Czech government plans to end incentives if profits are repatriated

The government intends to limit fiscal incentives to companies that repatriate profits, industry minister Karel Havelicek told Lidove Noviny. He argued that the model, established when the Czech Republic was still transitioning to a market economy, was no longer viable. He pointed out that there were about CZK290bn (EUR11.3bn) of dividend outflows annually, something that needed to end. Havlicek added that the Czech Republic had turned into a semi-finished goods factory, not providing any development opportunities. The primary idea is to offer fiscal incentives only to investors who commit to develop production and offer investment in training and research. Effectively, Havlicek would like to see more investment that develops the country further, rather than only companies who take advantage of cheaper labor and more favorable tax terms. He gave the co-operation between GE Aviation and CVUT as a good example, as GE Aviation had invested into developing know-how locally, thus leaving at least some profits at home.

Along that line, Havlicek supports the idea of PM Andrej Babis to make banks set aside a part of their dividends into a national development fund, so that they pay back part of what they make locally. Havlicek doesn’t support the proposal of the CSSD, the junior cabinet partner, which wants to tax bank assets instead (at a rate between 0.05% and 0.3%). However, it remains unclear whether banks will be willing to do this voluntarily, as it would be essentially an additional tax on dividends. Havlicek has been arguing for a smarter approach to the issue, finding a way to work with banks, rather than against them.

Overall, Havlicek is trying to push a more benevolent way of keeping profits from being repatriated from the Czech Republic. It’s still unknown whether the scheme will be very effective. The Czech Republic currently has an issue of acute skilled labor shortages, accompanied by very robust wage growth, something that makes it increasingly less attractive to investors. If the fiscal regime turns into a less amicable one, leading to a greater cost on dividend payments, we figure that fewer investors would be willing to invest for a longer period, as it will be simply more expensive than elsewhere.

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