From 1 May 2021, new foreign investment screening rules will apply

in the Czech Republic. Will you or your company be impacted?

Read on for an intial overview.

What are the new rules?

The Foreign Direct Investment Act, passed by the Czech Parliament in January 2021 and effective from 1 May 2021,
has been introduced in response to the new EU Framework for screening of foreign direct investments throughout
the EU (Regulation (EU) 2019/452 of the European Parliament). It introduces a level of vigorous screening for non EU
investments in the Czech Republic, overseen by the Ministry of Industry and Trade. The new FDI rules will materially
impact the process of investment and transactions by non-E.U. investors.

Who is a foreign investor?

A foreign investor is any person or legal entity from outside the E.U. making an investment in the Czech Republic or,
a person or legal entity who is established in the E.U. but who is directly or indirectly controlled by a person/entity
from outside the E.U.

A trust administrator or fund manager can also, under certain conditions be deemed a foreign investor if similar
issues of exercising control or influence over the fund by a non- EU national apply.

What constitutes a foreign investment under the new rules?

The new rules are aimed at investments which provide the foreign investor with “effective control” of the Czech
target. “Effective control” is defined broadly to encompass:

- Acquisition of a stake of at least 10% of voting rights in the target

- Membership of the foreign investor (or a related party) in the statutory bodies of the target
- Ownership of assets used by the target to perform its business activities, or
- Any other form of control which gives the foreign investor access to information, systems or technology
which are vital for the protection of the security of the Czech Republic or its public safety and order.

It is important to note that acquisition of a shareholding is not essential to trigger the FDI rules, fulfilment of any one
of the above conditions is deemed “effective control”.

Which industries/areas of investment are affected?

The FDI rules envisage 2 categories of FDI screening:

1. Mandatory Prior Approval for Specified Industries

- Manufacturing/research/development/innovation/lifecycle management of military equipment
- Critical infrastructure – e.g. energy, gas, heat, water, food, healthcare, transportation, emergency
services, financial markets, public administration
- Critical information infrastructure/cybersecurity
- Development and production of dual use (military/civilian) products (including software and
technology)

Mandatory consultation in the event of certain proposed media investments – national TV or radio license or
publishing of print media with a minimum daily average of 100.000 printed copies in the last calendar year.

2. Discretionary Retroactive Review Up to 5 years after completion on any investment that has the potential to
affect the security of the Czech Republic or its public order and safety, the Ministry may at its discretion
order such a review on any foreign investment.

Foreign investors may seek a voluntary consultation with the Ministry in order to obtain a decision by the
Ministry if the specific foreign investment is to be subject to screening, such consultation removes the
possibility of later ex officio review by the Ministry of the same investment, assuming that complete
 information was provided. Such voluntary consultation provides legal certainty to investors seeking clarity of
application of the new FDI rules and assurance that their investment will not be subject to later review.

Screening procedure

The Ministry of Industry and Trade is the government body in charge of reviewing foreign investments that fall
within the parameters of the new FDI rules, as well as undertaking consultations from foreign investors.

With respect to mandatory notifications/consultations, the transaction cannot be finalized until clearance has been
issued by the Ministry.

Timeframe: Unconditional clearances are issued with 90 days. More complex cases may take an additional 30 days.

Penalties

The new FDI rules impose significant penalties for breach and non-compliance.

If a foreign investor fails to notify a transaction or request a mandatory consultation, the applicable penalty can be
up to 1% of total net turnover for the latest accounting period or up to CZK 50 million if the turnover cannot be
calculated.

If the foreign investor proceeds with a transaction irrespective of a negative decision by the Ministry or fails to
uphold certain conditions imposed in the decision by the Ministry, the fine can be up to 2% of total net turnover for
the latest accounting period or up to CZK 100 million if the turnover cannot be calculated.

Practical considerations for foreign investors

The scope of investments or activities triggering review under FDI rules is considerably broad and foreign investors
will need to stay vigilant to maintain compliance as even activities such as nominating new company directors may
trigger FDI rules.

The FDI rules apply not just to the standard “third country” non EU countries but will apply also to include
Switzerland and members of the European Economic Area, such as Lichtenstein and Norway. And post Brexit United
Kingdom.

FDI clearance is now an additional condition for effectiveness of a transaction, as failure to comply renders a
transaction ineffective.

Transaction negotiations will need to reflect the timeline obligations for FDI clearance, in a parallel fashion to the
manner in which Anti Monopoly clearance is already factored into timelines.

Given the new nature of the FDI rules, a careful approach to reviewing each possible invested by a foreign investor is
highly recommended, along with the seeking of voluntary consultations with the Ministry where appropriate. Do
not hesitate to contact KSB for assistance in this regard.