Category: Czech Republic

The Czech Parliament recently passed a bill amending the country’s Pharmaceutical Act to restrict the exportation of pharmaceuticals from the Czech market that has, in the past, resulted in a shortage of some medicinal products within the country. The Czech pharmaceutical market is thus facing a substantial change once the amendment becomes effective on December 1, 2017.

In recent years, Czech patients have faced shortages of various pharmaceutical products as a result of parallel export in situations where, for various reasons – often involving price regulation or absent patent protection – the prices abroad were substantially higher than on the Czech market. In order to meet the statutory obligation to supply sufficient amounts of pharmaceutical products to Czech patients, many pharmaceutical companies implemented direct distribution channels that aimed to ensure that pharmacies were able to obtain enough products for patients.

Without prior discussion with stakeholders, the Czech Parliament took the initiative to solve the situation in its own way – which, many believe, will have the opposite effect to the one desired.

Under the amendment, wholesalers will be obliged to supply pharmaceuticals upon receipt of a pharmacy’s request within two days. In order to be able to provide the necessary medicines, wholesalers will be entitled, in turn, to request them from marketing authorization holders (“MA Holders”), who are obliged to ensure that the medicinal product is available as needed by patients in the Czech Republic by supplying it in adequate quantities and time intervals. These MA Holders will be obliged to supply amounts corresponding to the market share of the wholesaler who submitted the request. The relevant market for the purposes of the market share calculation shall be the entire wholesale market of human pharmaceuticals in the country.

A fine of up to CZK 20,000,000 can be imposed on MA Holders who breach this obligation.

The consequences of the new obligation, while still unclear, are potentially far-reaching. Currently, there is no implementing regulation that provides detailed guidelines on how to determine the adequate quantities of medicinal products to cover the needs of patients in the Czech Republic or on how to determine the market share of particular medicinal product wholesalers. This may be particularly problematic in situations where direct distribution channels that supply the pharmacies are already in place. Another question that arises in this context is who, exactly, is obliged to calculate the market share and what information sources the MA Holders should use in order to verify the wholesaler’s request. 

More importantly, it seems that MA Holders will be forced into a de facto cartel agreement, since the amendment will impose obligations that, de facto, lead to the same outcome as a market-sharing agreement between wholesalers (as the fixing of wholesalers’ market shares is equivalent to a horizontal hardcore cartel). Thus, the conclusion of such agreements might require settling the conflicting interests of wholesalers in cooperation with them. It will be interesting to observe how this will be perceived by the competition authorities.

Moreover, despite performing their statutory obligations, Czech or foreign MA Holders, if dominant on the relevant market, might be found to be abusing their dominant position if they refuse to supply other (new or foreign) wholesalers – which obviously have a zero market share.

It is clear that the amendment, instead of improving supply to pharmacies, may have the opposite effect, as many MA Holders, in view of the risks involved, may decide to abandon the Czech market altogether. Moreover, the amendment might adversely affect the already-functioning direct distribution channels, and patients might face even more serious shortages than before.

By Sylvie Sobolova, Partner, Kocian Solc Balastík

This Article was originally published in Issue 4.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Legislators on both the European and Czech level have been active in adopting new regulations that influence several areas of the modern economy. Financial services, with consumer finance on one side and markets in financial instruments on the other, have been at the center of these efforts. Financial regulation is not, however, the only measure heavily affecting banks, investment firms, and FinTech companies by putting new compliance requirements in place. Another huge legal instrument – the General Data Protection Regulation adopted on the EU level in 2016 – imposes new requirements on all companies dealing with personal data.

Consumer Finance and the New Consumer Credit Act

On December 1, 2016, the new Consumer Credit Act took effect in the Czech Republic. This new law was designed to clear the consumer loans market – which had been flooded by dubious businesses providing subprime loans for sky-high interest rates – by imposing vigorous regulatory requirements on non-bank providers of consumer loans, which until then had been able to conduct business on the basis of a simple trade license. 

