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requirements from 9 to 12 percent as of July 1994, and the discount and lombard rates by 0.5 percent (as of October 24 they were 8.5. and 11 percent respectively). The Czech National Bank also has been strengthening its supervision over commercial banks.

2. Exchange Rate Policy

The Czech government has followed a "hard crown" policy which has kept the crown stable since January 1991. The official exchange rate has remained at the level of 28-30 crowns per U.S. dollar throughout 1993 and only in October 1994 did it fall below 28 crowns, following the USD-DM exchange rate. The composition of the currency basket was changed in May 1993 from a mixture of five currencies to a new basket of German marks (65 percent) and U.S. dollars (35 percent). The crown is fully convertible for trade purposes. Full current account convertibility is expected in 1995 and full capital account convertibility in 1996-1997.

Under the Foreign Exchange Act of 1990, both domestic and foreign companies in the Czech Republic are guaranteed the right to freely exchange crowns for hard currency in business-related, current account transactions. Current account transactions include the import of goods and services, royalties, interest payments and dividend remittances. Repatriation of earnings from U.S. investments is also guaranteed by the U.S.-Czechoslovak Bilateral Investment Treaty which went into effect in December 1992. However, there is currently a 25 percent tax on repatriation of profits from the Czech Republic, and capital account transactions still require a foreign exchange license. In the past, companies were obligated to exchange any foreign convertible currency earned for crowns, except for cases when the bank granted permission to maintain a foreign-exchange account. As of March 1, 1994, the Czech National Bank has routinely granted permission to establish foreign currency accounts. Private persons do not need permission to have a foreign-exchange account. Additionally, if requested, banks must sell to foreign investors for Czech crowns foreign currency equal to revenue from investment. In this instance, "revenue from investment" is defined as income from business profits, interest, capital profits, securities, or intellectual property.

3. Structural Policies

The continued shift away from a centrally-planned economy towards the free market continues to require adjustments throughout the legal, financial, and political structure. Some of the major changes are outlined below.

Taxes: The new tax system of January 1993 provides uniform rates and is better aligned with EU tax policies. The corporate income tax or "profit tax" of 43 percent in 1993 was lowered to 42 percent in 1994 and, if approved by the Parliament, should drop to 41 percent in 1995. In addition, in 1993 the government implemented a 5 percent value added tax (VAT) on staple goods and a 23 percent VAT on other as well income tax. The 23 VAT is to lowered by percent as of 1995. The government plans to lower tax rates to EU levels over time. A bilateral tax treaty between the United States and the Czech Republic was signed in September 1993 and went into force retroactively as of January 1, 1993. Prices: Over 95 percent of price controls were eliminated in 1991. As of late 1994, only the price of utilities, rents, gasoline, fuel oil, and various municipal services continue to be regulated. Remaining price controls are being eased gradually over time.

Wages: Following repeated warnings against wage inflation, the government reimposed punitive levies on excessive wage growth at the end of June 1993. For wage growth between 15 and 30 percent, companies unable to demonstrate productivity gains are taxed at 100 percent of the excess in wages. For wage increases of more than 30 percent, the tax equals 200 percent of the excess increase not justified by productivity growth. However, the government has announced it will abolish wage regulation in the second half of 1995.

Privatization: The Czech government completed its first wave of privatization in August 1993. Under this program, the majority of stock under large-scale privatization was sold through the voucher program, whereby citizens over the age of 18 were allowed to acquire shares of enterprises through the purchase of vouchers. Approximately 80 percent of Czechs (and Slovaks, as the program started under the Federation) eligible to participate in this program did so. The second wave of privatization started on April 11, 1994 and is expected to be complete by early 1995. The government plans to sell 861 companies with property value of 155 billion crowns during the second wave.

4. Debt Management Policies

The Czech Republic maintains one of the lowest foreign debts in central and eastern Europe. As of September 1994, the gross foreign debt was approximately 9.0 bil


lion dollars. Government debt represents approximately 17 percent of GDP, and current government plans call for the level of debt to drop to 10 percent by the year 2000. The government believes it can reach this level by payment of interest combined with general expansion of the economy. The current level of indebtedness is well within the limits specified by the Republic's agreement with the IMF. The Czech Republic repaid its debt to the IMF ahead of schedule, the first post-communist country to do so.

Due mainly to the lending policies of the former communist regime, the current government is owed approximately 4.5 billion dollars by various (mainly formerly communist bloc) countries. Among them are Russia (owing approximately 3 billion dollars) and Syria (owing approximately 750 million dollars). Although the Russian debt was restructured in 1994 and some payments on this debt have been made, collection on other debts is uncertain.

5. Significant Barriers to U.S. Exports

The government of the Czech Republic is determined to create and maintain a free market, and has made the elimination of artificial trade barriers an important element of its overall economic policy. Thus, there are currently no significant barriers for U.S. exports to this country. The Czech Republic adopted a GATT tariff code which has an average tariff of 5-6 percent.

