Category: Issue 11.4

CMS Croatia Partner Marija Musec and CMS Poland Partner Lukasz Szatkowski discuss electricity storage regulatory developments and the unique challenges faced by stakeholders in the CEE energy market.

CEELM: To start with the basics, how would you define electricity storage?

Szatkowski: When we speak about electricity storage, we typically make reference to large-scale facilities integrated into the grid system aimed at stabilizing national or regional grids. They play a critical role in supporting the development of renewable energy resources (RES) and facilitating the transition to sustainable energy markets.

Musec: Essentially, energy storage serves as a key tool for storing electricity generated during times of surplus and releasing it during times of high demand. This ensures access to energy precisely when it’s most needed, particularly during peak periods or in areas where energy availability is limited.

In terms of legal aspects, energy storage is considered a regulated activity, much like energy trade or production. It is regulated and monitored by the state authorities.

CEELM: Are there any instances within the CEE region where the industry isn’t regulated?

Musec: Most jurisdictions I’m familiar with have regulations governing it, although with some exceptions. There are two main types of exceptions from licensing: either for very small-scale operations that don’t require a license or for operations that serve public purposes such as grid stabilization.

Szatkowski: I agree – in Poland and neighboring countries, large-scale projects are regulated similarly, with strict regulations governing the storage of these assets and revenue schemes in place. Smaller projects, on the other hand, follow a more liberalized licensing approach, often resulting in significantly smaller endeavors.

CEELM: When we talk about the regulatory framework, is it generally at the national or EU level?

Szatkowski: When it comes to typical licensing activities, we can discuss batteries as a case study. We engage in a legal market, navigating through project development, which involves a series of transactions and joint development agreements, particularly in more established markets where local teams play a crucial role. This process is regulated by local legislation, determining the necessary permits. Additionally, there’s an operational aspect overseen by regulators and the evolving nature of the CEE markets adds another layer of complexity, especially regarding capacity markets within the EU. This development is heavily influenced by local regulations on a market-by-market basis. Ultimately, the regulatory landscape resembles that of general regulations, particularly in markets where I operate. Battery storage aligns closely with renewable energy generation, with revenue streams contingent upon market strategies.

Musec: In my experience, we often encounter local specificities, especially in zoning and spatial planning, which are crucial initial steps for investors to navigate, considering local peculiarities. Additionally, factors such as grid connectivity and environmental studies are important. However, during the operational phase, there tends to be a more standardized model, although this can vary depending on the maturity of the market.

CEELM: How would you characterize the regulatory development in recent years?

Musec: The regulatory framework has been established in nearly all Balkan countries for several years, but what needs to come next is the actual implementation of projects. It is fairly well-developed but still needs to be put into practice, tested, and validated by projects. Regrettably, in many CEE markets, battery storage is still in the development phase, so operational projects have yet to emerge. Nevertheless, there is significant interest from developers.

Szatkowski: In general, developers tend to move faster than the regulatory framework. They began in Poland, the Czech Republic, Romania, and Ukraine before any regulatory framework was established, even before the onset of the war. Subsequently, legislation caught up, as was the case in our region. Often, there were pathways to clarify certain aspects for successful battery project development. Poland experienced waves of technological focus, particularly among local developers with limited horizons, driven by diverse development strategies and grid capacity constraints. Some renewable assets couldn’t connect to the grid, prompting a shift to storage with grid access. Some projects were co-located, offering flexibility, but due to increasing interest in standalone projects, the recent focus has been primarily on storage projects.

From a legal perspective, the complexity isn’t significantly different, sometimes even easier than certain generation facilities. However, the technical aspects of the projects can be challenging. We encountered one of the initial projects in Poland where an investor with extensive overseas projects assessed opportunities in Poland. They found that substantial technical adjustments were necessary, along with challenges in agreeing on pricing. Consequently, many international investors opted for greenfield projects. Looking back two years, we now witness these developers achieving success, benefiting from their portfolio with grid connections.

CEELM: What do you see as the biggest regulatory challenges currently in the deployment of energy storage solutions in the CEE countries?

