New FDI rules come into force in the Czech Republic on 1 May 2021

Since the adoption of the EU foreign direct investment ("FDI") regulation, the necessity of introducing a screening mechanism at the national level has been gaining momentum amongst Member States. This is particularly true for the CEE region, as most CEE jurisdictions did not have such mechanisms in place.

The legislative initiative to establish an FDI screening mechanism in the Czech Republic dates back to April 2020, when the Czech government greenlighted a bill aimed at strengthening control over the FDI flowing into the Czech Republic by setting up a framework that allows transactions capable of threatening national security and/or internal or public order to be blocked. The final version of the Act on FDI Screening was adopted on 19 January 2021 and will enter into force on 1 May 2021 (the "Act").

What transactions are caught?

An FDI notification is triggered if:

• a foreign investor
• makes an investment of any form with the intention to carry out economic activity in the Czech Republic,
• which creates an effective level of control of the foreign investor over such economic activity;
• in an industry important in connection with the security of the Czech Republic or its internal or public order.

Notion of foreign investor

As follows from the Act, a foreign investor is a natural/legal person from outside the EU, or a natural/legal person that is directly or indirectly controlled by the former. A trust administrator can also be regarded as a foreign investor if the person who set up the trust or who in any way exercises influence it (or in whose benefit the trust was established) is a non-EU natural /legal person or is directly controlled by such a person.

Effective level of control

The screening mechanism applies only to those transactions where an effective level of control is acquired. Effective level of control means:

• direct or indirect control over a stake equal to or greater than 10 % of the shares or voting rights in the target (the 10 % also includes shares or voting rights of entities belonging to the same group of companies as the foreign investor);
• membership of the foreign investor (or its related party) in the corporate bodies of the target;
• ownership of an asset through which the economic activity is performed; or
• another type of control resulting in the foreign investor gaining access to information, systems or technology which are important in connection with the protection of the security of the Czech Republic or its internal or public order.

Sensitive industry sectors

The Act requires a mandatory filing prior to closing for foreign investments made in sectors that are particularly important to the security of the Czech Republic and its internal and/or public order. Such sensitive sectors include:

• production, research, development, innovation of military material and ensuring the lifecycle of such material;
• elements of critical infrastructure such as energy, gas, heat and water management, food and agriculture, healthcare, transportation, communication and IT systems, financial markets, emergency services and public administration;
• administration of essential information or communication systems;
• development and production of dual-use products.

Should the investment concern the media sector, the Act provides for a mandatory consultation if the target undertaking holds a licence for nationwide radio or television broadcasting or if the target undertaking is a publisher of periodicals with a minimum daily average of 100,000 printed copies in the last calendar year. In all other instances, consultations are voluntary.

Ex officio investigations are possible up to five years after closing in sectors deemed capable of threatening the security of the Czech Republic and internal or public order, and under special circumstances even after this five-year period (circumvention of a filing obligation).

Screening procedure

The authority in charge of screening and approving foreign investments as well as of leading the consultation process is the Ministry of Industry and Trade (the "Ministry"). The Ministry also works in close cooperation with other public bodies, such as the Ministry of the Interior, the Ministry of Defence, the Ministry of Foreign Affairs, the police and the intelligence services as well as other bodies whose competence would cover the respective foreign investment.

Foreign investors are obliged to file the obligatory notification or consultation request with the Ministry and must not implement the transaction prior to receiving clearance. An unconditional clearance will be issued within 90 days from the day the Ministry received a complete notification. In more complex cases, this can be extended by an additional 30 days. In case of a conditional clearance (and related consultation with the Czech government) the review period may last up to 165 days. The Act also provides for a stop-the-clock mechanism.

If the results of the screening indicate that the investment could pose a threat to national security or public order, the Ministry will issue a negative decision prohibiting the investment in question. The negative decision can be challenged before the court.

Fines

A foreign investor who does not comply with the obligations under the Act or in the decision of the Ministry can face hefty fines. The Act stipulates a fine of up to 1 % of the total net turnover achieved in the last closed accounting period, or if the turnover cannot be calculated, a fine of between CZK 50,000 (approx. EUR 1,900) and CZK 50,000,000 (approx. EUR 1,900,000) for infringement of the obligation to notify the transaction or request a consultation.

If the foreign investor implements the transaction despite a negative decision of the Ministry or if it does not comply with the conditions imposed in the clearance decision, the fine can be even higher, i.e. up to 2 % of the total net turnover achieved in the last closed accounting period, or up to CZK 100,000 (approx. EUR 3,800) and CZK 100,000,000 (approx. EUR 3,800,000) if the turnover cannot be calculated.

author: Claudia Bock