Some provisions of the 1993 Czech tax code have been criticized as inhibiting investment. In particular, concern has been expressed over bad debt write-off and the tax status of group and offshore companies. Czech legislation denies (generally until bankruptcy proceedings are initiated) corporate tax deductibility of bad debt reserves and the possibility of reclaiming VAT on bad debts. In addition, Czech legislation effectively penalizes use of holding company structures by leveling both corporate tax and dividend withholding tax on profit flows between group companies, thus creating double taxation on such profits. Czech law also does not permit intragroup use of losses (i.e., offsetting losses in one group entity against profits in another) and imposes corporate tax on dividends received from foreign holdings without allowing use of a foreign tax credit for the underlying tax suffered in the subsidiary's home jurisdiction. Offshore companies are taxable in the Czech Republic if they engage in a significantly lower level of domestic activity than the guidelines recommended by the Organization of Economic Cooperation and Development (OECD) or standards applied in other countries.

With a few limited exceptions, such as defense-related industries, all sectors of the Czech economy are fully open to U.S. investment. The official monopolies in tobacco and film distribution were both abolished in 1993.

In late 1991, Czechoslovakia signed a Bilateral Investment Treaty (BIT) and an agreement with the U.S. Overseas Private Investment Corporation (ŎPIC). The BIT was ratified by the U.S. in August 1992 and ratification by the Czechoslovak parliament occurred in late 1992.

A bilateral tax treaty was signed with the Czech Republic in September 1993 and entered into force in January 1994. The United States granted most favored nation (MFN) status to Czechoslovakia in 1992 and to the Czech Republic as a successor state in January 1993. The Czech Republic has signed the Uruguay Round document in GATT to lower tariff rates over the next ten years.

6. Export Subsidies Policy

A legal framework is being drafted to enable the Czech export bank, a subsidiary of the Export Guarantee and Insurance Company, to provide export guarantees and credits to Czech exporters. It is expected to begin operating in mid-1995. Additionally, the government maintains a fund (the Fund for Market Regulation) through which it purchases domestic agricultural surpluses for resale on international markets. For some commodities, pricing is established at a level which includes a subsidy to local producers.

7. Protection of U.S. Intellectual Property

The Czech government has agreed to be bound by the obligations undertaken by the former Czechoslovak government under the Bern, Paris, and Universal Copyright Conventions and is working to ensure that laws for the protection of intellec tual property conform to those of western Europe. However, enforcement of existing regulations is still uneven.

Enforcement of video piracy laws is an ongoing concern for U.S. video and motion picture exporters. While awareness of the problem by Czech officials is increasing, economic losses continue to threaten the viability of these exports. In 1993 the Czech Antipiracy Union (CPU) stated that 40 to 50 percent of the local market for video cassettes was lost to video products either illegally produced or imported. The CPU filed 450 video piracy court cases in 1992 and 468 in 1993, but enforcement

remains lax and fines are low. In 1993, the activity in Prague's so-called "video exchanges" stabilized. Inspections in video-lending shops, carried out by CPU in cooperation with the police, has improved enforcement. Copyright violations also represent a problem, especially copies from German originals and piracy of both foreign and Czech originals.

There have been similar concerns about software piracy. Recently, two cases of software piracy were disclosed by the media and are under investigation by the police. The US-based Business Software Alliance has opened an affiliate office in Prague and is working to raise the level of awareness on this and similar issues. 8. Worker Rights

Workers in the Czech Republic have the legal right to form and join unions without prior authorization. Currently, two-thirds of workers are members of some labor organization, although the overall number of union members has declined slightly since 1991. Under the law, all workers are guaranteed the right to strike when mediation efforts have been exhausted; exceptions are those workers in sensitive positions (nuclear power plant operators, military, police, etc.) who are forbidden to strike.

Workers also have the right to organize and bargain collectively. Wages are set by free negotiation.

Forced or compulsory labor was expressly prohibited by the federal government's 1991 Declaration on Basic Rights and Freedoms, and the Czech Republic has adopted the same guarantee. There is no evidence or indication that such practices have occurred since the 1989 Revolution.

The basic minimum age for employment is 16. Exceptions are made for 15 yearolds who have already finished elementary school and for 14 year-olds who have completed courses at special schools for the disabled.

The Ministry of Labor and Social Affairs has set minimum wage standards to guarantee an adequate standard of living for a worker and, with special allowances, for his family as well. A standard workweek of 42.5 hours was mandated by law, but collective bargaining has brought the actual number of hours worked closer to 40. Additionally, caps exist for overtime and workers are assured at least 30 minutes of paid rest per work day and annual leave of three to four weeks per year. As far as the Embassy is aware, all workers' rights are applied to firms with U.S. investment and do not differ from those in place in other sectors of the economy.

Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993

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Source: U.S. Department of Commerce, Bureau of Economic Analysis.

