Investing in Central Europe Your move in the right direction

September 2014 Contents

1. Investing in Central Europe ...... 3 Introduction The Investment Process

2. Why Central Europe? ...... 7

3. Comparison of Selected Data ...... 13 Basic Facts Main Macroeconomic Data GDP Growth in CE Taxation

4. Country Guides for , Czech Republic, Poland, and ...... 19 General Overview of Economy Structure Legal Entities Labour and Wages Education Infrastructure The Most Active Industries / Sectors Industrial Parks Investment Incentive Foreign Direct Investment (FDI) Expatriate Life Weather and Climate

5. Deloitte Central Europe ...... 127 Deloitte Central Europe Our Expertise

6. Contact us ...... 131 5. Contact Us ...... 164 Investing in Central Europe Introduction

The key drivers for investors making cross-border direct invest- ments are usually either to gain access to new and growing markets, or to reduce costs. The countries of Central Europe (“CE”) score highly on both. Estonia

Over the past years, the countries of CE have made significant changes to their tax, accounting and legal systems in order Latvia to attract foreign investments. The governments in most CE countries are offering different types of incentives to make their country more attractive. Over the past few years, the volume of foreign direct investment in CE has grown significantly; the bene- fits are obvious – political stability, availability of highly skilled and inexpensive labour, attractive tax regimes, favourable macroeco- nomic indicators, growing markets and proximity to the customer base of “old” Europe, etc. The accession of 8 of the 17 countries of Central Europe to the European Union on 1 May 2004 and Poland another 2 countries on 1 January 2007 has greatly accelerated the volume of foreign direct investment (“FDI”) flowing into CE.

In addition to the political, economic and social factors that are Czech Republic differentiating the CE region, there are nuances specific to the CE Slovakia business culture. The tradition of doing business in CE countries may be somewhat different from the ”western” business style that most investors are used to and investors are often confronted with Hungary an approach not previously encountered in their home country. Romania

Especially in the case of foreign investors looking for government investment incentives, building relationships, properly managing the negotiation process and communication with the relevant Bosnia government bodies are often the key success factors. - Herzegovina Bulgaria Monte- negro

Macedonia

Albania

4 The Investment Process

The stage of the investment dictates, in large part, what issues 1. Planning •• Labour efficiencies are most relevant to the investor. Accordingly, it also determines expansion/ •• Costs efficiencies the types of services that we seek to provide to the investor. This relocation •• Free access to the EU is the basic approach of our FDI service line. •• Growing local market Based upon our understanding of the foreign investors’ invest- •• Availability of Investment incentives ment, we try to pin-point where they stand on the investment timeline. We can then focus our attention on the issues we think 2. Consider •• Bulgaria are most relevant to them at the moment. We have prepared the competitive •• Czech Republic a high-level summary of certain issues to give investors an idea advantages of •• Hungary as to where they may need to focus. We have also indicated how CE region we can be of assistance. •• Poland •• Romania Some of the most relevant issues a foreign investor faces during •• Slovakia the start-up period are: •• Structuring the investment;

•• establishing a legal entity to do business; 3. Select the most •• Regional analysis •• determining the availability of investment incentives; and suitable •• Access to your market – infrastructure country in CE •• Availability of workforce •• analysing business processes from a and VAT region perspective. •• Industrial Parks/Office Space

4. Choose the best •• Legal structure location based •• Tax structure on important •• Investment incentive procedure factors •• HR issues •• Customs issues •• VAT issues •• Payroll/Bookkeeping issues •• Financing

5. Set up a legal •• Compliance with local laws entity for your •• Business Modeling investment •• Business relationship management •• Group Transaction

6. Continue with your operational phase

7. Plan further expansion of your production services

Investing in Central Europe 5

Why Central Europe? The accession of 11 Central European countries into EU has European Union (EU) Membership created many opportunities for foreign investors. This section Free access to the EU market describes some of more significant factors that make this region On May 1, 2004 eight countries from Central Europe joined attractive. the EU. In terms of the number of countries, this enlargement •• European Union Membership was the largest in the history of the EU. Within the enlarged EU, the new member states account for about 16% of the population, •• Low Labour Costs 9% of the overall GDP (measured in purchasing power standards) •• Favourable Tax Environment and 15% of total employment. The enlargement process continued •• Availability of Investment Incentives on 1 January 2007, when Bulgaria and Romania joined the EU. On 1 July 2013, Croatia became the 28th member state. •• GDP Growth •• Improving Infrastructure New EU member states in Central Europe have been undergoing a rapid transformation process. The countries in this region such as Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia share common characteristics and, in many ways, can be considered as one Central European market. All of them are members of the OECD, NATO and the EU, which are critical factors that many foreign investors consider when deciding whether to locate their production facilities in this region. EU membership has transformed these countries into a customs free zone and in 2007, after joining the Schengen area, all remaining borders have been completely removed. It allows total free movement of capital, goods, people and services within the 28 EU member states. As such, Central Europe has become a major part of the European and global business environment.

The recent high inflow of foreign direct investment (FDI) is the result of the favourable location-specific conditions of Central Europe.

CE members of the EU:

Population as of 1 January 2014

Country Population (million) Bulgaria 7.2 Croatia 4.3* Czech Republic 10.5 Estonia 1.3 Hungary 9.9* Latvia 2.0 Lithuania 2.9 Poland 38.5 Romania 20.0* Slovenia 2.1 Slovakia 5.4

Source: Eurostat, 2014

* As of 1 January 2013

8 Lower Labour Costs Minimum monthly wages in selected EU member states Access to highly skilled and affordable workforce as of 1 January 2012 and 2013 (EUR) One of the key economic variables considered in the context Country 2012 2013 of competitiveness, outsourcing and production-location deci- sions is labour cost and its availability. With the EU accession and Romania 162 158 the related foreign investment into CE, labour cost competitiveness Bulgaria 138 159 has become an even more important issue. Latvia 286 287

Lithuania 232 290

Economic surveys demonstrate that labour costs vary enormously Czech Republic 310 312 among the EU member countries. In addition, bureaucratic rules Estonia 290 320 for businesses, overstated regulation in many fields, powerful unions and ineffective labour codes in Western Europe are driving Hungary 296 335 factors for many companies to seriously consider relocating their Slovakia 327 338 operations into CE. The former low cost countries within the EU Poland 336 393 such as Ireland, Portugal and are no longer considered as low cost countries. Given the new European mobility, companies Portugal 566 566 in these countries are relocating some of their production activities Spain 748 753 to the cheaper part of the EU. Before 1989, there was a strong base of different industries and a competitive education system Slovenia 763 784 with major focus on technical fields such as electro-technics, United Kingdom 1202 1264 math and chemistry spread throughout the whole region. This has become an important argument when making the decision 1398 1430 to place new investments into CE that can offer not just low cost Belgium 1444 1502 but also skilled labour. In addition, the number of youths speaking multiple languages in CE has been gradually increasing. Major Luxemburg 1801 1874 foreign companies have successfully established or relocated their Source: Eurostat, 2013 shared service centers, customer and call centers, software and IT centers into CE. This demonstrates that CE is also a suitable place for services oriented activities.

Investing in Central Europe 9 Favourable Tax Environment Availability of Investment Incentives Low rates attract foreign investors Financial support to foreign investment Many Central European countries have sharply slashed their tax One of the key tools used by the new EU member states in CE to rates to attract foreign investment. These significant reduc- attract foreign investments is the provision of investment incen- tions in the corporate rates in Central Europe are tives. Since the countries of CE initially lacked financial resources becoming one of the driving factors behind the relocation of to offer such direct incentives as subsidies, they have mostly manufacturing and service oriented business activities into focused their efforts on providing investors with fiscal incen- this region. Independent economists praise these countries for tives in the form of tax relief by using funds provided by the EU the implementation of tax reforms by reducing companies’ tax or favourable provision. In most cases they have offered burden as an effective way to attract foreign investment and combinations of trade and tax incentives and have also been to spur sustainable economic growth. The economists project offering direct incentives over the past years as well. In general, that further reduction of corporate tax in CE might continue. the trend in the CE region over the past years has been to offer This continuing trend will make this region attractive for foreign the same level of tax incentives to foreign investors who meet investments in the long run. the same criteria. It should be noted that all forms of investment incentives constitute state aid and must be approved by the Euro- Corporate income tax pean Commission in Brussels before they can be provided to investors. The vast majority of investment incentive schemes have already been approved by the European Commission but mainly Country Corporate for larger investments case-by-case prior approval is still neces- Bulgaria 10 % sary. Countries within CE have appointed their governmental bodies with administration and set up proper procedures to assist Hungary 10*/19 % foreign investors with their requests. Romania 16 %

Czech Republic 19 %

Poland 19 %

Slovakia 22 %

Source: The WorldWide Tax, 2014

Notes: *The corporate tax for income up to HUF 500 million is 10%.

10 GDP growth in CE Improving infrastructure Prior to the financial crisis, CE experienced a remarkable There is good infrastructure in the CE region – with favourable economic transformation. The region underwent very dynamic connections to the European-wide transportation network and developments and the industrial and agricultural sectors shrank in good internal rail and networks, all of which are key factors relation to GDP as the services sector grew rapidly. to attracting foreign investors to this region. In addition major increase of air traffic has triggered expansion of capacities and Now, the economies are expected to keep recovering from services at international airports. the deep recession in 2009, and grow faster in 2015-2016.

GDP growth in CE

Real GDP Real GDP Real GDP growth forecast Country growth (2012) growth (2013) 2014 2015 2016 2017 2018

Bulgaria 0.6% 0.9% 1.7% 2.7% 3.3% 3.5% 3.5%

Czech Republic -1% -0.9% 2.4% 2.6% 3.5% 3.6% 3.8%

Hungary -1.7% 1.1% 2.5% 2.3% 2.2% 2.6% 2.8%

Poland 2% 1.6% 3.2% 3.5% 4.4% 4.3% 4.3%

Romania 0.6% 3.5% 3.0% 3.5% 3.9% 4.2% 4.3%

Slovakia 1.8% 0.9% 3.0% 3.5% 3.7% 3.8% 3.9%

Serbia 1.6% -1.7% 2.0% 3.0% 3.6% 4% 3.8%

Source: Eurostat, 2014; The Economist Intelligence Unit, 2014

Investing in Central Europe 11

Comparison of Selected Data Basic facts

2014 Population Area (km²) Capital city Main language Currency Membership in (million) international organizations Albania 2,8* 28,748 Tirana Albanian Lek (ALL) WTO, NATO, CEFTA Bosnia and 3,8 51,209 Sarajevo Bosnian, Serbian, Convertible mark WTO (observer), Herzegovina Croatian (BAM) CEFTA Bulgaria 7.3 111,002 Bulgarian Lev (BGN) EU, NATO, OECD, WTO Croatia 4,3 56,538 Zagreb Croatian Croatian kuna EU, NATO, WTO (HRK) Czech Republic 10.5 78,866 Prague Czech Czech Koruna EU, NATO, OECD, (CZK) WTO Estonia 1.3 45,277 Tallinn Estonian Euro (EUR) EU, NATO, OECD, WTO Hungary 9.9 93,030 Budapest Hungarian Hungarian Forint EU, NATO, OECD, (HUF) WTO Latvia 2.0 64,589 Riga Latvian Lat (LVL) EU, NATO, WTO Lithuania 3.0 65,300 Vilnius Lithuanian Litas ( LTL) EU, NATO, WTO Macedonia 2,1 25,713 Skopje Macedonian Macedonia Denar CEFTA (MKD) Moldova 4,2 33,800 Chisinau Moldovan Moldovan Leu WTO, CEFTA (MDL) Montenegro 0,6 13,812 Podgorica Montenegrin Euro (EUR) WTO, CEFTA Poland 38.5 322,575 Warsaw Polish Polish Zlotyi (PLN) EU, NATO, OECD, WTO Romania 20.0 238,391 Romanian Leu (Ron) EU, NATO, OECD, WTO Serbia 7,2 77,474 Belgrade Serbian Serbian Dinar WTO (observer), (RSD) CEFTA Slovakia 5.4 49,036 Bratislava Slovak Euro (EUR) EU, NATO, OECD, WTO Slovenia 2.1 20,273 Ljubljana Slovene Euro (EUR) EU, NATO, OECD, WTO

Source: The Economist Intelligence Unit, 2014; Eurostat, 2014

14 Main macroeconomic data

2013 Inflation (%) GDP per capita Goods & Goods & Unemployment Minimum (EUR) services services Import rate (%) monthly wage (bn EUR) (bn EUR) (EUR) Albania 1.9 3312* 1.8 3.7 15.6 157 Bosnia and -0.1 3508 4.3 7.2 27 267 Herzegovina Bulgaria 0.9 3800 28 28.4 13 158.5 Croatia 2.2 8400 18.7 18.3 17.2 372.4 Czech Republic 1.4 11300 117.5 108 7 312.0 Estonia 2.8 9600 16.2 16.1 8.6 320.0 Hungary 1.7 9000 94.2 86.3 10.2 335.27 Latvia -0.0 7100 13.9 14.4 11.9 286.7 Lithuania 1.1 8500 30.1 29.8 11.8 289.6 Macedonia 2.8 2595 4* 5.7* 28 200 Moldova 4.6 1686 2.63 4.89 5.1 84 Montenegro 1.8 5200 1.4* 2.2* 15 148 Poland 1.2 8600 186.3 176.8 10.3 392.73 Romania 4.0 4600* 60 60.8 7.3 157.5 Serbia 2.2 4286 14.3 18 21 186 Slovakia 1.4 9500 70.4 65.9 14.2 337.7 Slovenia 1.8 14800 27.6 25.2 10.1 783.7

Source: BiH Directorate for Economic Planning, 2014; Economist Intelligence Unit, 2014; Eurostat, 2014; IMF, 2014; National Bureau of Statistics, Moldova, 2014; National Bank of Moldova, 2014; World Bank 2014

* year 2012

** year 2011

Investing in Central Europe 15 GDP growth in CE

Country Real GDP Real GDP Real GDP growth forecast growth (2012) growth (2013) 2014 2015 2016 2017 2018 Albania 1.6% 0.4% 2.0% 3.0% - - - Bosnia and -0.7% 1.6% 1.8% 2.9% 3.2% 3.3% 3.5% Herzegovina Bulgaria 0.6% 0,9% 1.7% 2.7% 3.3% 3.5% 3.5% Croatia -2.2% -0.9% -0.4% 1.1% 1.8% 2.3% 2.8% Czech Republic -1% -0.9% 2.4% 2.6% 3.5% 3.6% 3.8% Estonia 3.9% 0.8% 2.7% 3.0% 3.4% 3.4% 3.7% Hungary -1.7% 1.1% 2.5% 2.3% 2.2% 2.6% 2.8% Latvia 5.2% 4.1% 3.9% 4.9% 4.8% 4.9% 4.6% Lithuania 3.7% 3.3% 3.0% 3.8% 3.6% 3.8% 3.6% Macedonia -0.4% 2.9% 3.4% 3.7% 3.6% 3.8% 4.0% Moldova -0.7% 8.9% 2.9% 3.3% 3.5% 3.7% 3.6% Montenegro -2.5% 3.5% 2.8% 3.2% - - - Poland 2% 1.6% 3.2% 3.5% 4.4% 4.3% 4.3% Romania 0.6% 3.5% 3.0% 3.5% 3.9% 4.2% 4.3% Serbia -1.5% 2.5% -0.5% 2.0% 3.6% 4.0% 4.2% Slovakia 1.8% 0.9% 3.0% 3.5% 3.7% 3.8% 3.9% Slovenia -2.5% -1.1% 0.2% 1.0% 2.0% 2.4% 2.5%

Source: Eurostat, 2014; The Economist Intelligence Unit, 2014

16 Taxation

2014 Personal tax Corporate tax VAT VAT reduced rate Albania 13%-23%1 10% 20% N/A Bosnia and Herzegovina 10% 10% 17% N/A Bulgaria 10% 10% 20% 9% Croatia 12-40%2 20% 25% 13% Czech Republic 15%/22%3 19% 21% 15% Estonia 21% 21% 20% 9% Hungary 16% 10%/19%4 27% 5%/18%5 Latvia 24% 15% 21% 12% Lithuania 15%/20% 6 15% 21% 5%/9%7 Macedonia 10% 10% 18% 5% Moldova 7%/18%8 12% 20% 0%/8%9 Montenegro 9% 9% 19% 7% Poland 18%/32%10 19% 23% 5%/8%11 Romania 16% 16% 24% 5%/9%12 Serbia 10-20%13 15% 20% 0%/10%14 Slovakia 19%/25%15 22% 20% 10% Slovenia 16-50%16 17% 22% 9,5%

Notes:

1 Depending on the income: 0%: 0-30,000 ALL, 30,001 – 130,000 ALL: 13% of the amount over 30,000 ALL, 130,001 and above: 13,000 + 23% of the amount above 130,000

2 Depending on the income: 12%: up to 26,400 HRK, 25%: 26,400 – 105,600 HRK, 40%: above 105,600 HRK

3 A tax rate of 22% applies to income exceeding 48 times the average salary

4 Corporate tax rate for income up to HUF 500 million is 10%.

5 There are reduced rates of 18%, relating to hotels and basic food, and 5% rate that relates mainly to products and services such as books and medicines.

6 The standard income tax rate is 15%. For distributed profits, 20% income tax rate is applied.

7 VAT of 5% applies to pharmaceuticals and medicines, 9% rate applies to books.

8 Tax rate of 18% applies to the taxable annual income exceeding MDL 27,852. The annual below the respective amount is taxable at 7% rate.

9 8% rate is applied to bread and bakery products, milk and dairy products, medicines, natural production of plant, horticulture, zootechnics etc. 0% rate is applied to , international transportation services, supplies designated to the technical assistance projects etc.

10 Tax rate of 32% applies to income exceeding 85,528 PLN.

11 Rate of 5% applies to foodstuffs, 8% rate applies to pharmaceuticals, medicines, passenger transport, newspapers, hotels, restaurants, admission to cultural sporting and entertainment events

12 The reduced 9% VAT rate applies to hotel services, books, newspapers and medicines. The reduced 5% rate applies to buildings supply.

13 Income from yield on investments (capital) in Serbia is taxed at the rate of 15%.

14 The rate of 10% applies to basic foodstuffs, gas, cultural events, the reduced 0% rate applies to transportation, exports, etc.

15 The individual income tax rate in Slovakia is 19% for income up to EUR 35,022 and 25% for income exceeding this ceiling.

16 rates: 16%, 27%, 41% and 50%.

Investing in Central Europe 17

Country Guides

If yours is a multinational business, you need to have access to objective and informed insights for many jurisdictions.

Understanding the ins and outs of doing business around the world is a daunting task.

Deloitte Central Europe has developed these short country guides to help you find your way among CE countries with the highest investment potential, covering important business and human resources topics like investment climate, personal and business taxation, labour law, legal entities etc. Bulgaria

1. General Overview of Economy Personal Income Tax Before the recent economic crisis, Bulgaria, a former communist A 10% rate applies for most types of individuals’ income. country that entered the EU on 1 January 2007, had experienced There is no non-taxable minimum. A 15% flat tax applies on macroeconomic stability and strong growth. Since a major income of sole traders. economic downturn in 1996 that led to the fall of the then socialist government, the public policy became committed to Generally, the taxable income of individuals includes monetary economic reform and responsible fiscal planning. Minerals, income, as well as benefits received in-kind. Certain types of including coal, copper, and zinc, play an important role in income are exempt from taxation including capital gains from industry. In 1997, macroeconomic stability was reinforced disposal of shares on a regulated Bulgarian/EU/EEA market, by the imposition of a fixed exchange rate of the lev against income from disposal of certain real estate, etc. The tax rates for the German D-mark - the currency is now fixed against the euro interest income from deposit accounts in EU/EEA banks (including -and the negotiation of an IMF standby agreement. Low inflation from Bulgarian banks) will be reduced as follows: and steady progress on structural reforms improved the business •• 8% for income, received in 2014; environment. In 2009 the GDP of Bulgaria shrank by 5% which •• 6% for income, received in 2015; was mainly the result of the decline in foreign direct investment due to the global economic crisis. Before that the economy •• 4% for income, received in 2016; of the country enjoyed a steady growth of over 6% for four •• 0% for income, received in 2017 and subsequent years. consecutive years. In 2013 Bulgaria’s GDP rose by 1.2% Remuneration received for work performed in Bulgaria or for Political system provision of services in Bulgaria is considered income from According to the Constitution of Bulgaria, adopted by the Great Bulgarian source, regardless of whether the remuneration is paid National Assembly on July 13, 1991, Bulgaria is a parliamentary in Bulgaria or abroad. Therefore, such remuneration is subject democratic republic in which the sovereign power belongs to to personal income tax in Bulgaria unless a Double the people who exercise it through their representative bodies, provides otherwise. elected by direct and secret ballot. Every Bulgarian citizen over the age of 18 has the right to elect or to be elected. Bulgarian tax residents are subject to tax on their worldwide income, whereas non-residents are taxed on their Bulgarian- The National Assembly, elected for a period of four years, sourced income only. is the supreme body of state power. The National Assembly enacts, amends and rescinds the laws, appoints and dismisses Individuals, irrespective of their nationality, are considered the Government and the Directors of the Bulgarian National Bulgarian tax residents if they: Bank, draws up the state budget, adopts the resolutions for 17 holding referenda, constitutes, transforms and abolishes •• have a permanent address in Bulgaria ; or ministries. •• reside in the country for more than 183 days in any given 12-month period; or •• have been sent abroad by the Bulgarian State, by Bulgarian 2. Tax Structure state bodies and organizations, by Bulgarian enterprises Principal (the family members of such individuals are also considered •• Personal Income Tax residents); or •• Corporate Income Tax •• have centre of vital interests (personal and economic ties) in •• Value Added Tax Bulgaria.

The Bulgarian tax system also includes withholding taxes, one-off Subject to personal income tax is the gross taxable income taxes on certain expenses, local taxes and fees, tax on insurance including the basic compensation and all taxable benefits less premiums, duties, customs duties and environmental fees. the allowed deductions (Bulgarian and foreign mandatory social security and health insurance contributions at the individual’s The tax year in Bulgaria coincides with the calendar year. expense; voluntary pension/life/health/unemployment insurance contributions subject to certain conditions/limitations; standard flat deductions applicable to income from independent business activities, etc). 17 Individuals who have a permanent address in Bulgaria but their centre of vital interests is not in the country are not considered Bulgarian tax residents.

20 Bulgarian personal income tax on employment income as well Under Bulgarian tax depreciation rules fixed tangible and intan- as the statutory insurance contributions due by the employees gible assets can be depreciated for tax purposes on a straight-line should generally be withheld and paid by the employer through basis, except for land, goodwill, forests, plants and works of art. the monthly payroll. Bulgarian personal income tax return for Only tax depreciation as per a special tax depreciation schedule the respective year should be filed with the revenue authorities by is recognized for tax purposes (accounting depreciation is not 30 April of the following year. If an individual files his/her annual tax deductible). The assets are classified in seven categories with tax return by 10th of February of the following year, he/she a separate maximum annual rate applying to each category. can utilize a 5% discount on the portion of his/her outstanding liability paid within the same deadline. In case they have not An entity may choose to apply a lower rate for a certain category, utilized this option, the same discount of the outstanding annual as well as to change the rate each year. Maximum annual tax liability is available if: the tax return is submitted electronically and depreciation rates vary between 4% and 50%, depending on the tax due is paid by 30 April of the following year. the type of asset.

Individuals are generally not obliged to file annual tax returns if The tax deductibility of certain interest costs incurred by they have received only: employment income for which the full the entities (except for banks and other credit institutions) tax due has been withheld by the employer; non-taxable income may be restricted under the Bulgarian thin capitalization rules. and/or income subject to one-off tax. The interest costs that may be affected include all finance expenses incurred in relation to debt financing. If the annual Certain income of residents or non-residents is not taxed with average debt to equity ratio of the company exceeds 3:1 (some the annual tax return (e.g. dividends and liquidation quotas of) the interest expenses may not be tax deductible in the current for residents and non-residents; management and technical year. However, they may become tax deductible in the following services fees, interest, royalties, franchising and factoring fees, five consecutive years under certain conditions. capital gains from disposal of real estate and financial assets, etc. for non-residents having no fixed base in Bulgaria). It is taxed A Bulgarian corporate income taxpayer has the right to carry separately with specific flat one-off final tax which varies from forward its tax loss and offset it against future tax profits (if any) 5 to 10 %. The one-off tax may be reduced or eliminated under from the next five consecutive years. Once the taxpayer has an applicable tax treaty. EU residents may declare deductible chosen to carry forward its tax loss it is obliged to continue to expenses and claim corresponding refund of the one-off tax paid do so until the tax loss has been offset in full or the five-year on a gross basis under certain conditions. Exempt from taxation period has expired. Separate five-year offset periods apply to tax with one-off tax are capital gains from disposal of shares on losses occurring in consecutive years. Change of control over a regulated Bulgarian / EU / EEA market by EU / EEA residents. a company does not affect the tax losses carry forward capability.

Lump-sum taxation is applicable to individuals and sole traders Corporate income tax liabilities are reported annually through performing certain business activities (e.g. hotel and restaurant, fling an annual tax return by 31 March of the following year. retail business, etc.) who are not VAT-registered and whose turn- The corporate tax has to be paid also by 31 March. Corpo- over for the preceding year does not exceed BGN 50 thousand. rate taxpayers are obliged to prepare statistical reports to be filed along with the annual tax return. A discount of 1% from Corporate Income Tax the annual corporate income tax due but not more than BGN Subject to corporate income tax are companies and partnerships 1,000 is available if the annual tax return (along with the statis- established under Bulgarian law as well as permanent establish- tical report) is submitted electronically and the annual tax due is ments of non-resident entities in Bulgaria. paid by 31 March.

Bulgarian corporate income tax rate is 10 % is charged on Monthly or quarterly advance tax payments are due during the basis of the financial result of the taxpayer as per its profit the year. and loss account, adjusted with certain non-deductible items and tax allowances, as provided for in the law.

Investing in Central Europe 21 Bulgaria

Withholding tax The tax should be withheld by the resident payer and remitted Withholding tax is due on certain types of income when accrued to the budget by the end of the month following the quarter of to a non-resident entity (having no in the income accrual or of the decision for dividend distribution (in Bulgaria), such as interest, royalties, franchising and factoring case withholding tax on dividends or liquidation quotas is paid). fees, technical (including consultancy) and management services fees, income from hiring out movable or immovable property In case of capital gains, it is their recipient which should remit capital gains from transfer of real estate, capital gains from the withholding tax due within the terms indicated above. disposal of financial assets issued by resident entities or the State and municipalities (exemption for capital gains from disposal Entities resident in the EU may declare tax deductible expenses of shares on a regulated Bulgarian/EU/EEA market), service fees and claim a corresponding refund of the withholding tax paid and remuneration for the use of rights (unless actually received); on a gross basis. The claim is annual and should be filed by 31 penalty or damages payments (except for insurance compensa- December of the following year. tion) accrued to entities tax resident in low tax jurisdictions One-off tax Dividends are subject to 5% withholding tax when distributed Certain expenses accrued by the taxpayers are subject to one-off to individuals, resident non-profit entities and non-residents tax, namely representative expenses, social expenses provided (except for EU/EEA entities). Dividends distributed to resident in-kind to the employees and managers (with few exceptions), companies are not included in their taxable income except for and expenses related to the use of vehicles for management dividends distributed by special purpose investment companies purposes. and non-EU/EEA foreign entities. The tax rate is 10 % on the accrued expenses. Both the respective General withholding tax rate is 10 % on the gross amount for all expense and the one-off tax applicable to it are deductible for taxable income. For certain types of income, for instance capital corporate income tax purposes. gains, disposal of financial instruments, etc., taxation is made on net basis. Corporate tax incentives and specific tax regimes The amount of the annual corporate income tax due by entities 5% rate of withholding tax is applied on interest and royalties on their profits from manufacturing, including toll manufacturing, accrued to related party legal entities resident in the EU subject to may be partly or fully reduced. meeting the EU Interest and Royaties Directive conditions. Such interest and royalties will be exempt from withholding taxation The application of the is subject to certain limitations as of 1 January 2015. and conditions, including the EU state aid restrictions.

No withholding tax applies to interest over: Special purpose investment companies, close-ended licensed investment companies and collective investment schemes author- •• bonds or other debt securities, issued by a Bulgarian legal ized for public offering in Bulgaria are not subject to corporate entity and traded on a regulated market in the European income tax. Union (“EU”) or the European Economic Area (“EEA”);

•• a loan, granted by a tax resident entity of an EU or EEA Special corporate tax regimes are applicable to state-subsidized Member State, which is financed through issue of bonds enterprises, commercial maritime shipping companies and or other debt securities (issued specifically for this purpose) gambling businesses. traded on a regulated market in the EU or the EEA. The Bulgarian law allows a in the form of acceler- The withholding tax rates may be reduced under an applicable ated depreciation (100% per annum) for intangible assets formed tax treaty, subject to meeting certain criteria. as a result of research and development activities.

Tax treaty relief is applied by the income recipient directly if rules the income accrued for the calendar year does not exceed BGN The Bulgarian transfer pricing rules require that taxpayers apply 500 thousand. In all other cases a non-resident can benefit arm’s length prices in their related party transactions. Arm’s from tax treaty relief if an advance clearance is obtained from length prices are those which unrelated parties would have the Bulgarian revenue authorities under a specific procedure. agreed in similar circumstances. This requirement is imposed both to cross-border and domestic transactions.

22 Largely based on the 1995 OECD Guidelines, the Bulgarian Any entity may apply for voluntary VAT registration. However, if transfer pricing rules envisage 5 methods for determining arm’s voluntarily registered, such entity will not be able to deregister for length prices, e.g. the Comparable Uncontrolled Price Method, two years following the year of registration. the Resale Minus Method, the Cost Plus Method, the Transac- tional Net Margin Method, and the Profit Split Method. In order to register for VAT purposes foreign entities have to appoint a local fiscal representative, except when they have A taxpayer is obliged to prove the arm’s length character of its a registered branch in Bulgaria. The requirement does not apply related party transactions during a tax audit by applying one of to EU based entities. the above methods. Foreign entities not established and not VAT-registered in Bulgaria The legislation does not include specific requirements as to performing certain supplies to local businesses will not have the format and contents of transfer pricing documentation which to register for VAT purposes. The VAT will be self-charged by taxpayers can produce as evidence for arm’s length pricing. the local customer (reverse charge mechanism). However, a transfer pricing manual released by the Bulgarian •• Supplies to which reverse charge of VAT applies include: revenue administration mentions the items that would appear appropriate to include in the documentation. The manual •• services provided to businesses (with some exceptions); s contains a set of other useful guidelines relating to different •• supply of goods with installation; supply of natural gas and transfer pricing topics. For instance, with respect to intra-group electricity; services, the manual suggests specific profit mark-up ranges that •• supply of goods under a triangular transaction (i.e. a supply of have proved customary for Bulgaria. goods between three entities VAT-registered in three different EU Member States; under certain conditions the ultimate Value Added Tax (VAT) customer self-charges VAT, while the supplies for the first two The Bulgarian VAT legislation is based on the EU VAT rules and entities are exempt with right to deduction of the input VAT). Directive 2006/112/EC.

Monthly VAT returns are filed and the tax is due by the 14th of Applicable VAT rates are as follows: the following month. The tax period is a calendar month. •• 20 % for domestic supplies, intra-community acquisitions and VIES returns have to be filed monthly by the same deadline if importation from non-EU countries, intra-community supplies of goods or certain services have been •• 9 % for hotel accommodation services. performed during the respective month.

Entities are obliged to register for Bulgarian VAT purposes if they VAT can be refunded through the VAT returns within: have performed: •• 2 months (period for carry forward and offsetting of •• transactions with a place of supply in Bulgaria for which the claimable VAT against VAT payable) and 30 days of filing the VAT should be charged by the supplier exceeding BGN 50 the last VAT return (period for effective refund); thousand for the last 12 months; •• 30 days of filing the VAT return for entities which have •• intra-community acquisitions exceeding BGN 20 thousand performed exempt supplies with the right to deduction during the calendar year; exceeding 30% of the total turnover from taxable supplies for the last 12 months. •• distance sales in Bulgaria exceeding BGN 70 thousand during the calendar year. An investor in a large investment project which has received authorization by the Ministry of Finance can receive a refund Entities established in an EU Member State performing supply of within 30 days. The investor can also apply reverse charge for goods with installation in Bulgaria to customers non-registered VAT on importation of goods (without effective cash outflow). for VAT purposes are obliged to register irrespective of their taxable turnover. EU based foreign entities which are not registered and estab- lished for VAT purposes in Bulgaria can receive a refund of Foreign entities which receive services with a place of supply in the local input VAT incurred for goods and services used for Bulgaria for which the recipient has to self-charge Bulgarian VAT supplies with a place of supply outside Bulgaria. A specific are obliged to register irrespective of their taxable turnover. procedure before the authorities of the EU Member State of establishment has to be followed.

Investing in Central Europe 23 Bulgaria

Non-EU based entities may be entitled to a refund on a reciprocal Vehicle tax basis (i.e., if their country of provides the right to The tax rate is determined annually by each municipality within refund of VAT to Bulgarian entities). A specific procedure before ranges stipulated in the law. It depends on the type and charac- the Bulgarian revenue authorities has to be followed. teristics of the vehicle and applies to cars, ships and airplanes.

Intrastat Donation tax Intrastat is a system for collecting statistical data about intra- Donation tax is between 3.3% and 6.6% on the value of community movement of goods between Bulgaria and the other the donation. The exact rate is determined annually by each EU Member States. municipality. Lower rates and exemptions apply to donations between relatives. All entities VAT-registered in Bulgaria have to file Intrastat returns if the thresholds for incoming (“arrival”) and outgoing (“dispatch”) intra-community movement of goods between Inheritance by a spouse, children and their descendants are Bulgaria and the other EU Member States are exceeded. exempt.

The threshold triggering the obligation to the file Intrastat returns The tax is between 0.4% - 0.8% on inheritance exceeding BGN for 2014 are: 250 thousand in favor of brothers, sisters and their descendants (between 3.3% and 6.6% for other heirs). The exact rate is deter- •• BGN 360 thousand for arrival of goods; or mined annually by each municipality. •• BGN 210 thousand for dispatch of goods Tourist tax The deadline for filing Intrastat returns is the 14th day of The tax rate is between BGN 0.2 - 3 per night. The exact rate the month following the month of arrival or dispatch of is determined by the municipality in which the accommodation the goods. facilities are located.

Local taxes and fees Tax on insurance premiums Real estate tax A 2% tax is due on insurance premiums for insurance contracts The real estate tax is between 0.01% - 0.45% annually on covering risks on the territory of Bulgaria. The tax should the higher of the gross book value and the tax value of be collected by insurers but it is intended to be a burden to the immovable property (or on the tax value for residential prop- the insured. Certain insurance premiums are exempt from the tax erty). The exact rate is determined by the municipality in which (e.g., life insurance, permanent health insurance). the real estate is situated. Excise duties Garbage collection fee The Bulgarian excise duties legislation is based on the EU rules. It is determined by each municipality and is generally levied on Excise duties are applicable for certain products including: the gross book value of the real estate (or on the tax value for •• electricity and energy products (motor fuels, coal, etc.); residential property). Alternatively, it may be determined on the basis of the number and volume of waste containers used. •• alcohol; It is expected that from 2015 municipalities will not be allowed •• products. to determine the waste collection fee on the basis of the gross book value, tax value or the market price of real estate. In 2014 The excise rate for electricity is BGN 2 per megawatt hour a new methodology should be developed and adopted by (BGN 0 for electricity sold to individuals for use in their homes). the Parliament.

Transfer tax The tax rate is between 0.1% - 3% on the higher of the sales price or the tax value of the transferred real estate / on the insur- ance value of cars. The exact rate is determined annually by each municipality.

24 The excise duty rates for the most common motor fuels are: products either on their own or through a licensed collective waste management organization. •• Leaded gasoline – BGN 830 per 1,000 liters;

•• Unleaded gasoline – BGN 710 per 1,000 liters; The products which are subject to the product fee include: •• Gas oil and kerosene – BGN 645 per 1000 liters; •• certain motor vehicles and tires; •• Liquefied petroleum gas – BGN 340 per 1,000 kilograms; •• goods with plastic, paper, metal, glass, wooden, textile, etc. •• Natural gas as a motor fuel – excise duty on natural gas of packaging; 0.85 lev per gigajoule will apply until a decision by the Euro- •• batteries; pean Commission for non-compliance with the rules on State •• motor oil; aid in the form of a reduced rate of excise duty on natural gas as a motor fuel. If such a decision is issued, the date of its •• electric or electronic apparatus and appliances. issuance excise rate rises to 5.10 lev per gigajoule.Heavy fuel oils for ships – BGN 645 per 1,000 kilograms. 3. Business Establishments The excise duty rates for the most common heating fuels are: Bulgarian legislation allows for the following types of business organizations: •• Gas oil and kerosene– BGN 50 per 1,000 liters (the rate applies only to marked gas oil and kerosene); •• an unlimited (general) partnership; •• Heavy fuel oils, heavy oils other than lubricants, tar, creosote •• a limited partnership; oils – BGN 50 per 1,000 kilograms; •• a limited liability company; •• Liquefied petroleum gas – BGN 0; •• a joint stock company; •• Natural gas – BGN 0.6 per gigajoule for use in industry; •• a limited partnership with shares; •• Coal and coke – BGN 0.60 per gigajoule. •• a sole trader;

The following excise duty rates apply to alcohol: •• a branch; •• Beer – BGN 1.5 per hectoliter/degree Plato; •• a holding; •• Ethyl alcohol – BGN 1,100 per hectoliter of pure alcohol •• a co-operation; measured at 20°C; •• a representative office. •• Intermediate products – BGN 90 per hectoliter of product; The most appropriate types for carrying out business in Bulgaria •• Still and sparkling wines, and other still and sparkling are: a limited liability company and a joint stock company. fermented beverages – BGN 0. Companies may also open a branch office. All of these have to be entered into the commercial register. The following excise duty rates apply to: •• Cigars and cigarillos – BGN 270 per 1,000 items; Limited liability company - “OOD” It is a commercial company with share capital owned by its •• Smoking tobacco (for pipes and cigarettes) – BGN 152 per shareholders whose liability is limited to the amount of the shares kilogram. subscribed. A limited liability company may be founded by one or more persons, including foreign natural or legal persons. The excise duty rate for cigarettes is determined as the sum of: The minimum capital is BGN 2. Contributions to the share capital •• A specific duty of BGN 101 per 1,000 cigarettes; and may be paid in cash or in kind. The statutory bodies of the limited •• A proportional duty of BGN 23% of the sales price liability companies are the general meeting of shareholders, which must be held at least once a year, and the managing Environmental fees director(s). A sole shareholder limited liability company is called The producers or importers (or the entity performing an intra- “EOOD”. It is owned by a natural or legal person. The sole community acquisition) of products the use of which leaves large shareholder exercises the powers of the general meeting and (a) amounts of waste have to pay a product fee based on the type managing director is appointed to run the company. A limited of waste. The entities can avoid paying the product fee if they liability company must prepare financial statements each year. collect or recycle certain amount of the waste produced by their

Investing in Central Europe 25 Bulgaria

Joint stock company - “AD” Minimum monthly gross salary: BGN 340 It is a commercial company with share capital owned by its shareholders whose liability is limited to the amount of the shares Average monthly gross salary: BGN 79618 for the first quarter they subscribe. A joint stock company can be founded by one of 2014. (“EAD”) or more persons, including foreign natural or legal persons. The minimum share capital of a joint stock company Social security: Individuals working in Bulgaria and in certain is BGN 50,000. A share capital higher in value is required for cases working abroad are subject to Bulgarian statutory insurance the establishment of special types of companies like banks, insur- contributions unless the EU regulations or a bilateral social secu- ance companies, etc. The financial statements of the joint stock rity agreement provide otherwise. companies are subject to statutory audit. The EU regulations on the coordination of the social insurance schemes apply with respect to citizens of EU/EEA/, Branch as well as to eligible third-country nationals in a cross-border Foreign legal entities registered abroad and allowed to perform situation. Also, Bulgaria has a number of bilateral social security commercial activities in the country of their registration can agreements with other countries. register a branch office in Bulgaria. No authorized capital is required to open a branch. A branch is not a legal entity. The social insurance contributions are calculated on the basis Branches are obliged to maintain accounts as an independent of the gross remuneration received by the employee subject to company. a maximum earnings cap of BGN 2,400 per month (BGN 28,800 annually). Representative Office It is regulated by the Investment Incentives Law. Foreign persons The aggregate rates of statutory insurance contributions are who are entitled to engage in business activity under the legisla- split up between the employer and the employee in a certain tion of their own countries may set up a representative office proportion. which is registered with the Bulgarian Chamber of Commerce and Industry. Representative offices are not legal persons and For 2014 the following rates apply for statutory social insurance may not engage in economic activity. contributions.

Type of Employer Employee Overall 4. Labour and Wages contribution rate Regular Working hours: 8 hours a day. A 48 hour rest period Pension Fund 7.1% 5.7% 12.8% is required during a 7-day period, normally the half of it is on Contribution* Sunday. Universal 2.8% 2.2% 5.0% Pension Fund* Annual paid leave: not less than 20 working days. Labour 0.4% 0.4% Accident and 1.1% 1.1% Retirement: An individual is entitled to Bulgarian pension for Occupa- tional insurable length of service and age if he/she attains the statu- Diseases Fund** tory age (63 years and 8months for men and 60 years and 8 Common Illness 2.1% 1.4% 3.5% months for women) and the statutory length of service (37 years and Maternity and 8 months for men and 34 years and 8 months for women). Fund The statutory age increases by 4 months every year to reach Unemployment 0.6% 0.4% 1.0% 65 years for men and 63 years for women. Similarly, the statu- Fund tory length of service increases by 4 months every year to reach Health 4.8% 3.2% 8.0% 40 years for men and 37 years for women. Insurance Alternatively, entitlement to pension may be acquired with15 years Total*** 17.8% 12.9% 30.7% insurable length of service and attainment of the age of 65 years 18.5% 31.4% and 8months (both for men and women). The statutory age *Employees born before 1960 are liable for Pension Fund Contribution of increases by 4 months every year to reach 67 years. 17.8% split between the employer and the employee as follows 9.9% : 7.9% and do not pay the contribution to the Universal Pension Fund of 5%. **The rate for Labour Accident and Occupational Diseases Fund varies between 18  As per the publicly available information provided by the National Institute 0.4% – 1.1% depending on the type of the economic activity performed. of Statistics. ***Additional employer contributions may be due for certain hazzardous profes- sions: for Pension Fund (3%) and for Professional Pension Fund (7% or 12%). 26 Labour contracts Upon termination of the employment relationship after According to the Labour Code the employment contract may the employee has acquired the right to a pension for insured be concluded for an indefinite period of time or, alternatively, service and age, irrespective of the grounds for the termination, as an employment contract for a fixed term. An employment he is entitled to compensation by the employer in the amount of contract is considered to be concluded for an indefinite period his gross labour remuneration for a period of two months. unless explicitly agreed and stated otherwise. An employ- However, if the employee has worked with the same employer ment contract concluded for an indefinite period may not be for the last ten years or more, he will be entitled to compensation changed to a fixed-term contract unless explicitly requested by equal to his six months gross labour remuneration. the employee, and stated so in writing. Immigration regulations An employment contract for a fixed term may be concluded only Bulgarian immigration legislation divides the expatriates in under circumstances and conditions explicitly provided for under two categories: EU, EEA or Swiss nationals, and third-country Bulgarian Labour Code. nationals.

Employment contract for a trial period Third-country nationals In cases when the work requires the ability of the employee The work and residence regimes for third-country nationals are who will perform it to be tested, his final appointment may be more restrictive and aim at protecting the internal labour market. preceded by a contract providing for a trial period of up to 6 Not all third-country nationals are allowed to enter Bulgaria months. Such a contract may also be concluded in the case when and remain in the country without a valid entry visa (a so called the employee wants to make sure the job is suitable for him. “visaless stay”). To work and reside in Bulgaria they need a work permit, a long-term visa D and a residence permit. Termination The employment contracts should be terminated in writing, Employment: third-country nationals need Bulgarian work grounded on explicitly provided by Bulgarian Labour Code permits to legally work in the country. A work permit is required termination grounds and following the applicable formal for the expatriate both to be employed under Bulgarian labour termination procedure. Most of these procedures could be agreement and to be seconded to the country by a foreign regarded as employee protective ones. In any case, the dismissed employer. To approve a work permit the employment authorities employee has the right to file a claim against the employer have to be convinced that the employees who are third-country in the state courts and claim the damages in cases of unfair citizens are not over 10% of the total work force of the Bulgarian dismissal. There are some categories of employees that enjoy employer. A work permit is valid for a maximum term of one year protection against dismissal (for example absent employees (e.g. and may be subsequently renewed under certain conditions. on sick leave, pregnant, nursing mothers, military assignment), employees suffering of explicitly listed diseases, mothers of chil- There are several categories of third-country nationals, who dren up to three years of age, etc.). are exempt from the work permit requirement, namely: indi- viduals who are registered with court resolution as executives of Termination notice periods may not be less than 30 days and a Bulgarian company/Branch office, general managers of repre- may not exceed 3 months. The termination period for fixed sentative offices, expatriates who have a Bulgarian permanent term employment contract is 3 months but not more than residence permit etc. the remainder of the employment term. Residence: upon obtaining a Bulgarian work permit or being The employment contracts could be terminated upon mutual registered as an executive / general manager, the expatriate consent of the parties. In case that the termination of should apply for a long-term visa D (immigration visa). Such visas the employment contract is upon initiative of the employer, are issued by the Consulate Sections to the Bulgarian Embas- he could offer a compensation of not less than four gross sies abroad. The visa D is a multiple entry visa and may be valid monthly salaries of the employee. for a period of 180 days within 6 months. When the expatriate obtains his/her visa D, he/she is entitled to apply for a Bulgarian In addition to other statutory compensations, upon dismissal due prolonged residence permit. The residence permit is issued for to closing down of the enterprise or part of it, staff reduction, a maximum term of one year and can be subsequently renewed. etc., the employee is entitled to a special additional compen- sation from the employer. This compensation is due only if the employee is unemployed after the termination of the employ- ment contract.

Investing in Central Europe 27 Bulgaria

In certain specific cases, third-country nationals may obtain The annual number of university graduates rose strongly up a short term residence business visa. The business visa is a special to 2002, when there were around 45,500 graduates and then type of one or multiple entry visa, issued to third country fell back to 41,500 in 2005. Since then there was a new sharp nationals, who do not have a visa-less stay in Bulgaria and need increase with the number reaching 60,000 in 2011. to visit the country for attending business meetings or project implementation. It is valid for a maximum period of 90 days Private education at primary and secondary levels, although not within 6 months, 1 year or in exceptional cases 5 years. The busi- significant in numerical terms, is growing fast: in 2010 there were ness visa does not allow third-country nationals to be employed 68 private schools, with 6,179 pupils. In 2006/2007 the share in the country. of computers with Internet access in the Bulgarian schools was 85.2%, while in 2010/2011 the percentage reached 94.1%. EU, EEA or Swiss nationals Employment: Employment: expatriates and their family members, who are EU, EEA or Swiss nationals, do not need a work permit 6. Infrastructure to be legally employed in the country. Bulgaria’s transport infrastructure is reasonably well developed, but has suffered from low spending and poor maintenance in Residence: EU, EEA or Swiss nationals may enter and reside in the post-communist period. Gradual improvement in communica- Bulgaria only with their national passport or ID card for a period tion routes should arise from two factors: first, the development of up to three months. Upon expiry of the said three-month of European transport corridors (four of which are set to pass period, they should apply for a Bulgarian long-term residence through Bulgaria); and second, investments aided by an influx of certificate. The latter may be issued for a maximum term of five EU funds (€6bn is to be invested in transport under the infrastruc- years. ture programs for 2007-2015).

Family members of EU, EEA or Swiss nationals, who are third- country nationals, follow the status of their family member and Bulgaria had 37,300 km of roads in use at end-2001-an increase can exercise their right of free movement. They may be required of 400 km since end-1994. All but 3,000 km were hard-surfaced, to have an entry visa. with motorways accounting for 324 km. The proportion of road surfaces categorized as “good” decreased significantly in 2004 and 2005, and at end-2005 only 70.1% of motorways and 5. Education 34% overall of roads were rated above Category IV. At the end The educational system, traditional in style, has generally been of 2009 there were 19,435 km of roads rated above Category considered a national asset. However, inadequate funding and IV, 418 km of which motorways. Development plans focus on low teacher morale in the post-communist period have led upgrading and on investments-especially in motorways- to to some erosion in its quality. Furthermore, the shortage of integrate the country’s road system with the international Western-style business education, particularly in finance and network, although implementation has so far been slow, owing marketing, has generally been more serious than in the more to policy and legal disputes. An infrastructure strategy adopted advanced transi- tion countries, although this is progressively in 2006 envisages the construction of 717 km of motorways in being corrected. The country’s elite foreign-language secondary the 2006-15 period. Bulgaria’s government is planning a total schools, especially the English-language schools of Sofia and investment of about BGN 1.7 billion in infrastructure construc- , have produced a steady supply of fluent and well- tion in 2011. The BGN 1.7 B in question will come from EU educated linguists for foreign companies and have provided funds and the state budget. Of those, BGN 1.2 billion will be much of the country’s political elite. invested in the construction of roads and highways, and the rest will be invested in municipal infrastructure projects. Currently The number of teaching staff has gradually declined, drop- the government is emphasizing on the construction of Trakia, ping from 126,048 in the system as a whole in the 2000/2001 Lulin, Maritsa and Struma highways. The construction of 120 km educational year to 104,078 in 2010/2011. A further drop of new highways is in progress. can be expected: teachers have been involved in pay disputes with the Ministry of Education and Science in recent years, and gradual pay rises are to be accompanied by a restructuring program. The number of students in technical colleges and institutions of higher education rose considerably in the post- communist period, from 183,500 in 1990/91 to 285,000 in 2012/2011.

