Investing in Central Europe Your move in the right direction
December 2016 Investing in Central Europe | Your move in the right direction
Content
1. Investing in Central Europe 3 Introduction The investment process
2. Why Central Europe? 9
3. Comparison of selected data 10 Basic facts Main macroeconomic data GDP growth in CE Taxation
4. Country guides for Bulgaria, Czech Republic, Hungary, Poland, Romania and Slovakia 15 General overview of economy Tax structure Legal entities Labor and wages Education Infrastructure The most active industries / sectors Industrial parks Investment Incentive Foreign Direct Investment (FDI) Expatriate life Weather and climate
5. The Social Progress Index and Foreign Direct Investment in CE Region 149
6. Deloitte Central Europe 164 Deloitte Central Europe Our expertise
7. Contact us 168
2 Investing in Central Europe | Your move in the right direction
Introduction
The economic and business outlook Indeed, Romania is “the new sexy” and we •• When the Eurozone grows by an extra for Central Europe have “taken Romania out of the Balkans”. 1%, then the CEE region grows by In 2016-17 the core/central CEE region Growth exceeds 4% and a large majority an extra 1.3%. looks like a “safe haven” globally. When of companies report excellent business •• But South-eastern Europe (SEE), with many emerging markets and developed and this is across most sectors. Romania the exception of Romania, was not ones face strained economic and is not as roller-coaster as it sued to be and performing as well due to structural political developments, core CEE looks the recent 18 months have been some economic issues such as budget comparatively much better. of the best for business in the last 20 years deficits, debt levels and poor allocation with the economy recording some of its of funding, with Serbia pressing Hungary, Poland, the Czech Republic best fgures in 20 years for indicators such for austerity measures against a soft and Slovakia (the core CEE region) did as unemployment and inflation. growth back-drop. go through a very tough 5 year period economically and commercially from The timing of the core CEE revival is rather •• The SEE markets were about “9-18 2009 to May 2013. The core CEE region good as critically Russia and Ukraine months behind” the core CEE ones, and south-eastern Europe were badly obviously went through recessions in 2015 but by mid-2016, the SEE markets have hit and business confidence was poor and in 2016 or with very low growth while embraced that catch-up with GDP growth for most of 2009 to spring 2013 with Turkey is experiencing a softer patch. Over levels at close to 3%. occasional exceptions. The region was the last 18-24 months and for the next performing sub-par and most business 15 months, at least, more companies are executives were certainly disappointed putting more focus on the core CEE region. and despondent with the region. Hungary When •• The core CEE region is booming relatively and the Czech Republic were slumped in and core CEE grew at 8 times the GDP recession or sub-par growth just 2-3 years of Latin America in 2015 and in 2016! the Eurozone ago. Poland, which along with Russia and Turkey, was a key regional market. Poland, •• Poland is one of the best performing grows by an extra for reasons we outline below, has always transition markets in the world. been a growth market and has experienced •• Consumer confidence in Hungary and fewer cycles than its neighbors and fewer 1%, then the CEE the Czech Republic during 2014-15 cycles in recent years than most markets saw some of the best improvements in globally. region grows by the world and in Europe. an extra 1.3%.
3 Investing in Central Europe | Your move in the right direction
CEE and other regions comparative GDP growth The CEE/SEE region will attract more attention this year and through to 2020 and of course this will make the markets more 2015 2016 2017 competitive and attractive. Core CEE region 3.7 2.9 3.0 The only major cloud on the horizon is Southeast Europe 2.8 3.0 2.9 corporate headquarters (!): they are seeing Eurozone 1.8 1.4 1.0 many markets globally soften and with the CEE region posting good economic USA 2.3 1.6 2.2 numbers and a reasonable business rally, Latin America (-0.2) (-0.5) 1.9 headquarters tend to say: “Well done, congratulations and now give us even Asia Pacific 4.6 4.4 4.3 more top line and bottom line”. We witness a similar trend in parts of the MEA region Sources: Consensus Economics, Ceemea Business Group, IMF. where the actual business recovery is not as strong as in the CEE region. The comparative numbers still speak The core CEE region will remain a more for themselves with the core CEE region mature single-digit sales market for most There are several key reasons growing faster than any region in the world companies and we are seeing this trend for the turnaround: with the exception of Asia Pacific. in 2015-17. But we can confirm that more As we noted above, one axiom is that when companies than ever are reporting a mild/ the Eurozone grows by an extra 1%, then But some minor qualifcation is required: steady uptake in business. One major US the CEE region grows by an extra 1.3% the core CEE markets are now witnessing conglomerate reports organic top-line and in 2014 the Eurozone added an extra a slower 2016 than 2015 and this is due sales growing at 8-10% and as the regional 1.5% and stabilized in 2015. The rally in to the slower cycle of EU funding this managing director notes: “For such markets, the Eurozone is the key driver for CEE year. 2016 is an “in-between” year for EU this is very sizeable and helps buttress other exports, investment and industrial output. funding budgets and so public investment slower markets in the EMEA region”. But from mid-2014, we also started to see has slowed in the CEE region and entails a positive contamination from exports and slightly softer growth. And, of course, we And there is more good news: unless there investment into consumer spending which now have the Brexit scenario which will is a serious downturn in the Eurozone has usually been the weak link in these impact the region more in 2017. As we or eastern Ukraine turns into something markets. Unfortunately, unemployment noted above, whenever the EU falters, much more serious, the consensus then was slower to recuperate but even these then there is risk for the CEE region. We is for these markets to grow steadily and stubbornly negative figures have started now expect the Eurozone to decelerate sustainably for the next 5 years. So far, events to improve across the region from late to about 1.0% GDP growth in 2017 and in eastern Ukraine and sanctions on Russia 2014 (in Hungary, thanks to government this will mean lopping off about 0.3% from have only had a marginal impact on CEE programs unemployment tumbled more most of the CEE (and SEE) markets. This GDP figures: trimming off 0.1% or 0.2% from quickly and earlier). means that 2017 will be weaker but not growth of 2.5% to 3.5% for these markets in 1. Improvement in Eurozone: low oil prices a catastrophe and by 2017 EU funding will 2015-2017. . help disposable consumer spending on once again be kicking-in and compensating non-energy items, low inflation helps for the Brexit effects. But Brexit and the consequent Eurozone real wages, weak Euro helps exports slowdown in 2016 and especially in 2017 and quantitative easing will help stock The key point to make is that the economic combined with weaker EU funding in 2016 markets and property sectors. numbers are improving but this does not does mean that the CEE region will not shine automatically mean that the business quite as much as in 2014 and 2015. But results are therefore booming immediately. the point remains that as a region, core CEE These core CEE markets are mature, and now combined with an improving SEE, will transitioned markets (although they do stay a decent growth region compared with retain regions which are still emerging). other emerging markets and developed ones
4 Investing in Central Europe | Your move in the right direction
2. Bank credits are flowing better: Minimum monthly wages in selected EU member states as of 1 January 2012, for a while in 2009-10 the banking 2013, 2015 and 2016 sector did look like a weak link but the worst was soon over and new credit 2012 2013 2015 2016 emission is now rising 2-4% which Romania 162 158 217 278* is quite decent and in Poland such new credits are rising at 4-6%, close Bulgaria 138 159 184 215 to record levels. Latvia 286 287 360 370 3. Several CEE governments are imposing Lithuania 232 290 300 350 softer austerity programs on their economies. Czech Republic 310 312 331 365
4. Inflation (or deflation) is extremely low Estonia 290 320 390 430 (or deflationary) in all the CEE markets. Hungary 296 335 332 358 5. This allows the central banks in Slovakia 327 338 380 405 the region to keep interest rates at record low levels which, in turn, kicks Poland 336 393 409 430 back and stimulates the investment and Portugal 566 566 589 618 production outlook. Spain 748 753 756 764 6. But low inflation (or deflation) is very important in stimulating real wages Slovenia 763 784 790 790 (i.e. salary after inflation): some UK 1202 1264 1378 1278 nominal wages are rising well given the demand for labor as economies France 1398 1430 1457 1466 expand. But even in economies where Belgium 1444 1502 1502 1531 nominal wages are for example just +1%, then if inflation is negative at say Luxemburg 1801 1874 1922 1922 -1%, then real wages are positive by 2%. The combination of some increase Source: Eurostat, 2016 in nominal wages across a back-drop *Source: Romanian Ministry of Labor of very low inflation is boosting consumer confidence and household spending. Also, as other emerging markets across A few samples of economic indicators 7. EU funding has been a consistent bed- the globe start to decelerate or face which are typical for these core CEE rock of investment for the region and specific political challenges, and as wages markets testify to the recent improvement: despite the deceleration in 2016, we in China continue to raise steadily, so •• Consumer confidence in Hungary in anticipate a rally on this front in 2017- many European and US investors are 2013-14 improved at the fastest rate 2022. starting to “re-on-shore” investments of any country in the whole of Europe. into Central Europe and especially South- Through 2016 it has stabilized close East Europe to benefit from lower wage to record levels. costs. In addition, companies who are manufacturing or providing services •• At the start of 2013, Czech industry was for the European continent, then being down -4.2% and in June 2016 was up based/ established in the CEE/SEE region +3.9%. makes sense by reducing transport costs •• At the start of 2013 business confidence in and providing better opportunities for just- Slovakia was -9 and in June 2016 was +9. in-time deliveries etc.
5 Investing in Central Europe | Your move in the right direction
•• Retail sales in Poland were rising +3.5% in Corporate Income Tax Rate the frst half of 2016 compared with flat trends in the summer of 2014. Country Corporate tax rate •• Industry in Poland was up +4% through Bulgaria 10% the frst half of 2016 while negative for much of 2013. Hungary 10%/19 %*
•• Hungarian retail sales were -3.2% in 2014 Romania 16% but since then have averaged +4-5%. Czech Republic 19% •• Hungarian industry was down -2.7% in Poland 19% 2014 and in 2016 so far has averaged +7%. Slovakia 22%
Poland: a quick case-study Source: The WorldWide Tax, 2016 Poland has outperformed the other core CEE markets (even in the 2013 downturn) Notes: *The corporate tax for income up to HUF 500 million is 10%. for several reasons:
1. Poland has a large domestic economy. Poland remains one of these winning Availability of Investment Incentives 2. It is less dependent on external trade markets and didn’t go through any 5-year Financial support to foreign with the proportion of GDP emanating slowdown as with the other CEE markets: investment from trade at only 33% in Poland instead it was weak briefly from autumn One of the key tools used by the EU compared with 72% in Slovakia, 70% in 2012 to summer 2013 and is now back up. member states in CE to attract foreign Hungary and 60% in the Czech Republic. Poland is actually still storming along at investments is the provision of investment When global and Eurozone trade has the moment with excepted GDP of 3.3% incentives in various forms. Cash grants slumped, being less dependent on trade this year and perhaps dipping down (mostly from European Structural Funds has been a big positive for Poland. to about 3.0% in 2017 due to Brexit effects. in “new” EU member states), local cash 3. The government has been much less Poland is, of course, a developed and highly grants and tax reliefs or deductions are obsessed with austerity measures than competitive market though: but still, a good providing investors in CE countries. In other CEE markets. and large volume market to have in ones’ most cases local governments created portfolio. special investment incentives packages 4. The banking sector and loan profile offered combinations of cash and tax is stronger and the Central Bank has Favorable Tax Environment incentives. It should be noted that all forms been reasonably aggressive in cutting Low corporate tax rates in CE countries of investment incentives constitute state interest rates to support GDP growth. attract foreign investors aid and must be approved by the European The authorities are also eliminating Although the nominal corporate income tax Commission in Brussels before they can certain restrictions on consumer rate in some CE countries might increase be provided to investors. The vast majority lending. in the near future, it is expected to remain of investment incentive schemes have 5. Remittances from abroad have been generally attractive in comparison to other already been approved by the European very strong although they have slowed. western EU countries. CE countries are Commission but mainly for larger implementing tax reforms by reducing investments (up to EUR 100 million) case- 6. Polish companies are sitting on cash and companies’ tax burden as an effective way by-case prior approval is still necessary. are relatively profitable. to attract foreign investment and to spur Countries within CE have appointed their 7. Inflation has fallen sharply in recent sustainable economic growth. governmental bodies with administration quarters. and set up proper procedures to assist foreign investors with their requests. 8. The Central Bank is ready to intervene to protect the zloty at around 4.30 to the Euro.
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Summary There are many “catch-up” opportunities •• Executives argue that there are still some Global business is not getting any easier in the region and EU-funding will continue M&A options available: not everything and one can well argue that the global to assist this: has been sold; economy and global business have never •• GDP per capita will catch up (GDP per •• But especially the political risk, compared properly recovered from the 2009 financial capita for some CEE countries is still 35%- with other emerging markets, looks very crash. We are all living in a very “new 65% of the EU average); acceptable compared say with South normal” and it is not easy. Many executives Africa, India, Turkey, Nigeria, Brazil, complain about a chronic malaise among •• National GDP will grow faster than Mexico, Russia etc; consumers and clients and that all aspects developed markets; of business are now tougher and demand •• And of course Central Europe is obviously •• Consumer spending and investment will more time than they used to prior to 2009. closer to Europe than Asia or the Middle increase faster than developed markets; Even the years 2011-12 globally, now in East and this helps transport costs and hindsight, appear relatively good. •• More remote, “backward” regions will just-in-time delivery business; catch up; •• And in a more volatile world the CEE So what? Well, against this back-drop •• Western and local companies will be able region is closer to Europe and the USA in the CEE region is looking relatively sound to further develop their brands as brand terms of culture and history and shared and sustainable. It is no longer the “glory convergence takes place; experiences; boy” of the years 2002-2008 but one should consider the following: •• Sales per capita have great scope e There is a new normal in the world and for catch up; •• Within Europe the CEE looks like a new normal in the CEE region but the CEE the strong growth region again, much •• The slow but steady rise of the middle one doesn’t look that bad. more dynamic than the Eurozone and class across the region which offers even when some of its economies are a consumer segment willing to buy within the Eurozone e.g. Slovakia; premium products;
•• This looks sustainable over the medium- •• Companies have very good opportunities term into 2022 but of course with to develop affordable innovation probably softer GDP growths the markets products to capture those customer become more mature. segments which are low-middle class or actually quite poor: not everyone in the CEE region is rich and doing well;
•• Companies are looking to locate more out-sourcing operations here as wages rise in Asia;
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The investment process
The stage of the investment dictates, in Planning 1 • Labor efficiencies large part, what issues are most relevant expansion/relocation • Costs efficiencies to the investor. Accordingly, it also • Free access to the EU determines the types of services that we • Growing local market seek to provide to the investor. This is • Availability of Investment incentives the basic approach of our FDI service line.
Based upon our understanding Consider the competitive 2 • Bulgaria of the foreign investors’ investment, we advantages of CE region • Czech Republic try to pin-point where they stand on • Hungary the investment timeline. We can then focus • Poland our attention on the issues we think are • Romania most relevant to them at the moment. • Slovakia We have prepared a high-level summary of certain issues to give investors an idea as to where they may need to focus. We have also indicated how we can be Select the most suitable 3 • Regional analysis of assistance. country in CE region • Access to your market – infrastructure Some of the most relevant issues a foreign • Availability of workforce investor faces during the start-up period • Industrial Parks/Office Space are: •• Structuring the investment; Choose the best location 4 • Legal structure based on important factors • Tax structure •• establishing a legal entity to do business; • Investment incentive procedure •• determining the availability of investment • HR issues incentives; and • Customs issues • VAT issues •• analyzing business processes from • Payroll/Bookkeeping issues a customs and VAT perspective. • Financing
Set up a legal entity for 5 • Compliance with local laws your investment • Business Modeling • Business relationship management • Group Transaction
Continue with your operational phase 6
Plan further expansion of your production services 7
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Why Central Europe?
Since May 1, 2004 some 11 Central We presume Schengen will remain in place European countries have joined but there will be more emergency options the EU culminating on July 1, 2013 with for countries to deviate temporarily. the accession of Croatia which became The recent flurry of GDP growth and the 28th EU state. Within the enlarged rising confidence which has intensified EU, the new CEE member states account during the last two years and which looks for approximately 16% of the population, reasonably sustainable, when many other 9% of overall GDP (measured in markets globally are struggling, also adds purchasing power parity) and 15% of total to their investment appeal. employment. The markets are also attractive in The CEE region within the EU offers terms of their labor costs and over relatively low labor costs, a favorable the last 10 years the CEE markets replaced tax environment, and availability of tax the southern European ones such as Spain, incentives and since spring 2013 solid GDP Portugal, and Greece as the location growth trends across most of the economic for cheap labor. However, the appeal sectors. of the markets is based more than on just cheap wages. As we note above, there is Investors are increasingly clustering some considerable growth divergence the markets either into a greater CEE in recent years and also currently region within the EU or as sub-clusters with as the southern “peripheral” EU markets the core CEE markets (Hungary, Poland, struggle economically while the core CEE Czech Republic, Slovakia and increasingly ones are relatively booming. Investors also Romania) and the remaining smaller SEE get good value for money in labor costs markets. All the EU members are also as most foreign companies agree that members of the OECD and NATO which the overall quality of CEE staff is relatively are reassuring factors for companies when good when compared with other European making long-term investment decisions. and emerging market economies. Also EU membership has transformed these as wages continue to rise and accelerate in countries into a customs-free zone and in China and some other emerging markets, 2007, after joining Schengen, all remaining the skill set, proximity and “cultural borders have been removed. This allows close- ness” and language skills all add complete free movement of capital, goods, to the appeal of the CEE region. people and services across the 28 EU member states. One new risk of course is A small but growing number of companies how viable is Schengen now with the wave are “re-on-shoring” some investments and of 2015 migration. This is an open question outsourced activities. and could “go either way”.
9 Investing in Central Europe | Your move in the right direction
Comparison of selected data
Basic facts
Membership in Area 2016 Population Capital city Main language Currency international (km²) organizations
Albania 2.8* 28,748 Tirana Albanian Lek (ALL) WTO, NATO, CEFTA
Bosnia & Bosnian, Serbian, convertible mark WTO (observer), 3.8 51,209 Sarajevo Herzegovina Croatian (BAM) CEFTA
Bulgaria 7.1 111,002 Sofa Bulgarian Lev (BGN) EU, NATO, OECD, WTO
Croatia 4.1 56,538 Zagreb Croatian Croatian kuna (HRK) EU, NATO, WTO
Czech Republic 10.5 78,866 Prague Czech Czrech Koruna (CZK) EU, NATO, OECD, WTO
Estonia 1.3 45,277 Tallinn Estonian Euro (EUR) EU, NATO, OECD, WTO
Hungary 9.8 93,030. Budapest Hungarian Hungarian Forint (HUF) EU, NATO, OECD, WTO
Latvia 1.9 64,589 Riga Latvian Euro (EUR) EU, NATO, WTO
Lithuania 2.8 65,300. Vilnius Lithuanian Euro (EUR) EU, NATO, WTO
Macedonia Denar Macedonia 2.1 25,713 Skopje Macedonian CEFTA (MKD)
Moldova 3.5 33,800. Chisinau Moldovan Moldovan Leu (MDL) WTO, CEFTA
Montenegro 0.6 13,812 Podgorica Montenegrin Euro (EUR) WTO, CEFTA
Poland 37.9 322,575 Warsaw Polish Polish Zloty (PLN) EU, NATO, OECD, WTO
Romania 19.7 238,391 Bucharest Romanian Leu (Ron) EU, NATO, OECD, WTO
Serbia 7 77,474 Belgrade Serbian Serbian Dinar (RSD) WTO (observer), CEFTA
Slovakia 5.4 49,036 Bratislava Slovakian Euro (EUR) EU, NATO, OECD, WTO
Slovenia 2 20,273 Ljubljana Slovene Euro (EUR) EU, NATO, OECD, WTO
*estimated
Source: TheEconomist Intelligence Unit, 2014; Eurotsat
10 Investing in Central Europe | Your move in the right direction
Main macroeconomic data, 2016*
Goods & Inflation GDP per Goods & services Unemployment rate Minimum monthly Country services (%, avg) capita (€) * import (bn $) (%) mid 2016 wage (€) export (bn $)
Albania 1,5 9 100 2,9 5,9 16,9 180
Bosnia & 0,0 12 000 6,8 12,7 42,0 235 Herzegowina
Bulgaria -0,4 13 300 26,0 29,0 9,9 215
Croatia -0,6 16 700 12,5 20,0 13,7 414
Czech Republic 0,6 25 000 140,0 131,0 5,2 365
Estonia 0,4 21 400 12,5 13,4 6,3 430
Hungary 0,5 19 500 101,0 96,0 6,0 358
Latvia 0,3 18 600 11.0 14,5 9,7 370
Lithuania 0,9 21 100 25.0 27.0 8,5 350
Macedonia -0,2 14 500 5,8 8,4 24,6 232
Moldova 7,7 5 900 2,5 5,7 4,8 96
Montenegro -0,8 9 000 3,7 4,9 17,6 288
Poland -0,5 11 200 205,0 198,0 9,5 430
Romania -1,0 16 300 58.0 68.0 6,4 278**
Serbia 1,6 13 700 16,0 21,5 17,9 235
Slovakia -0,1 22 200 76,0 74,0 9,9 380
Slovenia -0,1 23 700 28,0 26,0 12,6 790
Sources: IMF, World Bank, Eurostat, CEEMEA Business Group
*Data gathered in August 2016 **Source: Romanian Ministry of Labor
Note 1: GDP per capita fgure is on PPP basis and not lower exchange rate number Note 2: Trade is merchandise "fob" = free on board Note 3: trade fgures are in US dollars
11 Investing in Central Europe | Your move in the right direction
GDP growth in CE, % change*
Country Real GDP growth Real GDP growth forecast
2012 2013 2014 2015 2016 2017 2018
Albania 1,6 1,4 1,9 2,5 3,1 3,2 3,0
Bosnia and -0,9 2,5 1,1 3,1 3,0 3,0 2,9 Herzegowina
Bulgaria 0,2 1,3 1,5 3,0 2,6 2,6 2,8
Croatia -2,2 -1,1 -0,4 1,6 1,9 1,7 1,7
Czech Republic -0,7 -0,5 1,9 4,3 2,5 2,6 3,0
Estonia 5,2 1,6 2,8 1,1 1,9 2,6 2,7
Hungary -1,7 1,9 3,7 2,9 2,1 2,4 2,4
Latvia 4,0 3,2 2,4 2,7 2,5 2,9 2,9
Lithuania 3,8 3,5 3,0 1,6 2,8 3,0 2,9
Macedonia -0,5 2,9 3,5 3,6 3,4 3,5 3,2
Moldova -0,7 9,4 4,6 -0,5 1,5 3,0 2,8
Montenegro -2,5 3,3 2,1 3,0 3,3 2,9 3,2
Poland 1,6 1,3 3,3 3,6 3,4 3,1 3,2
Romania 0,6 3,5 2,9 3,8 4,1 3,3 3,2
Serbia -1,0 2,6 -1,8 0,7 2,0 2,3 2,2
Slovakia 1,8 1,4 2,4 3,6 3,2 3,1 3,0
Slovenia -2,6 -1,0 3,0 2,8 2,1 2,0 2,3
Source: CEEMEA Business Group
*Data gathered in August 2016
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Taxation
2016 Personal tax Corporate tax VAT VAT reduced rate
Albania 13%-23%1 15% 20% N/A
Bosnia and Herzegovina 10% 10% 17% N/A
Bulgaria 10% 10% 20% 9%
Croatia 12-40%2 20% 25% 5%/13% 3
Czech Republic 15%/22% 4 19% 21% 10%/15% 5
Estonia 20% 20% 20% 9%
Hungary 15% 9% 27% 5%/18%6
Latvia 23% 15% 21% 12%
Lithuania 15% 15%7 21% 5%/9%8
Macedonia 10% 10% 18% 5%
Moldova 7%/18%9 12% 20% 0%/8%10
Montenegro 9%/13%11 9% 19% 7%
Poland 18%/32%12 19% 23% 5%/8%13
Romania 16% 16% 24% 5%/9%14
Serbia 10-30%15 15% 20% 10%16
Slovakia 19%/25%17 22% 20% 10%
Slovenia 16-50%18 17% 22% 9,5%
Source: CEEMEA Business Group
Notes: 1 Depending on the income: 0-30,000 ALL: 0%, 30,001 – 130,000 ALL: 13% 9 Tax rate of 18% applies to the taxable annual income exceeding MDL 27,852. of the amount over 30,000 ALL, 130,001 and above: 13,000 + 23% of the amount The annual taxable income below the respective amount is taxable at 7% rate. above 130,000. 10 8% rate is applied to bread and bakery products, milk and dairy products, 2 Depending on the income: 12%: up to 26,400 HRK, 25%: 26,400 – 158,400 HRK, 40%: medicines, natural production of plant, horticulture, zootechnics etc. 0% rate is above 158,400 HRK applied to exports, international transportation services, supplies designated 3 Reduced rate of 13% applies to accommodation, hospitality services, baby food, to the technical assistance projects etc. edible oils; and 5% rate applies mainly to basic food (bread and milk), books, daily 11 Progressive rates are prescribed for salary, only. On the portion of monthly gross newspapers, medicines. salary in excess of 720 Eur, 13% tax applies 4 A tax rate of 22% applies to income exceeding 48 times the average salary 12 Tax rate of 32% applies to income exceeding 85,528 PLN. 5 Tax rate of 10% applies to some groceries, printed books and pharmaceuticals 13 Rate of 5% applies to foodstuffs, 8% rate applies to pharmaceuticals, medicines, 6 The standard VAT rate on products and services is 27%. An 18% rate is applicable passenger transport, newspapers, hotels, restaurants, admission to cultural sporting to basic food products (milk, dairy products, bread, etc.), the provision and entertainment events of accommodation, internet and restaurant services. A 5% rate applies 14 VAT of 9% applies to food, drugs, books, accommodation in hotels, while the reduced to pharmaceuticals and certain medical equipment, aid for the blind, books and rate of 5% applies to the supply of buildings as part of the social policy under certain newspapers, district heating services, certain meats, milk (with the exception for UHT conditions. and ESL milk), eggs and the sale of newly built residential real estates (certain 15 Income from yield on investments (capital) in Serbia is taxed at the rate of 15%. limitations apply). 16 Depending on the type of income, level of income and status of the income recipient; 7 Micro companies (those with up to 10 employees and up to EUR 300,000 in income The rate of 10% applies to basic foodstuffs, medicine, gas, cultural events , etc. per year) may be entitled to reduced rate of 5%. 17 The individual income tax rate in Slovakia is 19% for income up to EUR 35,022 and 8 VAT of 5% applies to pharmaceuticals and medical purposes products, equipment 25% for income exceeding this ceiling. for disabled persons’ technical assistance and repairs of such equipment; 9% 18 Progressive tax rates: 16%, 27%, 41% and 50%. rate applies to heating and hot water (until 31.12.2016), books and printed non- periodical materials, journals and magazines (with certain exceptions), passenger transport services on regular routes, hotel accommodation services (from 1.1.2015).
