population of about 10.5 million and consists of two distinct regions, Bohemia in the west and Moravia in the east.

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History:

On 1 May 2004 the Czech Republic, along with other former communist countries in Central & Eastern Europe such as Poland, Hungary and Slovakia became fully-fledged members of the European Union. This landmark event marked the returning of the Czech Republic to Europe where the Czech people felt that they had always historically belonged. After all the Czech Republic (or formerly Czechoslovakia which ceased to exist on 1 January 1993) was once an economic powerhouse exporting to the rest of the world during the Industrial Revolution after the end of WW1 in 1918. The Czech Republic was under communist influence after WW2 from 1948 until 1998 when the Velvet revolution (so-called because of its non-violent nature) took place.

Economic Development:

Since then the country has been ruled by democratic parties which have shown support for the private sector through the privatisation process and encouragement of foreign direct investment (FDI). The country has undergone significant changes in terms of economic and legal reforms bringing it more in line with the rest of Europe. According to the latest statistical data, gross domestic product grew 4.1% in the second quarter of 2004, inflation is low at 2% and unemployment which has remained steady over the last several years stands currently at 9.1%.

Why Invest in the Czech Republic?

Out of all the countries in Central & Eastern Europe (CEE) the Czech Republic has proved to be the most stable in terms of economic developments and has also had the highest level of FDI per capital according to the Vienna Institute for Comparative Economic Studies. The amount of FDI totalling USD 37 billion up to 2002 is expected to continue according to CzechInvest, the governmental agency responsible for inward investment. Based on a forecast by the World investment prospects, Economist Intelligence Unit, this is predicted to be at around USD 4 to 5 billion per annum over the next few years. This is testament itself to the attractiveness of the country for foreign investors.

The main advantages of the Czech Republic compared to other surrounding countries in CEE such as Poland or Hungary and indeed most of the Western European countries seem to be :

Geographical position and infrastructure – the Czech Republic has a strategic location in the geographical heart of Europe making it extremely accessible from both the established western markets and emerging eastern markets. Furthermore, the extensive transport and rail infrastructure (with proposed further investments by the government) highlights the Czech Republic as a crossroads of major European transit corridors. Now that the Czech Republic is part of the European Union, prospective foreign investors are in an excellent position to serve the world´s most populated markets from their bases here.

Highly educated and skilled workforce – The Czech Republic offers a workforce with a very high percentage of people educated to University standard. Of the 200,000 students currently enrolled, about 40,000 are finance and economic students and 25,000 are IT students. According to the OECD, the Czech Republic ranks among countries with the highest percentage of science and engineering students.

Low labour costs – the Czech Republic ranks among countries with the lowest average labour cost. It is still much lower than in western European countries and is lower or on par with those in many rapidly developing Asian economies. It is also competitive (especially in the IT sector) in comparison to neighbouring countries such as Poland or Hungary. The average monthly salary in the first quarter of 2005 was CZK 17,678 (equivalent to around EUR 580 per month) and continues to grow at a steady pace.

Investment incentives – In 1998 the government introduced investment incentives that led to a marked increase in investments in greenfield and brownfield projects. Consequently most of the large international companies (Toyota, Ford, Siemens, Phillips, Nestle, Phillip Morris, Danone, Eastman, Tesco, Matsushita and many more) have chosen the Czech Republic for building manufacturing plants and warehouses.

More recently non-statutory incentives have been introduced for investment in so called “strategic services” applying to projects such as headquarters operations, shared service centres, call centres, research & development and high tech repair. There have been a number of large investors as well as small service sector companies that have moved their operations and re-located to the Czech Republic. These included most recently for example DHL which is consolidating its IT operations in Prague and Accenture which selected Prague for its pan-European shared service center. Consequently the Czech Republic is being promoted as a Hub for business support services in the CEE Region.

Taxation – The country´s current rate of corporate tax is 26% (which will be reduced to 24% in 2006) and and it is understood that the finance ministry has plans to lower the tax rate even further by 2006 in order to strengthen its position and remain the most competitive in the region. There is even talk of introducing a flat rate tax to simplify the overall tax system.

Investment Opportunities

There are numerous investment opportunities in the Czech Republic, some of which have already been mentioned. Briefly the different categories of investment :

·         Real estate – This continues to be one of the hottest areas to invest in. There is continued demand for most types of real estate including residential, commercial, retail and logistics and warehouse. Yields have dropped over the past several years as prices have increased but still there is still a yield gap compared to Western Europe that is wide enough to allow yields to converge in the future. Since the 1 May 2004, many EU nationals (and non-EU nationals alike) have shown interest in buying property in the Czech Republic which they are allowed to do so through the formation of a special purpose vehicle company (a company that can not operate as a business firm). In the case of EU nationals however who apply for a special EU residency permit, they can even buy property in their own names.  

·         Strategic Services – These include headquarters operations, customer contact centres, shared service centres, research & development centres, software development, expert solution centres, design centres and hi-tech repair centres. This is a growing area with both major and small service sector companies re-locating their operations to establish a central base in the Czech Republic. As mentioned earlier in this article, special investment incentives have been introduced – the precise terms of which are negotiable. Examples of well known companies that have re-located their operations to the Czech Republic include DHL, Accenture, Honywell and many others including SME´s that are following in their footsteps.

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·         Manufacturing – Investment in hi tech manufacturing sectors is particularly attractive due to the Czech Republic´s long and rich industrial heritage as well as the highly attractive package of investment incentives on offer as mentioned earlier in this article.

·         Others – There are other sectors that in the past have presented good investment opportunities such as :

·         Financial Services – Most of the banking sector has now been privatised but there are still opportunities available as there is increasing demand for financial services/products.

·         Tourism – The Czech Republic is becoming an increasingly attractive holiday destination due to the richness of its culture and architecture and consequently there are good opportunities for company´s operating in this field.

·         Telecommunications – This sector is slowly being privatised and again investment opportunities exist.

Structures of Business Entities

The setting up of a business is governed mainly by the Commercial Code (equivalent to company law in the UK), Trade Licensing Law and Civil Code. The commercial code recognises 5 different entities which must be registered in the commercial register :

·         Limited liability companies (referred to as s.r.o. companies) – equivalent to a private limited company in the UK. This is the most common way of doing business in the Czech Republic.

·         Joint-stock companies (equivalent to a public limited company in the UK)

·         Others that include general commercial partnerships, limited partnerships and co-operatives.

In addition, a foreign entity may establish a branch which is not a legal entity but must be registered in the commercial register and all the legal, accounting and tax rules that apply to companies pretty much also apply to branches in the same way.

Author´s note: The author was born in the UK in 1966 and is a British UK qualified FCCA who has lived and worked in Prague for more than 10 years. In 2004 the author left public practice to set up a business consultancy called ETHER Consulting s.r.o. which provides a one-stop service aimed at foreign small and medium-sized foreign companies and individuals that are interested in doing business in the Czech Republic. Please visit our web site at www.etherconsulting.cz which also lists some of our business partners and clients.

 

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