Attention, Investors! Foreign Investments Screening

Selected foreign investments from non-EU countries are subject to screening and approval by the Czech Ministry of Industry and Trade ("Ministry"). The purpose is to protect the security of the Czech Republic and its internal or public order.

Investment screening is a trend that has emerged in democratic countries over the last 10 years. ’It is a response to the aggressive economic expansion of some autocratic regimes.

A frequent goal of this economic expansion is to gain access to advanced technologies and critical infrastructure, which can be used diplomatically and economically against the target country of the investment or its allies in the long term. According to theCzech Investment Screening Act (“FIS Act”), a foreign investor is not only an investor,who is not a citizen of the Czech Republic or of another EU Member State, or does not have a registered office in the Czech Republic or in another EU Member State, but also someone who is directly or indirectly controlled by such a person.

Generally, investors from the USA, Great Britain, Asia, Australia or Africa will meet these criteria under the FIS Act.

A prerequisite for the application of FIS Act is the quantitative parameters of the investment, i.e. the effective degree of control. Simply put, this includes:

• the acquisition of at least 10% of the voting rights in the target entity of the investment (directly or indirectly),

• membership in the body of the target entity,

• the ability to dispose of ownership rights to the assets with which the target entity carries out its economic activity,

• other means of control

In terms of investment categories, these are activities related to military material, operation of critical infrastructure, critical information infrastructure systems or dual-use goods.

Foreign investments in the above categories can only be made with the prior (conditional) approval of the Ministry.

As part of the review process, the Ministry disseminates the information obtained from the foreign investor under the FSI Act to the relevant government institutions (such as various ministries and intelligence services) and other public authorities that are materially affected by the particular investment.

In particular, if at least one of the cooperating state authorities considers the investment under review to constitute a security threat, the Ministry may grant conditional approval, conditional admissibility, prohibition or prohibition of further continuation of the foreign investment. Only if all state authorities involved conclude that the investment under review does not pose a threat, the Ministry shall issue a decision on its approval without any conditions.

The decision of the Ministry may be challenged in court by means of an administrative action.

In case of non-compliance with the law, the foreign investor may be fined up to 1% of the total turnover or up to CZK 50 million if the turnover cannot be ascertained. It is therefore advisable to closely review any proposed transaction in which a non-EU investor intends to acquire assets or shares in a company in the Czech Republic. Investors should be aware that the categories of critical infrastructure, information infrastructure or dual-use goods are broad and may cause regulatory problems, even if the implementation of the transaction appears to be a smooth process at first glance.

By Mgr. Radek Werich

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