Musec: I believe that private enterprise will continue to seek out its own paths forward. We observe the efforts of private entities and anticipate responses from institutions.

Szatkowski: In my view, there’s been a generally positive shift in terms of regulators in recent years – particularly when compared to 15 years ago, when they were often seen as slow to react. Now, regulators appear more dynamic, showing an inclination to listen to the market. While they may not move as swiftly as investors, such rapidity isn’t necessarily expected from them.

CEELM: As lawyers, what specific topics are you currently monitoring closely, and what would be one item on your wish list?

Szatkowski: My wish list for this region of Europe is simple: stable regulations that remain consistent regardless of changes in government. Additionally, our market has proven to be incredibly resourceful – even without strict regulations, it finds ways to adapt. However, the real challenge arises when regulatory adjustments are necessary due to changes in the framework.

Musec: I would highlight two areas. First, transparency in government plans and their adherence is indeed important. It’s essential to improve transparency and adherence to government plans, especially regarding the grid. Providing clearer, more transparent, and reliable information will enable developers to anticipate future developments and make informed decisions accordingly.

Second, cost reduction for grid connection is also crucial. The high cost of grid connection is a major bottleneck that needs to be addressed. By minimizing these costs, we can remove significant barriers to entry and encourage more widespread adoption of renewable energy sources. Maintaining a stable framework in this area is crucial for continued progress.

Szatkowski: I’d add that in the battery storage business, ESG is crucial. However, there’s a lot of equipment sourced from markets lacking proper supply chain supervision, despite the need for it. The issue isn’t just about regulations; it’s also about what banks will accept in the end. Investors are uncertain about how to handle this, as there’s no clear idea of where to source some of the equipment from.

This article was originally published in Issue 11.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

It has been more than half a year since the Czech Republic transposed the EU Whistleblowing Directive by introducing the Czech Whistleblower Protection Act (Act), effective as of August 1, 2023.

The main aim of the Act is to create secure internal reporting channels within which whistleblowers may report defined violations of the law of which they have become aware in connection with their work or other similar activities. For this reason, all employers with 50 or more employees, together with other specified persons, are considered obliged entities and, as such, are required to implement an internal reporting system (IRS).

As the whistleblowing legislation stems from an EU directive, multinational groups of companies tend to have their own global whistleblowing solutions. This may seem attractive, however, as legislation varies considerably from country to country across Europe, local implementation is inevitable, and as the obliged entity must ensure the report can be submitted in person, appointing a local Whistleblowing Officer is usually recommended. The differences include the violations that fall within the scope of reporting, the reporting process itself, the procedure of processing reports, the communication with the whistleblower, the time limits, whether there is anonymous reporting, and other issues. Failure to comply with local regulations may result in the liability of the obliged entity. Furthermore, in order to assess the reasonableness of the report properly, knowledge of local legislation is necessary.

In the Czech Republic, only obliged entities with 249 or fewer employees (including agency employees) are allowed to share an IRS. If an obliged entity has 250 or more employees, then it is required to have its own IRS and its own Whistleblowing Officer, even if it is part of a group. Special rules apply for obliged entities that are subject to AML regulations, such as financial institutions, law firms, etc.

A global solution usually includes internal policies the scope of which is broader than the Czech Act. This can cause complications in practice when a report is actually submitted. The Act contains an exhaustive list of violations which may be reported. The obliged entity is not obliged under the law to ensure the assessment of the reasonableness of the report, which is not included in this exhaustive list. However, if the obliged entity decides to extend this list, the question of whether the obliged entity will then be subject to the obligations under the Act in relation to the report submitted in this extended scope is not yet resolved. For the sake of safety, it is recommended to proceed with all reports that fall within the scope of the Act and the internal policies in compliance with the Act.

Under the Act, only the Whistleblowing Officer officially designated by the obliged entity can have access to the full contents of the report and the identity of the whistleblower(s). Other persons, such as HR team members, may have access only to anonymized or generalized parts of the report and only under the condition that such sharing is necessary for the investigation and assessment of the report.

