In this Article, I will share with you some legal insights regarding investment in the Czech Republic and summarize important points characterizing legal environment here in 2017.
If you are thinking about investing in the Czech Republic you will need to consider a wide range of factors from technical to tax. It is likely that you will be focused on particular business opportunities and whether they are worth your money or not. You will be dreaming about high returns, multiplied EBITDAs and, with this in mind, you will use your imagination to compile the perfect plan to increase the value of your investment. I honestly believe that legal matters may be some of the last aspects you consider – particularly as they deal with the least pleasant pictures of conflicts, stress and gradual devastation of the investment.
But wait a moment and consider a different angle: Everybody likes to be protected, right? Well, this is exactly what the law is for!
Let’s look at the investment environment in the Czech Republic in 2017 through our brand new glasses and try to summarize the most important points.Point No. 1: New Czech Private Law
You may have heard that a brand new Civil Code and Business Corporations Act came into effect as of January 1, 2014. Despite three years of being in effect, those governed by the regulation are still unsure of its application, despite reading thousands of pages of information about it. The main reason is that there is still hardly any case law from the upper courts on both Acts, meaning there is little guidance for how they are to be interpreted.
However, on the other hand, we have to remember that the main reason for this complete recodification of Czech private law was to repeal the outdated communist Civil Code from 1964 and finally embody respect for individual freedom and all its manifestations into Czech legislation.
And this is where the opportunity lies. Instead of channeling Socrates and declaring “I know that I know nothing”, it would be better to use this opportunity to find new ways to structure and protect your investment. For example, before 2014 there was very limited opportunity to create different types of shares (i.e. shares with different rights and obligations) in a Czech limited liability company (LLC), the most common type of company in the Czech Republic, and an LLC shareholder might own only one share. Since 2014, it has been possible to create unlimited types of LLC shares and an LLC shareholder may own more than one LLC share and even different types. This is a great opportunity to structure an investment exactly according to the actual circumstances and to provide appropriate corporate law protection to the investor.
Point No. 2: Slow, Slow, Slow Czech Courts
It is much easier to change the law than to change habits of people applying it. Ordinary Czech courts are still very slow – to enforce one’s rights before them means you should be prepared for a 2-3 year long legal battle, at least.
Fortunately, there is an alternative to ordinary courts in the form of commercial arbitration. This may be held not only in the Czech Republic but pretty much worldwide, as the Czech Republic is a contracting party to New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Czech courts may refuse enforcement of a foreign arbitral award only in very limited cases; mainly if the dispute may not be subject to arbitration under Czech law or if the enforcement would be contrary to the public policy of the Czech Republic. It follows from Czech case law that Czech courts interpret these exceptions very narrowly. Thus, slow domestic courts might be used as forum in cases when the investor feels it might be sued (e.g. as a seller under SPA for warranty claim), while in opposite cases an arbitration clause is added (e.g. in cases of claims under shareholders agreement with local co-investors). There is nothing else to be added, other than the words of Winston Churchill: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
Point No. 3: Wide BIT Protection
It is always advisable to have ultimate backup plan if everything goes wrong. In case of investment in a foreign country, including the Czech Republic, such a backup plan is a form of protection of foreign investment pursuant to the respective bilateral investment treaty (BIT) concluded between the Czech Republic and the investor’s country. The Czech Republic is a contracting party to 77 effective BITs (for comparison, Poland has 60 BITs, Slovakia 48 BITs and Hungary 55 BITs). When planning the investment, it is more than advisable to structure it not only with respect to tax issues, but also with respect to available BIT protection. For example, if your holding company owning your investment in the form of 40% share in a Czech company and performing nearly no economic activity is incorporated in Switzerland, you should be aware that only legal entities with real economic activities in Switzerland are protected under Czech-Swiss BIT. However, if your Swiss holding company establishes a subsidiary in the Netherlands, which holds the investment instead of it, such Dutch mailbox company would be fully protected under Czech-Dutch BIT as only incorporation under Dutch law is required.
All the above mentioned points are important, but let me add one more – the closing point. Anyone who has ever been to the Czech Republic knows that Czechs produce and drink the best beer in the world. No discussions. If you choose to invest in the Czech Republic, you may one day get to visit the Czech Republic and taste the best beer in the world. And this alone is something that deserves serious consideration…