Czech Foreign Investment Screening

Who is a foreign investor and what does “effective level of control” mean

The Act on Screening of Foreign Investments draws a clear distinction: a foreign investor is a natural or legal person who is neither a citizen nor has its registered office in the Czech Republic or another EU Member State.

If such an investor is in a position to control a company, whether in the Czech Republic or through an EU subsidiary, and brings capital or decision-making rights, it constitutes a foreign investment. The Act is not limited to majority stakes; even the acquisition of 10% of voting rights in a company subject to security regulation requires state approval in many cases.

An effective level of control is not limited to ownership. The Act recognises a range of ways in which an investment may manifest itself, for example membership in a company body or the right to directly or indirectly dispose of the company’s assets. In transactions where an investor’s entry into corporate bodies or the setup of control rights is being addressed, it is often necessary to align the investment documentation and internal governance rules, which is supported by our contracts and negotiations service.

This also includes “another level of control, the consequence of which is the ability of a foreign investor to gain access to information, systems or technologies that are important from the perspective of safeguarding the security of the Czech Republic.” This means the investor does not need to have formal control; if a practically influential voting stake or access to sensitive technological data is sufficient, screening is triggered.

Management often makes the mistake of thinking that if the new owner is a minority shareholder or entrusts management to a Czech person, everything will be fine. It will not. Screening is triggered based on actual participation in management or control, regardless of the formal structure. In practice, it is therefore worthwhile to carry out a preliminary legal review (especially of rights to technologies, data and corporate governance), similarly to the transactions described in the article how not to let the buyer drive down the company’s price during due diligence. The attorneys at ARROWS advokátní kancelář can help you clarify how to approach this situation and when notification is required.

Amendment effective from August 2024: Exponential expansion of screened sectors

Until the end of August 2024, Czech rules for screening foreign investments were relatively lenient. Only a handful of transactions per year were subject to mandatory notification. Most historical approvals automatically ended with unconditional clearance – however, the Ministry of Industry and Trade (MPO) has on several occasions in the past completely prohibited entry by foreign investors, underscoring the seriousness of the screening process.

Now everything is changing. As of 24 August 2024, an amendment to the Act entered into force, systematically linking the screening of foreign investments with the new Cybersecurity Act, specifically with the implementation of the NIS2 Directive. If an investment targets digital infrastructure, it is often also necessary to address regulatory impacts in the financial market (e.g., for fintech projects), where advice under CNB licences and investments typically applies. As a result, tens of thousands of additional companies have automatically fallen within the mandatory screening regime.

The newly screened sectors include in particular digital infrastructure and ICT services, such as internet service providers, telecommunications operators, data centres, cloud service providers, or domain name registries. This also includes energy and utilities (gas and electricity distributors, heat suppliers, renewable energy sources).

This also covers transport and traffic management (airport, port and rail network operators, public transport operators), healthcare and pharmaceuticals (hospitals, pharmacies, manufacturers of medicinal products and medical supplies). The chemical industry and facilities subject to major accident prevention are also subject to screening.

This also includes financial services and market infrastructure, such as banks, insurance companies or stock exchanges. Regulatory requirements in these sectors are also linked to licensing matters, which are practically summarised in the follow-up text why financial institutions turn to ARROWS for CNB licences.

Companies in these industries are now automatically considered sensitive targets for screening purposes if they meet the legal criteria set by the new cybersecurity legislation. A foreign investor from a non-European third country therefore cannot access these companies without prior approval from the ministry, and the timeline may stretch for months.

How the screening itself works: Deadlines, procedures and possible outcomes

Once a foreign investor notifies its intention or the Ministry of Industry and Trade (MPO) obtains information, the MPO initiates the screening phase. Here, the MPO has 45 calendar days to assess whether the investment is acceptable from a security perspective. During this period, the ministry reviews:

During this period, the Ministry verifies whether the investor is linked to a non-EU state (for example, a government, a state-owned enterprise, or the armed forces), its track record, whether it has breached conditions in other transactions, and whether it appears on sanctions lists. It also assesses the threat to the security of the Czech Republic, in particular with regard to technologies, data, and infrastructure, as well as the impact on internal order and public peace.

