New Regulation of Cross-border Transactions – Act on Screening of Foreign Investments in the Czech Republic

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On May 1, 2021, the Foreign Direct Investments Screening Act (Act No. 34/2021 Coll. – the "FDI Act") is set to come into force, which will allow the government to screen potentially high-risk foreign transactions by investors from countries outside the EU. Based on the new rules, the state may approve the foreign investment under review, or make it conditional upon the fulfillment of certain conditions, or in the extreme case, prohibit its execution (or continuation, in the case of existing projects). When planning cross-border transactions, it is important to assess whether the given investment is subject to clearance sufficiently ahead of time. If so, one must allow for a work-intensive and time-demanding screening procedure.


1. Objectives of New Regulation

The FDI Act seeks to introduce government oversight over foreign investments in key sectors (such as critical infrastructure). The Czech Republic has previously seen no check on foreign investments, with limited exceptions in certain sector-specific laws (such as the Act on Firearms or the Act on Banks). The FDI Act is designed to adapt Czech law to Regulation (EU) 2019/4521 (the "Regulation") and introduces the EU-wide standard for screening foreign direct investment from third countries. As part of the newly created process, Member States will share information on investments that they screen, and will coordinate related measures. Given the rather broad and general language of the Regulation, the way in which the individual Member States will assess various types of investments is bound to differ in the details from jurisdiction to jurisdiction. In the Czech Republic, foreign investment screening procedures will be conducted before the Ministry of Industry and Trade (the "Ministry"). In certain cases, high-risk investments may also be subject to review by the Czech government.


2. Investments within Purview of FDI Act

Whether or not the government will examine a given investment crucially depends on whether the assets in question must be considered a foreign investment, and whether the investment is headed into a high-risk sector. 

According to the FDI Act, a foreign investment is any kind of asset made available by a foreign investor2 for the purpose of pursuing business operations in the Czech Republic, if this investment allows the investor to exercise an effective degree of control over the target company. An ‘effective degree of control' is understood by the FDI Act to mean:

a) the ability of the foreign investor to dispose of a share of at least 10% in the voting rights (or to exercise a corresponding measure of influence) in the target (including shares of persons under unified control and of persons acting in concert),

b) membership of the foreign investor (or a person close to them) in a body of the target,

c) the ability of the foreign investor to dispose of ownership rights to the assets used by the target to pursue its business operations, or 

d) any other degree of control that gives the foreign investor access to information, systems, or technologies of importance from the point of view of protecting the integrity of the Czech Republic, national security, or public safety and order.  

The FDI Act does not require any direct acquisition of ownership participation in the target – it suffices that any of the above criteria is satisfied, such as membership in the body of the target, ownership of things needed to pursue the business, etc. 


3. Areas of Screened Investments

The law operates with two basic categories of investments and related screening arrangements: (a) investments in risk areas (i.e. sectors and industries that carry a higher risk for interests protected by the state, stipulated by the FDI Act) – these require prior approval; and (b) other investments that do not require approval, but that may retroactively be screened ex officio, because of their potential to threaten interests protected by the state.

Investments Requiring Prior Clearance

The first group comprises investments into risk areas (as defined in the law) that are afforded a heightened level of protection and require approval before the investment is made. This is the case, e.g. if the target of the given investment is engaged in the manufacturing, research, development, innovation, or lifecycle management of military equipment (under the Act on Foreign Trade in Military Equipment), operates a part of critical infrastructure (under the Crisis Management Act), is the administrator of an ICT system for critical information infrastructure (under the Cyber-Security Act), or develops or manufactures dual-use goods (i.e. goods listed in Annex IV to Regulation (EC) 428/2009 designated for civilian use which may be appropriated for military purposes). If the screened investment is evaluated as being high-risk, the Ministry may decide to give conditional approval and set conditions that must be met for the investment to go through, e.g. the need to enter consultations if the influence of the foreign investor were to increase in the future. In the extreme case, approval may be withheld.

