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					29163 '93 10 :4 7        a                                      H"A.%&JJAR'1'• Pratia                                         a uu .

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                                                 March 26, 1993                                                        MAUN. VA

   Mr . Anton Van Vaay
   Senior Manager
   New Business Development
   B .A .T . Industries p .l .o .
   Vindsor Hous e
   50 Victoria Street
   London SV1H ONL

   RE : Trades Licensing Act . Excise Law and Tobacco Monopo

   Dear Mr . Van Vaay .

         During your visit in Prague in February, you requested that
   we prepare a summary of the Trade Licensing Act as well as an
   English translation of the Excise Act and the relevent provisions
   on the Tobacco Monopoly Law .

          Attached we are sending you :

        (i) Memorandum summarizing the relevant provisions of the
   Trades Licensing Act ;

       (ii) English translation of the full wording of the Act on
   Excise Duty ; an d

      (iii) English translation of the relevant provisions of the
   Tobacco . Salt and Spirit Monopoly Act of 1950 .

               w 3M11C ON OFFICC ISI TTILT F.NTI !TUT WW WASMIMG74M oC 11otl1-I)M TLL rJM 43T-7iw MX- [![1117 :-00
29-03 '93 l0 :47 IT               IIu '.&llARI'• Praha (IaU 3

     HOGAN & Hit 5oN

      In close cooperation with Mr . Tom Howe of Schroders, we
 continue monitoring and will keep you informed on the current
 developments in the area of the tobacco legislation in the Czech
 Republic .

                                           Sincerely yours,

                                           Raymond J . Bat1a, Jr .

  cc : Mr . Tom Howe . London
28 43 93 1U :48 '8'                 H11GA\&1I . Jfl Prulsu Quu 4

                          M H$ O R A N D U X
                           March 26, 199 3

  TO : Mr . Anton Van Vaa y
        Senior Manager, New Business Development
        B .A . T . Industrie s

  FROM : Hogan & Hartson, Pragu e

  RE : Summary of Relevant Provisions of the Czech Trades Licensing
       Act (Act, No . 455/1991 Sb ., dated October 2, 1991, effective
       as of January 1 . 1992 )

  1 . Introductio n

       The Trades Licensing Act (the "Act") regulates the
  conditions under which an entrepreneur (whether a natural person
  or a legal entity) may engage in a business activity and is
  essentially of an administrative and technical nature . By
  caparison, the Commercial Code deals with the formation of
  a business enterprise . as well as regulatory corporate governance
  issues, and, in addition, regulates the relationship between
  entrepreneurs . The purpose of the Act is to protect certain
  public interests / by defining conditions and requirements which
  dust be satisfied by entrepreneurs before they start doing, as
  well as while doing . business activities in the Czech Republic .

        The Act has general application ; both natural persons and
  legal entities conducting "business activities' in the Czech
  Republic must comply with the conditions and requirements set
  forth in the Act . The term "business activities' refers to all
  business activities (sometimes referred to in the Act as
  'trades') unless such activities are specifically exempt by the
  Act . The business activities exempt by Section 3 of the Act are
  either (i) activities reserved by law to be conducted by the
  state or a legal entity specified in a special regulation (e .g .,
  tobacco, spirits and salt production, postal services) . or (ii)
  subject to specific conditions and requirements under special
  lays and regulations legal services, banking and insurance
  services, energy generation and distribution) .

  ------------------------- ---------------------------------------
  11 The term "protection of public interest" means, for example,
  the protection of consumers' health, lives and property, the
  safety of the business performance, the national defence and
  safety and the public order in general .

29 .03 '93 10 :9                         11 tGANUART-Pr4hu               ZUG .,

       Depending on the degree of public interest to be protected
  in particular cases, the Act divides business activities into two
  classes : notifiable trades and licensed trades . Vithin the first
  class, the Act distinguishes between three subclasses of business
  activities . In addition, the Act distinguishes between (i)
  general requirements which must be met by all entrepreneurs both
  before and when performing any business activity, and (ii)
  specific requirements which must, in addition to the general
  requirements, be met by entrepreneurs both before and when
  performing certain business activities .