If the Ministry of Industry and Trade (MPO) believes that security could be threatened, the proceedings move to Phase II, which lasts at least a further 45 days (up to 90 days in total from the start of Phase I). In such a case, decision-making is elevated to the level of the Government. Political and security aspects are decisive at this stage, and consultations are held with the intelligence services.

The outcome of the review may be an unconditional clearance, meaning the transaction may proceed, or a conditional clearance (so-called “mitigation measures”). In that case, the investor may enter, but only subject to strict restrictions—for example, it may be prohibited from developing certain technology in the EU, from accessing sensitive data, or from hiring employees from third countries. The third option is an unconditional prohibition, meaning the investment may not be carried out at all.

Management must take into account that conditional approvals tend to be very strict. In the case of one telecommunications group entering another, the European Commission imposed a restriction on the investor that it could not finance the target company. For an investor seeking to modernise the company and fund its growth, this is almost prohibitive. Similar restrictions may also be imposed by the Czech Ministry of Industry and Trade (MPO) under the Czech investment screening legislation.

Tax and legal tools: What is changing for foreign investors

A foreign investor entering a Czech company does not face only security screening. There is a whole range of tax and legal situations that may significantly increase the cost of the transaction or complicate it.

If the seller is a non-resident outside the EU/EEA, the buyer—i.e., the future foreign investor—must generally withhold 10% of the purchase price as security for tax vis-à-vis the tax authority. This tax security applies to income from the sale of an ownership interest in a Czech company.

However, there are exceptions—for example, if the seller provides a certificate of tax residence for the purposes of a double tax treaty that allocates taxation of such income solely to the seller’s country of residence, or if the seller proves that the tax has been secured in another way. In large acquisitions, however, this in practice means tied-up capital and administration.

If a Czech company pays a dividend to a foreign investor, withholding tax of 15% is automatically deducted. In some countries, additional taxes are then applied in the investor’s home jurisdiction—for example, in the USA additional taxes on dividends are commonly withheld. The result is effective taxation that may reach high levels, although it is usually mitigated by applying double tax treaties. The attorneys at ARROWS, a Prague-based law firm, can help you optimise the structure of financial flows.

When acquiring a Czech company, a foreign investor must review what contracts the company has, including contractual penalties and reservations, what tax and legal issues affect it, whether it is part of any insolvency proceedings, and whether its liabilities are in order. The attorneys at ARROWS, a Prague-based law firm, carry out legal due diligence and tax due diligence to uncover risks hidden in the company’s history for the investor.

Practical risks and how to address them

Two typical real-life scenarios

Case 1: A Chinese investor wants to acquire 51% of a technology company in the Czech Republic.
The company operates cloud services and falls under the new Cybersecurity Act. The investor cannot simply buy the shares and take over management, but must first notify the Ministry of Industry and Trade (MPO).

The new regime effective from 24 August 2024 means this is automatically a sensitive investment. The MPO has 90 days to decide. During that time, the acquisition is blocked.

If the MPO approves, it will most likely be subject to conditions. For example, the investor may not develop certain technologies, must appoint an auditor, and may not transfer certain sensitive data outside the Czech Republic. The acquisition becomes more expensive due to legal advice, is extended by months, and the final investment is tied to restrictions.

Case 2: A Singapore fund wants to acquire only a 15% stake in an energy company.
It may seem like a minority investment, so it could be without screening. Wrong.

From 24 August 2024, energy companies are automatically sensitive, and even the acquisition of a 10% stake requires notification. If the fund completes the transaction without notification and the Ministry later discovers it, it faces a fine of up to 10% of net annual turnover, a retroactive ban, and a forced sale of the stake.

The fund thus finds itself in a situation where a public authority may force it to sell its stake on unfavourable terms.