28 Railways Rail is a significant domestic mode of transport for freight, although road transport now accounts for a larger (and increasing) share of the total. In 2009 there were 4,150 km main lines (of which, in turn, 68.3% were electrified). For the period 2000-2009 the State has invested more than BGN 2.1 billion (EUR1.074 billion) in the sector. However most of this money was needed to support the operations of the state-owned company in charge of the system. Investment, planned at around €1.2bn in 2007-15, will focus on the continuing overhaul and repair of existing infrastructure, on upgrading rolling stock, and on modernization work, such as further electrification of track and double tracking. Both business and railway officials have been vocal about the system’s problems: in late 2006, around two- thirds of main track was deemed to be in unsatisfactory condition and the 7,083 rail cars at the disposal of Bulgaria State Railways (BSR) are reckoned to be around 1,470 short of the number needed to meet freight needs in 2007. demand for international air travel. Bulgaria has two other major Shipping airports, at Varna and . A €400m investment across both Bulgaria has five main ports, of varying degrees of modernity. airports is planned to cope with an expected rise in passengers The largest are Varna and Burgas, both on the Black Sea; Varna to 8m in 2040, from 2.7m passengers in 2004. In response to mainly handling containers, grain and bulk goods, and Burgas demand for both cargo and tourist-oriented low-cost passenger crude oil and some bulk commodities. There are three sizeable transport, the government recently added and ports on the (Ruse, Lom and ), and 24 smaller Rousse (in northern Bulgaria) to its list of airports able to accept sea and river ports. Of all modes of transport, sea trans- international air traffic. Some of the airports or parts of them are port has declined the least since 1989, perhaps because it is to be awarded concessions. the least dependent on the vagaries of the domestic economy. The geographic position of the ports is their key advantage. Telecommunications Bulgaria entered the post-communist era with one of the highest However all of them need renovation. There has been some densities of analogue fixed telephone lines in the former Soviet modernisation of the ports, but much more needs to be done if bloc. Although the quality of the equipment which used to the sector is to become more internationally competitive. Varna support the network was less impressive than its density, it has has ambitions to rival Romania’s Constanta, but its plans include improved greatly in recent years. The fixed-line monopoly of a very costly relocation of Varna East port and the construction the Bulgarian Telecommunications Company (BTC) ended in of three new terminals; Lom already upgraded its South Pier and 2005, when alternative fixed-line operators were given access to is seeking to exploit its position on the EU’s north-south Corridor its network. Over ten alternative operators had been licensed by IV by investing in two new terminals. A system of 25- or 30-year late 2006 but their market share is small. concessions is intended to play an important role in upgrading ports and terminals, with concessions on a few of the country’s Mobile penetration has risen rapidly in recent years, with smaller ports already awarded or in the pipeline. subscriber numbers at over 10.5m at end-2010, compared with 0.7m at end-2000 and 4.73m at end-2004. The penetra- Air transport tion rate was 80% at end-2005 and in 2010 it was reported Air is the least significant mode of freight transport, carrying just to have risen to 140% (greater than the average for the EU). 21,000 tons in 2005 (although the total was three times higher Each of the three mobile operators has a licence for universal than in 2002). Currently there are five air carriers engaged in mobile telecommunications service (UMTS, or “third-generation” the State Aviation. Bulgaria Air (the carrier that emerged from mobile). Heavyweight foreign firms are playing an increasing role the sale of national carrier Balkan Airlines) handles most busi- in Bulgaria’s telecoms sector. ness. Recently it bought four new airplanes aiming to improve its image. Sofia airport, which handled 1.6m passengers in 2004, has undergone a €210m upgrade to provide it with the capacity and modern facilities needed to deal with the expected rise in

Investing in Central Europe 29 Bulgaria

The Internet 7. The Most Active Industries/Sectors Internet penetration is rising and has already reached half of Agriculture the population of the country. Of the people aged between Bulgaria had 5.3m ha of utilised agricultural land in 2005, down 16 and 74, 40% use Internet regularly (every day or once in from 5.7m ha in 1999. Of this, 3.1m ha was classified as arable. a week). Above 20% of the employees in the companies used Land prices in Bulgaria are far lower than those in the European computer on their workplace at the end of 2009. The shift from Union. The average price per decare in 2011 varied between BGN dial-up connections to high-speed local area networks (LANs), 220 and BGN 320 (EUR 112 – 164). cable networks, and asymmetric digital subscriber line (ADSL) connections is supporting higher Internet usage. In the coming Bulgaria’s chief grain crop is wheat, grown mainly in Dobrudzha years, increasing digitalization of the network, better regulation, in the north-east. The country’s harvests of barley and maize increased competition and higher foreign investments should are also substantial. Major industrial crops include sunflowers, improve the country’s ability to take advantage of the Internet. tobacco and sugarbeet. Tomatoes, cucumbers and peppers are important exports. Apples and grapes are significant fruit crops, The media but production continues to suffer from the long-term effects of High levels of literacy and of television and radio ownership post-communist neglect of many orchards and vineyards. have boosted the influence of the media. There are six televi- Grapes are used mainly for wine, a major export oriented mostly sion channels that are at present licensed as national terrestrial to European markets and Russia. Europe represents a potentially broadcasters. Three state radio channels broadcast nationally, promising market for poultry and other meat exports, but difficul- and the private sector has several national licensed radio chan- ties in meeting EU sanitary regulations remain a constraint. nels. The range of newspapers available is wide for a market of Bulgaria’s size (none of the papers are state-owned). Agriculture is dominated by the private sector, which accounted for 98.4% of the sector’s gross output in 2004. The private At national level these include: 24 Chasa (24 Hours) and Trud sector includes a sizeable number of co-operatives operating on (Labour), the two largest-circulation dailies owned by Media privately owned land-although at around 1,520 in 2005 these Group Bulgaria Holding; Standart, Monitor, Sega, a popular numbered 23% fewer than two years earlier. These now have left-of-centre daily; Duma, a daily, which has a relatively low more in common with Western-style co-operatives than with circulation and is affiliated to the Bulgarian Socialist Party (BSP) the post-communist co-operatives that were in operation for Capital Daily; and the weekly Capital, which is widely regarded much of the 1990s. According to official statistics, the labour as the most intellectually serious publication. force in agriculture (including fisheries and forestry) averaged 801,900 in 2005, with the sector accounting for a little less than As of early 2011 importance of the state owned electronic media one-quarter of total employment: those employed under labour is limited. State-owned national channel BNT has a share of 7% contract, however, accounted for only 8.4% of the total-no among viewers. Nova TV (owned by the MTG Group) is second doubt a reflection of the continued importance of small family with 14% being well behind the leader BTV (part of CME Group) farms. Currently over 60% of the people working in the sector which currently has over 40% of the market. Apart of the top 3, are over the age of 55. there are numerous cable and regional TV operators with various political and content focuses, which provide wide choice for Mining and semi-processing domestic audience. Similar is situation on radio market. Bulgaria has a wide variety of metallic and non-metallic mineral resources. Lead-zinc and copper deposits are sufficient to support Since 1989 senior-level appointments in the state-owned elec- large non-ferrous metallurgical works, notably at Kurdzhali and tronic media have been politicized and subject to various forms . Several significant gold deposits exist and have attracted of government pressure, although the cruder forms of control foreign investors. Proven deposits of more than 50 non-metallic and censorship have been absent. Privately owned electronic and minerals exist, among them refractory dolomites, quartzite, print media have not been subject to systematic state control, but kaolin, marble, refractory clay and gypsum. journalistic standards are uneven and self-censorship is perceived as widespread. The fact that most newspapers are affiliated either to political parties or to business groups has been a further complication; regulatory bodies for the electronic media have sometimes taken intrusive or eccentric decisions; and the legal environment is not always conducive to robust expression.

30 In recent years mining experienced revival from the low base Underpinned by foreign investments, transport machinery and achieved in the course of post-communist era restructuring. This electrical & optical industries are leading recovery in machine development is underpinned from high prices of non-ferrous building in the recent years. Among sub-sectors, stronger growth metals, as well as increased demand for building materials and was recorded by ship-building, production of spare parts and quarrying products by booming construction industry. components for automotive industry, etc. Production lines in which the country is strong are hydraulic machines, fridges, Iron and manganese ore are extracted, although output of iron optical equipment, etc. ore covers only a fraction of the steel industry’s requirements. The defense industry was hit hard by the demise of the Warsaw Manufacturing Pact and the closure of lucrative markets in the developing Bulgaria’s manufacturing industry is the product of heavy indus- world-in some cases reacting to the latter by murky and politi- trialization in the socialist period. Bulgarian industry was therefore cally damaging deals with objectionable regimes. Currently it is hit particularly hard by the disintegration of the Council for downsized, mostly privatized, mostly by management-employee Mutual Economic Assistance (CMEA, or Comecon, the commu- buy-outs (MEBOs) of dubious value, and its overall importance nist states’ economic bloc) and sudden exposure to a world for manufacturing is limited. Some plants have found new uses market in which many of its specialist products were uncompeti- in civilian and NATO-oriented production, and ongoing moderni- tive. The manufacturing sector returned to growth in 2000, with zation of Bulgaria’s armed forces in accordance with NATO exporting industries performing most strongly. requirements will lead to work for others in the roles of subcon- tractors or offset partners. Disputes over the use of Russian The sector recorded very strong growth in output in the period technologies have bedeviled many plants for much of the post- 2003 – 2005. However in the last few years the manufacturing communist period. levels decreased and in November 2009 the manufacturing output was 10.8% less than in November 2008. Performance Construction across individual sectors has been highly uneven. Food- Construction was the economic branch worst affected, in volume processing, including tobacco-processing, was important terms, by post-communist decline, collapsing in 1991 to less historically, but has suffered from the shrinkage of former Soviet than one-third of its 1989 level of activity, and reaching a low markets. There have been several successful foreign investments point of less than one-quarter of its 1989 level of output in 1997. in the sector, although these have so far been oriented mainly Construction activity has grown consistently since then. Gross to the internal market. Significant foreign investment helped value added (GVA) in construction rose by over 14% in both clothing exports, largely to the EU, boom until 2004. However, 2004 and 2005. Construction activity has contributed significantly these fell back in 2005 as the EU removed restrictions on imports to recent economic expansion in Bulgaria. From an expendi- from , before a mild revival began in 2006. Increased ture perspective, much of the high level of stockbuilding in competition from low-cost producers appears to be reinforcing the national accounts represents construction projects. Bulgarian firms’ tendency to move up the value-added chain by positioning them- selves as flexible and logistically convenient Until 2009 the sector was undergoing a boom, with housing, producers, rather than relying purely on price competitiveness. industrial and commercial construction all growing strongly. In 2009 both the import and export of clothing products fell by The financial crisis put an end to this leaving many small 20%. construction firms struggling to survive. Worst affected was the construction of buildings which is due to the lack of invest- The oil refining industry has developed on the basis of exports ment. During the second quarter of 2010 576 buildings were and a domestic market that, until recently, was fairly well finished and ready to be used which is 20% less than the number protected. The chemicals industry was the beneficiary of heavy for the same period of 2009. Infrastructure projects, financed investment in the communist period, but was vulnerable by the State are becoming a significant part of the contribu- thereafter to the cyclical nature of the branch, to international tion sector and are likely to become more important in the next competition and, in some cases, to rises in the price of natural couple of years. gas-which is used as both feedstock and fuel. Ferrous metallurgy, an industry in which the giant combine at Kremikovtsi, which is now in liquidation, used to account for 90% of Bulgaria’s production, has suffered from delayed privatisation and technical obsolescence.

Investing in Central Europe 31 Bulgaria

After the decrease of growth in 2009 and 2010, the registered Process of banking consolidation was completed in 2003. growth in the Construction sector in 2011 y/y is 87.1% according The share of foreign banks in the domestic credit market has to the National Statistics Institute. Construction output rose by increased from 38% in 1999 to over 80% in 2011. 4%y/y in April following a revised 2% y/y hike a month earlier. Civil engineering works rose by 9.2% y/y in April, faster than Currently, Bulgaria FSI market, although still developing and the 7.5% increase in March. The volume of buildings construc- vulnerable, remains relatively stable. Operating in a financial tion edged up by 0.1% y/y in April, following a 2% decline in environment where the Central Bank is legally denied from own the previous month. In seasonally adjusted terms, total construc- monetary policy and is restricted from lending to commercial tion output was 0.2% higher on the month in April as registered banks and government, and where the national currency is tied by Intellinews in June 2012 Country report. to Euro at fixed rate, Bulgarian banks maintain their balance sheets simple, with no exposure to securities and other assets Tourism praised through markets. Bulgaria provides recreation and tourism potential with its 102 resorts, 34 of national importance (five mountainous and ten at As a result, the risks with the banking sector portfolio are limited the Black sea coast and 68 of local importance (spa, forest and to the credit exposures to corporates and individuals. Thus seaside). the sector has been affected by the crisis significantly slower and over a longer period, which allowed banks to develop and imple- The number of foreign tourists visiting Bulgaria dropped by ment respective measures and keep control over the asset side of 4.6% y/y to 605,937 in May, the statistics institute reported. the balance sheets. Banking sector profits were seriously affected, The rate of decline decelerated significantly from April, when but no significant write-offs were necessary and no substantial the number of foreign tourists in the country reached 14% losses were reported. Although dominated by Greek bank inves- lower y/y. Foreign tourist visits rose by 31.2% in monthly terms, tors, Bulgarian banking market did not diminish, but continued following the seasonal pattern. In May, both business and vaca- growing, even in the period of massive repayment of liabilities, tion trips stayed below their y/y numbers (down by 3% y/y and which Bulgarian subsidiaries owed to their Greek parents. 8.4% y/y, respectively). Tourists from the EU countries visiting Bulgaria decreased by 8.6% y/y in May mainly due to reduction The banking market, however, is still fragmented and is expected in number of tourists from Germany and Great Britain. Russian to consolidate further. The macroeconomic outlook is that tourists increased numbers have the highest contribution to the economy will continue to struggle but still growing, while the positive trend. The number of Bulgarians travelling abroad unemployment rate will remain stable and not that high. Having added 5% m/m and 4.6% y/y to 348,414 in May, respectively no problems with the liquidity, the banking sector will return 35% holiday makers and 38% - for business travels. This year’s to growing mode as soon as economy turns back to the rates tourism revenues are expected to exceed last year’s and to reach as observed before the crisis – of 6 percent and above. BGN 3bn, as compared to about BGN 2.8bn in 2011, according to Government’s estimates. Some 5-8% higher number of foreign The insurance market is still relatively underdeveloped, but is tourists are expected by year-end, mainly due to increased growing quickly. Foreign involvement was severely limited until number of tourists from Russia and (up by 15-20%). a Western-style insurance law passed in mid-1997 opened up the market. In 2005 – 06 insurance sector underwent structural Financial services change, with key players on the local market being bought by Until 1996 the banking system was weak. State banks lend to KBC, Generalli, Wiener Staedtische and Uniqa. Non-life Insur- loss-making state industries, and these credits grew steadily ance sector suffered from the crisis but there are recent signs as loans were rolled over and unpaid interest was added. In of recovery and moving back to the growth rates, which were the private sector, collusive relations between banks and entre- regarded as normal for the decade before 2008. However, preneurs resulted in the granting of large loans with little or no the gap in penetration of life insurance sector remains as large collateral and no prospect of repayment. As part of the program as it was always before and with current perspectives which of reforms linked to the introduction of the currency board in do not move to better. 1997, the Bulgarian National Bank (the BNB, the central bank) introduced stronger banking supervision and tighter prudential After reaching 2.4 billion in 2008, the private pension funds rules. A bank privatisation programme was executed with buyers dropped to 1.6 billion at the end of 2009 to recover to 2.5 billion being mostly respectable international groups and, till the end of at mid-2012. A pension reform is being implemented which 2004 the state controlled only one bank with negligible market includes smooth increase of the retirement age over the next few presence. years.

32 The capital market is small and is likely to remain so. With 9. Investment Incentives the increased attractiveness of the market around EU accession, The main thrust of the government’s incentive policy is to in late 2006 – early 2007 the market experienced boom. Initial manage the development of a free-market economy. Foreign Public Offerings (IPO’s) became a viable source for fund-raising investors have free access to the privatization program, which and many local companies turned to it. It has significantly shrunk, comprises both the privatization of state-owned companies and however, as affected by the crisis and no signs for real recovery the granting of concessions for the use of state-owned assets. are currently observed. The total market capitalization remains low – about 16% to GDP and the average daily traded volume is Tax incentives around 1.5 million. Under the provisions of Corporate Income Tax Act some general tax incentives are applicable. They are mainly related to invest- ment in depressed regions and employment of disabled and 8. Industrial Parks unemployed people, such as: After the residential property boom in Bulgaria of 2003 and •• Manufacturing companies operating in depressed regions 2004, the end of 2005 and 2006 were registering increased with high level of unemployment are entitled to corporate activity and interest in the industrial property market. income tax reduction or exemption subject to certain condi- tions, provided in the law. The major difficulty in the industrial property market is the size of the available plots. Most plots for sale are small and acquiring •• Companies are entitled to certain deductions for hired a larger than 10 acres plot close to major roads and with appro- employees: (i) who have been registered as unemployed for priate infrastructure proves to be very difficult. The demand of a period exceeding one year prior to their current employ- industrial plots close to major cities and/or major motorways is ment; or (ii) have been unemployed and are of more than 50 several times higher than the supply. Because of its economic years of age; or (iii) are disabled unemployed persons. importance the major interest is for plots around Sofia where •• Companies employing disable individuals are entitled for a number of international companies and manufacturers are corporate upon meeting the requirements set building productions and warehouse facilities for their Bulgarian in the law in proportion to the number of people with disabili- and regional operations. Most plots around the round ring ties to the total of number of employees. (the Sofia M25) are already acquired by various companies and the market is looking at the western parts around the capital, Entities VAT-registered in Bulgaria investing in a large investment as well as poorly developed northern surroundings of Sofia. project can, upon receiving authorization by the Ministry of Most attractive seem to be the areas around the motorways Finance: going south towards and north-west towards the Serbian •• self-assess the VAT on importation of certain goods (i.e., border. The decrease in the construction activity as a result of the reverse charge mechanism will apply and the VAT the economic downturn, however, has lowered the interest for on importation will not be related to a cash outflow for industrial plots. the entity). The goods should not be subject to excise duty and should be included in a list agreed with the Ministry of Out of the capital most dynamics in the Bulgarian industrial prop- Finance. erty market are the cities of , Plovdiv with the new Kuklen industrial zone and Russe with the options for cheap •• Refund VAT under a faster procedure – within 30 days of filing transportation along the Danube river. the VAT return.

Even more companies are interested in building up their ware- house for their regional and European operations. With its strategic geographical location Bulgaria attracts many companies setting up their distribution centers to operate in the Balkans. Warehouses occupancy varies between 50-70% for the old warehouses and 95-97% for the newly build ones. In Sofia only 2% of the ware- houses are not occupied and the average rent is €5/sq.m.

Investing in Central Europe 33 Free-trade zones 11. Expatriate Life Free-trade zones offer some tax and customs benefits to foreign Now that Bulgaria is a fully-fledged member of the European investors. Union, greater numbers of international businesses have estab- lished operations in the nation’s capital Sofia and as a result Free-trade zones have been established at Ruse, Burgas, Vidin, the levels of inward migration from international professional Plovdiv, , and Dragoman. expatriates has stepped up a gear.

The import and export of goods to and from, as well as between, There are now many expats living in Sofia who herald from these areas could be exempt from customs duties, VAT, excise the UK, Ireland, America and Germany for example, and if you’re duties upon meeting certain conditions. considering going to join them you’re going to want to know all about the things to do for expatriates living in Sofia outside of Incentives and foreign investment strategy working hours. Bulgaria’s government is committed to the development of a free-market economy; the following are designed to attract There are no special rules regarding taxation of expatriates foreign investments in the country. in Bulgaria. They are taxed according to the general rules 1. Opportunity for foreign investors to tender for concessions to applicable. use state-owned assets.

2. Liberalization of the import and export regimes. 12. Weather and Climate 3. Guaranteed repatriation of profits. Bulgaria’s most comfortable temperatures are found mid-May to 4. Foreign investors enjoy the same rights as domestic investors. mid-September. The country’s climate is influenced by the Medi- terranean and Black Seas, making for generally mild conditions 5. Internally convertible currency. throughout the country. Summer days rarely get too hot. In the mountains and in the evenings, temperatures are about 10 Doing business in Bulgaria, however, has its challenges. degrees F/5 C cooler than in the rest of the country, on average. The country must deal with still low living standard of most of its The winter can be bitterly cold, snowy and damp, but health spas residents and the uncertainties that have accompanied economic are open, skiing is good, and the concert season is in full swing. reforms. New legislation affecting business life is rapidly devel- Be sure to take a sweater, even in the summer, for cool evenings. oping, and it is therefore essential that foreign investors plan carefully and obtain expert advice from the very beginning of their business dealings in Bulgaria.

10. Foreign Direct Investment (FDI) After the leap in 2008, when FDI in Bulgaria reached EUR 5685 million, there was a significant decline throughout the following years until 2011, when the flow was marginal. However, certain improvement is observed as of early 2012. Reported FDI for the first seven months of the year amount to EUR 846.2 million (2,1% of GDP), compared to EUR 376,5 million (1% of GDP) for the same period in 2011.

34 Czech Republic

1. General Overview of Economy 2. Tax Structure The Czech Republic is one of the most stable and prosperous Principal Taxes of the post-Communist states of Central Europe. Growth is •• Personal Income Tax supported by exports to the EU, primarily to Germany, and a strong recovery of foreign and domestic investment. Domestic •• Corporate Income Tax demand is playing an ever more important role in underpinning •• Value Added Tax growth as interest rates remain low. Accession to the EU gives further impetus and direction to structural reform. Intensi- The Czech tax system also includes excise duties which are fied restructuring among large enterprises, improvements in imposed on particular goods. Real estate tax is levied on plots the financial sector, and effective use of available EU funds should of land and on construction. The real estate is levied strengthen output growth. In November 2013 Czech National on the sale or transfer of real estate. The is payable for Bank voted in favour of the use of foreign-exchange intervention vehicles used for commercial purposes. As from January 1, 2014 to support economic growth. The intervention, which involves the inheritance and gift taxes are incorporated within the income buying euro with the national currency, had an almost instanta- tax system and the same rates apply as for income tax (with neous effect in weakening the koruna against the euro. It was certain exemptions). announced that this will continue until the start of 2015. In addition to taxes, some local charges and compulsory social Political system security and health insurance are applied in the Czech Republic. The Czech Republic is a parliamentary democracy with a bicam- eral Parliament. Key features Those liable to pay corporate income tax are all legal entities, The Chamber of Deputies has 200 seats and is elected by popular including foreign companies with permanent establishment vote under a direct representation system with a 5% entry (mostly branches) in the Czech Republic. threshold. Aside from legislative powers, the Chamber of Depu- ties gives and rejects confidence to the cabinet and approves The corporate income tax base is the trading result (i.e. profit or the state budget. loss) which is adjusted in accordance with the Income Taxes Act. Partners in general partnerships and general partners in limited The Senate has 81 seats and is elected by a majority system for partnerships are taxed on their share of the partnership’s taxable six-year terms with one-third of the Senators being replaced income. Taxable income derived from partnerships is subject every two years. It approves laws proposed by the Chamber of to corporate or personal income tax, depending on whether Deputies. the partner liable for the tax is a company or an individual.

The formal head of state is the President, who is largely A company is treated as a resident if it has a registered office or a ceremonial figure, but has the power to appoint the Governor place of management in the Czech Republic. Resident compa- of the National Bank and members of the Constitutional Court. nies are liable to tax on worldwide income. A company that The President is chosen in direct elections. The head of the exec- has neither a registered office nor a place of management in utive is the Prime Minister, appointed by the President. The PM the Czech Republic is treated as a non-resident. Non-resident appoints Ministers with approval from the President. companies are subject to Czech corporate income tax only if they receive income or gains from Czech sources and provided The Constitutional Court can rule on the unconstitutionality of that the Czech Republic has the right to levy taxes in terms of laws or other legislation. an applicable treaty.

The Czech taxable period is the calendar year or the economic year. The deadline for filling the annual tax return is the end of the third month after the end of the taxable period. This deadline may be extended to the end of the sixth month if the tax return is prepared and submitted by a registered tax advisor under a Power of Attorney. The Power of Attorney must be filed at the Financial Office by the end of the third month after the end of the taxable period. Companies that are subject to statutory audits have the filling deadline automatically extended to the end of the sixth month after the end of the taxable period.

Investing in Central Europe 35 Czech Republic

Czech entities are entitled to deduct expenses that are incurred to All transactions with related parties must be conducted at arm’s generate, assure and maintain the income of the entity. Particular length. If the Tax Authorities find that a company does not deal expenses are disallowed or may be deductible up to a limited with related parties at arm’s length principles, the Tax Adminis- amount. trator will adjust the company’s tax base accordingly.

A tax loss may be carried forward for offsetting against taxable Thin capitalisation rules are applied in the Czech Republic and profits, but no later than the fifth subsequent taxable period. restrict the deductibility of interest and other financial costs (inclusive of guarantee fees, credit facility fees etc.) on “loans and A withholding tax at the rate of 15% is levied on dividends paid credits” as defined in the Czech Income Taxes Act. The limita- to both domestic and foreign participants from the countries with tion of the debt/equity ratio is 4:1 (6:1 for banks and insurance which the Czech Republic concluded double taxation treaty or companies). The ratio applies on debt provided or “secured” (e.g. tax information exchange treaty. Otherwise the applicable rate by a guarantee) by a related party. is 35%. This tax may be reduced under the terms of the relevant double taxation treaty binding for the Czech Republic. A with- Under the Czech Income Taxes Act, the remuneration paid holding tax at the rate of 0% is related to dividends paid out to an employee by a company should be regarded as income by a subsidiary company, which has its place of business in from a “dependent activity“. A company (employer) is generally the Czech Republic, to the parent company in any EU Member regarded as the withholding agent of personal income tax from State, Switzerland, Norway or Iceland. Dividend distributions dependent activities and is obliged to withhold the personal between two Czech companies are exempt from the tax under income tax from the remuneration of its employees on a monthly similar conditions. Further, the rate of 0% is related to the divi- basis and pay it to the tax authorities. An employer prepares dend income of the parent company, which has its place of an annual reconciliation of advances, provided that business in the Czech Republic, derivable from a subsidiary the employee is not required by the law to file an annual personal company in any EU Member State. For all these exemptions, income tax return and asks for this reconciliation no later than certain conditions have to be met (e.g. shareholding of at least by the 15th of February following the calendar year for which 10% for the period of 12 months). From 2008, dividends arising the reconciliation is prepared. If the employee does not ask to a Czech tax resident company and to a company that is the employer for the annual tax reconciliation, the tax liability of a tax resident in another EU Member State, Norway or Iceland the employee is treated as fulfilled by the withheld payroll tax are also exempt if paid by a subsidiary that: is a tax resident in advances. The reasons for obligatory filing of an annual personal a non-EU country with which the Czech Republic has concluded income tax return are e.g. receipt of other income exceeding CZK an effective double taxation treaty; has a specific legal form; 6,000 during the taxable period, receipt of employment income satisfies the conditions for the dividend exemption under the EC exceeding 4x the average wage in any month of the taxable Parent-Subsidiary directive; and is subject to a home country tax period (which is then subject to the solidarity surcharge). comparable to Czech corporate income tax at a rate of at least 12%. Advance income tax payments are always calculated based on the last known tax liability. They are not, therefore, payable in The Interest/Royalty Directive is fully applicable to interest the first year. If the last tax liability was lower than CZK 30,000, payments to any EU Member State, Switzerland, Norway or tax advances are not payable. Iceland. Interest and royalties paid to a tax non-resident from the countries with which double taxation treaty or tax infor- VAT is levied on domestic taxable supplies, the importation of mation exchange treaty is concluded are subject to a 15% goods, the acquisition of goods from another EU country, and withholding tax under the Czech Income Taxes Act. Other- the purchase of specified services from foreign companies. wise 35% tax rate applies. The exemption in compliance with The VAT base is usually the basis of consideration for goods sold the Interest/Royalty Directive also does not apply to interest that or services rendered, including customs duties, clearance and is treated as dividends according to the thin capitalization rules transportation costs, and excise duties (if applicable). except interest paid to a tax resident of the European Economic Area.

Capital gains on sale of securities and participations are exempted from the tax if conditions similar to those required to qualify for the dividend exemption under the EC Parent-Subsidiary are satisfied.

36 Companies seated in the Czech Republic with a turnover Withholding taxes exceeding CZK 1 million per 12 calendar months are required On dividends 15%, if not reduced to register for VAT. Simplified registration is also required if by a relevant double purchases from other EU countries exceeds CZK 326,000 taxation treaty per calendar year and in some specific transactions – such as the acquisition of certain services. A company can register Dividends paid out by a subsidiary 0%, if certain voluntarily even if its turnover fails to reach the above amounts if company to a parent company within conditions are met it renders taxable supplies in the Czech Republic. the Czech Republic or to the EU/Swit- zerland/Norway/Iceland or from the EU Foreign businesses and companies from other EU member states parent or subsidiary company (based are obliged to register for VAT in the Czech Republic if taxable on the EU Parent Subsidiary Directive) supply is performed in case of which it is not the recipient who should self-assess Czech VAT. Voluntary registration is possible. Dividends paid out by a subsidiary to 0%, if certain a parent company from the non-EU conditions are met The standard rate of 21% applies to the majority of industrial country to the Czech Republic/EU/ goods, services and real estate transfers. A reduced VAT rate of Norway/Iceland 15% is applied to selected goods (agriculture products, foodstuffs and pharmaceuticals) and selected services. On interest 15%, if not reduced by a relevant double The VAT return must be filed and the tax paid within 25 days taxation treaty after the end of the taxable period. The taxable period is a calendar month or calendar quarter, depending on taxpayer Interest paid out by a Czech company 0%, if certain condi- turnover. to an EU/Swiss/Norwegian/Icelandic tions are met related party based on the EU Interest/ In case of newly registered VAT payers calendar month Royalty Directive as a taxable period is possible only. On royalties 15%, if not reduced by a relevant double Excise duties are levied on hydrocarbon fuels and lubricants, taxation treaty spirits, beer, wine and tobacco products. Royalties paid out by a Czech company 0% applicable from There is a uniform real estate transfer tax at the rate of 4%. This to an EU/Swiss/Norwegian/Icelandic 1 January 2011 (until tax is applied when real estate is sold or transferred. related party based on the EU Interest/ 30 December 2010, Royalty Directive the Czech Republic Double taxation treaties may tax royalties up The Czech Republic has concluded a considerable number of to a rate of 10%) double taxation treaties. In most cases, the double taxation trea- ties concluded by the Czech Republic follow the OECD model.

The Czech Republic, as a legal successor to Czechoslovakia, has adopted the treaties concluded by Czechoslovakia in its legislation.

Current tax rates Corporate income tax 19% (5% tax rate applies for some types of fonds etc.) Personal income tax 15+7%* Value added tax Standard rate: 21% Reduced rate: 15% Real estate transfer tax 4%

* Solidarity surcharge applicable from 2013 to 2015 to income exceeding 48times the average wage per year.

Investing in Central Europe 37 Czech Republic

Social Security and health insurance The social security rates mentioned above are decreased by 3% The social security and health insurance system comprises (both for employees and self-employed persons) in case of partic- pension, state employment, and general health and sickness ipation in the pension saving scheme, which was introduced insurance schemes. in 2013 as the second pillar of the Czech pension system. If the individual registers into this scheme, he has to pay the contri- Social security contributions are compulsorily paid by employers butions in the amount of 5% (in addition to the decreased social (legal entities or individuals who employ at least one employee), security contributions) from his assessment base, which equals to employees and self-employed persons. the assessment base for the social security purposes. The contri- butions are paid to the tax authorities, which transfer them Health insurance contributions are compulsory for everyone who subsequently to the respective pension fund. For employees, has permanent residence in the Czech Republic or is an employee the pension-saving contributions are withheld from their wage of a Czech resident employer, excluding persons whose contribu- by the employer on a monthly basis, same as the social security tions are paid by the state. Both obligatory social security and contributions. obligatory health insurance contributions settled by an employer are generally considered as deductible expenses for tax purposes. A cap equal to 48 times (CZK 1,245,216 for 2014), the average The rates of contribution for social security and health insurance monthly wage is applicable to the assessment base for social are as follows at present: security purposes. Health insurance is uncapped. The minimum assessment base for the health insurance purposes equals to Employer the minimum wage (CZK 8,500 per month in 2014). There is no minimum assessment base for the social security purposes in case Pension insurance 21.5% of employment. Employment insurance 1.2%

Sickness insurance 2.3% Customs System Health insurance 9.0% Since 1 May 2004, the Czech Republic has been a Member state of the European Union. This fact influence customs arrangements Employee significantly. The Czech Republic, like other new Member States, Pension insurance 6.5% has completely adopted customs rules applied in the EU. Employment insurance 0% At present, the Czech Republic participates in the single market Sickness insurance 0% of the EU. Customs controls at the internal borders of the EU and Health insurance 4.5% customs formalities have been abolished for the movement of goods inside the EU. Self-employed person Pension insurance 28.0% Customs duties can be even lower due to the extensive application of customs preferences resulting from Employment insurance 1,2% Agreements concluded with a broad range of countries (Norway, Sickness insurance (voluntary) 1,4% Iceland, Switzerland, Liechtenstein, Macedonia, Albania, Algeria, Health insurance 13.5% Tunisia, Israel, Morocco, South Africa, Lebanon, Jordan, Syria, Egypt, Mexico, Chile, South Korea, etc.). Customs unions have Person without taxable income. The health insurance been created with , Andorra and San Marino. Further- contributions are paid from minimum wage. more, the Czech Republic grants preferential treatment to Health insurance 13.5% goods originating in developing and least developed countries. These customs preferences are conditioned by proving origin of the goods. Person voluntarily participating in a pension insurance scheme (from chosen assessment base) According to customs regulations, all standard customs proce- Pension insurance 28% dures, including procedures with an economic impact, can be used: the release into free circulation, customs warehousing, inward processing (suspension system or drawback system), processing under customs control, temporary admissions, outward processing, transit and exportation.

38 The Single Administrative Document (“SAD”) is used for releasing News in the Czech Legislation the imported and exported goods for the respective procedure Several amendments to Income Taxes Act are expected to be or for terminating the procedure. The simplified procedures may effective in 2015. The most important amendments which are be applied for all customs procedures and can save a significant currently proposes can be found below, nevertheless, please note amount of cost and time for importers and exporters. The new that neither of such amendments has been approved yet and Computerised Transit System (NCTS) and Import and Export such amendments are currently subject to the consultation. Customs System (ICS and ECS) enable paper-less communication between the operators and customs authorities. Changes in the Income Taxes Act Fund taxation Annex “A” The amendment proposed should be introducing the term “basic Albania Lithuania investment funds” (which is defined solely for the purpose of Armenia Luxembourg the Income Taxes Act) which is defined as an investment fund Australia Macedonia that is a share fund or a trust fund; an investment fund meeting Malaysia the requirement of holding a maximum share of below 10% for Malta a period of time shorter than 12 months. Such basic investment Bahrain Mexico funds should have the possibility of using the reduced 5% income Belgium Moldova tax rate, however, the payment of a profit share from the basic Barbados Mongolia investment fund should not be exempt from income tax. Morocco The standard 19% income tax rate should be applied to all other Bosnia and Herzegovina Netherlands funds. For investment funds and foreign funds that are not basic Brazil New Zealand investment funds, but meet certain conditions (such as being Bulgaria Nigeria a resident of an EU member state or of a state belonging to EEA), Canada Norway the payment of a profit share should be exempt from the income China Panama tax. Croatia Philippines Cyprus Poland Tax loss utilisation in subsequent restructures Portugal The proposed amendment provides for the possibility of claiming Egypt Romania a tax deduction from a tax base in cases where a tax loss that has Estonia Russian Federation already been transferred to another company is re-transferred to Ethiopia Saudi Arabia yet another company during changes. Finland Serbia and Montenegro France Singapore Loan for use, loan for consumption, gratuitous bailment Germany Slovak Republic The proposed amendment states that assets gained by Slovenia the borrower in an interest-free loan for use by the consumer of Greece Spain the loan for consumption, and the bailee in the gratuitous bail- Hong Kong South Africa (Republic of) ment are subject to tax with the exemption up to the amount of Hungary Sri Lanka CZK 100 thousand per taxable period. Iceland Sweden India Switzerland Individuals Indonesia Syria Employee benefits Ireland While in the current situation, all benefits provided to employees Israel Thailand (healthcare, sport, culture and education benefits; with Tunisia the exception of recreation, which has a limit of CZK 20 thou- Japan Turkey sand) are exempt of tax and insurance, starting 2015, all these Jordan Ukraine groups of benefits shall be limited to CZK 10 thousand per year. Kazakhstan United Arab Emirates Korea (Republic of) United Kingdom Lump sum costs Korea DPR United States of America A limit should be introduced for lump sum cost deductions not Kuwait only for persons with income that is subject to special regulations Latvia Venezuela (for example attorneys) and for leases, but also for sole traders Lebanon Vietnam (with the exception of crafts traders), the limit being income of CZK 2 million.

Investing in Central Europe 39 Czech Republic

Pensioners may look forward to the return of the basic tax 3. Legal Entities discount, and taxpayers with more than one child will appreciate Generally, there are four permissible business company forms in higher tax benefits for the second child and the next children. the Czech Republic: joint stock company (akciova spolecnost - a.s.); limited liability company (spolecnost s rucenim omezenym VAT - s.r.o.); limited partnership; and unlimited partnership. In The amendment to the VAT Act that is expected to become addition, also European company (SE) may be established in effective in 2015 (later in certain areas) has been the subject of the Czech Republic. Below are the requirements of an a.s. and external consultations during the course of June. The Ministry an s.r.o., the most popular company forms. As of 1 January 2014 of Finance of the Czech Republic should then incorporate any the regulation of the Czech corporate law, including the main comments into the draft amendment and present the final draft features of the legal entities, was significantly changed, to the Czech Government. Below is a list of the key areas that the amendment covers: Joint Stock company (a.s.) •• A second reduced tax rate of 10% should be introduced Minimum amount of registered capital is CZK 2m or EUR for a very narrow spectrum of groceries, printed books and 80 000. The registered capital may be expressed in EUR, only if pharmaceuticals. the accountancy of the company is maintained in EUR in accord- ance with the special legal regulations. The registered capital is •• The amendment should introduce a reverse charge treatment made up by the shareholders’ investment contributions and is (‘RCT’) also in the case of a simple transfer of real estate. divided into shares of a certain nominal value or into a certain •• A second reduced tax rate of 10% should be introduced amount of shares without stating the nominal value (unit shares). for a very narrow spectrum of groceries, printed books and Articles of Association shall stipulate the minimum amount of pharmaceuticals. the registered capital to be paid up at the time of formation of •• The amendment should introduce a reverse charge treatment the company. The formation of the company is effective, only if (‘RCT’) also in the case of a simple transfer of real estate. each of the founders paid up the share premium, if any, in full and all founders paid up in aggregate at least 30% of nominal or •• The RCT should also be introduced for certain types of accounting value of all subscribed shares by the time stipulated in goods (mobile phones, tablets, greenhouse emission allow- the Articles of Association of the Company; however, before filing ances, telecommunication services, gas, electricity, corn, an application with the Commercial Register at the latest. etc); however, this RCT will only become effective following the issuance of the relevant governmental regulation (if any). Bringing of the in kind contribution to the company must take •• The amendment will even allow the RCT to be introduced for place before formation of the company. supplying any type of goods/services for a period of up to 9 months – again only if the relevant governmental regulation The amount of capital contributed in kind must be declared in is issued. writing in the Article of Association and must be evaluated by expert selected by the founders. •• From 2015, the VAT Act should include a ban on adjusting the tax base later than three years from the date of receiving There are no restrictions on the number of shareholders, or on the payment received before the taxable supply date when their nationality or residence. Sole founder of the a.s. can be legal the supply had not yet been rendered. entity (company) as well as a natural person. •• The application of the reduced 15% rate should be preserved for small-scale structures for the purpose of using Regarding the company´s bodies the new Czech Act on Busi- a detached house or an apartment building (construction of ness Corporations and Cooperatives provides for two different appurtenances). corporate structures. Company may have either dualistic (Board •• The amendment should bring a new definition of a construc- of Directors and supervisory Board) or monistic (Administrative tion plot of land that would comply with EU law. Board and Managing Director) system of organization. •• The still-missing definition of a plot of land adjacent to A company with monistic structure must have an Administra- a building should finally be introduced in the Czech VAT Act. tive Board. The Administrative Board has three members (either •• If the supplier, in good faith, exempted supplies of goods to natural persons or legal entities), unless the Articles of Association another member state of VAT, any VAT additionally assessed determine otherwise. The Chairman of the Administrative Board by the tax administrator will be paid by the buyer. has to be a natural person.

40 The Managing Director is a statutory body and conducts At companies with registered capital equal to or over CZK the business management of the company. He is appointed 500,000,000 the status of qualified shareholder requires by the Administrative Board. The Managing Director has to be the shareholding of shares of total nominal value or number a natural person and can be simultaneously the Chairman of of unit shares equaling to at least 1% of the registered capital the Administrative Board. of the company. Generally a quorum is obtained at the general meetings when shareholders holding at least 30% of the compa- A company with dualistic structure must have a Supervisory ny’s registered capital are present, unless otherwise determined Board. The Supervisory Board has three members (either natural by the Articles of Association. A simple majority of voting shares persons or legal entities), unless the Articles of Association is enough for most decisions; however, a two-thirds or three- determine otherwise. The Members of the Supervisory Board are quarters vote is necessary if the Articles of Association or the law elected and recalled by the General Meeting. stipulates so (e.g. to change the Articles of Association).

Management is conducted by the Board of Directors. The Board Limited Liability company (s.r.o.) of Directors must have at least three members (either natural Minimum amount of registered capital is CZK 1. Minimum contri- persons or legal entities), unless the Articles of Association bution for individual shareholder in the company is CZK 1, unless determine otherwise. The members of the Board of Directors are the Memorandum of Association stipulates higher amount. At elected and recalled by the General Meeting, unless the Articles least 30% of each founder’s monetary contribution plus amount of Association determine that they are elected and recalled by of share premium, if any, must be paid at the time of filing of the Supervisory Board The Board of Directors is responsible for the petition for registration of the company with the commercial day-to-day management of the company, preparation of annual register. The same applies in the event the company is established financial statements and corporate reports, and maintenance of by one founder. the company’s accounts etc. Bringing of the in kind contribution to the company must take Shares may be registered or bearer, and both types are transfer- place before company´s formation. The amount of capital able. Bearer´s share may be issued only in a book-entered form contributed in kind must be declared in writing in the Memo- or in an immobilised form. There is no minimum value or other randum of Association and must be evaluated by expert selected limitation placed on the value of individual shares. by the founders.

The Articles of Association may allow and determine different A limited liability company may be founded by one person (either types of shares and attribute different rights thereto. The shares natural person or legal entity). The number of company´s share- to which no specific rights are attributed shall be deemed holders is not restricted. as basic shares. Shares with preferential right to dividends or to a share in a liquidation balance Preferred shares does not A supervisory board may be set up but is not required by law. include a right to vote, unless otherwise determined by the Arti- The legislation stipulates that the supervisory board is set up cles of Association. Shares without right to vote may be issued only in case that the Memorandum of Association or special act up to the total sum of either nominal values equaling to 90% states so. Management is conducted by one or several Execu- of the total registered capital of the company. At companies tives, elected by the company’s shareholders at the general with registered capital equal to or under CZK 100,000,000 meeting. The office of the company’s Executive can be held shareholders holding shares of total nominal value or number either by a natural person or a legal entity. In case the company of unit shares equaling to at least 5% of the registered capital has more than one executive, the Memorandum of Association of the company may request from the board of directors that can determine that the Executives shall create a collective body. the General Meeting of the company is convoked, that certain The Executive(s) is responsible for day-to-day management of items be added to the agenda of a General Meeting, that Board the company, preparation of annual financial statements and of Directors of the company be investigated by the Supervisory corporate reports, and maintenance of the company’s accounts Board, or to file the petition regarding compensation of damage etc. caused to the company by the Board of Directors (status of qualified shareholder). At companies with registered capital over CZK 100,000,000 the status of minority shareholder requires the shareholding of shares of total nominal value or number of unit shares equaling to at least 3% of the registered capital of the company.

Investing in Central Europe 41 Czech Republic

Generally a quorum is obtained at the General Meetings when the special nature of the work, which would make it unrea- shareholders holding at least 50% of all votes are present, sonable to require an employer to conclude an employment unless otherwise determined by the Memorandum of Associa- relationship for an indefinite term with the employee who is to tion. A simple majority of votes is sufficient for most decisions; perform such work, the aforementioned limits do not apply as of however, a two-thirds vote or votes of all shareholders are neces- 1 August 2013. The operational reasons as well as the conditions sary if the Memorandum of Association or the law stipulates so of conclusion of fixed-term employment relationship must be (e.g. to change the Memorandum of Association). determined either by a written agreement concluded with a trade union or by the employer’s internal regulation in case there is no trade union active at the employer. 4. Labour and Wages Employment market Once the above mentioned threshold has been met and The Czech Republic has a highly skilled workforce, particularly in the employment continues, the contract would automatically technology and engineering. Educational and literacy levels are become indefinite (i.e. the position would be made a permanent high. Companies report few difficulties in recruiting skilled and one), with exceptions described above. The minimum annual unskilled workers, particularly in industrial areas where unemploy- holiday is four weeks. ment is highest. Finding workers is difficult only in Prague and parts of western Bohemia, where the unemployment rate hovers Working hours around 6.5%. There is also a dearth of individuals with manage- The official workweek is 40 hours. The Labour Code sets strict ment and financial expertise. limits on overtime work – the total overtime work may not exceed 8 hours per week in average in the period lasting no Employees’ rights longer than 26 weeks (52 weeks in case it is agreed in the collec- The employment relationship governed by Czech law is regu- tive bargaining agreement), not including the overtime work for lated by Act No. 262/2006 Coll., Labour Code, as amended which compensatory time off was provided. (hereinafter the “Labour Code”) that came into effect on 1 January 2007. The Czech labour law generally grants more Employees must be paid the achieved wage and plus a bonus legal protection to the employee and endeavours to achieve of at least 25% of the average earnings or time off in lieu of a more equal position of the parties in the employment rela- the 25% bonus for overtime work. Based on an agreement tionship. The Labour Code, therefore, considerably restricts between the employer and the employee it is possible to the liberty of the contract in the employment relationships. Since include part of the overtime work into the employee’s salary 1 January 2012 an important amendment to the Labour Code (i.e. in the maximum amount of 416 hours in case of manage- entered into force which brought more flexibility to the Czech rial employees and 150 hours in case of other employees per labour law. These changes resulted especially in simplification calendar year). of the wording of the Labour Code and of recruitment and dismissing employees. On 1 January 2014 the new amendment Wages and benefits to the Labour Code entered into force bringing the Labour Code The minimum-wage law is set out in Government Order No. in conformity with the New Civil Code. 210/2013 Coll, and amounts to CZK 8,500 per month or CZK 50.60 per hour since 1 August 2013. The previous amount of The Labour Code complies in general with EU norms. minimum wage was set to CZK 8,000 and was valid since 2007. It contains the basic definitions for the discrimination and anti- The minimum wage is set at subsistence level; actual wages discriminatory rules, the sexual-harassment provision, equal paid are much higher. The minimum wage is paid to only 1% of treatment of EU nationals and Czech individual employees, and employees in business sector, according to the Ministry of Labour specific EU rules on trade unions. These questions have been also and Social Affairs (Ministerstvo prace a socialnich veci), but it is regulated by a separate Anti-discrimination act in 2009. important for calculating minimum bases for health-insurance and social-security contributions. Some trade unions (for The Labour Code, in line with EU law, contains rules limiting example, agriculture and construction unions) negotiated higher employers in concluding the fixed-term employment contracts. minimum wages directly with their employers. However, the Labour Code allows fixed-term employment contracts to be renewed after maximum three years for up The average monthly wage in year 2013 amounted to CZK to two times and in maximum length of three years per each 25,128. The average monthly wage in the first quarter of the year renewal, i.e. maximum nine years. If on the employer’s part 2014 amounted to CZK 24,806. there are serious operational reasons, or reasons consisting in

42 Further benefits specifically covered in the Labour Code include 5. Education the following: The Czech Republic combines an outstanding level of general education with strong science and engineering disciplines. For Vacation: Employees who have worked at least 60 continuous generations the Czech education system has generated high working days with a given company are entitled to paid annual class, technical problem-solving skills in environments where vacation (on a pro-rata basis related to the number of days standard solutions were impossible. worked in the calendar year). The minimum annual vacation is four weeks. Where an employment contract lasts for less than School education is compulsory from ages 6 to 15 (elemen- one year, one-twelfth of the annual holiday is accrued for each tary and lower secondary school). After 9 years students may 21 days worked. continue at three basic types of upper secondary school: voca- tional training centres, secondary schools and grammar schools Maternity: Maternity leave lasts 28 weeks (37 weeks for women (gymnazia). Undergraduate and graduate studies are offered by giving birth to more than one child at the same time). This may colleges (offering 3 to 4-year bachelor programmes). be extended as a parental leave at the request of the mother until the child reaches three years of age. During maternity The Czech education system has a very strong position in leave, the mother has no right to wages but qualifies for sickness upper secondary education, which serves as the foundation for benefits. Fathers also may apply for parental leave of up to three advanced learning and training opportunities, as well as prepara- years. tion for direct entry into the labour market. The percentage of adult population that had completed at least secondary educa- Sick pay: If an employee is absent from work because of illness, tion in the Czech Republic is permanently among the highest he/she is provided by wage compensation by the employer for in all OECD countries. More than 90% of the Czech population the first 14 calendar days. This compensation is granted from aged 24-64 had completed at least upper secondary education in the fourth working day of temporary incapacity. From the 15th 2013, compared to an EU average of 75%. (Source: EUROSTAT). working day, a sick payment from the social security insurance is paid to the employee. The sick payment amounts to 60% of Vocational education and training are thoroughly integrated into the average earnings. both secondary and higher education institutions, and enrolment in vocational education is exceptionally high by OECD standards. In case of work injury, employees are entitled to compensa- tion on loss of earnings, compensation on pain and diminishing The Czech Republic also has a very good position in tertiary of social position, compensation on purposefully expended education. There has been an increase in university-level skills in costs associated with the treatment and material damage. For the adult population, as measured by educational attainment. the death of an employee, due to work injury, the surviving spouse would receive a one-off indemnification of CZK 240,000 While public universities offer programmes ranging from and each dependent child shall receive CZK 240,000. Parents economics, statistics and public administration to finance, of the deceased living with him/her in the same household shall accounting, international relations and marketing, a number of receive an aggregate sum of CZK 240,000. The survivors are also private institutions specialize in business administration courses. entitled to other compensatory payments. Several institutions and universities offer high-quality MBA programmes and are affiliated with foreign universities and Unemployment: Unemployment benefits are provided for up to colleges. five/eight/ eleven months (depending on the age of an unem- ployed person) at the rate of 65% for the first two months of The Czech Republic provides free and flexible choice in continuing unemployment, 50% for the next two months and 45% of education. Private training providers and non-profit organisations the previous net average earnings for the remaining period. co-exist and complement secondary schools and universities. The total sum of unemployment benefits to be paid is capped at According to recent research, the most frequently taught courses 58% of the average wage in the Czech Republic for the period include use of PCs, accounting, management, finance, marketing from the first to the third quarter of the previous year. and foreign languages.