        The classification of business activities is as follows :


              1 . Subclass One : Craft s
              2 . Subclass Two : Regulated Trades
              3 . Subclass Three : Unregulated Trade s


  Ii . General Reauirement s

       The Act applies certain general requirements which must be
  met by the executive (or his/her proxy) of the business
  irrespective of the nature of the business activity (Section 6 of
  the Act) which are as follows :

         (i) minimum age of 18 years :

       (ii) legal competence to perform legal acts ;

      (iii) trustvorthness (an individual is considered trustworthy
              under the Act unless he/she was legitimately sentenced
              (a) for a criminal offense related to the subject of the
              particular trade for which a authorization is sought, or
              (b) for another willful criminal offense if the
              performance of the particular trade by such person would
              give cause for concern that such person may, in
              connection with such trade's performance . commit the
              same or a similar criminal offense .

99,U3 -9J W4- IM III-UlIr l                                          i. dmi

       Vhere _he business activity is performed by a legal entity,
 the above general requirements (as well as any specific
 requirements as discussed below) must be satisfied by the person
 who shall -e responsible for both the technical operation of the
 activities of the entity and the entity's compliance with the
 Act . This person, called a "proxy" under the Act, must be
 appointed by any legal entity engaged in business . For example,
 to form a business entity which produces electrical fuses, the
 founder of the business entity would need to produce documentary
 evidence that the person in charge of the actual production of
 the fuses (e'&_ a plant manager), was a qualified electrical
 engineer . The individual (proxy) need not be the executive or
 member of Board of Director of the business entity (since the
 requirements do not relate to the conduct of activities with
 third parties) but does have to be resident in the Czech
 Republic .

 III_ IF!AB TRADES (Sections 19 to 25 of the Act )

     Notifiable trades are business activities, the performance
 of which is not subject to an approval license) of a state
authority . In principle, all individuals or legal entities . upon
proof that they have satisfied certain conditions and
requirements as stipulated by the Act, have the right to perform
such activities . Individuals or entities who desire to perform
such activities must only (i) notify, in the form stipulated by
the Act, the appropriate local Trades Office that they have
started pe_forming the activity at a certain date, (ii)
supplement the notification with evidence that they have met all
conditions required by the Act, and (iii) pay a fee of Kd 1,000 .
Upon satisfaction of the conditions and requirements by the
 "applicant', the Trade Office must issue the "Trade Certificate"
which serves as an attestation of the authorization to do
business activity specified therein . It should be noted .that the
authorization to perform a notifiable trade activity commences on
the day of the notification to the Trade Office (or on any later
date as the applicant may specify in the notification) and not on
the day of the issuance of the Trade Certificate .

       The criterion for the classification of the notifiable
trades into the three subgroups is based on the scope and level
of professional requirements (ice,,, educational or work
experience qualifications) which must be met by the entrepreneur
(or its prcxy) .


?q r+ a .7 1n•in 8 1IMA%&HART- PrnJ

       1 . Crafts (Sections 20 Lv 22 of the Aot )

       Crafts are listed in Annex No . 1 to the Act . In addition to
 the general requirements .section 21 provides that an ent epreneur
 (ytv;y) who wishoo to ctsart performing nraft5 OluSt prow his/her
 professional qualifications by a certificate of appre tiosship
 (or another similar document) and a document a rtifying
 completion of three years (in specified cases longer) o working
 experience in the respective or similar trade . To the a tent the
 entrepreneur or proxy is unable to produce the ocuments
 specified in Section 21, then Section 22 of the Act provides for
 alternative proof of the relevant professional qualifications .

