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Czech Republic – New legal regulation on the screening of foreign investments
From 1 May 2021, a new legal regulation on the screening of foreign investments in the Czech Republic will come into effect. There will be screening in place for investments into public and private companies relevant for the security protection or public order completed after 1 May of this year in the Czech Republic. For this purpose, an investment is considered to be any asset that gives the investor the opportunity to control the economic activity of the target person. For example, this can be ownership or also membership in the body of the target person. It is possible to impose a fine up to 2% of the turnover for breach of obligations imposed by the new act.
All new investments made by foreign legal and natural persons from countries outside the EU and all entities controlled by these persons will be subject to screening. Under certain conditions, investments made on behalf of trust funds will also be screened. An investment is considered to be the entry of a foreign investor into a target person in the Czech Republic, which will enable it to exercise an effective level of control over the economic activity of the target person. This person can be described as follows:
- the possibility to exercise at least 10% of the voting rights or the possibility to exercise a respective influence in the target person;
- membership of a foreign investor, or its related person, in the body of the target person, the investor’s opportunity to exercise the property rights through which the target person conducts economic activity; or
- a different level of control that allows access to information, systems or technologies important from the point of view of protection of security and internal and public order of the Czech Republic.
The act imposes the obligation to notify about investments meeting following defining characteristics:
- investments of a foreign person;
- enabling the exercise of control; and
- a field related to ensuring public order and security of the Czech Republic.
All investments that are not fully completed before 1 May 2021 and meet the criteria set by the act must be reported. The day of completion of the investment is considered to be:
- the conclusion of the last of the contracts on the basis of which the investment is made;
- acquiring an effective degree of control over the target person; or
- the start of the economic activity.
The new act regulates the procedure of approval of the investment, which will fall under the responsibility of the Ministry of Industry and Trade (MIT). The transaction cannot be completed until it is approved in this proceeding. If the investment does not pose a risk, the MIT will approve it within 90 (maximum 120) days. If the investment appears to be problematic, the MIT will start negotiation on conditions with the investor. The decision of the MIT on the basis of this negotiation, which can usually be the decision on approval of the investment with certain conditions or conversely a decision on prohibition of the investment, is also approved by the government, which can also completely reject the decision of the MIT. If the investment is assessed as dangerous, the MIT decides on a prohibition of completion of the investment. For foreign investments that do not meet the above criteria, but are capable of endangering the security or internal or public order of the Czech Republic, the MIT may initiate proceedings to screen the foreign investment ex officio within five years from the date of completion of the foreign investment. To obtain legal certainty, a foreign investor may voluntarily request confirmation from the state, that the state has no objections to the investment (so-called consultation).
In case of failure to comply with the prohibition of the investment or with the conditions of the investment, it can be fined up to 2% of the turnover or CZK100 million if the turnover is not known.
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