13 Investing in Central Europe | Your move in the right direction
BG
14 Investing in Central Europe | Your move in the right direction
Bulgaria
1. General overview of economy through their representative bodies, elected Personal Income Tax Economic growth in Bulgaria has gained by direct and secret ballot. Every Bulgarian A 10% flat tax rate applies for most types pace, reaching 3.0% in 2015, and rising citizen over the age of 18 has the right of an individuals’ income. There is no non- private consumption should underpin to elect or to be elected. taxable minimum. A 15% flat tax applies on continued momentum in 2016-18. This is income of sole traders. supported by an improving labor market The National Assembly, elected for a period with falling unemployment and strong of four years, is the supreme body of state Generally, the taxable income of individuals growth of real wages (+8% y/y in 2015). power. The National Assembly enacts, includes monetary income, as well Consumer confdence has been rising amends, and rescinds the laws; appoints as benefts received in-kind. Certain types and is near a post-crisis high. Net exports and dismisses the Government and of income are exempt from taxation were the most important contributor the Directors of the Bulgarian National including capital gains from disposal to GDP growth last year and should Bank, draw up the state budget, adopts of shares on a regulated Bulgarian/EU/EEA remain a positive driver in 2016 and 2017 the resolutions for holding referenda, market, income from disposal of certain real but growing import demand is expected constitutes, transforms and abolishes estate, etc. The tax rate for interest income to see the size of contribution decline. ministries. from deposit accounts in EU/EEA banks The contribution to GDP from investment (including Bulgarian banks) is 8%. last year is also expected to pull back in 2. Tax structure 2016 due to lower absorption of EU funds, Principal taxes Remuneration received for work performed before gradually picking up again in 2017- in Bulgaria or for provision of services •• Personal Income Tax 18. Business confdence should improve in Bulgaria is considered income from as the economic recovery becomes more •• Corporate Income Tax a Bulgarian source. That is regardless frmly entrenched and falling loan rates of whether the remuneration is paid •• Value Added Tax will make credit more affordable. Business in Bulgaria or abroad. Therefore, such confdence should improve as the economic remuneration is subject to personal income The Bulgarian tax system also includes recovery becomes more frmly entrenched tax in Bulgaria unless a Double Tax Treaty withholding taxes, one-off taxes on certain and falling loan rates will make credit more suggests otherwise. expenses, local taxes and fees, tax on affordable. insurance premiums, excise duties, customs Bulgarian tax residents are subject to tax on duties and environmental fees. Political system their global income, whereas non-residents The tax year in Bulgaria coincides with According to the Constitution of Bulgaria, are taxed on their Bulgarian- sourced the calendar year. adopted by the Great National Assembly income only. on July 13, 1991, Bulgaria is a parliamentary democratic republic in which the sovereign power belongs to the people who exercise it
15 Investing in Central Europe | Your move in the right direction
Individuals, irrespective of their nationality, of April and in the absence of enforceable Corporate Income Tax are considered Bulgarian tax residents if public obligations. Individuals are generally Subject to corporate income tax are they: not obliged to fle annual tax returns if companies and partnerships established they have received only: the employer, under Bulgarian law as well as permanent •• have a permanent address in Bulgaria1; non-taxable income and/or income subject establishments of non-residential entities in •• reside in the country for more than 183 to one-off tax have withheld employment Bulgaria. days in any given 12-month period; income for which the full tax is due. Certain income of residents or non- Bulgarian corporate income tax rate •• have been sent abroad by the Bulgarian residents is not taxed with the annual of 10 % is charged based on the fnancial State, by Bulgarian state bodies and tax return (e.g. dividends and liquidation result of the taxpayer as per its proft organizations, by Bulgarian enterprises quotas for residents and non-residents; and loss account, adjusted with certain (the family members of such individuals management and technical service fees, non-deductible items and tax allowances, are also considered residents); or interest, royalties, franchising and factoring as provided for in the law. •• have center of vital interests (personal fees, capital gains from disposal of real and economic ties) in Bulgaria. estate and fnancial assets, etc. for non- Under Bulgarian tax depreciation rules, residents having no fxed base in Bulgaria). fxed tangible and intangible assets Subject to personal income tax is the gross It is taxed separately with a specifc flat one- can be depreciated for tax purposes taxable income including the basic off fnal tax, which varies from fve to ten on a straight-line basis, except for land, compensation and all taxable benefts percent. The one-off tax may be reduced goodwill, forests, plants and works of art. without the allowed deductions (Bulgarian or eliminated under an applicable tax Only tax depreciation as per a special tax and foreign mandatory social security treaty. EU residents may declare deductible depreciation schedule is recognized for tax and health insurance contributions at expenses and claim corresponding refunds purposes (accounting depreciation is not the individual’s expense; voluntary pension/ of the one-off tax paid on a gross basis tax deductible). The assets are classifed in life/health/unemployment insurance under certain conditions. Exempt from seven categories with a separate maximum contributions subject to certain conditions/ taxation with the one-off tax are capital annual rate applying to each category. limitations; standard flat deductions gains from disposal of shares on a regulated applicable to income from independent Bulgarian / EU / EEA market by EU / EEA An entity may choose to apply a lower rate business activities, etc.). residents. for a certain category as well as to change the rate each year. Maximum annual tax Bulgarian personal income tax on Lump-sum taxation is applicable depreciation rates vary between 4% and employment income as well as the statutory to individuals and sole traders performing 50%, depending on the type of asset. insurance contributions by employees certain business activities (e.g. hotel and should generally be withheld, and paid by restaurant, retail business, etc.) who are the employer through the monthly payroll. not VAT-registered and whose turn- over Bulgarian personal income tax returns for the preceding year does not exceed BGN for the respective year should be fled with 50,000. the revenue authorities by the 30th April of the following year. An individual has a right to a 5% reduction of the outstanding tax liability of the annual tax return if the tax return is submitted electronically by the 31st of March the year following the reporting one; the tax is paid to the state budget by the 30th
1 Individuals who have a permanent address in Bulgaria but their center of vital interests is not in the country are not considered Bulgarian tax residents. 16 Investing in Central Europe | Your move in the right direction
The tax deductibility of certain interest Withholding tax No withholding tax applies to interest over: costs incurred by the entities (except Withholding tax is applicable on certain •• bonds or other debt securities, issued for banks and other credit institutions) types of income when accrued to a non- by a Bulgarian legal entity, municipality may be restricted under the Bulgarian residential entity (having no permanent or the State and traded on a regulated thin capitalization rules. The interest costs establishment in Bulgaria), such as interest, market in the European Union (“EU”) that may be affected include all fnance royalties, franchising and factoring fees, or the European Economic Area (“EEA”); expenses incurred in relation to debt technical (including consultancy) and fnancing. If the annual average debt management service fees, income from •• a loan, granted by a tax resident entity to equity ratio of the company exceeds hiring out movable or immovable property of an EU or EEA Member State, which is 3:1 (some of) the interest expenses may capital gains from transfer of real estate, fnanced through issue of bonds or other not be tax deductible in the current year. capital gains from disposal of fnancial debt securities (issued specifcally for this However, they may become tax deductible assets issued by resident entities purpose) traded on a regulated market in in the following fve consecutive years under or the State and municipalities (exemption the EU or the EEA; certain conditions. for capital gains from disposal of shares •• A loan, taker to which is the state on a regulated Bulgarian/EU/EEA market), or a municipality, even in the cases where A Bulgarian corporate income taxpayer has service fees and remuneration for the use no bonds are issued on the debt. the right to carry forward its tax loss and of rights (unless actually received); penalty offset it against future tax profts (if any) or damages payments (except for insurance The withholding tax rates may be reduced from the next fve consecutive years. Once compensation) accrued to entities tax under an applicable tax treaty, subject the taxpayer has chosen to carry forward resident in low tax jurisdictions. to meeting certain criteria. its tax loss it is obliged to continue to do so until the tax loss has been offset in full Dividends are subject to 5% withholding tax Tax treaty relief is applied by the income or the fve-year period has expired. Separate when distributed to individuals, resident recipient directly if the income accrued fve-year offset periods apply to tax losses non-proft entities and non-residents for the calendar year does not exceed BGN occurring in consecutive years. Change (except for EU/EEA entities). Dividends 500 thousand. In all other cases, a non- of control over a company does not affect distributed to resident companies are not resident can beneft from tax treaty relief the tax losses carry forward capability. included in their taxable income except if an advance clearance is obtained from for dividends distributed by special purpose the Bulgarian revenue authorities under Corporate income tax liabilities are investment companies and non-EU/EEA a specifc procedure. reported annually through fling an annual foreign entities. tax return by March 31st of the following The tax should be withheld by the resident year. The corporate tax has to be paid General withholding tax rate is 10 % on payer and remitted to the budget by by the 31st of March as well. Corporate the gross amount for all taxable income. the end of the month following the quarter taxpayers are obliged to prepare statistical Types of income, for instance, capital gains, of the income accrual or of the decision reports to be fled along with the annual tax disposal of fnancial instruments, etc. for dividend distribution (in case withholding return. A discount of 1% from the annual taxation is made on a net basis. tax on dividends or liquidation quotas is corporate income tax due but not more paid). than BGN 1,000 is available if the annual tax Interest and royalties accrued to related return (along with the statistical report) is party legal entities residing in the EU are In case of capital gains, it is their recipient, submitted electronically and the annual tax subject to meeting the EU Interest and which should remit the withholding tax due is paid by 31st of March. Royalties Directive conditions or, under within the terms indicated above. domestic law certain conditions are met, Monthly or quarterly advance tax payments are exempt from withholding taxation Entities resident in the EU may declare are due during the year. as of the 1st of January 2015. tax-deductible expenses and claim a corresponding refund of the withholding tax paid on a gross basis. The claim is annual and should be fled by December 31st of the following year.
17 Investing in Central Europe | Your move in the right direction
One-off tax Transfer pricing rules Value Added Tax (VAT) Certain expenses accrued by the taxpayers The Bulgarian transfer pricing rules require The Bulgarian VAT legislation is based on are subject to one-off tax, namely that taxpayers apply arm’s length prices the EU VAT rules and Directive 2006/112/EC. representative expenses, social expenses in their related party transactions. Arm’s Applicable VAT rates are as follows: provided in-kind to the employees and length prices are those, which unrelated •• 20 % for domestic supplies, intra- managers (with few exceptions), and parties would have agreed on in similar community acquisitions and importation expenses related to the use of vehicles circumstances. This requirement is imposed from non-EU countries, for management purposes. both to cross-border and domestic transactions. •• 9 % for hotel accommodation services. The tax rate is 10 % on the accrued •• Entities are obliged to register expenses. Both the respective expense Largely based on the 1995 OECD Guidelines, for Bulgarian VAT purposes if they have and the one-off tax applicable to it are the Bulgarian transfer pricing rules envisage performed: deductible for corporate income tax fve methods for determining arm’s length purposes. prices, e.g. the Comparable Uncontrolled •• transactions with a place of supply in Price Method, the Resale Minus Method, Bulgaria for which the VAT should be Corporate tax incentives and specific tax the Cost Plus Method, the Transactional Net charged by the supplier exceeding BGN regimes Margin Method and the Proft Split Method. 50 thousand for the last 12 months; The amount of the annual corporate income •• intra-community acquisitions exceeding tax due by entities on their profts from A taxpayer is obliged to prove the arm’s BGN 20 thousand during the calendar manufacturing, including toll manufacturing, length character of its related party year; may be partly or fully reduced. transactions during a tax audit by applying one of the above methods. •• distance sales in Bulgaria exceeding BGN The application of the tax holiday is subject 70 thousand during the calendar year; to certain limitations and conditions, The legislation does not include specifc •• certain services supplied to non-taxable including the EU state aid restrictions. requirements as to the format and contents persons established in Bulgaria (unless of transfer pricing documentation, which they have applied the MOSS scheme Special purpose investment companies, taxpayers can produce as evidence for arm’s in another EU Member State) – when close-ended licensed investment companies length pricing. However, a transfer-pricing the supplier is not established. and collective investment schemes manual released by the Bulgarian revenue authorized for public offering in Bulgaria are administration mentions the items that Entities established in an EU Member State not subject to corporate income tax. would appear appropriate to include in performing supply of goods with installation the documentation. The manual contains in Bulgaria to customers not registered Special corporate tax regimes are applicable a set of other useful guidelines relating for VAT purposes are obliged to register to state-subsidized enterprises, commercial to different transfer pricing topics. irrespective of their taxable turnover. maritime shipping companies and gambling For instance, with respect to intra-group businesses. services, the manual suggests specifc proft Foreign entities, which receive services mark-up ranges that have proven to be with a place of supply in Bulgaria for which The Bulgarian law allows a tax incentive in customary for Bulgaria. the recipient has to self-charge Bulgarian the form of accelerated depreciation (100% VAT, are obliged to register irrespective per annum) for intangible assets formed of their taxable turnover. as a result of research and development activities.
18 Investing in Central Europe | Your move in the right direction
Any entity may apply for voluntary VAT VAT can be refunded through VAT returns Tax incentives registration. However, if voluntarily within: Under the provisions of the Corporate registered, the entity will not be able Income Tax Act, some general tax incentives •• 2 months (period for carry forward and to deregister for two years following the year are applicable. They are mainly related offsetting of the claimable VAT against of registration. In order to register for VAT to investment in depressed regions and VAT payable) and 30 days of fling the last purposes, foreign entities have to appoint employment of disabled and unemployed VAT return (period for effective refund); a local fscal representative, except when people, such as: they have a registered branch in Bulgaria. •• 30 days of fling the VAT return •• Manufacturing companies operating The requirement does not apply to EU for entities, which have performed in depressed regions with high based entities. exempt supplies with levels of unemployment are entitled the right to deduction exceeding 30% to a corporate income tax reduction Foreign entities not established and not of the total turnover from taxable or exemption subject to certain VAT-registered in Bulgaria performing supplies for the last 12 months. conditions, provided in the law; certain supplies to local businesses will not have to register for VAT purposes. The VAT An investor in a large investment project, •• Companies are entitled to certain will be self-charged by the local customer which has received authorization by deductions for hired employees: (i) who (reverse charge mechanism). the Ministry of Finance, can receive a refund have been registered as unemployed within 30 days. The investor can also apply for a period exceeding one year prior Supplies where the reverse charge of VAT reverse charge for VAT on importation to their current employment; or (ii) have applies: of goods (without effective cash outflow). been unemployed and are of more than 50 years of age; or (iii) are disabled, •• services provided to businesses (with EU based foreign entities which are not unemployed persons; some exceptions); registered and established for VAT purposes •• Companies employing disabled •• supply of goods with installation; supply in Bulgaria can receive a refund of the local individuals are entitled to corporate of natural gas and electricity; input VAT incurred for goods and services tax exemption upon meeting used for supplies with a place of supply •• supply of goods under a triangular the requirements set by the law in outside Bulgaria. A specifc procedure transaction (i.e. a supply of goods proportion to the number of people before the authorities of the EU Member between three entities VAT-registered in with disabilities to the total of number State of establishment has to be followed. three different EU Member States; under of employees. Non-EU based entities may be entitled certain conditions the ultimate customer to a refund on a reciprocal basis (i.e., if self-charges VAT, while the supplies Entities that are VAT-registered in Bulgaria their country of tax residence provides for the frst two entities are exempt with and are investing in a large investment the right to refund VAT to Bulgarian entities). right to deduction of the input VAT). project can, upon receiving authorization A specifc procedure before the Bulgarian by the Ministry of Finance: revenue authorities has to be followed. Monthly VAT returns are fled and the tax •• self-assess the VAT on importation is due by the 14th of the following month. of certain goods (i.e., the reverse charge The tax period is a calendar month. mechanism will apply and the VAT on importation will not be related to a cash VIES returns have to be fled monthly by outflow for the entity). The goods the same deadline if intra-community should not be subject to excise duty and supplies goods or certain services have should be included in a list agreed with been performed during the respective the Ministry of Finance; month. •• refund VAT under a faster procedure – within 30 days of fling the VAT return.
19 Investing in Central Europe | Your move in the right direction
Intrastat Transfer tax Tax on insurance premiums Intrastat is a system for collecting statistical The tax rate is between 0.1% - 3% A 2% tax is due on insurance premiums data about the intra- community movement on the higher of the sales price for insurance contracts covering risks on of goods between Bulgaria and other EU or the tax value of the transferred real the territory of Bulgaria. Insurers should Member States. estate / on the insurance value of cars. collect the tax, but it is intended to be Each municipality determines the exact rate a burden to the insured. Certain insurance All entities VAT-registered in Bulgaria have annually. premiums are exempt from the tax (e.g., life to fle Intrastat returns if the thresholds insurance, permanent health insurance). for incoming (“arrival”) and outgoing Vehicle tax (“dispatch”) intra-community movement Each municipality within ranges stipulated Excise duties of goods between Bulgaria and the other in the law determines the tax rate annually. The Bulgarian excise duties legislation EU Member States have exceeded. It depends on the type and characteristics is based on EU rules. Excise duties are The threshold triggering the obligation of the vehicle and applies to cars, ships and applicable for certain products including: to the fle Intrastat returns for 2015 are: airplanes. The amount of vehicle tax will be •• Electricity and energy products (motor determined ex officio based on the data •• BGN 370 thousand for arrival of goods; or fuels, coal, etc.); in the register of vehicles maintained by •• BGN 220 thousand for dispatch of goods. the Ministry of the Interior. A tax liable •• Alcohol; person will be notifed about the amount •• Tobacco products. The deadline for fling Intrastat returns of the vehicle tax. is the 14th day of the month following The excise duty rate for electricity is BGN the month of arrival or dispatch Donation tax 2 per megawatt hour (BGN 0 for electricity of the goods. Donation tax is between 3.3% and 6.6% on sold to individuals for use in their homes). the value of the donation. Each municipality The excise duty rates for the most common Local taxes and fees determines the exact rate annually. Lower motor fuels are: Real estate tax rates and exemptions apply to donations The real estate tax is between 0.01% - 0.45% between relatives. •• Leaded gasoline – BGN 830 per 1,000 annually on the higher of the gross book liters; value and the tax value of the immovable Inheritance tax •• Unleaded gasoline – BGN 710 per 1,000 property (or on the tax value for residential Inheritance by a spouse, children and their liters; property). The municipality in which the real descendants are exempt. estate is situated determines the exact rate. •• Gas, oil and kerosene – BGN 645 per The tax is between 0.4% - 0.8% on 1000 liters; Garbage collection fee inheritance exceeding BGN 250 thousand •• Liquefed petroleum gas – BGN 340 per This is determined by each municipality in favor of brothers, sisters and their 1,000 kilograms; and is generally levied on the gross book descendants (between 3.3% and 6.6% value of the real estate (or on the tax value for other heirs). Each municipality •• Natural gas as a motor fuel – excise for residential property). Alternatively, it determines the exact rate annually. duty on natural gas of 0.85 leva per may be determined based on the number gigajoule will apply until a decision by and volume of waste containers used. Tourist tax the European Commission for non- As of January 1st, 2016, municipalities are The tax rate is between BGN 0.2 - 3 compliance with the rules of State aid no longer allowed to determine the waste per night. The municipality in which in the form of a reduced rate of excise collection fee on the basis of the gross book the accommodation facilities are located duty on natural gas as a motor fuel. If value, tax value or the market price of real determines the exact rate. such a decision is issued, the date of its estate. issuance excise rate rises to 5.10 leva per gigajoule. Heavy fuel oil for ships – BGN 645 per 1,000 kilogram. The excise duty rates for the most common heating fuels are:
20 Investing in Central Europe | Your move in the right direction
•• Gas, oil and kerosene– BGN 50 per 1,000 A gradual increase in the excise duty 3. Business Establishments liters (the rate applies only to marked gas, rates of cigarettes is expected throughout Bulgarian legislation allows for the following oil, and kerosene); the period of 2016 – 2018 with types of business organizations: an aim of reaching a minimal excise duty •• Heavy fuel oils, heavy oils other than •• An unlimited (general) partnership; of BGN 177 per 1000 cigarettes by the 1st lubricants, tar, creosote oils – BGN 50 per of January 2018 as per the requirements •• A limited partnership; 1,000 kilograms; of the EU Directive. The increase is •• A limited liability company; •• Liquefed petroleum gas – BGN 0; as follows: •• A joint stock company; •• Natural gas – BGN 0.6 per gigajoule •• A specifc duty of BGN 161 per 1,000 for use in industry; cigarettes; and •• A limited partnership with shares;
•• Coal and coke – BGN 0.60 per gigajoule. •• A proportional duty of BGN 25% •• A sole trader; of the sales price from 2016 •• A branch; The following excise duty rates apply •• A specifc duty of BGN 168 per 1,000 to alcohol: •• A holding; cigarettes; and •• Beer – BGN 1.5 per hectoliter/degree •• A co-operation; •• A proportional duty of BGN 27% Plato; of the sales price from 2017 •• A representative office. •• Ethyl alcohol – BGN 1,100 per hectoliter •• A specifc duty of BGN 177 per 1,000 of pure alcohol measured at 20°C; The most appropriate types for carrying out cigarettes; and business in Bulgaria are a limited liability •• Intermediate products – BGN 90 per •• A proportional duty of BGN 28% company and a joint stock company. hectoliter of product; of the sales price from 2018 •• Still and sparkling wines, and other still Companies may also open a branch and sparkling fermented beverages – Environmental fees office. All of these have to be entered into BGN 0. The producers or importers (or the entity the commercial register. performing an intra- community acquisition) The following excise duty rates apply to: of products which leave large amounts Limited liability Company - “OOD” of waste have to pay a product fee based It is a commercial company with share •• Cigars and cigarillos – BGN 270 per 1,000 on the type of waste. The entities can capital owned by its shareholders items; avoid paying the product fee if they collect whose liability is limited to the amount •• Smoking tobacco (for pipes and or recycle certain amount of the waste of the shares subscribed. One or more cigarettes) – BGN 152 per kilogram. produced by their products either on their persons, including foreign natural or legal own or through a licensed collective waste persons, may found a limited liability The excise duty rate for cigarettes is management organization. company with minimum capital of BGN determined as the sum of: 2. Contributions to the share capital may The products, which are subject to the fee, be paid in cash or in kind. The statutory •• A specifc duty of BGN 101 per 1,000 include: bodies of the limited liability companies cigarettes; and are the general meeting of shareholders, •• Certain motor vehicles and tires; •• A proportional duty of BGN 23% which must be held at least once a year, and of the sales price •• Goods with plastic, paper, metal, glass, the managing director(s). A sole shareholder wooden, textile, etc. packaging; limited liability company is called “EOOD”. A natural or legal person owns it. •• Batteries; The sole shareholder exercises the powers •• Motor oil; of the general meeting and (a) managing director is appointed to run the company. •• Electric or electronic apparatus and A limited liability company must prepare appliances. fnancial statements each year.
21 Investing in Central Europe | Your move in the right direction
Joint stock company - “AD” for women) and the statutory length Social security: Individuals working in A commercial company with share capital of service (38 years for men and 35 years Bulgaria and in certain cases working owned by its shareholders whose liability for women). The statutory age increases abroad are subject to Bulgarian statutory is limited to the amount of the shares by 4 months every year to reach 65 years insurance contributions unless the EU they subscribe. A joint stock company for men and 63 years for women. Similarly, regulations or a bilateral social security can be founded by one (“EAD”) or more the statutory length of service increases agreement provide otherwise. persons, including foreign natural or legal by 4 months every year to reach 40 years persons. The minimum share capital for men and 37 years for women. The EU regulations on the coordination of a joint stock company is BGN 50,000. of social insurance schemes apply with A share capital higher in value is required Alternatively, entitlement to pension may respect to citizens of EU/EEA/Switzerland, for the establishment of special types be acquired with 15 years insurable length as well as eligible third-country nationals of companies like banks, insurance of service and attainment of the age of 65 in a cross-border situation. In addition, companies, etc. The fnancial statements years and 8months (both for men and Bulgaria has a number of bilateral social of the joint stock companies are subject women). The statutory age increases by 4 security agreements with other countries. to statutory audit. months every year to reach 67 years. The social insurance contributions are Branch Minimum monthly gross salary: BGN 420 calculated based on the gross remuneration Foreign legal entities that are registered Average monthly gross salary: BGN 941 received by the employee subject abroad and allowed to perform commercial for the third quarter of 2016. to a maximum earnings cap of BGN 2,600 activities in the country of their registration per month (BGN 31,200 annually). can register a branch office in Bulgaria. No authorized capital is required to open a branch. A branch is not a legal entity. For 2015, the following rates apply for statutory social insurance contributions. Branches are obliged to maintain accounts as an independent company. Type of contribution Employer Employee Overall rate
Representative Office Pension Fund Contribution* 7.1% 5.7% 12.8% The Investment Incentives Law regulates it. Foreign persons who are entitled to engage Universal Pension* 2.8% 2.2% 5.0% in business activity under the legislation Labor Accident and Occupational 0.4% 0.4% of their own countries may set up Diseases Fund** 1.1% 1.1% a representative office, which is registered with the Bulgarian Chamber of Commerce Common Illness and Maternity Fund 2.1% 1.4% 3.5% and Industry. Representative offices are Unemployment Fund 0.6% 0.4% 1.0% not legal persons and may not engage in economic activity. Health Insurance 4.8% 3.2% 8.0%
17.8% 30.7% 4. Labor and wages Total*** 12.9% Regular Working hours: 8 hours a day. A 48- 18.5% 31.4% hour rest period is required during a 7-day period; normally half of it is on Sunday. *Employees born before 1960 are liable for Pension Fund Contribution of 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%. Annual paid leave: not less than 20 working **The rate for Labor Accident and Occupational Diseases Fund varies between 0.4% – 1.1% depending on days. the type of the economic activity performed.