       2 . Re u e Trades (Sections 23 and 24 of the Act

        Regulated trades are listed in Annex No . 2 . The rocedur e
 for obtaining the necessary official authorization ( Trade
 Certificate) is similar to that applied in the case of c4rafts . In
 addition to the general requirements, an entrepreneur (plroxy) who
 wishes to start performing regulated trades must pro his/her
 professional qualifications . By contrast to cr fts, the
 professional qualification requirements are formulated more
 specifically which results from the relatively specific (nature of
 each particular regulated trade activity . In most asps, the
 professional requirements are stipulated by special r gulation .
 Thus, Annex No . 2 refers to special regulations with especrt to
 each regulated activity (o,g with respect to " roue 205
 - Inspection of electrical equipment" . pr fessional
 qualifications are specified by the provisons of ecree No .
 50/1978 Sb . and by Decree No . 51/1978 Sb) . In ases not
 specifically regulated by special laws or regulations, the
 qualification requirements arc specified by Annex No . 12 itself .
 ;cYg ., with respect to "Group 213 - Industrial cans ruction",
 .riiversity education in civil engineering and 8 years xperience
 qualification are required) . Finally, with respect t certain
 regulated trades, both the requirements as stipulated y special
 regulations and the requirements applied to crafts (sic above)
 rust be satisfied (e .&-, "Group 205 - Assembly and repair of
 electronic office and rcprographic equipment") .

      3 . Unregulated Trade s

      Unregulated trades are all business activities u    less they
 are (i) exempt from the "trades regime" under Section    3 of the
 Act (see above), or (i) listed in Annexes No . 1 or 2    o the Act
 or in Annex No . 3 to the Act related to Licensed T      ades (see

29/03 '93 10 ;5I   $   Iii'A'6IIAk'I'             I'rnhr+          zUU b

  below) . For example, most activities related to purcLses and
  sales of goods and services are considered unregulated trades . No
  requirements, other than the general requirements undei Section
  6 of the Act (see above), must be satisfied prior to the
  performance of these activities .

  IV . LICENSED TRADES (Sections 26 and 27 of the Act )

         The performance of licensed trades is subject to ant!approval
   (Trade License) of the local Trade Office . In coptrast to
  Notifiable Trades, (i) the applicant has no entitlement to obtain
  the license even if he/she has satisfied all general andlspecific
  requirements as stipulated by the Act (IA,, whether         ►a license
  will be issued or not is at the discretion of the Tradel-Office),
   (ii) in specified cases, the appropriate Trade Office may set
  specific conditions limiting the performance by a particular
  entrepreneur of a licensed activity, such as confining its
  performance to a certain territory or to a certain /period of
  time . (iii) the authorization to perform licensed trades
  commences only on the day on which the license was delivered by
  the appropriate Trade Office to the applicant ; and (ivt) the fee
  payable by the applicant is Kd 3,000 . Similarly, the appointment
  of a (new) proxy responsible for the internal technical
  operations of the business entity must, with respect to licensed
  trades, be approved by the appropriate Trade Office .

       The greater restrictions imposed on licensed trades result
  from (i) the higher level of the professional qualifications
  needed for the orderly performance of certain business activitie s
          production and distribution of dangerous poisons), (ii)
  the specific nature of certain business activities which may have
  an adverse impact on the environment or which may endanger human
  lives (e .a ., air transport and air services), and (i i) a high
  degree of personal integrity and trustworthness required from
  individuals performing certain business activities (e .>zt, private
  detective agencies, catering activities) .

       Licensed trades are those listed in Annex No . 3 tt the Act .
  The performance of licensed trades is subject to the following
  conditions :

        (a) the applicant (or the proxy of the applican entity)
            must satisfy the general requirements under Section 6
            of the Act ;

        (b) the applicant (or the proxy of the applicant) mus t

29`03 '93 10 :32      e                 HoG .1\8R,11~'E' I'ruiu i          Q(Jw c

                   prove his/her professional qualification (ie .,
                   educational or/and work experience qualification) as
                   stipulated by Annex No . 3 with respect to each
                   particular business activity ;

           (c) in cases specified in Annex No . 3, the Trade Office may
                set territorial, time or other limitations on the
                performance of the business activity (g,g,, 'Group 314-
                'Taxi services . Railway operations") ; and

           (d) in cases specified in Annex No, 3, a statement (ie .,
               a consent) of an appropriate administrative or other
               authority is required prior to the final decision of
               the local Trade Office ( .g,,_, statement of the Ministry
               of Interior with respect to "Group 305 - Assembly and
               repair of telecommunication equipment" ; statement of
               the Czech National Bank with respect to "Group 314
               - Exchange offices') . The statement of the appropriate
               administrative authority is obtained from the relevant
               authority by the respective Trade Office (not by the
               applicant) within 30 days of the day on which the
               application was filed with the Trade Office . This
               statement is binding on the Trade Office . At its sole
               discretion, the Trade Office may require statements of
               other administrative authorities not specified in Annex
               No . 3 to the Act .

