At the beginning of this century the territory of the Czech Republic was one of the most economically developed parts of Europe and was the most industrialized part of the former Austria-Hungary. Between the two world wars the Czech lands were listed among the ten most developed states of the world.

After the Second World War the Czech state came under the Soviet sphere of influence and for forty years was the victim of communist experiments. Market relations were deeply repressed, market institutions were liquidated and industry, land, and trade were completely nationalized and submitted to central control. The whole country went through a long and destructive economic stagnation and actual decline in some areas.

However, even under the communists many companies maintained or built-up relatively respectable reputations.

- glass industry - Moser, Bohemia Glass

- brewing - Pilsner Urquell, Budweiser

- trucks - Tatra, Avia, Liaz

- tractors - Zetor

- cars - Skoda

- buses - Karosa

- tramcars - CKD Tatra

- planes - Albatros, Turbolet

- motorcycles - JAWA, CZ

- textile machines - Elitex

The fall of communism in l989 opened the road to economic reversal and the reintroduction of a market economy through radical economic transformations, which drew upon five basic measures:

• liberalization of prices and foreign trade
• internal convertibility of the currency
• privatization programs
• restrictive monetary and financial policy of the state
• tax reform

Today the transformation of economy is nearing completion and there are many encouraging signs of economic recovery.

• The private sector has begun to prevail in economy and its influence on general economic development is steadily increasing. By the end of 1994, 80-90% of economy should be privatized.
• Millions of Czechs participated in the unique "coupon privatization" scheme which is now in its second wave of selling off state-owned companies. The process enabled citizens to purchase inexpensive coupon booklets of privatization "points" which they could exchange for shares in companies. The model is now being adopted by other former communist countries.
• The goods and labor market is quickly developing and at the same time a capital market has been established. (The Commercial Stock Exchange takes place three times a week with an average 700 million Kc in transactions per day.)
• The exchange rate with foreign currencies has been stabilized (for the past 4 years it has been maintained at approximately 29 Kc for l USD, l8 Kc for l DM.)
• The balance of payments is in surplus and foreign currency reserves reached 7.7 billion USD (June l994) which corresponds approximately to seven months worth of imports.
• Inflation is under control and the rate is expected to stay below 10 percent in 1994, according to government and OECD estimates.
• The national debt of the Czech Republic per capita, pegged at approximately 850 USD, is the lowest in the region. The Czech government paid back all its loans from the International Monetary Fund in the summer of 1994 - two years ahead of time.
• Demand is substantially increasing; this is apparent from rising household expenses for goods and services at stable prices.
• The unemployment rate remains low and is expected to rise to a maximum of only 4% in 1994, according to government estimates.
• The export market is rapidly and successfully shifting to the markets of OECD countries, and exports themselves are rapidly increasing (in l993 stable prices increased by more than 17%).
• Both the volume of personal and corporate deposits is increasing. The rate of savings is also increasing. These trends reflect the population's confidence in the domestic currency.

MACROECONOMIC INDICATORS

Source: CESTAT-EUROSTAT

DEVELOPMENT OF MAIN ECONOMIC INDICATORS

Gross Domestic Product

The noticeable decline in real gross domestic product (GDP) during l991 slowed down and in 1993 the situation was further stabilized. The GDP is expected to increase by up to 2.5% in 1994, according to government estimates.

Industrial production chart...

Consumer Prices

The complete liberalization of prices which began Jan. 1, 1991 led to an extreme but isolated rise in prices. The implementation of a value added tax (VAT) on 1.1.1993 brought another rise in prices. Consumer prices have now stabilized and average monthly inflation has been kept under 0.8% during the first half 1994.

Commodity structure of FT
FT development

State Budget

The state budget for l993 registered a slight surplus. Revenues totalled 358 million Kc and expenditures 356.9 million Kc. The government proposed a balanced state budget for l994, which was approved by Parliament. At the end of the first half of 1994, the state budget registered a surplus of 9.7 billion Kc.