Obliged entities are required to publish specific information about the IRS in a way that allows remote access. The term “remote access” can be interpreted simplistically to mean the internet. The most common and best solution is to provide this information on the obliged entity’s website. It is essential that this information be easily accessible to potential whistleblowers. The existence of an external reporting system operated by the Ministry of Justice of the Czech Republic must also be mentioned.

Control over compliance with the Act is carried out by the Ministry of Justice and the Labor Inspectorate. Inspections are already carried out by the Labor Inspectorate, focusing mainly on whether the obliged entity has: (i) a designated Whistleblowing Officer, (ii) adopted internal policies, (iii) ensured that whistleblowers are able to submit a report, (iv) published information about their IRS in a manner allowing remote access, (v) ensured that only the Whistleblowing Officer has access to the full content of the reports, (vi) already received a report – if so, related documentation on the assessment is required.

It is therefore necessary for obliged entities in the Czech Republic to ensure that they have duly implemented the Act.

By Barbora Urbancova, Partner, and Jakub Krivka, Associate, Peterka & Partners

This article was originally published in Issue 11.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Similarly to other countries, the Czech Republic is undergoing a digital transformation. Without a doubt, this transformation allows businesses to facilitate their operations and makes all of our lives much easier. On the other hand, this transformation leads to new cybersecurity threats that may hinder businesses and cause significant losses.

Threats of cyberattacks have become more imminent recently due to several factors, such as the COVID-19 pandemic that made companies adapt to remote working and, consequently, created more opportunities for cybercriminals. The war in Ukraine has also increased the risk of cyberattacks.

Such attacks are usually aimed at confidential information and data which present an essential value for businesses and organizations. Attackers also often try to disrupt the operations of certain organizations – in particular, of providers of important services or utilities.

The fact that cybersecurity risks have increased is evidenced by data published by the authorities as well as by certain businesses. The 2022 Report on the State of Cybersecurity in the Czech Republic issued by the Czech National Cyber and Information Security Authority (Authority) on July 17, 2023 (the Authority’s most recent report on this topic), states that while the Authority recorded a slight decrease in cyber incidents in 2022, the Czech Police recorded an almost twofold increase in cybercriminal activities. The report also mentions that the activities of state-sponsored cyber actors and cybercriminal groups continue to be the greatest threat to the Czech Republic’s cybersecurity. The increase in cybersecurity risks was confirmed by businesses. For instance, according to a press release published on January 30, 2024, by the Czech Banking Association, in 2023, Czech banks recorded 69,685 attacked clients with a total damage of CZK 1.35 billion.

These steadily increasing cybersecurity risks have been reflected in various pieces of legislation. The most significant piece of legislation concerning cybersecurity is EU Directive 2022/2555 on Measures for a High Common Level of Cybersecurity Across the EU, called NIS 2, which modifies the current cybersecurity legislation applicable in the EU. NIS 2 entered into force on January 16, 2023, and EU Member States must implement it into their national legislations by October 17, 2024. In the Czech Republic, the Authority already published a bill that is going to implement the NIS 2 Directive and which shall soon be introduced to parliament.

The obligations to be imposed on the organizations by the new legislation will include the obligation to take appropriate and proportionate technical, operational, and organizational measures to manage the risks posed to their systems. These measures will consist of adopting policies assessing the effectiveness of cybersecurity risk-management measures or ensuring supply chain security and human resources security. Members of management bodies will be required to attend regular training to gain sufficient knowledge and skills to identify risks and their impact on the services provided by the organizations.

Non-compliance with the obligations may lead to significant fines as the EU legislation requires EU member states to ensure that the fines will reach a maximum of at least EUR 10 million or 2% of total worldwide turnover.