Retirement: An individual is entitled ***Additional employer contributions may be due for certain hazardous professions: for Pension Fund (3%) to Bulgarian pension for insurable length and for Professional Pension Fund (7% or 12%). of service and age if he/she attains the statutory age (63 years and 8months for men and 60 years and 8 months 22 Investing in Central Europe | Your move in the right direction
The aggregate rates of statutory insurance courts and claim the damages in cases However, if the employee has worked with contributions are split up between of unfair dismissal. There are some the same employer for ten years or more, the employer and the employee in a certain categories of employees that enjoy he will be entitled to compensation equal proportion.2 protection against dismissal (for example to six months gross labor remuneration. absent employees (e.g. on sick leave, Labor contracts pregnant, nursing mothers, military Immigration regulations According to the Labor Code, assignment), employees suffering Bulgarian immigration legislation divides the employment contract may be concluded of explicitly listed diseases, mothers the expatriates in two categories: EU, for an indefnite period of time or, of children up to three years of age, etc.). EEA or Swiss nationals, and third-country alternatively, as an employment contract nationals. for a fxed term. An employment contract is Termination notice periods may not be considered to be concluded for an indefnite less than 30 days and may not exceed Third-country nationals period unless explicitly agreed and stated 3 months. The termination period The work and residence regimes for third- otherwise. An employment contract for a fxed term employment contract is 3 country nationals are more restrictive and concluded for an indefnite period may not months but not more than the remainder aim at protecting the internal labor market. be changed to a fxed-term contract unless of the employment term. Not all third-country nationals are allowed explicitly requested by the employee, and to enter Bulgaria and remain in the country stated so in writing. The employment contracts could be without a valid entry visa (a so called “visa- terminated upon mutual consent less stay”). To work and reside in Bulgaria An employment contract for a fxed term of the parties. In case that the termination they need a work permit, a long-term visa, may be concluded only under circumstances of the employment contract is upon and a residence permit. and conditions explicitly provided for under initiative of the employer, he could offer Bulgarian Labor Code. a compensation of not less than four gross Employment: third-country nationals need monthly salaries of the employee. Bulgarian work permits to legally work in Employment contract for a trial period the country. A work permit is required In cases when the work requires testing In addition to other statutory for the expatriate both to be employed the abilities of the employee, their fnal compensations, upon dismissal due under the Bulgarian labor agreement appointment may be established at a trial to closing down of the enterprise or part and to be transferred to the country by period of up to 6 months. Such a contract of it, staff reduction, etc., the employee is a foreign employer. To approve a work may also be settled in the case when entitled to additional compensation from permit the employment authorities have the employee wants to make sure the job is the employer. This compensation is due to be convinced that the employees who suitable for him/her. only if the employee is unemployed after are third-country citizens are not over 10% the termination of the employment contract. of the total work force of the Bulgarian Termination employer. A work permit is valid Employment contracts should be Upon termination of the employment for a maximum term of one year and may terminated in writing within grounds set relationship, after the employee has be subsequently renewed under certain by Bulgarian Labor Code and following acquired the right to a pension for insured conditions. the applicable formal termination service and age, irrespective of the grounds procedure. Most of these procedures could for the termination, he is entitled There are several categories of third- be viewed as employee protective. In any to compensation by the employer in country nationals, who are exempt from case, the dismissed employee has the right the amount of his gross labor remuneration the work permit requirement, namely: to fle a claim against the employer in for a period of two months. individuals who are registered with court the state resolution as executives of a Bulgarian company/Branch office, general managers of representative offices, expatriates who have a Bulgarian permanent residence permit etc.
2 As per the publicly available information provided by the National Institute of Statistics. 23 Investing in Central Europe | Your move in the right direction
Residence: upon obtaining a Bulgarian work Higher education is provided exclusively 6. Infrastructure permit or being registered as an executive by colleges and universities. In accordance The Bulgarian national transport system / general manager, the expatriate should with the Higher Education Act, they are all includes all modes of transportation – apply for long-term visa D (immigration self-governing and autonomous institutions. railway, road, sea, inland-waterway, air visa). Such visas are issued by the Consulate There are ffty-one higher education and intermodal transport. Being funded Sections to the Bulgarian Embassies abroad. institutions in Bulgaria offering degrees mainly by EU infrastructure programs, The visa D is a multiple entry visa and may at undergraduate and graduate levels. Bulgaria’s transport infrastructure is be valid for a period of 180 days within The academic year for most Bulgarian rapidly developing. The planned projects 6 months. When the expatriate obtains universities begins around October 1st for developing the transport system his/her visa D, he/she is entitled to apply and consists of fall and spring semesters. are aimed at the effective connectivity for a Bulgarian prolonged residence The academic year covers up to 30 weeks. of the transport network and removing permit. The residence permit is issued sections with insufficient capacity, reducing for a maximum term of one year and can be The educational system has generally been congestion, noise and improving safety. subsequently renewed. considered a national asset. However, inadequate funding and low teacher morale Roads In certain specifc cases, third-country in the post-communist period has led Bulgaria is connected to Western Europe, nationals may obtain a short-term residence to some erosion in its quality. Russia, Asia Minor, the Adriatic, the Aegean, business visa. The business visa is a special and the Black Sea through a network type of one or multiple entry visa, issued The shortage of Western-style business of international highways, which are being to third country nationals, who do not have education, particularly in fnance and further developed and reconstructed in a visa-less stay in Bulgaria and need to visit marketing, has generally been more serious accordance with the national transport the country for attending business meetings than in the more advanced transition model and strategy. or project implementation. It is valid countries, although this is progressively for a maximum period of 90 days within being adjusted. A major goal of the reform Statistics 6 months, 1 year or in exceptional cases of Bulgaria’s education system was to bring Total length of the country’s road network: 5 years. The business visa does not allow standards in line with the European context 19,728 km, including: third-country nationals to be employed in and to harmonize the educational process •• 610 km of motorways the country. with that of Europe. Bulgaria is actively working on building up an appropriate •• 2,965 km of category I roads 5. Education environment for modernizing the higher •• 4,042 km of category II roads The Bulgarian educational system is education system, taking into account traditional in style. Education in Bulgaria is the demands of society and businesses. •• 12,111 km of category III roads compulsory between the ages of 7 and 16. Good practices are examined and Parents have legal responsibility to secure disseminated. the school attendance of their child. The main types of secondary schools are general educational, vocational, language schools and foreign schools. Private schools Bulgaria’s transport have also been established and they are beginning to compete successfully with state schools. All schools in the country are infrastructure is rapidly co-educational, admitting students of both genders. The official language of instruction developing. is Bulgarian.
24 Investing in Central Europe | Your move in the right direction
The east-west direction is much better developed than the north-south direction, which is largely determined by the topography of the country. The accessibility in the North-East, South- West and South-East regions is better than that of other regions because of the higher density of motorways and frst-class roads.
Main transport corridors:
•• Corridor No. 4 Vidin-Sofa-Kulata linking Romania to Greece
•• Corridor No. 8 Kyustendil-Burgas-Varna linking Macedonia to the port of Varna.
•• Corridor No. 9 Ruse-Kazanlak-Kardzhali linking Romania to Greece and Turkey
•• Corridor No. 10 Kalotina-Svilengrad linking Serbia to Turkey
European corridors passing through Bulgaria:
•• No. 4 (from Germany to Istanbul) According to National Statistics Institute maximum 100 km/h, and in places with •• No. 7 (Rhine, Main, and Danube) (NSI) data, the total length of railway lines almost depleted options for keeping in Bulgaria was 5,658 km, including current the speed and guaranteeing security and •• No. 8 (from Durres, Albania to Varna) railway – 4,070 km and station tracks – safety. Key sections with reduced speed •• No. 9 (from Helsinki, Finland 1,588 km. Territorial distribution of railway are the following Sofa - Septemvri, Vidin - to Alexandropoulos, Greece) lines in the country is unbalanced due Medkovets, Plovdiv - Mihaylovo. Large parts to topography and socio-demographic of the railway (bridges and tunnels) are •• No. 10 (from Salzburg, Austria conditions. The highest density of the railway at the end of their lifecycle (for example, to Thessaloniki, Greece) network is in the South-West Region - 44.8 the routes Ruse – Varna). In 2013, km/1000 sq. km. Lower than the national the railway carried 26 million passengers Railways average is the density of the railway network (mainly domestic traffic) and 13,670,000 Rail is a signifcant domestic mode in the South- East, North-east and South tons of freight, 24.8% of which was of transport for freight, although road Central Region. Connections to neighboring international traffic. According to the results transport now accounts for a larger (and countries are relatively limited. The share of the updated national transport model, increasing) share of the total. of electrifed railway lines and the overall the share of passenger trips by railway in length of the lines in the current railway 2011 constituted 11.9% of all trips, and is 70.3%. This is considered satisfactory the share of freight carried by railway and is in line with the share of electrifed transport was 9.3%. Railway transport railway lines in other Member States. dominates the transport of solid mineral A signifcant part of the railway lines were fuels (48%) and ores, metal scrap and waste built more than 50 years ago, with geometry (53%). parameters, construction and equipment suitable for speeds of
25 Investing in Central Europe | Your move in the right direction
Shipping Air transport Mobile penetration in Bulgaria is high Bulgaria has fve main ports, all in varying Bulgaria has four operating commercial compared to neighboring Countries— degrees of modernity. The largest are airports – in Sofa, Plovdiv, Burgas and well above Greece, Macedonia, Romania, Varna and Burgas, both on the Black Sea. Varna. They handle both international Serbia or Turkey. Many individuals have Varna mainly handles containers, grain and and domestic flights. After accession more than one SIM card, although a large bulk goods while Burgas handles crude of Bulgaria to the EU, the air travel number of SIM cards are not active. There oil and some bulk commodities. There are markets demonstrated high growth due are three GSM operators: M-Tel, previously three sizeable ports on the Danube (Ruse, to the development of business and tourism known as Mobiltel (owned by Telekom Lom and Vidin) and 24 smaller sea and industry. The strong demand is serviced Austria), Telenor (owned by Telenor Norway, river ports. Of all modes of transport, sea mainly by the international airports in which was acquired from Greece’s OTE transport has declined the least since 1989, Sofa, Varna and Burgas, and to a lesser Telecom in August 2013 when it was known perhaps because it is the least dependent degree by the airports of Plovdiv and Gorna as Globul), and Vivacom, previously known on the vagaries of the domestic economic Oryahovitsa. As a result of the targeted as the Bulgarian Telecommunications scene. The geographic position of the ports investment policy in recent years, Company (BTC, the formerly state-owned is their key advantage. the country’s aircraft fleet is being updated monopoly telephone operator). at a fast pace and Bulgarian air carriers However, all of them need renovation. There continuously improve their competitiveness The Internet has been some modernization of the ports both in the charter and passenger service The Internet penetration rate in Bulgaria but much more needs to be done if on regularly scheduled international flights. was an estimated 59 users per 100 the sector is to become more internationally people in 2015—according to the National competitive. Varna has ambitions to rival Telecommunications Statistics Institute (NSI). This is low when Romania’s Constanta, but its plans include Bulgaria entered the post-communist compared with other European countries. a very costly relocation of the Varna East era with one of the highest densities It is below the penetration rates in higher- port and the construction of three new of analogue fxed telephone lines in income eastern European countries such terminals. Lom already upgraded its South the former Soviet bloc. Although the quality as the Czech Republic, Hungary, Slovakia Pier and is seeking to exploit its position of the equipment, which used to support and Poland, but above the rate of around 50 on the EU’s north-south Corridor IV by the network, was less impressive than per 100 people in neighboring Romania. investing in two new terminals. A system its density, it has improved greatly in of 25- or 30-year concessions is intended recent years. There has been a trend Greater access to the Internet and wider to play an important role in upgrading away from fxed lines to mobile telecoms. adoption of modern banking services, ports and terminals, with concessions on The rapid growth and falling price of mobile such as credit and debit cards, encourages a few of the country’s smaller ports already communications has led to a decline in e-commerce to rise steadily. The proportion awarded or in the pipeline. the number of fxed lines, which peaked at of the population that bought goods 2.9m in 2001, and is expected to drop from or services on the Internet increased from 1.9m in 2013 to 1.1m in 2019. The mobile 12.1% in 2013 to 18.5% in 2015, according telephone market has grown quickly. to the NSI. 91.31% of Bulgarian frms had The number of mobile-phone subscriptions access to the Internet in 2015, with the vast rose from 108% of the population at end- majority of these accessing the Internet 2006 to 145% at end-2013. using a broadband digital subscriber line (DSL) connection.
26 Investing in Central Europe | Your move in the right direction
In 2014 Bulgaria was ranked at the 20-th Bulgaria’s most important television stations Consolidation is likely to emerge as a key position in the global Net Index Explorer are foreign-owned. The private channel bTV strategic issue in the next few years, as one for broadband internet accessibility and belongs to Time Warner. Nova TV is part or more Greek-owned banks are likely speed, following the leaders in the ranking of the Swedish media concern, Modern to be sold as their parents re-focus - Hong Kong, Singapore, Romania, South Times Group. The introduction of modern operations on core markets. This will be Korea, Lithuania, Sweden, Switzerland, entertainment programming enabled an opportunity for smaller foreign-owned Macao, the Netherlands and Andorra. the national private broadcasters to rapidly banks in the sector to achieve better scale The average download speed in Bulgaria reduce the state television monopoly that and synergies. Whilst price competition is 33.5 Mbps and the average upload had existed for many years. Bulgarian for deposits should ease, intensifying speed is 22.8 Mbps. For comparison, in national radio and the private Darik Radio competition in mortgage refnancing after Romania the download speed is 55.7 Mbps are the only national broadcasters where prepayment penalties (beyond the frst for download and 29.3 Mbps for upload. the spoken word (rather than music) year) were banned in 2014. This offers The main reason for the good internet dominates. Apart of the top 3, there are a customer acquisition opportunity speed in Bulgaria is the fragmentation numerous cable and regional TV operators for players looking to grow in retail and and competitiveness of the ISP sector in with various political and content focuses, increase the importance of retention. With the country. which provide wide choice for domestic limited overall demand for new credit audience. Similar is situation on radio and pressure on fee income, increasing The media market. cross-sell and penetration of non-credit High levels of literacy and of television and products to grow customer wallet-share radio ownership have boosted the influence 7. Bank system will be important. Given the still weak asset of the media. Six television channels are With the economy gradually picking quality and large NPL stockpile in the sector, at present licensed as national terrestrial up, long-standing currency board (peg attention will be given to more effective broadcasters. Three state radio channels to EUR), fscal conservatism and low public management of credit risk, including broadcast nationally, and the private sector debt (the second lowest in EU for 2013), the workout, restructuring and third party has several national licensed radio channels. the Bulgarian fnancial system remains sales of non-performing assets. The range of newspapers available is stable even though it was shaken by wide for a market of Bulgaria’s size (none the bank run on the country’s fourth largest 8. Industrial parks of the papers are state-owned). bank in 2014 – Corporate Commercial The industrial zones in Bulgaria offer Bank. Years of strong deposit growth attractive conditions for establishing At the national level, these include: (2010 – 2013 CAGR 0f 10%) have greatly production, warehousing, logistics and improved the local funding of the banking other activities at very competitive prices. •• 24 Chasa (24 Hours) and Trud (Labor), sector and falling interest rates have made Investment projects are supported by the two largest daily circulations owned credit more affordable. The banking sector the Government, the Municipal Authorities by Media Group Bulgaria Holding; ROE (5.3% in 2012-13) is above that of its and by the various domestic and foreign •• Standart, Monitor, Sega, a popular left-of- southern CE peers in recent years and faces Chambers of Industry and Commerce in center daily; a setback due to losses at CCB in 2014, but Bulgaria. an underlying trend of improvement should •• Duma, a daily, which has a relatively be visible in 2015-16. There are 14 functioning zones, with active low circulation and is affiliated local and foreign investors. Furthermore, to the Bulgarian Socialist Party (BSP) In recent years, locally owned banks have there are 21 zones, either with fully •• Capital Daily, and the weekly Capital, been gaining market share at the expense or mostly developed infrastructure and which is widely regarded as the most of foreign-owned banks, notably the Greek- ready to be invested in, and 27 zones under intellectually serious publication. owned banks, but most of the others as well. development. Given the situation at CCB, the growth of the other locally owned banks is likely to be more restrained and the largest foreign-owned banks will likely beneft from a flight to quality.
27 Investing in Central Europe | Your move in the right direction
Trakia Economic Zone (TEZ) is one •• On the request of certifed investor, 10. Free-trade zones of the biggest economic projects in Bulgaria, the corresponding authorities may •• Free-trade zones offer some tax and a public-private partnership that includes transfer ownership rights or establish customs benefts to foreign investors. six major industrial zones in the region a limited ownership right over real of Plovdiv. Together the zones in TEZ have estate (private state or private municipal •• Free-trade zones have been established attracted over 1.1 billion euro of fxed- property) without a tender. at Ruse, Burgas, Vidin, Plovdiv, Svilengrad, capital investments. The total area of TEZ is and Dragoman. •• Consulting and individual administrative 1070 hectares, of which 325 hectares are services. Investors will be able already occupied. From the start of the 1st The import and export of goods to and to authorize Agency officials to obtain industrial zone Maritza in 1995 some 120 from, as well as between, these areas any documents for implementation investors located their sites in the region, could be exempt from customs duties, VAT of the corresponding investment project. of which 80 multinational, opening over 12 and excise duties upon meeting certain 000 jobs. •• Financial support for construction conditions. of technical infrastructure elements The industrial zone in Bozhurishte (near to the borders of the project site, needed 11. Incentives and foreign investment Sofa) is the biggest new economic zone for implementation of one or more strategy in Bulgaria with a total planned area of 2.6 investment projects. Bulgaria’s government is committed million sq. meters. On the frst stage, it to the development of a free-market •• Institutional Support. has 581 thousand sq. meters of area with economy. The following are designed already developed infrastructure. •• Financial grants of up to 50% to attract foreign investments in the country. for education and R&D projects and up 1. Opportunity for foreign investors 9. Investment Incentives to 10% for manufacturing projects. to tender for concessions to use state- The Bulgarian legislation introduced •• State tax exemption for changing the land owned assets. a system of promotion measures for initial status. Acquisition of real estate, private investments in tangible and intangible fxed 2. Liberalization of the import and export state or private municipal property assets and creating new employment linked regimes. without a tender and at a price lower thereto, according to the legislation of EU. than the market, but not lower than 3. Guaranteed repatriation of profts. the tax assessment of the property. The investment projects are classifed 4. Foreign investors enjoy the same rights to Class B, Class A and Priority investment •• Establishment of public-private as domestic investors. projects. Depending on the class partnerships with municipalities, 5. Internally convertible currency. government incentives may include: universities, other organizations from the academic society and etc. •• Information services. Bulgaria offers foreign investors a number of incentives supporting the growth of their •• Shortened administrative procedures business. The latter allow for a special - The central and local government alleviated regime for acquiring permanent authorities will provide administrative residence and/or Bulgarian citizenship. services shortened with one-third of the time period established by the law
•• Financial support of up to 25% for the vocational training for obtaining professional qualifcations.
•• Reimbursement of labor costs paid by the employer.
28 Investing in Central Europe | Your move in the right direction
For example, if a foreign citizen invests 13.Expatriate life over BGN 1,000,000 (appr. EUR 511,292) Now that Bulgaria is a fully-fledged member or increases with this amount an investment of the European Union, greater numbers already made by acquiring shares in of international businesses have established a Bulgarian listed company or bonds issued operations in the nation’s capital Sofa and, by the State or the municipality or Bulgarian as a result, the levels of inward migration IP rights, etc., (s)he would be granted with from international professional expatriates a Bulgarian permanent residence. has increased.
Subject to certain criteria such individual There are now many expats living in would be considered as eligible for Bulgarian Sofa, which come from the UK, Ireland, citizenship after 1 year as of receiving America and Germany for example, and if the permanent residence if (s)he increases you are considering joining them you are the investment under the same terms and going to want to know all about the things conditions up to an amount of at least BGN to do for expatriates living in Sofa outside 2,000,000 (appr. EUR 1,022,584) or makes of working hours. an investment of at least BGN 1,000,000 in the share capital of a Bulgarian company There are no special rules regarding taxation for carrying out the so called “priority of expatriates in Bulgaria. They are taxed investment project”. according to the general rules applicable.
12. Foreign Direct Investment (FDI) After the leap in 2008, when FDI in Bulgaria reached EUR 5685 million, there was a signifcant decline throughout the following years until 2011, when Now that Bulgaria is a fully- the flow was marginal. However, certain improvement was observed as of early fledged member of the European 2012, although not close to the levels seen before the global fnancial crisis. In 2015 Bulgaria drew 1.6 billion euros, up 22.5 Union, greater numbers percent from 2014. of international businesses Considering all of the advantages that Bulgaria provides, notably its fscal plan with one of the lowest tax rates in the area and have established operations in its low labor costs, the country remains well- placed for foreign investment to revive again the nation’s capital, Sofa. in 2016.
29 Investing in Central Europe | Your move in the right direction
CZ
30 Investing in Central Europe | Your move in the right direction
Czech Republic
1. General Overview of the Economy The current economic situation is The formal head of state is the President, The Czech Republic is one of the most favourable, the recovery from the recession who is largely a ceremonial fgure, but stable and prosperous countries in Central following the global financial crisis has has the power to appoint the Governor Europe. GDP per capita at purchasing been supported by improving external of the National Bank and members power parity reached 87% of the EU conditions, rising competitiveness of Czech of the Constitutional Court. The President average in 2015, the highest level in the CEE companies and the relaxed monetary is chosen in direct elections. The head region. Growth is supported by exports, policy of the Czech National Bank. of the executive is the Prime Minister, primarily to the EU, as well as investment appointed by the President. The PM activity supported by a favourable business Political system appoints Ministers with approval from environment and rising competitiveness The Czech Republic is a parliamentary the President. of the Czech economy. This advantage democracy with a bicameral Parliament. was underlined by the accession to the The Constitutional Court can rule on EU. As a small and very open economy, The Chamber of Deputies has 200 seats and the unconstitutionality of laws or other the Czech Republic is deeply integrated is elected by popular vote under a direct legislation. in global production chains. Key sectors representation system with a 5% entry are automotive industry and related threshold. Aside from legislative powers, upstream suppliers, machinery, assembly the Chamber of Deputies gives and rejects of electronics and IT equipment, iron and confdence to the cabinet and approves steel production. Major trading partners the state budget. are Germany, France, Austria, United Kingdom, Italy, China and neighbouring CEE The Senate has 81 seats and is elected by countries. a majority system for six-year terms with one-third of the Senators being replaced A key advantage of the Czech economy is every two years. It approves laws proposed its overall stability. Inflation is kept at a low by the Chamber of Deputies. and stable level. Current account of the balance of payment turned to a mild surplus. The financial sector is conservative and well capitalised. The government budget reached a mild surplus and government debt is declining.
31 Investing in Central Europe | Your move in the right direction
2. Tax structure A company is treated as a resident if it has A withholding tax at the rate of 15% is Principal Taxes a registered office or place of management levied on dividends paid to both domestic in the Czech Republic. Resident companies and foreign participants from the countries •• Personal Income Tax are liable to tax on worldwide income. with which the Czech Republic concluded •• Corporate Income Tax A company that has neither a registered a double taxation treaty or tax information office nor a place of management in exchange treaty. Otherwise the applicable •• Value Added Tax the Czech Republic is treated as a non- rate is 35%. This tax may be reduced resident. Non-resident companies are under the terms of the relevant double The Czech tax system also includes excise subject to Czech corporate income tax taxation treaty binding for the Czech duties which are imposed on particular only if they receive income or gains from Republic. A withholding tax at a rate of goods. Real estate tax is levied on plots Czech sources and provided that the Czech 0% is related to dividends paid out by a of land and on construction. The real estate Republic has the right to levy taxes in terms subsidiary company, which has its place transfer tax is levied on the sale or transfer of an applicable double taxation treaty. of business in the Czech Republic, to the of real estate. The road tax is payable parent company in any EU Member State, for vehicles used for commercial purposes. The Czech taxable period is the calendar Switzerland, Norway or Iceland (the same As from January 1, 2014 the inheritance year or the economic year. The deadline will apply for Liechtenstein after the double and gift taxes are incorporated within for fling the annual tax return is taxation treaty between Liechtenstein the income tax system and the same the end of the third month after the end and the Czech Republic comes into force). rates apply as for income tax (with certain of the taxable period. This deadline may Dividend distributions between two Czech exemptions). be extended to the end of the sixth companies are exempt from the tax under month, after the end of the taxable similar conditions. Further, the rate of 0% In addition to taxes, some local charges period, if the tax return is prepared and is related to the dividend income of the and compulsory social security and health submitted by a registered tax advisor parent company, which has its place of insurance are applied in the Czech Republic. under a Power of Attorney. The Power business in the Czech Republic, derivable of Attorney must be fled at the Financial from a subsidiary company in any EU Key features Office by the end of the third month after Member State. For all these exemptions, Those liable to pay corporate income tax are the end of the taxable period. Companies certain conditions have to be met (e.g. all legal entities, including foreign companies that are subject to statutory audits have shareholding of at least 10% for the period with permanent establishment (mostly the fling deadline automatically extended of 12 months). From 2008, dividends arising branches) in the Czech Republic. to the end of the sixth month after the end to a Czech tax resident company and to a of the taxable period. company that is a tax resident in another The corporate income tax base is EU Member State, Norway or Iceland the trading result (i.e. proft or loss) which Czech entities are entitled to deduct (the same will apply for Liechtenstein is adjusted in accordance with the Income expenses that are incurred to generate, after the double taxation treaty between Taxes Act. Partners in general partnerships assure and maintain the income Liechtenstein and the Czech Republic and general partners in limited partnerships of the entity. Particular expenses are comes into force) are also exempt if paid are taxed on their share of the partnership’s disallowed or may be deductible up by a subsidiary that: is a tax resident in taxable income. Taxable income derived to a limited amount. a non-EU country with which the Czech from partnerships is subject to corporate Republic has concluded an effective double or personal income tax, depending on A tax loss may be carried forward taxation treaty; has a specific legal form; whether the partner liable for the tax is for offsetting against taxable profts, but satisfies the conditions for the dividend a company or an individual. no later than the ffth subsequent taxable exemption under the EC Parent-Subsidiary period. directive; and is subject to a home country tax comparable to Czech corporate income tax at a rate of at least 12%.