      Unless stipulated otherwise in Annex No . 3, the local Trade
  Office must make its decision on an application for a Trade
  License within 60 days of its filing .

  V . Performing o Aciivit v

       It should be noted that a business entity (or a local branch
  office of a foreign entity) must obtain a Trade Certificate or
  Trade License for each business activity (trade) it is engaged in
  (Section 16 of the Act) . Thus, in most cases, a business entity
  may have to obtain more than one Trade Certificate or . License .
  However, the Act respects the fact that, in the real world,
  certain business activities typically supplement one another
  (e¢_, manufacturing products typically involves selling such
  products) . This is reflected in Sections 32 to 44 of the Act
  which, from the point of view of their subject, classify trades
  as :

            (i) commercial trades (Sections 33 to 40) ;
          (ii) manufacturing trades (Section 42) ; an d
         (iii) service-rendering trades (Section 43 and 44) .

2903 '93 1033   a                  IIUCA\&IIAR'J' Pr+jiia             QuJu

      According to Section 42, an authorized manufacturer of
 certain products may sell and repair the same products without
 having to apply for separate Trade Certificates or Licenses
 autnorizing him/her specifically tui• su . :I, sales or rcpaira .
 Similarly, he/she may, without any additional certificate or
 licence, purchase products for further sale and sell products
 from other manufacturers or wholesale for other manufacturers if
 such products are of the same kind as those manufactured by
 him/her .

 VT . Performing Business Activity in More Places of Busines s

       Under one Trade Certificate, an entrepreneur may perform
 his/her business activity (jr,.notifiable trade) in more tha n
 one permanent establishment (workplace) . The Act only requires
 that the entrepreneur notify, within one month, the local Trade
 Office of the establishment of a "subsidiary workplace" . If the
 'subsidiary' workplace(s) is (are) located in the territory
 within the jurisdiction of a local Trade Office, other than that
 issued the Trade Certificate, then the notification must be
 delivered to both Trade Offices (Section 17 (2) of the Act) .

      On the other hand, the performance of a business activity
 classified as licensed trade in a "subsidiary" workplace is
 subject to an approval of the local Trade Office within the
 jurisdiction of which the "subsidiary" workplace is located . If
 the Trade License was issued by another Trade Office, then that
 Trade Office must be notified by the entrepreneur of the
 establishment of such "subsidiary" workplace (Section L7 (3) of
 the Act) .

 VII . adesLicensing Act and Tobacco Productio n

       As mentioned under section I . above, production and
 distribution of tobacco and tobacco products are currently exempt
 from the regime of the Act . This is reflected in Section 3
 paragraph 1 (a) of the Act which sets forth that `trade" for
 purposes of the Act shall not mean activities reserved by law to
 be conducted by the state or by a legal entity specified in
 special regulations . In this context, the Act refers, inter alia,
 to Act No . 63/1450 Sb ., on Tobacco, Salt and Spirit Business and
 on Abolition of State Financial Monopolies . Thus, the tobacco
 business is currently governed solely by this "Tobacco Monopoly
 Act" of 1950 which precludes new tobacco producers from entering
 the Czech market .

29,03 'B3 10 :34 $'                   INi( 1Nl,ILtRT 1'ruhu -_[]I U I I

        The above implies that the abolition of the Tobacco Monopoly
   Act, currently under discussion within the Czech Government, will
   require a corresponding amendment of the Trades Licensing Act by
   classifying the tobacco business as one of the "trades" and thus
   subordinate it to the regime of the Act . Otherwise the tobacco
   business would become a business activity beyond any legal
   regulatory framework .