Under the new Act, such non-bank providers need to obtain a special permit from the Czech National Bank (CNB), newly empowered with regulatory authority over the consumer loans market. These licenses can only be issued to companies with a registered share capital of at least CZK 20 million (approx. EUR 750,000). The procedure resembles the bank licensing process in its complexity. Each provider must submit several documents and internal policies to the CNB reflecting compliance with the Act’s requirements, including the professional capacity of employees and compliance with strict procedures regarding the assessment of creditworthiness, AML rules, policies for communication with customers and for enforcing claims, IT security, and so on. 

The “cleansing effect” of the new legislation is apparent from the fact that as of March 1, 2017, only 107 applications for the CNB permit had been filed, in part because many firms lacked the resources to comply with the capital requirements. Those providers filing applications before that date are permitted to continue their business until the CNB decides on their request. The CNB has up to 15 months to make its final decision on any application, and as of May 8, 2017, no permits had been granted.

A Major Overhaul in Personal Data Protection

The General Data Protection Regulation, intended to harmonize and modernize European data protection rules, will take effect and replace the existing laws of the EU member states on May 25, 2018. In the wake of the Regulation, various businesses began the process of reviewing their data processing activities and internal procedures to prepare for the new rules. 

Meanwhile, the European Data Protection Working Party, an independent EU advisory body on data protection and privacy, started issuing guidelines on the unclear elements of the Regulation. In one of the April guidelines, the Working Party has addressed a frequent question of many companies, especially Internet firms and FinTechs: Will we need to appoint a Data Protection Officer? 

Under the Regulation, a DPO (a designated person responsible for data protection compliance) is mandatory where the company’s core activities require regular and systematic monitoring of data subjects on a large scale or large scale processing of sensitive data. 

The Working Party’s opinion clarifies that “core activities” are those operations that are an inextricable part of the company’s activity and cites a hospital processing patients’ health records and a security company surveilling public space as examples. By contrast, a company’s processing of personal data of its own employees is merely an ancillary activity. “Regular and systematic monitoring” includes all forms of online tracking and profiling, including, among other things, processing for the purposes of data-driven marketing activities, credit scoring, or location tracking. Consequently, a DPO will be necessary in many technology startups and companies developing mobile apps or providing consumer loans online.

By Jan Kotous, Counsel, Head of Corporate/M&A, and Jan Gerych, Associate, Wolf Theiss

This Article was originally published in Issue 4.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In the Czech Republic, the most important buzzword in the field of legal services and IT deliveries is “GDPR-Compliance” and it has serious ramifications for organizations, businesses, and public corporations.

Not a single week passes without at least one professional conference focused on GDPR, either in general, or on its selected issues – in particular, the scope and nature of the requirements imposed on DPOs, data portability (both completely new concepts in the Czech Republic), and the handling of personal data of employees and other workers. These subjects seem to be rolling in from all directions. Unfortunately, the debates and presentations are often used to create business leads (driven mostly by fear of draconian fines, which, if actually imposed, may lead to the effective liquidation of sanctioned enterprises) rather than a conceptual discourse on how Czech organizations collecting, controlling, and processing personal data can improve the quality of their management and ensure greater security for themselves and their customers.

A fundamental issue that has emerged recently is the low probability that the Czech legislator (the Parliament, which will pass the ministerial draft prepared by the Ministry of Interior) will adopt the relevant amendment to the Personal Data Protection Act before late autumn or winter of this year. A culminating government crisis has paralyzed the work of the legislature, and it is unclear whether the necessary amended legislation will be prepared in time for Czech personal data controllers and processors to adequately prepare for its requirements. There is also a strong concern that the Czech lawmakers will continue their tradition of extensive gold-plating and will make the national norms even stricter than the GDPR and the Article 29 Working Party’s guidelines. 