Exchange Rate

In l990 the Czechoslovak currency was devalued three times thus deflating the artificially high exchange rate of the crown.

Since May l993 the Czech crown has been affixed to the two most important world currencies - USD and DEM - oscillating only to the extent that the exchange rate between these two currencies oscillates. The exchange rate of about 29 Kc to l USD has been maintained since l990. The fixed exchange rate of the crown in relation to other freely convertible currencies has become the main anchor of the Czech economy.

Foreign Investments

• Direct investments into the separate branches of the economy in millions of USD

  ---

  Branch Consumer goods and tobacco Transportation industry Construction industry Banks and insurance system Food Chemicals Trade and services Machinery Others Total

  as of June 30, 1994 582.6 462.0 344.0 290.0 256.4 140.4 126.6 109.0 178.8 2,489.8

• A more detailed overview of the territorial structure is introduced in this table (again in millions of USD):

  ---

  Country Germany USA France Belgium Austria Switzerland Italy Others Total

  as of June 30, 1994 745.7 627.9 325.9 154.8 168.8 120.5 80.5 265.7 2,489.8

The slow-down of direct investments in l993 was brought on by investors who waited to see what consequences the split with Slovakia would have on the political and economic stability of the Czech Republic. Also, following the conclusion of the first wave of privatization, investors were waiting to learn what interesting projects were planned for the second wave. These conditions, however, have not changed the character of the current economic climate as one which is favorable for foreign investment. Major foreign consulting firms evaluate the Czech Republic as a reliable country where any risks attached to investment are becoming less significant.

Direct foreign investment in the CR (Territorial structure)

BANKING SYSTEM OF THE CZECH REPUBLIC

The banking system can be divided into three groups. The large banks, which emerged before l990 and which offer a complete assortment of banking services and command a wide network of branches. These include the Ceska sporitelna (Czech Savings Bank), the Investicni a postovni banka (Investment and Postal Bank), the Komercni banka (Commercial Bank), the Ceskoslovenska obchodni banka (Czechoslovak Commercial Bank) and Zivnostenska Bank.

The second group is composed of smaller Czech banks with a relatively minor share of foreign capital. They offer certain specialized services, the majority of which are oriented toward the private sector.

The third group is comprised of foreign banks which help complement the necessary competitive environment in the banking sector.

The structure of the banking system as of June 31, 1994:

- 24 commercial banks, joint stock companies without foreign ownership

- 12 commercial banks, joint stock companies with partial foreign ownership

- lO commercial banks, joint stock companies with lOO% foreign ownership

- lO branches of foreign banks

- l state monetary institute (Konsolidacni banka)

- There are also 41 representatives of foreign banks in the Czech Republic.

A new amendment to the banking law provides for state insurance of deposits in the country, which brings the Czech Republic's laws in this area closer into line with European norms.

CAPITAL MARKET

The capital market emerged in 1993. Crucial practical steps were taken for the development of stocks and shares in the Czech Republic during this year. These processes led to the creation of the Stock Exchange of Securities Praha, and the stock trading agency known as RM-System.

Stock and shares are traded on the Stock Exchange. Currently the exchange has 52 members who are entitled to trade. Other interested parties have access to the market only through the mediation of these members.

In the framework of the automatic electronic securities market, the RM-System is used mainly by minor investors who acquired their shares through coupon privatization and who have difficulty gaining access to the Stock Exchange. On the whole, trading is done within the framework of RM-S with approximately l,l00 securities.

INVESTMENT OPPORTUNITIES IN THE CZECH REPUBLIC

The favourable geographical position of the Czech Republic, its highly qualified labor force, and the excellent reputation of Czechoslovak products from the pre-war period began attracting the interest of foreign investors as early as November l989. Phillip Morris, Coca Cola, Procter and Gamble, Volkswagen, AVX/Kyocera are among the many multinational corporations to have opened production plants in the Czech Republic.

