Act on Screening of Foreign Direct Investments

On 3 February 2021, the Act on Screening of Foreign Direct Investments (No. 34/2021 Coll.) was published in the Czech Collection of Law with the effective date of 1 May 2021.

This Act has been adopted in accordance with the European Regulation 2019/452 establishing a framework for screening of foreign direct investments in the Union. During the legislative procedure the proposal of the Act was amended only to a minor extent.

The Act introduces screening mechanisms of third country investments which are likely to affect the security interests of the Czech Republic (mandatory screening). The Act outlines several sensitive sectors in which FDI will always be subject to a mandatory screening, e.g. production, research and development of military equipment or operation of any element of any critical infrastructure. The Act also enables a foreign investor to submit a request for a consultation in order to prevent a retroactive ban on the investment based on a later discovered security threat (discretionary screening).

Foreign non-EU investments that have not been scrutinized and do not affect one of the sensitive sectors may be reviewed for security and violation of the internal or public order of the Czech Republic up to 5 years retroactively from the date of completion of the investment.

If the screening of the foreign investment leads to a security risk finding the subsequent negotiations between the investor and the Ministry of Industry and Trade (the Ministry) are to set conditions for such investment so that security and strategic interests of the Czech Republic are not threatened. Security objections may be raised not only by certain governmental bodies of the Czech Republic but also by other EU member states or the European Commission.

The Ministry is responsible for conducting screening procedure of FDIs and both screenings – mandatory and discretionary – may lead to allowing (including conditionally allowing), restricting or cancelling any contemplated or existing FDI.

The screening procedure may be elevated from the Ministry to the Czech government if the opined bodies indicate a security risk of the FDI. The government has a power to conditionally approve the FDI and set the conditions, limit or prohibit a contemplated FDI, or revoke an existing FDI.

Prohibition of the FDI may have a form of restricting or banning voting and other equity rights of the foreign investor or the investor may be required to a divestment in a given deadline.

The Ministry’s decision (based on governmental opinion) may not be subject to an administration appeal or an administrative review. Such Ministry’s resolution may be subject to a judicial review or the screening process may be renewed, e.g. if there is any new evidence. However, neither of these options would suspend the Ministry’s challenged decision and such decision is therefore binding for the investor.

With this Act Czech laws follow recent development in other European countries and in the USA that aim to protect national (or European as the case may be) interests including security of the infrastructure, safety of people and independence of various industry sectors. Existing or contemplated investments may need to be internally reviewed and appropriate steps undertaken.

(This article is not intended to provide legal or other advice.)