Investing in Central Europe 43 Czech Republic

6. Infrastructure 6. Infrastructure Road network The Czech Republic already has the best road network in the region. The central government has administrative authority for developing and maintaining motorways totalling 776 km and 458 km of speedways (rychlostní silnice), as well as 5,791 km of national highways. Regional governments are responsible for secondary and local roads, which amount to 14,600 km and 34,200 km, respectively. The State Transport Infrastructure Fund spent CZK 26 bn road infrastructure in 2013. Electronic tolls for vehicles over 3.5 tons is already effec- tive, provided by company Kapsch (microwave technology), covering some 1,300 km of roads. The expansion of the toll system is planned but will most likely work as a hybrid of micro- wave and satellite technology.

Railway network The Czech transport and communications system is good by Road network east European standards but below the quality commonly The Czech Republic already has the best road network in the region, and significant byadditional the German investment VW groupis planned. – has The a major central governmentproduction hasfacility administrative in authority found in western Europe. The railways are an important means of Mladafor developing Boleslav. and Significant maintaining portionmotorways of its totalling output about goes 500 to km,the local as well as 5,500 trans- port, with a network of 9,470 km. km of national highways. Regional governments are responsible for secondary and andlocal Central roads, which European amount markets. to 15,000 Other km and car 34,000 producers km, respectively. are the TPCA (Toyota-Peugeot-Citroen Automobile) and HMMC (Hyundai Shipping and air transport The State Transport Infrastructure Fund spent Kc12.5bn on new motorway sections in Motors2004, up Manufacturing from just Kc7bn Czech).in 2003. TogetherThis compares with with Skoda Kc52bn Auto spent a.s., in 2004 on all River transport, along the 303 km of rivers that are navigable, is thosetransport three including carmakers railways reached and waterways. nearly 1.13 Electronic million tolls units for of lorries overall will be comparatively unimportant; its main use is for the internal move- introduced in the Czech Republic from January 1st 2007, with the system in operation production of passenger cars in 2013.The most important players ment of goods on the Vltava and Labe river, north of Prague. on 970 km of main roads by 2008, and eventually covering 2,000 km. among the automotive suppliers are subsidiaries of multinational The national air carrier, Czech Airlines (2,773,700 passengers in Railway network companies, such as Aisin, Bosch, Continental, Denso, Faurecia, 2013), has similarly small domestic significance, given the coun- The Czech transport and communications system is good by east European standards Johnsonbut below Controls, the quality Magna, commonly TRW found Automotive in western andEurope. many The others. railways are an try’s compact size. Since 2011, Czech Airlines merged in to important means of transport, with a network of 9,444 km, of which 2,843 km are holding with Ruzyně Airport (11 million passengers in 2013) to electrified. Ceske drahy (Czech Railways; CD), the state-owned freight and passenger Engineering form stronger entity. In April 2013, 460,725 Czech Airlines shares service provider, transported 181m passengers in 2004, up from 174m in 2003, Electricalalthough freightengineering traffic fell with in thisits robust period, growthfrom 93.3m is becoming to 88.8m tonnes, as transport by (i.e. 44% shareholding) were sold to Korean Air. the Czechlorry grew rapidlyRepublic’s following biggest Czech industry accession - overtaking into the EU the country’s in May 2004. traditional industrial sectors of steel production and engineering. Telecommunications Number of fixed telephone lines peaked in 2001 – 2002 and is Electrical and electronic industry steadily decreasing, counting 1,4 million participants in 2013. The growth of the electrical and electronic industry since Mobile phone penetration is more than 1 active SIM card per the second half of the 1990s in the Czech Republic was based on 16 citizen. There were 68% of households with computer and 67% the growth of both domestic consumption and export. In 2000, with internet access in 2013. revenues from the sale of their own products and services in all branches reached CZK 185bn. In 2004, the revenues totaled CZK 436bn which, in current prices, amounts to more than a redou- 7. The Most Active Industries/Sectors bling of the volume of production. In that period, the workforce Automotive Industry in the electrical industry increased by 35,000 (i.e. 22%). Domestic The automotive industry has been the most important production consumption of electrical industry production reached, in sector of the Czech Republic. It already accounts for 20% of manu- accordance with new methodology, CZK 328bn in 2000 and, facturing output and employs 260,000 people (Czech Invest). in 2004, grew up to CZK 428bn, i.e. more than a 30% growth. Traditionally, the largest share of consumption was accounted Key Players in the automotive industry for by heavy-current technology and by electronic components. Some of the key players in the Czech automotive industry are The largest accumulation of consumption was observed in elec- major OEM’s that are significantly boosting all automotive output tronic components. in the Czech Republic. Skoda Auto a.s. – a Czech brand owned

44 The Czech electrical and electronics industry has more than Currently the Czech Republic has very stable financial system. 160,000 employees and created an output of over CZK 440 bn It was confirmed by International monetary fund in its Financial in sales as of 2008 most of which is exported especially to other System Stability Assessment Update from 4 April 2012 stating countries of the European. that banks in the Czech Republic ample capital and liquidity, and solid profitability, got over the effects of the global financial crisis The electrical industry is primarily marked by: relatively unscathed and that stress test results show that Czech banks are resilient against substantial shocks. •• the complementary character of its production in creating prerequisites for the competitiveness of other branches of the manufacturing industry and power industry; Construction As with the rest of the economy, construction was almost •• a high proportion of imported materials, components and entirely state-controlled under communism and has quickly parts for production and assembly; been returned to private ownership. By 1996 more than 99% •• a wide range of technological processes; of all construction enterprises were in the private sector, which grew rapidly from 1990 both as a result of privatisation and •• a high proportion of supranational capital in new investment through the establishment of new, often small, firms. However, projects, especially in connection with the introduction of the construction of larger apartment blocks fell dramatically with advanced technologies; the end of the centrally planned system, hitting larger enterprises, •• the use of logistic networks of supranational companies; and output contracted by almost 50% during the latter half of •• a high proportion of science and research used in the produc- the 1990s, with the sector’s share in value added falling to 6.3% tion of computational and digital communications technology in 2004, from 11.5% in 1990 and in 2009 was the share 9.6%. and the need for highly-qualified employees in research and in The decline nonetheless appears to have bottomed out with production. the onset of an increase in demand for construction of greenfield production facilities, benefiting larger firms. Overall construc- Financial Services tion output peaked in 2008 and in 2010 shows 7.1% decrease The core of the commercial banking sector comprises three large compared with 2009 due to continuing crisis and lower state banks that had their roots in the communist era, with three of investments. the four hived off from the Czechoslovak State Bank’s enterprise lending operations in 1990. Together, the three - Komercni Retail banka (KB), Ceska sporitelna (CS) and the former foreign-trade Following privatisation, Czech-owned companies consolidated bank, Ceskoslovenska obchodni banka (CSOB) - accounted for a large number of small outlets into retail chains. However, 80% of all banking sector assets in 1994 (64% in 2011). These as Czech investors lacked marketing and management skills, banks inherited a large volume of non-performing loans from and their shops were often not in prime locations, they soon the communist period (including foreign-trade credits to devel- succumbed to foreign competition. Several European retail chains oping and Soviet- bloc countries, and domestic credits for private have invested heavily in the Czech retail market. Foreign compa- and co-operative housing construction). Successive governments nies have also spearheaded the move from small outlets to larger led by the Civic Democratic Party (ODS) in 1992-97 resisted their department stores and out-of-town hypermarkets. The retail full privatisation owing to fears that, once in private hands, they market was worth CZK 772bn and accounted for 12.7% of total would cease to support domestic enterprises. employment in 2009.

Sizeable stakes were sold during voucher privatisation, but Most consumer goods are manufactured locally. The local indus- the resulting ownership structures were not conducive to tries making consumer goods, especially the sectors producing restructuring. The banks controlled investment funds, which in white goods and personal computers (PCs), have received turn controlled large parts of the formerly state-owned enterprise huge foreign investments in the past decade. Retail sales grew sector. The result was a non-transparent web of cross-ownership by 25.6% in volume terms between 1998 and 2002, and by and continued insider lending that helped large enterprises avoid a further 5% year on year in 2003. Since then, retail sales are restructuring while adding to the state-owned banks’ bad-loan slowing down (0.6% year on year decrease in May 2014). portfolios.

Investing in Central Europe 45 Czech Republic

8. Industrial Parks Manufacturing Due to a considerable inflow of FDI into the country in recent •• Starting new or expanding existing production. years, the availability and choice of office space has improved •• The minimum investment is CZK 50 or 100 million (depending significantly. Most projects in the country are open-field construc- on the region), at least 50% of which must be invested in new tions, with the exception of some reconstructions of objects in machinery. cities. Technology Centers The Czech Republic boasts an excellent network of over 150 •• Activities qualifying as technology centers include applied industrial zones, which are located on the outskirts of virtually research and the development and innovation of hi-tech prod- every town of regional importance. ucts, technologies and production processes. •• The minimum investment is CZK 10 million and at least 40 new jobs must be created. 9. Investment Incentives Investment in manufacturing, technology centers and strategic Strategic Service Centers service centers are generally eligible for investment incentives granted by the Czech government. The latest amendment •• Activities qualifying as strategic service centers include to the Act on Investment Incentives came into force on 12 software development or innovation and repairs of hi-tech July 2012. An amendment to the Act on Investment Incen- equipment, as well as handling the management, operations tives is expected to take effect during 2015, including a fairly and administration of the internal affairs of companies. large number of legislative changes. The current wording of •• There is no minimum investment requirement; however 100 the amendment is not final. new jobs (40 for software development) must be created.

Forms of Investment Incentives Strategic Investment Projects Aid intensity is 25 % in the forms: •• Manufacturing •• Corporate income tax relief for 10 years; •• An investment in assets of no less than CZK 500 million, of •• Job creation grants (CZK 200,000 per newly created job, only which CZK 250 million in new machinery while creating no in regions with high unemployment rate); fewer than 500 new jobs. •• Purchase of land at a reduced price; Technology Centers •• Cash grant for acquiring assets of up to 5-7% of the costs (no more than CZK 2 billion) assuming the conditions of the stra- •• An investment in assets of no less than CZK 200 million, of tegic investment project are met (see below). which CZK 100 million in new machinery while creating no fewer than 120 new jobs Aid above 25 %: The eligible costs are calculated as the fixed assets for production •• Training and retraining grants (generally 25 % of total expen- or as the payroll costs of the new jobs incurred with respect to ditures for training and retraining, only in regions with high the project during 24 months after filling the vacancy in case of unemployment rate). technology centers and strategic service centers.

Selected Conditions for Specific Investment Projects Work on an investment project (i.e. the acquisition of assets, including acquisition orders, or commencing construction) may not begin before CzechInvest approves the project. At least 50% of the minimum investment must be financed from the compa- ny’s own equity. Other basic investment requirements (which must be fulfilled within three years from granting the investment incentives) are as follows:

46 10. Foreign Direct Investment (FDI) 12. Weather and Climate The stock of inward foreign direct investment (FDI) in the Czech The Czech climate is mixed. Continental influences are marked Republic was US$122.9 bn at the end of 2012. The country now by large fluctuations in both temperature and precipitation, while has only a few state enterprises left to sell, the most important moderating oceanic influences diminish from west to east. In being the energy company, CEZ. Although privatization oppor- general, temperatures decrease with increasing altitude but are tunities will soon dry up, steady inflows of FDI should come relatively uniform across the country at lower elevations. from reinvested earnings of foreign-owned firms and some new greenfield investment. The mean annual temperature at Cheb in the extreme west is 45º F (7º C) and rises to only 48º F (9º C) at Brno in southern Moravia. Germany is the largest foreign investor, with 23% of the inward High temperatures can reach 91º F (33º C) in Prague during July, FDI stock at the end of 2012 (the latest available data). and low temperatures may drop to 1º F (-17º C) in Cheb during The second and third largest foreign investors are Netherlands February. The growing season is about 200 days in the south but (with 15% of the inward FDI stock at the end of 2012) and less than half that in the mountains. Austria (with 14% of the inward FDI stock at the end of 2012). A significant portion of FDI inflows into the Czech Republic has Annual precipitation ranges from 18 inches (450 millimetres) in been concentrated in manufacturing and financial intermediation the central Bohemian basins to more than 60 inches on wind- (both about 24% of total FDI at the end of 20012), and dispro- ward slopes of the Krkonose Mountains of the north. Maximum portionately in the capital, Prague, and other large cities. Real precipitation falls during July, while the minimum occurs in estate and business activities have been the second-largest bene- February. There are no recognizable climatic zones but rather ficiary (with 15% of the total). More investment is being directed a succession of small and varied districts; climate thus follows towards transport, storage and communications and trade, hotels the topography in contributing to the diversity of the natural and restaurants. (Source: Czech Invest, Czech National Bank) environment.

11. Expatriate Life Although in most respects life in the Czech Republic has rapidly approached Western standards of living, the cost of living remains substantially lower than in Western Europe. According to the Union Bank of Switzerland average prices of goods and services in Prague are only 49.2% of those in Zurich. Domestic purchasing power in Prague is 45.1% of Zurich’s level, which is the highest purchasing power in CE.

With respect to accommodation Prague and all larger cities boast a wide range of rented furnished and unfurnished accom- modations for expatriates and their families, ranging from centrally-located apartments to spacious villas in leafy suburbs. Many real estate agencies offer relocation services for a charge of one to two months’ rent.

Prague and many cities in the Czech Republic are famous for their architectural heritage, museums, theatres, cinemas, galleries, historic gardens and cafes.

Investing in Central Europe 47 Hungary

1. General Overview of Economy 2. Tax Structure Hungary has made the transition from a centrally planned to Business taxation a market economy, with a per capita income one-half that of the Big Four European nations. The country continued to demon- Overview strate strong economic growth and acceded to the European The chief national taxes are the corporate income tax, local Union in May 2004. Hungary is also a member of the World business tax, value added tax (VAT), innovation contribution Trade Organization (WTO) and is a signatory to the WTO Agree- and a special surtax on certain companies (e.g. the financial ment on Financial Services. It participates in the Pan-European sector). Hungary’s corporate tax rate is competitive in the region, Cumulation, comprising the EU, the European Free Trade Associa- although the relatively low corporate rate is balanced by high tion (EFTA), the Central European Free (CEFTA) local business taxes levied by the municipalities. Other taxes countries and Turkey. include transfer tax and the real . A minimum tax can apply in certain circumstances. There is no branch profits tax, Hungary’s private sector accounts for over 80% of GDP. Foreign or capital tax. ownership of and investment in Hungarian firms are exten- sive, with cumulative foreign direct investment totaling more No withholding tax is levied on dividends, interest or royalty than EUR 60 billion since 1989. Hungary was severely hit by payments made to corporate entities. The absence of with- the economic crisis, with the budget deficit becoming extremely holding tax, combined with the participation exemption available difficult to finance, and the Hungarian forint quickly losing value. for capital gains on qualifying shareholdings and the 50% exemp- The country received a EUR 20 billion credit facility from the IMF tion for royalty income, makes Hungary an attractive location for which helped stabilize the situation at the end of 2008. As stipu- holding and licensing companies. lated in the agreement with the IMF, the government introduced severe austerity measures in 2009 to reduce the budget deficit to Hungary has fully implemented the EU parent-subsidiary, interest the required levels. and royalties, merger and savings directives into domestic law. Tax laws in Hungary are passed by the parliament and apply As a result, the economy began to recover in 2010 and recorded uniformly throughout the country, although the Local Taxes Act GDP growth of 1.1%. Although, the country’s economy fell back empowers local governments to levy certain taxes within their into recession in 2012, it emerged from it in the following year jurisdiction. The tax authority, the National Tax and Customs (1.1%) and a moderate growth is expected in 2014. Additionally, Administration (NAV), is responsible for the enforcement and while the financial crisis temporarily deepened the low employ- collection of tax. ment level and the high unemployment, labor market trends changed favorably in 2013 as employment improved and unem- Residence ployment (9.1%) as well inactivity declined. A company is resident in Hungary if it is incorporated under Hungarian law or has its place of management in Hungary. Political system A foreign company is deemed to be resident in Hungary if its Hungary is a parliamentary democracy with a unicameral parlia- effective place of management is in Hungary. ment called the National Assembly. The country’s legal system is based on a new constitution which replaced the previous Taxable income and rates constitution of 1949 (which had been considerably changed Hungarian resident entities are subject to tax on their worldwide in October 1989). It entered into force on January 1st, 2012. income. The taxable income of both resident and nonresident The Assembly is the highest organ of state authority and initi- corporate taxpayers is based on pretax profits, calculated in ates and approves legislation supported by the prime minister. the profit and loss statement and prepared in accordance with The president of Hungary, elected by the National Assembly for the Hungarian accounting rules, with a number of corrections to a five-year term, has a largely ceremonial role, but his/her powers the differences in deductible and nondeductible items recognized include appointing the prime minister and choosing the dates of by accounting and . the parliamentary elections. The prime minister selects cabinet members and has the exclusive right to dismiss them. Each Hungarian-registered subsidiaries of foreign companies are cabinet nominee appears before one or more parliamentary taxable under ordinary domestic rules. Registered branch offices committees in consultative open hearings and must be formally and non-registered permanent establishments (PEs) are taxed approved by the president. A constitutional court has authority to under the same regime applicable to Hungarian-registered firms. challenge legislation on the grounds of unconstitutionality. The corporate income tax rate is 10% up to HUF 500 million (approx. EUR 1.6 million), and 19% on the excess.

48 Hungary Quick Tax Facts for Companies Taxable income defined The basis of the computation of taxable income (“taxable base”) Corporate income tax rate 10% / 19% for corporate income tax purposes is the accounting profit or Branch tax rate 10% / 19% loss, which is adjusted by several increasing and decreasing rate 10% / 19% items in accordance with the relevant provisions of the Corpo- Basis Adjusted pre-tax profit rate Income Tax Act. Based on the applicable double tax treaty, Participation exemption Available foreign-source income may be exempt or foreign paid tax may (subject to certain conditions) be credited. In addition, a major part of the foreign tax paid may be credited even in the absence of a double tax treaty between Loss relief Hungary and the relating country (subject to certain conditions). − Carryforward Available indefinitely, but limita- − Carryback tions on use In determining the taxable base, allowable deductions from Generally not available the profit and loss statement include: provisions for anticipated Double taxation relief Exemption or credit liabilities and recaptured costs accounted for as revenue in (depending on treaty) the tax year; extraordinary depreciation rebooked, that increased Tax consolidation Available only for VAT purposes the corporate tax base in previous tax years; and dividends Transfer pricing rules Yes received accounted for as revenue (except dividends from a controlled foreign company (CFC)). Thin capitalization rules Yes (ratio 3:1)

Controlled foreign Yes Dividends received by a Hungarian company are exempt from company rules corporate income tax (and withholding tax), regardless of Tax year Calendar year by default, but the extent of the participation. The participation exemption different fiscal year can be elected applies to capital gains derived from the sale or in kind contribu- Advance payment of tax Monthly/quarterly tion of participation; however, the taxpayer must hold at least Return due date Last day of the fifth months 10% of the subsidiary (which cannot be a CFC) for at least one following the end of the fiscal year year (see below) and report the acquisition of the participation to the tax authority within 75 days after the acquisition. Similar Withholding tax exemption rules apply for capital gain deriving from the sale of − Dividends 0% qualifying intellectual property. − Interest 0% − Royalties 0% Deductions − Branch remittance tax 0% All expenses incurred in deriving taxable business income may Capital tax 0% generally be deducted in computing corporate income tax Real estate transfer tax 4% up to HUF 1 billion (approx. liability. Allowable deductions include: losses carried forward, EUR 3.3 million) and 2% for recognized provisions, the costs of switching between accounting the exceeding amount, capped at currencies, foreign currency gains and losses, and depreciation HUF 200 million and amortization of assets as set out in the Corporate Income Tax VAT 27% (general rate) Act.

Minimum tax Corporate taxpayers can deduct 50% of royalties (so that 50% of A minimum income applies to taxpayers that incur losses or earn such revenue/income can be exempt from corporate income tax); low profits. Minimum income generally is calculated as 2% of however, the deduction may not exceed 50% of the taxpayer’s total revenue minus the costs of goods sold and the value of total pretax profits. intermediated services. A taxpayer whose pretax profit and tax base are both less than 2% of its adjusted gross profit can opt to The tax base can be reduced by R&D costs, in other words these pay minimum tax or submit a declaration stating that its tax base costs are deducted twice (once as an accounting expense and is legitimately calculated, and support its declaration with certain once as a tax base adjustment - see also under 9. “Investment information. If the taxpayer elects to file a statement, the tax Incentives”). authorities will process the declaration using a risk analysis program. If the analysis shows that there is a high risk that the loss was generated as a result of unlawful cost accounting or understated revenue, the authorities may initiate an audit.

Investing in Central Europe 49 Hungary

The Corporate Income Tax Act includes the concept of “costs Although the Accounting Act recognizes the “lower of cost or not in the interests of the enterprise,” largely to cover items that market” principle, the law contains special rules for asset revalu- could be used for purposes. Expenses may not be ation that may be followed, among other purposes, to measure deducted if they are not incurred for business purposes. Consid- the effect of inflation. Enterprises may revalue certain assets at eration paid for a service, if the use of the service conflicts with the balance sheet date, these include: rights, intellectual property, the reasonable management principle, is not deductible. Other tangible assets (except investments) and financial investments nondeductibles include expenses due to subsidies, assumed (except for securities loans). liabilities and assets given free of charge to non-Hungarian companies, as well as receivables waived against related parties In revaluing assets, where market value is less than book value, and fines. the difference must be accounted for as an extraordinary depre- ciation expense. Where the market value is greater than book Depreciation value, the difference can be accounted for in a valuation reserve, Accounting depreciation of assets is generally calculated by under the equity account, and as a valuation adjustment, under the straight-line method, under which the same percentage the relevant asset account. Generally, the revaluation increases of the original value of the asset is deducted each year. Tax the valuation reserve if the adjustment value of the current year depreciation is more stringently regulated, with the law setting exceeds that of the previous year (up to the value of the reserve the mandatory rates for most asset types. However, although adjustment); it decreases the valuation reserve if the adjustment tax payers can apply lower rates, these cannot be lower than value of the current year is less than that of the previous year. the accounting depreciation. The value adjustment must be performed separately for all assets, and revaluations are not included as income in the taxable base. A three-year tax depreciation period (33% per year) applies to computers, office equipment, advanced industrial equipment, Losses and many types of environmental protection, medical and labora- Generally, tax losses may be carried forward indefinitely, but may tory equipment. Motor vehicles are depreciated over five years not be carried back. The use of loss carryforwards is limited to (20% per year). Other fixed assets, not specifically included in 50% of the current year’s taxable income, thus 50% of taxable the depreciation table, are tax-depreciated at 14.5% per year. income will remain taxable even where losses are utilized. Further restrictions apply to the carry forward of losses in the course Tax depreciation can be accelerated by applying a 50% rate of transformations (i.e. mergers, de-mergers) or changes in instead of a 33% or 14.5% rate to computers, computer acces- the direct or indirect control of the taxpayer under the Civil Code. sories and new tangible assets purchased or produced in 2003 or later. Equipment used for film and video production may be The carryforward of losses, where majority control in the taxpayer amortized at a 50% rate. has been acquired (except for a transformation), is permitted only if: (i) the majority shareholder (or its legal predecessor) In relation to buildings, tax depreciation is set at 50 years (2% and the taxpayer were related parties during the past two tax per year) for structures of long duration, 3% for those of medium years on a continuous basis; or (ii) shares of the taxpayer or duration and 6% for those of short duration. Buildings that are the majority shareholder are at least partially listed on the stock leased out are depreciable at 5% per year. An owner of assets exchange; or (iii) the taxpayer continues its activities, which are (other than real estate) leased to another party may use acceler- not significantly different in nature from the activities carried out ated depreciation up to 30% of the acquisition cost of the leased before majority control was acquired, for the next two years and assets. Industrial and agricultural structures are depreciable at generates income from such activities in both years. annual rates of 2% and 3%, respectively. Other structures depre- ciate at annual rates ranging from 2% to 20%. Non-depreciable In a legal transformation, the legal successor will be able to assets include registered land (except some land that has been utilize losses only if (i) the direct/indirect majority shareholder used for waste disposal) and works of art. Write-off periods tend for purposes of the Civil Code (or its related party) remains to correspond to international standards. the majority shareholder of the legal successor; and (ii) in the two tax years following the transformation, the taxpayer generates For intangible assets the accounting depreciation is accepted for income from at least one of the activities carried out by the legal taxation purposes as well. predecessor (except for holding activity).

50 Capital gains taxation Double taxation relief Gains derived from the sale of assets are treated as ordinary Unilateral relief business income. Thus, capital gains are included in the corporate Foreign-source income is taxable in Hungary, with a credit tax base and taxed at the 10%/19% rate unless the participation granted under domestic law for foreign tax paid, even if there is exemption applies. Under the participation exemption, capital no tax treaty with the country of source. gains realized on the sale or in kind contribution of (Hungarian Tax treaties and foreign) participations are exempt from corporate income tax Hungary has a broad tax treaty network, which generally follows if the following requirements are met: the OECD model treaty. Hungary’s tax treaties provide for credit for foreign tax paid or an exemption of the foreign income. •• The participation represents at least 10%; Hungary has implemented OECD-compliant exchange of informa- •• The taxpayer has held the participation for at least one year; tion provisions. and •• The taxpayer has reported the acquisition to the Hungarian No special procedural requirements apply to obtain benefits tax authorities within 75 days of the acquisition. under Hungary’s tax treaties (but Hungary does not levy with- holding tax on dividends, interest or royalties under its domestic Any loss (including capital loss, foreign exchange loss or loss in law). value) relating to such participation is nondeductible. Capital gains tax exemption applies to qualifying intellectual property Hungary Tax Treaty Network as well. Operating in a manner similar to the regime for capital Albania France Macedonia Singapore gains on shares, any gains on the sale or contribution in kind Armenia Germany Malaysia Slovakia of qualifying intellectual property is exempt from tax provided the taxpayer reported the acquisition or production (the registra- Australia Georgia Malta Slovenia tion in the books) of the intellectual property to the Hungarian Austria Greece Mexico South Africa tax authorities within 60 days and holds the property for at least Azerbaijan Hong Kong Moldova Spain one year. Even if a sale of intellectual property does not qualify Belarus Iceland Mongolia Sweden for the participation exemption, gains realized will be exempt if Belgium Indonesia Morocco Switzerland the taxable amount (gain) is used to purchase qualifying intel- Bosnia India Montenegro Taiwan lectual property within three years of the sale. Taxation of capital gains may be deferred if the transaction qualifies as a “preferen- Brazil Ireland Netherlands Thailand tial transaction” in accordance with the Merger Directive, and Bulgaria Israel Norway Tunisia certain formal requirements are met. Capital gains resulting from Canada Italy Pakistan Turkey the following transactions may apply the favorable treatment if China Japan Philippines Ukraine the necessary conditions are fulfilled: Croatia Kazakhstan Poland United •• revaluation of assets in mergers, de-mergers; Kingdom •• transfer of certain assets and liabilities forming a business unit; Cyprus Korea (R.O.K.) Portugal United States or Czech Kosovo Qatar Uruguay •• exchange of shares. Republic Denmark Kuwait Romania Uzbekistan Non-resident capital gains tax may apply if a non-resident entity Egypt Latvia Russia Vietnam directly disposes (sells, contributes in kind, etc.) a participation Estonia Lithuania San Marino in a Hungarian entity, which qualifies as a real estate holding Finland Luxembourg Serbia company as defined by the Corporate Income Tax Act. In this case, the realized gain should be subject to Hungarian corporate income tax provided that the double taxation treaty effective between Hungary and the country where the disposing entity is resident allows the taxation of such transaction.

Investing in Central Europe 51 Hungary

Anti-avoidance provisions Thin capitalization Transfer pricing Under the thin-capitalization rule, according to the CIT Act, Hungary’s transfer pricing rules, which are generally based on interest paid or accounted for on that part of the liabilities that the OECD guidelines, specify that transactions between related is in excess of the borrower’s equity as multiplied by three is entities should be considered for taxation purposes at the same not deductible for corporate tax purposes (the debt to equity price as equivalent transactions between unrelated parties. If ratio is 3:1). With regards to this rule, any liabilities relating to an individual or an organization, directly or indirectly, has more which interest is paid (with the exception of bank loans) should than 50% ownership or voting rights in another entity, or direct generally be taken into consideration, however, certain receiva- or indirect management control of another entity, the entities bles may be deducted from the liabilities. Interest-free loans and are related parties. For private individuals, the law includes family loans with not market interest rates should also be considered members. for thin-capitalization purposes if deemed interest deduction is performed under the transfer pricing rules. The thin-capitalization The following transfer pricing methods may be used: compa- rule applies for liabilities between unrelated parties as well. rable uncontrolled price method, resale minus method, cost-plus method, the transactional net margin method and the profit Controlled foreign companies split method. If none of these methods lead to a proper result, Certain income, such as dividends received from controlled the taxpayer may apply any other defensible method. If the price foreign companies that would normally be exempt, is taxable. applied between related enterprises differs from the market Meanwhile certain expenses incurred, such as impairment, which price, the taxpayer or the tax authorities may adjust the tax are deductible under general rules, are non-deductible if incurred base to reflect the market price. If the tax authorities make in relation to a controlled foreign company. In addition, undis- an adjustment, however, they may impose a fine of up to 50% of tributed profit of the controlled foreign company is also taxable the additional tax liability and the taxpayer may have to pay late at the hands of the Hungarian resident shareholder. A controlled payment interest. foreign company is a foreign company which derives most its income from Hungary (or in which a Hungarian individual directly Branch offices are subject to the same arm’s length pricing or indirectly holds at least 10% of shares), and the foreign requirements as all enterprises in Hungary, even for transactions company is effectively taxed at less than 10%. A company between the branch and its head office. with a seat or tax residency in an EU or OECD member state or a country that has concluded a tax treaty with Hungary is not Related parties must prepare documentation justifying their a controlled foreign company if it has real economic presence in transfer prices, although an exemption from the obligation to that foreign country. prepare a transfer pricing report applies – among others – •• for transactions in small value (less than HUF 50 million, General anti-avoidance rule The substance over form principle applies; contracts, transactions approx. EUR 167,000 per year), or and similar operations are examined in accordance with their true •• where an advance pricing agreement is obtained with respect content. The tax authorities can disallow tax benefits of contracts to the arm’s length price of the transaction. and other transactions concluded with the intent to evade tax.

Separate transfer pricing reports have to be prepared for each Administration related party agreements, however, a combined documentation Tax year can be prepared for more agreements if their content is similar or The tax year is generally the calendar year, although taxpayers the same. may elect a different financial year that also applies for tax purposes. All businesses, other than financial enterprises, credit Simplified reporting is allowed for certain low value added institutions and insurance companies, are allowed to adopt intragroup services (e.g. specific IT services, legal activities, etc.) if a financial year different from the calendar year, subject to certain specified requirements are met. For instance, the relevant transac- criteria (e.g. being able to justify the use of the different tax year). tion cannot be related to the core activity of any of the parties and its value may not exceed a ceiling set by law. An exemp- The tax year is generally 12 months, but can be shorter in certain tion may be available for low value added intragroup services if cases. If a different tax year is chosen, the tax authorities must be the margin applied is between 3% and 10%. informed of the change.

52 Filing and payment Rulings Corporate income tax is assessed on an annual basis. A self- A binding tax ruling is available in Hungary, upon submission assessment system applies, under which the taxpayer establishes of a request to the Ministry for National Economy (Ministry). the amount of the corporate tax payable. The application is subject to a flat fee of HUF 5 million (approx. EUR 16,000). The Ministry has 75 days to decide on the ruling Advance tax payments are due on a monthly basis for companies after the submission of the request (which can be extended by whose tax liability exceeded HUF 5 million in the preceding year, 60 days). A taxpayer also may request an accelerated proce- and the payments are due by the 20th of each month. All other dure, where the fee is HUF 8 million (approx. EUR 25,000), and companies must make quarterly advance payments. Companies the deadline for a decision is 45 days (which can be extended by exceeding a net sales revenue of HUF 100 million (approx. EUR 30 days). If the tax treatment cannot be assessed by the Ministry, 332,000) are liable to pay the difference between their expected the taxpayer is entitled to a refund of 85% of the statutory fee. annual CIT liability and the CIT advances paid during the year (so called top-up obligation) by the 20th day of the last month in Rulings are binding only for that entity which files the request. the tax year. They can be requested for future and past transactions as well, however, rulings for past transactions can cover only certain The final payment of tax is made at the time the annual tax annual income tax types. These ruling requests should be filed return is filed. Most returns are due by 31 May following until the filing day (or due date) of the relevant tax returns. the income year. If the fiscal year is different from the calendar year, annual tax returns are due by the last day of the fifth month A special binding ruling is available for large taxpayers (i.e. those following the end of the fiscal year. employing more than 200 persons or having a balance sheet total exceeding HUF 1 billion) in terms of corporate income Most companies in Hungary must file tax returns electronically. tax purposes that will not be affected by future corporate tax Electronic filing requires registration for a distinct code, which changes. This ruling is binding for three years irrespective of tax can be obtained through local government offices. law changes. In these circumstances the Ministry’s fee is HUF 8 million (approx. EUR 25,000), and HUF 11 million if an acceler- Consolidated returns ated procedure is required. Hungarian law does not provide for group taxation for income tax purposes, as a result it is not possible to file a consolidated A tax ruling cannot be applied to determine the arm’s length tax return. price in related party transactions, but an advance pricing agree- ment (APA) can be requested from the tax authorities regarding Statute of limitations the determination of the applicable transfer pricing method and The general statute of limitations is five years from the end of the arm’s length price or price range. the year the tax return is due and the period for the enforcement and collection of tax is five years starting from the end of the year APA requests can be submitted to the tax authorities. The appli- in which the tax is due. cation is subject to a statutory fee from HUF 500,000 to HUF 10 million. If the exact fair market value can be determined, Tax authorities the statutory fee is equal to 1% of the fair market value. An APA The tax authorities in Hungary comprise the state tax authority is valid for at least three years and a maximum of five years (with and the customs authority (referred as National Tax and Customs the possibility of a one-time extension for an additional three Administration (NAV)) and the notaries of the municipal govern- years). Bilateral and multilateral APAs are also available. After ments (local tax authority). The tax authorities’ responsibilities submission of the request, the tax authorities have 120 days to include maintaining taxpayer records, assessing tax, collecting decide on the APA, which can be extended twice by an additional and enforcing taxes and other public dues enforced as taxes, 60 days. If the application is rejected, the taxpayer is entitled to controlling and supervising compliance with tax obligations, a refund of 75% of the statutory fee. disbursing central subsidies and effecting payment of tax refunds.

Investing in Central Europe 53 Hungary

Other taxes on business Withholding taxes Local business tax Dividends Local business tax (LBT) is imposed by local municipalities, where Hungary does not levy withholding tax on dividends paid to the company has its registered seat or permanent establish- foreign companies. ment for LBT purposes. The base of the LBT is the net sales revenue (excluding royalty income) minus the cost of goods sold, Interest the value of intermediated services, subcontractors’ fee, costs Hungary does not levy withholding tax on interest paid to foreign of materials and the direct cost of R&D activity. Depending on companies. the revenue volume (above net sales revenue of HUF 500 million, approx. EUR 1.6 million), the deduction of cost of goods sold and Royalties cost of intermediated services is subject to limitations. Hungary does not levy withholding tax on royalties paid to foreign companies. Depending on the decision of the local municipality, and at its discretion, the maximum rate of LBT may reach 2%. Certain Branch remittance tax municipalities do not levy LBT. The annual LBT return is due on Hungary does not levy a branch profits tax. the last day of the fifth month following the given year. Tax advance payments are due twice a year (in the third and ninth Wage tax/social security contributions day of the tax year) and, similar to CIT top-up, obligation also The employer generally is responsible for assessing and with- applies at year end. holding the amount of the employee’s personal income tax and social security liability on a month’s wages. Innovation contribution Innovation contribution is collected by the government to Corporate taxpayers are subject to a variety of social security generate more funds for corporate R&D. With a rate of 0.3%, taxes. Based on the gross wages of their employees, firms are the base of the innovation contribution is identical to the local required to pay a social tax of 27%, which replaced the employ- business tax base. Newly registered companies in the year of er’s social security contribution; and the gross salary’s 1.5% is registration, businesses qualifying as a micro or small sized paid as training fund contribution. enterprise, and Hungarian branches of foreign entities are exempt from the innovation contribution. Indirect taxes Value added tax Special tax on financial institutions Domestic supply of goods and services as well as intra-Commu- Credit institutions, investment companies, stock exchanges, nity acquisitions and imports are subject to VAT in Hungary. commodity traders, venture capital fund management compa- nies, and investment fund management companies are subject The standard VAT rate on products and services is 27%. An 18% to a special tax. The base and rate of the tax is determined sepa- rate is applicable to basic food products (milk, dairy products, rately for all the above types of financial enterprises. bread, etc.) and the provision of accommodation. A 5% rate applies to pharmaceuticals and certain medical equipment, aid Financial transaction tax for the blind, books and newspapers and district heating services. Financial transaction tax applies to payment service providers, Transactions exempt from VAT include: the sale of buildings credit institutions authorized to pursue currency exchange activi- with an occupancy permit issued more than two years ago or ties and intermediaries of currency exchange services resident in the rental of buildings (with an option for taxable treatment), Hungary. The subject of the financial transaction tax – among postal and financial services, education, certain health and public others – is any transfer of funds, direct debit, cash withdrawals television services, and sport and lottery services. The few exempt from payment accounts, loan repayment and commissions and products include basic medical materials and folk art products. fees as charged. The payable financial transaction tax is 0.6% Rights and intangibles also are subject to VAT. of the transferred amount in case of cash withdrawals (with certain exemptions), and 0.3% of the transferred amount in all other cases (capped at HUF 6,000 [approx. EUR 20] per payment transaction).

54 Following the elimination of trade barriers with the EU, sales Land tax transactions between Hungary and other EU member states are Land tax should be paid by the owners of land. The introduction considered intra-community acquisitions or supplies. In intra- of the tax is dependent on the decision of the local munici- community supplies the taxpayer may issue an invoice to its pality where the land is located. The tax can be based either EU-based purchaser without charging VAT if it has proof that on the area of the land in square meters or on the adjusted the goods left Hungary; the buyer then settles the VAT payment. market value of the land. The tax rate is determined by (and at EU-based taxpayers supplying goods in Hungary can request VAT the discretion of) the local government, and in 2014 it should not registration, but non-EU taxpayers supplying products in Hungary exceed HUF 331.1 (approx. EUR 1.1) per square meters (which must use a fiscal representative for Hungarian VAT transactions. is adjusted in every year by the changes in consumer prices, published by the Hungarian Central Statistical Office) or 3% of Nonresident companies can reclaim Hungarian VAT if registered the adjusted market value. for VAT purposes in their home country. For firms registered outside the EU, Hungarian VAT may be reclaimed based on Real estate transfer tax bilateral agreements (such agreements exist with Liechtenstein See under “Transfer tax.” and Switzerland). Transfer tax Branch offices of foreign companies in Hungary are subject to The sale or transfer of real property or participation in VAT. Each branch of a foreign company in Hungary is treated a Hungarian real estate holding company is subject to transfer as a separate entity and must file a separate VAT return. tax. The tax, payable by the purchaser, is levied on the fair The supply of services between a branch and its head office market value of the property. The transfer tax rate is 4% up to falls outside the scope of VAT unless the branch is member of HUF 1 billion (approx. EUR 3.3 million) and 2% for the exceeding a Hungarian VAT group. amount, capped at HUF 200 million (approx. EUR 650 thou- sand) per property. For transfer tax purposes, real estate holding All related firms and their branches with a business establishment company is presumed to mean an entity with Hungarian real in Hungary are eligible for group taxation and are collectively estate(s) with a book value exceeding the 75% of the total asset regarded as a single taxpayer for VAT purposes. Services and value less cash assets and cash receivables, or a company holding products provided within the VAT group are not subject to VAT. 75% participation in a company with such a real estate value Capital tax percentage. Hungary does not levy capital tax. The transfer of motor vehicles is also subject to a transfer tax. Real estate tax The amount of tax depends on year of production and engine Building tax power. Building tax should be paid by the owners of buildings. The intro- duction of the tax is dependent on the decision of the local municipality where the building is located. The tax can be based Administrative and court procedures are subject to procedural on the net floor space of the building expressed in square meters fees. In general, no stamp duty is levied on the conclusion of or on the adjusted market value of the building. The maximum a loan or other agreements. tax liability may be HUF 1,821 (approx. EUR 6) per square meters in 2014 (which is adjusted in every year by the changes in Customs and excise duties consumer prices, published by the Hungarian Central Statistical No customs apply in relation to EU member states; rates deter- Office) or 3.6% of the adjusted market value. mined by the Community Customs Code apply in respect of goods imported from outside the EU.

Excise tax is levied on items such as alcoholic beverages, petrol and tobacco products.

Investing in Central Europe 55 Hungary

Environmental taxes Residence The main types of environmental taxes include product charges, Individuals with Hungarian citizenship (excluding dual citizens charges on emission and energy tax. Product charges are levied with no permanent residence in Hungary) and foreigners with on domestically produced, imported or distributed products, a Hungarian settlement permit are tax residents. A foreigner which endanger the environment, e.g. fuel and mineral oils, tire, without a Hungarian settlement permit is considered tax resi- cooling devices, packaging material, promotional paper and elec- dent if he/she has a permanent home exclusively in Hungary. If tronic devices. Charges on the emission of polluting substances the individual also has a permanent home in another country or for the environment are levied in proportion to the amount of has no permanent home in Hungary, the individual is regarded the substance that seeped into the air, soil or landscape water. as a Hungarian tax resident if his/her center of vital interests is Energy tax is assessed on electricity, natural gas and coal. in Hungary. If the individual’s center of vital interests cannot be determined, the individual is regarded as a Hungarian tax resident The release of certain packaging materials to commercial trade is if he/she has a habitual abode in Hungary (e.g. he/she stays in subject to tax. the country for more than 183 days in a calendar year). An EEA national will be deemed tax resident if his/her stay in Hungary Taxes on individuals exceeds 183 days in the calendar year. Residence status may be Individuals in Hungary are subject to a variety of taxes, including affected by a tax treaty. the personal income tax, social security contributions, real estate tax, and inheritance and . Entrepreneurs may be entitled Taxable income and rates to opt to be subject to the simplified enterprise tax (EVA) or Hungarian resident individuals are subject to tax on their world- entrepreneurs taxed under the fixed rate tax of small taxpayers wide income (i.e. income from any source, such as income from (KATA). There is no special regime for expatriates. employment, the carrying on of a business, capital gains, income from investments, etc.). For nonresidents, only Hungarian-source Hungary has limited social security exemptions for third country income is taxable (including income from employment, business national expatriates (non-EEA citizens) assigned to Hungary activities or real property transactions in Hungary). Hungarian- and their foreign employers. If a Hungarian company employs source income is defined as income received domestically or a foreign individual, social security charges on both the employee offshore for activities performed in Hungary, or income earned and the employer are due in Hungary. Any exemptions from from Hungarian assets. Hungarian social charges are based on the conditions of the assignment structure, EU social regulations or an applicable Gross income is considered the taxable base, which must then be bilateral social security agreement. aggregated with income from other sources (excluding income taxed separately such as dividend income, capital gains, etc.). Hungary Quick Tax Facts for Individuals Certain categories of income are exempt, these include: benefits paid under the state social welfare provisions or by social Income tax rates 16% insurance, allocations for childcare and state pension income, Capital gains tax rates 16% scholarships for full-time study and tax refunds. Basis Income Double taxation relief Possible Deductions and reliefs Tax year 2014 Professional training, business travel and accommodation qualify Return due date 20 May 2015 as business expenses if properly supported by invoices. Housing provided by a Hungarian firm is taxable as part of employment Withholding tax income if evidenced by an employment contract. For foreign − Dividends 16% or based on the DTT employees seconded to Hungary without an employment − Interest contract with a Hungarian firm, housing could be considered − Royalties a nontaxable benefit. Net N/A Social security EE: 18,5%, ER: 27% Subject to certain restrictions, deductions are granted for capital Inheritance tax 18% or 9% gains derived from the disposal of real estate. Real estate tax Subject to the decision of the municipality Families with one or two children are entitled to a tax base decrease of HUF 62,500 per child per month and HUF 206,250 VAT 27% per child for families with three or more children.

56 If the situation arises such that the family does not have enough Other taxes income to use the whole amount of the family , The municipalities levy a tax on motor vehicles. the family is able to claim the outstanding amount from their social security contributions in the form of family contribution Compliance credit. The taxable period for individuals is the calendar year. The deadline for the filing of tax returns is 20 May of the year Rates following the relevant taxable period, although an extension to The personal income tax is a flat rate of 16%. Passive income, 20 November may be obtained. such as dividends, interests and rental income is also subject to a 16% tax. A 6% health tax is imposed on interest income. A 14% health tax is imposed on certain passive income, e.g. divi- 3. Legal Entity dend income, capital gains and income exceeding HUF 1 million Principal forms of business entity from the renting out of real property. 27% health tax is imposed Under the Act on the Investments of Foreigners in Hungary, on gross taxable income (excluding income taxed separately with few exceptions specified in the Act, foreigners are entitled such as dividend income, capital gains, etc.) that is received from to carry out business activity in Hungary only if they register an entity not classified as a disburser (e.g. employment income a branch or establish a Hungarian company. Under the terms of from abroad). the Civil Code , a company in Hungary may be established under a variety of legal forms. The most common for foreign investors Inheritance and gift tax are the company limited by shares (részvénytársaság - Rt) and Inheritance duty amounting to 18% is levied with regards to the limited-liability company (korlátolt felelősségű társaság - Kft). assets and 9% with regards to property. Furthermore, special These organisational forms correspond closely to the German AG rates are applicable in the case of motor vehicles and infields. (Aktiengesellschaft) and GmbH (Gesellschaft mit beschränkter A full exemption applies to inheritances received by direct Haftung). Foreign investment may take two other legal forms: descendants (including the spouse of the deceased). Moreover, the limited partnership (beteti tarsasag - Bt) and the general an exemption of up to HUF 20,000,000 applies to assets inher- partnership (kozkereseti tarsasag - Kkt). These latter forms of ited by step and foster children. organisation require unlimited legal liability of the members. All members of a Kkt are jointly and severally liable; at least one Gift tax is due on gifts of real estate, movable property and member of a Bt must have unlimited liability. the granting of a right, surrender of a right or exercise thereof without consideration, and the waiver of a right without consid- An Rt. may be established only in a closed form (Zrt.). After eration. A full exemption applies to individuals who receive gifts the Zrt. has started its operations, its shares may be listed on from direct descendants and spouses. Similarly to the inheritance any stock exchange and then the company shall be registered duty, the gift tax rate is 18% in the case of assets and 9% in as an opened form Rt. (Nyrt.). the case of property. If the value of the asset or property is less than HUF 150,000, the transaction is exempt from gift tax. Formalities for setting up a company Owing to less stringent registration and operating procedures Net wealth tax and to lower minimum capital requirements, most new private- None sector firms incorporating in Hungary now choose the Kft form. The shareholders of a company may differ from the provisions of Real property tax the Civil Code unless (i) it is prohibited by law, (ii) where any dero- A local tax may apply to dwelling places and land; municipalities gation violates the interest of the company’s creditors, employees have the right to impose such taxes and determine the rates, up and minority members, or it is likely to prevent the exercise of to specified limits. the effective governmental supervision over the company.