32 Investing in Central Europe | Your move in the right direction
The Interest-Royalty Directive is fully Under the Czech Income Taxes Act, Companies seated in the Czech Republic applicable to interest payments to any the remuneration paid to an employee with a turnover exceeding CZK 1 million EU Member State, Switzerland, Norway by a company should be regarded per 12 calendar months are required to or Iceland (the same will apply for as income from a “dependent activity“. register for VAT. Simplified registration is Liechtenstein after the double taxation A company (employer) is generally regarded also required if purchases from other EU treaty between Liechtenstein and the as the withholding agent of personal countries exceed CZK 326,000 per calendar Czech Republic comes into force). Interest income tax from dependent activities year and in some specific transactions – and royalties paid to a tax non- resident and is obliged to withhold the personal such as the acquisition of certain services. A from the countries with which double income tax from the remuneration of its company can register voluntarily even if its taxation treaty or tax information exchange employees on a monthly basis and pay it turnover fails to reach the above amounts treaty is concluded are subject to a 15% to the tax authorities. An employer prepares if it renders taxable supplies in the Czech withholding tax under the Czech Income an annual reconciliation of payroll tax Republic. Taxes Act. Otherwise a 35% tax rate advances, provided that the employee is applies. The exemption in compliance with not required by the law to fle an annual Foreign businesses and companies from the Interest-Royalty Directive also does not personal income tax return and asks for this other EU member states are obliged apply to interest that is treated as dividends reconciliation no later than by the 15th to register for VAT in the Czech Republic according to the thin capitalisation rules of February following the calendar year if taxable supply is performed, unless it is except interest paid to a tax resident for which the reconciliation is prepared. If the recipient who should self-assess Czech of the European Economic Area. the employee does not ask the employer VAT. Voluntary registration is possible. for the annual tax reconciliation, the tax Capital gains on the sale of securities and liability of the employee is treated as fulflled The standard rate of 21% applies participations are exempted from the tax by the withheld payroll tax advances. to the majority of industrial goods, services if conditions similar to those required to The reasons for obligatory fling of an annual and real estate transfers. A reduced VAT qualify for the dividend exemption under personal income tax return are e.g. receipt rate of 15% is applied to selected goods the EC Parent-Subsidiary are satisfied. of other income exceeding CZK 6,000 during (agriculture products, foodstuffs and the taxable period, receipt of employment pharmaceuticals) and selected services and All transactions with related parties must income exceeding 4x the average wage in a reduced 10% rate applies to the supply be conducted at arm’s length. Otherwise, any month of the taxable period (which is of certain goods from 1 January 2015 the taxpayer is obliged to adjust its tax then subject to the solidarity surcharge). (for example special nutrition for babies, base accordingly. If the Tax Authorities find certain medical drugs, books). that a company does not deal with related Advance income tax payments are always parties according to the arm’s length calculated based on the last known tax The VAT return must be fled and principles, the Tax Administrator will adjust liability. They are not, therefore, payable the tax paid within 25 days after the end the company’s tax base and impose related in the frst year. If the last tax liability was of the taxable period. The taxable period sanctions. lower than CZK 30,000, tax advances are not is a calendar month or calendar quarter, payable. depending on taxpayer turnover. Thin capitalisation rules are applied in the Czech Republic and restrict the VAT is levied on domestic taxable supplies, In case of newly registered VAT payers deductibility of interest and other financial the importation of goods, the acquisition calendar month as a taxable period is costs (inclusive of guarantee fees, credit of goods from another EU country, and possible only. facility fees etc.) on “loans and credits” as the purchase of specifed services from defined in the Czech Income Taxes Act. The foreign companies. The VAT base is usually Excise duties are levied on hydrocarbon limitation of the debt/equity ratio is 4:1 (6:1 the basis of consideration for goods sold fuels and lubricants, spirits, beer, wine for banks and insurance companies). The or services rendered, including customs and tobacco products. There is a uniform ratio applies on debt provided or “secured” duties, clearance and transportation costs, real estate transfer tax at the rate of 4%. (e.g. by a guarantee) by a related party. and excise duties (if applicable). This tax is applied when real estate is sold or transferred.
33 Investing in Central Europe | Your move in the right direction
Double taxation treaties The Czech Republic has concluded Current tax rates a considerable number of double taxation Corporate income tax 19% (5% tax rate applies for basic investment funds etc.) treaties. In most cases, the double taxation treaties concluded by the Czech Republic Personal income tax 15+7%* follow the OECD model. Standard rate: 21%
The Czech Republic, as a legal successor Value added tax Reduced rate: 15% to Czechoslovakia, has adopted the treaties concluded by Czechoslovakia in its Reduced rate: 10% legislation. Real estate transfer tax 4%
Withholding taxes
On dividends Dividends paid out by a subsidiary company to a parent company 35% (paid to foreign participants), if no double taxation treaty or tax within the Czech Republic or to the EU/Switzerland/Norway/Iceland information exchange treaty is concluded or from the EU parent or subsidiary company (based on the EU 15%, if not reduced by a relevant double taxation treaty Parent Subsidiary Directive) 0%, if certain conditions are met
Dividends paid out by a subsidiary to a parent company from 0%, if certain conditions are met the non-EU country to the Czech Republic/EU/ Norway/Iceland
35% (for comment look above at dividends) On interest Interest paid out by a Czech company to an EU/Swiss/Norwegian/ 15%, if not reduced by a relevant double taxation treaty Icelandic related party based on the EU Interest- Royalty Directive 0%, if certain conditions are met
35% (for comment look above at dividends)
15%, if not reduced by a relevant double taxation treaty On royalties 0% applicable from Royalties paid out by a Czech company to an EU/Swiss/Norwegian/ Icelandic related party based on the EU Interest-Royalty Directive 1 January 2011 (until
30 December 2010, the Czech Republic may tax royalties up to a rate of 10%)
* Solidarity surcharge applicable from 2013 to income exceeding 48times the average wage per year.
34 Investing in Central Europe | Your move in the right direction
Social Security and health insurance The social security and health insurance Employee system comprises pension, state Pension insurance 21.5% employment, and general health and sickness insurance schemes. Employment insurance 1.2%
Sickness insurance 2.3% Social security contributions are compulsorily paid by employers (legal Health insurance 9.0% entities or individuals who employ at least one employee), employees and self- employed persons. Employee Health insurance contributions are Pension insurance 6.5% compulsory for everyone who has permanent residence in the Czech Republic Employment insurance 0% or is an employee of a Czech resident employer, excluding persons whose Sickness insurance 0% contributions are paid by the state. Both Health insurance 4.5% obligatory social security and obligatory health insurance contributions settled by an employer are generally considered as deductible expenses for tax purposes. Self-employed person The rates of contribution for social security and health insurance are as follows at Pension insurance 28.0% present: Employment insurance 1.2%
A cap equal to 48 times the average monthly Sickness insurance (voluntary) 2.3% wage (i.e. CZK 1,296,288 for 2016) is Health insurance 13.5% applicable to the assessment base for social security purposes. Health insurance is uncapped. The minimum assessment base for the health insurance purposes equals Person without taxable income. The health insurance contributions are paid from to the minimum wage (CZK 9,900 per month minimum in 2016). There is no minimum assessment base for social security purposes in case Health insurance 13.5% of employment.
Person voluntarily participating in a pension insurance scheme (from chosen assessment base)
Pension insurance 28%
35 Investing in Central Europe | Your move in the right direction
Customs System According to customs regulations, all 3. News in the Czech Legislation Since 1 May 2004, the Czech Republic has standard customs procedures, including Changes in the Income Taxes Act been a Member state of the European special procedures, can be used: the release There are no major changes expected Union. This fact influences customs into free circulation, customs warehousing, in the taxation of corporations for 2017; arrangements signifcantly. The Czech inward processing temporary admissions, however, the respective legislation is still Republic, like other new Member States, has outward processing, transit and exportation. being discussed and its effectiveness will be completely adopted customs rules applied postponed till April 2017 or later. in the EU. The Single Administrative Document (“SAD”) is used for releasing the imported Starting from December 2016 companies At present, the Czech Republic participates and exported goods for the respective will have to report received revenues (in in the single market of the EU. Customs procedure or for terminating the procedure. the form of cash) via the newly introduced controls at the internal borders The simplifed procedures may be applied electronic evidence of revenues system. In of the EU and customs formalities have for all customs procedures and can save the first round this obligation is imposed been abolished for the movement of goods a signifcant amount of cost and time to hotels, catering and food providers and inside the EU. for importers and exporters. The new restaurants. The next round will focus on Computerised Transit System (NCTS) and wholesale and retail (starting from March Customs duties can be even lower due Import and Export Customs System (ICS 2017) as well as craftsmen (starting from to the extensive application of customs and ECS) enable paper-less communication March 2017). Nevertheless, the launch of preferences resulting from Free Trade between the operators and customs the new recording system induced protests Agreements concluded with a broad range authorities. and many attempts to amend already of countries (Norway, Iceland, Switzerland, approved legislation, so it is probable that Liechtenstein, Macedonia, Albania, Algeria, In 2016, the new European Union Customs there will be changes and amendments Tunisia, Israel, Morocco, South Africa, Code and related Czech local legislation which will change the respective provisions. Lebanon, Jordan, Syria, Egypt, Mexico, came into force. One of the targets of these Chile, South Korea, etc.). Customs unions changes is to make the customs procedures Individuals have been created with Turkey, Andorra simpler and faster for economic subjects. There are no major changes in the taxation and San Marino. Furthermore, the Czech The Czech Republic is also progressing of individuals expected for 2016; however, Republic grants preferential treatment on the path to fully electronic customs the respective legislation is still being to goods originating in developing and procedures. discussed and its effectiveness will be least developed countries. These customs postponed till April 2017 or later. preferences are conditioned by proving origin of the goods. Self-employed individuals will have to cope with the newly introduced electronic evidence of revenues; all individuals requested to do so by the tax authority will have to fle a declaration of their property and prove how they fnanced the acquisition of this property – the authority will be entitled to request such a declaration if the total wealth of the individual exceeds CZK 5 million.
36 Investing in Central Europe | Your move in the right direction
VAT non VAT registered businesses in the 3. Legal entities As of January 2016 new VAT reports have Czech Republic. A VAT rate for restaurant Generally, there are four main business been introduced: additional data in invoice services has been reduced from 21% company forms in the Czech Republic: details have to be filed electronically to to 15% (except for serving alcoholic joint stock company (akciova spolecnost the tax authorities together with VAT beverages and tobacco products). a.s.); limited liability company (spolecnost returns. The amendment further affected s rucenim omezenym s.r.o.); limited mostly the real estate area by introducing As of December 2016, businesses rendering partnership; and unlimited partnership. In a new definition of building plots in the restaurant services or accommodation addition, also a European company (SE), VAT system and new rules for determining in the Czech Republic have an obligation a European Economic Interest Grouping which land is, for VAT purposes, adjoining to record their sales according to the Act (Evropske hospodarske zajmove sdruzeni), to a building. on Registration of Sales. Further business a cooperative (druzstvo) and a European sectors will be covered by this obligation Cooperative Society (evropska družstevni Further amendment to the VAT Act during 2017 and further on. A sale has spolecnost) may be established in the Czech became effective on 29 August 2016. The to be registered if paid in cash, by card, Republic. Below are the requirements amendment has introduced a broadly- or by similar means, if it entails a business of an a.s. and an s.r.o., the most popular applicable reverse charge regime for the income taxable by Czech income tax (and if company forms. As of 1 January 2014 sale of goods to a tax- payer if the sale is not specifcally exempt from registration by the regulation of the Czech corporate law, realised by a person not established in the the Act on Registration of Sales). Payments including the main features of the legal Czech Republic and not registered as a VAT made by direct bank account transfers entities, was signifcantly changed. payer in the Czech Republic. Under certain or bank debits do not have to be registered. circumstances, foreign entities registered A VAT Act amendment which should Joint Stock company (a.s.) as VAT payers might be able to deregister become effective likely as of 1.4.2017 has The minimum amount of registered capital provided they realise only supplies that been prepared. The suggested changes are, is CZK 2m or EUR 80,000. The registered would otherwise be subject to the reverse among others, the following: capital may be expressed in EUR, only charge regime. if the accountancy of the company is •• New rules for taxing payments made maintained in EUR in accordance with the •• A further and relatively significant change before the supply is rendered should special legal regulations. The registered is the revocation of the special status of change with major impacts mostly on capital is made up by the shareholders’ free zones. From 29 August 2016, free prepaid telecommunication cards; investment contributions and is divided zones shall be considered a standard •• Special rules for determining a date into shares of a certain nominal value or area of the Czech Republic where the of taxable supply in case of recurring into a certain amount of shares without common tax regime is applicable. During supplies will be removed; stating the nominal value (unit shares). 2016 several VAT Act amendments have Articles of Association shall stipulate the been introduced which, among others, •• The shortages of goods should be subject minimum amount of the registered capital delivered the following changes: The to the input VAT recovery adjustments to be paid up at the time of formation of the definition of a building plot of land, the (currently subject to output VAT); company. The formation of the company is supply of which is taxable, has been •• Local reverse-charge mechanism should effective, only if each of the founders paid broadened substantively. Local reverse- be applied on forced supplies of goods (ie up the share premium, if any, in full and all charge has been introduced to various judicial sales); founders paid up in aggregate at least 30% supplies of goods such as electricity or of the nominal or accounting value of all gas, and to supply of telecommunication •• Investment companies will treat open subscribed shares in the time stipulated in services not rendered to final consumer. funds and sub-funds differently as such the Articles of Association of the Company; Furthermore, a local reverse-charge funds will be - for VAT purposes – however, before filing an application with mechanism applies to all local supplies considered a separate person. the Commercial Register at the latest. of goods to Czech VAT taxpayers (regardless of whether established or not) performed by non-established and
37 Investing in Central Europe | Your move in the right direction
Bringing of the in kind contribution to the A company with dualistic structure At companies with registered capital equal company must take place before formation must have a Supervisory Board. The to or under CZK 100,000,000 shareholders of the company. Supervisory Board has three members holding shares of total nominal value or (either natural persons or legal entities), number of unit shares equalling at least 5% The amount of capital contributed in kind unless the Articles of Association of the registered capital of the company must be declared in writing in the Article of determine otherwise. The Members of the may request from the board of directors Association and must be evaluated by an Supervisory Board are elected and recalled that the General Meeting of the company expert selected by the founders. by the General Meeting. is convoked, that certain items be added to the agenda of a General Meeting, that There are no restrictions on the number of The business management of the company Board of Directors of the company be shareholders, or on their nationality is conducted by the Board of Directors. investigated by the Supervisory Board, or or residence. The sole founder of the a.s. The Board of Directors has at least three to file the petition regarding compensation can be a legal entity (company) as well as a members (either natural persons or legal of damage caused to the company by the natural person. entities), unless the Articles of Association Board of Directors (status of qualified determine otherwise. The members shareholder). Regarding the company´s bodies the new of the Board of Directors are elected and Czech Act on Business Corporations and recalled by the General Meeting, unless At companies with registered capital over Cooperatives provides for two different the Articles of Association determine CZK 100,000,000 the status of qualified corporate structures. The company may that they are elected and recalled by shareholder requires the shareholding have either a dualistic (Board of Directors the Supervisory Board. The Board of of shares of total nominal value or number and Supervisory Board) or monistic Directors is responsible for the day-to-day of unit shares equalling at least 3% (Administrative Board and Managing management of the company, preparation of the registered capital of the company. Director) system of organisation. of annual financial statements and corporate reports, and maintenance At companies with registered capital equal A company with a monistic structure of the company’s accounts etc. to or over CZK 500,000,000 the status must have an Administrative Board. of qualified shareholder requires the The Administrative Board has three Shares may be registered or bearer, and shareholding of shares of total nominal members (either natural persons or legal both types are transferable. Bearer´s share value or number of unit shares equalling entities), unless the Articles of Association may be issued only in a book-entered form at least 1% of the registered capital of determine otherwise. The Chairman of the or in an immobilised form. There is no the company. Generally a quorum is Administrative Board has to be a natural minimum value or other limitation placed obtained at the general Meetings when person. on the value of individual shares. shareholders holding at least 30% of the company’s registered capital are present, The Managing Director is a statutory body The Articles of Association may allow and unless otherwise determined by the and conducts the business management determine different types of shares and Articles of Association. A simple majority of of the company. He is appointed by the attribute different rights thereto. The present voting shares is enough for most Administrative Board (or the General shares to which no specific rights are decisions; however, a two-thirds or three- Meeting if determined in the Articles of attributed shall be deemed as Basic shares. quarters vote is necessary if the Articles of Association). The Managing Director has to Shares with preferential right to dividends Association or the law stipulates so (e.g. to be a natural person and can simultaneously or to a share in a liquidation balance shall change the Articles of Association). be the Chairman of the Administrative be deemed as Preferred shares which does Board. not include a right to vote, unless otherwise determined by the Articles of Association. Shares without right to vote may be issued up to the total sum of either nominal values equalling 90% of the total registered capital of the company.
38 Investing in Central Europe | Your move in the right direction
Limited Liability Company (s.r.o.) The Memorandum of Association may Employees’ rights The minimum amount of registered capital allow and determine different types The employment relationship governed by is CZK 1. The minimum contribution of shares and attribute different rights Czech law is regulated by Act No. 262/2006 of an individual shareholder in thereto (for example preferential right Coll., Labor Code, as amended (hereinafter the company is CZK 1, unless the to dividends or fixed right on dividends, the “Labor Code”) that came into effect Memorandum of Association stipulates etc). The shares to which no specific rights on 1 January 2007. The Czech labor law a higher amount. At least 30% of each are attributed shall be deemed as Basic generally grants more legal protection to founder’s monetary contribution plus the shares. The Memorandum of Association the employee and endeavours to achieve amount of share premium, if any, must may also allow one shareholder to hold a more equal position of the parties in be paid at the time of filing of the petition more shares, even of the other type . the employment relationship. The Labor for registration of the company with the Code, therefore, considerably restricts the commercial register. The same applies in The share of the shareholder can be liberty of the contract in the employment the event the company is established by represented by an ordinary share relationships. Since 1 January 2012 an one founder. certificate, if the Memorandum of important amendment to the Labor Association stipulates so. Code entered into force which brought Bringing of the in kind contribution to more flexibility to the Czech labor law. the company must take place before Generally a quorum is obtained at These changes resulted especially in the the company´s formation. The amount the General Meetings when shareholders simplification of the wording of the Labor of capital contributed in kind must be holding at least 50% of all votes are Code and of recruitment and dismissing declared in writing in the Memorandum of present, unless otherwise determined by employees. On 1 January 2014 the new Association and must be evaluated by an the Memorandum of Association. A simple amendment to the Labor Code entered expert selected by the founders. majority of votes is sufficient for most into force bringing the Labor Code in decisions; however, a two-thirds vote conformity with the New Civil Code. A limited liability company may be founded or votes of all shareholders are necessary if Currently, the amendment by one person (either a natural person the Memorandum of Association to the Labor Code with the planned or legal entity). The number of the or the law stipulates so (e.g. to change the effectiveness as of July 2017 is proposed company´s shareholders is not restricted. Memorandum of Association). and discussed. The proposed wording introduces among other things a new A supervisory board may be set up but 4. Labor and wages category of the managerial employee and is not required by law. The legislation Employment market the (currently missing) regulation stipulates that the supervisory board is The Czech Republic has a highly skilled of home office. set up only in case the Memorandum workforce, particularly in technology and of Association or special act states so. engineering. Educational and literacy levels The Labor Code complies in general with Business management is conducted by are high. Companies report few difficulties EU norms. It contains the basic definitions one or several Executives, elected by the in recruiting skilled and unskilled workers, of discrimination and anti-discriminatory company’s shareholders at the General particularly in industrial areas where rules, the sexual-harassment provision, Meeting. The office of the company’s unemployment is the highest. Finding equal treatment of EU nationals and Czech Executive can be held either by a natural workers is difficult also in regions where individual employees, and specific EU rules person or a legal entity. In case the the unemployment rate is low, e.g. in on trade unions. These questions have company has more than one executive, Prague and parts of western Bohemia, it also been regulated by a separate Anti- the Memorandum of Association can hovers around 2-3%. There is also a dearth discrimination act in 2009. determine that the Executives shall of individuals with management and create a collective body. The Executive(s) fnancial expertise. is responsible for the day-to-day management of the company, preparation of annual financial statements and corporate reports, and maintenance of the company’s accounts etc.
39 Investing in Central Europe | Your move in the right direction
The Labor Code, in line with EU law, Working hours The average monthly wage in the year 2015 contains rules limiting employers in The official workweek is 40 hours. amounted to CZK 26,467. The average concluding fixed-term employment The Labor Code sets strict limits on monthly wage in the period of the first to contracts. However, the Labor Code overtime work – total overtime work may third quarter of the year 2016 amounted to allows fixed-term employment contracts not exceed 8 hours per week on average CZK 27,000. to be renewed after a maximum of in a period lasting no longer than 26 three years, up to two times, and for a weeks (52 weeks in case it is agreed on Further benefits specifically covered in maximum length of three years per each in the collective bargaining agreement), the Labor Code include the following: renewal, i.e. maximum nine years. If on not including the overtime work for which the employer’s part there are serious compensatory time off was provided. Vacation: Employees who have worked operational reasons, or reasons consisting at least 60 continuous working days with in the special nature of the work, which Employees must be paid the achieved a given company are entitled to paid would make it unreasonable to require wage, plus a bonus of at least 25% of the annual vacation (on a pro-rata basis an employer to conclude an employment average earnings or time off in lieu of the related to the number of days worked relationship for an indefinite term with the 25% bonus for overtime work. Based on in the calendar year). The minimum employee who is to perform such work, an agreement between the employer and annual vacation is four weeks. Where the aforementioned limits do not apply as the employee it is possible to include part an employment contract lasts for less than of 1 August 2013. The operational reasons of the overtime work into the employee’s one year, one-twelfth of the annual holiday as well as the conditions of conclusion salary (i.e. in the maximum amount of 416 is accrued for each 21 days worked. of fixed-term employment relationship hours in case of managerial employees and must be determined either by a written 150 hours in case of other employees per Maternity: Maternity leave lasts 28 weeks agreement concluded with a trade union calendar year). However, it is only possible (37 weeks for women giving birth to more or by the employer’s internal regulation in when the salary itself is stipulated in the than one child at the same time). This case there is no trade union active at the agreement between the employer and the may be extended as a parental leave at employer. employee (e.g. in the employment contract the request of the mother until the child or in the agreement on salary). reaches three years of age. During maternity Once the above-mentioned threshold has leave, the mother has no right to wages but been met and the employment continues, Wages and benefits qualifies for sickness benefits. Fathers may the contract would automatically become The minimum-wage law is set out in also apply for parental leave of up to three indefinite (i.e. the position would be made Government Order No. 233/2015 Coll, years. a permanent one), with the exceptions and amounts to CZK 9,900 per month or described above. The minimum annual CZK 58.70 per hour since 1 January 2016. Sick pay: If an employee is absent from holiday is four weeks. The previous amount of minimum wage work because of illness, he/she is provided was set to CZK 9,200 and was valid since with wage compensation by the employer 1 January 2015. In 2017, the amount of for the first 14 calendar days. This minimum wage will be set to CZK 11,000 compensation is granted from the fourth per month and CZK 66 per hour. The working day of temporary incapacity. From minimum wage is set at the subsistence the 15th day of sickness, a sick payment level; actual wages paid are much higher. from the social security insurance is paid The minimum wage is paid to only 3.2% of to the employee. The sick payment amounts employees, according to the Ministry of to 60% of the average earnings. Labor and Social Affairs (Ministerstvo prace a socialnich veci), but it is important for calculating minimum bases for health- insurance and social-security contributions. Some trade unions (for example, agriculture and construction unions) negotiated higher minimum wages directly with their employers.