        This issue has also been addressed by the Czech Ministry of
   Agriculture (the "Ministry") in the draft Act on Tobacco . Spirit
   and Products thereof, a copy of which was sent to S .A .T . and
   Hogan & Hartson by Mr . 0 . Rankin of Lonpra A .S . on March 10 . This
   draft law also includes a corresponding draft amendment to the
   Trade Licensing Act . Ve understand that the intention of the
   Ministry is to newly classify tobacco processing and
   manufacturing of tobacco products as a licensed trade (this
   should be reflected in amended Annex No . 3 to the Act) . This
   would mean that, after the Tobacco Monopoly Act has been
   abolished, a tobacco manufacturer in the Czech Republic would
   have to comply with the conditions and requirements of the Act
   applicable to licensed trades as discussed above .

        in addition to the specific educational and work experience
   qualifications which will have to be net by a tobacco
   manufacturer or his/her proxy, the draft of the Ministry
   stipulates that a Trade License for tobacco manufacturing should
   be subject to prior consent of the Ministry of Agriculture which
   should ensure compliance with the Act on Tobacco, Spirit and
   Products thereof (i•e•, with the new act currently under
   preparation) . Thus, whether such consent of the Ministry will be
   obtained relatively easily or not will depend on the final
   wording of the Act on Tobacco and Spirit . Should the Act impose
   the condition that any new tobacco producer would be required to
   operate primary production facilities as well as secondary
   production facilities, as currently proposed by the Ministry, the
   change in the legislation would be rather formal .

29 93 '93 10 :99 e                   II0G.I\&H .AHT Prah a

                              Extract from
                          Tobacco Monopoly Ac t

                               No . 63/195 0

                          dated May 17, 195 0
                 nn Tnhnrrn, Salt and Spirit Huoinos s
            and on Abolition of State Financial Monopolie s

                                 Part I

                           Tobacco Busines s

         (1) The Minister of Food, in agreement with the Minister of
  Finance, shall form a national enterprise from the assets of the
  state enterprise "Czechoslovak Tobacco Monopoly" ("6eskoslovenskfi
  tab&kovy monopol"), except for the assets specified in section
   (2) below .

       (2) The Minister of Food, in agreement with the Minister of
  Finance and upon proposal of the Minister for Internal Trade,
  shall exclude from the assets of the state enterprise
  Czechoslovak Tobacco Monopoly those assets which are used for the
  conduct of marketing actvities . The Minister for Internal Trade
  shall include this portion [of the assets) into an [other]
  enterprise within his own jurisdiction .

        (3) The Minister of Finance, in agreement with the Ministers
  for Food and Internal Trade, shall specify which portion of the
  liabilities arising from the previous activities of the
  Czechoslovak Tobacco Monopoly shall be assumed by the national
  enterprise (pursuant to section (1) above] and which by the
  enterprise that has assumed the portion of the assets pursuant to
  section (2) above .

                                   1 2
      (1) The national enterprise pursuant to 1 1 section (1)
  above shall have the exclusive right :

         (a) to grow tobacco and tobacco seeds ; an d

29,03 '93 10 :55   $   11u1,.l .aII.ikr-I'rolio [tUI a

       (b) to process tobacco and its substitutes, and to
          manufacture tobacco products .

       (2) The national enterprise pursuant to 0 I section (1) may
  transfer the right of tobacco and tobacco seeds growing to other
  persons (entities) as specified in the Grower's Rules to be
  adopted by this enterprise .

29 03 '93 10 :36 '8'                     IIUG.1 ..&I RRT Prah a                ROla

                           of the Czech National Counci l
                               dated 20 November 1992
                                    on Excise Duty
               The Czech National Council has passed the present Act!

                                    section on e
                                 fauerei gra~isian s

                                     Article 1
                              introductory provision s

     (1) The present Act shall set fnrth thn conditions of taxability
          concerning hydrocarbon fuels and lubricants, alcohol and
          alcoholic beverages, beer, wine and tobacco products
          ("selected products") which shall be liable to excise duty
          ("tax") .

     (2) The selected products shall be taxed in accordance with the
          present act once only .