Social security contributions The supreme body of the Kft. is the members’ meeting Employees are required to make social security contributions of (taggyűlés), and the shareholders’ general meeting (közgyűlés) 18.5% from their gross salary, withheld by the employer. for Rts. If the Kft or Zrt has only one member/shareholder, Employers are required to make social security contributions of the competence of the supreme body is exercised by the same 27% above the gross salary of the individual and 1.5% voluntary body. training fund contribution.

Investing in Central Europe 57 Hungary

A supervisory board of at least three members must be estab- Setting up a supervisory board is mandatory for a Zrt if lished if the annual average number of employees exceeds 200, the shareholders representing at least 5% of the votes require otherwise a supervisory board in general is optional. If a supervi- so. Management is conducted by the board of directors sory board is required, because of the number of the employees, (igazgatóság), which consists of at least 3 members elected by then one-third of the members of the supervisory board must be the shareholders at the general meeting. No restrictions apply elected by the employees. regarding the nationality or residence of the directors. Nyrts. have extensive publishing and disclosure obligations. With regards to a Zrts, the management of the company is conducted by a board of directors (igazgatóság) or by a sole Limited-liability company (Kft) chief director (vezérigazgató), while for a a Kft, the Hungarian Minimum capital is HUF 3,000,000. A Kft may be formed by one legislation does not recognize the concept of board of directors, or more owners. Additionally, it is not permitted to solicit others and the management is conducted by one or more managing publicly to become owners. Contributions can be made in cash directors. The management is responsible for preparing the finan- or in kind. However if, upon establishment, the amount of in-kind cial statements of the company. A company’s supreme body may contributions reaches half of the initial capital, all of the in-kind confer the right of general representation upon an employee contribution has to be transferred. appointed by it, as a so called company secretary. There are no restrictions on the number of members or founders, In Hungary, the registration of companies belongs to the compe- or on their nationality or residence. A simple majority is usually tence of the Court of Registration of the respective county, and sufficient for most decisions; however, a majority of at least 75% it is statutory to be represented in the procedure by an attorney- of the quota holders is necessary, for instance, to amend the arti- at-law. The registration procedure takes approximately 2-3 weeks cles of association or to remove a managing director. after the filing of all necessary corporate documents. The judge is entitled to require additional information or documents that may Management can be conducted by one or several managing extend the procedure. There is a registration fee of HUF 100,000 directors elected by the members for a definite or indefinite term; in the case of Zrts. and Kfts. Upon the increase of the initial alternatively, the articles of association may provide that all equity capital, 40% of the above fees are payable. The fee for regis- holders are entitled to manage the Kft as managing directors. tering an Nyrt. from a Zrt. is HUF 500,000. The representation rights of managing directors may be restricted or distributed among several managing directors in the articles Forms of entity of association. However, such restriction or division is ineffective Requirements for Rt and Kft towards third parties, i.e. the act of the managing director will Company limited by shares (Rt) be binding to the company even if he/she acted beyond his/her Minimum capital is HUF 20 million in case of Nyrts. and HUF power that has been limited internally by the articles of associa- 5 million in case of Zrts. Furthermore, the share capital of tion. At the members’ meeting it may be decided that the MD the company in general must be secured completely by subscrip- of the company may authorize certain employee(s) to represent tion. The amount of cash contributions at the time of foundation the company within a particular scope, concerning specific may not be less than 30 % of the share capital. With certain matters if prescribed in the company’s articles of association. exceptions, the amount of capital contributed in kind must be declared in writing and must be audited by certified auditors. Branch of a foreign corporation Foreign firms have been able to establish a branch office in There are no restrictions on the number of shareholders or any sector since January 1st 1998, under Act CXXXII of 1997 founders, or on their nationality or residence. An Rt may issue on Branch Establishments. A branch office in Hungary qualifies ordinary or preference shares. Nominal value of preference shares as an entity without legal personality; therefore, the foreign firm may not exceed 50% of the total share capital of the company. bears responsibility under Hungarian law. The Act CCXXXVII The transfer of registered shares issued by a Zrt. may be limited of 2013 on Credit Institutions and the Act CXX of 2001 on in the articles of association. Simple majority is enough for most the Capital Market permit the establishment of branches of regu- decisions; however, a majority of at least 75% is necessary lated financial entities. A branch may engage only in activities for major decisions, such as amending the articles of associa- that comply with the laws of both Hungary and the country of tion, deciding on transformation or termination without legal the head office. successor of the company. Shareholders representing at least 5% of shares with voting rights may ask the board of directors to add certain items to the agenda of a general meeting or to have the management of the company be investigated.

58 Legislation in all areas (for instance, tax law) has been drafted The Capital Market Act regulates the acquisition of public with the expressed intent to create a level playing field for branch companies to protect small investors and improve transparency offices – that is, neither giving them advantages over domesti- in acquisitions. Once a shareholder accumulates a 33% direct cally registered companies nor subjecting them to disadvantages. or indirect stake in a company, a public offer must be made The procedure for registering a branch office is very similar to on the full share package in the given company. If no single that of a legal entity, with some differences. shareholder owns more than 10% of the company, the threshold for mandatory public offers is 25%. Shareholders increasing their Regulation of business ownership to more than 5% in a public firm must report their Mergers and acquisitions shareholding to the Financial Supervisory Authority. Company Mergers require permission from the Hungarian Competition bylaws may impose stricter requirements, such as reporting Authority (GVH) if, based on the previous year: (1) the merging requirements starting at 2% ownership. companies have combined annual revenue exceeding HUF 15 billion; and (2) the net sales revenue of the merging companies Monopolies and restraint of trade exceeds HUF 500 million. In calculating the HUF 500 million Monopolies and market dominance are not prohibited per se. threshold, the revenue of firms acquired by the participating Rather, the Competition Act bans the abuse of a dominant companies or groups in the preceding two years must be taken position that restricts competition. A dominant position arises into account, even if the transactions are still awaiting regula- when substitute goods cannot be acquired elsewhere, or can tory approval. In case of the merger of credit institutions or be acquired only under substantially less favorable conditions; commercial banks, the HUF 15 billion threshold is calculated on when a company’s goods cannot be sold to another party, or the basis of revenue from interests, fees and securities transac- can be sold only to a party under substantially less favorable tions. Furthermore, for the merger of financial institutions as well conditions; or when a company can pursue its economic activi- as when any shareholder increases its stakes above 20%, 33% ties in a manner significantly independent of other participants or 50%, the permission of the National Bank of Hungary (being in the market or without having to consider the attitudes of its the financial supervisory authority) is also required. competitors, suppliers, customers or other business partners.

The law does not distinguish between horizontal and vertical The Competition Act includes the following nonexclusive list of mergers. The GVH may not reject a merger unless it creates or agreements or concerned practices that might not be permitted if strengthens a dominant position, hinders competition and results they have, as their object or effect, the prevention, restriction or in disadvantages that outweigh any possible advantages arising distortion of economic competition: from the transaction. The GVH must also review international •• Price fixing or defining other business conditions; acquisitions for the merger of local subsidiaries if they exceed the prescribed sales revenue threshold. The GVH may call for •• Restricting or controlling manufacturing, distribution, tech- the separation or divestiture of merged entities if the parties fail nical development or investment in a product or industry; to apply for authorization. •• Dividing purchasing sources, restricting freedom of choice in purchasing or excluding others from the purchase of goods; Legally, a merger is regarded as a concentration of undertakings •• Dividing a market, excluding others from selling, restricting under the Competition Act, which includes standard mergers or sales choices; acquisitions of ownership shares or assets, but also the acquisi- tion of control over another undertaking (irrespective of any •• Preventing others from entering a market; specific ownership stake) and the establishment of certain joint •• Discriminating against business partners through sales or ventures. purchase price or conditions; and •• Tie-in contracts, i.e. requiring specified purchases besides the original contract item.

Investing in Central Europe 59 Hungary

Agreements between companies to engage in the above As from fiscal year 2011, the deadline for submitting financial practices are not prohibited if the combined market share of statements (other than consolidated financial statements) is the parties does not exceed 10% or if the companies are part of the last day of the fifth month following the balance sheet date the same group. of the fiscal year, thus harmonizing the deadline for submitting the statements with the tax return filing date for calendar year The Trade Act defines the concept of significant market power companies. The document retention obligation for accounting in the context of wholesale/retail businesses and their suppliers, source documents, financial statements, general ledgers and and prohibits the abuse of such power. A company, or any group other analytical records is eight years. of undertakings or purchasing alliance to which it belongs, that has annual revenue of HUF 100 billion is considered to have significant market power. Such power also exists if a company 4. Labour and Wages has a dominant bargaining position under market conditions. Employee rights and remuneration The Labor Code contains minimum provisions for employment Accounting, filing and auditing requirements contracts, job descriptions, place of work, hiring out labor and The appointment of an auditor is mandatory if the company’s rules for the termination of employment. average annual net sales revenue of two consecutive busi- ness years exceeds HUF 300 million, or the average number of Employees are entitled to organize trade unions. Subsequently, employees exceeds 50 in two consecutive business years. Other- these trade unions may inform their members of their rights and wise, the appointment of an auditor is optional. The auditor must obligations concerning financial, social, cultural as well as living be a legal person or an individual registered with the Hungarian and working conditions. They also may represent their members Chamber of Auditors. vis-à-vis the employer and before government agencies in matters concerning labor relations and employment. The Hungarian accounting system is based on the Hungarian Accounting Act, which incorporates Hungarian Accounting Employees as a group are entitled to participate in the company’s Standards. As a member of the EU, Hungarian law is in accord- matters; these rights are exercised by the works council or ance with European Commission (EC) Regulation No. 1606/2002, the employees’ trustee elected by the employees. Employers must which requires the application of IFRS in the preparation of inform the works councils or trade unions (if any) before deci- consolidated financial statements of listed companies. Hungarian sions are made regarding a mass redundancy. Accounting Standards are supplemented by government decrees based on special requirements for banks, insurance companies, Discrimination against employees based on nationality, language, stockbrokers, investment funds, pension funds and various ethnicity, sex or sexual orientation is prohibited, as is discrimina- nonprofit institutions. tion with regard to establishing or terminating employment, Hungarian companies should prepare their unconsolidated application procedures, training and the determination of financial statements based on Hungarian law. Consolidated working conditions. financial statements, if necessary, can be prepared based on the Hungarian Accounting Law or IFRS. The annual financial Working hours statements must be submitted electronically to the Company The statutory number of daily working hours is 8; this may not Service, which forwards the statements to the Court of Registra- exceed 12 hours, including overtime. Employees are entitled to tion. Although it is possible to file directly with the court, this two non-working days per week. Sunday workers, i.e. if the work does not eliminate the requirement to file with the Company is performed in their regular working hours, must receive 150% Service. Public companies limited by shares have more extensive of their regular daily salary and be provided with another day off. publishing and disclosure obligations. Issuers on the Budapest Exemptions to this rule may apply to special working schedules, stock exchange must compile and publish earning reports on but employers must provide adequate rest time for workers. a quarterly or semi-annual basis, depending on capitalization or Workers must be paid minimum premiums of 15% for night work the number of shareholders. and 50% for overtime work. The maximum overtime can be 250 hours annually, and 300 hours if provided so by the collective Unconsolidated financial statements are also prepared to provide agreement. a basis for the determination of corporate income tax with certain adjustments.

60 Each employee is entitled to a regular vacation every calendar The employee contributions are assessed and withheld year. The minimum duration of the vacation is 20 days. However, by the employer. The general rate of sick pay is 60% if there are additional vacation days indicated according to the age the employment period was longer than two years, and 50% if of the employee so that when the employee is 45 years old the employment period was less than two years; the maximum the duration of regular vacation is 30 days. Supplementary vaca- amount of sick pay cannot exceed two times the minimum wage. tion days are given, among others, if the employee has children. The employer must pay 70% of wages for a maximum of 15 work days per year in case of illness. Wages and benefits The Labor Code sets a basic minimum salary in hourly and Other benefits monthly terms for all types of work, and the monthly minimum Besides the regular annual holiday leave of 20 days and the addi- salary requirement must be adhered to. The prevailing minimum tional days depending on the age of the employee as described salary is HUF 101,500 per month in 2014. According to above, extra days may be awarded to employees younger Hungarian sources, the average monthly gross salary in 2013 was than 18 (five days) and parents with children (up to seven HUF 227,000. The Labor Code allows a range of other specific days depending on the number of children). Maternity leave is minimum-salary levels and guidelines for certain types of work provided up to 24 weeks. (for example, by skill level, degree of responsibility and industry). Fringe benefits can be provided to employees in the form of food Salary levels vary widely. Wages in the state sector or at wholly vouchers, meals at workplace canteens, Szechenyi holiday card Hungarian-owned enterprises are generally lower than at (used for accommodation, food and beverages and recreation), multinational companies. Skilled white-collar labor commands schooling assistance, travel passes etc. The tax rate for fringe a premium, particularly for qualified information-technology benefits is 16% but the tax base adjustment is 19% resulting in specialists. There are also wide disparities among different an effective tax rate of 19.04%. Furthermore for fringe benefits regions of the country: salary levels in Budapest and the western there is also a health tax payment obligation which is 14% but counties are higher than in the depressed eastern regions. the tax base adjustment is 19% resulting in an effective health tax rate of 16.66%. (Total effective tax rate of 35.7%). The Labor Code adopted the principle of equal wage for equal work, meant to address discrepancies between wages for male Benefit in kind can also be provided to the employees provided and female employees. Hungary is signatory to and adheres to that the benefits are available for all (or a specifically defined ILO conventions protecting worker rights. group) of the employees. Benefit in kind can be, for example, employee discounts, representation, etc. The tax rate for benefit Pensions in kind is also 16% but the tax base adjustment is 19% resulting Hungary has a two-pillar pension system (a third pillar was abol- in an effective tax rate of 19.04%. Furthermore, for benefit in ished as from 2011): kind there is also a health tax payment obligation which is 27% but the tax base adjustment is 19% resulting in an effective 1. Mandatory State Social Security Pension (funded by health tax rate of 32.13%. (Total effective tax rate of 51.17%). the employer and employee contributions outlined on the previous pages); and. Termination of employment 2. Voluntary Mutual Pension Fund (funded by voluntary employer An employer must give a specific reason for dismissing and employee contributions into a self-administered tax- an employee. Employees have the right to sue for damages for sheltered fund). unfair dismissal if the reason for dismissal is untrue or unclear. The rights of an employee remain in effect after a sale of Social insurance the employer company. The minimum notice period for dismissal The social tax payable by both the employer and the employee increases with the length of employment of the employee generally covers pension and healthcare insurance. Based on (between 30 and 90 days). the gross wages of an employee, the employer pays a 27% social tax. Companies must additionally pay 1.5% to the vocational Labor-management relations training fund. The employee contributes 10% for pension insur- There is a prescribed seven-day conciliation period before a strike ance (uncapped) and 7% for healthcare (uncapped as well), and may be held. It is customary, but not required, for notice of 1.5% of gross wages to the unemployment fund. a strike to be given one to two days before the strike. A national mediation and arbitration service exists to help settle labor disputes, but its services are not obligatory.

Investing in Central Europe 61 Hungary

Works councils are mandatory in all workplaces employing 50 5. Education or more persons. (For companies employing more than 15 but Educational attainments are comparable to those of Western fewer than 50 persons, appointment of an employee delegate Europe. A high standard of general education has played a crucial is mandatory.) The councils are forums for employee representa- role in attracting foreign employers to Hungary, especially in new- tion; the company’s employees elect the members, who can then technology sectors. negotiate employment terms on behalf of the staff. Members of works councils are often union representatives as well. The Hungarian education system is separated into three levels (elementary, secondary and higher education), including Individual labor contracts are standard practice among companies both publicly owned and some privately owned institutions. in Hungary, and the Labor Code requires them for employment An increasing number of primary and secondary schools teach relationships. Collective bargaining agreements for workers are English and German as second languages. Additionally, French, negotiated at the enterprise level and are rare, although trade Spanish and Chinese bilingual schools are also available in unions have been working to establish such contracts in several Hungary. industries. Works councils may negotiate collective agreements in enterprises where there are no trade unions. Schooling is compulsory for children between the ages of 6 and 16, and in broad terms the structure of the educational system Employment of foreigners remains little changed from the pre-transition period. General Different rules apply depending on whether the employee is elementary or primary school is usually followed either by an EEA national or a national of a third country (i.e. a non-EEA “vocational school” (for the training of skilled workers), “voca- country). EEA citizens and their family members do not need tional secondary school” (which offers a mixture of vocational a work permit in Hungary. The employer must notify the compe- and academic study), or the purely academic “gymnasium”. tent labor center of the employment that is not subject to The gymnasium remains the primary feeder of students to univer- a work permit. The commencement of the employment must sities, although various types of universities often accept students be reported no later than the start date of the employment; from vocational secondary schools. the termination of the employment must be reported on the day following the termination. There was a rapid expansion of university and college education in the 1990s and in 1999 Hungary joined the Bologna Process. As a general rule, a third country national can only be engaged According to the Hungarian Central Statistical Office, the number in employment (with very few exceptions) if he/she has a valid of students in tertiary education in 2009/2010 reached more than work permit and a residence permit. The work permit is issued 370,000. However, due to the recent change in the financing of by the labor center upon the application of the employer higher education (such as universities or high schools) the pupils and upon a showing that the individual’s skills are needed in applying for higher education and the total number of full-time Hungary. An employment contract may be concluded only after students in secondary education decreased by 7% in 2013. This the work permit is issued and may only last for the period set by had a positive effect on the students choosing the cheaper voca- the permit. tional schools: the proportion of students in special vocational schools increased to 23%. In gymnasiums this amount was 37% The residence permit is issued by the Office of Immigration and while in vocational secondary schools 41%. The number of Nationality. Both EEA and third country nationals must submit students that applied for BA/BSc trainings was 53,000 (78% of an application for a residence permit for the purpose of employ- them were admitted), while 22,000 students applied to MA/MSc ment. The following documents are necessary for the application: trainings (16,000 students can start their studies) in 2013. The work permit, contract of employment, a document certifying most popular majors in 2013 consisted of the following fields: accommodation in Hungary, evidence of having the necessary social sciences, economics and law (29% of graduates), technical qualifications for filling the position, certificate of expected sciences (17%), health and medical sciences, social and human annual income and health insurance. sciences, arts and agricultural sciences (5-8%).

The above rules also apply to EEA or third country nationals that are to be employed by a foreign company and transferred to Hungary on a secondment.

62

6. Infrastructure

6. Infrastructure Road network Hungary has been greatly investing in upgrading and extending its motorway network and road infrastructure over the last few years. The country’s national boarders and other regions are easy to access through its main motorways and trunk roads.

Hungary’s central location in Europe and the dense motorway network - one of the highest in Europe - provides an essen- tial competitive advantage. The four vital European transport corridors (from Northern Germany/North Sea to the Black Sea; from the Adriatic ports to Kiev-Moscow; the river Danube and the Rhine-Main canal, from the North-Sea; and “North-South” corridor from the Baltic states to Turkey and Greece), which pass through the country, provide unique access to Europe, including the fast-growing CIS market and key European ports.

Recently international cooperation has been strengthened with neighboring countries to foster this endeavor by harmonizing Road network HungaryWater transportationhas 6.8 km of roads per 1,000 sq km of land area, which it wants to increase to 27 road network developments. A top priority of the Hungarian km by 2015, approaching the average among current EU members. Currently, there are government is to further extend and reconstruct the road 700Hungary’s km of motorways; river, the Danube, the density crosses of the throughmotorway the whole network is countrylow by international network in Hungary. comparison,from North atto less South, than andhalf ofthus the the countryEU average. hasThe outstandingroutes forming a part of European transportwaterway corridors connections. are given The Danube-Rhine-Main preference. There are plans canal to construct in Europe additional 430 km of motorways by the end of 2006, and foresees a similar programme for the years Railway network immediatelylinks the North afterwards. Sea and The the Black main emphasis Sea and is the Adriaticon the building seaports of new high-quality roads, Hungary has an extensive railway network due to the country’s withalso aprovide possible alternative neglect of basicshipping maintenan routesce. from The financialAsia. viability of such highly ambitious construction plans has been questioned, but a new funding scheme based on central location: the railway covers the entire country and is public-private partnerships will take much of the costs off-budget (provided that the well connected to the international railway network. Numerous scheme wins EU approval). The motorways running south-west and south-east from key train lines regularly link the country with the main ports of Budapest7. The Most (toward CroatiaActive and Industries/ Serbia, respectiv Sectorsely) are also under development, as are severalAutomotive bridges overindustry the Danube and Tisza, and non-motorway inter-city roads and ring- Western Europe (e.g. Hamburg, Bremerhaven, Rotterdam) and roads. The road network is extensive, but only around half of Hungary's roads are paved. A those of the Adriatic (Koper, Trieste). State-run domestic railway governmentStarting almost road buildingfrom scratch programme at the beginning extending up of until the 1990s, 2015 will improve the situation, system, operated by MÁV, is widely used for industrial cargo ship- althoughthe vehicle many manufacturing important inter-urban sector hasroads become will continue a vital to source have just of two lanes. ping. Over 20% of total freight traffic is carried by rail transport, Railwayforeign networkinvestment, representing nearly 25% of industrial output which significantly exceeds the EU average. The total length of Inand Hungary, 20% of the exports railway today. network Despite covers the decline the whole country in European and it s well connected to the internationaldemand, the automotive railway network. production State-run dom returnedestic railway to growth system in operated2011- by MAV is railway lines is 7,476 km. widely used for industrial cargo shipping. However, lately the road transport has replaced railways2012 and as theincreased primary by form 2.1% of freight at the beginning transport, reflecting of 2013 both – after the improvements five in main Air transport years of contraction. In recent years, air traffic has grown rapidly, particularly regarding 21 the transport of passengers. This increase occurred after The country’s automotive industry relies severely on foreign direct the introduction of the discount airlines, which the Hungarian investment, which focuses on the assembling of engines, compo- airport authorities were forced to allow due to non-discriminatory nents and cars. Today, passenger cars cover nearly all domestic terms upon EU accession. Hungary has several domestic and production. In the last two years, numerous significant invest- international airports built throughout the country. ments, particularly from German companies Mercedes, Opel and Audi, have enhanced capacity and furthered more technologically The largest airport is the Liszt Ferenc International Airport in advanced plants. As a result, this has strengthened Hungary’s Budapest, and they are currently striving to make it the second position, which is now, according to the European Automobile biggest airport among the countries in the region in terms Manufacturers’ Association (ACEA), the fifth-largest producer of of the number of passengers. Other international airports of vehicles among new EU members. regional importance include: Debrecen (Northeast Hungary, and Balaton–Sármellék (West-Southwest Hungary).

Investing in Central Europe 63 Hungary

One of these advances in capacity and technology includes Information and communication technology the opening of an 800 million euro plant of Daimler (Germany) The availability of comparatively cheap and technically skilled in Kecskemet in 2012, which aimed for a production volume labor as well as the presence of nearby EU markets has attracted of about 100,000-120,000 Mercedes passenger cars. Audi a number of leading electronics and software firms to Hungary. also enlarged its capacity to 125,000 cars a year. Furthermore, The country has become a major European manufacturing center Renault-Nissan (France/Japan) established a regional spare parts for mobile telephone handsets, led by output at contract manu- supply center in Győr, aiming to supply to Central and Easter facturers such as Elcoteq (Finland) and Flextronics (Singapore). European markets, and General Motors invested 500 million euro at its Opel engine manufacturing facility in Szentgotthárd in order The increase of per-head disposable income led to the enhance- to expand capacity. ment of the telecommunications industry outside the fixed-line sector. As a result, the country’s penetration rate was over There are also 14 of the top 20 suppliers worldwide in Hungary, 100% in the end of 2012. The market extended to include three such as Bosch (Germany), Bridgestone (Japan) and Hankook players: T-Mobile (46.6% market share, 2013), Telenor (31.3%) (South Korea). The country’s most significant national compo- and Vodafone (22%). nent-maker, with strategic importance to the economy, is Rába (based in Győr). Internet use is expected to rise significantly in the future. Due to the strong inflows of EU infrastructure funding information Manufacturing technology (IT), the number of personal computers (PCs) is Hungarian manufacturing has transformed radically in the transi- forecasted to increase by over 40% between 2012 and 2018. tion period. Formerly characterized by large, heavy industrial Today, the major provider of Internet service is Magyar Telekom, plants that were dependent on cheap energy imports and shel- which represents more than 40% of the market, followed by tered from competition, the Hungarian industry today is largely UPC, Telenor and Vodafone, each with around 10% control over modern and efficient, thanks principally to the early entry of the market. foreign investors. The industry suffered a major decline in output during the 1990s. Manufacturing output declined a severe 54% There are an increasing number of Asian companies, including in 1989-92, and entered strong and sustained recovery only in Chinese firms, which are expanding their production to Hungary 1997, after economic stabilization measures introduced in 1995 in order to serve EU markets. For example, Huawei Technologies showed positive effects. After a 1.7% drop in the production Hungary and the Hungarian Investment and Trade Agency (HITA) volume of manufacturing in 2012, there was a 2.0% increase in signed a declaration of intent on plans by the Chinese telecom- the following year. munications equipment maker to expand in Hungary. The aim was to establish a software application and service development Hungarian electronics manufacturing ranks first in the Central innovation center in Hungary. and Eastern European region and is well placed globally, thus having the biggest growth potential among industries in Chemicals and pharmaceuticals Hungary. This is led in part by segments brought to Hungary Hungary inherited an important pharmaceutical industry from by foreign investors as greenfield investments - such as mobile the communist period, and today it is one of the most impor- telecommunications and other high-technology equipment, for tant manufacturing sectors in Hungary, representing 0.9% of which Hungary has become something of a center. Transport the European pharmaceutical market value. Hungary offers equipment is the second most significant manufacturing sector, several new small and medium-sized biotechnology companies, following the automotive industry, and presents a driving force as well as a solid presence of large pharmaceutical companies, for the industry with a volume 19% higher in 2013 year on numerous fast-growing research institutions and skilled labor year. Other manufacturing sectors with high export levels, such with rational labor-cost. as the chemical and food industry, have a longer tradition in Hungary, although these two have gone through major restruc- The largest pharmaceutical company, and the only major manu- turing and modernization. facturer not controlled by a foreign investor, Richter Gedeon, is a leading producer of generics and active ingredients, and is one of the most important foreign drug suppliers on the Russian market. Its active ingredient production has led to extensive exports to the US and Japan. Richter Gedeon recently acquired PregLem, a Swiss, and Grünenhalt, a German, pharmaceutical company.

64 Chemicals account for over 7% of total industrial production With increasing demand from foreign and domestic corpo- and 2% of Hungary’s exports. The market increased by 2.6% rate clients for simple and responsive services, more financial in 2012 to a value of $10.3 billion. The chemicals sector was institutions are providing universal banking, which ranges from already a major industry before Hungary’s transition, and the two straightforward lending to investment banking and securities largest companies, BorsodChem - the Hungarian subsidiary of trading. Most foreign firms tend to access local credit and capital the Chinese Wanhua Industrial Group - and TVK, have comple- markets through home country financial institutions that have mentary buyer-seller roles. TVK, now controlled by the oil opened branches in Hungary. and gas company MOL, is more closely linked to the oil and petrochemical value chain, as a major supplier of polyethylene, The largest Hungarian Bank OTP, the National Savings Bank, is polypropylene and other products. BorsodChem and TVK have more than 50%-owned by foreign investors. both become important European players in their respective markets, as well as completed coordinated, large-scale invest- ment programs. 8. Industrial Parks Hungary offers the widest selection of industrial parks in Agriculture the region: investors can choose from more than 190 operating Agriculture and viticulture have traditionally played an impor- industrial parks on the basis of their business, professional, or tant role in the economy due to Hungary’s favorable climate cultural demands. Establishing a business is facilitated by highly and fertile soil. Major crops include: wheat, maize and barley, favorable conditions, including management that is familiar with sunflower seeds, sugar beet, and a variety of vegetables and local circumstances, support from municipalities, and various fruits. Animal husbandry and dairy production are also important. tax benefits. Another very important point is that investments are usually implemented in a fairly short period of time (a few Hungary has nearly 5.3 million ha of agricultural land, 57% of months). the country’s total surface area. Including forests, total produc- •• 190 well equipped industrial parks tive land area rises to 7.2 million ha. Over the period 2005 -2013, the total spending of Common Agricultural Policy (CAP) expendi- •• Several large multinational companies have some part of their ture in the country was 11.94 billion euros. operations in industrial parks in Hungary •• 4,500 companies, giving work to over 180,000 people. Since In 2013 the agricultural sector accounted for approximately 4% the beginning in 1997 the companies have invested almost of the country’s GDP. Hungarian farms have increased by some HUF 4,000 bn. 22% in economic size, while labor input in agriculture presented •• Nearly half of industrial parks are situated by motorways, 426,000 people working full-time. and investors can expect professional logistics services almost everywhere. Agricultural exports show a consistent and substantial surplus over imports, the trade surplus in agricultural products rose by 2.5 billion in 2013.

Financial Services After an early recapitalization program, followed by compre- hensive privatization that brought in foreign strategic partners, Hungary now has one of the region’s most advanced banking sectors. Budapest, the capital, is Hungary’s . Privatization of the major banks began in the mid-1990s, and by the end of 1996 most banks had been sold to foreign investors.

The banking sector in Hungary is greatly concentrated, with a few banks dominating deposit-taking and lending. Majority foreign-owned banks’ share in total sector assets is more than 80%. On the other hand the non-bank financial sector, including insurance companies, asset management companies and venture capital and private equity firms, plays a less significant role. The vast majority of these firms are owned by commercial banks.

Investing in Central Europe 65 Hungary

9. Investment Incentives A development tax allowance for investments exceeding 100 Since Hungary’s accession to the EU, investors are eligible for EU million euro eligible expenditure (which is in accordance with EU subsidies, distributed primarily through government schemes. regulations on government subsidies) is available on a case-by- In addition to EU funding schemes, the Hungarian government case basis through a permit issued by the Ministry of National maintains several national incentive programs financed from Economics. Under the allowance, 80% of corporate income tax the central budget. Approval for foreign investment is required payable can be deducted normally for up to 10 years. in only a few industries or circumstances, such as financial institutions, telecommunications networks, investments with R&D costs related to the business of a Hungarian company (or its a major environmental effect and firms building a new shop or associated entities) may be taken as an item reducing the profits other business installation. Until 30 June 2014, the development for tax purposes, without the taxpayer having to satisfy any other tax allowance is available for investments under the following conditions. conditions. After this date the rules of the scheme would change drastically. The IP box regime provides a super deduction to the corporate income tax base of certain R&D costs, resulting in a double •• Investments that exceed HUF 3 billion (approximately EUR 10 deduction of such costs. The R&D costs eligible for the 200% million) eligible expenditure; super deduction must qualify as direct costs of fundamental •• Investments in promoted areas that exceed HUF 1 billion research, applied research or experimental development (defined (approximately EUR 3.3 million); below). These direct costs generally include the costs of activi- •• Investments aiming at job creation; ties carried out by the company itself with its “own” employees and equipment, although costs of outsourced R&D activities •• Investments with minimum HUF 100 million (EUR 330,000) performed under a cost sharing agreement also may qualify. eligible expenditure that are promoting environmental protec- tion, the provision of broadband internet services, film and Application of the R&D tax benefit is based on self-assessment video making, as well as basic research, applied research and in Hungary; it is not necessary to obtain approval from the tax experimental development; authorities. However, the Hungarian Intellectual Property Office •• Investments by small- and medium-sized enterprises that (HIPO) is responsible for determining whether projects qualify exceed HUF 500 million (EUR 1.7 million) if the enter- as R&D, the proportion of various R&D activities (experimental prise increases the number of employees by 20 (for small development, industrial research and fundamental research) and/ enterprises) or 50 (for medium-sized enterprises) within or whether the activities qualify as “own R&D activity” within the following four years, or increases its wage costs by at the meaning of the Corporate Income tax Act (i.e. R&D carried least 50 times (small enterprises) or 100 times (medium-sized out as part of a company’s operations). The decision of HIPO is enterprises) the annual minimum wage; binding upon any authority (including the tax authority). •• Investments promoting the process and distribution of agricul- tural products, or energy efficiency, and •• Investments in a free enterprise zone.

In the case of investments in the first 2 bullet points above, for a five-year period following the first incentive year, the company must meet additional requirements: either increase the number of employees by at least 150 (or 75 in underdeveloped regions) or increase the wage costs by at least 600 times (or 300 times in under-developed regions) the annual minimum wage.

66 10. Foreign investment 11. Expatriate Life Hungary generally welcomes foreign direct investment and The quality of life that Hungary offers foreign investors and the country provides a stable and secure legal framework for employees in Budapest and throughout the country is an impor- conducting business. Foreign participation is often recognized tant factor when businesses consider locating here. Expatriates by local businesses as an opportunity to access more advanced working in Hungary for extended periods have so far not been technology, export markets and critical working capital. Foreign disappointed: they have found living in Hungary pleasant and investments in Hungary are generally characterized by high Budapest exciting and less expensive than other major European profitability, but the rate of return on direct investments declined capitals. Moreover, the country boasts a rich and internation- slightly in 2012. ally recognized culture, distinctive cuisine, superb wines, a centuries-old spa tradition, excellent schools, and numerous Foreign investors may establish wholly foreign-owned compa- leisure activities and facilities. With its millennium-old culture and nies and joint ventures in various legal forms. New companies inspiring technological legacy, it is not surprising that many world must register with the court of registration. The Civil Code, businesses make Hungary their central European home. as well as the Act on Public Company Information, Registration of Companies and Company Dissolution (Act V of 2006) and 12. Weather and Climate its adjustments of 2007, provides for relatively simple company The climate in the southeast of Hungary is very different to registration procedures, although they include strict corporate the climate of North- and West-Hungary and is similar to responsibility requirements. the climate of the Mediterranean. The summers are long, hot and nearly without rain. The temperature is rising up to 38 degrees. Foreign investors can carry out “greenfield” investments or Autumn stays, like the Indian summer, warm and without much acquire all or part of state-owned enterprises being privatized, rain.. The start of the canoeing season is the middle of April, although private ownership (foreign or domestic) is restricted or although October is still a good month for canoeing. Higher forbidden in certain state-owned enterprises. The EU restricted rainfall occurs at the beginning of June but without rain periods available government subsidies in 2004; however, Hungary over several days. provides a wide variety of incentives to investors and subsidy schemes to SMEs. fDi Magazine, an investment publication of the Financial Times Group, entitled Budapest as the most attractive Eastern European city for FDI in 2014. Additionally, Hungary was ranked among the top ten in terms of cost effectiveness (7th place), FDI strategy (8th place) and business friendliness (5th place). Furthermore, two Hungarian regions are included among the top ten most competitive regions: the South Transdanubian region was named the 6th most cost-effective region, while the Great Plain and North region was ranked 3rd among the large European regions.

Investing in Central Europe 67 Poland

1. General Overview of Economy Political system After joining the EU in May 2004, Poland is the eight economy in Poland is a parliamentary democracy with a bicameral Parlia- the European Union and 22 economy in the world (2013, IMF) in ment, consisting of the Sejm (the lower house) and the Senate. terms of GDP. Domestic product (PPP) per capita was estimated The 460-member Sejm is elected under a proportional repre- by the IMF for nominal 21 903 USD (end of 2012). Economic sentation electoral system for a four-year term. When sitting in growth puts Poland among the fastest growing countries in joint session, members of the Sejm and Senate form the National Europe. In 2012 GDP grew by 2% and in the first quarter of Assembly. The National Assembly is formed on rare occasions, 2014 accelerated to 3,4% (NBP). Of the total GDP, the services such as taking the oath of office by a new president. sector generates approx. 64%, industry 32% and agriculture 4%. At the year of global recession in 2009, Poland was the only EU The Senate has 100 members elected for a four year term in economy registering positive GDP dynamics (1.7 percent) fueled 40 multi-seat constituencies under a rare plurality bloc voting by domestic consumption and public investments. The former method, where several candidates with the highest support are was attributed to continued wage growth in line with labour elected from each electorate. productivity, while the latter came as a result of EU structural funds, which Poland is the biggest beneficiary among the new EU The President is elected directly by popular vote for a five-year members. Poland‘s economy is a mixed economy. cadence, and his powers include calling a referendum, choosing the date of elections or using his veto to stop legislation. The state sector currently produces about 25 % of GDP and it is a level comparable to countries such as France and Norway. Most of the executive power is in the hands of the Prime Between Polish regions is very diverse in terms of economic Minister, who is free to select his co-workers members of development. The richest province of the country is Masovian the Council of Ministers. The cabinet he selects must be approved Voivodeship that cumulates gross national product per capita at by the Sejm by granting him the vote of confidence. 87.1 % of the EU average and 22,7% of Poland GDP (2012). By expansion of IPOs and privatization, the Warsaw Stock Exchange The Constitutional Court can rule on the unconstitutionality of became one of the best performing markets in the EU. Also, laws or other legislation. financial sector in Poland did not face a single bankruptcy or deleveraging problems widespread in other EU economies. 2. Tax Structure Polish main trading partners are the European Union countries The taxation system is uniform across the Republic of Poland, and Russia. Germany is responsible for over 27% of Polish exports and only small differences may appear in local taxes. In general, and imports. Poland has a negative balance of foreign trade. foreign companies and individuals pay the same taxes as Polish legal entities or private individuals (with some exceptions appli- The biggest problems of the Polish economy is the difficulty in cable to non-resident individuals). The exceptions to this rule may doing business due to excessive bureaucracy and unclear laws, result from international treaties signed by Poland (Agreements and the high administrative costs imposed on citizens, underde- on the Avoidance of Double Taxation). veloped infrastructure (roads network) and difficulties in the labor market resulting in low wages. In the first quarter of 2014, The main taxes in Poland are: the average monthly gross wages and salaries in the national •• Taxes on civil law transactions; economy amounted to 3895.31 PLN, i.e. they were by 4.2% •• Corporate income tax (CIT); higher than in the same period of 2013. •• Personal income tax (PIT); However, in 2013-2020 Poland again will be the biggest beneficiary •• Tax on goods and services (VAT); of EU funds that will strengthen domestic entrepreneurs to reap the rewards of membership via booming exports to the EU. The new •• Excise duty; EU Multiannual Financial Framework gives Poland 105.8 billion euro •• Stamp duty; of which 72.9 billion would be earmarked for implementation of •• Real estate tax the cohesion policy, and 28.5 billion for the agricultural policy. This means that in the years to come Poland will be the largest benefi- All companies intending to conduct business activities are given ciary of the EU cohesion policy funds among all Member States. a tax identification number (NIP) after registration with the appro- Although the EU budget for 2014–2020 is generally smaller than priate local Tax Office the previous one, Poland will receive almost 4 billion euro more than in the current financial framework 2007–2013.

68 The Tax System and Regulations Rulings All taxes in Poland are imposed by the tax law acts which set Two types of tax ruling are available in Poland: general and indi- the rules for imposing taxes, their rates and duties, as well vidual. General rulings aim to ensure that application of the tax as the responsibilities of taxpayers. The Minister of Finance may law by tax authorities is uniform; general rulings may be applied be authorized by an Act to decree regulations. All legislation is by all taxpayers. Individual rulings, which may only be relied on published in official publications [Journal of Laws (Dziennik Ustaw by the taxpayer obtaining the ruling, are issued upon written – Dz. U.) and the Offcial Journal of the Republic of Poland (Monitor request – the taxpayer has to set out the actual facts or planned Polski – M.P.)]. The Tax Ordinance (Tax Code – Ordynacja podat- events, the question and present its own opinion on the issue. kowa) is the most general tax regulation which defines: The taxpayers may apply for individual tax rulings to the Minister of Finance or the local tax authorities (with respect to the local •• the tax administration structure; taxes). •• Advance Pricing Agreements; •• tax rulings; Obtaining the ruling can help to avoid certain negative conse- quences in the event of the tax authorities taking a different view •• general taxation regulations, e.g. payment deadlines and tax on a matter in the future, i.e. fiscal penal responsibility, penalty arrears (tax underpayments); interest and it remains valid until changed by the tax authorities •• tax liabilities of third parties; (possible only in specific situations; change comes into effect •• tax information; starting from next settlements period, e.g. next year for CIT) or when the underlying provision of law is changed rendering •• tax proceedings; the ruling irrelevant. •• fiscal confidentiality; •• exchange of tax information with other countries; Moreover, if: •• tax certificates. •• during a tax audit tax authorities question tax consequences of the transaction covered by a tax ruling and assess addi- Other relevant legislation includes the Corporate Income Act, tional tax Personal Income Act, Value Added Tax Act, Civil Law Activities Act •• the consequences occurred after obtaining the ruling (for capital duties and transfer tax), Local Taxes Act (including e.g. •• the taxpayer acted according to this ruling, real estate taxes). Parliament passes tax legislation with a simple majority of votes. the taxpayer will not be obliged to pay the tax assessed by the tax authorities. Taxes in Poland are generally administered by:

•• Tax Offices – units supervising the collection of taxes in their Corporate Income Tax (CIT) territories. They also issue individual administrative decisions in Pursuant to the Polish tax law, capital companies (corporations), taxation cases. organizational units and limited joint-stock companies (with •• Fiscal Audit Offices – units, that perform taxation and proce- the exception of the other partnerships) having their registered dural audits of fiscal accounting. seat or place of management in Poland are subject to corporate income tax on their worldwide income (tax residents). Income •• Tax Chambers – supervise the tax offices and are empowered derived by residents from sources abroad is generally subject to to review the administrative decisions of tax offices and fiscal CIT under the same rules as income earned from Polish sources, audit offices. usually with a granted, unless a tax treaty •• The Minister of Finance – is responsible for Polish budgetary provides otherwise. policy and supervises the entire taxation system. •• Some taxes are administered by the local authorities, e.g. real Non-residents (companies having their registered seat or place estate tax. of management abroad) are liable to CIT only with respect to income earned in Poland. The amount of income (loss) is deter- Taxpayers may appeal to the Tax Chamber against the decisions mined on the basis of accounting books, with adjustments made of the local Tax Office or Fiscal Audit Office. An appeal against according to tax law. a decision of the Tax Chamber may be directed to the Regional Administrative Court. Taxpayers are also entitled to resort to the Supreme Administrative Court to review judgments of the Regional Administrative Courts.

Investing in Central Europe 69 Poland

A branch of a foreign company is generally taxed the same Taxation of dividends as a subsidiary, unless otherwise provided in a tax treaty. As a rule, income arising from participation in the profits of In general, a calendar year is deemed to be a tax year. However, a legal entity with its registered office or the place of manage- a taxpayer may change its tax year by notifying the appropriate ment in Poland, including the income from dividends, is taxed tax office and indicating a different period as a tax year. with the withholding tax at the rate of 19%.

As a result of its accession to the EU, Poland has implemented Dividends paid by Polish companies to non-residents the Parent Subsidiary Directive (PSD) and merger directive and In the case of dividend payment to the EU resident companies, the Interest Royalty Directive (IRD). European Economic Area (EEA) resident companies and Swiss companies the exemption from withholding tax will apply Double Tax Treaties upon the condition of at least 10% (25% for Swiss companies) Polish PIT and CIT regulations provide that a credit method of shareholding for an uninterrupted period of at least 2 years. avoiding double taxation is used, unless the specific double tax The two-year period condition can be fulfilled after the dividend treaty states otherwise. Poland has signed Double Tax Treaties is paid. with 88 countries. Most of the treaties signed by Poland are based on the 1977 OECD Model Convention, although some To benefit from a reduced rate, the foreign recipient should exceptions appear in several treaties. provide the Polish payer with a certificate of tax residence issued by the tax authorities in the recipient’s home country. Addition- Taxable income ally, the dividend receiver has to provide a signed declaration Taxable income comprises all revenue earned in a tax year, both of tax obligation on the entire taxable income at a country of financial and operating (with some exceptions) decreased by residence, regardless of the income’s source. tax-deductible expenses. A company’s profits consist of business/ trading income, passive income (e.g. dividends, interest and The above exemption is also available if the dividend is received royalties) and capital gains. Business income earned abroad is by the foreign permanent establishment of the dividend recipient aggregated with other income and is subject to Polish CIT. from EU/ EEA.

Depreciation / amortization If no aforementioned exemption applies, dividends paid to Fixed assets and intangibles are subject to depreciation / amorti- nonresidents are subject to withholding tax. The rate of with- zation if the projected useful economic life of the asset is longer holding tax depends on whether there is a tax treaty between than one year and they are related to the taxpayer’s taxable Poland and the shareholder’s country of residence: income. Fixed assets and intangibles assets with a value up to •• if no tax treaty exists between Poland and the shareholder’s PLN 3,500 may be directly expensed. As a rule, tax depreciation country of residence, the withholding tax rate is 19%; or / amortization is calculated on a straight-line basis. However, the reducing balance basis may be used for certain categories of •• if a tax treaty exists between Poland and the shareholder’s assets. Certain assets, such as land and works of art, cannot be country of residence, the withholding tax rate depends on depreciated. the tax treaty. The rate ranges from 0% to 15%. Utilizing the decreased rate may depend on other conditions, usually Rate the level of shareholding. Income (tax base) that is calculated in accordance with the tax provisions is subject to CIT at a rate of 19%.Please note that The decreased rate of withholding tax specified in the tax treaty revenues / deductible costs generated by a partnership are added is available provided that the dividend payer has a certificate of to each partner’s revenues / deductible costs in proportion to residence of the dividend recipient. their interest in the partnership; thus, the income is effectively taxed at the level of each partner. Dividend received by the Polish companies from foreign companies Relief for the purchase of new technologies As a rule, dividends received by Polish tax residents from foreign At the beginning of 2006, a new relief for the purchase of new companies are aggregated with other taxable revenues subject technologies was introduced. Thanks to this, taxpayers can to CIT under the general rules. However, the withholding tax decrease their tax base by the expenditure incurred for that payable abroad may be credited against CIT liability in Poland purpose (in the amount not exceeding 50% of this expenditure) (although the credit must not exceed CIT attributable to the divi- whereas they may still depreciate the value of purchased tech- dend type income). nologies in full.

70 In case of dividend payment received from EU resident •• the said payments are made by a taxpayer having its place companies, EEA resident companies and Swiss companies, of the registered office or place of management in Poland or the exemption from withholding tax will apply upon the condi- (under certain conditions) by a Polish permanent establish- tion of at least 10% (25% for Swiss companies) shareholding for ment of a company being a taxpayer in another EU country an uninterrupted period of at least 2 years. The two-year period on its world-wide income; condition can be fulfilled after the dividend is paid. This exemp- •• the said payments are made for the benefit of a company tion is also available for EU and EEA companies if they conduct which is a taxpayer in another EU/EEA country or Switzerland their business activity through a permanent establishment on its world-wide income; located in Poland and the received dividend is connected with the permanent establishment.The exemption is not applicable if •• the recipient of the said interest payments is a company the dividend income is received as liquidation proceeds. mentioned above or (under certain conditions) its PE situated in EU; Furthermore, the Polish tax regulations also provide underlying •• there is at least a 25% direct shareholding relation between tax credit related to dividends (and other dividend-type income the recipient and the payer (i.e. the recipient has at least 25% excluding liquidation proceeds) received by a Polish company of shares in the payer or the payer has at least 25% of shares from an entity which: in the recipient), and the shares are held or will be held unin- •• is not a resident of EU, EEA state or Switzerland; however terruptedly for at least a 2-year period; •• Poland has concluded a double tax treaty with the country of •• this benefit is also available when the recipient of the interest its tax residence. (royalties) is a sister company of a Polish company paying the interest (royalties), provided that the parent company This underlying tax credit is available upon the condition of at directly holds at least 25% of shares in both sister companies least 75% shareholding for an uninterrupted period of at least uninterruptedly for at least 2 years. 2 years. The two-year period condition can be fulfilled after the dividend is paid. If the requirement to hold the shares for 2 years is not satisfied at the time of payment of the interest (royalties), benefit can Taxation of interest, royalties and intangible services still be gained from the reduction (the exemption). However, Generally, interest paid to foreign tax resident is subject to if the shares are disposed of before the 2-year period lapses, a withholding tax at a rate of 20%, unless a relevant double tax the exemption expires and the company paying the interest treaty provides for a reduced tax rate. Similarly, the 20% with- (royalties) is required to pay the withholding tax according to holding tax applies to royalties and certain intangible services a relevant double tax treaty and, as the case may be, it may be (such as consulting, accounting, market research, legal services, also obliged to pay penalty interest. advertising, management and control, data processing, human resources, guarantees and other services of a similar nature), The above mentioned regulations apply to companies incorpo- unless a relevant double tax treaty provides otherwise. In general, rated in EU member states, and to the companies from the Swiss payments for intangible services are classified under double tax Confederation. The list of the above companies is specifically treaties as business profits that are not subject to withholding tax provided in an enclosure to the CIT Act. in the source country. Generally the entity paying interest, royalties or remuneration for To obtain a lower treaty rate, the recipient must present purchase of intangible services withholds and remits the tax at a certificate of tax residence issued by the tax authorities in the moment of payment. According to the definition included in the non-resident’s country of residence, and additionally has the Polish CIT Act “payment” means fulfillment of the obligation to provide a signed declaration of tax obligation on the entire to repay the debt in every form, including set-off or capitalization taxable income at a country of residence, regardless of of the interest. the income’s source.