40 Investing in Central Europe | Your move in the right direction
In case of work injury, employees 5. Education Vocational education and training are are entitled to compensation on loss The Czech Republic combines thoroughly integrated into both secondary of earnings, compensation on pain an outstanding level of general education and higher education institutions, and and diminishing of social position, with strong science and engineering enrolment in vocational education is compensation on purposefully expended disciplines. For generations the Czech exceptionally high by OECD standards. costs associated with the treatment education system has generated high and material damage. For the death of class, technical problem-solving skills in The Czech Republic also has a very good an employee, due to work injury, the environments where standard solutions position in tertiary education. There has surviving spouse would receive a one-off were impossible. been an increase in university-level skills indemnification of CZK minimum 240,000 in the adult population, as measured by and each dependent child shall receive School education is compulsory from ages educational attainment. at minimum CZK 240,000. Parents of the 6 to 15 (elementary and lower secondary deceased living with him/ her in the same school). After 9 years students may continue While public universities offer programmes household shall receive an aggregate sum at three basic types of upper secondary ranging from economics, statistics of CZK 240,000. The survivors are also school: vocational training centres, and public administration to finance, entitled to other compensatory payments. secondary schools and grammar schools accounting, international relations and (gymnazia). Undergraduate and graduate marketing, a number of private institutions Unemployment: Unemployment benefits studies are offered by colleges (offering 3 specialise in business administration are provided for up to five/eight/ eleven to 4-year bachelor programmes). courses. Several institutions and months (depending on the age of an universities offer high- quality MBA unemployed person) at the rate of 65% for The Czech education system has programmes and are affiliated with foreign the first two months of unemployment, a very strong position in upper secondary universities and colleges. 50% for the next two months and 45% education, which serves as the foundation of the previous net average earnings for advanced learning and training The Czech Republic provides a free and for the remaining period. The total sum opportunities, as well as preparation flexible choice in continuing education. of unemployment benefits to be paid is for direct entry into the labor market. Private training providers and non-profit capped at 58% of the average wage in the The percentage of the adult population organisations co-exist and complement Czech Republic for the period from the first that had completed at least a secondary secondary schools and universities. to the third quarter of the previous year.. education in the Czech Republic is According to recent research, the most permanently among the highest in all OECD frequently taught courses include the use countries. More than 90% of the Czech of PCs, accounting, management, finance, population aged 24-64 had completed at marketing and foreign languages. least upper secondary education in 2013, compared to an EU average of 75% (Source: EUROSTAT).
41 Investing in Central Europe | Your move in the right direction
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 1,228 km, as well as 5,810 km of national highways. Regional governments are responsible for secondary and local roads, which amount to 14,635 km and 34,129 km, respectively. The State Transport Infrastructure Fund spent CZK 26 bn on road infrastructure in 2013. Electronic tolls for vehicles over 3.5 tons are already effective, provided by administrative authority, covering some 1,450 km of roads.
Railway network The Czech transport and communications system is good by eastern European standards but below the quality commonly found in western Europe. The railways are an important means of transport, with a network of 9,470 km. Telecommunications Key Players in the automotive industry The number of fixed telephone lines Some of the key players in the Czech Shipping and air transport peaked in 2001 – 2002 and is steadily automotive industry are major OEM’s that River transport, along the 303 km of rivers decreasing, counting 1,4 million are significantly boosting all automotive that are navigable, is comparatively participants in 2013. Mobile phone output in the Czech Republic. Skoda Auto unimportant; its main use is for the internal penetration is more than 1 active SIM card a.s. – a Czech brand owned by the German movement of goods on the Vltava and Labe per citizen. There were 68% of households VW group – has a major production facility river, north of Prague. with computer and 67% with internet in Mlada Boleslav. A significant portion access in 2013. of its output goes to the local and Central The national air carrier, Czech Airlines European markets. Other car producers (2,773,700 passengers in 2013), has 7. The Most Active Industries/Sectors are the TPCA (Toyota-Peugeot-Citroen similarly small domestic significance, given Automotive Industry Automobile) and HMMC (Hyundai Motors the country’s compact size. Since 2011, The automotive industry has been the most Manufacturing Czech). Together with Skoda Czech Airlines merged into holding with important production sector of the Czech Auto a.s., those three carmakers reached Ruzyně Airport (11 million passengers in Republic. It already accounts for 20% nearly 1.3 million units of overall production 2013) to form a stronger entity. In April of manufacturing output and employs of passenger cars in 2015.The most 2013, 460,725 Czech Airlines shares (i.e. 200,000 people (Czech Statistical Office). important players among the automotive 44% shareholding) were sold to Korean Air. suppliers are subsidiaries of multinational companies, such as Aisin, Bosch, Continental, Denso, Faurecia, Johnson Controls, Magna, TRW Automotive and many others.
42 Investing in Central Europe | Your move in the right direction
Engineering •• a high proportion of supranational capital Currently the Czech Republic has a very Electrical engineering with its robust growth in new investment projects, especially stable financial system. It was confirmed is becoming the Czech Republic’s biggest in connection with the introduction by the International monetary fund in industry overtaking the country’s traditional of advanced technologies; its Financial System Stability Assessment industrial sectors of steel production and Update from 4 April 2012 stating that banks •• the use of logistic networks engineering. in the Czech Republic, having ample capital of supranational companies; and liquidity, and solid profitability, got Electrical and electronic industry •• a high proportion of science and research over the effects of the global financial crisis The growth of the electrical and electronic used in the production of computational relatively unscathed and that stress test industry since the second half of the 1990s and digital communications technology results show that Czech banks are resilient in the Czech Republic was based on and the need for highly-qualifed against substantial shocks. the growth of both domestic consumption employees in research and in production. and export. In 2000, revenues from the Construction sale of their own products and services in Financial Services As with the rest of the economy, all branches reached CZK 185bn. In 2015, The core of the commercial banking sector construction was almost entirely state- the revenues totalled CZK 581bn which, comprises three large banks that had their controlled under communism and in current prices, amounts to more than a roots in the communist era, with three has quickly been returned to private tripling of the volume of production. In of the four hived off from the Czechoslovak ownership. By 1996 more than 99% that period, the workforce in the electrical State Bank’s enterprise lending operations of all construction enterprises were in industry increased by 31,000 (i.e. 25%). in 1990. Together, the three Komercni the private sector, which grew rapidly from banka (KB), Ceska sporitelna (CS) and the 1990 both as a result of privatisation and Traditionally, the largest share former foreign-trade bank, Ceskoslovenska through the establishment of new, often of consumption was accounted for by obchodni banka (CSOB) accounted for 80% small, frms. However, the construction heavy-current technology and by electronic of all banking sector assets in 1994 (64% of larger apartment blocks fell dramatically components. The largest accumulation in 2011). These banks inherited a large with the end of the centrally planned of consumption was observed in electronic volume of non-performing loans from system, hitting larger enterprises, and components. the communist period (including foreign- output contracted by almost 50% during trade credits to developing Soviet-bloc the latter half of the 1990s, with the sector’s The Czech electrical and electronics countries, and domestic credits for private share in value added falling to 5.7% in industry has more than 140,000 employees and co-operative housing construction). 2015, from 8.1% in 1990. The decline and created an output of over CZK 580 Successive governments led by the Civic nonetheless appears to have bottomed bn in sales as of 2015 most of which is Democratic Party (ODS) in 1992-97 resisted out with the onset of an increase in exported especially to other countries their full privatisation owing to fears that, demand for construction of greenfeld of the European. once in private hands, they would cease production facilities, benefting larger to support domestic enterprises. frms. Construction was severely hit The electrical industry is primarily marked by the recession following the global by: Sizeable stakes were sold during fnancial crisis in 2008. In 2014 and 2015, voucher privatisation, but the resulting •• the complementary character of its the construction sector enjoyed a recovery production in creating prerequisites ownership structures were not conducive supported by the inflow of EU funds. for the competitiveness of other to restructuring. The banks controlled branches of the manufacturing industry investment funds, which in turn controlled and power industry; large parts of the formerly state-owned enterprise sector. The result was a non- •• a high proportion of imported materials, transparent web of cross-ownership and components and parts for production continued insider lending that helped and assembly; large enterprises avoid restructuring while adding to the state-owned banks’ bad-loan •• a wide range of technological processes; portfolios.
43 Investing in Central Europe | Your move in the right direction
Retail 9. Investment Incentives Manufacturing Following privatisation, Czech-owned Investment in manufacturing, technology •• Starting new or expanding existing companies consolidated a large number centres and strategic service centres are production. of small outlets into retail chains. However, generally eligible for investment incentives as Czech investors lacked marketing and granted by the Czech government. An •• The minimum investment is CZK 50 management skills, and their shops were amendment to the Act on Investment or 100 million (depending on the region), often not in prime locations, they soon Incentives took effect from 1 May 2015. at least 50% of which must be invested in succumbed to foreign competition. Several new machinery. European retail chains have invested Forms of Investment Incentives •• Creating no fewer than 20 new jobs. heavily in the Czech retail market. Foreign Aid intensity is 25 % in the form of: companies have also spearheaded •• Corporate income tax relief for 10 years; Technology Centres the move from small outlets to larger department stores and out-of-town •• Job creation grants (CZK 100,000/200,000 •• Activities qualifying as technology hypermarkets. The retail market was worth per newly created job, only in regions centres include applied research and the CZK 966bn and accounted for 7% of total with a high unemployment rate and CZK development and innovation of hi-tech employment in 2015. 300,000 in so called Special economic products, technologies and production zones); processes. Most consumer goods are manufactured •• Purchase of land at a reduced price; •• The minimum investment is CZK 10 locally. The local industries making million and at least 20 new jobs must be consumer goods, especially the sectors •• Cash grant for acquiring assets of up created. producing white goods and personal to 10-12,5% of the costs (no more than computers (PCs), have received huge foreign CZK 1,500 million for manufacturing, Strategic Service Centres investments in the past decade. Retail sales CZK 500 million for technology centres) grew by 3.5% year-on-year in volume terms assuming the conditions of the strategic •• Activities qualifying as strategic service on average between 2001 and 2015. investment project are met (see below); centres include software development or innovation and repairs of hi-tech •• Relief on real estate tax up to 5 years in 8. Industrial parks equipment, as well as handling Special economic zones. Due to a considerable inflow of FDI into the management, operations and the country in recent years, the availability administration of the internal affairs of Aid above 25 %: and choice of office space has improved companies. signifcantly. Most projects in the country are •• Training and retraining grants (generally •• There is no minimum investment open-feld constructions, with the exception 25 % or 50% of total expenditures requirement; however 70 new jobs for of some reconstructions of objects in cities. for training and retraining, only in regions repair and a shared service centre, (40 for with a high unemployment rate and in software development and data centres The Czech Republic boasts an excellent Special economic zones). and 500 for call centres) must be created. network of over 150 industrial zones, which are located on the outskirts of virtually every Selected Conditions for Specific Strategic Investment Projects town of regional importance. Investment Projects Work on an investment project (i.e. •• Manufacturing the acquisition of assets, including •• An investment in assets of no less than acquisition orders, or commencing CZK 500 million, of which CZK 250 million construction) may not begin before in new machinery while creating no fewer CzechInvest approves the project. Other than 500 new jobs. basic investment requirements (which must be fulflled within three years from granting the investment incentives) are as follows:
44 Investing in Central Europe | Your move in the right direction
Technology Centres 11. Expatriate life 12. Weather and climate Although in most respects life in the Czech The Czech climate is mixed. Continental •• An investment in assets of no less than Republic has rapidly approached Western influences are marked by large fluctuations CZK 200 million, of which CZK 100 million standards of living, the cost of living remains in both temperature and precipitation, while in new machinery while creating no fewer substantially lower than in Western Europe. moderating oceanic influences diminish than 100 new jobs According to the Union Bank of Switzerland from west to east. In general, temperatures average prices of goods and services in decrease with increasing altitude but are The eligible costs are calculated as the Prague are only 49.2% of those in Zurich. relatively uniform across the country at eligible fixed assets for production or as Domestic purchasing power in Prague is lower elevations. the payroll costs of the new jobs incurred 45.1% of Zurich’s level, which is the highest with respect to the project during 24 purchasing power in CE. The mean annual temperature at Cheb in months after filling the vacancy in the case the extreme west is 45º F (7º C) and rises of technology centres and strategic service With respect to accommodation Prague to only 48º F (9º C) in Brno in southern centres. and all larger cities boast a wide range Moravia. High temperatures can reach of rented furnished and unfurnished 91º F (33º C) in Prague during July, and low 10. Foreign Direct Investment (FDI) accommodations for expatriates and their temperatures may drop to 1º F (-17º C) in The stock of inward foreign direct families, ranging from centrally-located Cheb during February. The growing season investment (FDI) in the Czech Republic apartments to spacious villas in leafy is about 200 days in the south but less than was US$122.9 bn at the end of 2012. suburbs. Many real estate agencies offer half that in the mountains. The country now has only a few state relocation services for a charge of one enterprises left to sell, the most important to two months’ rent. Annual precipitation ranges from 18 inches being the energy company, CEZ. Although (450 millimetres) in the central Bohemian privatisation opportunities will soon dry Prague and many cities in the Czech basins to more than 60 inches on windward up, steady inflows of FDI should come from Republic are famous for their architectural slopes of the Krkonose Mountains reinvested earnings of foreign-owned firms heritage, museums, theatres, cinemas, of the north. Maximum precipitation falls and some new greenfield investment. galleries, historic gardens and cafes. during July, while the minimum occurs in February. There are no recognisable Germany is the largest foreign investor, climatic zones but rather a succession of with 23% of the inward FDI stock at the end small and varied districts; climate thus of 2012 (the latest available data). follows the topography in contributing to the diversity of the natural environment. The second and third largest foreign investors are the Netherlands (with 15% of the inward FDI stock at the end of 2012) and Austria (with 14% of the inward FDI stock at the end of 2012). A significant portion of FDI inflows into the Czech Republic has been concentrated in manufacturing and financial intermediation (both about 24% of total FDI at the end of 20012), and disproportionately in the capital, Prague, and other large cities. Real estate and business activities have been the second-largest beneficiary (with 15% of the total). More investment is being directed towards transport, storage and communications and trade, hotels and restaurants (Source: Czech Invest, Czech National Bank).
45 Investing in Central Europe | Your move in the right direction
Reinforced relationships and attractiveness of the Czech Republic
In December 2005, Jiri Paroubek and Chinese FDI in the Czech Republic (2007-2015), EUR mn Wen Jia-pao, prime ministers of the Czech Republic and China respectively, executed 2015 252,1 14 agreements defning general conditions 2014 -3,1 2013 of mutual cooperation in economic, political 6,3 2012 54,5 and cultural areas. One of the agreements 2011 -75,6 was the agreement on the promotion and 2010 8,6 protection of investments between the Czech 2009 -18,4 Republic and China that initiated the inflow 2008 -11,9 of Chinese capital. During the 2014 China 2007 47,1 Investment forum held in Prague, among -100 -500 50 100150 200250 many other CEE countries, the Czech Republic signed a Memorandum of Understanding on further development of mutual cooperation In July 2009, the agreement on cooperation are active in the technology, automotive in said areas. In March 2016, on the invitation between CzechInvest and the China Council manufacturing and environmental of Mr. Zeman, the president of the Czech for the Promotion of International Trade was industries. Republic, Mr. Xi Jinping, the president of the concluded. It has been guarantying mutual People’s Republic of China visited Prague and recommendation of business opportunities At the beginning of 2011, CzechInvest concluded tens of commercial memorandums and contacts, organisation of joint trade moved its office from Hong Kong to which open up a new page in the two nations’ missions, exchange of information and other Shanghai. This step is assumed to attract communications. support in order to attract new Chinese more potential investors and a higher investors to the Czech Republic. number of Chinese investments in the The mutual economic relations between the future. Moreover, another office of Czech Republic and China are supported by CzechInvest is actively promoting the Czech CzechTrade, an agency for promotion of CzechInvest, the investment and business Republic as an ideal target country for export under the Ministry of Industry and development agency of the Ministry of Chinese investments, e.g. it participated in Trade has been established in Chengdu, the Industry and Trade, which is in charge of the Chinese Outbound Investment Summit, third office in China (along with Bejing and attracting foreign direct investments to the one of the most important summits for Shanghai). Czech Republic. Since 1993, CzechInvest Chinese foreign investors. has mediated foreign direct investments Czech-China mutual economic cooperation totalling EUR 55m for the following Chinese The number of Chinese companies was not only developed and launched at the companies: Changhong, Shanxi Yuncheng establishing operations in the Czech state level but also in private sectors, such Plate-Making Group and YAPP Automotive Republic has been increasing steadily over as the investments of CEFC in 2015. Parts. the past decade. The most signifcant ones
46 Investing in Central Europe | Your move in the right direction
The highest interest is expected from Chinese companies engaged in technological, energy, biotechnical, construction and electro-engineering industries. Chinese investments in the Czech Republic are coming from both already existing and newly incoming Chinese companies. The key recent or upcoming Chinese investments in the Czech Republic are listed in the table below.
Major Chinese companies in the Czech Republic
Company Industry Year of Short description investment
Huawei IT, communication 2005 Huawei is a leading telecom solutions provider. Through continuous customer-centric innovation, the company has established end-to-end advantages in Telecom Networks, Global Services and Devices. Owned by Huawei Technologies Coöperatief U.A.
ZTE Communication 2005 ZTE Corporation is a global provider of telecommunications equipment and network solutions operating in more than 140 countries. It offers a wide choice of products ranging from voice, data, multimedia and wireless broadband services.
Changhong War industry, 2005 One of the world’s biggest LCD TV manufacturers. The factory, established household by Changhong in 2005, is located in the Industrial Zone of Nymburk city, 42 appliances, IT km east of Prague. There are four assembly lines with production of up to 1 million LCD TV's per year. The total investment is USD 10.89m.
Shanghai Maling Food 2006 The company, subsidiary of SHANGHAI MALING AQUARIUS Co., Ltd., is Aquarius Co., Ltd engaged in the production and sale of canned meat products and ready- made meals under the brand Mailing and Guiding, respectively.
Yuncheng Plate Plate-making 2007 Czech Yuncheng Plate making Co., Ltd is a professional rotogravure cylinder Making Printing making company with 2 working lines and an annual output of 12,000 Machinery Co., cylinders. The company's products include: pre-press, bases, gravure rollers, Ltd etc.
YAPP Automotive 2010 YAPP is engaged in the production of plastic fuel tanks in Mlada Boleslav. Its Automotive products are supplied to leading car makers such as Volkswagen, AUDI, GM, Parts Co., Ltd Ford, PSA, Hyundai and Kia. Total investment of USD 12.75m.
COSCO Shipping 2011 China Ocean Shipping (Group) Company (COSCO), one of the major multinational enterprises in the world, is China's largest and the world's leading Group specialising in global shipping, modern logistics and ship building and repairing, ranking the 327th in Fortune Global 500.
Noark Electric 2011 Noark has invested 3m EUR and engaged in R&D, manufacturing and distribution of electro technical machines and components; Prague is one of three regional centres (besides Shanghai and Chicago).
47 Investing in Central Europe | Your move in the right direction
Company Industry Year of Short description investment
Buzuluk Engineering 2011 BUZULUK a.s. is an engineering plant, it is a subsidiary of Dalian Xiangsu and Komarov designs, develops and produces:1. A wide range of machines and equipment for the rubber industry; 2. A wide range of piston rings. Dalian Xiangsu has invested 13m EUR in this deal.
SaarGummi Automotive 2011 Subsidiary of Chongqing Light Industry & Textile Holdings (Group) Co., Ltd. manufacturing sealing systems for the automotive industry including window seals, door weather strips, roof frame seals etc. Car makers using SaarGummi parts: Volkswagen, AUDI, Škoda, Seat, Porsche, GM, Opel, BMW, Daimler, Ford.
China CNR Co., Railway traffic 2013 CNR Co., Ltd. has invested EUR 10m in the Czech Republic and will carry out Ltd equipment systematic scientifc research on rail transportation and other areas of new technologies, new processes, new products and platform construction.
CEFC 2015 CEFC China Energy Company Limited represents the largest private company in Shanghai and the sixth largest private company in China and operates in many areas of industry, mainly in the fnance and power industry. CEFC acquired shareholdings in many signifcant Czech companies.
HiSense Electronic appliances 2015 Multinational white goods and electronics manufacturer with publically traded subsidiaries. Currently operating in 13 manufacturing facilities in China and several others in Europe and Africa.
Bank of China Finances 2015 One of the 5 biggest state-owned commercial banks in China. It was founded in 1912 by the Republican government. It is the oldest bank in mainland China still in existence. In 2015 a branch of the Bank of China was established in the Czech Republic.
Major Chinese investments in the Czech Republic
Company Industry Year of Short description investment
Živnobanka Finance 2015 Živnobanka building in Prague was founded in the 19th century and for a long period served as the seat of banking institutions. Today Živnobanka is a cultural monument. The building was bought by CEFC.
MÉDEA GROUP Marketing, media 2015 Médea Group and Empresa Media represent the largest communication and EMPRESA and media group in the Czech Republic. Within the agreement on strategic MEDIA (TMT) cooperation with CEFC, Médea Group and Empresa Media acquired a signifcant strategic and fnancial partner for further development in marketing and the media area.
48 Investing in Central Europe | Your move in the right direction
Company Industry Year of Short description investment
Travel Service Air transport 2015 Travel Service is the biggest Czech airline company. Travel Service operates (airlines) regular flights under the SmartWings brand, charter flights and private flights in the Business Jet category. Travel Service planes fly to more than 300 airports on 4 continents. Travel Service is present on the market not only in the Czech Republic but also in Slovakia, Poland and Hungary, where the company has its subsidiary companies. In 2015 CEFC joined as a minority shareholder.
Pivovary Brewing industry 2015 Pivovary Lobkowicz Group, a.s. is the Czech no. 4 brewing group by local sales Lobkowicz and no. 5 by total production. It consists of seven regional breweries located throughout Bohemia and Moravia. Commencement of their activities dates back to the Middle Ages and the oldest brewery was founded as early as in 1298. The Group produces a wide portfolio of beers that differ from each other by the large spectrum of their taste. Pivovary Lobkowicz is majority- owned by Chinese company Lapasan/CEFC.
EKOL, spol.s.r.o. Engineering industry 2015 EKOL group is a flexible and rapidly developing Czech company founded in 1991, which is currently a respected European manufacturer and supplier of equipment for the production of heat and electricity. In 2015 the Chinese engineering company Xi'An Shaangu Power acquired a 75 % stake in EKOL.
Le Palais Art Hotel services 2016 The fve-star hotel, Le Palais Art Hotel Prague, offers a unique and elegant hotel experience in an exclusive residential neighbourhood of Prague. The hotel was built as a residential palace in 1897 and is one of the fnest examples of Belle Époque architecture in Prague. The hotel was bought by CEFC.
Mandarine hotel Hotel services 2016 Hotel Mandarin Oriental, Prague is both a fve-star luxury hotel and a wonderfully preserved piece of history. The hotel offers a truly unique hotel experience with an acclaimed spa and beautiful rooms. It was bought by CEFC.
Slavia Praha & Sport 2016 Eden stadium is the most modern football stadium in the Czech Republic. It Eden stadium is the home venue of SK Slavia Prague. In 2016, CEFC, which owns a majority (football) stake in SK Slavia Prague, bought a 70% stake in the stadium and plans to improve the stadium capacity and turn it into the main national stadium for the Czech Republic national team.
ŽĎAS (Železiarne Engineering industry 2016 ŽĎAS, which commenced operations in Žďár nad Sázavou over 60 years ago, Podbrezová) is focused on the production of forming machines, forging presses, metal scrap processing equipment, rolled product processing equipment, castings, forgings, ingots and tooling, especially for the automotive industry. In 2016 ŽĎAS was taken over by CEFC.
Invia.cz Travel agency 2016 Invia.cz, Inc. is the largest online seller of vacation packages in Central Europe, services offering tours from more than 300 travel agencies. Invia was founded in 2000. In 2005 the company achieved a turnover of CZK 605m per year. Invia.cz is majority-owned by CEFC.
49 Investing in Central Europe | Your move in the right direction
HU
50 Investing in Central Europe | Your move in the right direction
Hungary
1. General Overview of the Economy which helped stabilize the situation at Additionally, while the fnancial crisis Hungary has made the transition from the end of 2008 and has been repaid since. temporarily reinforced the low employment a centrally planned economy to a market As stipulated in the agreement with the IMF, level and the high rate of unemployment, economy, with its per capita income the government introduced severe austerity the employment rate changed favorably amounting to half of that of the Big Four measures in 2009 to reduce the budget in 2013 and continued to improve in 2014 European nations. The country continued defcit to the required levels. (to 61.8%), while the unemployment rate to demonstrate strong economic growth declined (to 7.8%). In the second quarter and joined the European Union in As a result, the economy began to recover in of 2015 this number continued to decrease May 2004. Hungary is also a member 2010 and recorded a GDP growth of 1.1%. and fell to 6.9% while employment rate of the World Trade Organization (WTO) and Although the country’s economy fell back changed as expected, and rose to 63.8%. is a signatory to the WTO Agreement on into recession in 2012, it emerged from To compare, the Central European average Financial Services. It participates in the Pan- it in the following year (growing by 1.1%). of unemployment rate was approx. 15%. European Cumulation, comprising the EU, This progress continued during 2014 Predictions indicate that unemployment the European Free Trade Association (EFTA), when Hungary’s GDP increased by 3.6% rate will decrease to 6.4% by 2017 while the Central European Free Trade Agreement compared to 2013 and the country reached employment rate is likely to be at 66.4% in (CEFTA) countries and Turkey. the second highest growth of output in 2016. the EU rankings. This is due to increasing The private sector has increased signifcantly exports of manufactured goods, strong Political system since the 1990s due to the effective inward investment and a developing credit Hungary is a parliamentary democracy with early privatizations and a productive environment. These factors will continue a unicameral parliament called the National industrial sector supported by greenfeld to enhance growth through much of 2015 Assembly. The country’s legal system is investments. Foreign ownership and are likely to expand the economy by based on a new constitution which replaced of and investment in Hungarian frms 2.9% for the year as a whole. the previous constitution of 1949 (which are extensive, with cumulative foreign had been considerably changed in October direct investment totaling more than In 2016 GDP is expected to increase at 1989). It entered into force on 1 January EUR 60 billion since 1989. Hungary was an annual rate of 2.0% which is above 2012. The Assembly is the highest organ severely hit by the economic crisis, with the regional average. Further growth is of state authority and initiates and approves the budget defcit becoming extremely forecasted for the next 2 years, an annual legislation supported by the prime minister. difficult to fnance and the Hungarian forint increase of 2.3% in 2017 and 2.7% in 2018 quickly losing value. The country received indicating a better performance than a EUR 20 billion credit facility from the IMF the European average of 1.2% and 1.6%.
