On 3 February 2021, a new Act on Screening of Foreign Investments (“FIR Act“) introduced a foreign direct investment screening mechanism in the Czech Republic. The FIR Act draws on the framework established by the EU FDI Regulation (see our blog post accessible here for further details on this Regulation) and significantly changes the landscape for inbound investments into the Czech Republic by non-EU investors (including EU investors controlled by a non-EU person).
Under the regime, foreign investments meeting specified criteria will be mandatorily notifiable to the Czech Ministry of Industry and Trade (“Ministry“), and will be prohibited from closing until the Ministry issues its approval.
The FIR Act enters into force on 1 May 2021 and will apply to completed foreign investments as of this point (the FIR Act will therefore not have retroactive effect).
Which transactions are covered?
The FIR Act defines a foreign investment as covering any asset value invested in any form by a non-EU investor with the aim of carrying out economic activity in the Czech Republic, and which provides the investor with effective control of the target. The term “effective control” is defined broadly and includes transfers of as little as 10% of the voting rights or director participation/other rights in the target. This is also stated to cover any other type of control resulting in the ability of the foreign investor to access information, systems or technologies deemed important to the protection of the security of the Czech Republic, or its internal or public order.
Which foreign investments are covered?
Under the FIR Act, investments conferring effective control (as set out above) will be mandatorily notifiable where the target engages in one or more of the following activities:
- manufacturing, research, development, innovation or arranging for a life cycle of arms and military equipment;
- operations of critical infrastructure (including infrastructure related to energy, water management, food and agriculture, healthcare, transportation, communication and IT systems, financial markets, emergency services or public administration);
- administration of an information or a communication system of critical information infrastructure or of an essential service, or operation of an essential service; or
- manufacturing or development of dual-use items (i.e. items that may be used for both civilian and military purposes) set out in Annex IV of the Council Regulation (EC) No 428/2009.
What is the procedure?
Under the regime, the Ministry will initiate a review of notified investments. It must either issue a conditional or unconditional approval of the investment (if the investment would not compromise the security of the Czech Republic or its internal or public order), or prohibit the investment in other cases. The Ministry should generally issue an approval within 90 days of submission of the notification by the foreign investor, which is extendable (i) by an additional 30 days in complex cases, and (ii) by at least an additional 45 days where the investment raises concerns and thus requires government approval. The FIR Act does not provide for any assessment criteria, meaning the Ministry will have a large degree of discretion when reviewing investments.
The Ministry will also be able to proactively review non-mandatorily notifiable foreign investments up to five years after completion. Foreign investors can voluntarily request an opinion from the Ministry, setting out whether the investment is capable of compromising the security of the Czech Republic or its internal or public order, in order to avoid the risk of a subsequent review.
Consultation procedure for media sector foreign investments
The FIR Act also introduces a mandatory consultation procedure with the Ministry for foreign investments in the media sector. Specifically, a foreign investor must file a request for consultation if the target meets one of the following criteria in this sector:
- the target holds a nationwide radio or television broadcasting license; or
- the target publishes periodical(s) with an aggregate average printed circulation of at least 100,000 copies per day.
If neither the Ministry, nor other government institutions, have any objections to the investment, formal review proceedings will not be initiated and it will be conclusively presumed that the investment does not compromise the security, internal order or public order of the Czech Republic. Otherwise, a full review of the investment will be launched by the Ministry.
What are the sanctions for non-compliance?
Failure to request an approval for the investment or to request a mandatory consultation will be punishable by a fine of up to 1% of the investor’s total turnover in the previous financial year. The Ministry will also have the power, where upon review it deems security or internal/public order concerns to be present, to prohibit the transaction, or to require the foreign investor to sell the target (if the transaction has already closed). Failure to adhere to such an order, or to a conditional approval, will be punishable by a fine of up to 2% of the investor’s total turnover in the previous financial year.
For more information about the new regime, you may visit the Baker McKenzie FIRE Tool.