Stricter criteria for granting investment incentives

The government’s role in approving investment incentives will strengthen significantly. Until now, the government only approved strategic investment projects; from now on, it will approve all projects. This should help the government direct the provision of aid in line with its priorities and the needs of the state at the time. On the other hand, however, this will result in an outflow of good-quality projects, as the decisions will have to be made under time pressure. Under the existing wording of the law, it was relatively easy to outline the investment incentive amount and conditions beforehand. Investors could therefore make decisions regarding the placement of their investments based on relatively reliable information. The approval itself was more or less an administrative matter if conditions for granting aid were met and all necessary documentation was provided. Once the amendment is passed, investors will only gain a reasonable level of assurance that an investment incentive will be granted after it is approved by the government. Moreover, the criteria for assessing projects will not be known in advance. In addition to the usual qualification criteria, other facts, such as to what extent an investment will help increase the competitiveness of the Czech Republic and what benefits will be generated for the region and the state, will be taken into account. The subjective evaluation of immeasurable criteria and, especially, a time delay of up to several months compared with the current situation will cause uncertainty that may sway investors to invest in other countries.

Major changes proposed by the draft amendment are as follows:

• Investment incentives will only be provided in respect of investment projects that help increase the competitiveness of the Czech Republic and promote its economic development. The law directly stipulates the applicant’s duty to calculate expected benefits for the region and the state and give appropriate reasons.
• Certain criteria for obtaining investment incentives will not be determined by law but by a government decree, which will help flexibly respond to current economic developments.
• The duty to create at least 20 new job opportunities, in fact disallowing the provision of investment support to the automation of existing productions in the manufacturing industry, will be excluded from the law.

The amendment transfers a number of provisions from the law to a separate government decree. Under the new amendment, the government decree should regulate the following:

• Types of investment projects for which investment incentives can be granted.
• The definition of an investment project with a higher added value. In accordance with the proposed decree, these involve:
  • Investment projects in technology centres or strategic services centres.
  • Investment projects in manufacturing where the wages of 80% of employees amount to at least the average monthly gross pay of the region in which the investment project is carried out. Simultaneously, the investment incentive recipient must cooperate with a research organisation or a university and must employ at least 10% of personnel with a university degree or at least 2% of research and development personnel.
• The minimum amounts for acquisition of tangible and intangible fixed assets or the minimum numbers of newly created jobs (the minimum number of newly created jobs should not apply to investments in manufacturing);
• Examples of prescribed forms declaring an intention to obtain investment incentives.

The strict criteria may give rise to investors’ concerns whether they will be able to fulfil them, as they will not only have to assess their current plans but also the risk of changes in the surrounding environment. Even if investors can assume that their project meets the higher added value condition  with respect to a certain level of pay, they may not be ready to risk that such a condition will still be met three years later, e.g., as a result of an unpredictable change in the salary levels in the region. This relatively unfortunate setting of conditions is also likely to result in an outflow of many projects abroad.

New criteria should apply to projects whose applications for investment incentives will be filed after the amendment’s effective date. We recommend that investors consider the risks arising from the amendment and potentially apply for investment incentives before the amendment becomes effective.