It should be noted that although the current Czech Data Protection Act is well-adapted to EU’s Data Protection Directive (1995), its low practical enforceability together with an understaffed control body (the Czech Data Protection Office or UOOU) has resulted in relaxed – and often negligent – oversight of personal data treatment. Therefore, although the GDPR buzzes around in the Czech media almost every week, many organizations have not yet begun making the necessary preparations and are only now about to explore what the new legislation means for them. Regrettably, some of them may find out that diligent preparation cannot be achieved even in the remaining 12 months before the GDPR comes into force.

A second problem is the fundamental misunderstanding of the GDPR’s requirements on the addressees’ side. It is not only in the Czech Republic that the professional public falsely believes that the GDPR is solely the problem of the ICT or legal/compliance department. Only a few actually understand that GDPR is a multidisciplinary problem that Czech organizations will have to address by adopting comprehensive compliance programs, including legal, procedural, and organizational as well as technical approaches. Therefore, changing this biased perception must often be the first step in the compliance project.

A third problem is the inability of organizations to identify what personal data they process, in what amount, and how and for what legal purpose. The Czech economy is characterized by a high proportion of industrial production and services in which personal and other data is merely collected, processed, and stored in one of many enterprise systems without it always being clear if the organization will ever use it. When attempting to perform a basic impact/GAP analysis of the effect of the GDPR on the organization, it often turns out that even the responsible managers do not really know how much data they have, when and where it is processed, and how it is utilized after being processed. Many organizations are, therefore, currently performing more or less complex analyzes of personal data flows within them, the outputs of which often depend mainly on whether the organization was actually able to identify all repositories where the personal data may be located.

Law professionals providing GDPR consultancy and compliance services in the Czech Republic thus often become involuntary business analysts, who need to help the client analyze information systems, processes, and data storage before assessing the legal implications of GDPR in the organization.

By Jindrich Kalisek, Head of IP/IT/Data Protection, PRK Partners

This Article was originally published in Issue 4.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

As the Directive of the European Parliament and of the Council on Payment Services in the Internal Market (PSDII) introduces a number of changes to existing Czech legislation, a completely new Payment Services Act regulating the provision of payment services will be adopted in the Czech Republic. PSDII should be implemented by January 13, 2018.

The following new regulations are likely to be most significant to Czech businesses.

Indirect Payment Orders

Among the newly regulated payment services are so-called indirect payment orders. Put simply, these mediate the transmission of the payment order to the payment service provider (e.g., the bank that manages the account). The essence of the service is that the payer does not make the payment directly to the provider but to another provider – a so-called third party.

This service is typically used to pay for goods or services over the Internet where a third party, through an online link, allows the data necessary to execute a payment order between the merchant’s website and the banking system of the entity managing the payer’s payment account to be transmitted.

The activities of Internet payment service providers will also be regulated.

Payments for Digital Content

Under current legislation, an exemption applies for payments made by an electronic communications service provider via an electronic telecommunication device (such as a mobile phone) to pay for goods or services supplied and subsequently used by that device, regardless of the transaction value.

As a consequence of PSDII’s implementation, companies wishing to maintain the exemption from the obligation to obtain the authorization of a payment institution will be required to demonstrate that: (i) the payment relates only to digital content or voice services (i.e., not to goods or services); or (ii) the payment is for the payment of tickets or travel fares or for charitable purposes. In addition, a single payment may not exceed EUR 50 – or a total of EUR 300 per calendar month.

Limited Range of Suppliers or Services

Existing Czech legislation already excepts payments made in so-called limited networks – i.e., payments made at the premises of the issuer or for a narrowly-defined range of suppliers or goods and services. In effect, this is an exception for various types of membership cards – that is, cards issued by department stores, payment cards for petrol stations, and other types of payment cards.

As a consequence of the implementation of PSDII, this exemption will be slightly modified in order to assess more rigorously the interconnectedness between the range of suppliers and the range of goods or services. This can be demonstrated in a petrol station network, where the common purpose of the assortment of goods or services will be more rigorously assessed – i.e., goods sold at the petrol station that are unrelated to the operation of vehicles will not fall within the limited network exemption.