It is presumed that the new legislation will impose cybersecurity requirements on a much broader number of businesses than the current legislation. According to some estimates, in the Czech Republic, the number of organizations affected by the new legislation will increase from 600 to at least 6,000. Some say that it may even concern 15,000 subjects. The costs for implementing the obligations imposed by the new legislation are not negligible either. Czech organizations that are already dealing with cybersecurity have indicated that they annually spend tens of millions of Czech koruna (e.g., hospitals or Czech Post), hundreds of millions of Czech koruna (banks), or even billions of Czech koruna (the Czech conglomerate generating, distributing, and trading electricity and heat).

Although cyberattacks may present significant risks and the breach of obligations imposed by cybersecurity legislation may bring important sanctions, many businesses have not yet begun preparing for the new rules. According to some surveys, up to 80% of employees of IT departments in Czech companies do not know whether their organizations will be affected by the new legislation. This number seems high. Since the implementation of new requirements may take time, Czech companies should begin to prepare at their earliest convenience. Otherwise, cybersecurity may become a real challenge.

By Petr Hradil, Head of Cybersecurity, Peterka & Partners

This article was originally published in Issue 11.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Czech economy entered a deep slump in 2023 caused by the rather rare and unfortunate combination of negative economic and geopolitical factors, including one of the highest inflation rates in the EU, rising interest rates, high energy prices, a large public finance deficit, and the adverse impacts of the war in Ukraine. Altogether, these economic difficulties resulted not just in an economic recession but also adversely affected the Czech M&A market.

Even during such challenging times, both Czech and foreign investors kept fighting for attractive Czech targets in various sectors and successfully closed several large M&A deals, such as the strategic acquisitions of gas lines operator NET4GAS and gas storage facilities operator RWE Gas Storage by state-owned Czech electric energy transmission system operator CEPS, the sale of well-known manufacturer of optical equipment Meopta Optika to Carlyle, and the Christmas-time acquisition of Czech parcels logistics company Packeta by a consortium formed by CVC and Czech investment group EMMA Capital. However, the number of smaller M&A deals dwindled significantly, and the overall number of transactions closed in 2023 dropped by approximately 20%.

Expectations for 2024 are much brighter. Inflation is slowing and interest rates are expected to decline, which indicates the Czech economy might rebound soon. The anticipated economic resurrection may also have a positive impact on the local M&A market. Besides economic factors, the 2024 Czech M&A environment will also be affected by noteworthy legislative changes.

New Tax Regime Applying to Sales of Shares by Individuals

It’s no secret that tax changes can be a strong (de)motivating factor in any economic activity, and the Czech M&A market is no exception.

One of the main goals of the current Czech Government has been to tame rampant public debt. Therefore, it introduced a new tax consolidation plan that substantially limits various existing tax exemptions, including an exemption for individuals on the taxation of proceeds from share sales and sales of other types of stakes in business entities, among other measures. As of 2025, sellers meeting statutory conditions (such as holding for periods of three years for shares and five years for other types of stakes) will no longer benefit from an unlimited exemption. Instead, gross proceeds from sales of shares and stakes exceeding an annual cap of CZK 40 million will be subject to a tax.

Since this change will only apply to individuals and the tax cap is relatively low, sellers will logically be motivated to avoid the additional tax burden and might attempt to close their contemplated share sales and receive the cash proceeds from such deals in 2024 rather than waiting until 2025. This might result in an increase in the number of small and medium-sized Czech M&A transactions. Moreover, investors will probably prefer holding their shares indirectly through legal holding entities in the future (which will still benefit from an unlimited exemption), and we might also see a different approach to the structuring of the purchase price mechanism in share purchase agreements. In particular, there will probably be more deals where the purchase price will be divided into smaller annual installments or will include some form of annual earn-out.

New Regulation for Cross-Border Transformations

The second legislative change worth noting is an amendment to the Czech Transformations Act – a piece of legislation that provides the legal framework for mergers, demergers, and other forms of corporate transformations. The amendment is currently halfway through the Czech legislative process, and its main purpose is to implement new European rules introduced by the EU Mobility Directive for cross-border conversions, mergers, and divisions.