Additionally, according to the CIT Act, starting from July 1st, 2013 interest and royalty payments may be in some cases exempted from withholding tax. In principle, in order to benefit from the above exemption, the following conditions should be met:

Investing in Central Europe 71 Poland

It should be stressed that according to CIT Act interest, royalties •• the holding company and the subsidiaries have agreed to or remuneration for purchase of intangible services received in establish the capital group for a period of at least three tax connection with activity realized by permanent establishment of years by means of a notarial deed; the agreement must also foreign entity in Poland is basically treated as a taxable income of be filed with the tax office which issues an administrative such a permanent establishment and subject to taxation under decision and registers the capital group if all the conditions general rules. In such a case entity performing payment should are met. not remit the tax, still, relevant certificate of residence as well as written statement that the analysed payments are connected After the creation of the tax consolidated group, the compa- with activity of permanent establishment should be provided by nies forming this group should additionally satisfy the following the foreign entity. requirements: •• none of the companies included in the group can singularly Carrying Losses Forward benefit from income tax exemption resulting from non-CIT Losses incurred by a taxpayer may be carried forward and set act; off against income over the 5 following tax years from the year the loss is incurred, but only up to 50% of the loss suffered in •• the annual level of tax profitability of the group cannot be less a given tax year may be deducted at once. Losses cannot be than 3%; carried back. The right to carry losses forward is always linked •• companies from the group cannot maintain relations with to the entity that incurred the losses, rather than to the entity’s companies from outside the group resulting in a violation of specific assets. This means that the tax losses are not transferable the transfer pricing restrictions. with assets or the business (e.g. if the whole of a given taxpayer’s operations are transferred to another entity). The fiscal union formed and registered with the relevant tax authorities is treated as a separate entity for CIT purposes, which Furthermore, only in the case of mergers can the tax losses results in particular in the following advantages: of the surviving companies still be utilised, whereas the tax •• the losses of some of the members of the tax consolidated losses of the acquired companies are forfeited. If the merger group can be offset against the taxable income of its other results in the establishment of a new company, the tax losses of members; the merging companies cannot be utilised. •• the regulations on transfer pricing do not apply to transac- Group Company Regulations tions between companies within the group; The CIT Act allows for the creation of a “fiscal union” (or tax •• donations between companies within the group are deemed consolidated group), under which companies in a capital group to be a tax-deductible expense for the donor; are treated as a single taxpayer of CIT. •• the simplification of tax formalities, as only one company in the group prepares a tax return. The basic requirements for obtaining the status of a tax consoli- dated group are the following: Tax on Civil Law Transactions •• the capital group may be established only by limited liability The following acts are subject to tax on civil law transactions: companies or joint stock companies with registered offices in •• contract of sale and exchange of goods and property rights; Poland; •• contracts of loan of money or things designated only as to •• the average share capital of each member company should their kind; amount to at least PLN 1,000,000; •• contracts of donation – in the part relating to the donee •• the holding company should hold at least 95% of the shares taking over debts and burdens or obligations of the donor; in the remaining group companies; •• contracts of annuity; •• subsidiary companies cannot be shareholders in the holding company or other subsidiary companies in the group; •• contracts of division of inheritance and contracts of dissolu- tion of co-ownership – in the part relating to repayments or •• none of the members of the group can have tax arrears in additional payments; taxes which are state income; •• establishment of mortgage; •• establishment of usufruct for consideration, including irregular usufruct, and servitude for consideration; •• contracts of irregular deposit;

72 •• partnerships / companies deeds (articles of associa- Thin capitalization tion); amendments to the above transactions resulting in The Polish CIT Act contains provisions on thin capitalization, the increase of the tax base; restricting the debt- share capital ratio to 3:1. Interest paid on loans in excess of this ratio is not tax-deductible. When calcu- •• court judgments and settlements having the same result lating the debt-to-equity ratio, some additional debts to direct as above transactions. and indirect shareholders are taken into account. These regula- tions apply when loans are granted to a company by: In principle, the tax liability arises at the time when the transac- tion takes place. The taxpayer is obliged to submit the tax return •• a shareholder owning directly at least 25% of the voting and to pay the tax within 14 days from the day when the tax shares; liability arose, unless the tax is collected by a tax remitter. •• shareholders jointly owning directly at least 25% of the voting shares; The exemplary tax rates are as follows: on contracts of sale: •• another company, if the same shareholder owns directly at least 25% of the voting shares in each of the companies. •• of the real estate, other tangibles and selected property rights related to the real estate – 2% of their fair market value; The term “loans” for the purposes of thin capitalization regula- •• of other property rights – 1% of their fair market value; tions is broad and includes debt securities, deposits and irregular deposits. The thin capitalization restrictions cover loans granted on loan agreements – 2% of the amount of the loan (0% in case by foreign as well as Polish tax residents for CIT purposes. Please of loans from direct shareholders of capital company); note that Polish Ministry of Finance is planning to change regula- tions regarding i.a. thin capitalization from the date of January on the establishment of mortgage: 1st, 2015. Planned regulations shall not apply to loans disbursed before January 1st, 2015. •• to secure existing debts – 0.1% of the amount of secured debt; Transfer Pricing •• to secure a debt whose amount is not determined– PLN 19; General In principle, the Polish transfer pricing rules are based on on partnerships / companies deeds: the OECD Transfer Pricing Guidelines. As such, they introduce •• 0.5% of the value of the contribution to the partnership or the concept of the “arm’s length” level of transfer prices. If 0.5% of the company’s share capital; related parties conclude transactions on terms that differ from market practice and, as a result, the Polish entity discloses taxable •• 0.5% of the increase in the contribution or 0.5% of income lower than it would otherwise have disclosed, the taxable the increase in the share capital; income of this entity will be adjusted in accordance with this •• 0.5% of the amount of the additional payments; principle. •• 0.5% on the annual market value of the usufruct of objects or property rights vested in the partnership without Transfer pricing requirements apply also to Polish permanent consideration. establishments of foreign entities.

Tax liability shall be borne: According to the Polish tax regulations two entities are consid- ered to be related if there is the direct or indirect ownership of at •• in the case of contract of sale – by the buyer; least 5% of shares between them. •• in case of loan agreement – by the borrower; •• partnerships / companies deeds – by the partners, and in case The relationship shall be deemed to exist also where subjects or of other partnership or company deeds – by the partnership persons performing managerial, supervising or inspecting duties or company. are connected by family, capital and property links or the links resulting from employment relationship. Such relationship A notary public is a remitter of the tax when civil law transactions shall also be deemed to exist where any of the above persons are executed in the form of a notarial deed. combines managerial, supervising or inspecting duties.

Investing in Central Europe 73 Poland

Statutory transfer pricing documentation •• unilateral; In order to facilitate transfer pricing audits, the regulations put •• bilateral; and on taxpayers the requirement to prepare special documentation concerning the terms of transactions concluded with related •• multilateral agreements. parties (statutory transfer pricing documentation). The require- ment relates to each transaction with related entity (both Before submitting the APA application, the taxpayer may request cross-border and domestic), where the total amount arising from that the Ministry of Finance clears doubts regarding the individual the contract or the amount actually paid in the tax year exceeds: case, in particular if it is useful to seek an APA, what information is necessary, what is the procedure and when the decision can be •• EUR 100,000 – if the value of the transaction does not exceed expected. 20% of the share capital defined in accordance with the regu- lations on thin capitalization; or The APA application can be submitted by the Polish entity only. •• EUR 30,000 – if the transaction concerns services, sales or use The fee should be paid within 7 days afterwards. In the case of of intangibles; or any doubts regarding the pricing method chosen by taxpayer or documents enclosed to the application, the Ministry of Finance •• EUR 50,000 – in all other cases. may request additional explanations. In the end, the taxpayer receives a decision with a validity of no more than 5 years. Upon The duty to prepare statutory documentation also relates to request it can be extended for further 5-year periods. transactions where the payment is made directly or indirectly to an entity having its registered office in a (in April 2013, The proceedings should be finalized as follows the Minister of Finance issued a regulation which updated the list of tax havens). In these cases the threshold amounts to EUR •• unilateral APA – no later than in 6 months, 20,000. •• bilateral APA – no later than one year, and

Additionally, since 1 January 2014 limited joint-stock partnerships •• multilateral APA – no later than in 18 months. are considered legal entities subject to corporate income tax. As a result, the transactions between these companies and their The fee is 1 percent of the transaction value, up to the limit of related parties are subject to the transfer pricing regulations and EUR 1,250 – 50,000 (depending on the type of APA). The fee for documentation. prolongation of APA amounts to half of the fee for application for the agreement. Apart from the above, according to current legislative considera- tions, statutory transfer pricing documentation is going to be Taxpayers requesting APAs in Poland must choose one of obligatory also with respect to agreements constituting partner- the pricing methods, describe how it will be applied, indicate ships (in case the total value of contributions in kind exceeds EUR the circumstances which may influence the correctness of 50,000 or EUR 20,000 in case one of the partners in an entity the pricing methodology, prepare documentation used as a basis from tax haven country). for setting the level of transactional prices, inter alia agreements and other documents indicating the intentions of both parties The statutory transfer pricing documentation must be prepared in and propose tax years to be covered by the APA. Polish. Taxpayers must present it within 7 days of the request of the tax authorities. If the authorities find out that the taxpayer’s Tax information profit is higher (or the loss is lower) than declared in connec- Taxpayers conducting transactions with foreign parties are subject tion with related party transactions, and the taxpayer does not to certain notification requirements. In particular: provide them with the statutory documentation, the difference •• where a taxpayer and a related foreign entity engage in between the profit declared by the taxpayer and the profit deter- transactions exceeding EUR 300,000 in the tax year, the tax mined by the authorities is subject to 50% taxation. authorities must be informed of the transaction within three months from the year end; Advance Pricing Agreements (APA) •• where the foreign entity has an enterprise, a representative The provisions related to the APA procedure came into force on office or an establishment in Poland, the tax authorities must 1 January 2006. They allow taxpayers to verify the correctness of be informed if the value of a transaction exceeds EUR 5,000. the pricing methodology applied in the domestic / cross-border related party transactions and ascertain its up-front acceptance of Other transactions may have to be disclosed at the tax authori- the transfer pricing methodology by the tax authorities. There are ties’ request. three kinds of APA’s:

74 Branches of Foreign Companies VAT Rates and Regulations Foreign companies have been able to establish branches in Generally, the Polish VAT regulations are based on EU VAT Direc- Poland since 1 January 2000. The range of activities of these tives. The VAT regulations were subject to significant changes branches is limited to the scope of activities of the foreign in 2014. The changes concerned mainly various aspects and entity. Establishing a branch requires registration in the National areas of VAT regulations, such as taxpoint recognition, input VAT Court Register. Branches are subject to similar tax rules as those recovery, etc., which were aimed at further adjusting the Polish imposed on limited liability and joint stock companies. VAT regulations to EU Directive principles Moreover, due to economic downturn the VAT rates with respect to majority of Foreign companies may also operate in Poland in a form of repre- goods and services were increased starting from 1 January 2011. sentative offices. The range of activities of representative offices The general principles of the new system are presented below. is limited to representation and advertising. VAT is a broad-based tax levied on the supply of goods and Significant changes in the Polish transfer pricing services in Poland. A Polish entity is required to register for VAT regulations once its annual turnover on transactions subject to VAT exceeds In July 2013 the “Ordinance of the Minister of Finance of 10 PLN 150.000 (if the entity starts business activity during the year, September 2009 on the Mode and Procedure of Determining the limit is calculated as proportion of number of days of running Legal persons’ Income by Estimation and on the Mode and business activity in the year and the limit for whole year). Foreign Procedure of Eliminating Legal Persons’ Double Taxation in entrepreneurs have to register for VAT in Poland before they start Connection with the Adjustment of Profits of Associated Entities” any VAT-able activity in Poland (except for limited clearly enumer- has been significantly changed. This is the single most important ated cases). Generally, VAT is imposed on every supply of goods legislative amendment relating to transfer pricing made in Poland and services at the base or reduced VAT rate, unless the transac- during the last 10 years. The changes reflect the update of tion is exempt from Polish VAT. the OECD Transfer Pricing Guidelines and implement conclusions developed by the EU Joint Transfer Pricing Forum in the area of The base rate of VAT is 23% and is charged on most goods and low value added services. In particular changes include: services. A reduced VAT rate of 8% is imposed on the sale of such products or provision of services as: •• introduction of the regulations on the business restructuring, •• selected foodstuffs (not being subject to 23% VAT rate); •• the most adequate method rule, •• specific medicines and goods used in health care; •• definition of low value added services, •• catering and restaurant services; •• transfer pricing methods for R&D services, •• veterinary services •• definition and examples of shareholder costs, •• selected services related to TV and radio broadcasting •• obligatory elements of the comparability analysis and transfer pricing methods used by the tax authorities during transfer •• selected transport services; pricing audits, •• municipal services (e.g. mains water supply, sewage treat- •• possibility of conducting dispute resolution procedures to ment, street maintenance, plowing etc.); avoid double taxation involving three countries. •• fertilizers.

As a result of the amendment, the issue of business restructuring A reduced VAT rate of 5% is imposed on the sale of such prod- is of particular importance and is expected to become a subject ucts as: of deeper consideration by the tax authorities. •• selected foodstuffs Furthermore, the new regulations introduce new transfer pricing (not being subject to 8% or 23% VAT rates); documentation rules for low value added services. •• books and magazines for experts.

Subsequently, an increasing number of transfer pricing audits A reduced 0% VAT rate is levied (under specific conditions) on have been observed. The tax authorities more often investi- the intra-Community supply of goods, exports of goods, as well gate not only transfer pricing documentation, but also actual as some international transport services and services related to conditions of transactions between related parties (including international transportation. calculations of prices and the profitability of related parties).

Investing in Central Europe 75 Poland

A reduced 0% VAT rate may be applied to some domestic Excise Duty supplies, e.g. equipment for selected ships and airplanes. Excise duty is a levied on certain goods which Selected health care, financial, insurance, educational and cultural could be divided into four groups such as: energy products, services etc. are exempt from VAT, which accordingly prevents electricity, alcohol beverages and tobacco products. Excise duty is the taxpayer from recovering input VAT incurred in relation to also imposed on cars. such services. The excise duty legislation is set out in a number of EU Directives, The tax due to the Tax Office is calculated as the surplus of which means that each EU Member State may charge its own output VAT charged on sales over recoverable input VAT stated rates of excise duty along with differences in local country policy. on purchase invoices. The following activities are subject to excise duty: Transactions between VAT taxpayers must be documented with •• the production of excise goods; a VAT invoice. Sales to individuals who do not conduct business activities must be registered by a fiscal cash register if the turn- •• the movement of excise goods outside a tax warehouse; over with individuals exceeds a specific threshold. This threshold •• import of excise goods; generally amounts to PLN 20,000 (approx. EUR 5,000) but sales •• intra-Community acquisition of excise goods excluding intra- of several kind of goods need to be registered in a fiscal cash Community acquisition to a tax warehouse; register independent of the value of sales during the year.

Excise regulations indicate some other activities which may be Registered VAT taxpayers are obliged to submit monthly VAT subject to excise duty. returns (or quarterly VAT returns) to the appropriate tax office and keep registers of purchases and sales subject to VAT. In addition, There are special rules concerning taxation of electricity, it is EC Sales and Purchase Lists and Intrastat (in case the statutory chargeable at the moment of supply to end user. thresholds are exceeded) declarations must be submitted by the taxpayer with respect to its intra-EU transactions. Excise duty is calculated either as a percentage of the value of goods produced (or the customs value of the commodities) or on VAT that is due must be paid by the 25th day of the month a volume basis (fixed rate per unit). following the month (quarter) in which the VAT obligation arises.

The production of excise goods could be performed exclusively in a tax warehouse (excluding electricity and cars). Although Polish VAT law is generally compliant with the 112 EU Directive, it contains various country-specific provisions and The holding and movement of excise goods is subject to strict requirements, which are not common in other local VAT regimes. controls and special procedures apply. In respect of excise goods, These are usually very troublesome for foreign entrepreneurs. In there is possible to apply the excise duty suspension procedure. consequence VAT and Intrastat compliance is often a challenge However, there are some conditions (documentation require- and is being outsourced to firms experienced in Polish VAT settle- ments, excise guarantee) which should be fulfilled in order to ments. Deloitte offers such assistance. apply this procedure.

In the situation when a foreign entity (from outside the European Currently, intra EU movement of excise goods under duty suspen- Union) not registered for VAT purposes in Poland purchases sion procedure is based on an electronic system “EMCS”. goods/services in Poland, based on certain rules defined in the decree of the Ministry of Finance, it may apply under several Tax on Income Derived From Capital (Natural Persons) conditions for a refund of input VAT incurred on purchases in As a rule, capital gains derived in Poland are subject to a 19% flat Poland, on a reciprocity basis. Foreign entities within the EU may rate tax. From 1 January 2005, capital gains also realized outside apply for a refund of input VAT by submitting electronic VAT of Poland are subject to 19% flat rate tax (previously, they were refund applications. subject to progressive taxation). Income derived from the sale of shares is subject to a 19% flat rate tax and should be declared in Gambling tax the separate annual tax return PIT-38 disclosing the capital gains The economic activity in the area of games of chance and mutual realized during the given tax year. betting is out of scope of VAT. Instead of this, the entrepreneurs conducting this type of activity are subject to gambling tax.

76 The following sources of income are also subject to a 19% flat An individual regarded as a Polish tax non-resident is, on rate tax: the other hand, subject to Polish taxation only on income derived for work performed on the Polish territory, subject to provisions •• interest of given double tax treaty, i.e. if treaty protection no longer •• dividends applies, or from other Polish sources and is entitled to 20% flat •• proceeds from investment funds, etc. taxation on specific types of income (e.g. fees received under the civil law contracts or resolution of shareholders) as opposed Personal Income Tax (PIT) to progressive taxation of 18% and 32%. The tax year for indi- Under the Polish PIT Act, individuals may be subject either to viduals is equal to the calendar year. limited or unlimited tax liability in Poland. The tax status of a given individual depends solely on whether he / she has his / In general, cash and benefits in-kind received by an individual her place of residence in Poland. Up to 1 January 2007, the term constitute his / her taxable income, unless a particular income “place of residence” was not defined under the Polish PIT Act is tax exempt in Poland according to Polish domestic law and and the common practice was to turn to its Civil Code definition, the appropriate double tax treaty (if relevant). which stipulated that the “place of residence” was a place in which given individual stays with the intention to stay perma- Examples of income exempt from : nently. Starting from 1 January 2007, the amendment to the PIT •• amounts due to the individual with respect to business trips Act introduced the definition of residency for PIT purposes. (per diems, travel and accommodation expenses), up to the limits defined in the provisions of the Polish law; Given person is considered to have a place of residence in Poland •• amounts paid by the employer for raising of the professional if he / she: education of its employees (e.g. the value of courses and •• has closer economic or personal links with Poland (centre of trainings which have been undertaken in order to raise profes- vital interest), or sional qualifications as agreed by employer). •• stays in Poland for a period exceeding 183 days in calendar year. Selected possible deductions from income for tax purposes (decreasing taxable base): Polish PIT Act provisions on tax residency status should be •• employee’s contributions paid to the obligatory Polish social adapted along with provisions of double tax treaties concluded security system; by Poland. •• EU (EEA) statutorily due social security contributions paid in the given year provided that they were not deducted for Individuals not having their place of residence in Poland are tax purposes in this other country and were not due on viewed as Polish tax non-residents subject to limited tax liability in the income exempt from taxation in Poland; Poland, whereas those having their place of residence in Poland are regarded as Polish tax residents subject to unlimited tax •• donations granted for Polish and equivalent organizations liability in Poland. in the EU states or EEA countries or Switzerland conducting activities in the field of public welfare, donations granted for The status of a Polish tax resident implies that the total world- religious purposes (except for donations to natural persons) wide income received by a given individual is subject to taxation and the volunteer blood donations up to a level of 6% of in Poland taking into account relevant provisions of double tax the individual’s income; treaties. Polish residents for personal income tax purposes are •• donations for church charity purposes (applicable only to obliged to disclose in their Polish tax returns also private income church legal entities) no deduction limit provided (some such as interest, dividends, royalties, capital gains, sell of real additional conditions must be met to take advantage of this estate, rental income or income derived from personal business deduction); activity (including participation in civil partnership and limited partnership). The above income should be reported and taxed in •• payments made to taxpayer’s Individual Pension Insurance Poland taking into account relevant double tax treaty provisions. Account (Indywidualne Konto Zabezpieczenia Emerytalnego – IKZE) decreasing taxable income. The deduction is limited up to the amount constituting 4% of the taxpayer’s assessment basis for pension contribution for the previous year expenses incurred for rehabilitation purposes (some additional condi- tions must be met to take advantage of this deduction);

Investing in Central Europe 77 Poland

•• interests on loans drawn for housing purposes (under specific •• Polish source income derived by non-residents from inde- conditions if the loan was granted between 1 January 2002 pendent artistic, literary, scientific, educational and journalistic and 31 December 2006). activities, copyrights and inventions, as well as from personal service contracts, specific task contracts, managerial contracts, Selected possible deductions from tax: or similar contracts and from board member fees – 20%; •• 7.75% of the assessment basis of statutory due healthcare •• income derived from conducting business activities in Poland contributions paid by an individual in a given calendar year for – 19% (provided that the entrepreneur declares his choice of either his or her national healthcare insurance in Poland or in 19% rate by the date as determined in PIT Act; other- another EU or EEA countries or Switzerland provided that they wise he is subject to taxation of his business activity income were not deducted for tax purposes in this other countries and under general rules, i.e. progressive (18% and 32%) taxation. were not due on the income exempt from taxation in Poland; Apart from the above, according to the provisions of the Act •• Child tax deduction in the amount of PLN 1 112,04 per on lump-sum taxation of certain revenues earned by private year per child – amount applicable for 1st and 2nd child. individuals, the taxpayer may enjoy lump-sum taxation on Deduction increases to PLN 1 668,12 for 3rd child and PLN certain sources of income if he chooses to apply this taxation 2 224,08 for 4th and each next child. Deduction for one child system instead of applying the progressive taxation governed by is not applicable if individual’s income threshold exceeds PLN the provisions of PIT Act. Lump-sum taxation may be applicable 56 000,00 (PLN 112 000 for married tax payers and lone to such income as: parents).This deduction is applicable for parents bringing up children under 18 years of age or children under 25 years of •• revenues derived from renting real estate (if such tax regime age, if they study at school or at the university. is chosen by the taxpayer by the due date) 8.5% total gross proceeds (applicable as of 1 January 2010); Additionally please note that under Polish PIT Law regulations, •• revenues derived from performance of certain types of busi- it is possible to allocate 1% of the annual tax liability to a selected ness activity; Polish welfare organization. It does not influence the final tax liability of the individual (funds are transferred by the tax office Tax is generally due on a monthly basis (under certain circum- based on the taxpayer’s suggestion indicated in the annual tax stances, an entrepreneur may pay taxes due on a quarterly return). basis). Polish employers are obliged to calculate, withhold and pay the tax advances due on their employees’ remuneration to PIT rates for 2014 are as follows: the tax office relevant for the employer’s place of the registered office. Polish tax brackets valid in 2014 up to PLN 85 528 18% of taxable base less PLN 556.02 Individuals who receive income from abroad are personally over PLN 85 528 PLN 14 839,02 plus 32% of excess over responsible for the payment of monthly tax advances due on this PLN 85,528 income (there is no obligation to file monthly tax returns).

As a rule, the PIT rates indicated in the above table are applicable As a rule, every taxpayer is obliged to file an annual tax return to an individual’s total income. disclosing his aggregate annual income at the end of the tax year. The deadline for fling the tax return and paying the annual Notwithstanding the above, the Polish PIT Act provides for flat tax liability is 30 April of the year following the tax year for which / linear taxation on certain sources of income (which applies the return is filed. instead of progressive taxation). The following items are subject to a flat tax rate: Taxpayers may file the annual tax return jointly with their spouses if the following conditions are met simultaneously: •• capital gains – 19%; •• both spouses are subject to marital co-ownership for •• income from the sale of real estate which was purchased from the entire tax year (no prenuptial/postnuptial agreement was 1 January 2009, provided that it is not related to the business put in place between spouses indicating how their assets activity carried by a given person; if the sale of the real estate would be allocated in case of divorce), takes place after five full calendar years from the date of purchase or the sale takes place before five full calendar years •• both spouses are married for the entire tax year, but specific conditions are met, no tax is levied, otherwise •• neither of the spouses conducts business activity taxed at 19% tax on the proceeds from the sale of the real estate; linear or fat rate (including participation in partnerships).

78 Additionally, to qualify for joint fling: The main activities that can be taxed with tonnage tax are trans- portation of passengers and cargo as well as selected offshore •• both spouses should be subject to unlimited tax liability in operations. Please note that some other commercial activities Poland (Polish tax residents) or (e.g. lease of the containers, ship management services) may •• one spouse should be subject to unlimited tax liability in also be subject to tonnage tax provided that they are related to Poland and the other spouse should be subject to unlimited the activities mentioned above. Certain activities however (e.g. tax liability of another EU or EEA country (possessing certifi- fishing or fish processing, the construction of ports or repair of cate of tax residency issued by this other country) and at least port infrastructure) can never be taxed with tonnage tax. 75% of their world-wide income should be taxable in Poland or both spouses should be subject to unlimited tax liability of Generally, the tonnage tax base is calculated as a multiplica- another EU or EEA country, should possess certificates of tax tion of the daily rate (determined in the Tonnage Tax Act and residency issued by this other country and at least 75% of depending on the capacity of a given vessel) and the period their world-wide income should be taxable in Poland. of exploitation in a given month of the all ship-owner’s vessels subject to tonnage tax. The standard tonnage tax rate is 19%. Tonnage tax Income (in the part not re-invested in the ownership, renovation, As from 1 January 2007, based on the Tonnage Tax Act, modernization or reconstruction of another vessel within 3 years) the qualified ship-owners performing certain commercial ship- from the sale of ships is subject to taxation with the application ping activities in international traffic are entitled to subject their of 15% tax rate. incomes to tonnage tax instead of income tax. The Polish tonnage tax scheme is also a subject to a lock up Please note that since tonnage tax is regarded as a sort of public period. Therefore, it is only possible to enter the tonnage tax aid (income subject to tonnage tax is out of scope of CIT / PIT regime for a fixed period of 10 years. A choice must be made taxation) the Tonnage Tax scheme should be authorized by until 20 January of the first year of the tonnage taxation period the European Commission. The respective authorization was or in the case of a shipping company commencing the activities granted in the decision of 18 December 2009 - C 34/07 (ex N subject to tonnage taxation in the course of the tax year, until 93/2006). the day preceding the day of commencing these activities.

In its decision the Commission considered that the scheme Tax on Civil Law Transactions is compatible with the internal market and can contribute to The following acts are subject to tax on civil law transactions: the Community’s interest in the field of maritime policy, however •• contract of sale and exchange of goods and property rights; the Act of 2006 which introduced the tonnage tax, required adjustments. •• contracts of loan of money or things designated only as to their kind; Therefore, on the 27th of December 2012, Polish President •• contracts of donation – in the part relating to the donee signed amendment to the Polish Tonnage Tax Act, which adjusts taking over debts and burdens or obligations of the donor; the Polish legislation to the European Commission’s decision. •• contracts of annuity; Accordingly, the qualified ship-owners are: •• contracts of division of inheritance and contracts of dissolu- •• individuals and legal entities being the Polish tax residents tion of co-ownership – in the part relating to repayments or performing commercial shipping activities in the international additional payments; traffic listed in the Tonnage Tax Act, •• establishment of mortgage; •• foreign tax residents (i.e. individuals as well as legal enti- •• establishment of usufruct for consideration, including irregular ties) performing the above activities in Poland, which for usufruct, and servitude for consideration; the purposes of performing these activities use the vessels of •• contracts of irregular deposit; the minimum capacity of 100 gross register tons (GT) each. •• partnerships / companies deeds (articles of associa- tion); amendments to the above transactions resulting in the increase of the tax base; •• court judgments and settlements having the same result as above transactions.

Investing in Central Europe 79 Poland

In principle, the tax liability arises at the time when the transac- Local communities are entitled to establish rates for certain tion takes place. The taxpayer is obliged to submit the tax return taxes. However, these cannot exceed the maximum limits set by and to pay the tax within 14 days from the day when the tax the Parliament or decrees of the Minister of Finance. liability arose, unless the tax is collected by a tax remitter. Inheritance and donations tax The exemplary tax rates are as follows: Polish tax system includes also an inheritance and donations tax on contracts of sale: imposed on the acquisition, by the individuals, of goods located in Poland and property rights executed in Poland among others •• of the real estate, other tangibles and selected property rights through inheritance, donation and usucaption. related to the real estate – 2% of their fair market value;

•• of other property rights – 1% of their fair market value; Stamp Duty Stamp duty is chargeable on certain submissions and administra- on loan agreements – 2% of the amount of the loan (0% in case tion acts, including: of loans from direct shareholders of capital company); •• performance of an official acts in individual matters on notifi- cation or on request; on the establishment of mortgage: •• issuance of a certificate on request; •• to secure existing debts – 0.1% of the amount of secured debt; •• issuance of a permission (permit, concession); •• to secure a debt whose amount is not determined– PLN 19; •• other documents, e.g. power of attorney. on partnerships / companies deeds: Rates vary from PLN 1 to PLN 11,000. •• 0.5% of the value of the contribution to the partnership or 0.5% of the company’s share capital; 3. Legal Entity •• 0.5% of the increase in the contribution or 0.5% of Principal forms of doing business the increase in the share capital; The Polish law describes two types of capital companies: •• 0.5% of the amount of the additional payments; •• a limited liability company (spółka z ograniczoną •• 0.5% on the annual market value of the usufruct of odpowiedzialnością – abbreviated as “sp. z o.o.”) and objects or property rights vested in the partnership without •• a joint- stock company (spółka akcyjna – abbreviated consideration. as “S.A.”).

Tax liability shall be borne: The capital companies have legal personality and may in their •• in the case of contract of sale – by the buyer; own name acquire rights and incur obligations as well as sue and be sued. •• in case of loan agreement – by the borrower;

•• partnerships / companies deeds – by the partners, and in case Joint stock company (SA) of other partnership or company deeds – by the partnership Joint-stock companies are rather expensive to run and are or company. primarily used for large scale business activities, in particular if public offer is to be considered as a way of obtaining capital. A notary public is a remitter of the tax when civil law transactions It may start operating as a joint-stock company in organization are executed in the form of a notarial deed. even before registration.

Local Taxes and Charges The supervisory board in a joint-stock company is required by law. Local taxes include: It should consist of at least three (in public joint-stock companies •• real estate tax; - five) members appointed by the general meeting. The board exercises permanent supervision over all areas of the activities of •• road vehicle tax (imposed only on trucks and buses); the company. •• agricultural tax; •• forestry tax; •• dog ownership tax.

80 The shareholders are not liable for the obligations of The incorporation of a limited liability company requires under- the company. It means that the company is solely liable for its taking the following steps: (i) drafting the articles of association obligations. The board may be exempt from this liability under in the form of a notarial deed, (ii) appointing the company’s certain conditions. governing bodies, (iii) paying the entire share capital or providing the company with in-kind contribution (the minimum amount of The minimum start-up capital for a joint stock company is PLN the share capital amounts to PLN 5,000 which is an equivalent 100,000, of which 25% must be paid up before registration. One of approx. EUR 1,200 – 1,500), (iv) registering the company in or more founding members, who must sign an article of associa- the register of entrepreneurs of the National Court Register. tion, can establish a joint stock company. Starting from 2012, the foundation and registration of the limited Reserve capital is 8% of annual net profits, until reserve reaches liability company is possible based on a simplified internet proce- one-third of share capital. The minimum value of share is PLN dure, by using official forms and standard corporate documents. 0,01 (1 grosz). The most common type of shares are registered, bearer, common or preferred. Establishing a branch or representative office According to the Polish law, foreign entrepreneurs may set up Capital companies are separate taxpayers subject to CIT, as well branch offices on Polish territory, to carry out business activity. as they are taxpayers of VAT and other taxes in an ordinary A branch constitutes an internal part of the foreign enterprise fashion. and cannot acquire rights or incur obligations in its own name, sue or be sued. The scope of business activity of the branch may Limited-liability company (Sp z o.o.) not go beyond the foreign entrepreneur’s scope of activity. A limited liability company is the most popular and flexible form of conducting business activity in Poland. Limited liability Some special regulations (both Polish and European Union) companies may be used for any purpose allowed by law. They regarding opening of the branch may be applicable in the case are often used as special purpose vehicles, holding companies of specific industries. The branch is not a separate taxpayer and as national operating companies controlled by international of income tax in Poland. Polish income tax provisions refer to corporations. the foreign enterprise as a taxpayer and the branch is normally considered as their permanent establishment in Poland. Should The supervisory board is the main body controlling the business that be the case, only income related to the activities of this of the company. The main responsibility of the supervisory board branch in Poland is subject to 19% CIT. A foreign entrepre- is to examine the company’s financial statements, the reports neur (not the branch) is also a taxpayer with respect to VAT in of the management board on the company’s operations as well an ordinary manner. If the branch is employing, then it must be as to provide day-to-day supervision of the company’s affairs. registered for tax purposes (i.e. acquire a NIP number).

The on-going operations of the company are carried out by Similarly as in the case of a branch, foreign entrepreneurs may the management board which is also a representative and execu- open their representative offices in Poland. The major difference tive body of the company. The management board must consist between the branch and the representative office is that a repre- at least of one member, depending on the wording of the articles sentative office may be used only for running the marketing of association. and advertising activities of a foreign entrepreneur in Poland. The representative office does not constitute a separate legal The shares of a limited liability company do not take the form entity and is treated as part of a foreign enterprise. It cannot of a document and cannot be listed on the stock exchange. acquire rights or incur obligations, sue or be sued. Setting up There are no limitations with respect to the transferability of a representative office requires registration in the Register of shares, unless articles of association provide otherwise (e.g. by Representatives Offices of Foreign Business Entities kept by introducing preemption rights). One of the key advantages of the Minister of Economy. a limited liability company is that the shareholders are not liable for company debts.

Investing in Central Europe 81 Poland

4. Labour and Wages The Trade Union Law protects the country’s trade unions. Unions The employment market enjoy considerable influence on termination and other labour The unemployment rate in Poland - according to the Central issues. Wage bargaining is almost always conducted at the enter- Statistical Office (Glowny Urzad Statystyczny) - stands at 13.5% at prise level. Workers who are not members of a recognized the end of March 2014. union are still entitled to have their rights protected by a union. Unions must give employers relevant information about members The labor market in Poland shows the growing number of in the workplace; failure to comply with the request releases qualified staff, relatively low labor costs, yet high working stand- the employer from the agreement with the union. ards and quality of work. In recent few years we can observe Discrimination based on sex, nationality, race or union member- an increased interest of young people studying technical and ship is illegal. industry oriented specializations. Human resources directors see an increase in skilled staff available on the market and point out Poland’s labour law is more stringent than is typical in Europe. the positive changes in the curriculum, which goes hand in hand Enforcement can be rigorous and inspections by state authorities with growth and development in the profile of the companies. frequent. Consequently, finding local managers is becoming less difficult. Working hours Skilled labour is generally concentrated around bigger cities, The standard average working time cannot be longer than 8 specifically in the regions of Warsaw, Gdansk, Wroclaw, Krakow, hours per day and 40 hours a week. If it happens that these limits Silesia and Poznan. The eastern border regions still suffer from are exceeded, the employee shall be entitled to extra remunera- the highest structural unemployment in the country and low tion for overtime. Overtime may not exceed four hours a day and levels of investment. English-language skills are now a basic 150 hours per calendar year per worker. The legal rate for over- requirement for most white-collar positions. time work is a 50% premium for each extra hour and a 100% premium for each hour of work provided on Sundays, statutory Employees’ rights and remuneration holidays or in the night. Poland’s Labour Code – as well as a huge number of other labour law acts, regulates working hours, work safety, minimum wage, Wages and benefits non-discrimination in employment and collective bargaining, The Council of Ministers set the gross minimum monthly wage personnel files and employment termination. Contracts may at PLN 1680 as of 2014. There is only one minimum wage across be concluded for an indefinite period of time, for a definite all sectors, regions and occupations. Average wages in the public period (including also contract for substitution of an employee sector are higher than those in the private sector, PLN 4684 and during her/his absence at work) or for the time of completion of PLN 3542 respectively. Currently, more and more Poles in mana- a specific task. Any such contract may be preceded by a contract gerial positions earn salaries comparable to expatriate personnel. concluded for a trial period.

Employers must provide at least the minimum terms and benefits 5. Education indicated in the Labour Code, modifying them only to provide Since 1989, the Polish system of higher education has done more favourable terms for employees. Collective-bargaining much to catch up and broaden its curriculum. The state sector’s agreements may not deal with issues already covered in activities have been complemented by a thriving private sector, the Labour Code or those having to do with termination, work- as both sectors expanded to meet a rapid increase in demand. place order and discipline, and maternity leave. Industry-wide The participation rate in higher education has also increased agreements must be registered with the Ministry of Labour and sharply. Number of university students increased from 403th Social Policy (www.mpips.gov.pl), and company agreements with in the academic year 1990/91 to 1,550 th in academic year a regional labour inspector. 2012/13, a figure that compares well with western Europe. As academic salaries fell behind in the 1990s, many teachers with tenured posts in the state system also worked in the private university-level schools, of which there were 305 in 2012/2013. Of 1,55 million of students in 2012/13, 436 th were at private institutions, where the most popular specializations were business and administration, with a lower interest in pedagogy and social sciences.

82 The number of foreign students has increased to 29 thousands in Rail Network year 2012/2013. Universities (both public and private) have also The rail network in Poland is about 19,000 km long, is generally started to cater to the needs of working students by providing electrified, and the vast majority was built before World War II. part-time, evening and weekend studies. Due to the average age of the network and lack of sufficient maintenance, many sections are limited to speeds below 100 There are currently 19 fully accredited traditional universities in km/h (62 mph) even on trunk lines. There are no high-speed Poland, 23 technical universities, 9 medical universities and 5 lines and some 500 km (310 mi) allow 160 km/h (99 mph), most universities specialized in economics. In addition to these institu- notably the Central Trunk Line (CMK), which links Warsaw to tions there are then 10 agricultural academies, 4 pedagogical Katowice and Kraków, with some sections on an alignment that universities, a theological academy and 2 maritime service would permit 200 km/h (120 mph) but not operated at that universities. Amongst these there are 8 higher state academies speed. of music. Public academic institutions are supplemented by a number of private educational institutions. Altogether there are In 2008, the government announced the construction of almost 460 higher education entities in Poland being one of top a dedicated high speed line based on the French TGV model rates in Europe. The OECD’s International Student Assessment and possibly using TGV style trainsets, by 2020. The Y-shaped Programme, ranks Poland’s educational system as the 23rd best line would link Warsaw to Łódź, Poznań and Wrocław at speeds in the world, which is around OECD average of up to 320 km/h (200 mph). This includes an upgrade of Central Trunk Line to 250 km/h (160 mph) (or more) as this line has an LGV-like profile. Starting December 2014 electric ED250 6. Infrastructure Pendolino trains, purchased by PKP Intercity are expected to run Infrastructure Road network with speed 200 km/h on certain parts of Central Trunk Line. The poor state of the road network is one of the weakest aspects of Poland’s infrastructure. There are a few short stretches of Polskie Koleje Państwowe (PKP), a state-owned corporate group, highway (1520 km at the 2Q of 2014), expressway (1390 km in is the main provider of railway services, holding an almost 2014) and two-lane roads connecting most major cities (1800 complete monopoly in rail services as it is both supported and km). Road improvement and motorway building have been partly funded by the government. In 2014-2015 PKP owned critical components of Polish government infrastructure projects. companies of joint value up to 1 billion PLN may be proposed for However, many practical difficulties - including land purchase and sale. PKP Group is expected to invest 58,6 billion PLN till 2010. other planning problems – can be a restrain for the government 6. Infrastructure to implement new motorways development programs. Though, in recent years – road construction projects has increased due to EU Funds for infrastructure investments. Three major motorways connecting the entire country will be completed before 2017. Many road intersections projects are in a preliminary stage – either with contracts signed or construction in progress.

Most of them are planned to be executed in 2014-2015, when eight of ten largest Polish cities will be connected by a motorway network, being a part of Paneuropean transport network.

Road network Motorways and express roads are part of national roads network. As of 2Q of 2013 Poland had 383,000 km of national roads. Although Poland is missing the minimum required density of motorways and expressways, the total length of roads is relatively high and according to GDDKiA national roads condition report in 2012, 62% of national roads were confirmed to be in “good” condition, handling 11.5 tons per axle loads. 4,808 km (2,990 mi) of the Polish routes were classified as a part of TINA European Road network The poor state of the road network is one of the weakest aspects of Poland's transport corridors. infrastructure and a major handicap to business and economic development. The sharp rise in private car ownership has also put pressure on the country's roads. There are only a few short stretches of motorway (405 km at the end of 2003, up from 358 km at the end of 2000), and two-lane roads connect most major cities. Road improvement and motorway building were to have been critical components of the any newly elected Polish government. However, many practicalInvesting difficulties in Central - includingEurope land 83 purchase and other planning problems, suggestions of corruption, and a lack of interest from investors - have obstructed developments. The pace of motorway construction has quickened and the greater availability of EU funding should allow more rapid progress in improving the road network in the next few years. Railway network The express passenger services of Polish State Railways (PKP) are of a high quality, with good intercity links to neighbouring European cities such as Vienna, Prague and Berlin, and to Polish cities en route (although it has no high-speed trains of TGV or Pendolino standard). Katowice and Krakow are particularly well served. However, the railway system as a whole needs substantial restructuring. There has been little investment in track, signaling systems and stations since the fall of communism. PKP is highly indebted, but has complained that this is partly owing to non-payment by some of its customers, particularly those in the Polish steel industry. PKP is gradually being restructured, with infrastructure being separated from inter-city and local train operations. The European Commission will put pressure on the government to

16 Poland

There are three main PKP companies: Water Transport On the Baltic Sea coast, a number of large deep water seaports •• PKP PLK - owns and maintains infrastructure including lines exist to serve the international freight and passenger trade. They and stations. serve large ships, also the ro-ro passenger ferries of Unity Line, •• PKP Intercity - provides long-distance connections on the most Polferries and Stena Line which connect Poland with Scandinavia. popular routes. Trains are divided into the categories: Euro- The ports of Szczecin-Swinoujscie and Gdynia have seized new Night, EuroCity, Express InterCity (generally faster and more market opportunities, for example, catering the world biggest expensive) and TLK (interregional fast trains, slower than EN/ container docking in Polish DCT port in 2013. In 2012, Polish EC/EIC/Ex but cheaper) and international fast trains. ports handled 7 mln tonnes of cargo, respectively. Riverine •• PKP Cargo provides cargo rail transport. In 2013 PKP Cargo services operate on both domestic coastal routes and on almost raised 1,42 bil PLN on a Warsaw Stock Exchange. 3,812 km of navigable Polish rivers and canals. Most notable canals in Poland are the Danube–Oder and Elbląg canal. Air Transport The national airline, LOT Polish Airlines, was partially privatized Telecommunications in 1999, when the SAirGroup (based around Swissair) bought Although Poland’s telecommunications infrastructure has an initial 37.6% stake. The collapse of SAirGroup in 2001 improved immensely since 1989, progress has been uneven, with returned LOT to state ownership, and in 2002 LOT drew closer use of cellular telephones rising rapidly (56 million active SIM to Germany’s Lufthansa by joining the Star Alliance network cards at the end of Q2 2014 resulting in over 147% SIM cards of airlines. LOT is facing growing competitive pressures, as EU penetration), but the number of fixed telephony main lines has membership has compelled Poland to liberalize access to its been decreasing (11.8 million in 2005 to 6.8 million at the end airspace. LOT held talks for a sale of majority stake with Turkish of 2013). The former state monopolist, Telekomunikacja Polska Airlines but they did not go ahead. Recently European Commis- (TPSA, rebranded to Orange Polska in 2012), has been privat- sion approved on state aid for the company. The low fare airlines ized, with France Telecom buying the largest share.. Various have been quick to move in, with easyJet (UK), Ryanair (Ireland), other companies have entered the fixed phone market with Netia Wizzair (Poland/Hungary) all offering flights from a variety of being an alternative fixed-line operator actively consolidating airports in Poland. OLT Express (Poland), regional carrier, declared the market. Although prices have reduced considerably and avail- bankruptcy in 2012 after its license was suspended by Polish ability has increased, the fixed-line market is still dominated by Aviation Authority. TPSA (55% users and 50% revenues).

Poland is also battling with other countries in the region to Mobile phones market in 2013 remained dominated by four become the regional transport hub for east-central Europe, but players: T-Mobile Polska (27,5% SIM cards), Orange Polska rapid growth in passenger numbers in recent years has exposed (27,12%), Plus (25%) and Play (19%). the lack of capacity at Polish airports. The busiest airport in Poland, Warsaw’s Okecie (10 669 879 passengers on 2013 and Fixed broadband penetration in Poland is lower than in many approx. 50 thousand tonnes of cargo per year), is the main EU countries with some regions being visibly underdeveloped international hub for LOT and currently serves as the destina- (however, their situation should improve in the next years thanks tion for around 75% of all major international flights into to planned investments). This led to a high percentage of popula- Poland. Poland’s second-busiest airport is in Krakow (3 636 804 tion using mobile internet access. All mobile phone operators in passengers) and the third in Gdansk (2 826 412). The airport in Poland use GSM and UMTS. There are three major competitors Katowice is also developing rapidly (2 506 694). managing comparable market shares, T-Mobile, Orange (within the same group as TPSA) and Plus GSM. The fourth mobile In total there are 15 operating civil airports in such cities network operator, Play, entered the market in 2007 and acquired as Wrocław, Poznań, Rzeszów, Łódź, Bydgoszcz, Szczecin, over 8 million customers by the end of 2012. All mobile opera- Lublin or Gdynia. Because of Euro 2012 football championships tors provide 3G services with 4G (LTE) broadband being currently a number of airports around the country had been renovated and offered by Plus GSM and Cyfrowy Polsat (the largest satellite DTH redeveloped. This includes the building of new terminals with platform in Poland). LTE spectrum was obtained also by T-Mobile an increased number of jetways and stands at both Copernicus and Play in 2013 and other LTE spectrum tenders are foreseen. Airport in Wrocław and Lech Wałęsa Airport in Gdańsk. The latest modernized domestic airport in Poland is situated in Rzeszów.

84 7. The Most Active Industries/Sectors The VW Group (22% market share) has a significant presence Manufacturing in western Poland and is also a notable car producer. In early Years 2010-2012 were a period of gradual recovery of the Polish 2014 VW announced decision to build another factory in Greater economy after the slowdown observed in 2009. The economic Poland with planned investments of 800 mln euro and employ- results show very well compared to other European Union coun- ment as of 2300 people. Production will start in 2016 and ability tries, placing Poland among European leaders of growth. of 100 thousand cars annually should be reached in 2019.

In 2011, the industrial sector observed a slight improvement; Automotive industry consists of nearly 900 companies, of which the economic situation both inside and outside of the common 460 hold the ISO/TS 16949 certificate. Quality and high technical EU market led to a gradual recovery in demand for industrial potential of Polish staff is also confirmed by the number of production in EU countries. In Poland, the growth of industrial R&D centres created by: TRW, Tenneco, Valeo, Delphi, Wabco, output in 2011 reached a level which exceeded the EU average. Faurecia, MBtech and Eaton. Thanks to the growing economic activity among major trade partners (mainly Germany), Polish industrial sector grew during The major suppliers are: Bridgestone, Goodyear, Hutchinson, this period at a rate of 7.2% per annum. Companies engaged Brembo, Kirchhoff, Nexteer Automotive, Isuzu Motors, Lear in the food processing and cars manufacturing keep playing Corporation or Pilkington, Saint-Gobain. Moreover Poland is a predominant role in the production industry. The most impor- the 3rd largest bus manufacturer in Europe with plants of Solaris, tant sector in Poland is the food industry, representing more than Scania, Man or Autosan. 15% of the whole production, followed by the automotive and metallurgy (10% each). In 2012, Poland produced 4.5 million Source: PAIZ, PZPM computer units, which was over 10 times more than in 2005. Poland is one of the largest manufacturers of household appli- Agricultural Production ances and electronic appliances in Europe. The size of the agricultural made it one of the most challenging issues in terms of employee numbers in Poland’s EU accession Remaining state ownership in manufacturing is concentrated in negotiations. Although agriculture generates a small percentage sectors like defense equipment, shipbuilding and branches of of GDP (3,8%), it still accounts for around 16% of employment. the chemicals sector. The state also retains a considerable stake The high level of agricultural employment (even if much of it is, in oil refining. in effect, hidden unemployment) relative to agriculture’s share in GDP shows that substantial scope for restructuring exists. Automotive Industry Poland is well on the way to becoming a major car manufac- It also demonstrates the immense problems facing the rural turing centre, with several components manufacturers also economy and rural society in general in Poland. There are around setting up plants in the country. Export of polish automotive 2 million farms, all privately owned, and most of them small industry in 2011 reached 17,5 bn EUR and exports for 2014 sized (the average farm size is only 8 ha). Farms exceeding 15 are expected to reach 19 bn EUR. Out of 40 car and engine ha account for almost 10% of all farms and cover almost half plants located in Central-Eastern Europe (CEE) 16 are based in of total agricultural area. Around half of all farms are run on Poland (PAIZ 2013). Total investment in Polish automotive sector a subsistence basis, yielding little or no produce for the market. amounted to 6,5 bn EUR in 2011. Poland is the leading producer of potatoes, apples and rye in Fiat of Italy is the major Western investor in the industry (57% Europe and is one of the world’s largest producers of sugar market share), and has had a presence in Poland for many years beets and triticale, rapeseed, grains, hogs, and cattle. Poland is as a producer of small cars from its base in Bielsko-Biala in a net exporter of processed fruit and vegetables, meat, and dairy the south-west of Poland. Skoda (owned by German Volkswagen) products. and Renault of France, although they have no production in Poland, are also prominent on the domestic market.