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1 Danish Krone/Dollar exchange rates used: 1992: DKK 6.04-$1.00; 1993: DKK 6.48-$1.00, 1994: DKK 6.38-$1.00

21994 figures are all estimates based on available data in October 1994.

GDP at factor cost.

4Figures are actual, average annual bank lending interest rates, not changes in them.

Merchandise trade, excludes EU Agricultural Export Subsidies.

Note: All dollar figures shown in the text have been converted from Danish Kroner figures using the average DKK/USD exchange rate in the relevant year.

1. General Policy Framework

Denmark is a small, highly industrialized "value-added" country with a long tradition of foreign trade, free capital movements, political stability, an efficient and well-educated labor force, and a modern infrastructure effectively linking Denmark to the rest of Europe. Denmark's natural resources are concentrated in oil and gas fields in the North Sea, which make Denmark more than self-sufficient in oil and gas. As Denmark remains dependent on imported raw materials and semi-manufac

tures for its industry and on coal for its electrical power production, ensuring adequate supplies has always been a major goal of Danish trade and industry policies. Denmark's active liberal trade policy in the EU, OECD, and GATT often coincides with U.S. interests. Denmark ratified the Uruguay Rounds agreements in 1994. EU and EFTA countries account for more than three-quarters of Denmark's total trade. The United States, Denmark's largest non-European trading partner, accounted in 1993 for about five percent of total Danish merchandise trade. On May 18, 1993, Danish voters reversed their earlier rejection of the far-reaching European Union (The Maastricht Treaty) and reinforced Denmark's commitment to continued EU cooperation and integration. However, Denmark reserved its participation in the third phase of the Economic and Monetary Union (EMU). Denmark benefits from the EU Single Market, which started January 1, 1993, and has taken the initiative to increase the EU Commission's and member countries' focus on new nontariff trade barriers being created while other barriers are dismantled.

Despite increasing unemployment and low economic growth in the late 1980's and early 1990's, the underlying Danish economy has been strong due to increasing balance of payments surpluses and falling inflation. This resulted from the former minority center-right coalition government's tight fiscal policies of minimum increases in public expenditures and monetary and exchange rate policies similar to Germany's. The Social Democratic Party (SDP)-led majority coalition government, which took power in January 1993, relaxed fiscal policy, and introduced a limited income tax reform to kick-start the economy. The government also introduced a series of measures to combat unemployment, which have included government-funded leave programs and government-subsidized job creation measures. An SDP-led minority government has continued in office following the September 21, 1994 election. Despite strong economic growth starting in the second half of 1993, unemployment has been slow to react due to large productivity increases and extraordinarily large new inflows of labor. Although there is broad political agreement on putting a lid on the public sector's size and costs, increased unemployment benefit costs and other transfer income costs, as well as the introduction of recession response measures, have led to growing budget deficits. The public sector budget deficit almost doubled in 1993 to 4.4 percent of GDP and is only being marginally reduced in 1994. Foreign investment economic incentives consist of lenient income taxation of highpaid foreigners working in Denmark (a flat 30 percent tax on gross income). Since 1989, the government has spent the equivalent of about $10 million promoting direct investment in Denmark by U.S. and Japanese high-tech companies, which has assisted some U.S. acquisitions of Danish high-tech companies. U.S. and Japanese greenfield investments, on the other hand, have been limited.

Danish fiscal policy meets the conditions of the EMU. For example, Denmark complies with the prohibition against monetization of its central government deficits. Deficits are financed through the sale of government bonds and treasury bills on market terms.

The Danish fixed exchange rate policy (see section 2), pursued since the early 1980's, requires a monetary policy which gives high priority to price stability. This together with fully liberalized capital movements means there is limited room for Denmark to adopt independent interest rate and liquidity policies. Official Danish interest rates are linked closely to those of Germany. In order to tighten management of money-market rates (without adjusting official rates), the Central Bank, which has monetary policy authority, introduced in April 1992 a liquidity management system via weekly issuances of two-week deposit certificates and by providing liquidity to commercial banks via re-purchases of both treasury bills and deposit certificates. During 1993, the Central Bank successfully used discount rate adjustments to control liquidity and to protect the krone. The discount rate was adjusted 17 times, twice upwards by two percent during the February and July currency crises. The 15 downward changes were generally within 0.25 to 0.5 percentage point range. Starting at 9.5 percent at the beginning of 1993, the discount rate was reduced to 6.25 percent by the end of the year. By September 1994, the discount rate was five percent (last reduction was in May). However, the low inflation (two percent in 1994), together with monetary and the exchange rate policies, maintains high real market interest rates which impede investment.

2. Exchange Rate Policy

Denmark is a member of the European Monetary System (EMS) and its Exchange Rate Mechanism (ERM). It supports the objectives of the EMU, but has the right not to participate in its third phase (establishment of a single EU currency and relinquishment of national sovereignty over monetary policy). Since 1982, the government has successfully resisted solving Denmark's economic problems through exchange rate adjustments, and this policy continues. In August 1994, the trade

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