The prepared amendment will be the largest change to the Czech Transformations Act since 2011, and it will introduce several new concepts not recognized by the current Transformations Act, such as the possibility of transferring the seat of a Czech entity to a non-EU country or the use of a new type of demerger: division by separation. In addition, the amendment should provide for a number of useful technical changes, including the explicit regulation of parallel transformations or newly simplified publication and information duties that may open new opportunities for more complex local and cross-border transactions, offer more flexibility, and lower transaction costs.

By Jan Varecha, Associate Partner, PRK Partners

This article was originally published in Issue 11.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

While local courts have been taking the stance that mortgage over the land does not extend to objects subsequently built on the mortgaged land, in one recent case, the Supreme Court of Republika Srpska (RS Supreme Court) took an entirely opposite one. Applicable laws support the stance of the RS Supreme Court. Clear treatment of this issue by the courts is important for both mortgage creditors and buyers of subsequently-built objects.

Bosnia and Herzegovina (BH) comprises two entities – Republika Srpska (RS) and Federation of BH (FBH) – and the Brcko District of Bosnia and Herzegovina (BD) special district. The property rights on immovables are regulated on the level of RS, FBH, and BD. The laws of RS, FBH, and BD incorporated the Roman law principle pursuant to which the legal status of objects and the land on which such objects are built should be the same. The consistent application of such a principle means that in the case land is mortgaged, the object built on such land will also be mortgaged. There are only a few exemptions to such a principle (e.g., in the case of granted concession and in the case of a construction right established over the respective land).

Court Practice Denying Mortgage Extension Rule

In 2019, the district court in Banjaluka (in RS) rendered a decision pursuant to which the mortgage established over the land does not, by virtue of law, extend to the objects built on such land after the establishment of the mortgage. The court argued that the mortgage agreement must explicitly specify that the mortgage will extend to the subsequently-built objects on that land, which was not the case. Consequently, the mortgage creditor could not settle its claim by selling subsequently-built objects in the enforcement proceeding.

In another case, the municipal court in Bugojno (in FBH) rejected to inscribe ownership over immovable property in land books in favor of the person who purchased such property in the enforcement proceeding. The immovable property was sold to the elected purchaser in the enforcement proceeding initiated for the settlement of the claim secured by a mortgage established on such property. After the establishment of the mortgage, two new floors were built on the mortgaged property. Pursuant to the court, these changes altered the property after the establishment of the mortgage and such alterations prevent the inscription of the purchaser as the new owner in the land books. The respective court decision was confirmed by the second-instance court.   

The Approval of Mortgage Extension by the RS Supreme Court

In October 2023, the RS Supreme Court rendered a decision allowing enforcement over objects built after the establishment of a mortgage over the land on which the objects were built. The mortgage was established in 2013 over the land on which the building was under construction. In 2014, the plaintiff concluded an agreement to purchase the object in the respective building. At the time of the conclusion of the respective agreement, the object was not inscribed in land books and the plaintiff knew that the mortgage was inscribed over the land.   

The court found that the rights from the land extend to the objects permanently attached to such land. Thus, the court concluded that the plaintiff purchased a mortgaged object.   

Conclusion

The abovestated stance of the RS Supreme Court is in accordance with RS laws and should serve as a guide to the lower-instance courts in RS. We are not aware if the same stance has been adopted in the practice of FBH and BD courts. Since the laws in RS, FBH, and BD treat this matter equally, this issue should be treated the same, i.e., in line with the RS Supreme Court decision. We are not aware if the BH Constitutional Court (as a final court authority in BH) shares the views of the RS Supreme Court with respect to this matter. Therefore, it might be appropriate to explicitly state in mortgage agreements that the mortgage will extend to the objects built upon the establishment of the mortgage.   

Having the above in mind, purchasers of objects under construction should carefully examine the legal status of the land prior to the conclusion of a purchase agreement. Unlike in certain EU jurisdictions, BH does not have adequate statutory rules on the protection of purchasers of objects under construction. Therefore, these purchasers could only acquire contractual guarantees for the protection of their rights if the seller is willing to provide some. 