Opel / General Motors of the US (21% market share), which built a greenfield assembly plant in the Gliwice special economic zone (SEZ) in Silesia, is another leading producer and its success has contributed to the unexpected resilience of the Katowice region.

Investing in Central Europe 85 Poland

Construction Banking groups from Germany, France, Italy, the Netherlands In the second half of the 1990s, commercial construction activity and the US have a strong presence in Poland. For many Western was concentrated in a handful of major cities - notably Warsaw, institutions, the route into Polish banking was through buying Poznan, Gdansk and Krakow - as they and their surrounding stakes in the state-owned regional banking network. Subsequent regions attracted the majority of inward investment, as well consolidation in the west European banking market has led to as a substantial share of new hotels, offices and housing develop- a wave of mergers of their Polish subsidiaries. One of biggest ments. Construction activity was weaker elsewhere, because M&A transactions was merger of Pekao and BPH in 2007, which other regions missed out on inward investment and also because produced a new market leader Bank Pekao (UniCredit) control- of the lack of progress in motorway construction. Construction ling at the start some 27% market share. In the recent years slowed sharply from 1999, as high interest rates discouraged there were interesting capital moves on the Polish market to corporate investment. quote the merger of Raiffeisen and Polbank, dynamic entry of Santander Consumer Bank into the Polish market, transformation Despite the strong growth of the economy as a whole in 2004, of Multibank into mBank, merger of DnB Nord and Getin Bank the construction sector has been slow to recover, with signs oa purchase of Nordea by PKO BP. Also new banking projects of sustained growth only emerging in the first half of 2005. In such as Allianz Bank, Alior Bank and Meritum were developed. years 2006-2007 construction sector was developing fast owing Currently there are almost 70 banks operating in Poland. to both Euro 2012 and EU funded investments in infrastruc- ture and growing housing market. This was to some extent Traditional Industries limited by 2008 financial crisis, but since then the construction Steel Production production was growing constantly until 2012 as the main Output of crude steel in Poland fell sharply, from ca. 20 million infrastructure investments for Euro 2012 were under comple- tons in the early 1980s to just 8,4 million tons in 2012. One of tion. Poland became a safe heaven for the large international the major reasons for such significant decrease was global crisis construction companies in the recession times. In consequence, which resulted in demand’s decline. A very important factor growing market competition had stimulated increase of raw affecting the steel industry at the end of the year 2012 were material prices forcing many companies to perform its construc- growing financial problems, in particular in the construction tion projects at very low or sometimes negative margins. This sector. This negative effect is also visible in 2013. The crude steel led to huge losses revealed by the sector in 2012 and relatively production in Poland in the period of first six months of 2013 large number of bankruptcies of both sub and general contrac- remained on the level similar to analogous period of 2012 and tors. Currently, the industry is awaiting for launch of new road amounted to 4,5 million tons. and railway infrastructure as well as energy plants construction tenders expected to take place in nearest years. The Polish steel market has undergone some restructuring in recent years resulting in small plant closures on environmental Financial Services grounds and sale of steelworks to foreign investors. As a result The financial services sector in general is well regulated. of this process eleven Polish facilities are run by five multinational The banking sector is mostly in private hands and survived firms. These include ArcelorMittal and other Spanish, Ukrainian the economic downturn in 2008-2009, although currency and US firms, with the Polish Government now only having depreciation and inter-bank money market standstill brought a minimal ownership role. sector breakdown. In 2009 most toxic derivatives have been either settled or expired, and the system enjoyed higher liquidity. Steel production is concentrated in the south of the country, with Overall, the financial services sector has so far escaped the crises 70% of the Polish steel industry’s production capacity concen- that have hit severely some other post-communist economies. trated in two plants: Huta Katowice and Huta Sedzimira, which are along with four other branches located in Świętochłowice, 2009 was difficult for the entire financial services industry in Sosnowiec, Chorzów and Zdzieszowice owned by ArcelorMittal Poland. Banks operating in Poland recorded total revenues of Group. ArcelorMittal, with operations in Romania and the Czech 50 bn PLN and profits of almost 9 bn PLN (compared to 13 bn Republic as well as in Poland, has become the major force in PLN in 2007). Network expansion stopped and performance Central European steel production. audits led to staff restructuring and shut down of less profitable branches. Some banks (AIG, GMAC) made changes in ownership, while other (Noble, Getin, Fortis) implemented consolidation to cut the costs. In 2010 Irish AIB sold its Polish subsidiary, profit- able BZ WBK to Santander Bank. In 2012 net profit of the sector amounted to 16,2 billion PLN and in 2013 to 15,4 billion PLN.

86 The Polish steel market foregoes further consolidation process Apart from coal, Poland also produces significant quantities of which covers not only steelworks but also vertical consolidation. copper and silver, which are mined by one enterprise, KGHM Mergers are carried out for manufacturers and suppliers of ores Polska Miedź. In 2012 the company maintained the first place or distributors. Such structures are very favorable for the market in the ranking of the largest silver producers with 5.2% percent and allow the companies to be much more competitive. of global production. In 2010 KGHM launched its new strategy which considers involvement in new technologies and mining The biggest steel player is ArcelorMittal Poland (AMP), which has companies’ acquisitions. KGHM now undertakes numerous acqui- so far invested over 5 billion PLN. Other players include: CMC sition projects in Europe and Canada regarding among others Poland Sp. z o.o., CELSA huta Ostrowiec Sp. z o.o., Stalprodukt a producer of silver and two producers of copper. In 2011 KGHM S.A., ISD Huta Częstochowa Sp. z o.o., Alchemia S.A., Cognor successfully finalized acquisition of Quadra. Annual production of S.A., Huta Pokój S.A. i Huta Łabędy S.A. copper fluctuates around 500-550 thousand tons.

In May 2014 Polish steelworks produced 389 tonnes of pig iron, Retail sector that is 34,5% more than in May 2013 and 726 tonnes of crude The value of Polish retail market is estimated at nearly 100 billion steel which is 15% increase towards corresponding period. Euro (BMI CSF) and is expected to increase up to 120 billion Euro in 2014. Retail sales reached 4000 Euro per capita. The sector Mining and Semi-processing accounts for almost 17% of Polish GDP. The industry has Although Poland remains one of the world’s significant coal longterm positive dynamics resulting from the ongoing domestic producers, mining and quarrying output has been falling rela- demand and consumption, which provides a further develop- tively to total industrial production. Poland’s deep-coal mining ment prospects. Despite the well-established and organized retail industry has been under pressure throughout the transition chains, the market still features high market fragmentation and period as demand has fallen. At the same time, the strength of a high number of small businesses. the trade unions in the sector has kept labour costs high, despite the sector’s parlous financial state. A restructuring plan backed There are total 345 thousand stores in Poland, about 90% of by the World Bank has led to a sharp fall in employment in them with space smaller than 100 square metres, yet number of the industry. The industry gained some temporary respite in 2004 large stores is gradually increasing. as world coal and coke prices rose sharply, but a return to more normal market conditions re-emphasized the need for further restructuring. Today Polish coal mines are important players in 8. Technology and Industrial Parks the world coal industry, but coal extraction decreases; in 2012 Technology and Industrial Parks has been increasingly used in it fell to 39 mil t and in 2013 to 36 mil t. Poland as development-oriented solutions, addressed both to Polish and foreign businesses. Kompania Węglowa S.A., with 15 production units, over 60,000 employees and a coal output of 40 million t, is Poland’s largest Industrial and technology parks have many similar features coal production company. The company produced over half (mission, objectives, forms of action, organization, etc.). Each of Poland’s production volume of 79 million t of coal in 2012. park has its own individual character, resulting from the regional, Poland is also Europe’s leading metallurgical coal producer, due, social, cultural and economic conditions and available growth in part, to Jastrzebska Spółka Węglowa S.A., with an output factors. of 9.5 million t in 2012 and 13,6 million t in 2013 . The large volume production of metallurgical coal allows Poland to be one The most frequently designated purposes of the functioning of the leading coke producers in the EU (8.6 million t in 2012). parks are: •• to ensure favorable conditions for technology development Mining market is expected to reach a value of USD 4.37 bn by companies (24 parks) 2014, as compared with USD 12.32 bn in 2009. In the long run Poland is expected to reduce its dependancy on coal in order to •• facilitating better cooperation between science and business the EU CO2 emission limit by cutting current level by 20%. In (24 parks) 2014 104 thousand people were employed in the Polish mining •• support the economic development of the region (23 parks). sector.

Investing in Central Europe 87 Poland

In Poland there are 33 technological parks. In total there are 9. Investment Incentives 523 invested institutions, and 18 research units. The most Enterprises investing or expanding their activity in Poland may popular are Wroclaw Technology Park, which residents 85 entities apply for various types of incentives, such as investment incen- and one research institution; Pomeranian Science and Technology tives, research and development grants, revolving financial Park with 68 companies and two research institutes, Kraków instruments (e.g. preferential loans) and tax credits (incl. real Technology Park (58 and 3) and Poznań Science and Technology estate tax exemptions, Special Economic Zones, R&D tax credits).. Park (51 companies and three research institutions ). Support can be obtained from both National and European Polish technology parks employ over 16,500 people in total. Union Funds. Levels of aid are established separately for each Nearly 7.7 thousand of posts have been created in the Kraków aid scheme. Investment grants are in most cases recognized Technology Park. Employers are mainly small and medium- as regional aid19. Total aid granted for a specific project cannot sized enterprises and foreign enterprises. In 2013 in Gdynia, exceed the maximum aid intensity for a given region in Poland the Pomeranian Science and Technology Park was officially (see Regional Aid Map of Poland for the period 2014-2020). opened, being claimed as the biggest park in Poland. The project cost more than 50 million Euro. Grants are credited to the investors’ account as either reimburse- ment of incurred costs (periodical payments) or as advance The main obstacle, which the parks have to face is the lack of payments, which allows for effective financial liquidity manage- financial resources. Raising capital for innovative project is diffi- ment of the project. cult because of the high risk related to these projects. Regional Aid Map Parks may obtain a refund even up to 85% of the eligible costs The Regional Aid Map in Poland for 2014-2020 sis based on and related to: reflects the 16 administrative units of Poland known as “voivod- •• preparation and realization of the park’s strategy; ships”. Additionally, Mazowieckie voivodship was divided into 6 sub-regions. •• investment in expansion of the technical infrastructure; •• promotion of the park’s activity. The total value of available co-financing depends on: •• the location of the investment With regard to the expansion of activities, parks may receive (regional aid intensity level - %); co-financing for actions aimed towards: •• the value of the investment (eligible costs); •• searching for new, innovative enterprises; •• the size of the enterprise (large, medium, small, micro) •• potential and innovative ideas evaluation; •• a special algorithm is applied to estimate the aid level for •• capital investment in a newly created enterprise. projects exceeding EUR 50 M.

Additionally, under each aid scheme the park may simultaneously apply for training grants related to the projects.

19 The ultimate purpose of regional state aid is to support economic development and employment. The regional aid guidelines set out the rules under which European Union Member States can grant state aid to companies to support investments in new production facilities in the less advantaged regions of Europe or to extend or modernize existing facilities. The guidelines also contain rules for Member States to draw up regional aid maps (the geographical areas where companies can receive regional state aid, and at which intensities.

88 Regional Aid Map of Poland until the 31th of December, 2020

pomorskie warmińsko- podregion zachodniopomorskie mazurskie podregion ostrolęcko- ciechanowsko- siedlecky polski kujawsko- podlaskie pomorskie

mazowieckie wielkopolskie lubuskie podregion warzawski- podregion łodzkie zachodni warszawski wschodni M.st. Warszawa dolnośląskie lubelskie

świętokrzyskie opolskie śląskie

podregion podkarpatskie małopolskie radomski

50 % 35 % 25 % 20 % 15 %

After January the 1st 2018 treshold for Warsaw will decrease from 15% to 10%.

Different types of regional aid, such as investment grants and Legal documents concerning the New Financial Framework 2014- CIT exemptions in SEZ can be accumulated by investors up to 2020 and drafts of Operational Programs have been submitted to the maximum aid intensity level. The maximum aid intensity levels the European Commission and are subject to ongoing negotia- are shown on the Regional Aid Map of Poland, which shows tions.. Calls for proposals under New Financial Framework are that the intensity can reach up to 50% of the eligible investment expected to be announced by the end of 2014 / beginning of costs (for large enterprises). If more than one investment incen- 2015. tive is applied, the cumulative intensity of the aid cannot exceed the maximum level for a given area. As for now the only available incentives are the national incen- tives, described below, in the “NATIONAL FUNDS” part. The current thresholds are valid until the 31th of December, 2017. After January the 1st, 2018, 10% threshold will become Operational Programme Smart Growth (OP SG) 2014-20 effective for Warsaw. The other regions will remain at the same OP SG will be mainly dedicated to supporting R&D works, develop- level until 31st of December 2020. ment of new technologies and innovation, as well as increasing SME’s competitiveness. Entrepreneurs can expect revolving In case of medium-sized and small-sized enterprises, these aid financial instruments and cash grants supporting various types of intensity levels are increased by 10% and 20% respectively. investments. Companies interested in R&D activity will be able to apply for support covering all stages – R&D works, implementa- European union funds tion of pilot and demonstration lines and implementation of new The allocation under the European Union Funds for the period technology. Projects that focus on the practical application of 2014- 2020 amounts to EUR 77.6 billion, which is the biggest research and development works results in the market, especially national allocation among the EU’s 28 Member States. Funding those including investment in the areas identified as national and will be allocated in particular for innovative, research and regional smart specialization will also be supported. According to development projects, IT infrastructure investments, projects in the draft of OP SG, entities interested in developing a cooperation the field of eco-efficiency, support for SMEs and investments in between business and research institutes in key R&D sectors and the field of social inclusion. technologies may expect to be supported as well.

Investing in Central Europe 89 Poland

New Financila Framework 2014 – 2020: Funding Instruments

Types of potential incentives

Grantd and preferential Tax credits loans

•• Special Economic Zones will exist International EU funds National funds unitl 2026 programs for 2014 – 2020 •• New oportunities (from 2015/2016): new R&D tax credits International cooperation •• Real estate tas exeption programs in the area of science and R&D activities

EU funds National EU funds EU funds manged on National Center Ministry of Fund for manged on manged on European level for R&D Economy Environment state (central) regional level (including Protection level Horizon2020)

Center is Polish Aid of the leading Government environmentally managing Grant - e.g. friendly institution support for invetsments Poland for creation of R&D and business R&D funds Centers development with allocated mainly in form budget of USD of revolving 2 B each year instruments

Companies investing in R&D infrastructure may also benefit Operational Programme Infrastructure and Environment (OP from OP SG. The Programme includes measures for supporting IE) 2014-20 the creation and development of R&D infrastructure (R&D depart- The main objective of the Programme is to support economy ments, laboratories). Those interested in updating their company which is resource-efficient, environmentally friendly and management system may expect support for implementation of conducive to social and territorial cohesion. Entrepreneurs can non-technological innovation (organizational, marketing innova- expect support for projects covering efficient management of tion or implementation of new business models). Investments in resources which make companies more economically competi- hardware, equipment and technology essential in the creation tive. The scope of support under OP IE concerns investments in of innovative products and services can also be supported. Such the area of transition to a low carbon economy in all sectors, investments may also involve the creation of new workplaces or implementation of environmentally friendly solutions (e.g. energy the development of personnel skills. efficiency), as well as promotion of sustainable transport and removal of bottlenecks in key network infrastructures.

90 Operational Programme Digital Poland (OP DP) Preferential loans/grants – National and regional funds for OP DP is a new Operational Programme meant to support environmental protection and water management. the digitalization of Poland, which is convergent with the objec- Support is granted for ecological projects of a national signifi- tives of the European Digital Agenda. In order to provide full cance and scope as well as regional actions important due to implementation of the objectives, companies will be able to apply environmental requirements. Types of projects eligible for a loan/ for both revolving financial instruments and cash grants. Entre- grant include: renewable energy sources (wind energy, biomass preneurs considering investment involving construction, extension and biogas, geothermal energy), green investment schemes or alteration of network and telecommunications infrastructure, (biogas plants, CHP biomass plants and biomass heating plants) providing broadband Internet access with parameters of 30Mb/s and waste management (recycling of waste, waste disposal, utili- and more (100Mb/s preferred), may expect support for their zation of waste). Co-financing is available in the form of grants projects. Also, companies interested in the creation of services and preferential loans. and applications that use open content, open source software and open services may apply for support under the Programme. National Centre for Research and Development – NCR&D Since the current Financial Framework 2007-2013 is about Regional Operational Programme (ROP) to come to an end, NCR&D is the most significant source of Every voivodship, starting from 1 July 2014, will apply a new financial support for R&D activities which directly result in regional operational programme enabling providing support to the development of innovativeness. Tasks of NCR&D include local undertakings. the management and execution of R&D programmes addressed both to entrepreneurs and research units. The Centre manages A list of activities which may be supported within ROPs include both the domestic and strategic programmes and projects in i.a.: the field of defense and security. Also, the Centre carries out tasks related to the implementation of European Funds allocated •• R&D and innovation, for the development of science and higher education sectors in •• increase of SME’s competitiveness, Poland, as well as various international programmes. Projects •• production and distribution of renewable energy, implemented by NCR&D are funded mainly from the EU funds. There are also seven strategic, interdisciplinary areas of research •• creation of new workplaces, and development supported from national funds: •• development of products and services based on ICT •• new technologies in the field of energy technologies. •• lifestyle diseases, new drugs and regenerative medicine 20 National funds •• advanced information, telecommunications and mechatronic Polish Government Grants (PGG) technologies The objective of the government support Programme is to •• new material technologies provide additional funding for investments which are strategically important to the Polish economy and generate numerous new •• environment, agriculture and forestry workplaces. The detailed scope of support is negotiated individu- •• social and economic development ally with the competent Polish public authorities. •• security and defense of the state The Programme is intended for entrepreneurs planning invest- ments in the following priority sectors: automotive, aviation, Tax incentives electronics, agri-food industry R&D, biotechnology and modern Special Economic Zones (SEZ) services sector (BPO, IT, SSC) or, in case of “major”21 scale Tax incentives in the form of corporate income tax exemptions production, investments in other sectors. Many large enter- are available for investors in Special Economic Zones (SEZs). prises, such as Cadbury, Dell, Fiat, Ford, Gillette, LG, Samsung, SEZs are designated areas in Poland, where investors can run Sharp, Shell, Toshiba, Toyota, Volkswagen have benefited from businesses (manufacturing and services) on preferential terms the Programme. (generally, tax exemptions amounting up to 70% of investment expenditures).

20 Available on an ongoing basis 21 Investment of major scale is an investment which establishes that at least 200 new workplaces will be created and the eligible costs are above PLN 750 M, or at least 500 new workplaces will be created and the eligible costs are above PLN 500

Investing in Central Europe 91 Poland

Special permit is required to benefit from the abovementioned In case of a loss, the tax benefit may be used during the subse- tax incentives. Such permit is issued by the SEZ Management, on quent 3 tax years. On a monthly basis, entities with the R&D behalf of the Minister of Economy. center status can make appropriations to the innovation fund corresponding to 20% of their revenue, which reduces the tax There are fourteen Special Economic Zones in Poland. Each of base. them consists of a number of sub zones. This means that SEZ areas in Poland are spread across the country. Infrastructure The tax benefit is addressed to all entities operating in Poland within those areas is well developed, which makes them very and acquiring new technologies, except for taxable persons using attractive for investors. In case of large projects, investors may the flat rate method and enterprises which carry out business apply for granting the SEZ status to the location they specifically activity in Special Economic Zones. choose. Eligible costs include expenses incurred for the acquisition of SEZs have resulted in investments of the total value over EUR innovative technologies that have not been used worldwide for 20 billion and over 186,000 new jobs. The number of investors more than 5 years, what needs to be proved in an opinion issued in SEZs is growing fast, especially since Poland’s accession to by an independent scientific unit. The list of eligible expendi- the European Union. tures includes only costs of acquired technological solutions in the form of intangible assets. Therefore, the costs of internal R&D Additionally, SEZs are supposed to attract even more investments works as well as costs refunded from other public aid sources in close future, as their functioning has been recently prolonged do not qualify for tax benefit. from the end of 2020 until the end of 2026. Selected European and multinational R&D initiatives Eligible activities include both manufacturing and services The 7th Framework Programme aimed at supporting scientific (also modern services, such as: R&D, IT, BPO, call centers). and research activities, as well as the CIP Programme, designed Manufacturing investments in SEZs include numerous sectors, to improve the competitiveness and innovativeness have ended. such as automotive, electronics, household appliances, plastic They will be replaced by new programmes in the Financial products, wooden products, metallic and non-metallic products. Framework 2014-2020: Horizon 2020 and COSME. Horizon 2020 Tax incentives in SEZs (the amounts of CIT reliefs) are recog- as a successor of the 7th Framework Programme has officially nized as regional aid and they cannot exceed the maximum aid entered into force as of January 1, 2014, with a total budget of intensity for a given region of Poland (see Regional state aid map EUR 80 B. of Poland). Eligible expenditures comprise investment expenses for tangible and intangible assets. Alternatively, eligible expendi- Entrepreneurs may expect several improvements in ture can be calculated based on two-year labor costs of newly the Programme aimed at, e.g. simplification of the procedure or employed staff. unification of the criteria. Support under the Programme will be granted for projects including development work - prototyping, Apart from the above incentives, companies investing in the SEZ testing or experimental production in different sectors (i.e. are often granted exemptions from real estate tax by local automotive, pharmaceutical, FMCG, transport, communication authorities. Conditions of individual exemptions are a subject of technologies, energy sector). Horizon 2020 helps to connect negotiations with granting institutions. research activities and the market by e.g. supporting innovative enterprises in developing technological breakthroughs into viable R&D tax incentives products with real commercial potential. Polish R&D tax incentive system (implemented on January the 1st 2006) is currently much less effective than those implemented by other EU member states. Recently, a debate on creation of a new R&D tax incentive system in Poland has taken place. However, no specific declarations have been made by the Government yet.

Companies involved in R&D activities may deduct from their CIT base up to 50% of expenditure incurred for the acquisi- tion of new technologies in the form of intangible assets (e.g. proprietary rights, licenses, rights under patents or utility models, know-how etc.).

92 10. Foreign Direct Investment (FDI) 11. Expatriate Life The value of global foreign direct investment (FDI) improves, Poland is one of the major destinations for travellers. Its beauty although a pre-crisis level has not yet been reached. According can be admired in both its old cities and in the wild scenery of to the latest World Investment Report by UNCTAD, Poland is its national parks and nature reserves. Polish cities are cultural Europe’s 6th and the world’s 13th most attractive economy. In treasures in their own rights, showcasing unique examples of a long term perspective, the most important source of FDI are gothic, baroque, renaissance, and neoclassical architecture. reinvestments. Globally, the value of greenfield projects fell in Warsaw is a cosmopolitan center with museums, shops, and fine 2012 by one third, yet Poland came in second place in terms restaurants. Krakow is a smaller city with well-preserved historical of new projects of its kind in the entire European Union. While buildings, a charming central square, and a vibrant market the average size of the projects decreased, the Polish investors’ that wins visitors over instantly. The Tatras mountain range are interest and ability to generate new jobs are high. In 2012, a summer and winter sports playground of dramatic beauty. foreign direct investments in Poland have created 67% more jobs The Mazurian Lake- lands are also natural gems in Poland’s than in 2011. The sheer number of new jobs (13 111 posts) puts topography. In addition to these wonderful natural and historic Poland in third place on the continent after the Great Britain and sites, Poland has retained its strong tradition and history while Russia and ahead of both Germany and France. FDI in Poland in embracing modern and democratic institutions. 2013 accounted to 902,5 mil EUR as compared to 1 236,3 mil EUR in 2012. 12. Weather and Climate In 2012 Polish Statistical Office (GUS) recorded in Poland 25914 Poland has a temperate climate characterized by relatively cold companies with foreign capital. Among 1,712 new entities with winters and warm summers. Winters become increasingly severe foreign capital the majority (1397 companies) were greenfields. inland from the Baltic coast, with January temperatures averaging Among all the companies, the major group (84.4%) was small -1° C (30 F) in the north and going as low as - 5° C (23 F) in companies, i.e. those employing up to 49 people. The greatest the southeast. July temperatures range from 16.5° C (62 F) near importance, however, had 1 219 large enterprises (employing the coast to 19° C (66 F) in the south. Rainfall varies with alti- over 250 persons), which accounted for 52% of share capital and tude, ranging from less than 51 cm (20 inches) a year to as much 71.9% of employment. The most of entities conducted business as 127 cm (50 inches) in the southern mountains. activity related to trade, repair of motor vehicles (28.0%), manu- facturing (20.1%), real estate activities (9.5%) and construction (9.2%).

Most of FDI located in Poland in 2012 were invested in entities dealing with: •• Automotive, •• Business process outsourcing, •• R&D sector, •• Transport and equipment manufacturing , •• Production and distribution of energy, gas and water , •• Trade and repairs.

In 2011 the companies polled by GUS employed 1 566 500 people. The most numerous group among all (almost 50% of all employees) worked in manufacturing companies, while 24% were employed in trade and repairs.

Investing in Central Europe 93 Romania

1. General Overview of Economy The EUR 2 billion two-year precautionary IMF standby agreed In 2007, when Romania joined the European Union (EU), in September last year will provide a buffer should global it became the second-largest market in Central Europe and financial conditions deteriorate further, and it will also bolster the seventh-largest in the EU. With a population of 19 million, confidence amid continuing tensions in neighbouring Ukraine. it is an emerging economy with one of the highest growth Indeed, Romanian financial markets have been quite calm so potentials in the region. Romania’s adoption of a controversial far this year, with the RON little changed against the euro and flat-rate income tax of 16% in 2005 has been vital in driving long-term interest rates falling back to just over 5%. The IMF both economic growth and foreign investment. In 2001-2007, cites supportive policy, better absorption of EU funds, regulatory economic growth averaged an annual 7%, placing the country reform and rising confidence as reasons for a brighter economic among the fastest-growing economies in Europe. backdrop in 2014. A contentious has now been passed by parliament, lending support to the view that policymakers are From July 2010 the uniform rate of value-added tax (VAT) acting in a fiscally prudent manner. However, the IMF noted that increased from 19% to 24%. Social security contributions are work on reducing state-owned enterprise arrears had stopped, high (10.5% for employees and 20.8%-30.8% for employers), albeit budget transfers and restructuring efforts would help miti- but will be cut by five percentage points for employers in October gate the impact of this. 2014. According to Economist Intelligence Unit, the forecast average Recovery from recession in 2009-10 has been modest. Romania annual growth will reach 3.9% in 2015-18. Despite the pick-up avoided negative growth in 2012, with real GDP expanding by in 2013, there is little prospect of a strong recovery in foreign 0.7%, from 2.2% a year earlier, highlighting yet again the econ- direct investment (FDI) until later in the forecast period. Proposals omy’s heavy reliance on agriculture. Growth accelerated to for off-budget infrastructure investment were scrapped by 3.5% in 2013. This was driven by net exports, while domestic the previous government but could be reinstated by the current demand fell as a result of falling gross fixed capital formation one, stimulating a recovery in construction—assuming that and declining expenditure on government provided goods and financing can be provided by negotiating larger budget deficits. services. The independent projections for this year’s growth are in the region of 2.5-3%. Political system Romania’s political system is a Parliamentary Democracy. Romania’s current account deficit shrank to EUR 1.33bn [1% of The Romanian Parliament exercises the legislative powers while GDP] in Jan-Nov last year, which is only a quarter of the deficit the main executive powers are attributed to the government. in the same period of 2012, the central bank announced. In The president of the Republic, who is elected for a mandate the rolling 12 months ending in November, the gap was EUR of five years (while the Parliament is elected for a mandate of 1.78billion, or 1.3% of GDP. four years), guards the observance of the Constitution and acts as a mediator between different powers in the state (legislative, The average inflation in 2013, however, accelerated to 4% y/y executive and judiciary) as well as between the State and society. from 3.3% in 2012. More precisely, the annual rise in the trailing he Parliament includes the Chamber of Deputies and the Senate, 12-month consumer price index quickened from 2.8% in July- elected through direct suffrage. The election law establishes Aug 2012, amid weak 2012 output of farms, to 5.1% y/y in the number of deputies and senators. The Parliament passes July-Aug 2013. Both good crop in 2013 and particularly the VAT constitutional laws (which concern the revision of the Constitu- cut for bakery goods pushed down the 12-month trailing infla- tion), organic laws (endorsed by the majority suffrage of each tion to 4% y/y in December. chamber) and ordinary laws. According to the article 74 of the Constitution, the Education Act is an organic law. Romania’s seasonally-adjusted ILO unemployment rate increased by 0.1pps y/y and by 0.2pps m/m to 7.3% in May, the statistics The Government (executive body) is invested by the Parliament office reported. The EU28 unemployment rate was 10.3% in May on the basis of its governmental programme. 2014, down from 10.4% in April 2014, and from 10.9% in May 2013. The figure reflects the population actively seeking employ- The last national elections were on November 2012 (legislative) ment and is defined for the broadest age brackets of 15-74 years. and in November and December 2009 (presidential). The next presidential election is scheduled for November 2014, while the next parliamentary election is scheduled for 2016.

94 The national government consists of a Cabinet, headed by All companies must also produce half-year (as at 30 June of the prime minister, nominated by the president. The govern- the current year) unaudited financial statements. Companies are ment is led by the Union of Social Democracy (USD), comprising required to file comprehensive tax returns monthly or quarterly. the Social Democratic Party (SDP), the National Union for Corporate tax is paid quarterly (banks pay annual corporate the Progress of Romania (UNPR) and the Conservative Party (CP), income tax based on quarterly advanced payments). Starting with and supported by the Hungarian Union of Democrats in Romania 1st January 2013, other taxpayers may also opt to pay corporate (HUDR). It has a fairly secure parliamentary majority. tax based on quarterly advanced payments (i.e. a quarter of the corporate income tax paid in the previous year). Currently the President of Romania is Traian Basescu and the Prime Minister – Victor Ponta (SDP). Those companies that fulfill two out of the following three criteria: •• total value of assets of EUR 3,650,000 2. Tax Structure Resident/Non-resident •• net turnover of EUR 7,300,000 and Resident is considered to be any Romanian legal entity, any •• average number of employees during the fiscal year of 50 foreign legal entity having its place of effective management in should prepare annual financial statements that comprise: Romania, any legal entity with its registered office in Romania -- Balance sheet set up according to European legislation and any individual who establishes his center of vital interests in Romania. For associa- -- Profit and loss account tions between Romanian legal entities and foreign individuals -- Statements of changes in equity or entities that do not give rise to a legal person, the tax is -- Cash flow statement computed and paid by the Romanian legal entities on behalf of the partners. -- Explanatory notes for the annual financial statements.

Tax year Corporate taxation Generally, both the tax year and financial year is the calendar Resident entities are subject to tax on worldwide income. Non- year. However, entities may choose a different tax and finan- resident companies are taxed only on their earnings in Romania cial year (e.g. in accordance with the group financial year). If (through branches, permanent establishments or associations a company has a financial year different from the calendar year, that do not create a new legal person). then the tax period must be either the calendar or the financial year. The deadline for submitting the financial statements for Corporate tax is chargeable at a flat rate of 16% on accounting the previous year is: profits determined according to the Romanian Accounting Standards, adjusted for certain items under tax legislation. •• within 150 days after closing of the financial year for national Thus, the taxable profit of a Romanian legal entity is calculated companies, autonomous administrations, research and devel- asthe difference between the income derived from any source opment institutes, entities without legal personality pertaining and the expenses incurred in obtaining the taxable income to non-resident legal persons with the exception of entities throughout the fiscal year, deducting non-taxable income and set-up in Romania by European Economic Area legal persons; adding non-deductible expenses. •• within 120 days after closing of the financial year for all other legal entities;

Those entities that have not pursued an activity, except for trading companies, as well as those undergoing liquidation shall submit a statement for this purpose within 60 days as of the end of the financial year with the territorial units of the Ministry of Economy and Finance.

Investing in Central Europe 95 Romania

Non-taxable income expressly includes: Non-deductible expenses include: •• Dividends received from a Romanian legal entity from another •• Business entertainment and protocol expenses that exceed Romanian legal entity from an entity resident in an European the limit of 2% applied to the difference between revenues Union Member State or from an entity resident in a state with and deductible expenses other than corporate tax expenses which Romania has concluded a double tax treaty, provided and protocol expenses; that the receiver of dividends holds for an uninterrupted •• Fines or penalties due to Romanian authorities or foreign period of at least 1 year minimum 10% of the share capital of authorities; the payer of dividends; •• Contributions to non-mandatory pension funds over certain •• Revenues from reversal or cancellation of provisions / legal limits (EUR 400 per year, per employee) are non-deduct- expenses that were previously non-deductible and recovery of ible expenses; expenses that were previously non-deductible; •• Contributions to private health insurance over certain legal •• Non-taxable income expressly provided in agreements and limits (EUR 250 per year, per employee) are non-deductible memoranda approved by law expenses; •• Income from the cancellation of a reserve registered •• Social expenses that exceed the limit of 2% of the salary fund as a result of an in-kind participation to the capital of other realized; legal entities. •• Sponsorship expenses are non-deductible for corporate •• The capital gains received from the sale/assignment of shares income tax purposes. Taxpayers are, however, granted a fiscal held in a Romanian entity or an entity with which Romania credit up to whichever is the lower of 0.3% of turnover and has concluded a double tax treaty, provided that the receiver 20% of the profit tax due. of income holds for an uninterrupted period of at least 1 year minimum 10% of the share capital of the above mentioned •• Other expenses related to salaries that are not taxable at entities. the level of individuals; •• For the period 1st May 2009 – 31st December 2011, fuel Expenses are considered deductible if they are directly related to expenses were non-deductible for corporate income tax deriving income and correspond to taxable income. As regards purposes. As an exception, fuel expenses have been granted the deductibility criteria, the Romanian Fiscal Code provides that deductibility if these are incurred in relation to vehicles that expenses may be considered as deductible expenses, limited are used for certain activities (e.g. sales activities, paid trans- deductible expenses and non-deductible expenses. portation services, rental activities, security services, repairs, courier activities etc.); Limited deductible and non-deductible expenses include: •• Starting with 1 July 2012, 50% of the expenses directly attrib- •• Expenses made for acquisition of packaging; utable to a company’s vehicles not used for business purposes •• Expenses incurred for marketing and advertising with a view (e.g. fuel, car taxes, mandatory insurance, periodical technical to promote the company; inspection, , rent, non-deductible VAT, etc.); •• Research and development expenses that do not meet •• Starting 1 February 2013, depreciation expenses incurred for the requirements to be recognized as intangible assets for motorized vehicles used for personnel transport that do not accounting purposes; weigh more than 3,500 kg and do not have more than 9 seats, including the driver’s seat, are deductible within a limit •• Transport and accommodation expenses for business trips of RON 1,500 per month. in Romania or abroad incurred by employees and directors and secondees whose costs are covered by the Romanian Any tax differential arising from corporate profit tax incentives company; is treated as taxpayer’s reserves that cannot be used for share •• Expenses incurred for professional training and development capital increases, offsetting losses incurred or distribution to of employees; shareholders. •• Write-off of receivables in certain conditions. Tax losses incurred may be carried forward for seven years and are not adjusted for inflation.

96 Advance tax ruling availability Revaluation of assets The National Agency for Fiscal Administration may issue In order to determine the fiscal value of land, i.e. the un-depre- advanced tax rulings (ATR) at the request of taxpayers. The ATR is ciated fiscal value of fixed assets, the accounting revaluations an administrative fiscal document referring to a future fiscal situa- performed after 1 January 2007, as well as the un-depreciated tion of a taxpayer and is binding for the tax authorities, provided part of accounting revaluations performed between 1 January that the taxpayer has complied with its terms and conditions. 2004 and 31 December 2006 existing as at 31 December 2006, were to be considered. Also, accounting revaluations performed The advanced tax ruling is valid only as long as the relevant legal until 31 December 2003, as provided by law, are considered for provisions are not amended. Advance pricing arrangements fiscal purposes. (APA) are available for taxpayers looking to confirm the condi- tions and approaches to be used for establishing transfer prices As of 1st May 2009, revaluation reserves for fixed assets, for a fixed period of time. for transactions carried out between including land, performed after 1 January 2004, which are affiliated parties . An APA is compulsory and opposable to the tax deductible for corporate income tax purposes by way of depre- authorities and guarantees that the tax authorities will accept ciation or expenses with alienation/write-off of the assets, will be the transfer pricing methodology applied by the taxpayer. taxed simultaneously with the deduction of the tax depreciation or at the moment of the disposal or write-off of the related fixed The deadline for issuing an APA is: assets. •• 12 months in the case of a unilateral agreement; Withholding tax (subject to tax treaties) •• 18 months in the case of a bilateral/multilateral agreement.

Payments to: Interest Dividends Royalties The agreement is issued for a period of up to 5 years (in exceptional cases it is possible to be issued for a longer period). Resident - 16% / 0% - The agreement only produces future effects (there are some Companies exceptions). Non-resident 16% / 0% 16% / 0% 16% / 0% Companies Capital gains tax Companies do not have to pay a separate capital gains tax Dividends distributed to local companies are subject to a with- in Romania. Companies record capital gains in the profit and holding tax of 16%. Also dividends distributed to foreign loss account on which normal profits tax is payable. Foreign companies and/or non-resident individuals are subject to 16% companies that sell their interest in Romanian companies may be withholding tax, unless a reduction under a double tax treaty taxable on any capital gain made. Capital gains obtained by non- or the Parent-Subsidiary Directive is available. If the holding residents from the sale of real estate located in Romania from percentage is at least 10% and is maintained for a period of at the sale of shares held in Romanian legal entities are subject to least 1 year, no is applied. corporate income tax (i.e., 16%). However, if the capital gains are received from the sale/assignment of shares held in a Romanian In general, income obtained by non-residents from Romania is entity or an entity with which Romania has concluded a double subject to withholding tax. The applicable withholding tax rate is tax treaty and the receiver of income holds for an uninterrupted 16%. Such income may comprise: period of at least 1 year minimum 10% of the share capital of •• Dividends paid by a Romanian legal entity; the above mentioned entities, such gains are treated as non- •• Interest paid by a Romanian resident; taxable income. •• Royalties paid by a Romanian resident; Income from real estate properties also include, inter alia: •• Commissions paid by a Romanian resident; •• Income from sale/transfer of participation titles held in a legal •• Income for services performed in Romania; entity if minimum 50% of its fixed assets are either directly or •• Income from liquidation of a Romanian legal entity. through several legal entities real estate properties located in Romania; •• Income obtained from exploitation of natural resources located in Romania, including the gain obtained from the sale/ transfer of any right related to these resources, etc.

Investing in Central Europe 97 Romania

Derogations In addition to the above capping rule, the deductibility of interest There are certain derogations from the withholding tax rate, such expenses is subject to limitations based on the computation of as: the debt/equity ratio. Interest expense and foreign exchange net losses are fully deductible where the debt/equity ratio is lower •• Dividends received from a Romanian legal entity from another or equal to 3:1 and the company is in a positive equity posi- Romanian legal entity, from an entity resident in an European tion. Otherwise, the interest expense and related net losses from Union Member State or from an entity resident in a state with foreign exchange differences are non-deductible. which Romania has concluded a double tax treaty, provided that the receiver of dividends holds for an uninterrupted Unlike the above-mentioned threshold, the non-deductible period of at least 1 year minimum 10% of the share capital of interest expenses and foreign exchange differences can be carried the payer of dividends; forward to future periods, subject to the same thin capitalization •• Interest and royalties paid between related legal entities, test until their full deductibility. subject to the conditions provided by the Interest and Royalty Directive, are exempt provided that the beneficial owner of These limitations are not applicable to banks, non-banking finan- the interest and/ or royalties holds at least 25% of the capital cial institutions. of the subsidiary and such holding is maintained for a period of at least two years. Transfer pricing •• Income obtained from gambling is subject to a withholding Romanian tax law provides for transfer pricing rules and prin- tax of 25%. ciples in line with the OECD guidelines. The law stipulates that transactions between related parties should be carried out at •• If following a tax audit, the tax authorities reclassify a transac- arm’s length prices. In view of establishing the transfer prices, tion as artificial and the payments from that transaction are the taxpayer carrying out transactions with related parties is made in a jurisdiction with which Romania has not concluded liable, upon tax authorities’ request, to prepare and present, an information exchange agreement, a 50%withholding tax within certain timeframes, a file of the transfer prices. rate will be levied on that transaction.

In determining the price, the following methods are recom- Tax treaties mended by the Romanian profits tax regime: Romania has signed over 85 Double Tax Treaties. Different rates of withholding tax can apply to interest, dividends and royal- •• Comparable Uncontrolled Price Method (CUP) ties, depending on the terms of the treaty with the particular •• Cost Plus Method (CPM) country. The tax treaty provisions are applicable if the beneficiary •• Resale Price Method (RPM) of the income makes available a certificate of fiscal residence to the payer by the income payment date. •• Any other method accepted under OECD guidelines

Thin capitalization Stamp duty Romanian companies can generally deduct interest expenses Stamp duty is payable on most judicial claims, issue of certificates subject to thin capitalization rules. The level of deductibility and licenses as well as documentary transactions that require for loans obtained from companies, other than banks, their authentication. There are two types of stamp duty, which include branches, credit co-operatives, leasing, mortgage companies and the following: other non-banking financial institutions is limited to: •• Judicial stamp duty •• The National Bank of Romania’s (NBR) reference interest rate – •• Extra-judicial stamp duty for loans denominated in Romanian currency (i.e. RON). •• 6% annual interest rate – for foreign currency denominated Judicial stamp duty is levied on claims and requests filed with loans. The government can update this level periodically. courts and the Ministry of Justice, depending on the value of the claim. Quantifiable claims are taxed under the •• Any interest expenses which exceed this cap are permanently mechanism. Non-quantifiable claims are taxed at fixed amount non-deductible for corporate income tax purposes. levels. A judicial stamp duty may also be levied at the transfer of real estate property under certain circumstances.

Extra-judicial stamp duty is charged for the issue of various certifi- cations such as identity cards, car registrations, etc.

98 Sales taxes/VAT (inc. financial services) •• supply of school books, books, newspapers and magazines, The Romanian VAT legislation is harmonized with the VAT Council except for those intended solely for advertising purposes; Directive 2006/112/EC on the common system of value added tax •• supplies of all sort of prosthesis, except for dental plates and (“VAT Directive”) of orthopedic products;

VAT is generally charged on transactions with goods and services •• drugs for human and animal use; having the place of supply in Romania. •• accommodation in hotels and similar structures, including the rental of land for camping; The current VAT standard rate is 24%. •• supply of bread and fresh plane pastry products similar to bread such as: pretzels, loafs, as well as the supply of special Exports of goods and other specific operations are generally VAT categories of flower and wheat exempt with credit, based on specified documentation, while financial services are generally VAT exempt without credit. The reduced rate of 5% applies to the supply of buildings as part of the social policy, including the land on which they are built. The fiscal period is usually the calendar month. For taxable The building supplied as part of the social policy include, among persons registered for VAT purposes having annual turnovers others, the supply of buildings intended to be used as retirement below EUR 100,000, the fiscal period is the calendar quarter. homes, foster home and centers for recovery and rehabilita- Also, subject to the approval of the Romanian tax authorities, tion of disabled children, the supply of buildings to city halls taxpayers may choose other fiscal periods (i.e. half-year, year), with the purpose of subsidized renting-out to certain persons or depending on the nature and frequency of their activity in families of special economic condition, as well as the supply of Romania. buildings with a maximum utilizable space of 120 m2 and a value exceeding RON 380,000 (excluding VAT). Taxpayers applying the calendar quarter as reporting period have to switch to monthly reporting if carrying out intra-Community Additionally, the following transactions performed in Romania are acquisitions of goods in Romania. VAT compliance rules provide subject to Romanian VAT under the reverse charge mechanism that VAT registered entities file periodical VAT returns (i.e. form with the condition that both the supplier and the beneficiary are 300) with the relevant tax authority by the 25th of the month registered for VAT purposes in Romania: following the reporting period. •• Supplies of goods such as waste materials, residues and Taxpayers have to also submit: recyclable materials (iron scrap, non- ferrous scrap, recyclable paper, cardboard, rubber, plastic, and glass waste) and mate- •• Intrastat report – due by the 15th day of the month following rials resulting from their manufacturing (cleaning, polishing); the one for which the statement is prepared; •• Supplies of wood and wood materials; •• EC Sales and Purchases Lists (i.e. Statement 390) – due by the 25th of the month following the one in which intra- •• Supplies of certain cereals and technical plants; Community transactions are carried out; •• Transfer of greenhouse gas emission certificates; •• Local Sales and Invoices Lists (i.e. Statement 394) – due by •• Supply of electricity (applicable until 31 December 2018); the 25th of the month following the reporting period. •• Transfer of green certificates (applicable until 31 December 2018).

Taxable persons not registered for VAT purposes in Romania Payroll and social security taxes are required to pay VAT and to submit a special VAT return Employers in Romania are liable to pay social security contribu- for services rendered by non-residents, which have the place tions as a percentage of the salary paid to employees as follows: of supply in Romania. These obligations must be fulfilled by CAS (social security contribution): between 20.8% and 30.8% of the 25th of the month following the month when the services salary fund, depending on the labour conditions, the base being are supplied. capped at the level of five times the average gross salary (i.e. RON 2,298 starting with 1 January 2014) multiplied by the number of There are two reduced rates of VAT: 9% and 5%. The reduced employees. rate of 9% is applied to certain transactions such as: •• tickets to museums, castles, historical monuments, fairs and expositions, movie-theatres (cinemas), etc.;

Investing in Central Europe 99 Romania

Health fund: 5.2% of salary fund. Unemployment fund: 0.5% of As an exception from the said rule, the law stipulates the possi- salary fund. bility to establish a limited liability company having only one shareholder, named sole shareholder limited liability company. Insurance fund for work related accidents and professional The formation of sole shareholder limited liability company is diseases: 0.15%-0.85% of salary fund. subject to some legal restrictions, such as: •• a natural or legal entity cannot be sole shareholder in more Medical leave fund: 0.85% of salary fund. The computa- than one limited liability company. tion base for the contribution is capped at the level of twelve times the national minimum salary – MSE (minimum salary per •• a sole shareholder limited liability company cannot be sole economy), i.e. RON 900 starting with 1 July 2014. shareholder in another limited liability company.

Guarantee fund for salary debts: 0.25% of salary fund. The shareholders of a limited liability company are liable for the debts of the company but their liability is capped to Disabled person contribution: 4% x No. of employees x MSE the subscribed and unpaid share capital. x 50%. The contribution is payable by companies with more than 50 employees that do not hire disabled persons. Alterna- Share capital tively, the contribution equivalent can be used by companies to The minimum share capital is RON 200 and may be divided into purchase goods from institutions where disabled people work. shares having a minimum value of RON 10.

The shares issued by a limited liability company are incorpo- 3. Legal Entities rable assets and cannot be represented by negotiable financial The general legal framework with respect to Romanian Compa- instruments. nies is provided by Companies’ Law no. 31/1990. Under the law there are five types of companies described below as follows: The shareholders must entirely pay the subscribed capital upon the moment of the incorporation of a limited liability company. •• Partnerships; A limited liability company is a closed corporation, cannot be •• Limited partnerships; formed by public subscription or be registered on the stock exchange markets and cannot issue bonds. •• Partnership limited by shares;

•• Joint Stock Companies; Transfer of shares •• Limited Liability Companies. The shares issued by a limited liability company may be trans- ferred between the shareholders without restrictions. Basically any person can participate to the creation of compa- The transfer of shares to third parties is subject to: nies provided they have not been convicted for specific criminal •• the approval of the shareholders holding three quarters of offences. Partnerships, limited partnerships and partnerships the share capital; The shareholders may not derogate from limited by shares form a separate corporate entity from their the above mentioned restriction by inserting a contrary provi- shareholders but all of the shareholders in case of a partnership sion in the articles of association or by any other agreement. or only some of them in case of limited partnerships and partner- •• any interested person may file an opposition before ships limited by shares, are unlimitedly liable for the company’s the expiry of a 30-day opposition term, which starts running debts. from the publication in the Official Gazette of Romania of the shareholders decision mentioned at point (i) above. In the case of joint stock companies and limited liability compa- , The transfer of the shares becomes effective only after nies, the shareholders’ liability is limited to the amount they had the expiry of the 30-day opposition term or, in case an oppo- invested, i.e. the subscribed and unpaid share capital. Due to sition is filed, at the date the opposition request is dismissed. the advantages they offer, joint stock and limited liability compa- nies are the most common types of companies used in Romania. The transfer of shares must be registered in the Trade Registry and in the shareholder register of the company. Limited Liability Company Shareholder structure Companies Law provides that this type of company may be established by at least two shareholders. The maximum number of shareholders allowed by law for a limited liability company is 50.