Lastly, providers wishing to take advantage of this exemption will be subject to a reporting obligation to the Czech National Bank once they reach EUR 1 million in payments in any 12-month period. The Czech National Bank will then be able to assess the availability of the exemption and to intervene if it is used incorrectly.

Operation of ATMs and Sales Representatives

PSDII makes the exemption from the obligation to secure a payment institution license unavailable for independent ATM operators, which often charge premium fees for withdrawals from ATMs. The exemption will only be available to ATM operators who: (i) act on behalf of the issuer of the means of payment (i.e., banks); and (ii) do not provide any other payment services.

Due to the implementation of PSDII those sales representatives that act on both sides of a payment transaction (for example, some e-commerce platforms) will no longer be exempt from the obligation to secure a payment institution license.

By Vladimir Cizek, Partner, and Natalie Rosova, Attorney at Law, Schoenherr Prague

This Article was originally published in Issue 4.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

This past autumn brought extensive changes to the Czech Republic’s real estate acquisition tax, which, according to lawmakers, should align the country’s regulation to the European standard. Is it really the case? With the assistance of members of the Real Estate team within Taylor Wessing CEE, we compare the new regulation to those in neighboring countries. 

Before the amendment, the seller of real estate was generally obliged to pay the transfer tax, although the parties could agree that the buyer would take over that role. In practice, the ability to choose the actual taxpayer created a number of problems. The Amendment removes the option to choose the taxpayer, and now in all cases the taxpayer will be the buyer.

With regard to other Central European countries, it cannot be said unequivocally whether the change made by the Czech Republic is in line with a regional trend. Regulations in neighboring countries vary, and we find representations of virtually all possible solutions. In Poland, the taxpayer is the seller. In Hungary, it is the buyer, and it is also possible to assume the tax obligation under civil law, although the exchange requires the approval of the tax authority and is not binding. In Austria, both parties are jointly and severally liable, and their arrangements for paying the tax (as is in practice the rule) is not binding for the tax administrator. Slovakia went so far as to abolish the tax altogether in 2004. 

The amendment also removes the statutory liability of the buyer in the Czech Republic for payment of the tax by the seller. For the buyer, his position as guarantor was, of course, unfortunate, and therefore in practice as a rule he generally tried to “secure” the payment of the tax by the seller, mostly by retaining a part of the purchase price corresponding to the amount of the tax until proof of payment of the tax was made.

In other Central European jurisdictions, no such statutory liability exists. In Austria, however, as noted earlier, by law both parties are taxpayers, thus the situation is similar to the earlier Czech statutory liability: if the party obliged to pay the tax under the contract does not do so, the tax administrator usually turns to the other party to do so.

The 4% tax rate – above the regional average – was left untouched by the amendment. The only neighboring country with a higher tax is Hungary, where, in addition to the basic rate of 4%, an additional rate of 2% is applied if the tax base exceeds a certain threshold. Indeed, in most nearby countries, the tax is lower.

From time to time, the issue of taxation of so-called share deals (in companies owning real estate) comes up for discussion. Through share deals, it is possible in the Czech Republic to legally avoid the transfer tax. The amendment has gone so far as to eliminate the exemption of real estate’s contribution to the capital of companies, although subsequent dispositions in the form of a share deal remained exempt from the tax.

In neighboring states it is common to tax share deals. For example, in Hungary over the past ten years there has been a trend towards reducing the tax burden in relation to immovables, but share deals involving a minimum 75% share remain subject to the transfer tax. A similar rule applies in Austria (only it must be a 100% share). So if the Czech Ministry of Finance wanted to extend the tax on share deals in the future, practice in the neighboring states could serve as argument.

This recent amendment to the Czech real estate acquisition tax, in our opinion, has increased legal certainty. Whether it follows regional trends cannot however be unequivocally confirmed. Especially with regard to the rate of taxation, the country is definitely “behind.” The question is whether the best way forward would be to help shift the regional trend towards the simplest possible solution and follow Slovakia’s lead: To simply cancel the transfer tax.

By Marketa Cvrckova, Partner, Taylor Wessing

This Article was originally published in Issue 4.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.