13th July 2011

Legal Affairs Update (Winter, Spring 2011)


Public Procurement

In February 2011, the Ministry for Regional Development released a draft amendment to the Public Procurement Act and invited public to comment. The Government announced in April that reading of the bill in the Chamber of Deputies in June will be combined with the vote of confidence. The bill is now in the first reading in the Chamber of Deputies; the Economic Committee and the Committee for Pubic Administration and Regional Development of the Chamber will debate it in September. Generally, the bill is considered a big step forward, although some key changes weren’t incorporated. The primary aim of the bill is to reduce corruption risks in public procurement. Newly introduced key principles and measures aim at greater transparency of the tendering process (enhanced disclosure of information about bids - in particular the total price actual paid is to be disclosed, as well as the wording of the contracts; modified deadlines; elimination of possibly discriminatory criteria such as various certificates, a name list of the bidder’s statutory body members for the past 3 years, a name list of owners/shareholders owning more than 10% of the bidder’s equity, requirement of archiving documents for 10 years, etc.), extended scope of procurements that have to be processed according to the Public Procurement Act (from 2014, the Act will apply to all procurements over Kc1,000,000), greater efficiency of the tendering process (obligation to provide analysis and economic reasons for the selection of the winning bid, presence of experts in evaluation committees, an official list of experts, measures to avoid bid-rigging, greater oversight of the decision-making processes, the so-called major procurements (over Kc300 mil at the Government level and Kc20-200 mil at the municipal level) to be approved by the Government/municipal council). Weaknesses of the bill: a new principle introduced that in case of less than 3 bids, the tender must be cancelled. But the measure can be easily circumvented: if the public authority declares that the total number of eligible suppliers on the market is <5 (such declaration to be just notified to the Office for the Protection of Competition - but no oversight, no sanctions), the tender may go on regardless of the number of received bids. The drafters also refused the idea to provide for the institute of the "extraordinarily high price" in the law, similarly to the extraordinarily low price (which is already in the law). Another weakness is insufficient oversight of small procurements (the danger of a big procurement divided into a number of small procurements with little oversight). More.

Tax Reform – Direct, Indirect Taxation, Pension Reform

In spring 2011, the Ministry of Finance drafted a bill to set conditions for the introduction of the Single Collection Point (JIM, administration of tax and social security payments) – a key element of the planned tax reform. The bill went through an interministerial round of comments. The Finance Ministry say the idea behind the tax reform is to increase effectiveness of public finance, increase the state budget revenues by
1. reducing direct taxation (taxation of labor) and increasing indirect taxation (VAT and excise tax); i.e. use VAT tax revenues to finance pension reform (e.g. one of the changes proposed is registration of businesses with turnover newly at Kc750,000 compared with current Kc1,000,000 as VAT tax payers; the Ministry also plans an increase in the lower VAT rate from 10% to 14% as of January 1, 2012 and unification of VAT rates at 17,5% as of January 1, 2013 - the VAT rates bill is currently debated in the Chamber of Deputies and is heading towards second reading) and 
2. make the Czech tax system more transparent and user-friendly – this means cutting the number of tax exemptions.
Back to the JIM-introduction bill, it focuses primarily on direct taxation and social security contributions, while reform of indirect taxation and pension reform will be dealt with separately (draft acts related to pension reform were submitted to the government in June). This is critically viewed by the business sector that would prefer all-in-one approach (meaning overall impact of the reform(s) on the state budget would be explicit). Only part of the changes currently proposed by the Ministry is related to the actual introduction of JIM. It is also pointed to the uncertainty arising from frequent changes of the tax law and the potential costs of rejection of the second phase of the tax reform (indirect taxes and pension reform). Further amendments are expected in connection with the adoption of a new Civil Code.