100 Joint Stock Companies 4. Labour and Wages Shareholder structure After four years of deteriorating labour market outcomes, The minimum number of shareholders required by law to set up the first signs of stabilisation in EU unemployment are becoming this kind of company is two. In case that the company has only one manifest against the background of GDP growth turning positive, shareholder for a duration exceeding nine months, then any inter- improving sentiment, and recent reforms, according to European ested person may claim the dissolution of that respective company. Commission. Major labour market disparities persist across the EU and the euro area. Labour dynamics continued to differ substan- Similar to the provisions established for limited liability compa- tially across countries. While employment growth was robust nies, the liability of the shareholders is capped at the subscribed in the Baltics, Germany, Hungary, Malta and Romania, employ- and unpaid share capital. ment losses were recorded especially in Bulgaria, Croatia, Cyprus, Greece, the Netherlands, Spain, and Portugal. Differences in The law does not impose a maximum limit regarding the number unemployment dynamics reflected to a large extent GDP growth of shareholders for joint stock companies. differences, but a relevant role was played by different responses of employment to economic activity. Romania’s unemploy- Share capital ment rate was estimated at 7.1%for December 2013, down 0.2 For joint stock companies, the minimum share capital required by percentage points compared to the previous month, according to law is RON 90,000. This amount may be modified by the govern- Romania’s National Statistics Institute INS. In terms of numbers, ment so that the minimum share capital must always remain at Romania saw a decrease in unemployed citizens in December least at the level of RON equivalent of EUR 25,000. 2013, at 719,000, down from 740,000 recorded in November. However, the number increased from 671,000 unemployed Joint stock companies may issue bearer shares or nominative people in December 2012. shares. The shares issued may be preferential shares or regular ones, and they can be converted one into another. However pref- Romania’s net wages increased by a real 3.4% y/y and by erential shares cannot exceed one quarter of the share capital. a nominal 4.4% y/y to RON 1,682 (EUR 380.2) in May 2014, Generally the preferential shares do not allow the holder to vote the statistics office informed. In terms of euro, the average net in the general meeting. Joint stock companies may also issue wage was only 2.4% up y/y. Net earnings increased at compa- bonds for raising capital. rable rates of 4.5% y/y nominal and 3.2% y/y in real terms in April. In Q1, the annual advance of 4% in real terms and Upon the moment of the incorporation of a joint stock company 5.1% in nominal was the strongest growth in past couple of the shareholders must pay at least 30% of the subscribed capital. years. Combined with the slow but positive increase in employ- The difference may be paid in 12 months from the incorporation ment, higher wages contributed to the gradual recovery of date in the case of cash contribution, or two years in the case of private consumption in the first months of the year. Household in kind contribution. The shares issued by a joint stock company consumption increased by 5.8% y/y (volume terms) in Q1. may be also acquired by a public subscription. In this case the shareholders must pay in cash 50% of the subscribed capital Legal framework and the other half in 12 months from the incorporation date of The Romanian employment legal framework is governed by Law the company. no. 53/2003 – regarding the Labour Code (“the Labour Code”), Law no. 62/2011 regarding social dialogue on the collective Transfer of shares bargaining agreement, and Law no. 168/1999 on labour conflicts Generally the shares of a joint stock company are freely trans- and Government Emergency Ordinance no. 56/ 2007 regarding ferable between the shareholders or to a third party. However the employment and transfer of foreigners in Romania. Also the shareholders may restrict the transfer of the sharers by there are collective bargaining agreements concluded at the level inserting some limitations into the articles of association. of activity sectors, group of employers and employer which are applicable in employment relations. A joint stock company cannot acquire its own shares or grant financial assistance (e.g. loans or security) for the acquisition of its shares, except for some limited cases, expressly provided by law.

The transfer of shares takes place by declaration performed by the transferor and the transferee or by their proxies in the shareholders’ register, unless other methods are provided by the articles of association.

Investing in Central Europe 101 Romania

Working hours Vacation: All employees are guaranteed their right to a paid By law, the normal duration of full-time employees’ work time annual rest leave. The minimum duration of the annual paid rest is 8 hours per day or 40 hours per week (5 working days). leave is, according to the Labour Code, 20 working days. In case The maximum legal duration of the work time cannot exceed of special family events (employee’s marriage, child’s marriage, 48 hours per week, including extra hours. As an exception, child’s birth etc.), employees are entitled to paid days off, not the duration of the work time, including the extra hours, may included in the duration of the rest leave. The law, the appli- be extended to over 48 hours/week, provided that the average cable collective labour agreement or internal regulations settle of the working hours, calculated for a reference period of three the special family events and the number of paid days off. calendar months, does not exceed 48 hours/week. For young- sters up to the age of 18, the duration of the working time is 6 hours per day and 30 hours per week. 5. Education The general legal framework to organize, administrate The work time is regularly, distributed, to 8 hours per day, 5 and provide education in Romania is established through days per week, followed by two rest days. For certain sectors the Constitution, the Education Law (Law 1/2011, republished, of activity, companies or professions, collective or individual subsequently amended and completed) – organic law, ordinary negotiations, or specific laws may settle a daily duration of laws and governmental ordinances. Specific procedures and the work time, shorter or longer than 8 hours. A daily duration regulations are established through Government Decisions and of a 12-hour working day shall be followed by a 24-hour rest Orders of the Ministry of National Education. period. Implementation of the legislation and general administration and Specific provisions are provided with respect to individualized management of the education and training system are ensured work schedules, to the extra time work, to the night work, at the national level by the Ministry of National Education. In as well as to the organization of the work conditions. exercising its specific attributions, the Ministry of National Educa- tion cooperates at the central level with other Ministries and All employees are guaranteed their rights to a paid annual rest institutional structures subordinated to the Government. leave. The minimum duration of the annual paid rest leave is, according to the Labour Code, 20 working days. Universities and other higher education institutions are autono- mous and are granted by the law the right to establish and Specific provisions are also enforced with regard to the vocational implement their own development policies, within the general training leaves. provisions of the in-force legislation. The Ministry of National Education coordinates the activity of the universities and other Wages and benefits higher education institutions, complying with the principles of Salary: Discriminations are banned in the setting and granting university autonomy. of a salary, on such criteria as gender, sexual behavior, genetic features, age, nationality, race, skin color, ethnicity, religion, In the Romanian education system, schooling starts at the age political option, social background, disability, family situation of seven, and is compulsory until the tenth grade (which or responsibility, trade union membership or activity. The salary corresponds to the age of sixteen or seventeen). The school consists of the base salary, indemnities, increments and other educational cycle ends with the twelfth grade, when pupils bonuses. Salaries are confidential and employers are bound to graduate the baccalaureate. take all steps to keep confidentiality. •• Pre-school or Kindergarten – organized for children aged 3-6, is optional under the age of six. At the age of six, children Under Article 41 of the Romanian Constitution refers to must join the “preparatory school year”, which is mandatory the minimum wage for the purpose of social protection. in order to enter the first grade. ; From January 1, 2014 until July 1, 2014, the national monthly minimum gross base salary guaranteed to be paid, for a full-time •• Primary school– organized for pupils aged 6/7-10 includes working schedule (an average of 169.333 hours per month), grades I to IV; was set at RON 850 (around EUR 188), while starting with July •• Lower secondary (gymnasium) - grades V to IX for pupils aged 1, 2014, the national monthly minimum gross base salary was 10-15; established at RON 900 (around EUR 200). •• Upper secondary (high-school) – grades X to XII/XIII for pupils aged 16-18/19, has the following branches: theoretical, tech- nological and vocational (art, sport, theology);

102 •• Professional education lasts between six months and two As of December 2013, the sections in service include years and is organized by technical and vocational high a 110-kilometer long motorway linking Bucharest with Pitești, schools which prepare pupils for the current local workforce. the – Săliște segment (33.6 km), the Cunța – Deva segment The pupils graduating professional schools get a “qualifica- (76.4 km), the Traian Vuia – Balinț segment (17.1 km) and tion certificate”. Graduates can then continue their studies the Timișoara – Arad motorway (54 km, in the western part of in the upper-secondary cycle, a technological or vocational Romania). The total length of the opened sections is 290 km, high-school, in a low- frequency program; with another 141 km under construction. Several sections between and Deva, comprising a total length of 71.8 km, •• Post high-school non-university education: lasts between one were tendered in 2013, and construction began in 2014, to three years and is organized by post-high schools preparing the pupils for the current job market. Higher education, The rail network, which is the main means of internal transport including university and post-university education. Higher for passengers and freight, covers 20,077 km, the seventh-largest education in Romania is made accessible by public and private railway network in EU, but only 38% of the system is electrified. institutions. These include universities, academies and colleges Following years of falling volumes, the number of passengers organized in specialized departments. In accordance with its seems to have stabilized at around 500,000 per day. objectives, university education comprises: short university education offered by university colleges (three years), long Annual cargo traffic volumes are about 70m tonnes, mainly of university education (four to six years) and postgraduate coal, oil products, common metals, cement, quarry products, university education (one to two years). chemicals and agricultural items. Caile Ferate Romane (CFR) is the official state railway carrier of Romania. CFR is divided into The level of government expenditure on education is expected to separate companies, amongst which: CFR Calatori, respon- reach 3.7% of the country’s GDP, as compared to 3.22% in 2013. sible for passenger services; CFR Marfa, responsible for freight transport; CFR Infrastructura, manages the infrastructure on According to official data centralized by the National Institute of the Romanian railway network; and Societatea Feroviara de Statistics, as of January 2014, the total number of stable popula- Turism, or SFT, which manages scenic and tourist railways. tion was approximately 19.5 million.

The privatization of CFR Marfa is supposed to take place in 2014. 6. Infrastructure The process will be handled by the Department of Privatization, which is established within the Ministry of Economy. Transportation infrastructure in Romania is state property, and is administered by the Ministry of Transports. Shipping The Port of Constanta is the main Romanian port and is located Road and rail at the intersection of the trade routes connecting the Western At the end of 2013, public roads in Romania amounted European and Central European developed countries with to 84,887 km, of which 17110 km (20.2%) national roads, the raw material suppliers from the Community of independent 35,587 km (41.9%) county roads and 32,190 km (37.9%) states, Central Asia and Transcaucasus. It is one of the largest communal roads. From the viewpoint of pavement, the structure European ports and the largest Black Sea port. of public roads network registered, as follows: 34.4% modern- ized roads, 26.1% light cover roads and 39.5% stone and ground The role of the port of Constanta should be emphasized since roads. Out of total national roads, 36.6% were European roads, the port of Constanta generates and attracts 70% of the inland 17.1% were motorways, 1.6% represented 3 lane traffic roads waterway international and transit traffic, 40% of the railway and 10.0% represented 4 lane traffic roads. In 2013 reference international and transit traffic and 12% of the road interna- year, the length of motorways recorded an increase of 94 km, tional and transit traffic. Maritime transport through the port of compared to 2012 reference year. part of the Pan Constanta absorbs half of total export and import volumes, while European IV Corridor is currently under construction. It is also road haulage and rail freight have overall equal shares, road is the Priority Project 7 of the Trans-European Transport Networks, more heavily used for inland border exports to EU countries. and construction receives 85% funding from the European Union Cohesion Fund. Parts of A3 – Transilvania Motorway are also Along the Romanian Black Sea shore there are other two under construction, which is the largest motorway project in commercial maritime ports: and Midia. Furthermore, Europe with a length of 588 km from Bucharest to (near all ports are directly connected with the Danube-Black Sea the Hungarian border), and which is expected to be completed Channel, which ensures the connection between the Black Sea by 2018. and the Danube.

Investing in Central Europe 103 Romania

In Romania, the Danube River has a length of 1,075 km, approxi- mately 44% of its whole navigable length. The Romanian Danube is divided into two structurally different sectors: the River Danube and the Maritime Danube. Several ports situated along the Mari- time Danube, namely Galati, Braila, and Sulina, allow the access of both river and maritime vessels, so they also serve international sea trade.

Ports are administered by national companies under the authority of the Ministry of Transports and Infrastructure. There are a few exceptions, namely Sulina, Turnu Magurele and ports, which are administrated by local authorities.

The inland waterway network presently has a length of 1,700 km and is comprised of: •• The Danube from Bazias to Sulina; •• Secondary navigable branches of the Danube; •• Navigable channels. the next three modules for the construction of a new passenger terminal, a cargo terminal, an aircraft fuel depot, a 600 m exten- Air transport sion for the runway (to a total length of 3,000 m), as well as of Romania’s 17 regional airports were built between 1921 and a new access roadway. 1972 and upgraded between 1962 and 1980. After 1990, in order to comply with European standards, the Ministry of Trans- In 2007 Romania has signed an “open sky” agreement, which port and Infrastructure initiated a module for the upgrading and allows any airline operator from the EU to set up business wher- extension of the existing infrastructure, to cover the period up to ever it wants. As a result, Tarom is facing growing competition 2015, financed both from EU structural funds and domestic funds from low-cost airlines. The low cost airlines operating in Romania and involving basic infrastructure upgrading. are: Wizz Air, , Aer Lingus, Air Berlin, Germanwings, Ryanair, and Flyniki. In November 2010, Schengen Area evaluation committee experts visited International Airport Henri Coanda in Otopeni, near capital Telecommunications Bucharest, to assess the country’s progress regarding airspace, Romania is one of the fastest-growing IT markets in Eastern namely the technical measures taken to separate the passenger Europe. The country has made significant progress in all of flow intra and extra Schengen on the Henri Coanda airport. the information and communications technology (ICT) subsec- tors, including basic telephony, mobile telephony, Internet and IT. Bulgaria’s and Romania’s bids to join the Schengen Area were approved by the European Parliament in June 2011 but rejected The Romanian incumbent telecom operator Romtelecom by the Council of Ministers in September 2011. Although and mobile telecom operator Cosmote, indirectly controlled the original plan was for Schengen Area to open its air and sea by Deutsche Telekom in Romania, will be rebranded under borders with Bulgaria and Romania by March 2012, and land the T-Mobile label of Deutsche Telekom, local media announced borders by July 2012, opposition from the Netherlands has in March 2014. Furthermore, the joint CEO of Romtelecom and deferred the two countries’ entry to the Schengen Area until Cosmote announced that shareholders are discussing the merger September 2013 at the earliest. This deal is pending approval of of the two companies. The process should be completed by the European Council. September and would cost EUR 40million.

Iasi International Airport has started a long-term, multi-stage The merger of Romtelecom and Cosmote might not impact upgrade program; the airport will basically be reconstructed into significantly on the telecom market in terms of market size, a state-of-the-art airport. On 7 August 2013, the construction performance or trend, but could strengthen the operators’ works for the new runway have begun. The second stage of market positioning, providing its brand awareness comparable to the module will involve the construction of two rapid-exit taxi- the main competitors, Orange and Vodafone. ways and an apron. In 2016–2020, the project will continue with

104 Fixed lines numbered 4.74 million at the end of 2013, repre- The penetration rate reached 67.7% per 100 inhabitants, while senting a penetration rate of 23.6 per 100 people, according to for 3G and superior technologies the penetration rate reached data from the National Authority for Management and Regula- 47.6% in 2013. The penetration rate for USB/modems/cards tion in Communications (ANCOM). In the long run, the fixed-line reached 7.7% at end-2013, up from 7.1% at end-2012. telephony market is expected to decrease, as mobile services and VoIP-based offers will continue eating into the shares of fixed The number of fixed broadband internet connections advanced lines. The number of users recorded a slight increase, to 4.04 by 7.1% y/y to 3.8million in 2013, slowing down from the 7.9% million in 2013, compared to 4.01 million in the previous year. y/y advance in 2012, according to data from ANCOM. The pene- tration rate increased by 0.3 pps to 18.8% per 100 inhabitants The revenues from mobile communication services increased and by 4.6 pps to 46.2% for 100 households. marginally to EUR 2.36 billion in 2013 from EUR 2.3billion in 2012, thus returning on positive territory after four years of The number of Romanian domains (.ro) has grown rapidly in decline, according to an analysis of Bursa newspaper based on recent years, to almost 710,000 in December 2013, compared financial results of the telecom operators reported to the finance to 575,000 at the end of 2011, 500,000 in 2010 and 68,000 at ministry. The telecom revenues were impacted by the economic the end of 2004. crisis, maturing market and lowering tariffs in the past five years, Bursa commented. The Romanian e-commerce market consists of approx. 4,500 online stores, 1,000 more than in 2012, according to the esti- Mobile telephony services witnessed a light recovery in mates given by the main players. Of the total number of e-shops, the number of active users in 2013, when the total number of over 1,000 are enrolled in and certified by the RomCard 3D active users inched up by 0.3% y/y to 22.9million, according to Secure standard, compared to 781 stores in 2012. data released by the market regulator ANCOM in April 2014. The number of prepaid card users increased by 0.2% y/y, while “The Romanian e-commerce market has expanded steadily the number of subscription-based customers rose by 0.5% y/y YoY with 33-35%. There are little, if at all, industries which still in 2013. At end-2013, there were 22.9mn of mobile telephony register such an increase. Even if in other neighbouring countries active users, of which 13.5mn prepaid and 9.4mn subscription- such as Poland, the Czech Republic and Hungary, the eCom- based. The penetration rate of mobile telephony thus reached merce market is more developed, Romania presents a fantastic 113.9% per 100 inhabitants, up from 113.5% at end-2012, but growth potential and is high priority for investors when it comes lower than 116.4% at the end of 2011. The number of users to Eastern Europe,” says Andrei Radu, Founder & CEO of GPeC of bundled services surged by 28% y/y to a total of 8.7 million (Romanian eCommerce Awards Gala, one the most important in 2012, according to the regulator data. The number of users eCommerce events in Romania). more than doubled compared to the first half of 2011, which reflects increasing customer demand for several telecom services The media purchased together, at a more convenient price. The penetration 2013 marked the first steady year for the media industry of rate for bundled services reached 51.8% per 100 households following the economic downturn in 2009, which had hit at end-2013, from 56% at end-2012 the industry, hard, and the same stability is expected for 2014. During 2007-2012 the online became the favorite platform The Internet as traditional media lost investment share. The broadband internet penetration remains much below the EU average, despite the rapid increase in the recent years, reaching Television remained the main platform though but it remained 56% in 2013, below the 76% EU average. The number of broad- flat at the level of 2012 at 193 million EUR and prospects for band connections in Romania increased from 300,000 in 2008 to 2014 look the same, according to Media FactBook Romania. 3.8 million in 2013 and is expected to continue growing, to reach 4.5 million in the next four years. CME maintained leadership both in terms of audience and revenue followed by INTACT, KANAL D and SBS Broadcasting. The number of mobile broadband connections surged by 34.7% y/y to 13.6 million in 2013, backed by the 58.2 y/y rise of mobile Intact Group has been challenging CME’s leading position subscriptions or dedicated extra-option connections, data from following some major acquisitions from CME. The two media the telecom regulator (ANCOM) show. groups are expected to continue their leadership battle by changing formats and introducing new programs.

Investing in Central Europe 105 Romania

During the past year TV stations improved the quality of their Some of the key moves of the industry included the launch of programs and increased their audience share by broadcasting “Paptot” by BP Publishing (the editor of Forbes) and Manager already existing successful shows and news investments. Talent Express by Medien Holding. Ringier closed the print version of shows have continued to dominate the TV landscape as PRO TV “Baby” magazine switching to online while Intact Publishing continued to broadcast new editions of “Romanians Got Talent”, closed “Income” magazine. Adevarul Media also decided to “The Voice of Romania”, “Masterchef” and Antena 1 with shows manage their sales internally and took over Red Media, the sales such as “X Factor” and “Top Chef”. house selling advertising space for Adevarul Holding publications. In its turn, burda International GmbH acquired Sanoma Hearst Prima TV is also going through changes following its acquisi- Romania thus becoming one of the top players with over 35 tion from Pro Sieben by Cristian Burci, who also owns Adevarul publications in its portfolio and over 40 online media services. Holding. Starting April 2014, Intact Grup closed GSP TV and launched Radio ZU TV channel which is expected to build upon The Economist brought on the market “Intelligent Life” bimonthly Radio ZU’s brand, the number one radio station in Bucharest. and Medien holding launched “Ski Pass”, a niche magazine dedi- Antena 2 was rebranded as Antena Stars with a new program- cated to seasonal sports. ming grid. Mediafax group, one of the main players in the print media, With Internet penetration reaching more than half of the Roma- readjusted their business by closing PRO TV Magazin and “In nian households, digital platforms are also expected to grow Style” magazine. Also some publications had to change their even though they have not capitalized on their potential as yet. periodicity: “Pro Sport” and “Pro Motor” became supplements to Also with the high mobile phone penetration (113.9%) and Ziarul Financiar business daily. the increased use of smart phone devices, more revenues are expected in this area and a switch from traditional TV and media In 2013, the top investors remained the same as in 2012, oper- in general will become more pronounced. ating in cosmetics (EUR 38 million), mobile telecommunication (EUR 36 million) and medical products (EUR 31 million) industries. Apart from Bucharest, Transylvania is leading in terms of adoption rate followed by Muntenia and Moldova. Prospects for 2014 show that the total net media market will remain flat with a continued decline in outdoor advertising (-2%) Romanians are spending more time than ever online, second and print (-10%). TV and radio will keep investment levels while after Ukraine in terms of number of hours per week (18.6 hours online is expected to grow by 8%. versus 21.7 hours). Romanians’ favorite destinations while online are google.ro, Facebook, youtube and Yahoo. Furthermore shop- ping online is constantly increasing, as in 2013 total spending 7. The Most Active Industries/Sectors reached 600 million EUR. Agriculture Agriculture, a sector in turmoil for more than three years and Radio market had also a year of stagnation with an audience which contributes annually with 6-7% of GDP, brought EUR comparable to 2012. Audience is more and more attracted to 18.5 billion into the economy in 2013, the best result in history, radio streaming and “in the car” listening favored by weekend marking a28% increase on 2012. In 2013, business growth in tourism and affordable modern digital devices. agriculture came on the background of good weather which sustained productivity for crops of wheat, corn, sunflower or Some of the most important changes for the radio market in rapeseed, but also gave a fresh breath for animal breeders who 2013 were the fact that Radio Guerrilla ceased to broadcast were defeated by high feed prices after the drought-plagued after losing their license and the fact that Greek media holding summer of 2012. Antenna Group Company bought Kiss FM, Magic FM, One FM and Rock FM. According to the National Institute of Statistics, Romania exported during the period January to April 2014 over 1 million Print media has continued its decline throughout 2013 and tons of wheat worth EUR 232.5 million. Third world countries to forced publishers to offer more attractive packages. which Romanian producers exported wheat include Congo (over 25,300 tons worth EUR 5.2 million) and Morocco (29,500 tons worth EUR 6.2 million). Also last year, the bulk of the 4.7 million tons of exported wheat, worth EUR 990 million, went to Sri Lanka, Congo, Mauritania, Nigeria, Vietnam, etc.

106 Starting 1January 2014, Romania is obliged to deregulate its Recently, German group Daimler announced that they intend to property market under terms of its EU accession treaty. This will invest EUR 300 million in their existing factory in Sebes to turn remove restrictions on land acquisitions by foreigners. However, it into a major center for the production of Mercedes gearboxes. enterprising investors from abroad have already purchased This would put Alba County on the map of the major auto 10% of the agricultural land in the country via locally registered production centers in Romania and the region. companies. In terms of funding, in 2012 Romania managed to draw EUR 2.4 billion, according to Agerpres. For the period Pharmaceutical and healthcare market 2014-2020, Romania has at its disposal a EUR 7.2 billion budget In 2013, the Romanian market for pharmaceuticals was esti- from European funds for rural development. mated at RON 11.75 billion (EUR 2.65 billion), which means only 0.3% more than in 2012. Manufacturing Manufacturing industry in Romania is the main economic growth Breaking it down by segment, the sales to hospitals edged down engine and is strongly related to export performance. This year’s by 0.5% to RON 1.58 billion (EUR 357 million) last year, while positive results have been determined by some structural improve- those to drug stores virtually stagnated at RON 10.1billion (EUR ments in the local economy due to increased production capacity 2.3 billion). Out of the drug store sales, the sales on prescription of the automotive industry as well as improved product quality. (Rx) narrowed 0.8% to RON 8.38 billion (EUR 1.89 billion), while OTCs on the opposite expanded by 6.6% to RON 1.77 billion In 2013, Romania’s industrial output rose by 7.1%, due to (EUR 402.8 million). the increase in manufacturing, which saw a 4.5% hike in the first 11 months of 2013 compared with the same period of Cegedim is predicting a 2.7% y/y increase in the value of 2012, according to data from the National Institute of Statistics the Romanian pharmaceutical market this year, although it has (INS). Large industrial groups recorded increases in turnover in based this prediction mainly on the updating of the reimbursement the capital goods industry (+14.4 percent), the durable goods list. However, with this now being placed under review, there is no industry (+4.6 percent), the current goods industry (+2.9 percent) guarantee that the update will take place anytime soon. and the intermediate goods industry (+1.0 percent). The overall turnover in industry (domestic market and foreign market), in The prices of both locally-produced drugs and imported drugs nominal terms increased 4.2% in the first 11 months of 2013 are controlled by the Ministry of Health, except for OTCs and compared with the same period of 2012. food supplements. There has been free pricing for OTCs since 2002.Manufacturers should notify the Ministry of Health about Automotive the prices of their OTC products on a quarterly basis. Over the last years, the automotive industry has been one of the most profitable sectors in the Romanian economy. According In April 2013, the Romanian healthcare minister blocked to the Association of Romanian Car Manufacturers (ACAROM), the parallel export of oncology medications as a temporary the automotive sector represented 11% of the Romanian GDP measure in a move to keep the medicines for Romanian patients. in 2013. In 2013, the Romanian brand Dacia (Renault group) dominated the Top 10 brands and represented almost a third The pharmaceutical companies have been increasingly cautious of the total passenger car registrations. Also, the Volkswagen regarding their portfolios since the introduction of the controver- brand was a success on the Romanian market, surpassing Skoda sial clawback tax in 2012 (a quarterly contribution for releasing at a small difference. Some 410,959 cars were produced in onto the Romanian market of drugs included in national health Romania in 2013, representing a growth of 23.7% in comparison programs, used by persons in home treatments whether or not with 2012. No light commercial vehicles have been produced. In they contribute to the cost, based on medical prescription, by the first quarter of 2014, 37,430 cars were manufactured, which persons undergoing hospital treatment and also drugs funded by was 0.2% higher vs. the first quarter of 2013. the National Health Insurance Fund and by the Ministry of Health) and started to adjust product assortment in order to avoid Planned investments refer to the following: situations in which they become liable to pay back significant amounts. Some producers chose to remove prescription-based •• In 2014, TRW plans to open a factory in Roman to produce medicines that are no longer profitable under the current taxa- airbags; tion system, while at the same time, paying increasing attention •• Lear announced that a new car seating facility will open in Iasi to their OTC portfolios. in 2014.; •• Daimler will invest EUR 300 million in its Sebes factory to produce a new gear box from 2016.

Investing in Central Europe 107 Romania

The main associations in the field are requesting a new law to The healthcare industry in Romania has been one of the most change the clawback tax mechanism for generic drugs. This dynamic sectors for investment over the past years, maintaining aims to boost generic drug uptake within the healthcare system. growth throughout the financial crisis. Most developments The generic drug industry in Romania has argued in favour have been driven by private health services, diagnostics and of calculating the clawback tax on manufacturers’ prices and pharmaceutical retail and distribution. Yet the transformation of not final consumer prices, and for a cap to be introduced on the Romanian healthcare landscape is still in the early stage, with the amount the generics sector has to pay relative to multina- “white spaces” and areas for development across most segments. tional drugmakers operating in the Romanian market. The sector has seen multiple private equity transactions and may increasingly consolidate. Some components of it, like long term The Romanian market thus follows the same pattern in care, have not yet received the attention experienced in other EU the CEE region, where the pharmaceutical market’s growth is countries. concentrated on the OTC segment. Nonetheless, we note that the good dynamics of the OTC segment has limited impact The Romanian people have to cover 40% of the price of phar- on the Romanian market- as the bulk of sales is generated by maceutical drugs, as Romania ranks in the bottom places in the prescription-based medicines. Europe in terms of Government support for patients who need drugs, states the Romanian Association of the International Drugs By 2023, OTC drugs are forecast to represent 16.39% of the total Producers (ARPIM). Romania ranks low also in terms of budget market, down from 18.21% in 2013. In local currency terms, weight allocated to health from the GDP, around 4% in 2012, the sector is expected to post CAGRs of 4.7% for the 2013-2018 much below the European average of 9%. period and 5.7% for the 2013-2023 period. For the year 2014, the Government of Romania allocated 4.3% of GDP (EUR 6.15 billion) to the healthcare sector, a very low On the production side, there are only a few significant domestic percent compared with the average percentage of GDP allocated players left, and during the next few years these are expected in East Central European (6.7% of GDP) or Western Europe to be acquired by foreign companies-attracted by Romania’s (9.8% of GDP). In the last two years the budgetary allocations for relatively large market, fast growth and low cost base. According healthcare were 4.4% in 2013 and 4% in 2012. to BMI, the Romanian pharmaceutical market offers significant growth opportunities for drugmakers. The Romanian market is Real Estate and Constructions characterised by an ageing population and a large, unaddressed In 2013, the real estate market was more dynamic in terms of disease burden. Pharmaceutical expenditure is expected to reach transactions, new supply and strategic moves. The number of RON18.73bn (US$4.85bn) by 2018, posting a compound annual real estate transactions progressed by 16.9% y/y in 2013 and growth rate of 6.1% in local currency terms and 3.1% in US approximately 114,500 sqm of new modern retail stock were dollar terms. added to the market. Prospects are encouraging for 2014 as well, considering that in February alone there were seven retail projects In June 2011, The Romanian Ministry of Health classified all under construction only in Bucharest. the public and private hospitals from Romania in five categories of general hospitals, and two categories of specialized (branch) In 2013, the value of investments in commercial real estate hospitals. After this classification, depending on the category projects reached EUR 343 million, up by over 100% y/y, they belong, the hospitals are receiving differentiated fundings according to a study of real estate broker CBRE released earlier from National Health Insurance House. in March. Also, 15 transactions were recorded for 30 real estate assets, with an average value per transaction of EUR 23 million. Following the classification, there are 460 hospitals in Romania: The construction works index edged down 0.6% y/y, in full •• 393 public hospitals; year 2013, driven downwards by the poor performance in •• 69 private hospitals. the construction of new non-residential buildings. The construc- tion sector thus returned in the negative area after two years Private Medical Centers (with 12 hours hospitalization) first of slight recovery in 2011-2012. The construction works index started to appear in Romania in 1995 and are concentrated in in 2013 was 24% below the pre-crisis peak level reached in cities with populations over 150,000. They are split into two cate- 2008;however it hovered 3.6% above the lowest level reached gories: Private Outpatient Medical Centers and Specialized Clinics. during the recession period, in 2010. There is a high concentration of Private Outpatient Medical Centers in Bucharest (100), almost the same as the number of such centres located throughout the rest of Romania (over 90).

108 The activity in the construction sector seems to have stabilized on The Greek-held banks operating in Romania maintained their a low level, despite the slight annual decline recorded in 2013. market share in terms of assets in 2013, ending the year at Despite the authorities’ efforts, many large scale projects are a level of 12.3%. Compared to 2008, they lost over 5pps of their delayed or stalled, few new projects are launched, while ongoing position. The French-controlled banks registered a13.5% market ones are facing financing difficulties. share becoming the second largest group of banks by nationality after the Austrian banks (37.1%). The number of residential building permits dropped by 0.2% y/y in 2013, slowing down from the 4% y/y decline in 2012 and Some 90% of the banking sector assets belong to foreign banks. 6.6% y/y decrease in 2011, statistical data show. According to NBR, the top five commercial banks – BCR (17.5%), BRD, Banca Transilvania, UniCredit Tiriac Bank and CEC Bank – The gross value added by construction declined by 1.2 y/y in account for 54% of the total banking sector assets. 2013, according to the latest release of the national forecasting body CNP and is expected to rise in 2014 by 6.1% y/y and further The main events taking place in the banking sector last year slow down to 5.4% y/y in 2015. The production in construction were: is also projected to rise by 6% y/y in 2014 and further 5.3% y/y •• UniCredit and Raiffeisen Bank acquired RBS and Citi Bank in 2015. (retail) portfolios, respectively.

The transport projects will benefit from EUR 9 billion in EU •• Piraeus sold the assets structure of former ATE Bank to funding under the 2014-2020 financial frame, according to a group of local investors the Romanian ministry of European funds. Part of these funds, •• Emerging Europe Accession Fund acquired MKB (Nextebank) worth EUR 6 billion in total for regional developments, will in fact •• Romanian International Bank was sold to Getin Golding be used also for transport infrastructure. (Poland).

In 2013, the major transactions included the sale/acquisition of Foreign financial groups continued to drain money from Romania City Mark Mall, Mega Mall Bucharest, The Lakevies, Vulcan Value in 2013 – bringing the second deleveraging episode (2011-2013) Center, Severin Shopping Center, Deva Shopping Center, Galleria to over EUR 6bn, compared to EUR 7.4bn in 2009. BIS-reporting and Hotel Continental Cluj-Napoca. banks’ exposure to Romania, measured as % of country’s As of 1 January 2012, the 5-year term prohibiting the acquisition banking assets, decreased in 2009-2013 to 18.7%. The share is of land for secondary residences or offices by individuals and well above emerging Europe’s 13.4% average. legal entities from EU member states who are not residents of Romania was waived. Romania’s leasing market decreased by 9% in 2013, compared to 2012, to EUR 1.24 billion, the general secretary of the country’s Financial services financial companies association ALB, Adriana Ahciarliu, said. Although the global economic crisis has highlighted vulnerabili- ties and hit the financial services industry, the local banking sector Last year’s new financing was split among the passenger and managed to maintain its assets at EUR 81 billion (RON 363.3 commercial vehicles segment, (71%, EUR 879 million), the equip- billion) in 2013. Banking system profit for 2013 amounted to EUR ment segment, (25%, EUR 315million) and real estate (4%, EUR 11 million (RON 48.6 million), after 3 consecutive years of losses. 49 million).

The Romanian banking sector seems also reasonably well posi- ALB Romania’s press release stated that, in accordance with tioned to withstand any internal or external liquidity shocks, due the national economic growth supported by agricultural produc- to healthy capital accumulation over the last few years. Roma- tion and export growth, financing in financial leasing proved to nia’s capital adequacy ratio has risen to 15.1% in Q413, from be a consistent supporter of the financing needs of these sectors. a level of 13.9% the previous quarter. A recent Financial Stability Thus, compared to 2012, the year 2013 registered an increase in Report from the NBR found that in an adverse scenario (stipu- agricultural equipment from 14% to 23%, similar to the equip- lated as 20% currency depreciation or a prolonged recession) ment financing for the wood processing industry (up from 3% to healthy buffers would allow the sector’s solvency ratio to remain 4%), the financing of food and beverage (up from 2% to 5%), above 10%. and the car service industry (up from 1% to 3%).

Investing in Central Europe 109 Romania

The Romanian insurance market closed 2013 with a negative Generale S.A (EUR 1.5 billion), Banca Transilvania (EUR 0.8 billion), financial result of EUR 290.5 million (RON 1.28 billion), according Electrica (EUR 0.8 billion), and Transgaz (EUR 0.5 billion).Three to the Annual Report of Financial Supervisory Authority (ASF). Of new companies were privatized starting with the third quarter of the 37 insurance companies operating on the Romanian market, 2013. The Romanian Government sold 10% in Nuclearelectrica 17 entities reported positive financial results (profit), while (nuclear power generation), 15% in Romgaz (natural gas produc- the other 20 companies reported losses. tion) and 51% in Electrica (electricity distribution). Electrica’s IPO, worth EUR 444 million, is the largest in BSE’s history. More than Total subscribed premiums registered a 0.9% decrease y/y to 80% of the securities sold in Electrica’s IPO were shares, which EUR 1.84 billion according to ASF, of which 80% belong to are available for trading at BSE. Romgaz was the second largest the general insurance segment and 20% to life insurance. IPO, worth EUR 383 million. Over the past years the insurance market has come to be dominated by international groups such as Vienna Insurance In 2012, the BSE was declared by Bespoke Investment Group, Group (VIG; Austria), Uniqa (Austria), Allianz (Germany), ING a UK-based brokerage firm, as the 4th fastest growing stock (Netherlands), Groupama (France) and Generali (Italy) The top ten exchange in the world, with a growth of 21.4%. companies account for around 80% of gross premiums in local currency terms, and the top five hold more than 50%. 8. Industrial Parks The Romanian Pension Funds’ Association (APAPR).data shows Industrial parks in Romania have been promoted through govern- net assets of mandatory pension funds (Pillar II) reached ment ordinance no.65, approved by Law no. 490 in July 2002, RON 13.94 billion (EUR 3.94 billion) at the end of 2013 and as the authorities showed serious commitment to boosting busi- the number of contributors reached 6 million, while voluntary ness investments in the Romania. pension funds (Pillar III) have assets of RON811.6 million (EUR 181 million) and 313,348 contributors ( 7% more than in 2012). The title of industrial park is granted by an order of the Minister The average annualized yield of the private pension funds regis- of Administration and Interior pursuant to assessing the docu- tered 10.45% for Pillar II and 10.39% (average risk) and 11.69% mentation lodged only by a partnership. (high risk) for Pillar III, in 2012, according to CSSPP. Establishment of an industrial park is based on the association Stock exchange in participation between central and local public administration The Bucharest Stock Exchange (BSE) became operational in 1995, authorities, economic agents, research institutes and/ or other having an electronic system allowing online trading of stock, interested partners. The purpose of setting up industrial parks fixed- income securities, money market instruments, rights and is to stimulate economic and social development, to perform warrants. It is the main market for listed securities. RASDAQ, the transfer of technology, to induce investment inflows. the system for over-the-counter share sales, was launched shortly after in 1996. The BSE absorbed in 2005 the RASDAQ securities Industrial park license may be granted only to companies acting exchange, thus providing greater liquidity and choice to potential solely in the industrial parks field, called the managing companies investors. The BSE stocks are included in the FTSE Mondo Visione (“Administrator –Company”). Exchanges index as of November 9, 2010, in the BET index of as of March 21, 2011, as of June 17, 2011 in the Dow Jones None of the business entity associates that use the utilities and/ Global Exchanges, as well as of September 19, 2011 in ROTX or infrastructure of the industrial park may hold control, directly index. or indirectly, over the Administrator-Company. The exploitation of industrial parks may be performed by Romanian legal entities and The total market capitalization of the Bucharest Stock Exchange branches or representative offices of foreign legal entities, based reached EUR 30 billion at mid-2014, after a steady increase over on commercial agreements concluded with the last 2 years with a CAGR of 25% since January 2012. This the Administrator-Company. was due to the increase in the number of companies on the regu- lated market by 5 to 84 issuers, of which IPOs added EUR 4.4 The following benefits are granted for establishing and devel- billion in market cap, and a 20% CAGR of the main index BET, oping an industrial park: calculated since the beginning of 2012.The largest companies by •• Exemption from the payment of fees charged for changing market capitalization are: Erste Group Bank AG (EUR 8.2 billion), the purpose or for withdrawing the land related to the indus- OMV Petrom S.A. (EUR 6.1 billion), S.N.G.N. Romgaz S.A. (EUR trial park from the agricultural circuit, for the partnership 3.0 billion), Fondul Proprietatea (EUR 2.7 billion), New Europe holding the title of industrial park. Property Investments PLC (EUR 1.7 billion), BRD – Groupe Societe

110 •• The local authorities may grant tax deductions, pursuant to Its membership has also helped solidify institutional reforms by decisions of the local or county councils, for the real estate subjecting government policies to EU scrutiny and thus offering properties and lands transferred to the industrial park for reassurance to potential investors. However, judicial weak- usage purposes, as well as other facilities, in accordance with ness, legislative unpredictability, corruption and bureaucratic the law. inefficiencies, among others, continue to mark the investment environment. •• According to article 257 (1) in the Fiscal Code, no tax is levied on the land inside an industrial park, and pursuant to article Capital inflows are free from constraint. Romania concluded 250 paragraph 9 in the Fiscal Code, there is no tax levied on capital account liberalisation in September 2006 with the decision the buildings or facilities inside industrial parks either. to permit non-residents and residents abroad to purchase deriva- •• The initiative was in line with other incentives, mostly fiscal, tives, treasury bills and other monetary instruments. A broad which Romania has sought to provide in recent years to small range of (both tax and non-tax) investment incentives is available and medium sized enterprises or to certain types of economic to local and foreign investors. Tax incentives include special activity in areas identified as disadvantaged or in free trade incentives for expenses related to R&D, dividend tax exemption zones. under certain conditions, corporate tax exemption for reinvested profit in equipment and machinery, reduced VAT rate of 5% for In June 2013, Romania housed 52 industrial parks, according to the sale of buildings under a social policy project and local tax the Ministry of Economy. exemptions for businesses located in industrial parks or scientific and technological parks. More and more companies have shown interest in such parks because of the variety of fiscal facilities. In order to fully develop Starting with January 1, 2013, the VAT cash system becomes an industrial park, an initial investment is needed which may vary effective, under which chargeability of tax occurs on full or partial from EUR 10 million up to 30 million; however the projects may cashing of delivery of goods or the rendering of services. Starting easily and rapidly attract investments of up to EUR 250 million. 1st of January 2014, the system is optional for taxpayers who obtained in the last calendar year a turnover up to EUR 500,000. Although some of the industrial parks operate below capacity, VAT cash system applies only to transactions where the place of there are successful examples such as Tetarom Cluj, ICCO, delivery or the place of supply is deemed to be in Romania. Metrom, Prejmer Brasov, Automecanica Medias and Ploiesti West Park. About the latter, the company that developed it, Alinso In addition, there are employment incentives for special Group, says it is the largest logistics center in South-Eastern categories, as well as state aid schemes for large investments. Europe, in which they will invest a total of EUR 750 million. Under certain conditions, the state may cover the salary costs and related social contributions for a limited period of time. An alternative for real estate developers looking for possibilities A private investor in Romania may benefit from business aid for unused land could be selling or renting the plots to investors from EU funds (structural and cohesion); incentives often take interested in solar energy. the form of development grants. Romania has six Free Trade Zones (FTZs), all located in ports with one exception, the newly established Arad-Curtici FTZ. Because of its location, the latter 9. Investment Incentives could become one of the most attractive for investors. General Romania’s attractiveness for investment is boosted by: one of provisions include unrestricted entry and re-export of goods and the largest markets in Central and Eastern Europe; its strategic an exemption from customs duties and VAT. The law also permits geographic location at the crossroads of the traditional commer- the leasing or transfer of buildings or lands for terms of up to 49 cial and energy routes connecting the EU, Asia and the Balkans; years to corporations or natural persons, regardless of nationality. extensive sea and river navigation facilities; a well- educated Foreign-owned firms have the same investment opportunities yet cheap labour force; and an extensive network of double tax as Romanian entities in FTZs. Since 1 January 2007, the European treaties. Community Customs Code applies to Romania’s FTZs.

Upon the country’s accession to the EU on 1 January 2007, Romania took steps to strengthen tax administration, enhance transparency, and create legal means to resolve contract disputes expeditiously.

Investing in Central Europe 111 10. Foreign Direct Investment (FDI) The central characteristic of the Romanian cuisine is its great Romania actively seeks foreign investments and it has been variety. It is a cuisine influenced by repeated waves of different a leading FDI recipient in South-Eastern Europe. The country’s cultures: the ancient Greeks, with whom Romanians traded; legal framework for FDI, encompassed under a substantial body the Romans, who gave the country its name; the Saxons, who of law subject to frequent revision, provides national treatment settled in southern Transylvania; the Turks, who for centuries for foreign investors, guarantees them free access to domestic dominated Romania; as well as Slavic and Magyar neighbours. markets, and allows them to participate in privatisations. Foreign The main ingredients used by Romanian chefs are meats such investors are entitled to establish wholly foreign-owned enter- as pork, beef and lamb, fish, vegetables, dairy products and fruit. prises in Romania, while there is no limit on foreign participation in commercial enterprises. Foreign firms are allowed to partici- There are lots of festivals and public holidays in Romania, espe- pate in the management and administration of the investment, cially during the summer or winter seasons. Some are linked to as well as to assign their contractual obligations and rights to the widely practiced Orthodox religion, some mark life events, other Romanian or foreign investors. There are no restrictions on and others represent stages in the agricultural calendar. foreign investors acquiring property or land. However, for a tran- sition period of seven years after Romania’s accession to the EU, The main public holidays are Easter, New Year’s Day, Labor foreign investors cannot purchase agricultural land or forests and Day on May 1st, Rusaliile (celebrated 50 days after Easter), forestry land (except for farmers acting as commercial entities). The Assumption of the Blessed Virgin Mary into Heaven on August 15th, National Day on December 1st, and Christmas on Foreign direct investments reached EUR 3.4 billion in Romania the 25th and 26th of December, each with many public celebra- in 2009, according to data from the National Bank of Romania tions and unique festivals of their own. (NBR), taking the entire stock of FDI to the country to almost EUR 50 billion. In 2013, FDI volume totaled EUR 2.7 billion, the highest level in the last four years, according to data from 12. Weather and Climate NBR. The year 2012 saw the first rise in FDI after the financial Romania has a temperate climate with four distinct seasons. crisis hit, reaching EUR 2.1 billion. Spring is pleasant with cool mornings and nights and warm days. Summer is quite warm, with extended sunny days. The hottest areas in summer are the lowlands in southern and eastern 11. Expatriate Life Romania where 37ºC is often reached in July and August. For travellers, Romania offers the opportunity to see many inter- Temperatures are always cooler in the mountains where it tends esting and wonderful places. The country offers something for to be more humidity and rainfall all year round, as fog and mist everyone: beautiful landscapes, museums, spas, old cities, castles, are more common at higher altitudes. On the coast, summers are restaurants, shopping, cinemas, malls and more. There are many pleasant and winters are mild. great places to visit in Romania, such as: the Danube Delta, Sighisoara Citadel, Rasnov citadel, Bran Castle, Histria citadel, In autumn, days are generally warm with cool evenings. October Painted churches in Moldavia and the Olt Valley, Peles Castle in brings a display of colourful autumn foliage, but it can also , the Merry Cemetery (Cimitirul Vesel) in Sapanta, Sibiu, etc. be quite cold and rainy. Most rain falls in the autumn and in the spring. Largest urban centers in Romania are Bucharest (Capital City), Constanta, Iasi, Brasov, Cluj-Napoca, Timisoara, , Ploiesti. Winters are cold, with temperatures below 0ºC, especially Accommodation in Romania differs significantly between at night when temperatures can dive down to -15ºC. Frosty the capital, Bucharest, and the rest of the country. winds are common and snow covers most of the country from Single-family houses are common in villages and small towns, December to mid-March. Very warm clothing is recommended in whereas blocks of flats and housing estates are more frequent in winter. big cities. All over the country you can find houses and flats for rent. The cost of rental varies a lot depending on the location, ease of access, condition of the property, etc.

112 Slovakia

1. General Overview of the Economy 2. Tax Structure Since joining the EU in 2004 the Slovak economy has under- Tax Administration gone very dynamic development. Slovakia has been praised for the implementation of significant economic reforms. Stability Registration Requirements in the financial sector, integration into OECD and NATO, An entity or individual that obtains a license to perform or starts the adoption of the euro and the continuous improvement of performing business activities in Slovakia is obliged to register the business environment has helped the Slovak economy speed with the relevant Tax Authorities until the end of the calendar up its economic growth. The steady inflow of FDI proves that month following the month in which the entity obtained permis- the country has become a favorite destination for foreign inves- sion or authorization for performing business activities. tors. This is especially true in the industrial and business services Statutory time limit to assess additional tax sectors, which saw a big inflow of FDI in the last years. Slovak tax law allows the Tax Authorities to review tax periods for a period of five years from the end of the calendar year in which Slovakia has an export-oriented economy, its main trade partners the tax return should have been filed. With respect to the Slovak being Germany and the Czech Republic. The services sector is Tax Administration Act, effective from 1 January 2010, a seven- the main contributor to GDP, with a share of over 60%, followed year period replaces the five-year period for a tax audit if a tax by industry (over 35%) and finally agriculture. For 2014, GDP loss positions was recorded by a taxable person. growth is projected at 2.4%, falling behind the record high of 10.4% in 2007. Unemployment continues to be significant at The application of the respective provisions relates to financial over 13%, mainly in the south and east of the country. year 2010 onwards.