51 Investing in Central Europe | Your move in the right direction
The president of Hungary, elected by by the parliament and apply uniformly process the declaration using a risk analysis the National Assembly for a fve-year throughout the country, although the Local program. If the analysis shows that there term, has a largely ceremonial role, Taxes Act empowers local governments is a high risk that the loss was generated but his/her powers include appointing to levy certain taxes within their jurisdiction. as a result of unlawful cost accounting the prime minister and choosing the dates The tax authority, the National Tax or understated revenue, the authorities may of the parliamentary elections. The prime and Customs Administration (NAV), is initiate an audit. minister selects cabinet members and responsible for the enforcement and has the exclusive right to dismiss them. collection of tax. Taxable income defined Each cabinet nominee appears before The basis of the computation of taxable one or more parliamentary committees Residence income (“taxable base”) for CIT purposes in consultative open hearings and must A company is resident in Hungary if it is is the accounting proft or loss, which be formally approved by the president. incorporated under Hungarian law or has its is adjusted by several increasing and A constitutional court has the authority place of management in Hungary. A foreign decreasing items in accordance with to challenge legislation on the grounds company is deemed to be resident in the relevant provisions of the CIT Act. Based of unconstitutionality. Hungary if its effective place of management on the applicable double tax treaty, foreign- is in Hungary. source income may be exempt or foreign 2. Tax structure paid tax may be credited. In addition, Business taxation Taxable income and rates a major part of the foreign tax paid may be Overview Hungarian resident entities are subject credited even in the absence of a double The chief national taxes are the corporate to tax on their worldwide income. tax treaty between Hungary and the relating income tax (CIT), local business tax The taxable income of both resident and country (subject to certain conditions). (LBT), value added tax (VAT), innovation nonresident corporate taxpayers is based contribution and a special surtax on certain on pretax profts, calculated in the proft and Deductions companies (e.g. the fnancial sector). loss statement and prepared in accordance In determining the taxable base, allowable Hungary’s corporate tax rate is competitive with the Hungarian accounting rules, with deductions from the proft and loss in the region, although the relatively low a number of corrections to the differences statement include (among others): corporate rate is balanced by high local in deductible and nondeductible items •• release of provisions for anticipated business taxes levied by the municipalities. recognized by accounting and tax law. liabilities and recaptured costs accounted Other taxes include transfer tax and the real for as revenue in the tax year; estate property tax. A minimum tax can Hungarian-registered subsidiaries apply in certain circumstances. There is of foreign companies are taxable under •• extraordinary depreciation rebooked, that no branch profts tax, excess profts tax ordinary domestic rules. Registered branch increased the CIT base in previous tax or capital tax. offices and non-registered permanent years; establishments (PEs) are taxed under •• dividends received accounted No withholding tax is levied on dividends, the same regime applicable to Hungarian- for as revenue (except dividends from interest or royalty payments made registered frms. As of 1 January 2017 a controlled foreign company (CFC)); to corporate entities. The absence the CIT rate is 9%. of withholding tax, combined with •• losses carried forward; the participation exemption available Minimum tax •• loss in value of receivables rebooked; for capital gains on qualifying shareholdings A minimum income applies to taxpayers that and the 50% exemption for royalty income incur losses or earn low profts. Minimum •• unrealized foreign currency gains related along with capital gain exemption on income generally is calculated as 2% to fnancial investments and long-term qualifying intellectual properties, makes of the total revenue. A taxpayer whose liabilities; and Hungary an attractive location for holding pretax proft and tax base are both less •• depreciation and amortization of assets and licensing companies. than 2% of the income minimum may opt as set out in the CIT Act. to pay minimum tax or submit a declaration Hungary has fully implemented the EU stating that its tax base is legitimately parent-subsidiary, interest and royalties, calculated, and support its declaration with merger and savings directives into domestic certain information. If the taxpayer elects law. Tax laws in Hungary are passed to fle a statement, the tax authorities will 52 Investing in Central Europe | Your move in the right direction
Dividends received by a Hungarian company Depreciation Industrial and agricultural structures are are exempt from CIT (and withholding tax), Accounting depreciation of assets is depreciable at annual rates of 2% and 3%, regardless of the extent of the participation. generally calculated by the straight-line respectively. Other structures depreciate The participation exemption applies method, under which the same percentage at annual rates ranging from 2% to 20%. to capital gains derived from the sale of the original value of the asset is Non-depreciable assets include registered or in kind contribution of participation. deducted each year. Tax depreciation is land (except some land that has been However, the taxpayer must hold at least more stringently regulated, with the law used for waste disposal) and works of art. 10% of the subsidiary (which should not setting the mandatory rates for most Write-off periods tend to correspond be regarded as a CFC) for at least one year asset types. Although taxpayers may apply to international standards. (see below) and report the acquisition lower depreciation rates for tax purposes of the participation to the tax authority (than the one set forth by the CIT Act), For intangible assets the accounting within 75 days after the acquisition. the selected rate cannot be lower than depreciation is accepted for taxation Similar exemption rules apply for capital the rate applied for accounting purposes. purposes. The Accounting Act recognizes gain deriving from the sale of qualifying revaluation of assets under certain intellectual property. A three-year tax depreciation period (33% conditions. Enterprises may revalue certain per year) applies to computers, office assets at the balance sheet date, these Corporate taxpayers can deduct 50% equipment, advanced industrial equipment, include: rights, intellectual property, tangible of royalty income derived from certain and many types of environmental assets (except investments) and fnancial intangible assets (e.g. patents, software protection, medical and laboratory investments (except for securities loans). copyrights, property rights etc.) (so that 50% equipment. Motor vehicles are depreciated of such income can be exempt from CIT). over fve years (20% per year). Other In revaluing assets, where market value is Taxpayers are eligible for a tax allowance fxed assets, not specifcally included in less than the book value, the difference based on the income from royalties the depreciation table, are tax-depreciated must be accounted for as an extraordinary to an extent to which the intangible assets at 14.5% per year. depreciation expense. Where are generated as a result of their own R&D the market value is greater than book activities. However, the deduction may not Taxpayers may apply 10% tax depreciation value, the difference should be accounted exceed 50% of the taxpayer’s total pretax on goodwill, on condition that the taxpayer for in a valuation reserve, under the equity profts. provides a statement in its tax return account, and as a valuation adjustment, declaring that calculation or derecognition under the relevant asset account. The tax base can be reduced by R&D costs of goodwill took place under the principle Generally, the revaluation increases (i.e. the R&D costs may be deductible twice). of due course of the law. the valuation reserve if the adjustment Once as an accounting expense and once value of the current year exceeds that as a tax base adjustment see also under 9. Tax depreciation may be accelerated by of the previous year (up to the value “Investment Incentives”). applying a 50% rate instead of a 33% of the reserve adjustment); it decreases or 14.5% rate to computers, computer the valuation reserve if the adjustment The CIT Act includes the concept of “costs accessories and new tangible assets value of the current year is less than that incurred not in relation of the proft purchased or produced in 2003 of the previous year. The value adjustment generating acitivty of the enterprise,” or later. Equipment used for flm and video must be performed separately for all assets, largely to cover items that could be used production may be amortized at a 50% rate. and revaluations are not included as income for tax avoidance purposes. Expenses may in the taxable base. not be deducted if they are not incurred In relation to buildings, tax depreciation is for business purposes. Consideration set at 50 years (2% per year) for structures paid for a service, if the use of the service of long duration, 3% for those of medium conflicts with the reasonable management duration and 6% for those of short duration. principle, is not deductible. Other Buildings that are leased out are depreciable nondeductibles include expenses due at 5% per year. An owner of assets (other to subsidies, assumed liabilities and assets than real estate) leased to another party given free of charge to non-Hungarian may use accelerated depreciation up to 30% companies, as well as receivables waived of the acquisition cost of the leased assets. against related parties and fnes. 53 Investing in Central Europe | Your move in the right direction
Losses In case of transformations tax losses may be Any loss (including capital loss, foreign Tax losses generated up to the last day carried forward only if: exchange loss or loss in value) relating of the tax year started in 2014 may to participation under the participation •• The shareholder who acquires be utilized by no later than in the tax exemption is nondeductible. Capital gains direct or indirect majority control in year including 31 December 2025 (with related to qualifying intellectual property the successor due to the transformation the conditions applicable at the time should be tax exempt as well. Operating in or its related party had direct or indirect when the tax losses occurred). Tax losses a manner similar to the regime for capital majority control in the predecessor at day generated subsequent to 1 January 2015 gains on shares, any gains (calculated with preceding the effective date of the merger; may be utilized for 5 tax years following a proper ratio) on the sale or contribution and the year of generation. Generally, no tax in kind of qualifying intellectual property carry back is allowed. •• The successor generates income from at is exempt from tax provided the taxpayer least one of the predecessor’s activities reported the acquisition or production Furthermore, the utilisation of tax for at least two consecutive tax years (the registration in the books) losses carried forward is limited to 50% subsequent to the merger. of the intellectual property to the Hungarian of the current year’s taxable base (excluding tax authorities within 60 days and holds the tax losses to be utilised). Tax losses Capital gains taxation the property for at least one year. Even should be utilised in the chronological Gains derived from the sale of assets are if a sale of intellectual property does not order of their creation (i.e. in accordance treated as ordinary business income. Thus, qualify for the participation exemption, gains with the frst-in-frst-out method). Further capital gains are included in the corporate (calculated with a proper ratio) realized restrictions apply to the carry forward tax base and taxed at a 9% flat rate unless will be exempt if the taxable amount (gain) of losses in the course of transformations the participation exemption applies. Under is used to purchase qualifying intellectual (i.e. mergers, de-mergers) or changes in the participation exemption, capital gains property within three years of the sale. the direct or indirect control of the taxpayer realized on the sale or in kind contribution Taxation of capital gains may be deferred if under the Civil Code. of (Hungarian and foreign) participations the transaction qualifes as a “preferential are exempt from CIT if the following transaction” in accordance with the Merger In case of change in the direct or indirect requirements are met: Directive, and certain formal requirements majority control tax losses may be carried are met. Capital gains resulting from •• The participation represents at least 10%; forward only if: the following transactions may apply •• The taxpayer has held the participation the favorable treatment if the necessary •• The new majority shareholder (or its legal for at least one year; and conditions are fulflled: predecessor) and the subject company were related parties in the past two •• The taxpayer has reported the acquisition •• revaluation of assets in mergers, de- tax years before the acquisition on to the Hungarian tax authorities within 75 mergers, a continuous basis; or days of the acquisition. •• transfer of certain assets and liabilities •• At least part of the shares of the taxpayer, forming a business unit, or or shares of the entity acquiring •• exchange of shares. the majority control are listed on a regulated stock exchange; or Non-resident capital gains tax may •• The taxpayer continues its activity, which apply if a non-resident entity directly is not signifcantly different in nature from disposes (sells, contributes in kind, etc.) the activity carried out before the majority a participation in a Hungarian entity, which control was acquired, in the next qualifes as a real estate holding company consecutive two tax years, and generates as defned by the CIT Act. In this case, income from such activity in both years. the realized gain should be subject to 9% Hungarian CIT provided that the double taxation treaty effective between Hungary and the country where the disposing entity is resident allows the taxation of such transaction.
54 Investing in Central Europe | Your move in the right direction
Double taxation relief No special procedural requirements apply to obtain benefits under Hungary’s Unilateral relief tax treaties (but Hungary does not levy withholding tax on dividends, interest Foreign-source income is taxable in or royalties under its domestic law). Hungary, with a credit granted under domestic law for foreign tax paid, even Hungary Tax Treaty Network if there is no tax treaty with the country of source. Albania France Macedonia Singapore
Armenia Germany Malaysia Slovakia Tax treaties Hungary has a broad tax treaty network, Australia Georgia Malta Slovenia which generally follows the OECD model treaty. Hungary’s tax treaties Austria Greece Mexico South Africa provide for credit for foreign tax paid Azerbaijan Hong Kong Moldova Spain or an exemption of the foreign income. Hungary has implemented OECD-compliant Bahrein Iceland Mongolia Sweden exchange of information provisions. Belarus Indonesia Morocco Switzerland
Belgium India Montenegro Taiwan
Bosnia Ireland Netherlands Thailand
Brazil Israel Norway Tunisia
Bulgaria Italy Pakistan Turkey
Canada Japan Philippines Ukraine
United Arab China Kazakhstan Poland Emirates
Croatia Korea (R.O.K.) Portugal United Kingdom
Cyprus Kosovo Qatar United States
Czech Republic Kuwait Romania Uruguay
Denmark Latvia Russia Uzbekistan
Egypt Liechtenstein San Marino Vietnam
Estonia Lithuania Saudi Arabia
Finland Luxembourg Serbia
55 Investing in Central Europe | Your move in the right direction
Anti-avoidance provisions Related parties must prepare Thin capitalization Transfer pricing documentation justifying their transfer Under the thin-capitalization rule, according Hungary’s transfer pricing rules, which are prices, although an exemption from to the CIT Act, interest paid or accounted generally based on the OECD guidelines, the obligation to prepare a transfer pricing for on that part of the liabilities that is in specify that transactions between related report applies – among others – excess of the borrower’s equity as multiplied entities should be considered for taxation by three is not deductible for corporate •• for transactions in small value (less than purposes at the same price as equivalent tax purposes (the debt to equity ratio HUF 50 million, approx. EUR 167,000 per transactions between unrelated parties. is 3:1). With regards to this rule, any year), or If an individual or an organization, directly liabilities relating to which interest is paid or indirectly, has more than 50% ownership •• where an advance pricing agreement is (with the exception of bank loans) should or voting rights in another entity, or direct obtained with respect to the arm’s length generally be taken into consideration, or indirect management control of another price of the transaction. however, certain receivables may be entity, the entities are related parties. deducted from the liabilities. Interest-free For private individuals, the law includes Separate transfer pricing reports have to be loans and loans with not market interest family members. As of 2015 the taxpayer prepared for each related party agreements, rates should also be considered for thin- and any other person would also be however, a combined documentation can capitalization purposes if deemed interest considered as related parties, if the same be prepared for more agreements if their deduction is performed under the transfer management may influence the fnancial content is similar or the same. pricing rules. The thin-capitalization rule and business decisions of the parties. applies for liabilities between unrelated Simplifed reporting is allowed for certain parties as well. The following transfer pricing methods may low value added intragroup services be used: comparable uncontrolled price (e.g. specifc IT services, legal activities, Controlled foreign companies method, resale minus method, cost-plus etc.) if specifed requirements are met. Certain income, such as dividends received method, the transactional net margin For instance, the relevant transaction from controlled foreign companies that method and the proft split method. If cannot be related to the core activity of any would normally be exempt, is taxable. none of these methods lead to a proper of the parties and its value may not exceed Meanwhile certain expenses incurred, result, the taxpayer may apply any other a ceiling set by law. An exemption may be such as impairment, which are deductible defensible method. If the price applied available for low value added intragroup under general rules, are non-deductible if between related enterprises differs from services if the margin applied is between 3% incurred in relation to a controlled foreign the market price, the taxpayer or the tax and 10%. company. In addition, undistributed proft authorities may adjust the tax base to reflect of the controlled foreign company is also the market price. If the tax authorities make Anti-hybrid rules taxable at the hands of the Hungarian an adjustment, however, they may impose As of 1 January 2015 a new general principle resident shareholder. A controlled foreign a fne of up to 50% of the additional tax was introduced into the Hungarian tax company is a foreign company which liability and the taxpayer may have to pay legislation which intends to eliminate double derives most its income from Hungary late payment interest. non-taxation resulting from international (or in which a Hungarian individual directly treaties. or indirectly holds at least 10% of shares), Branch offices are subject and the foreign company is effectively taxed to the same arm’s length pricing at less than 9%. A company with a seat requirements as all enterprises in Hungary, or tax residency in an EU or OECD member even for transactions between the branch state or a country that has concluded a tax and its head office. treaty with Hungary is not a controlled foreign company if it has real economic presence in that foreign country.
56 Investing in Central Europe | Your move in the right direction
General anti-avoidance rule The fnal payment of tax is made at the time Rulings The substance over form principle applies; the annual tax return is fled. Most returns A binding tax ruling is available in contracts, transactions and similar are due by 31 May following the income Hungary, upon submission of a request operations are examined in accordance year. If the fscal year is different from to the Ministry for National Economy with their true content. The tax authorities the calendar year, annual tax returns are (Ministry). The application is subject can disallow tax benefts of contracts and due by the last day of the ffth month to a flat fee of HUF 5 million (approx. other transactions concluded with the intent following the end of the fscal year. EUR 16,000). The Ministry has 90 days to evade tax. to decide on the ruling after the submission Most companies in Hungary must fle of the request (which may be extended once Administration tax returns electronically. Electronic fling by 60 days). A taxpayer also may request Tax year requires registration for a distinct code, an accelerated procedure, where the fee The tax year is generally the calendar which can be obtained through local is HUF 8 million (approx. EUR 25,000), year, although taxpayers may elect government offices. and the deadline for a decision is 60 days a different fnancial year that also applies (which may be extended once by 30 days). for tax purposes. All businesses, other than Consolidated returns If the tax treatment cannot be assessed fnancial enterprises, credit institutions and Hungarian law does not provide for group by the Ministry, the taxpayer is entitled insurance companies, are allowed to adopt taxation for income tax purposes, as a result to a refund of 85% of the statutory fee. a fnancial year different from the calendar it is not possible to fle a consolidated tax year, subject to certain criteria (e.g. being return. Rulings are binding only for that entity which able to justify the use of the different tax fles the request. They can be requested year). Statute of limitations for future and past transactions as well, The general statute of limitations is fve however, rulings for past transactions can The tax year is generally 12 months, but can years from the end of the year the tax return cover only certain annual income tax types. be shorter in certain cases. If a different tax is due and the period for the enforcement These ruling requests should be fled until year is chosen, the tax authorities must be and collection of tax is fve years starting the fling day (or due date) of the relevant informed of the change. from the end of the year in which the tax is tax returns. due. Filing and payment A special binding ruling is available for large CIT is assessed on an annual basis. Tax authorities taxpayers (i.e. those employing more than A selfassessment system applies, under The tax authorities in Hungary comprise 200 persons or having a balance sheet which the taxpayer establishes the amount the state tax authority and the customs total exceeding HUF 1 billion, approx. EUR of the corporate tax payable. authority (referred as National Tax and 3,225,108 ) in terms of CIT purposes that Customs Administration (NAV)) and will not be affected by future corporate tax Advance tax payments are due on the notaries of the municipal governments changes. This ruling is binding for three a monthly basis for companies whose tax (local tax authority). The tax authorities’ years irrespective of tax law changes. In liability exceeded HUF 5 million (approx. responsibilities include maintaining these circumstances the Ministry’s fee is EUR 16,092) in the preceding year, and taxpayer records, assessing tax, collecting HUF 8 million (approx. EUR 25,000), and the payments are due by the 20th of each and enforcing taxes and other public HUF 11 million (approx.. EUR 35,479) if month. All other companies must make dues enforced as taxes, controlling and an accelerated procedure is required. quarterly advance payments. Companies supervising compliance with tax obligations, exceeding a net sales revenue of HUF disbursing central subsidies and effecting A tax ruling cannot be applied to determine 100 million (approx. EUR 332,000) are payment of tax refunds. the arm’s length price in related party liable to pay the difference between their transactions, but an advance pricing expected annual CIT liability and the CIT agreement (APA) can be requested advances paid during the year (so called from the tax authorities regarding top-up obligation) by the 20th day of the last the determination of the applicable transfer month in the tax year. pricing method and the arm’s length price or price range.
57 Investing in Central Europe | Your move in the right direction
APA requests can be submitted to the tax Innovation contribution Withholding Taxes authorities. The application is subject Innovation contribution is collected by Dividends to a statutory fee from HUF 500,000 to HUF the government to generate more funds Hungary does not levy withholding tax on 10 million (approx.. EUR 1,612 to EUR for corporate R&D. With a rate of 0.3%, dividends paid to foreign companies. 32,253). If the exact fair market value can be the base of the innovation contribution determined, the statutory fee is equal to 1% is identical to the local business tax base. Interest of the fair market value. An APA is valid for at Newly registered companies in the year Hungary does not levy withholding tax on least three years and a maximum of fve of registration, businesses qualifying interest paid to foreign companies. years (with the possibility of a one-time as a micro or small sized enterprise, and extension for an additional three years). Hungarian branches of foreign entities are Royalties Bilateral and multilateral APAs are also exempt from the innovation contribution. Hungary does not levy withholding tax on available. After submission of the request, royalties paid to foreign companies. the tax authorities have 120 days to decide Special tax on financial institutions on the APA, which can be extended twice by Credit institutions, investment companies, Branch remittance tax an additional 60 days. If the application is stock exchanges, commodity traders, Hungary does not levy a branch profts tax. rejected, the taxpayer is entitled to a refund venture capital fund management of 75% of the statutory fee. companies, and investment fund Wage tax/social security contributions management companies are subject The employer generally is responsible Other taxes on business to a special tax. The base and rate of the tax for assessing and withholding the amount Local business tax is determined separately for all the above of the employee’s personal income tax and Local business tax (LBT) is imposed by local types of fnancial enterprises. social security liability on a month’s wages. municipalities, where the company has its registered seat or permanent establishment Financial transaction tax Corporate taxpayers are subject to a variety for LBT purposes. The base of the LBT is Financial transaction tax applies to payment of social security taxes. Based on the gross the net sales revenue (excluding royalty service providers, credit institutions wages of their employees, frms are income) minus the cost of goods sold, authorized to pursue currency exchange required to pay a social tax of 27%, which the value of intermediated services, activities and intermediaries of currency replaced the employer’s social security subcontractors’ fee, costs of materials and exchange services resident in Hungary. contribution; and the gross salary’s 1.5% is the direct cost of R&D activity. Depending The subject of the fnancial transaction tax paid as training fund contribution. on the revenue volume (above net sales – among others – is any transfer of funds, revenue of HUF 500 million, approx. EUR 1.6 direct debit, cash withdrawals from payment Indirect Taxes million), the deduction of cost of goods sold accounts, loan repayment and commissions Value added tax and cost of intermediated services is subject and fees as charged. The payable fnancial Domestic supply of goods and services to limitations. transaction tax is 0.6% of the transferred as well as intra-Community acquisitions and amount in case of cash withdrawals (with imports are subject to VAT in Hungary. Depending on the decision certain exemptions), annual HUF 800 of the local municipality, and at its discretion, (approx.. EUR 3) for payments made with The standard VAT rate on products the maximum rate of LBT may reach 2%. credit/debit cards (in case of PayPass and services is 27%. An 18% rate is Certain municipalities do not levy LBT. cards HUF 500 [approx.. EUR 2]) and 0.3% applicable to basic food products (milk, The annual LBT return is due on the last day of the transferred amount in all other cases dairy products, bread, etc.), the provision of the ffth month following the given year. (capped at HUF 6,000 [approx. EUR 20] per of accommodation, internet and Tax advance payments are due twice a year payment transaction). restaurant services. A 5% rate applies (in the third and ninth day of the tax year) to pharmaceuticals and certain medical and, similar to CIT top-up, obligation also equipment, aid for the blind, books and applies at year end. newspapers, district heating services, certain meats, milk (with the exception for UHT and ESL milk), eggs and the sale of newly built residential real estates (certain limitations apply).
58 Investing in Central Europe | Your move in the right direction
Transactions exempt from VAT include: with Nonresident companies may reclaim Real estate tax an occupancy permit issued more than two Hungarian VAT if they are registered for VAT Building tax years ago or the rental of buildings (with purposes in their home country. For frms Building tax should be paid by the owners an option for taxable treatment), postal and registered outside the EU, Hungarian of buildings. The introduction of the tax fnancial services, education, certain health VAT may be reclaimed based on bilateral is dependent on the decision of the local and public television services, sport and agreements (such agreements exist with municipality where the building is located. gambling services. The few exempt products Liechtenstein, Switzerland and Norway). The tax may be based on the net floor include basic medical materials and folk Branch offices of foreign companies in space of the building expressed in square art products. Rights and intangibles also Hungary are subject to VAT. Each branch meters or on the adjusted market value are subject to VAT. Bad debt relief is not of a foreign company in Hungary must fle of the building. The maximum tax liability available in Hungary for VAT purposes. VAT return. The supply of services between may be HUF 1,100 (approx. EUR 4) per a branch and its head office falls outside square meters (which is adjusted in every Following the elimination of trade barriers of the scope of VAT unless the branch year by the changes in consumer prices, with the EU, sales transactions between is member of a Hungarian VAT group published by the Hungarian Central Hungary and other EU member states are or the head office is a member of a VAT Statistical Office) or 3.6% of the adjusted considered intra-Community acquisitions group in another Member State. market value. or supplies. In intra-Community supplies the taxpayer may issue an invoice to its EU- All Hungarian entity and foreign entity’s Land tax based purchaser - who is in the possession branches with a business establishment in Land tax should be paid by the owners of a valid VAT number in the country Hungary are eligible for group taxation and of land. The introduction of the tax is of destination - without charging VAT if are collectively regarded as a single taxpayer dependent on the decision of the local the taxpayer has proof that the goods left for VAT purposes. Services and products municipality where the land is located. Hungary. EU-based taxpayers carrying out provided within a VAT group fall outside The tax may be based either on domestic taxable transactions in Hungary of the scope of VAT. the area of the land in square meters or on may request VAT registration. Non-EU- the adjusted market value of the land. based taxpayers carrying out domestic In the recent years new control mechanisms The tax rate is determined by (and at taxable transactions in Hungary must use have been introduced in Hungary, by which the discretion of) the local government, and a fscal representative for Hungarian VAT the tax authority can access information it should not exceed HUF 200 (approx. EUR registration. relevant for VAT purposes. Realtime tracking 0,6) per square meters (which is adjusted is required regarding the transport of goods in every year by the changes in consumer made with trucks and cash registers in prices, published by the Hungarian Central certain industries are required to have Statistical Office) or 3% of the adjusted online connection with the tax authority. market value. Domestic transactions exceeding a certain value have to be reported separately in Real estate transfer tax the periodic VAT returns and in the future See under “Transfer tax.” such transactions and every other outgoing invoce will have to be reported realtime. Until the introduction of this real time reporting specifc xml report should be generated upon the request of the tax authority in the case of a tax audit.