Investments Carrying Risk of Ex Officio Retroactive Review

The second group comprises investments outside risk areas that nonetheless have the potential to threaten the integrity of the state, national security, or public safety and order, and may therefore, at the discretion of public officials, be submitted to a retroactive review at any time within five years from their completion. The date of completion of a foreign investment is understood to mean (a) the date of execution of the agreement (or, as the case may be, the last of the agreements) whose purpose is to implement the foreign investment, (b) the date on which an effective degree of control has been attained over the business operations of the target, or (c) the date on which the target begins its business operations, whichever occurs last. The Ministry may issue a decision on the conditional admissibility of the foreign investment, on the prohibition of the implementation of the foreign investment, or on the prohibition of the continued existence of the foreign investment, if this is necessary, as per a government decision, to protect the integrity of the Czech Republic, national security, or public safety and order.


4. Consultations (Preliminary Assessment of Investments)

When in doubt as to the risk profile of a given investment, the investor may file a request for a consultation before going forward with the investment. Based on the consultation, the Ministry will conclude whether or not the investment must be screened. The consultation may serve as an "insurance policy" of sorts for the investor that the government won't impose restrictions on the given investment after the fact within the context of ex officio proceedings. Investments on which consultations were held cannot be reviewed later (barring cases in which false or incomplete information was submitted). Consultations are mandatory if the target holds a national radio or television broadcasting license or is the publisher of a periodical with an average aggregate minimum circulation of 100,000 print copies per day.


5. Screening Procedures and Sanctions

A host of detailed information must be disclosed in both the request for clearance of a foreign investment and the request for a consultation, including information on the ownership structure of the investor and the target, on the source of financing for the foreign investment, on direct and indirect shares in the ownership and voting rights in the target (or comparable influence) both before and after the transaction, etc. The screening procedure ought to be completed and an assessment of the investment be made, within 90 days from the day on which the investment clearing procedure was commenced,3 whereas the outcome will either be a statement whereby the Ministry approves the investment, or else a memorandum containing restrictions for the investment that the Ministry issues based on a government resolution. A decision which was conditional upon a government resolution cannot be contested by way of an administrative-law appeal, nor be submitted to judicial scrutiny in a review procedure.  A lawsuit brought against such a decision, or a request to reopen the case in which the decision was handed down, cannot be awarded suspensive power.   

Failure to comply with the FDI Act carries the risk of a fine for the foreign investor in an amount of up to 1% of their aggregate net turnover for the most recent complete fiscal period, or up to CZK 50,000,000 (if the investor went ahead with the foreign investment without filing a request for approval, or without filing a mandatory request for consultations), or in an amount of up to 2% of the aggregate net turnover for the most recent complete fiscal period, or up to CZK 100,000,000 (if the foreign investor failed to respect a decision whereby the further continuation of an existing foreign investment has been prohibited, or to fulfill the conditions that were imposed on them).  The FDI Act does not apply to investments that were completed before the FDI Act came into force.  


Practical Consequences of New Regulation

  • In the case of investments into risk areas (as determined by the FDI Act), foreign investors must procure prior approval from the Ministry (similar to how clearance must be obtained from the Anti-trust Office in the case of competition-law concerns).
  • The statutory requirements should be taken into account early on when structuring the transaction, given the time demands of the screening procedure (with its 90-day duration in standard cases, and up to five months or even more in more sophisticated cases), and should be reflected in the transaction documents.  
  • With a view to the overall demands of the screening procedure (in terms of the sheer volume of input – data and documents – that is required), and given the stiff sanctions for failure to comply with the FDI Act, foreign investors ought to contemplate whether to already have legal counsel represent them during the preparatory stage (collection of documents, interaction with ministry officials).
  • The need for foreign investment screening must also be taken into account for transactions that are already underway, and that are unlikely to be completed before the FDI Act comes into force (i.e. before May 1, 2021).

The above summary represents a brief outline of this new piece of legislation and its requirements. If you have any questions as to the practical aspects of the new regulation, please do not hesitate to contact Marie Talašová, Ivo Janda, or Jan Jakoubek.


View the PDF 'New Regulation of Cross-border Transactions – Act on Screening of Foreign Investments' in Czech.


1 Regulation (EU) 2019/452 of the European Parliament and of the Council of March 19, 2019 establishing a framework for the screening of foreign direct investments into the Union.
2 A foreign investor is defined as a third-country investor (from outside the EU) or an investor who is established in the EU, but is under the direct or indirect control of a person from a third country. Under certain circumstances, a trustee who engages in, or contemplates, foreign investments on account of a trust fund may also be considered a foreign investor.
3 Up to 165 days in some cases, e.g. if the case is complex and the draft decision is submitted to the government for approval


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