                                     Article z
                                Definition of term s

     For the purposes of the present Act, the terms herein used shall be
     defined as follows :

     a) Inland shall be defined as the territory of the Czech
          Republic ,

     b) Abrcad shall be defined as that territory which is not the
         Czech Republic ,
     C) Expert of selected products shall be defined as their release
         into free circulation' abroad or into temporary I circulation=
         abroad for the purpose of their treatment or processing and
         the certification of their definitive or temporary export
         abrcad .

     d) Import of selected products shall be defined as their release
          into free circulation inland or into temporary Firculation :
          inland for the purpose of their treatment or processing ,

                  Art . 74 of Act no . 44/1974 Sb ., Customs Act, as amended
                  by subsequent provisions (full text of Act Flo . 461/1992
                  Sb . )
           z      Article 78 of Act no . 44/1974 Sb .
29 03 '93 10 :57                          11114 .i411ART • 1'ruhu                QUI D

     e) Administrator of tax shall be defined as the appropriate
         financial authority3 ; when importing selected products, it
         shall be the customs house'

     f) Release from storage shall be defined as :

               1 . The physical release of selected products effected by the
                     taxpayer (see Article 3) in order to meet contractual
                     obligations', or done for organizational : units or
                     operational units6 within which sales of selected
                     products take place ,

               2 . The use of selected products in the manufacture of
                    products which are not subject to tax ,
               3 . The use of selected products for the personal use of the
                     taxpayer, the members of his household and his other
                     relations', his employees, members and partners, also use
                     of the selected products referred to in Article 35 for
                     direct consumption or physical release on the premises
                     where these products are stored, with the exception of
                     release from storage as set forth in Articles 1 and 5 .

               4 . The use of selected products in advertising ,

               5 . The use of selected products for any purpose that is
                     not directly related to business operations'` .

                                      Article 3
                                      Taxpayer s

     (1) Taxpayers ("payers") shall be all natural and juristic persons
          who manufacture selected products inland or to whom exported
          or imported selected products are to be released .

     (2) Payers shall be also natural and juristic persons who release
          from storage any selected products that are not liable t o

                   Act no . 531/1990 Sb . of the CNC on local tax authoritie s
           4       Article 8a of Act no . 44/1974 Sb .
           3       Articles 409 to 475 inclusive of Act no . 513/1991 Sb .,
                   Commercial Code, Articles 588 to 630 inclusive of Act no .
                   40/1964 Sb ., Civic Code, as amended by later provisions
                   Article 7 of Act 513/1991 Sb .

                   Articles 115 to 117 inclusive of Act no . 40/1964 Sb .
           9       Article 2 of Act no . 513/1991 Sb .
     29/03 '03 50 :5"   e                     1{U(;A%&ItART - Praha                Zul u

                 excise tax as per Article 6 paragraph 1 letters b) and
                 part-raph 2 . for purposes other than those referred to in
                 Article 8 paragraph 1 letters b) and paragraph 2 .

           (3) other specific provisions related to taxpayers are set forth
                in Articles 18, 24 and 34 .

                                          Article 4
                                         Tax liability

           (1) Selected products manufactured inland or imported into the
                country and specified in the second part of the present Act
                shalt be, liable to tax .

           (2) Selected products on which tax has already been paid shall not
                be :cable to tax, unless tax refunds have been affected
                thereon in accordance with Article 12 .

                                         Article S
                                   Arising of tal liabilit y

           (1) Tax liability shall arise :
                 a) In domestic production, on the day the manufacturer
                      releases selected products from storage ,

                 b) In the import of selected products, on the day the
                      entitlement of the state to customs duty arises' ,

                 c) For selected products exempted from tax in accordance
                      with Article 8 paragraph 1 letter b) and paragraph 2, on
                      the day they are released from storage for purposes other
                      than those set forth in Article 8 paragraph i letter b)
                      and paragraph 2 .

                 d) For selected products manufactured inland or imported
                      into the country for which tax refunds have been effected
                      in accordance with Article 12 paragraph 1 letter b), on
                      the day they are released from storage for purposes other
                      than those set forth in Article 12 paragraph 1 letter b) ;
                      the provisions of Article 8 paragraph i letter b) and and
                      paragraph 2 shall remain unaffected thereby .

.4               e} on the day of accounting as losses are entered in the
                     account of deficits and damage in the double-entry book-
                     keeping system, or on the day any reduction in stock-
                     levels is recorded in the stock records in the single-

                        Article 46 of Act no . 44/1974 Sb .

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