Capital tax Hungary does not levy capital tax.
59 Investing in Central Europe | Your move in the right direction
Transfer tax Environmental taxes Taxes on individuals The sale or transfer of real property, The main types of environmental taxes Individuals in Hungary are subject to a variety rights related to real estate or the sale include product charges, charges on of taxes, including the personal income of the shares of a Hungarian real estate emission and energy tax. Product charges tax, social security contributions, real holding company is subject to transfer tax. are levied on the frst domestic sale estate tax, and inheritance and gift tax. The tax, payable by the purchaser, is levied as a main rule, on products which endanger Entrepreneurs may be entitled to opt to be on the fair market value of the property. the environment, e.g. fuel and mineral oils, subject to the simplifed enterprise tax (EVA) The transfer tax rate is 4% up to HUF 1 tire, cooling devices, packaging material, or entrepreneurs taxed under the fxed rate billion (approx. EUR 3.3 million) and 2% promotional paper and electronic devices. tax of small taxpayers (KATA). There is no for the exceeding amount, capped at HUF Charges on the emission of polluting special regime for expatriates. 200 million (approx. EUR 650 thousand) substances for the environment are levied in per property. For transfer tax purposes, proportion to the amount of the substance Hungary has limited social security exemptions real estate holding company is presumed that seeped into the air, soil or landscape for third country national expatriates (non-EEA to mean an entity with Hungarian real water. Energy tax is assessed on electricity, citizens) assigned to Hungary under certain estate(s) with a book value exceeding natural gas and coal. circumstances and their foreign employers. the 75% of the total asset value less cash If a Hungarian company employs a foreign assets, cash receivables, accrued income The frst domestic sales of certain individual, social security charges on both and loans or a company holding 75% products fall outside of the scope the employee and the employer are due in participation in a company with such a real of the environmental tax, since these Hungary. Any exemptions from Hungarian estate value percentage. products should be recollected (i.e.batteries, social charges are based on the conditions fluorescent lamps, etc.) by the frst domestic of the assignment structure, EU social The transfer of motor vehicles and rights seller. regulations or an applicable bilateral social related to motor vehicles are also subject security agreement. to a transfer tax. The amount of tax depends on year of production and engine Hungary Quick Tax Facts for Individuals power. Income tax rates 15% Stamp duty Administrative and court procedures are Capital gains tax rates 15% subject to procedural fees. In general, no Basis Income stamp duty is levied on the conclusion of a loan or other agreements. Double taxation relief Possible
Tax year 2017 calendar year Customs and excise duties No customs apply in relation to trade among Return due date 20 May 2018 EU member states; rates determined by the Community Customs Code apply in Withholding tax respect of goods imported from outside – Dividends the EU. – Interest 15% or based on the DTT Excise tax is levied on items such – Royalties as alcoholic beverages, petrol and tobacco products. Net wealth tax N/A
Social security EE: 18,5%, ER: 22% or 23.5%
Inheritance tax 18% or 9%
Real estate tax Subject to the decision of the municipality
VAT 27%
60 Investing in Central Europe | Your move in the right direction
Residence Deductions and reliefs Rates Individuals with Hungarian citizenship For foreign employees sent Hungary without The personal income tax is a flat rate (excluding dual citizens with no permanent an employment contract with a Hungarian of 15%. Passive income, such as dividends, residence in Hungary) and foreigners with frm, housing could be considered as a non- interests and rental income is also subject a Hungarian settlement permit are tax taxable beneft. Employers may provide to a 15% tax. residents. A foreigner without a Hungarian housing or a housing allowance to local settlement permit is considered tax resident if employees as a non-taxable beneft up A 14% health tax is imposed on certain he/she has a permanent home exclusively in to 5 years provided certain criteria are met. passive income, e.g. dividend income, Hungary. If the individual also has a permanent Furthermore, employers may also provide capital gains and income exceeding HUF 1 home in another country or has no permanent daycare and kindergarten care and services million (approx. EUR 3200) from the renting home in Hungary, the individual is regarded to the employees’ children as tax free out of real property. A 22% health tax as a Hungarian tax resident if his/her center benefts. may be imposed on gross taxable income of vital interests is in Hungary. If the individual’s (excluding income taxed separately such center of vital interests cannot be determined, Families with one child are entitled to a tax as dividend income, capital gains, etc.) the individual is regarded as a Hungarian base decrease of HUF 66,670 (approx. EUR that is received from an entity other than tax resident if he/she has a habitual abode 215) per child per month, HUF 100,000 the legal employer. in Hungary (e.g. he/she stays in the country (approx. EUR 323) per child per month for more than 183 days in a calendar year). for families with two children and HUF Inheritance and gift tax An EEA national will be deemed tax resident 220,000 (approx. EUR 710) per child per Inheritance duty amounting to 18% is if his/her stay in Hungary exceeds 183 days in month for families with three or more levied with regards to assets and 9% with the calendar year. Residence status may be children. regards to property. Furthermore, special affected by a tax treaty. rates are applicable in the case of motor If the situation arises such that the family vehicles and infelds. A full exemption Taxable income and rates does not have enough income to use applies to inheritances received by direct Hungarian resident individuals are subject the whole amount of the family tax credit, descendants (including the spouse to tax on their worldwide income (i.e. income the family is able to claim the outstanding of the deceased). Moreover, an exemption from any source, such as income from amount from their social security of up to HUF 20,000,000 (approx. EUR employment, the carrying on of a business, contributions in the form of a family 64,499) applies to assets inherited by step capital gains, income from investments, etc.). contribution credit. and foster children. For nonresidents, only Hungarian-source income is taxable (including income from Newlyweds are entitled to a tax base Gift tax is due on gifts of real estate, employment, business activities or real decrease of HUF 33,335 (approx. EUR movable property and the granting property transactions in Hungary). Hungarian 107) per month per couple for two years of a right, surrender of a right or exercise source income is defned as income received following the date upon which they were thereof without consideration, and domestically or offshore for activities married if certain conditions are fulflled. the waiver of a right without consideration. performed in Hungary, or income earned from The newlyweds are required to jointly verify A full exemption applies to individuals who Hungarian assets. the validation of the allowance. receive gifts from direct descendants and spouses. Similarly to the inheritance duty, Gross income is considered the taxable base, the gift tax rate is 18% in the case of assets which must then be aggregated with income and 9% in the case of property. If the value from other sources (excluding income taxed of the asset or property is less than HUF separately such as dividend income, capital 150,000 (approx. EUR 483), the transaction gains, etc.). is exempt from gift tax.
Certain categories of income are exempt, these include: benefts paid under the state social welfare provisions or by social insurance, allocations for childcare and state pension income, scholarships for full-time study and tax refunds. 61 Investing in Central Europe | Your move in the right direction
Net wealth tax 3. Legal Entity The supreme body of the Kft. is None Principal forms of business entity the members’ meeting (taggyűlés), and Under the Act on the Investments the shareholders’ general meeting Real property tax of Foreigners in Hungary, with few (közgyűlés) for Rts. If the Kft. or Zrt. has only A local tax may apply to dwelling places exceptions specifed in the Act, foreigners one member/shareholder, the competence and land; municipalities have the right are entitled to carry out business activity of the supreme body is exercised by that to impose such taxes and determine in Hungary only if they register a branch person. the rates, up to specifed limits. or establish a Hungarian company. Under the terms of the Civil Code, a company in A supervisory board of at least three Social security contributions Hungary may be established under a variety members must be established if the annual Employees are required to make social of legal forms. The most common for foreign average number of employees exceeds 200, security contributions of 18.5% from their investors are the company limited by shares otherwise a supervisory board in general is gross salary, withheld by the employer. (részvénytársaság, Rt.) and the limited- optional. If a supervisory board is required, liability company (korlátolt felelősségű because of the number of the employees, Employers are required to make social társaság, Kft.). These organisational then one-third of the members security contributions of 22% above forms correspond closely to the German of the supervisory board must be elected by the gross salary of the individual and 1.5% AG (Aktiengesellschaft) and GmbH the employees. training fund contribution. (Gesellschaft mit beschränkter Haftung). Foreign investment may take two other With regard to Zrts., the management Other taxes legal forms: the limited partnership (betéti of the company is conducted by a board The municipalities levy a tax on motor társaság, Bt.) and the general partnership of directors (igazgatóság) or by a sole chief vehicles. (közkereseti társaság Kkt.). These latter executive officer (vezérigazgató), while forms of organisation require unlimited for a Kft., the Hungarian legislation does not Compliance legal liability of the members. All members recognize the concept of board of directors, The taxable period for individuals is of a Kkt. are jointly and severally liable; and the management is conducted by one the calendar year. at least one member of a Bt must have or more managing directors. unlimited liability. The deadline for the fling of tax returns is In Hungary, the registration of companies 20 May of the year following the relevant An Rt. may be established only in a closed belongs to the competence of the Court taxable period, although an extension to 20 form (Zrt.). After the Zrt. has started its of Registration of the respective county, November may be obtained. operations, its shares may be listed on any and it is statutory to be represented stock exchange and then the company shall in the procedure by an attorney-at- be registered as an opened form Rt. (Nyrt.). law. The registration procedure takes approximately 2-3 weeks after the fling Formalities for setting up a company of all necessary corporate documents. Owing to less stringent registration and The judge is entitled to require additional operating procedures and to lower information or documents that may extend minimum capital requirements, most the procedure. There is a registration new private sector frms incorporating fee of HUF 100,000 (approx. EUR 323) in in Hungary now choose the Kft. form. the case of Zrts. and Kfts. The shareholders of a company may differ from the provisions of the Civil Code unless (i) it is prohibited by law, (ii) where any derogation violates the interest of the company’s creditors, employees and minority members, or it is likely to prevent the exercise of the effective governmental supervision over the company.
62 Investing in Central Europe | Your move in the right direction
Forms of entity Limited-liability company (Kft.) CCXXXVII of 2013 on Credit Institutions and Requirements for Rt. and Kft. Minimum capital is HUF 3,000,000 (approx. the Act CXX of 2001 on the Capital Market Company limited by shares (Rt.) EUR 9,692). A Kft. may be formed by permit the establishment of branches Minimum capital is HUF 20 million (approx. one or more owners. Additionally, it is of regulated fnancial entities. A branch may EUR 64,499) in case of Nyrts. and HUF not permitted to solicit others publicly engage only in activities that comply with 5 million (approx. EUR 16,126) in case to become owners. Contributions can be the laws of both Hungary and the country of Zrts. Furthermore, the share capital made in cash or in kind. of the head office. of the company in general must be secured completely by subscription. The amount There are no restrictions on the number Legislation in all areas (for instance, tax of cash contributions at the time of members or founders, or on their law) has been drafted with the expressed of foundation may not be less than 30 % nationality or residence. A simple intent to create a level playing feld of the share capital. With certain exceptions, majority is usually sufficient for most for branch offices – that is, neither giving the amount of capital contributed in kind decisions; however, a majority of at least them advantages over domestically must be declared in writing and must be 75% of the quota holders is necessary, registered companies nor subjecting audited by certifed auditors. for instance, to amend the articles them to disadvantages. The procedure of association or to remove a managing for registering a branch office is very There are no restrictions on the number director. similar to that of a legal entity, with some of shareholders or founders, or on their differences. nationality or residence. An Rt. may issue Management can be conducted by one ordinary or preference shares. Nominal or several managing directors elected by Regulation of business value of preference shares may not the members for a defnite or indefnite Mergers and acquisitions exceed 50% of the total share capital term; alternatively, the articles of association Mergers require permission from of the company. may provide that all equity holders are the Hungarian Competition Authority entitled to manage the Kft. as managing (GVH) if, based on the previous year: (1) The transfer of registered shares issued directors. the merging companies have combined by a Zrt. may be limited in the articles annual revenue exceeding HUF 15 billion of association. Simple majority is enough The representation rights of managing (approx. EUR 48,380,594); and (2) the net for most decisions; however, a majority directors may be restricted or distributed sales revenue of the merging companies of at least 75% is necessary for major among several managing directors in exceeds HUF 500 million (approx. decisions, such as amending the articles the articles of association. However, such EUR 1,612,686). In calculating the HUF of association, deciding on transformation restriction or division is ineffective towards 500 million (approx. EUR 1,615,415) or termination without legal successor third parties, i.e. the act of the managing threshold, the revenue of frms acquired of the company. Shareholders representing director will be binding to the company even by the participating companies or groups at least 5% of shares with voting rights may if he/she acted beyond his/her power that in the preceding two years must be taken ask the board of directors to add certain has been limited internally by the articles into account, even if the transactions items to the agenda of a general meeting of association. The managing director are still awaiting regulatory approval. In or to have the management of the company of the company may authorize certain case of the merger of credit institutions be investigated. employee(s) to represent the company or commercial banks, the HUF 15 billion within a particular scope, concerning specifc (approx. EUR 48.462million) threshold is Setting up a supervisory board is matters if prescribed in the company’s calculated on the basis of revenue from mandatory for a Zrt. if the shareholders articles of association. interests, fees and securities transactions. representing at least 5% of the votes Furthermore, for the merger of fnancial require so. Management is conducted by Branch of a foreign corporation institutions as well as when any shareholder the board of directors (igazgatóság), which Foreign frms have been able to establish increases its stakes above 20%, 33% consists of at least 3 members elected by a branch office in any sector since January or 50%, the permission of the National Bank the shareholders at the general meeting. No 1st 1998, under Act CXXXII of 1997 on of Hungary (being the fnancial supervisory restrictions apply regarding the nationality Branch Establishments. A branch office in authority) is also required. or residence of the directors. Nyrts. have Hungary qualifes as an entity without legal extensive publishing and disclosure personality; therefore, the foreign frm bears obligations. responsibility under Hungarian law. The Act 63 Investing in Central Europe | Your move in the right direction
The law does not distinguish between Monopolies and restraint of trade Agreements between companies to engage horizontal and vertical mergers. The GVH Monopolies and market dominance are not in the above practices are not prohibited if may not reject a merger unless it creates prohibited per se. Rather, the Competition the combined market share of the parties or strengthens a dominant position, Act bans the abuse of a dominant position does not exceed 10% or if the companies hinders competition and results in that restricts competition. A dominant are part of the same group. disadvantages that outweigh any possible position arises when substitute goods advantages arising from the transaction. cannot be acquired elsewhere, or can The Trade Act defnes the concept The GVH must also review international be acquired only under substantially less of signifcant market power in the context acquisitions for the merger of local favorable conditions; when a company’s of wholesale/retail businesses and their subsidiaries if they exceed the prescribed goods cannot be sold to another party, suppliers, and prohibits the abuse of such sales revenue threshold. The GVH may or can be sold only to a party under power.. Such power exists, among others, call for the separation or divestiture substantially less favorable conditions; if a company has a dominant bargaining of merged entities if the parties fail to apply or when a company can pursue its position under market conditions. for authorization. economic activities in a manner signifcantly independent of other participants in Accounting, filing and auditing Legally, a merger is regarded the market or without having to consider requirements as a concentration of undertakings under the attitudes of its competitors, suppliers, The appointment of an auditor is the Competition Act, which includes customers or other business partners. mandatory if the company’s average annual standard mergers or acquisitions The Competition Act includes the following net sales revenue of two consecutive of ownership shares or assets, but also nonexclusive list of agreements business years exceeds HUF 300 million the acquisition of control over another or concerned practices that might not (approx. EUR 969 thousand), or the average undertaking (irrespective of any specifc be permitted if they have, as their object number of employees exceeds 50 in two ownership stake) and the establishment or effect, the prevention, restriction consecutive business years. Otherwise, of certain joint ventures. or distortion of economic competition: the appointment of an auditor is optional. The auditor must be a legal •• Price fxing or defning other business The Capital Market Act regulates person or an individual registered with conditions; the acquisition of public companies the Hungarian Chamber of Auditors. to protect small investors and improve •• Restricting or controlling manufacturing, transparency in acquisitions. Once distribution, technical development The Hungarian accounting system is a shareholder accumulates a 33% direct or investment in a product or industry; based on the Hungarian Accounting Act, or indirect stake in a company, a public offer which incorporates Hungarian Accounting •• Dividing purchasing sources, restricting must be made on the full share package in Standards. As a member of the EU, freedom of choice in purchasing the given company. If no single shareholder Hungarian law is in accordance with or excluding others from the purchase owns more than 10% of the company, European Commission (EC) Regulation No. of goods; the threshold for mandatory public offers 1606/2002, which requires the application is 25%. Shareholders increasing their •• Dividing a market, excluding others from of IFRS in the preparation of consolidated ownership to more than 5% in a public selling, restricting sales choices; fnancial statements of listed companies. frm must report their shareholding Hungarian Accounting Standards are •• Preventing others from entering to the National Bank of Hungary. Company supplemented by government decrees a market; bylaws may impose stricter requirements, based on special requirements for banks, such as reporting requirements starting at •• Discriminating against business partners insurance companies, stockbrokers, 2% ownership. through sales or purchase price investment funds, pension funds and or conditions; and various nonproft institutions.
•• Tie-in contracts, i.e. requiring specifed purchases besides the original contract item.
64 Investing in Central Europe | Your move in the right direction
Hungarian companies should prepare their 4. Labor and wages Workers must be paid minimum premiums unconsolidated fnancial statements based Employee rights and remuneration of 15% for night work and 50% for overtime on Hungarian law. Consolidated fnancial The Labor Code contains minimum work. The maximum overtime can be 250 statements, if necessary, can be prepared provisions for employment contracts, hours annually, and 300 hours if provided based on the Hungarian Accounting Law job descriptions, place of work, hiring so by the collective agreement. or IFRS. The annual fnancial statements out labor and rules for the termination must be submitted electronically of employment. Each employee is entitled to a regular to the Company Service. Public companies vacation every calendar year. The minimum limited by shares have more extensive Employees are entitled to organize trade duration of the vacation is 20 days. However, publishing and disclosure obligations. unions. Subsequently, these trade unions there are additional vacation days indicated Issuers on the Budapest stock exchange may inform their members of their rights according to the age of the employee so must compile and publish earning reports and obligations concerning fnancial, that when the employee is 45 years old on a quarterly or semi-annual basis, social, cultural as well as living and working the duration of regular vacation is 30 days. depending on capitalization or the number conditions. They also may represent their Supplementary vacation days are given, of shareholders. members vis-à-vis the employer and before among others, if the employee has children. government agencies in matters concerning Unconsolidated fnancial statements labor relations and employment. Working hours are also prepared to provide a basis The statutory number of daily working for the determination of corporate income Employees as a group are entitled hours is 8; this may not exceed 12 hours, tax with certain adjustments. to participate in the company’s matters; including overtime. Employees are entitled these rights are exercised by the works to two non-working days per week. Sunday The deadline for submitting fnancial council or the employees’ trustee elected workers, i.e. if the work is performed in their statements (other than consolidated by the employees. Employers must inform regular working hours, must receive 150% fnancial statements) is The last day the works councils or trade unions (if any) of their regular daily salary and be provided of the ffth month following the balance before decisions are made regarding a mass with another day off. Exemptions to this rule sheet date of the fscal year, thus redundancy. may apply to special working schedules, but harmonizing the deadline for submitting employers must provide adequate rest time the statements with the tax return Discrimination against employees based on for workers. fling date for calendar year companies. nationality, language, ethnicity, sex or sexual The document retention obligation orientation is prohibited, as is discrimination Workers must be paid minimum premiums for accounting source documents, fnancial with regard to establishing or terminating of 15% for night work and 50% for overtime statements, general ledgers and other employment, application procedures, work. The maximum overtime can be 250 analytical records is eight years. training and the determination of working hours annually, and 300 hours if provided conditions. so by the collective agreement.
Working hours Each employee is entitled to a regular The statutory number of daily working vacation every calendar year. The minimum hours is 8; this may not exceed 12 hours, duration of the vacation is 20 days. However, including overtime. Employees are entitled there are additional vacation days indicated to two non-working days per week. Sunday according to the age of the employee so workers, i.e. if the work is performed in their that when the employee is 45 years old regular working hours, must receive 150% the duration of regular vacation is 30 days. of their regular daily salary and be provided Supplementary vacation days are given, with another day off. Exemptions to this rule among others, if the employee has children. may apply to special working schedules, but employers must provide adequate rest time for workers.
65 Investing in Central Europe | Your move in the right direction
Wages and benefits Social insurance favorable taxation could be applied up The Labor Code sets a basic minimum The social tax payable by both the employer to the total annual amount of HUF 200,000 salary in hourly and monthly terms for all and the employee generally covers (approx. EUR 646) per year of the fringe types of work, and the monthly minimum pension and healthcare insurance. Based benefts excluding the benefts provided salary requirement must be adhered on the gross wages of an employee, on the Szechenyi holiday card and up to. The prevailing minimum salary is the employer pays 27% social tax. to the total amount of HUF 450,000 (approx. HUF 111,000 (approx. EUR 358) per Companies must additionally pay EUR 1,454) including the benefts provided month in 2016. According to Hungarian 1.5% to the vocational training fund. on the Szechenyi card. Based on the tax law sources, the average monthly gross The employee contributes 10% for pension changes for 2017, there will be signifcant salary in 2015 was HUF 247,800 (approx. insurance (uncapped) and 7% for healthcare changes in benefts that qualify as fringe EUR 800). The Labor Code allows (uncapped as well), and 1.5% of gross wages benefts as of 1 January 2017. The vast a range of other specifc minimum-salary to the unemployment fund. majority of these benefts that used to be levels and guidelines for certain types available, including workplace catering, of work (for example, by skill level, degree The employee contributions are assessed schooling assistance, etc. will no longer of responsibility and industry). and withheld by the employer. The general qualify as fringe benefts with favorable rate of sick pay is 60% if the employment taxation. Salary levels vary widely. Wages in the state period was longer than two years, and 50% sector or at wholly Hungarian-owned if the employment period was less than Beneft in kind can also be provided enterprises are generally lower than at two years and certain conditions are met; to the employees provided that the benefts multinational companies. Skilled white-collar the maximum amount of sick pay cannot are available for all (or a specifcally defned labor commands a premium, particularly exceed two times the minimum wage group) of the employees. Beneft in kind for qualifed information-technology (maximum HUF 7,400/day (approx. EUR can be, for example, employee discounts, specialists. There are also wide disparities 23)). The employer must pay 70% of wages entertainment etc. The tax rate for beneft in among different regions of the country: for a maximum of 15 work days per year in kind is also 15% but the tax base adjustment salary levels in Budapest and the western case of illness. is 19% resulting in an effective tax rate counties are higher than in the depressed of 17.85%. Furthermore, for beneft in kind eastern regions. Other benefits there is also a health tax payment obligation Besides the regular annual holiday which is 27% but the tax base adjustment The Labor Code adopted the principle leave of 20 days and the additional days is 19% resulting in an effective health tax of equal wage for equal work, meant depending on the age of the employee rate of 32.13%. (Total effective tax rate to address discrepancies between wages as described above, extra days may be of 49.98%). for male and female employees. Hungary is awarded to employees younger than 18 (fve signatory to and adheres to ILO conventions days) and parents with children (up to seven Termination of employment protecting worker rights. days depending on the number of children). An employer must give a specifc reason Maternity leave is provided up to 24 weeks. for dismissing an employee. Employees Pensions have the right to sue for damages for unfair Hungary has a two-pillar pension system Fringe benefts can be provided dismissal if the reason for dismissal is (a third pillar was abolished as from 2011): to employees in the form of food vouchers, untrue or unclear. meals at workplace canteens, Szechenyi 1. Mandatory State Social Security holiday card (used for accommodation, The rights of an employee remain in effect Pension (funded by the employer and food and beverages and recreation), after a sale of the employer company. employee contributions outlined on schooling assistance, travel passes etc. The minimum notice period for dismissal the previous pages); and. The tax rate for fringe benefts is 15% but increases with the length of employment 2. Voluntary Mutual Pension Fund (funded the tax base adjustment is 19% resulting in of the employee (between 30 and 90 days). by voluntary employer and employee an effective tax rate of 17.85%. Furthermore contributions into a self-administered for fringe benefts there is also a health taxsheltered fund). tax payment obligation which is 14% but the tax base adjustment is 19% resulting in an effective health tax rate of 16.66%. (Total effective tax rate of 34.51%). This 66 Investing in Central Europe | Your move in the right direction
Labor-management relations As a general rule, a third country national Schooling is compulsory for children There is a prescribed seven-day conciliation can only be engaged in employment (with between the ages of 6 and 16 and, in broad period before a strike may be held. It is very few exceptions) if he/she has a valid terms, the structure of the education system customary, but not required, for notice combined work and residence permit. has changed little compared to the pre- of a strike to be given one to two days The combined work and residence permit transition period. General elementary before the strike. A national mediation and is issued by the Office of Immigration or primary school is usually followed either arbitration service exists to help settle labor and Nationality. The following documents by a “vocational school” (for the training disputes, but its services are not obligatory. are necessary for the application: pre- of skilled workers), a “vocational secondary agreement on employment, a document school” (which offers a mixture of vocational Works councils are mandatory in all certifying accommodation in Hungary, and academic studies) or the purely workplaces employing 50 or more persons. evidence of having the necessary academic “high school”. The high school (For companies employing more than 15 qualifcations for flling the position, remains the primary feeder of students but fewer than 50 persons, appointment certifcate of expected annual income to universities, although various types of an employee delegate is mandatory.) and health insurance. The labor center of universities often accept students from The councils are forums for employee should give their approval for Hungarian vocational secondary schools. representation; the company’s employees employment as part of the application elect the members, who can then negotiate process and upon a showing that There was a rapid expansion of university employment terms on behalf of the staff. the individual’s skills are needed in Hungary. and college education in the 1990s and Members of works councils are often union Although a pre-agreement on employment in 1999 Hungary joined the Bologna representatives as well. is required for the application process, Process. According to the Hungarian the fnal employment contract may be Central Statistical Office, the total number Individual labor contracts are standard concluded only after the combined work of students in formal education – public practice among companies in Hungary, permit and residence permit is issued education and higher education in and the Labor Code requires them and may only last for the period set by total – was 1.9 million in 2014/2015. for employment relationships. Collective the permit. The educational level of the population bargaining agreements for workers are is gradually evolving. Nearly 55% had at negotiated at the enterprise level and The above rules also apply to EEA or third least a GCSE in 2014, while more than 23% are rare, although trade unions have country nationals that are to be employed of the population aged 25 to 64 possessed been working to establish such contracts by a foreign company and transferred a university or college degree. The number in several industries. Works councils to Hungary on a secondment. of students in tertiary education in may negotiate collective agreements in 2014/2015 reached more than 370,000 and enterprises where there are no trade 5. Education the proportion of foreign students within unions. Educational attainments are comparable full-time students has more than doubled to those in Western Europe. A high since 2005. The number of students in Employment of foreigners standard of general education has played vocational schools decreased in 2014 (by Different rules apply depending on a crucial role in attracting foreign employers 21%), while that of high school students whether the employee is an EEA national to Hungary, especially in the new technology grew to 39%. or a national of a third country (i.e. sectors. a non-EEA country). EEA citizens and their family members do not need The Hungarian education system is a work permit in Hungary. The employer divided into three levels (elementary, must notify the competent labor center secondary and higher education), including of the employment that is not subject both publicly owned and some privately to a work permit. The commencement owned institutions. An increasing number of the employment must be reported no of primary and secondary schools teach later than the start date of the employment; English and German as second languages. the termination of the employment Additionally, French, Spanish and Chinese must be reported on the day following bilingual schools are also available in the termination. Hungary.