How to prepare properly: Practical steps for management

If, as management or the owner of a company, you know that a foreign investor from a country outside the EU is preparing to invest in you, you should:

Verify whether your company is subject to screening. Find out whether you operate in one of the sensitive sectors (IT, energy, healthcare, transport, finance). From 24 August 2024, this is more precise – if you are a provider of a regulated service under the higher-obligations regime pursuant to the Cybersecurity Act, you are automatically a sensitive target.

Engage a lawyer early, ideally at the preparatory stage when the investor is still in negotiations. The attorneys at ARROWS, a Prague-based law firm, will help you assess the risks and prepare the company and the transaction for screening.

Structure the purchase agreement with a clear screening condition. The content must clearly state that closing is conditional upon the Ministry’s approval. Without this, the investor may withdraw from the agreement if issues arise.

Prepare documents for the Ministry – information about the company, its assets, contracts, employees, and foreign links. The Ministry will want to request details, and if you are prepared, you will speed up the process.

Arrange tax advice. A foreign investor will want to optimise the tax structure. The attorneys at ARROWS, a Prague-based law firm, will help you configure the transaction so that it is tax-efficient for both parties while remaining compliant with Czech and international rules.

Rights and obligations after approval: What will change in the company’s governance

If the Ministry approves the transaction subject to conditions, this may mean substantial restrictions for the investor. It is not just a formality – these are limiting rights embedded in the Ministry’s decision, which must then be reflected in internal agreements (SHA, articles of association) and in the day-to-day management of the company.

Examples of conditions the Ministry typically imposes include a ban on developing certain technologies outside the EU. The investor therefore cannot move development capacity to its parent company outside the EU.

There are also restrictions on access to data, where sensitive data (personal data, technical secrets) must not leave the territory of the Czech Republic or the EU. In such a case, the investor must appoint auditors from the state security agency.

Restrictions on employees from third countries are often imposed, meaning that the investor cannot hire senior managers from the parent company outside the EU if they would have access to sensitive information.

This may also include a consultation obligation, under which the investor must consult further changes—such as new investments, a sale of the shareholding, or a change of business activity—with the Ministry of Industry and Trade (MPO).

In practice, this means that the investor may have formal ownership, but a practically limited right to manage. Routine decisions—such as a new production project, leasing premises, or changing service pricing—may need to be approved by the ministry. This makes management more difficult and slows down decision-making.

Final summary

Foreign investment into a Czech company from countries outside the EU is no longer something management can ignore or treat as an ordinary financial acquisition. The new legal reality—especially after the expansion of screening in August 2024—means that state authorities now significantly influence every such transaction. Management must factor in deadlines, uncertainty, possible restrictions, and the serious risk that the government may directly prohibit the investor’s entry.

Common mistakes that lead to problems include underestimating the need to notify the ministry and the lack of legal advice at the preparatory stage. Another is incorrect structuring of the share purchase agreement without a screening condition. Problems also include not knowing whether the company falls under the new cybersecurity regime. Tax aspects and optimisation for the foreign investor must not be overlooked either.

If, as management, you want to ensure that the transaction goes smoothly and without unnecessary delays, and you want to avoid later surprises or fines, you should contact the attorneys at ARROWS, a Prague-based law firm, already at the preparatory stage, before signing any share purchase agreement.

The ARROWS team focuses on the rules for screening foreign investments, understands how the ministry operates in practice, and can help you assess how sensitive your company is, prepare the notification, negotiate with the authorities, and structure transactions.

Whatever your situation—whether you own a company and are preparing to sell it to a foreign investor, or you represent an investor and are considering how to enter a Czech company—contact consultation@arws.cz and, during a consultation, you will clarify what risks you face and how to prepare for them.

Read also:

• Expansion via Share Deals in the Czech Republic: Legal Checklist for Safe Growth
• Vendor Due Diligence: Protecting Value and Price in Company Sales
• Why Legal Support Is Essential in M&A Transactions: Key Risks and Phases
• CFO Checklist: 7 Legal Traps in Company Structures and Contracts in the Czech Republic
• When External Counsel Fails: Internal Legal Team's Role in Business Risk Management in the Czech Republic