Labor Market, Human Resources
In spring 2011, the Ministry of Labor and Social Affairs drafted amendments to Labor Code, the Act on Employment and the Act on Sickness Insurance. All these are heading to the Chamber of Deputies. The changes proposed in the Labor Code mirror negative practical experience of users with the 2007 amended Code. The bill increases flexibility of the labor market and reduces administrative costs of businesses (re-introducing institutes such as temporary secondment, allowing courts (in specific cases) to decide about the compensation to an employee who filed a suit against his/her employer for an invalid termination of employment). Based on the proposal of the former Minister of Labor and Social Affairs P.Necas, the bill newly introduces 6-month trial period for managers, the amount of severance pay in correlation with the duration of employment, inclusion of hours worked overtime in the contracted salary. Businesses criticize the provision on fixed-term contracts, insufficient regulation of non-compete and non-solicitation clauses, and absence of flexible forms of working (home, tele, shared jobs, etc.). The Ministry has also proposed a social reform package (Sociální reforma 2011), a set of amendments with the aim to increase efficiency of the system (allowances, distribution, administrative burden). The draft amendment act is now in the first reading in the Chamber of Deputies (to be discussed by the Committee for Constitution and the Committe for Social Policy).

Amendments to the Employment Act shows the aim of the Ministry to combat illegal work (sanctions up to Kc5,000,000 mil, black lists of employers). As a consequence, businesses will be sanctioned for making employees work under a self-employment contract (the so-called švarc systém). The bill is now in the first reading in the Chamber of Deputies (to be debated by the Committee for Social Policy). Also, job agencies are obliged as of April 1 to be insured against bankruptcy. 

The Amendment Act on Foreigners’ Residence in the Czech Republic entered into force on January 1, 2011 (harmonization with EU Directives). Employers have been complaining that provisions of the Act do not give space for a more expedient way of visa application processing for managers and specialists - 3rd country nationals – hired by transnational corporations. Arguments of the Ministry are based on security concerns and non-discriminatory approach to all foreigners entering the Czech Republic. The implementation of the Amendment Act has been slow also due to re-organization of the Alien Police and the fact that the Ministry of the Interior have undertaken the visa/immigration agenda. The change increased administrative burden (new requirements regarding health insurance, delays in visa processing and issuance) and costs related to lengthy procedures and delayed arrivals of specialists in the country, the business community say. Biometric data collection and chip ID cards were supposed to be introduced as of May 2011, but the implementation has been delayed. The newly introduced system of arranging a meeting in advance via telephone functions well. The Ministry of the Interior is drafting a material proposal of a new Act on Foreigners’ Residence (to be submitted to the Government by August 2011). Still, the issue of a difficult intra-corporate transfer remains unsloved. The Intra-Corporate-Transfer Directive is currently being debated at the EU level.

Members of Boards of Directors or Supervisory Boards, besides having a mandate contract, will possibly be officially allowed to have also an employment contract. The Ministry of Justice has proposed an amendment to the Commercial Code that would explicitly allow for the duality. The dual system has been silently tolerated for 20 years, with a discussion going on how to treat members of statutory bodies, who are simultaneously employees (have an employment and a mandate contract at the same time), in terms of taxation of income, contributions into the systems of health care, social and pension insurance. In May 2011, amendments to respective acts were also proposed by the Ministry of Labor and Social Affairs to make employees and statutory body members equal in terms of contributing to the pension and sickness insurance systems. The question of income taxation remains unsolved (currently, income of statutory body members isn’t tax deductible). The bill is heading towards the second reading in the Chamber of Deputies. The Commitee for Constitution suggested in their changing proposal that the measure could take effect on January 1, 2012.

Civil Code, Commercial Law
In spring, the Ministry of Justice proposed a comprehensive new regulation of the Czech Civil Law (private law). Currently, new Civil Code and new Act on Corporations are in the first reading in the Chamber of Deputies (should become effective as of January 1, 2013, as planned by the Ministry). The aim of the new Civil Code is to unify a rather fragmented civil law (new law will replace current Civil Code, part of the Commercial Code, part of the Labor Code) and make it more user-friendly. Major changes are expected in legal terminology; new legal instruments will be introduced; the freedom of contract is stressed. The adoption of a new Civil Code means new amendments to a wide range of acts, including Labor Code or tax acts. The brand new Act on Corporations should replace the current regulation of companies / corporations under the Czech Commercial Code and better define the process of their establishment and operations. No major changes of regulation are expected, although there are exceptions: corporate governance (including liability / responsibility of statutory bodies), regulation of holdings and capital companies (limited liability companies and joint stock companies). There will be a possibility to establish a limited liability company with a share capital of CZK 1, for example. Opponents of the proposed changes are concerned about the introduction of a new terminology and related uncertainty. The new draft Civil Code and the draft Act on Corporations will be discussed by the Committee for Constitution in August 2011).