Among other factors, the Czech Republic is attractive to foreign investors for the following reasons:

• liberal economic policy of the government
• political stability
• highly qualified labour force
• wage controls, which enable the maintenance of low production costs
• an exchange-rate of the crown favourable for export

In recent years, legislation guaranteeing the security of foreign investors has been strengthened, and these investors are now considered fully equal to native entrepreneurs. There are no restrictions on the amount of foreign investment in the Czech Republic.

No formal approval is needed for foreign investments except in the case of investment in the privatization scheme, banking, or the arms industry.

Opportunities for Legal Entrepreneurship in the Czech Republic:

The Commercial and Trade Code offers the following opportunities for business in the Czech Republic:

• foundation of a branch establishment of a foreign company
• entrepreneurship of physical entities on the basis of a trade licence:

- general conditions: age above 18 years, full competence for legal acts, probity

- special conditions - e.g. certification of training in the field or experience is necessary for small businesses

• establishment of one of the following types of companies:

A General Commercial Partnership

- defined as a company which includes at least two physical or legal entities in a common undertaking under a common trade name.

A Limited Partnership- defined as a company in which one or more partners guarantee the commitments to the amount of a initial deposit as written in the Commercial Register (limited partners) and one or more partners with their entire assets (general partners).

A Limited Liability Company - in which the partners participate through their investments (of money or by other sources), which constitute the basic capital of the corporation. The basic capital must be at least l00,000 Kc (USD 3,390) and the minimum investment of a partner is 20,000 Kc (USD 678).

A Joint Stock Company - in which shareholders participate in the undertakings with their investments, which constitute the basic assets. The value of the capital stock cannot be less than 1,000,000 Kc (USD 33,900). The number and nominal value of the shares are dependent on the decision of the founders.

A Cooperative - defined as a community of an indeterminate amount of people who can unite not only for the purpose of the undertaking, but also for the protection of their economic, social, and other needs. The basic capital of a cooperative, which must be at least 50,000 Kc (USD 1,695), constitutes the total investment of the members of the cooperative.

Commercial Register

All entrepreneurial subjects in which foreigners participate must be registered in the Commercial Register. The Commercial Register is a public document administered by the courts, which registers companies on the basis of an application together with:

- a trade licence

- a founding document of the corporation

- confirmation that the start-up capital has been deposited in one of the Czech banks

- a lease contract for commercial spaces

- a residence permit for foreigners

TAXES

From January 1, l993, a new tax system, which is based on the principles implemented in the tax systems of EC countries, is valid in the Czech Republic.

The most important aspects of the tax system are: a value added tax (VAT); a consumer tax; an import tax; a tax on incomes of physical and legal entities; a road tax; a real property tax; a gift and inheritance tax.

• TAX RATES ON THE INCOMES OF PHYSICAL ENTITIES

Income in Kc	Tax in Kc
0 - 60,000	15%
60,000 - 120,000	9,000 + 20% of any income above 60,000
120,000 - 180,000	21,000 + 25% of any income above 120,000
180,000 - 540,000	36,000 + 32% of any income above 180,000
540,000 - 1,080,000	151,000 + 40% of any income above 540,000
1,080,000+	367,200 + 44% of any income above 1,080,000

• TAXATION ON THE INCOMES OF LEGAL ENTITIES:

- There is a 42% corporate income tax rate. The government plans to gradually lower this rate.

• VALUE ADDED TAX (VAT)

- The value added tax is levied on all goods and services which are ordered in the Czech Republic, and also on imported goods. Goods which are exported from the Czech Republic are not taxed.

- tax rates:

23% - basic rate

5% - most food, fuels, pharmaceutical products, services

DUTIES

• The Czech Republic is a founding member of GATT (the General Agreement on Tariffs and Trade) and all import taxes are in agreement with international treaties.
• The mean customs rate incidence is 7% (10.7 % for imports of agricultural produce and foodstuffs, 5.9% for imports of other products).

REAL ESTATE PROPERTY

The foreign currency law sets out certain limitations for foreigners who wish to acquire rights to real estate while residing outside the territory of the Czech Republic. A common means of purchasing real estate is the establishment of a corporation registered in the Czech Republic.