By Djordje Dimitrijevic, Head of Real Estate, Dimitrijevic & Partners

This article was originally published in Issue 11.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Respecting intellectual property rights (IPR) in Bosnia and Herzegovina is a journey less traveled, yet one of paramount importance in today’s digital age. In a world where information knows no bounds and creative works are easily shared with a click, the value of safeguarding original ideas and innovations often takes a back seat. Let’s dive into this exploration of the complexities surrounding intellectual property in a landscape where imitation frequently overshadows ingenuity. The lack of awareness and enforcement mechanisms regarding IPR poses significant challenges for creators and innovators striving to protect their work. Without proper safeguards in place, the risk of exploitation and unauthorized use looms large, hindering the growth of a dynamic and inventive environment within the nation. Additionally, as technology continues to advance at a rapid pace, navigating the intricate web of intellectual property laws becomes increasingly daunting for individuals and businesses alike.

When delving into the realm of IPR in Bosnia and Herzegovina, a glaring concern emerges in the form of inadequate awareness and regard for these fundamental rights and accompanying legislation. Despite the existence of robust legal structures governing IPR, the actual execution of these laws presents a formidable hurdle. While the administrative capabilities within institutions overseeing IPR in Bosnia and Herzegovina are commendable, the critical need remains for stringent enforcement of legal provisions in real-world applications.

Despite significant progress made to harmonize Bosnia and Herzegovina’s laws with European regulations on IPR, the ultimate challenge remains in effectively executing these regulations in practice. Sadly, the glaring disconnect between theory and practice persists as a pressing issue. Central to this challenge is the stark reality that intellectual property concerns are often relegated to a position of insignificance, overshadowed by more immediate priorities. As the country grapples with these complexities, a crucial shift in mindset and allocation of resources is imperative to foster a culture where IPR are not only acknowledged but actively safeguarded and championed as drivers of innovation and economic growth.

A prevalent problem within the realm of IPR in Bosnia and Herzegovina is plagiarism. This unethical practice involves the unauthorized use of another person’s intellectual property without proper acknowledgment of the original creator. The evolution of new technologies presents the legal system with fresh challenges in protecting IPR, giving rise to new issues. In a community where there is a lack of clear awareness regarding the rights of intellectual creators, as well as a fear of repercussions, it becomes difficult to instigate a shift that would lead to the respect for creators’ rights and a fear of consequences. As digital technology and internet usage continue to proliferate, the online showcasing of intellectual property has become increasingly prevalent. However, this development brings its own set of challenges. While IPR protections extend to digital platforms, enforcing these rights poses difficulties. The ease of replicating digital content, combined with the sheer volume of online material, makes monitoring and regulating intellectual property infringements on the internet a complex task.

The lack of adequate protection measures and stricter sanctions for IPR violations pose a significant barrier to any meaningful progress in Bosnia and Herzegovina. The prevailing issue stems from a general lack of awareness among the public regarding the seriousness of intellectual property infringement, exacerbated by ineffective sanctions and a shortage of preventive measures from the owners of intellectual creations. Without robust protection mechanisms in place, coupled with more stringent repercussions for violators, there is little incentive for individuals and businesses to respect IPR. The absence of a strong deterrent fails to deter potential infringers, leading to a culture where such violations are normalized and often go unpunished. Moreover, the lack of proactive measures from intellectual property owners further compounds the problem. Without actively safeguarding their creations through proper registration, monitoring, and enforcement, creators leave their intellectual property vulnerable to exploitation and unauthorized use.

From a critical perspective, it is evident that without an overhaul of the existing system to incorporate stronger protection measures and stricter penalties for violators, the situation is unlikely to improve. The prevailing apathy toward intellectual property rights violations will persist unless there is a fundamental shift in mindset, supported by robust legal frameworks and enforcement mechanisms. Failure to do so not only undermines the rights of creators and innovators but also hampers economic growth, innovation, and competitiveness in the long run. Often aware of the steps we need to take to achieve our desired goal or produce the intended effect, we conclude that sometimes it is easier said than done.

By Milica Cizmovic, Partner, Cizmovic Law Firm

This article was originally published in Issue 11.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.