Criminal liability of Corporations
In winter 2011, the Ministry of Justice presented the draft Act on Criminal Liability of Corporations (debated in the Chamber of Deputies already in 2004). The Czech Republic is the last EU member state to adopt this kind of regulation. In continental law, criminal liability of legal entities, as a form of collective liability, is a controversial issue. The Act is currently in the first reading in the Chamber of Deputies. The bill includes a list of around 80 violations of law corporations can be sanctioned for, however, the list does not include economic criminal activity such as ‘tunneling’, breaches of law in the area of public procurement, horizontal cartel agreements, cross-border trade with military material and state-controlled technologies. There is no provision on Leniency Program in the draft Act. The impact of the regulation would be therefore very limited, it is maintained by some legal experts. Opponents of the bill view the act as a criminalization of business and express concerns how implementation of the act would affect partners/shareholders who are not directly responsible for criminal activity of the corporation. The bill had its first reading in the Chamber of Deputies in May 2011 and is heading towards the second reading. The Committee for Constitution suggested in its changing proposal (June 2011) extending criminal liability of corporations also to breaches of competition and public procurement laws.

Health Care Reform
The amendment to the Act on Health Insurance was approved by the Chamber of Deputies on June 21, 2011. The stated intent of the amendment is to reduce costs of pharmaceuticals by adjusting reimbursement and pricing policy. The Ministry of Health claims this is necessary because pharmaceutical costs are higher than elsewhere in Europe. Measures approved could create market dominance for a few generic producers. If enacted in its current form, the amendment to the Act on Health Insurance could also affect the Czech Republic’s ability to create a strong medical research cluster. The Senate will discuss the bill at its session on July 20, 2011.

The Act on Supported Renewable Energy Sources (drafted by the Ministry of Industry and Trade) is in the first reading in the Chamber of Deputies. A concern about this new bill is that it could have an impact on all existing contracts for the purchase, manufacture and delivery of renewable energy as it includes provisions for retroactivity. The new bill should replace the existing Act on Support of Energy Production from Renewable Sources. The Committees for Economy, Environment and Agriculture have not discussed the bill yet. The Czech Republic has transposed the Energy Performance of Buildings Directive (EPBD II), which means conversion to zero-energy buildings by 2020. It is maintained by some that the relevance of energy efficiency in the energy policy of the country is relatively underestimated. The energy policy drafters concentrate on energy consumption (energy sources) rather than on energy saving.

The Ministry for Regional Development drafted amendments to the Construction Act and the Act on Expropriation in spring. The aim behind the draft amendment to the Construction Act is to eliminate problems arising from practical application of some provisions, reduce administrative burden related to zoning and construction permits (the principle of one-stop-shop), and regulate more precisely participation of general public in proceedings related to permitting infrastructure constructions, for example. The draft amendment Act on Expropriation proposes specification of compensation for expropriation (e.g. in cases when there is non-existent contruction plots market), regulation of disputes and competence of authorities in solving disputes, etc. The Construction Act and the Act on Expropriation were submitted to the Government

In May, the Ministry of Industry and Trade released the Strategy of International Competitiveness of the Czech Republic (2012-2020, 9 thematic ‘pillars’, over 150 measures within more than 50 projects) and invited public to comment. The business community has welcomed the outlined road map ‘to the top 20 most competitive countries of the world’, as absence of such a strategy lead to a deteriorating business environment, they say. Weaknesses of the strategy include absence of a more detailed vision, incoherence, conflict with other ministries’ proposals (e.g. investment incentives: key area for the Ministry of Industry and Trade vs. Ministry of Finance tax reform proposal to eliminate the incentives; smart immigration policy concept of the Ministry of Industry and Trade vs. national security-based objections of the Ministry of the Interior). The Strategy went through the interministerial round of comments, a public commenting round and will be discussed by the Government in the coming weeks

Members of the American Chamber of Commerce in the Czech Republic