Political System If, prior to the expiration of such time limit, the Tax Authori- Slovakia is a parliamentary democracy with a unicameral Parlia- ties initiates an action with its aim being the assessment of tax, ment, the National Council of the Slovak Republic (“Council”). another period of five years commences from the end of the year in which the taxpayer was notified of such an action. In this case, The 150-seat unicameral Council is the highest legislative body of the tax may be additionally assessed no later than 10 years after Slovakia. Delegates are elected for a four-year period on the basis the end of the year in which the duty to file a tax return arose. In of proportional representation. The Council has budgetary as well cases when double tax conventions were applied, the statute of as legislative powers. limitation expires after 10 years from the end of the year in which the tax return was due. The Slovak head of state is the President, elected by direct popular vote for a five-year period. Although mostly a ceremonial Tax returns figure, the President can use his veto to stop legislation proposed Generally, the tax year coincides with the calendar year. by the Council. The taxpayer can select a fiscal year as its tax year for corporate taxes. For certain types of tax (for example VAT, excise duties) The most executive power lies with the head of government, the tax period is the calendar month or calendar quarter. Corpo- the Prime Minister, who is usually the leader of the largest rate income taxes are assessed on the basis of annual returns, parliamentary party. The Prime Minister is appointed by the Presi- which must be filed within three months following the end of dent. The rest of the cabinet is appointed by the President on the taxation period. The tax payer must also calculate and pay the recommendation of the Prime Minister. the calculated tax by the filing date. A taxpayer must file an addi- tional tax return if it finds out that the tax liability is higher than A 13-member Constitutional Court has the power to challenge the tax liability declared in the tax return legislation on grounds of unconstitutionality.

Investing in Central Europe 113 Slovakia

Corporate Income Tax Transfer Pricing Corporate Income Tax Rate The transfer pricing rules apply to cross-border transactions Effective from 1 January 2014, the corporate income tax rate is between economically, personally or other business-related 22%. foreign entities. An economic relationship is defined as having direct or indirect ownership or voting rights of more than Calculation of the Tax Base 25% as well as a business relationship between related indi- Tax is paid on the taxable profit derived from the profit reported viduals. A personal relationship is defined as a participation in in the financial statements according to Slovak Accounting the management or control of the other party, also through Standards and adjusted for deductible and non-deductible items. persons or shareholders of the company and their related The tax base of taxpayers using the double-entry bookkeeping individuals. system is assessed on the accruals basis. For taxpayers applying IFRS instead of Slovak Accounting Standards, further adjustments If the difference between the prices agreed between the Slovak are required. entity and a foreign related party and the arm’s length price is not sufficiently justified (and supported by appropriate docu- Generally, expenses recorded by the taxpayer are tax deductible if ments), such a difference will be subject to additional taxation they can be proved to have been spent on generating, ensuring and penalties, provided that the transfer pricing adjustment and maintaining taxable income, unless they are: increased the tax base in Slovakia. •• Partially deductible up to a certain limit determined either The adjustment will be determined with reference to the condi- by the Slovak Income Tax Act (ITA) or by a special law (for tions that would arise among independent persons in a similar example the Act on Travel Allowances); or business or financial relationship (the principle of independent •• Specifically stated as non-deductible in the Slovak Income Tax relationship). The following methods are used to determine Act. the adjustment: •• Comparison of the prices (the method of comparable uncon- Some expenses are deductible only after being paid. trolled prices, resale price method, cost plus method); Advance Payments •• Comparison of profits; or For corporate income tax purposes, advance payments are •• Combination of the aforementioned methods or any other required on a monthly or quarterly basis, depending on reasonable method, which is in accordance with the principle the amount of the company’s tax liability in the previous tax of independent relationships. period. They are paid on a monthly basis if the taxpayer’s tax liability for the previous tax period exceeded EUR 16,600 or The transfer pricing documentation is required on the managers’ on a quarterly basis if it ranged between EUR 2,500 and EUR services, purchase of stocks and material, loans, and other trans- 16,600. The tax administrator can rule on a different payment of actions within the group. advance payments. The purpose of the transfer documentation is to record Due to the latest amendment to the ITA, for the taxation periods the pricing methodology of the taxpayer’s non-arm’s length starting after 1 January 2014 it is necessary to re-calculate transactions, including its relationship with the related parties, the amount of the corporate income tax prepayments being paid the prices for services, loans and credit granted. The documen- based on the previous year’s tax base using the tax rate valid in tation should demonstrate that the pricing of the Controlled the tax period to which the tax prepayments relate, i.e. 22%. Transactions is in compliance with the arm’s length principle.

Tax Credit The documentation content depends on the circumstances and A tax credit is available in the form of a reduction of the corpo- conditions applicable to individual Controlled Transactions of rate tax liability. The taxpayer is provided with tax relief applicable the taxpayer and the transfer pricing method employed. for 10 years up to the amount approved by the Slovak govern- The documentation should be prepared separately for each ment for a specific investment project (please see Section 9 for Controlled Transaction or jointly for a group of Controlled Trans- further details). actions, ie several Controlled Transactions that are closely related, are of the same kind, have been made under identical conditions or are comparable from a function and risk perspective.

114 There are two types of reporting requirement, depending on Tangible Fixed Assets the taxpayer’s financial reporting. The Full Documentation Tangible assets are capitalized and depreciated if their value is requirement is applicable only to IFRS reporters and the Simplified more than EUR 1,700 and if their expected useful life exceeds Documentation requirement is applicable to non-IFRS reporters. one year.

If the documentation is not submitted when required, a penalty Tangible fixed assets are divided into four categories for of up to EUR 3,000 per request may be assessed. Penalties are depreciation purposes, and for each category, a period of not tax deductible. If the documentation is not provided, the tax depreciation is prescribed, as set out below authorities will also perform their own economic analysis and may adjust the price to the most unfavorable point of the arm’s Category Period of Type of asset length range. Adjustments may result in additional tax with appli- depreciation cable penalties and late payment interest. (Years) 1 4 Computers, cars and certain tools Regarding the investment incentives, the companies that were etc. granted specific investment incentives according to the Slovak 2 6 Machinery and equipment, furni- Investment Incentives Act No. 561/2007 have to apply the arm’s ture, vehicles for special purposes, length principle. In failing to do so, the companies would not etc. be able to utilize their tax credits granted in the year in which the prices with foreign related parties were not set arm’s length. 3 12 Production equipment, e.g. steam Should the tax authority request the transfer pricing documen- boilers and auxiliary equipment tation, the taxpayer is obliged to submit such documentation etc. within 15 days from the date of the request. As of 1 January 4 20 Pipelines, buildings of timber 2014, the transfer pricing documentation might be requested in construction, other buildings, etc. specific cases also outside the process of tax audit. The transfer pricing documentation should be submitted in Slovak. However, A Company may choose to depreciate assets either by using upon the taxpayer’s request, the tax authority may allow that the straight-line or the accelerated method. Once the method the transfer pricing documentation be submitted in a language for each asset has been selected, it must not be changed for other than Slovak. the entire period of depreciation. The accelerated method allows for higher depreciation claims in the early years of an asset’s life. Thin capitalization It is possible to interrupt the tax depreciation of tangible assets There are no thin capitalization rules in Slovakia; however, Slovak in some taxable periods and then continue as if the taxpayer government is currently considering their implementation in had not interrupted depreciation. In this way, the time period in the Slovak tax legislation. which the fixed assets are fully depreciated for tax purposes is prolonged. Tax Treatment of Losses Tax losses are deductible from the tax base. From 1 January Withholding Taxes 2014, the taxpayer may utilize tax losses incurred in FY2014 and Withholding taxes are paid on interest, royalties and other onwards within a maximum of four consequent taxation periods payments such as on lease rentals. Double Tax Treaties concluded after the taxation period in which the tax loss was declared. by Slovakia with a number of countries normally reduce Losses may not be carried back. withholding tax rates. Treaty rates can be applied directly if the contractual parties meet respective tax residency criteria. Depreciation If the interest and royalties are paid to residents of other EU Generally, fixed assets are depreciated for tax purposes by Member States and certain conditions are met, such payments the owner or lessee of the tangible or intangible fixed asset. are not subject to withholding tax. The basic Slovak withholding tax rate is set at 19%. From 1 March 2014, the withholding tax Intangible Fixed Assets rate at 35% shall be applied on payments made to tax payers of Intangible assets are capitalized and depreciated if the value non-contractual states (in general, states that did not conclude of the intangible is more than EUR 2,400 and if their expected a Double tax treaty with Slovakia). useful life exceeds one year, and if they were purchased or created by an activity of the taxpayer. The intangibles specified Dividends above can be depreciated in accordance with Slovak accounting Dividends paid as distribution of profit after tax, generated after rules. 1 January 2004 are not subject to Slovak taxation.

Investing in Central Europe 115 Slovakia

Collateral tax VAT Rate If a Slovak tax resident (company or individual) makes a payment The standard VAT rate is 20% (19% before 1 January 2011). abroad (except for payments made to taxpayers of EU Member As of January 2007 the Slovak VAT Act introduced a reduced VAT States) and these payments relate to specific Slovak-sourced rate of 10%. This reduced rate applies only to books, antibiotics, income, Slovak tax residents are then obliged to secure 19% certain pharmaceutical and sanitary products as mentioned in or 35% of the payments, unless the payment is subject to Annex 7 to the VAT Act. withholding tax, or unless the non-resident taxpayer submits a confirmation issued by the Slovak tax administrator that it is VAT Returns paying advance tax payments in Slovakia. The taxpayer is obliged The standard assessment period is the calendar month. If to remit withholding taxes within 15 days of the following month a turnover of less than EUR 100,000 in the previous 12 months is for the previous calendar month to the relevant tax authority. reached by a registered VAT payer, the tax period can be chosen If taxes are not paid on time or in an incorrect amount, the tax to be a calendar quarter. authorities may claim the due tax (including penalties) from the Slovak taxpayer that did not comply with the law. VAT returns must be submitted by the 25th day of the month following the tax period concerned. Where returns are submitted Considerations for Groups monthly or quarterly, payment in full must accompany the return, Slovak tax law does not provide for consolidated tax returns. At i.e. VAT for a relevant tax period is payable by the 25th day present, each company must file its own tax return and pay its of the following month. If the 25th day is a weekend/public own taxes. Losses can be deducted only from the tax base of holiday, then it is next working day. The VAT liability is regarded the entity that incurred the loss. as being paid within the statutory deadline, if the bank transfers the money from company’s bank account at the latest on the day Value Added Tax of deadline. Registration All individuals or legal entities that perform economic activities in Effective as of 1 January 2014 all VAT payers are obliged to file Slovakia are regarded as taxable persons. A taxable person with its all submissions (including filing of VAT return) with the Slovak Tax seat, place of business or fixed establishment in Slovakia is obliged Authorities electronically. Hard copy filing of VAT return is not to register for VAT purposes after exceeding turnover of EUR possible anymore. 49,790 within the 12 preceding consecutive calendar months. In general, the turnover consists of all performed taxable supplies in VAT transactions statements Slovakia. A taxable person can apply for voluntary VAT registration. A new obligation for Slovak VAT payers has arisen from January 2014 – filing of a VAT transactions statement. This statement A foreign entity without a registered office, place of business or shall reflect the information from individual invoices with respect fixed establishment in Slovakia performing taxable transactions to the following transactions: with a place of supply in Slovakia is obliged to register for Slovak •• Local supplies of goods and services; VAT purposes before the moment of starting a business activity which is subject to VAT in Slovakia, however there are some •• Local supplies of specific products on which the local reverse- exceptions stipulated in the legislation (e.g. when the VAT obliga- charge mechanism applies (e.g. agricultural products, mobile tion is shifted to the customer or upon importation of goods). phones, microprocessors, goods from iron & steel, etc.) provided (i) the tax base stated on the invoice exceeds EUR Effective from 1 October 2012, in certain circumstances, at 5,000 and (ii) both supplier and customer are VAT registered the time of VAT registration, taxable persons are required to in Slovakia; transfer a guarantee payment (either in cash or a bank guarantee) •• Input transaction where recipient of goods or services is to the Tax Authority’s bank account, which will be held for 12 obliged to pay VAT; months. The Tax Authority will determine the amount of the tax •• Local purchases of goods and services (only with the right to guarantee payment in range from EUR 1,000 to EUR 500,000. deduct the input VAT); The applicant is liable to transfer the guarantee payment within 20 days upon the receipt of the decision of the Tax Authority. •• Correction invoices (both received and issued). The tax guarantee payment will be used for any outstanding debts relating to the first 12 months after the guarantee payment was paid. Generally, the remaining amount of the interest-free guarantee payment will be paid to the registrant within 30 days from the end of the above 12-month period.

116 VAT transactions statement shall be filed electronically together •• In the case of importation, the taxpayer has the underlying with the VAT return to the Slovak Tax Authorities. Under specific customs declaration and the import VAT has already been paid conditions, if no transactions were performed, the VAT transac- to the customs authorities. tions statement for the respective month does not have to be filed. The deadline for the VAT transactions statement corre- Input VAT that relates to VAT-exempt taxable supplies cannot be sponds with the deadline of the VAT return, i.e. the 25th of deducted and becomes an expense of the taxpayer. These are, the month following the month of the VAT liability. for example: •• Financial services (e.g. the provision of consumer loans); If the VAT return is filed sooner than the 25th of the month •• Insurance services; or following the month of the VAT liability, the VAT transactions •• Supply and lease of real estate under certain conditions. statement should be filed by the same date as the VAT return at the latest. The supplies exempt from VAT with the right to deduction are, for example: Liability for VAT payment Effective from 1 October 2012, the VAT payer to whom •• Delivery of goods to other Member States to a person regis- the goods/services are/shall be supplied is liable for the VAT tered for VAT purposes in another Member State; stated in the invoice if the supplier: •• Transfer of own goods by a taxable person to another •• Did not pay this VAT; or Member State for one’s own business purposes; •• The international transport of passengers; or •• Became unable to pay this VAT; •• Export of goods or services. and the VAT payer knew, should know or could know about this fact by the tax point date. The customer is obliged to pay the VAT VAT Refund (or its part) that was not paid by the supplier within the deadline. In Slovakia, under normal circumstances, a VAT refund happens The Tax Authority of the supplier decides on assessing the VAT automatically. If a taxpayer is in a VAT refund position for payment to the customer as the guarantor and VAT payment a certain month (month A), the tax authority will wait for falls due within eight days after the decision was delivered to the VAT position of the following month (month A+1) and offset the customer. If the VAT is then paid by the supplier, the VAT paid the VAT due (month A+1) against the deductible VAT (month A). by the customer is returned to the customer. The outstanding balance will be reimbursed within 30 days of filing a VAT return for month A+1. If the VAT return is subject to Claiming Input VAT a VAT audit by the Tax Authority, the excessive VAT deduction will In general, the taxpayer is entitled to deduct VAT applied on be reimbursed within 10 days of the completion of the audit. goods and services used in the course of his business performed as a VAT-registered payer. However, input VAT cannot be VAT Refund for Foreign Entrepreneurs deducted from supplies linked with certain supplies, which are Foreign entrepreneurs without a place of business, branch or VAT-exempt without the right to deduction and from certain permanent establishment registered in Slovakia, which are not specific purchased supplies (e.g. refreshments and entertainment, VAT-registered in the Slovakia and which incurred Slovak VAT can etc). ask for a refund. If such persons have incurred VAT in Slovakia on the purchase of goods or services or on the import of goods, In order to qualify for an input VAT deduction, the following they will be entitled to a refund, provided they meet the condi- conditions have to be met: tions laid out in the VAT Act: •• They are registered for VAT in their country of establishment; •• A taxable liability arose for the taxpayer performing business Their country of establishment gives VAT refunds to Slovak activities; entities (reciprocity principle); and •• In the case of domestic supply, the taxpayer has an invoice •• The goods or services purchased, or goods imported must be issued by a supplier; used for the foreign entrepreneur’s business activities abroad. •• In the case of reverse-charged services and goods supplied with installation or assembly, the entry of the VAT in During the period for which the VAT refund is claimed, the company’s records for VAT purposes is sufficient for the foreign person must not have made any sales of goods or the deduction; supplies of services within Slovakia (with certain exceptions, •• For the acquisition of goods from other Member States, e.g. transport services and complementary services relating to the taxpayer has an invoice issued by the supplier; exported goods and goods under a customs regime, a supply of goods with installation or assembly). Investing in Central Europe 117 Slovakia

The refund can be claimed not later than six months after A person commuting to the Slovak Republic on a regular basis the end of the calendar year in which the VAT was incurred. (even daily) only for the purpose of performing dependent Generally, VAT shall be refunded within six months after activities is not considered a Slovak tax resident solely because the submission of the application. he spends more than 183 days here, i.e. the 183-day rule does not apply to commuters. Customs Legislation As the Slovak Republic is a Member State of the European The concept of economic employment was introduced from Customs Union, the customs legislation of the EU is directly 1 January 1999 and also applies to employees seconded by applicable in the Slovak Republic as in the other EU Member a foreign company to a Slovak company. It is no longer important States. The customs duty rates for goods are also unified in all EU in relation to income tax prepayments whether it is a foreign or Member States. a domestic employer that pays a foreign employee for his or her work. If a Slovak company issues orders regarding how the work The customs code allows the use of the following customs proce- should be done, it is considered to be the employer of the expa- dures when trading with third countries: triate even if the expatriate receives salary from abroad. •• Release into free circulation; The economic employer has a duty to make income tax prepay- •• Transit regime; ments to the Tax Authorities toward the foreign individual’s •• Customs warehousing; Slovak personal income tax. •• Inward processing of goods; •• Processing under customs control; The personal income tax rates from 2013 are: •• Temporary admission; •• 19% on a monthly tax base up to EUR 2918.526 •• Outward processing of goods; and •• 25% on a monthly tax base exceeding EUR 2918.526 •• Export of goods. The tax base is calculated as the gross salary decreased by Taxation of Individuals the mandatory employee social security contributions and also Slovak tax residents are liable for personal income tax on the tax-deductible allowances. their worldwide income. Slovak tax non-residents are liable for personal income tax only on Slovak-sourced income. Any Social Security Contributions individual with a permanent home registered in Slovakia or who The social security system in Slovakia consists of social security spends more than 183 days in a calendar year in Slovakia is contributions and health insurance contributions. If the indi- considered to be a Slovak tax resident. viduals are on the Slovak payroll, the monthly social security withholding is done by the employer on a monthly basis.

The social security contributions in Slovakia are relatively inexpensive and are capped as follows in the table bellow:

Assessment Base Contributions % Insurance System in Slovakia Max (EUR) Employer (%) Employee (%) Self-employed (%) Old-age Insurance* 4025 14 4 18 Sickness Insurance 4025 1.4 1.4 4.4 Disability Insurance* 4025 3 3 6 Accident Insurance gross income 0.8 0 0 Health Insurance 4025 10 4 14 Unemployment Insurance 4025 1 1 0 Reserve Fund 4025 4.75 0 4.75 Guarantee Fund 4025 0.25 0 0 TOTALS 4025 35.2 13.4 47.15

* old-age and disability = pension

118 Local Taxes An LLC is an administratively-easy entity to operate. One execu- Local taxes include various payments (real estate tax, dog tax, tive, who is appointed initially in the corporate documents (i.e. accommodation tax, etc) administered by municipalities. Founding Deed or Memorandum of Association), can represent the LLC individually. Thus, a formal board of directors is not The most important tax is real estate tax, which is assessed on needed. In addition, there is more flexibility regarding the alloca- land, buildings and flats (hereinafter “real estate”). In general, tion of profits and distribution of cash among owners. the owner of the real estate is the payer of the real estate tax. Joint Stock Company An initial tax return needs to be filed by the 31 January following The minimum registered capital of a JSC is EUR 25,000 divided the year in which the real estate was acquired. No other tax over a number of shares with certain value. Slovak law recognises return need be filed unless the conditions decisive for the levy of private and public JSCs. JSC can be created by one shareholder, the tax are changed (e.g. change of type of land, sale of prop- provided that such shareholder is a legal entity. The total number erty) or if the taxpayer applies for an exemption from tax. The tax of shareholders is in general unlimited. administrator (municipality) assesses the tax by 15 March each year. Usually, the tax is due on 31 March. However, it is possible The administrative obligations of a JSC are more complex than to agree with the municipality on the payment of tax in several those of an LLC. For example, the statutory body of a JSC, instalments. the Board of Directors (“BOD”), has to be created. In addition, a JSC must create a Supervisory Board, which has a certain level The tax base is determined based on the area of land in square of control over the BOD. Last but not least, a JSC does not have metres (in the case of land tax) and/or the area the buildings much flexibility regarding the distribution of cash, as it must be cover (in the case of tax for buildings) and the basic tax rate. done with respect to the shareholders.

The tax base for land and buildings is determined based on General Partnership the status of the property owned as of January 1 of the relevant According to the Slovak Commercial Code, a general partnership tax period. The individual tax rates and coefficients are declared is a partnership in which two or more parties conduct business annually by individual municipalities and can vary greatly. under a common business name and bear joint and several liability for the obligations of the partnership with all their proper- ties. A PLC as a partnership is established for a mutual business 3. Legal Entities purpose and it has to be established by at least two parties – As a result of the decisions made as part of a foreign investor’s natural persons and/ or legal entities – foreign or local. There is structuring of an investment, some legal form of doing business no registered capital requirement (although it is possible to make in Slovakia must be established. The most common legal form of a contribution) and all partners can represent the company. conducting business in the Slovak Republic is through a limited liability company (hereinafter an “LLC”, “spoločnosť s ručením Limited-Partnership Company obmedzeným”, “s.r.o.”) or a joint stock company (hereinafter This is an entity where one or more members are liable up to a “JSC”, “akciová spoločnosť”, “a.s.”). Both types of legal entity the amount of their unpaid contribution into the registered provide the investor with limited liability in the Slovak Republic; capital registered in the Commercial Register (limited partner) however, there are differences, with which the investor should be and one or more members are liable with all their property familiar. There is also the option to create a general partnership (general partner). In this sense, it is a mixture between a limited (“verejná obchodná spoločnosť”, “v.o.s.”) and a limited-partner- liability company and a general partnership. The limited partner is ship company (“komanditná spoločnosť“, “k.s.”). obliged to make a capital contribution of an amount established by the memorandum of association, with a minimum of EUR 250. Limited Liability Company The minimum registered capital of an LLC is currently EUR 5,000. An LLC can be established by as few as one shareholder or 4. Labour and Wages as many as 50 shareholders. A company with one shareholder Slovakia still remains country with one of the lowest salary levels may not be the sole founder or the sole owner of another in Central Europe. Regarding specific sectors, e.g. telecommu- company. While this provision may complicate a Slovak holding nication and finance had the highest average salary in Slovakia structure, it can be dealt with rather easily. in 2012. Contrary, salaries in the health care sector were one of the lowest.

Investing in Central Europe 119 Slovakia

Within Slovakia, there is a wide gap among salary levels The Labour Code also specifies the minimum salary with respect to individual regions. E.g. Bratislava region has conditions for Slovak workers. The minimum wage is the highest salary level. Some of the reasons are Bratislava’s EUR 2.023 per hour (EUR 352 per month) and additional distance from Vienna, status of capital city of Slovakia and high increases are mandated for the following conditions: inflow of foreign investment in Bratislava region. The lowest salary levels have the regions in the eastern part of the country. salary + minimum increase of The disadvantages of this region are weak infrastructure and low overtime work 25%* volume of foreign investment. work during state holiday 50%*

Labour Legislation night work 20%** As part of any investment in Slovakia, it is natural that hazardous heath working 20%** the investor will eventually hire some Slovak employees. conditions The Slovak Labour Code has recently undergone a series of * of employee’s average salary amendments to make it more “employer friendly”. However, ** minimum hourly increase for night work and hazardous heath working the last amendment of the Labour Code brought some major conditions is calculated from minimum hourly wage changes designed to protect the employee. Therefore, before Source: Deloitte Slovakia, 2014 embarking on a program to hire any employees in Slovakia, an investor must understand the labour legislation and prepare The law strictly limits reasons for the termination of a labour employment contracts and human resource policies accord- contract from the employer’s side by means of a written notice. ingly. Hereby, we discuss some of the most relevant aspects of The minimum notice period is the same for the employer as well the Labour Code, although at a very high level. Therefore, it is as for the employee and takes at least one month. If the notice is recommended that the investor obtain a legal counsel to review given to an employee who has worked for at least five years for this area in more detail. the same employer, the notice period is at least three months.

The Slovak Labour Code governs the area of employment The minimum annual holiday to be provided to employees is relations in Slovakia. Under this code, an employment relation- four weeks. Any employee older than 33 years is entitled to five ship is founded through a written labour contract between weeks’ annual holiday. The Labour Code also specifies the length the employer and the employee, which represents the mutual of maternity leave, which is 34 weeks (37 weeks if the mother is agreement of the contractual parties. a single parent and 43 weeks if the mother gives birth to more than one child). Both men and women are entitled to a retire- The labour relationship is created from the day that was agreed ment pension at the age of 62. upon in the labour contract as the first day of work. The employ- ment relationship can be concluded for a definite period of time or for an indefinite period of time. Within the labour 5. Education contract, it is possible to agree upon a trial period, the dura- Before 1989, when Slovakia entered the free market economy, tion of which is a maximum of three months (or six months the education system was characterised by a strong focus on in the case of managers or leading employees) and cannot be technical fields such as mathematics, physics, electrotechnics and extended; the trial period must be agreed in writing, otherwise chemistry. At that time, the Slovak education system provided it is not valid. During this trial period, either party can terminate adequate technical knowledge and an abundance of graduates the labour relationship immediately without ramifications. in areas such as mechanical and electrical engineering, civil engi- neering and chemical production, military and energy production Generally, the working time of an employee in Slovakia is for the existing Slovak economy. limited to 40 hours a week. It is possible to require or to agree with an employee on some overtime work. An employer may As of 2014, in Slovakia there are approximately 2200 primary (subject to some specific exceptions) require from an employee schools and 850 high schools, middle and associated middle an additional 8 hours of overtime work per week during a period schools. As of 2012, 91% of the Slovak population aged 25-64 of a maximum of four consecutive months (if they agree, 12 has reached secondary or higher education. months). The total overtime work requested by an employer may not exceed 150 overtime hours per calendar year. The employer Higher education in Slovakia is covered by 36 universities and can agree with the employee on additional overtime work; colleges. Almost 200,000 students were enrolled at these univer- however, the total overtime cannot exceed 400 hours per sities during 2014, a significant number of them in economic calendar year. and technical faculties. Almost 50% of today’s young people are expected to complete university education in their lifetime.

120 6. Infrastructure Water Transport Highways and Network Approximately 200 km of Danube River forms the western border Slovakia’s first- and second-category roads are in fair condi- of Slovakia, and the capital city of Bratislava sits on its banks. tion. While only 418 km of highways are operational today, The Danube is a trans-European artery, flowing for 3,500 km the highway network is currently under construction and is between the Northern European states and the Romanian Black planned to reach about 715 km in length by 2017. Gaps in Sea coast. In the Slovak section there are two ports – Bratislava the highway connection between Bratislava and Kosice are one and Komarno. of the reasons of the current difference in the economic develop- ment of Eastern Slovakia compared to the Bratislava region. 7. The Most Active Industries/Sectors Automotive Industry In6. additionInfrastructure to the highway network, express roads and first-class roads connect all parts of Slovakia and neighbouring countries. In 2013, more than 975,000 cars were produced in Slovakia – the automotive sector remains a key industry. Slovakia’s location in Central Europe, its EU membership, skilled labour, competi- tive production costs, taxes and other factors have influenced remarkable growth in the automotive sector. According to the Automotive Industry Association of the Slovak Industry (AAI), there are approximately 140 Tier 1 and Tier 2 suppliers to the automotive industry in Slovakia. Currently, about 60,000 people are employed in this industry.

Key Players on the Market Volkswagen was the first automotive manufacturer to enter Slovakia, doing so in 1991 through the acquisition of the Slovak manufacturer of car components BAZ. To date, the company

has grown into one of the most sophisticated production plants Road network within the entire VW Group. In January 2003, Slovakia emerged RailwaySlovakia’s firstNetwork and the second category roads are in fair condition. While only 300 The railwaykm of highways network are current inly Slovakia operational is a resulttoday, the of high 150way years network of isdevel currently- as the winner in a Central European site selection competition for under construction and is planned to reach about 689 km in length by 2010. Current opmentgaps in the and highway numerous connection political between agendas. Bratislava – From Kosice the point are a cause offor viewthe vast another major producer. A joint venture between PSA Peugeot ofdifference railway in transport,the economic Slovakia development is a transitof the east comparedcountry. to The main the Bratislava inter region.- and Citroen selected the city of Trnava (cca 50 km from Bratis- These two cities are expected to connect by highway by the year 2010 through the nationalnorthern corridor railway and routes by 2012 have through a direct the southern link to corrid rail or.lines Improvement in Slovakia. of the lava) as the site of a new production plant. The Korean company highway connection between Bratislava and Vienna is also being planned and should KIA Motors chose Žilina for its first production facility in Europe. Manybe completed local bycompanies 2007. and foreign investors use the railway heavily as a main mean of transport. One of the main advantages A sizeable network of suppliers complements the three car Railway network ofThe the Slovak railway network railway in Slovakia network is a inresu the Easternlt of 150-years part of development of Slovakia in various producers. isstate the existence and economic ofconditions broad-gauge and numerous rail, whichpolitical is agendas. compatible From withthe point of view of railway transport Slovakia is a transit country. Main international railways the Russianroutes have a directnetwork. link to rail lines in Slovakia. Many local companies and foreign Investment Opportunities investors heavily utilize the railway as a means of transport. One of the major Having such a critical mass of car producers makes Slovakia a very advantages of the Slovak railway network in the Eastern part of Slovakia is the Airexistence Transport of large gauge rail, which is compatible with the Russian network. attractive place for supply chain companies, many of which are

ThereAir transport are 8 international airports in Slovakia, of which already in Slovakia. Together with other neighbouring countries, the airportsThere are 15 publicin Bratislava airports in and Slovakia, Kosice however, cover onlythe majority the airports of in airBratislava, the production capacity of the Central European region reached Kosice, Poprad, Sliac, Piestany, and Zilina have international importance. The traffic.Bratislava Currentand Kosice trends airports show are by significant far the most activelyinterest used in inthe develop Slovakia with- the almost 3 million cars in 2013. mentZilina andof BratislavaPoprad airports international likely to be theairport. next to It isdevelop ideally because located of the inHyundai- KIA investment in Zilina and the increase of tourism in the mountainous Poprad a triangleregion. Current 65 kmtrends from show Vienna a significant and inte 193rest kmfor major from development Budapest, of but Bratislava Engineering for many years it has been underutilised. Its recent, rapid growth16 In the past, Slovakia was a major manufacturing centre for has been fuelled by low-cost airlines. Bratislava’s airport was the member states of the Warsaw Pact. Slovakia produced reconstructed in 2010. massive amounts of heavy armoury, weapons and machinery. As such, mechanical and electrical engineering have a long tradition in Slovakia and present foreign investors with many opportunities such as a pool of qualified and available workers, an existing infrastructure and potential acquisition targets.

Investing in Central Europe 121 Slovakia

Key Players on the Market Investment Opportunities Slovakia’s history of manufacturing bearings attracted Despite a relatively-short history of outsourcing IT processes, the second-largest European bearing manufacturer, INA; which means a delay of more than ten years when compared to the German concern, Danfoss, which has been producing the West, insiders predict IT success in Slovakia just as in interna- compressors in Slovakia since 2001, has extended its produc- tional markets. IT services have been outsourced in Slovakia for tion to Povazska Bystrica by relocating its Danfoss Bauer and about five years, but it only started to bring actual results three Danfoss Gearmotor divisions from Germany. Whirlpool has years ago. a large washing machine manufacturing facility in the North- eastern city of Poprad. Also in the same city are the railwagon International Business Services production facilities of the Slovak company Tatravagónka and In addition to moving manufacturing facilities to Slovakia, global other Slovak companies includeing Kinex in Bytča and Tatramat companies are also relocating administrative support services in Poprad. Over the past few years, companies such as Mobis in to Slovakia. This recent trend is being fuelled by an available Gbelany, Emerson Electric in the city of Nové Mesto nad Váhom, and inexpensive workforce that is highly trained in IT, finance the Brazilian company Embraco in Spišská Nová Ves and Johnson and language skills. Also, the favourable individual and social Control International have recorded successful growth. Other insurance tax rates and the easy access to Vienna and Bratislava major foreign companies include ZF Sachs in Trnava, Volk- airports make Bratislava an attractive place for such administrative swagen Electrical systems in Nitra and BSH Drives and Pumps in centres. Through these consolidated administrative centres, multi- Michalovce. national companies can provide a consistent level of support for their entire European operations In Slovakia, this sector includes Electronics Industry a broad range of services, including: The electronics industry represents a traditional industry in •• Professional consulting services; Slovakia. As a sub-sector of electrical engineering, it is, together with the automotive sector, one of the most active sectors of •• Back-office Support Services; the Slovak economy. The sector employs a significant part of •• Data processing; the Slovak workforce. •• Financial services;

Key Players on the Market •• Online services; Samsung Electronics and Foxconn are the two most dominant •• Software development; electronics producers in Slovakia. •• Technical support services;

Other significant producers are Whirlpool, Hansol, Emerson, •• Customer service call-in centres. Bosch Siemens, Panasonic, Yazaki and more. Major Shared Services & Call Centres in Slovakia Information & Communication Technology (ICT) The most suitable location for shared services in Slovakia proves Slovak IT firms are competing successfully on international to be Bratislava as this city hosts several shared and call centres markets e.g. solutions for the business, banking, and financial such as Dell, IBM, Amazon, AT&T, Hewlett Packard, Johnson sectors, as well as for the government, telecom, manufacturing, Controls, Kone, Henkel, Kraft Foods and others. and small and medium-sized enterprises. Major growth areas in the Slovak market include hardware, software, IT and telecom- Investment Opportunities munications services. International business services are becoming a very active sector in the Slovak economy. Global competition from low-cost Key Players in Telecommunications countries forces many international companies to reduce their Three international mobile operators operate on the market – overheads by transferring part of their business activities to less- Telefonica O2, Orange and T-Com. The latter two, along with expensive territories. Slovakia, with its language and IT skilled and smaller local and international players, also provide fixed broad- low-waged labour force, is becoming the favourite location for band internet access. such services.

Key Players in IT The sector comprises big international players like HP, IBM, Acer, and regional and local companies - Eset, Sygic, Asseco and Soitron.

122 Chemical Industry One of the priorities of the Slovak government, together with This sector comprises the production of chemicals, agrochemicals local municipalities, is to support the development of new indus- and pesticides, chemical fibres, coating composition, phar- trial parks that can accommodate this demand. The land within maceuticals and other chemical products. More than others, industrial parks is meant to be properly zoned for construc- the chemical industry is dependent upon the import of raw tion with all necessary permits and utility connections that are materials. Foreign capital started penetrating the Slovak market required by a foreign investor. Foreign investors can then either in the early 1990s through the establishment of new companies buy or lease the land. Despite this uniform vision, the struc- and joint venture operations. ture of industrial parks varies in Slovakia, with some being owned directly by municipalities and others by private owners. Key Players on the Market As a result, the pricing structure and degree of development can The leading companies in heavy chemistry are Chemko in vary drastically among the parks. Strazske, Duslo in Sala; in the production of chemical fibres, Nexis Fibers, located in Eastern Slovakia in the city of Humenne; in The most highly-developed industrial parks are typically used by petrochemical production, Slovnaft in Bratislava and Petrochema home to the major automotive companies and their suppliers. in Dubová; in synthetic fibres, Chemosvit in Svit and Slovensky These investments are significant reasons for development and Hodvab in Senica. reconstruction of the industrial parks.

Metallurgical Industry Slovakia has a long tradition in metallurgy. Massive military 9. Grants and Incentives output had substantially contributed to the development of Investment Incentives Slovak metallurgy during the socialist era. After 1989, a rapid The availability of investment incentives represents an attractive decline of military production drove metallurgy production into part of investing in Slovakia. Investment incentives are provided decline. Slovakia’s steel production is not expected to change to support the investments in economically less-developed significantly by 2014 as the restrictions of the production quotas regions in Slovakia. The incentives are provided in accord- set up by the EU, must be followed. ance with the Act on Investment Incentives and it is subject to approval procedures. The current rules are based on the appli- The Key Players on the Market cable legal regulations of Slovakia and the valid legislation of The largest company in the sector is U.S. Steel Košice. Other the European Union (EU). companies are Železiarne Podbrezová, Slovalco located in Žiar nad Hronom, Bekaert Hlohovec and Kovohuty in Krompachy. In general, the forms and intensity of investment incentives depend on the type of investor project (activity), the volume of Rubber Industry investment, and the geographical location of the investment. With its roots in the past, the rubber industry is now closely tied with automotive producers in Slovakia and abroad. According to the valid legislation as of July 2014 Slovakia provides the following forms of investment incentives: Key Players on the Market •• Tax credit (to be used for up to 10 years); The Matador Group in Púchov associates several companies. Its core business is in the manufacturing of tyres and indus- •• Cash grant for the purchase of assets; trial rubber products; the German Continental Matador, which •• Cash contribution for the creation of new jobs; and acquired a branch of Matador, is also a tyre producer. •• Transfer of land (owned by the municipality/state) for lower than market value; Investment Opportunities in Traditional Industries The aforementioned industries represent a significant opportunity The incentives can be applied either to a new project (a green for foreign investment. field investment) or an expansion of an existing facility. The rules regulating minimum investment amounts, timing and intensity of incentives are basically the same for a new investment in a new 8. Industrial Parks establishment or expanding an existing one. The beneficiary of Slovakia has been experiencing a significant inflow of FDI since the investment incentives can only be a Slovak legal entity with its 2001. As the privatisation process is essentially complete, registered seat in the Slovak Republic; however, the application the majority of new foreign investments are in the form of green- can be filed by the parent company. and brown-field projects. This process has created a high demand for suitable land with good logistics and proper infrastructure.

Investing in Central Europe 123 Slovakia

The minimum amounts of total eligible costs depend on Technological and Strategic Centres the location of investment: Technological centre research Strategic centre Unemployment Lower than Higher 50% development activities shared & services, rate (district) average than higher than customer support average average Minimum investment (EUR Million) 0.5 0.4 Minimum 10 5 3 Minimum university-educated 70% 60% eligible costs people (EUR Million) Minimum amount of costs covered 50% 50% Minimum 5 2.5 1.5 by equity (EUR Million) amount of Minimum number of newly created 40 40 costs covered jobs by equity (EUR Million) Maximum intensity of the incentives Minimum share 60% 50% 40% of modern technologies Minimum 40 40 40 number of

newly created

jobs

The application is filed with the Ministry of Economy of Slovakia (MoE). It consists of several steps - filing the initial investment plan, which is reviewed by the MoE and other relevant insti- tutions. After the review, the Ministry prepares the offer of investment incentives to the investor. If the investor agrees, the application for investment incentives can be filed. Conse- Note: The unemployment rate in the district where the investment is located is quently, the decision on granting the incentives is issued by compared to the average in Slovakia for the year preceding the year in which the MoE. The whole process can take 5-9 months. the application is filed.

124 Stimuli for Research and Development 10. Expatriate Life The conditions for granting and using the incentives for research The inflow of FDI into Slovakia has also brought in many expa- and development are stipulated in the Act on Stimuli for Research triates and their families, who have chosen to live and work and Development. It can be applied for the establishment of in Slovakia. While the expatriates are scattered throughout a new workplace designed to perform research and development the larger cities, the major communities are in Bratislava, Žilina activities or for the extension of an existing workplace. and Košice. The living conditions are similar to the standards found in the larger cities in Western European countries and at The minimum amounts of total eligible costs for a research and the same time the cost of living is remarkably lower, outside of development project in Slovakia are dependent on the type of Bratislava. Slovakia provides a wide selection of high-standard activity performed: luxury apartments and houses for rent.

Type of Micro Middle Large entre- projects and small entrepreneur preneur 11. Weather and Cllimate entrepreneur (in EUR Mil) (in EUR Mil) Slovakia has a mild continental climate, with generally cold, dry (in EUR Mil) winters and warm (sometimes hot), moist summers. Tempera- Basic 0.25 0.5 1 tures will vary according to elevation in the many mountainous research areas. The warmest and driest regions are the southern plains and the eastern lowlands. Heavy snow with significant accumu- Applied 1.5 2.5 3.5 lation is common at higher elevations in the Tatra Mountains and during the winter months. experi- mental Bratislava, the capital, experiences average temperatures from -2º research C in January to 25º C in July.

Slovakia provides the following investment incentives for research and development activities: •• Subsidy from state budget funds to: •• Support basic research, applied research and experimental development; •• Develop studies of project feasibility; •• Ensure the protection of industrial property; or •• Temporary assignment of highly-qualified staff for research and development; •• Income tax relief, granted for a proportional part of the tax base.

Investing in Central Europe 125

Deloitte Central Europe Deloitte Central Europe Over the past two decades, Central Europe has experienced one Estonia of the most remarkable economic transformations ever, and Deloitte has played a major part in this changing landscape since its first office was established in the region in 1990. The dynamic Latvia changes have created a wealth of opportunities for doing business. We have assisted our clients, including governments, Lithuania large national enterprises, multinational companies, and small and medium-sized high growth companies in this new competitive environment.

At present, Deloitte Central Europe spans 17 countries with more than 3,900 professionals in 34 offices – but we still operate Poland as one cohesive organisation. This Central European structure was formed in 1997. At this time we integrated our national practices to form Deloitte Central Europe because we realised Czech Republic that to best serve our clients we needed to be able to share our Slovakia knowledge, expertise and manpower throughout the whole Moldova region. Hungary Our integration has allowed us to manage regionally and deliver Romania locally, adding value to our services and allowing them to be Slovenia Croatia performed in the most efficient manner. At Deloitte Central Bosnia Serbia Europe we are dedicated to finding solutions for our clients: - Herzegovina solutions which create value for them. Our mission has been, and Bulgaria Monte- continues to be, very simple: to help our clients and our people negro excel. Our vision is to be the standard of excellence. Macedonia

All the Central Europe offices of Deloitte refer to one or more of Albania Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee and its network of member firms, each of which is a legally separate and independent entity.

128 Our Expertise •• Personal Tax Services At Deloitte Central Europe we believe in having strong industry •• Global Employer Services practices to support our service line expertise. Many of our •• Employee Benefit Services industry experts have worked in key industry sectors. They developed the know-how and experience to understand •• Bookkeeping industry-specific issues and are ready to share their resources and •• Business Process Outsourcing knowledge of best practices. By utilising our industry practices, we are able to provide value-added, industry-specific services to •• R+D and Government Incentives our clients. •• Payroll Services •• Customs and Global Trade FDI Site Selection Services To assist foreign investors in their initial, and most critical, stages •• Legal Services of their investment process, we have developed a specialised service line focused on the specific needs of FDI. We are offering Deloitte Legal is a unique network of 125 offices in 55 a uniform co-ordinated approach and a full range of FDI specific countries with more than 1,100 experienced lawyers providing services across the whole CE region. a wide range of legal services. In 17 countries across Central Europe, local and international clients are served by a highly Our FDI specific services include but are not limited to: qualified team of more than 150 lawyers possessing a wealth of industry experience in, amongst others, the FSI sector and •• Country analysis and sector overview the manufacturing industry. •• Site selection (in co-operation with our site selection team in Brussels, Belgium) Financial Advisory Services •• Investment incentives advisory and management For the past years, governments throughout Central Europe have dramatically reformed their economies by moving commercial •• Negotiation support with local/national government, munici- enterprises from state control to private ownership. A myriad of palities, etc. opportunities and pitfalls have arisen for local entrepreneurs and •• Business assistance to other service lines (Tax & Legal, Finan- foreign multinationals, and traversing this new landscape can be cial Advisory Services, Audit & Advisory incl. Enterprise Risk difficult. The potential for growth in Central Europe is enormous, Services and Consulting Services) but this region also presents unique challenges not found in more developed markets. Tax & Legal Services Keeping up with changing tax requirements, opportunities, Whether you are interested in privatisation strategies, and risks can pose a challenge to any organisation, from a local cross-border acquisitions, corporate finance transactions, business to a multinational. Your tax planning must keep pace development and venture capital, business and asset valuations, with – even help shape – your company’s operations. This means value enhancement strategies, corporate recovery or fraud that your tax experts must manage all of the intricate details in investigations, our Financial Advisory Services professionals can local jurisdictions while understanding and strategically planning help you. We focus on: the global flow of transactions. •• Mergers & Acquisitions – Transaction services

We offer our clients a broad range of fully integrated tax services. •• Post-Merger integration Our approach combines insight and innovation from multiple •• Strategic Acquisition or Investor Search and Analysis disciplines with business and industry knowledge to help your •• Privatisations company excel globally.International Corporate Tax Services •• Project Finance and Debt Raising •• International Corporate Tax Services •• Commercial/Financial Due Diligence •• Local Corporate Tax Services •• Business, Real Estate and Equipment Valuations •• Services – VAT and Customs Duty •• Business Modelling •• Transfer Pricing Services •• Non-Performing Loans •• Merger and Acquisition Services •• Public Private Partnerships

Investing in Central Europe 129 Audit & Advisory Services Consulting Services In a world where business is confronted with new challenges at Our professionals can help you plan, grow and structure your an unprecedented speed, the need for solid financial reporting business and address key issues such as strategy, technology and and forecasting has never been more critical. Annual audits are change management. We provide integrated consulting services start, but they are not enough. When it comes to coping with focused on large national entities, multi-national corporations, market analysts and wary shareholders with 24-hour trading at growth organisations, and public sector entities. their fingertips, you need to know where you stand today. With our unique, collaborative approach, we offer not only Our network of Audit and Enterprise Risk Services professionals industry and functional business performance knowledge, but provide a range of audit and advisory services to assist clients also the insight of others through our consulting alliances. We in achieving their business objectives, managing their risk and work closely with clients to improve business performance, improving their business performance – anywhere in the world. drive shareholder value and create a competitive, sustainable We offer credibility, assurance and independence. Our Audit & advantage, regardless of where in the world your business takes Advisory services include:Statutory & International Audits you. We provide the following services: •• Statutory & International Audits •• Strategic Planning and Management Including Balanced Scorecard •• Financial Statement Transformations •• Performance Improvement and Cost Reduction •• Financial Reporting •• Process Optimisation •• Review of Accounting Systems and Internal Controls •• Customer Relationship Management •• Sarbanes-Oxley Compliance & Advisory •• Supply Chain Management •• Accounting Consultation •• Production Management •• Training •• Cost and Corporate Performance Management •• Financial Due Diligence •• Treasury Management •• Audit Committee Services •• Selection and Implementation of Information Systems •• Control Assurance •• Human Capital Advisory Services •• Internal Audit Services •• Advisory Services Related to the Acquisition of EU Funding •• Capital Markets •• Forensics Services

130 Contact us

Marek Metrycki Milos Macura Poland Country Leader Serbian Cluster Country Leader Partner, Internal Services Partner, Internal Services +48 225 110 707 +381 (11) 3812 111 [email protected] [email protected]

Josef Kotrba Eric Olcott Czech Republic Country Leader Adriatics Country Leader Partner, Internal Services Partner, Financial Advisory +420 246 042 366 +38 512 351 945 [email protected] [email protected]

Marian Hudak Sylvia Peneva Slovakia Country Leader Bulgaria Country Leader Partner, Audit Partner, Audit +421 258 249 211 +35 928 023 127 [email protected] [email protected]

Gábor Gion Maksim Caslli Hungary Country Leader Albania and Kosovo Country Leader Partner, Audit Partner, Financial Advisory + 36 (1) 428 6827 +355 4 451 7931 [email protected] [email protected]

Ahmed Hassan Gavin Flook Romania and Moldova Country Leader Baltics Country Leader Partner, Audit Partner, Audit +40 (21) 2075 260 +420 234 078 930 [email protected] [email protected] This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, any of its member firms or any of the foregoing’s affiliates (collectively the “Deloitte Network”) are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

Deloitte” is the brand under which tens of thousands of dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee. Each member firm provides services in a particular geographic area and is subject to the laws and professional regulations of the particular country or countries in which it operates. DTTL does not itself provide services to clients. DTTL and DTTL member firm are separate and distinct legal entities, which cannot obligate the other entities. DTTL and each DTTL member firm are only liable for their own acts or omissions, and not those of each other. Each of the member firms operates under the names “Deloitte”, “Deloitte & Touche”, “Deloitte Touche Tohmatsu”, or other related names. Each DTTL member firm is structured differently in accordance with national laws, regulations, customary practice, and other factors, and may secure the provision of professional services in their territories through subsidiaries, affiliates, and/or other entities.

Deloitte Central Europe is a regional organization of entities organized under the umbrella of Deloitte Central Europe Holdings Limited, the member firm in Central Europe of Deloitte Touche Tohmatsu Limited. Services are provided by the subsidiaries and affiliates of Deloitte Central Europe Holdings Limited, which are separate and independent legal entities.

The subsidiaries and affiliates of Deloitte Central Europe Holdings Limited are among the region’s leading professional services firms, providing services through more than 3,900 people in 34 offices in 17 countries. For regional projects and projects requiring regional resources, the services are provided by Deloitte Central Europe Limited, which is an affiliate of Deloitte Central Europe Holdings Limited. Deloitte Central Europe Limited is one of the leading professional services organizations in the country providing services in tax, consulting, risk management and financial advisory services.

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s approximately 200,000 professionals are committed to becoming the standard of excellence.

© 2014 Deloitte Central Europe