Czech investment incentives target hi-tech firms

The Czech Republic is almost constantly battling against its CEE neighbors to attract large foreign investors for whom government incentives such as tax breaks can be decisive when choosing a location for an investment venture. In given the current economic climate and downturn in investments less-developed regions especially would benefit from large inflows of investment capital.

And it is with this aim that amendments to the law on investment incentives and other relevant laws have been drafted. More specifically, the amendments are aimed at stimulating innovative technologies, the IT sector and strategic services and attracting investors who provide added-value services.

In this respect, the planned amendments reflect the desire to shift the focus of the Czech economy away from manufacturing industries towards the development and production of innovative technologies with high added-value, which in the long-term promise to provide are a more stable economic base and have great export potential.

More incentives

The amendments, however, do not ignore the manufacturing sector where the most common form of incentive is tax breaks for firms setting up production in the Czech Republic. In this area, tax breaks are to be extended from the current period of five years to 10 years. Economic stagnation resulted in lower profits, which in turn lead to tax breaks on profits being cancelled out by income tax obligations.

This concession has been prompted by the stagnation of the economy resulting in lower profits, which have lead to tax breaks on profits being cancelled out by income tax obligations. The new requirement to put 50 percent of the entire investment into new equipment, as opposed to the current minimum of Kč 50 million, should interest a new range of potential investors.

In the area of job creation, penalties for investors who do not maintain the agreed number of job positions for a full five years will be relaxed. Under the current incentives system, investors can lose all concessions if they do not maintain agreed workforce numbers; however, under the amended law only concessions stemming from the number of job positions cancelled will be cut off or subject to reimbursement.

In the way of new incentives for high-tech industries, investors who establish technological centers, invest a minimum of Kč 10 million in equipment and technology, and create jobs for 50 or more people will qualify for concessions. For companies producing software the employment requirement will be lower at 40 positions, whereas providers of strategic services will have to create a minimum of 100 jobs.  

Investors will be able to decide in which area they wish to reap the incentives: either in the form of tax breaks on the purchase of material or non-material property, or for a two-year period reduced or exemption on taxes payable by employers on employees’ wages.    

Strategic investments

Another novelty to attract investment is the planned creation of an institute of strategic investors for those who undertake large-scale investment projects in the Czech Republic. In order to qualify as a strategic investor a company will have to invest a minimum at least Kč 500 million into the manufacturing sector of which at least Kč 250 million must be invested into equipment, and create at least 500 jobs.

Under the new provisions technological firms will have to make a minimum investment of Kč 200 million (of which Kč 100 million must be ploughed into equipment), and create 200 jobs to qualify as a strategic investor.

Having fulfilled these requirements a strategic investor will with the agreement of the government have the right to draw financial support amounting to up to five percent of the total amount the company invests. To date the highest-profile strategic foreign investments into the Czech Republic have been in the automotive sector. The Hyundai Motor Company, for example, spent around Kč 30 billion on building its plant in Nošovice, northeast Moravia.

As well as the economic downturn, the tightening of conditions for qualifying for investment incentives in amendments introduced to the investment law in 2007 have led to a marked decrease in direct investment into the Czech Republic. Given that fully developed economies such has the UK and Canada have recently boosted their range of incentives considerably, it would be unwise for the Czech lawmakers not to react.

Positive effects from the promised raise in incentives are badly needed in the less developed regions of the Czech Republic. But potential investors should not concentrate just on qualifying for incentives. Past experience indicates that a wide range of investors have failed to take full advantage of incentives on offer.