67 Investing in Central Europe | Your move in the right direction
6. Infrastructure Road network Hungary ranks ffth in the region regarding infrastructure quality in the 2015-2019 forecast period as a result of its well- developed road and telecoms networks. Hungary has made signifcant investments in upgrading and extending its motorway network and road infrastructure over the last few years, many of them with the help of EU-funded projects. The country’s national borders and other regions are easy to access through its main motorways and trunk roads. There are 199,567 km of roads, approximately 38% of which is paved.Hungary’s central location in Europe and having one of the densest motorway networks in Europe provides an essential 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 the “North-South” corridor from the Baltic states to Turkey and Railway network Air transport Greece), which pass through the country, Hungary has an extensive railway network In recent years, air traffic has grown rapidly, provide unique access to Europe, including due to the country’s central location: particularly regarding passenger transport. the fast-growing CIS market and key railways cover the entire country and This increase occurred after the introduction European ports. is well connected to the international of discount airlines which the Hungarian railway network. Numerous key train lines airport authorities were forced to allow due Recently, international cooperation has been regularly link the country with the main to the non-discriminatory terms accepted strengthened with neighboring countries ports of Western Europe (e.g. Hamburg, upon EU accession. Hungary has several to foster this endeavor by harmonizing Bremerhaven, Rotterdam) and those domestic and international airports across road network developments. A top priority of the Adriatic (Koper, Trieste). The state-run the country. of the Hungarian government is to further domestic railway system, operated by MÁV, extend and reconstruct the road network in is widely used for industrial freight transport The largest airport is the Liszt Ferenc Hungary. and the company has earned profts from its International Airport in Budapest, and they operations in recent years. Over 20% of total are currently striving to make it the second freight traffic is carried by rail transport, biggest airport among the countries which signifcantly exceeds the EU average. in the region in terms of the number Road transport has replaced the rail of passengers. Other international airports network as the primary choice for freight of regional importance include Debrecen haulage, despite the recently increased road (Northeast Hungary) and Balaton–Sármellék tolls, however the government launched (West-Southwest Hungary). a reconstruction projects with the support of EU funds.There are approximately 8,000 km of railways, most of which have a standard gauge and a third are electrifed.
68 Investing in Central Europe | Your move in the right direction
Water transportation One of these advances in capacity Both medium and long-term prospects Hungary’s main river, the Danube, crosses and technology includes the opening for the automotive industry in Hungary the whole country from North to South, of an EUR 800 million plant of Daimler are good. The satisfaction and loyalty providing the country with outstanding (Germany) in Kecskemét in 2012 which of companies with their current locations waterway connections. The Danube-Rhine- aimed for a production volume of about are notably high and they plan to expand Main canal in Europe links the North Sea 100,000-120,000 Mercedes passenger cars. capacity over the next fve years, produce with the Black Sea, and the Adriatic seaports In less than 4 years the plant produced new products and hire staff. also provide alternative shipping routes a total of 500.000 cars, meaning a better from Asia. performance than expected. In their Manufacturing recent statement Daimler announced Hungarian manufacturing underwent radical 7. The Most Active Industries/ Sectors that the company will spend EUR 1 billion transformation in the transition period. Automotive industry by 2020 to expand its existing site in Formerly characterized by large heavy Starting almost from scratch at Kecskemét which will almost double its industrial plants that were dependent on the beginning of the 1990s, the vehicle capacity. cheap energy imports and sheltered from manufacturing sector has become a vital competition, the Hungarian industry today source of foreign investment, accounting Audi also expanded its capacity to 125,000 is largely modern and efficient, thanks for 20% of total exports. Despite the decline cars a year and added an additional shift principally to the early entry of foreign in European demand, the automotive at the plant in 2014, and a second phase investors. production began expanding again in of expansion is planned in Győr in 2017/18. 2011/2012 and became the key driver Furthermore, Renault-Nissan (France/Japan) The production volume of manufacturing of growth in Hungary: its production established a regional spare parts supply increased by 8.1% in 2015, representing represented more than a quarter center in Győr with the aim of supplying 95% of industrial output, following of the manufacturing output and increased to Central and Eastern European markets, an 8.6% increase in 2014, which continued by 21% in 2014. Only 3% of the companies and General Motors invested EUR 500 to be signifcantly influenced by sales on in Hungary is considering the relocation million in its Opel engine manufacturing external markets. Although output grew of its production facility to another country facility in Szentgotthárd in order to expand in each of the sectors, the manufacture in Central Europe in the next fve years. its capacity. The new-car market has seen of transFport equipment represented a signifcant growth in recent years, however the most signifcant growth with an increase The country’s automotive industry relies it is still far smaller than it was in 2003. In of 17%. severely on foreign direct investment, 2015 there were 77,171 new passanger car- focusing on the assembly of engines, registrations which is 14% higher compared Hungarian electronics manufacturing components and cars. Today, passenger to results in 2014, and signifcantly higher ranks frst in the Central and Eastern cars make up nearly all of the domestic than the EU average of 9.3%. Further growth European region and is highly ranked production. In the last two years, numerous is expected at a value of 7% in 2016 due globally. This is led in part by segments signifcant investments, particularly from to the economic growth. brought to Hungary by foreign investors the German companies Mercedes, Opel as greenfeld investments such as mobile and Audi, have enhanced capacity and led 14 of the top 20 suppliers worldwide, such telecommunications and other high- to the construction of more technologically as Bosch (Germany), Bridgestone (Japan) technology equipment, for which Hungary advanced plants. and Hankook (South Korea), are also present has become something of a center. in Hungary. The country’s most signifcant national component manufacturer, with Other manufacturing sectors with high a strategic importance for the economy, is export levels, such as the chemical and Rába (based in Győr). The Bosch production food industries, have a longer tradition facility in Hatvan, which was established in in Hungary, although these two have 1998, has become the world’s largest in gone through major restructuring and the Bosch Automotive Electromics division modernization. and contributed products to more than 500 million vehicles worldwide since it opened.
69 Investing in Central Europe | Your move in the right direction
Information and communication There is an increasing number of Asian The supply of chemical products technology companies, including Chinese frms, represented 39% of domestic sales The availability of comparatively cheap which are expanding their production in the whole processing industry. and technically skilled labor as well to Hungary in order to serve EU markets. The chemicals sector was already a major as the presence of nearby EU markets For example, Huawei Technologies Hungary industry before Hungary’s transition, and has attracted a number of leading is set to spend approximately USD 36.66 the two largest companies, BorsodChem electronics and software frms to Hungary. million on the development of broadband (the Hungarian subsidiary of the Chinese The country has become a major European technology in Hungary. Huawei supplies all Wanhua Industrial Group) and TVK, have manufacturing center for mobile telephone of the top telecommunications companies complementary buyer-seller roles. TVK, handsets, led by output from contract and is the second biggest Chinese investor now controlled by the oil and gas company manufacturers such as Nokia, Elcoteq (both in Hungary. Moreover, the company is MOL, is more closely linked to the oil and Finland) and Flextronics (Singapore). expanding its regional innovation center petrochemical value chain as a major situated outside of Budapest. supplier of polyethylene, polypropylene The increase of per capita disposable and other products. BorsodChem and TVK income led to the expansion The range of both business-to-business have both become important European of the telecommunications industry outside and business-to-consumer e-commerce players in their respective markets and the fxed-line sector. The market expanded offerings widened rapidly. Most international have completed coordinated, large-scale to include three main players: T-Mobile e-commerce businesses are available in investment programs. (subsidiary of Deutsche Telekom), Telenor the country however at a higher price due (Norway) and Vodafone (UK) with 48.1%, to the smaller market therefore fewer Agriculture 28.6% and 23.4% market share respectively. economies of scale and the low level Agriculture and viticulture have traditionally of competition. played an important role in the economy The mobile market is saturated as there was due to Hungary’s favorable climate and only a growth of 0.3% in the number of new Chemicals and pharmaceuticals fertile soil. Major crops include wheat, maize subscribers between June 2013 and June Hungary inherited and barley, sunflower seeds, sugar beet and 2014. Meanwhile the number of Internet an important pharmaceutical industry a variety of vegetables and fruits. Animal users increased by 17% from 2010 to 2014 from the communist period, and today it is husbandry and dairy production are also and it is likely to further grow by 6% by one of the most important manufacturing important. 2019 due to the rapid growth of mobile sectors in Hungary, representing 0.9% Internet use, rising personal incomes, falling of the value of the European pharmaceutical Hungary has nearly 5.3 million ha prices and improved service provision and market. Hungary has several new small and of agricultural land, comprising 57% online content. Fast broadband access medium-sized biotechnology companies, of the country’s total surface area. By technologies are available to 74 % of homes, as well as a solid presence of large including forests, the total productive land which is above the EU average of 62%. Due pharmaceutical companies, numerous area rises to 7.2 million ha. Over the period to the strong inflow of EU infrastructure fast-growing research institutions and skilled between 2005 and 2013, the total spending funding for information technology (IT), workforce with a moderate cost of labor. of Common Agricultural Policy (CAP) the number of personal computers (PCs) is expenditure in the country was EUR 11.94 forecast to increase by over 40% between Richter Gedeon, the largest pharmaceutical billion. In 2014 the agricultural sector was 2012 and 2018. company and the only major manufacturer approximately 4.4% in gross value added. not controlled by a foreign investor, Agricultural output grew by 9.6% in volume Today, the major Internet service provider is is a leading producer of generics and as crop production (13% volume growth) Magyar Telekom which holds more than 46 active ingredients and is one of the most contributed to the success of the sector % of the market, followed by UPC, Telenor important foreign drug suppliers on and, at the same time, the production and Vodafone, each controlling around 10% the Russian market. Its active ingredient volume of livestock and animal products of the market. production has led to extensive exports also improved (by 5.6%). to the US and Japan. Other leading frms are Egis (51% owned by Servier of France), Teva (Israel) and Chinoin, a subsidiary of Sanof- Aventis (France).
70 Investing in Central Europe | Your move in the right direction
The new Széchenyi 2020 development With increasing demand from foreign 9. Investment Incentives plan for 2014–20 will offer funding and domestic corporate clients for simple Investors are eligible for subsidies, opportunities to agricultural businesses and responsive services, more fnancial distributed primarily through government as part of the planned Environment and institutions are providing universal banking, schemes. Energy Efficiency Operational Programme, which ranges from straightforward lending the Regional and Settlement Development to investment banking and securities Cash grant opportunities Operational Programme and the Hungarian trading. Most foreign frms tend to access The main types of cash incentives related Fisheries Operational Programme. local credit and capital markets through to investments are focused on asset fnancial institutions from their home investment (e.g. purchasing assets, Financial services country that have opened branches in construction work, etc.), creating new jobs, After an early recapitalization program, Hungary. and training employees. The Hungarian followed by comprehensive privatization Government makes a VIP subsidy that brought in foreign strategic partners, The frst fnancial institution established by opportunity available for investments Hungary now has one of the region’s most Bank of China in Central Europe opened in greater than € 5, 10 or 20 million that advanced banking sectors. Budapest, 2003 in Budapest and is planning to expand create a certain number of new jobs the capital, is Hungary’s fnancial center. its business scope. (50/100), depending on the purpose and The privatization of the major banks began location of the investment. An investment in the mid-1990s and by the end of 1996 8. Industrial parks exceeding EUR 30 million can be eligible most banks had been sold to foreign Hungary offers the widest selection with a job creation of only 25 regardless investors. of industrial parks in the region: investors of the region. The conditions of the VIP can choose from more than 200 operating subsidy are determined in a negotiation In the beginning of 2016 the Growth industrial parks according to their business, procedure between the investor and Supporting Programme (GSP) was launched professional or cultural demands. the Hungarian authorities. The main which is the fnal phase of the Funding Furthermore, the government is planning areas that attract support are asset for Growth Scheme (FGS) that will provide to invest more than EUR 482 million investment (greenfeld, brownfeld further support to the banking sector in in the construction and development or capacity extension) and investments order to encourage lending to small and of industrial parks in 25 cities across aimed at job creation. Beyond the VIP medium-sized enterprise (SMEs). the country between 2016 and 2018. subsidy opportunity, an additional job- creation grant is also available for investors The banking sector in Hungary is greatly Establishing a business is facilitated by highly creating at least 250 new jobs. The amount concentrated, with a few banks dominating favorable conditions, including management of the job-creation grant is € 3,000 per new deposit-taking and lending. The share that is familiar with local circumstances, employee. of majority foreign-owned banks’ in total support from municipalities and various tax sector assets exceeds 80%. On the other benefts. Another very important point is The VIP cash grant is also available hand, the non-bank fnancial sector, which that investments are usually implemented in for R&D projects with costs exceeding includes insurance companies, asset a fairly short period of time (a few months). EUR 3 million. The maximum aid intensity management companies and venture of the R&D VIP cash grant is 25%. •• 210 well equipped industrial parks capital and private equity frms, plays a less signifcant role. The vast majority of these •• Several large multinational companies The Hungarian Government also offers frms are owned by commercial banks. have some part of their operations in a VIP subsidy opportunity for training industrial parks in Hungary employees. The subsidy is available to investors creating at least 50 new jobs, •• 4,200 companies employing over the amount of the subsidy per capita 200,000 people cannot exceed the amount of € 3,000. •• Nearly half of industrial parks are located This subsidy is provided for trainings with along motorways, and investors can maximum aid intensity of 50%. The aid expect professional logistics services intensity can be increased further in almost everywhere. the case of small- and medium-sized enterprises and for training of disabled or disadvantaged workers. 71 Investing in Central Europe | Your move in the right direction
Approval for foreign investment is •• Investments aiming at job creation; Tax allowances related to corporate required in only a few industries R&D activity •• Investments with minimum HUF 100 or circumstances, such as fnancial R&D costs related to the business million (EUR 330,000) eligible expenditure institutions, telecommunications networks, of a Hungarian company (or its associated that are promoting environmental investments with a major environmental entities) may be taken as an item reducing protection, flm and video making, effect and frms building a new shop the profts for tax purposes, without basic research, applied research and/ or other business installation. the taxpayer having to satisfy any other or experimental development; conditions. A variety of other cash grant opportunities, •• Investments made by small and medium- funded primarily by EU funds, are available sized enterprises that exceed HUF 500 The IP box regime provides a super for small and medium-sized companies, million (EUR 1.7 million). If the enterprise deduction to the corporate income tax base as well as startups and, in some cases, with increases the number of employees by 5 of certain R&D costs, resulting in a double single or consortia based applications. EU (for small enterprises) or 10 (for medium- deduction of such costs. The R&D costs funded grant opportunities, as opposed sized enterprises) within the following eligible for the 200% super deduction to the VIP cash subsidy, are only available four years or increases its wage costs must qualify as direct costs of fundamental for a certain period of time and even if by at least 10 times (small enterprises) research, applied research or experimental applicants comply with all application or 25 times (medium-sized enterprises) development (defned below). These criteria, budgets allocated to the specifc the annual minimum wage; direct costs generally include the costs calls for grant application may only honor of activities carried out by the company itself •• Investments promoting the process and top quality projects. A large proportion with its “own” employees and equipment, distribution of agricultural products, and of EU funded cash grant opportunities although costs of outsourced R&D activities for the corporate sector are allocated •• Investments with minimum HUF 100 performed under a cost sharing agreement for research, development and innovation million (EUR 330,000) eligible expenditure also may qualify. projects. Investment grants are typically in a free enterprise zone. available for small and medium-sized The R&D costs can be deducted also when enterprises but not for large companies. Companies realizing investments referred computing the local business tax base and to in the frst 2 bullet points above must the innovation contribution base. Moreover, Beyond cash grant incentives, fnancial meet, for a four-year period following corporations employing researchers with instruments (e.g. subsidized loan, the frst incentive year, additional academic grades or titles are relieved from guarantee, risk capital, etc.) are becoming requirements: either increase the number paying social tax (27% on gross wages) and even more important going forward. of employees by at least 50 (or 25 in training fund contribution (1.5% on gross Financial instruments provide a repayable underdeveloped regions) or increase wages) up to a monthly gross income wage beneft for applicants (as opposed the wage costs by at least 300 times amount of HUF 500 thousand (EUR 1.6 to grants) but the terms of these (or 150 times in under-developed regions) thousand). instruments are more favorable than the annual minimum wage. similar instruments under market terms. If the corporate income tax base is negative A development tax allowance due to the utilization of the R&D deduction Development tax allowance for investments exceeding 100 million euro and the taxpayer meets certain conditions, The development tax allowance is available eligible expenditure (which is in accordance it may decide to use 50% of potential for investments under the following with EU regulations on government corporate income tax benefts available conditions: subsidies) is available on a case-by- based on the deferred losses created by case basis through a permit issued by the deduction of R&D costs to reduce its •• Investments that exceed HUF 3 billion the Ministry of National Economics. Under social tax payable instead. (approximately EUR 10 million) eligible the allowance, 80% of corporate income tax expenditure; payable can be deducted normally for up Local municipalities have the right to provide •• Investments in promoted areas that to 10 years. The development tax allowance enterprises with tax incentives from local exceed HUF 1 billion (approximately EUR is not available in Budapest and in some business tax in an amount equivalent 3.3 million); part of the Central Hungarian region. to 10% of the direct costs of basic, applied or experimental research.
72 Investing in Central Europe | Your move in the right direction
Application of the R&D tax beneft is Foreign investors may establish wholly regions are included among the top ten based on self-assessment in Hungary; it foreign-owned companies and joint most competitive regions: the South is not necessary to obtain approval from ventures in various legal forms. New Transdanubian region was ranked as the 6th the tax authorities. However, the Hungarian companies must register with the court most cost-effective region, while the Great Intellectual Property Office (HIPO) is of registration. The Civil Code, as well Plain and the Northern region were ranked responsible for determining whether as the Act on Public Company Information, 3rd among the large European regions. projects qualify as R&D, the proportion Registration of Companies and Company of various R&D activities (experimental Dissolution (Act V of 2006) and its 11. Expatriate life development, industrial research and amendments of 2007, provide for relatively The quality of life that Hungary offers foreign fundamental research) and/or whether simple company registration procedures, investors and employees in Budapest and the activities qualify as “own R&D activity” although they include strict corporate throughout the country is an important within the meaning of the Corporate responsibility requirements. factor when businesses consider Income tax Act (i.e. R&D carried out as part establishing a presence here. Expatriates of a company’s operations). The decision Foreign investors can carry out “greenfeld” working in Hungary for extended periods of HIPO is binding upon any authority investments or acquire all or a part have so far not been disappointed: they (including the tax authority). For ongoing of state-owned enterprises being privatized, have found living in Hungary pleasant and or past (already completed) projects “expert although private ownership (foreign Budapest exciting and less expensive than opinion” could be obtained from HIPO which or domestic) is restricted or forbidden in other major European capitals. Moreover, is not binding on the authorities; however, certain state-owned enterprises. The EU the country boasts a rich and internationally it is accepted so far in all cases by the tax restricted available government subsidies recognized culture, distinctive cuisine, authority. The tax authority itself requests in 2004; however, Hungary provides a wide superb wines, a centuries-old spa tradition, HIPO for their professional opinion on past variety of incentives to investors and subsidy excellent schools and numerous leisure R&D projects during tax audits, so the tax schemes to SMEs. activities and facilities. With its millennium- authority recognizes the technical expertise old culture and inspiring technological of HIPO. Hungary is among the top performers legacy, it is not surprising that many global in the region and has one of the highest businesses make Hungary their Central Starting in 2017, a new R&D qualifcation rates of FDI stock per capita. It is ranked European home. method will be introduced based on which third out of 16 countries in the regional taxpayers could request the qualifcation ranking in 2015-2019 considering factors 12. Weather and climate of groups of projects carried out in the same such as government policy towards foreign The climate in Southeast Hungary is very fnancial year. capital, the availability of investment different from the climate of Northern protection schemes and the national and Western Hungary and is similar 10. Foreign investment culture’s degree of openness to foreign to the climate of the Mediterranean. Hungary generally welcomes foreign direct influences. In 2014 the main invested The summers are long, hot and with investment and the country provides sectors were the fnancial and insurance hardly any rain. The temperature can rise a stable and secure legal framework services with 48.6%, and the manufacturing up to 38 degrees. Autumn remains, like for conducting business. Foreign industry with 35.6%. the Indian summer, warm and without much participation is often recognized by local rain. The start of the canoeing season is businesses as an opportunity to access fDi Magazine, an investment publication the middle of April, although October is still more advanced technology, export markets of the Financial Times Group, named a good month for canoeing. Higher rainfall and critical working capital. Hungary Budapest as the most attractive Eastern occurs at the beginning of June but without has several advantages which attracts European city for FDI in 2014-2015. rainy periods of over several days. foreign investment inflows including its Additionally, Hungary was ranked among geographical locations which provides a link the top ten in terms of cost effectiveness between Eastern and Western Europe. (7th place), FDI strategy (8th place) Good infrastructure and the favorable tax and business friendliness (5th place). system are also strong points of the country Furthermore, two Hungarian encouraging foreign investment.
73 Investing in Central Europe | Your move in the right direction
PL
74 Investing in Central Europe | Your move in the right direction
Poland PL 1. General overview of economy At the year of global recession in 2009, Polish main trading partners are Poland is located in Central Europe, between Poland did not escape the effects the European Union countries, Russia and Germany and Belarus and Ukraine, with of the crisis, although domestic demand China. Germany is responsible for over some above 500 kilometers of Baltic Sea kept the economy far from recession. 26% of Polish exports and 22% of imports. coastline. Since the start of economic Poland was the only EU economy registering Poland has a negative balance of foreign transition in early 1990-ties, Poland has positive GDP dynamics (1.7 percent) fuelled trade. had democratically elected governments by domestic consumption and public that adopted structural reforms program, investments. The former was attributed The biggest problems of the Polish economy that allowed Poland build democracy and to continued wage growth in line with labor is the difficulty in doing business due a market economy. productivity, while the latter came as a result to excessive bureaucracy and unclear laws, of EU structural funds, which Poland is and the high administrative costs imposed Accession to the EU in 2004 intensifed the biggest benefciary among the new EU on citizens, underdeveloped infrastructure economic growth. Duty-free access members. Poland‘s economy is a mixed (roads network) and difficulties in the labor to the vast Western European market economy. Income per capita is only around market resulting in low wages. In June 2015, and the additional legal security resulting half of Western European EU member the average monthly gross wages and from the EU membership, combined with states, and productivity gains have bypassed salaries in the national economy amounted Poland’s comparatively low labor costs, have many domestically-oriented service to 4 040 PLN, i.e. they were by 2.5% higher attracted foreign direct investment. These providers and the large agricultural sector. than in the same period of 2013. new investments have turned Poland into an open, internationally integrated economy. The state sector currently produces about 20% of GDP which is below level of Western After joining the EU in May 2004, Poland is countries. Polish regions are very diverse the eight economy in the European Union in terms of economic development. and 24 economy in the world (2015, IMF) in The richest province of the country is terms of GDP. Domestic product (PPP) per Masovian Voivodeship that cumulates capita was estimated by the IMF for nominal gross national product per capita at 87.1 23,926 USD (end of 2013). Economic % of the EU average and 22,7% of Poland growth puts Poland among the fastest GDP (2012). By expansion of IPOs and growing countries in Europe. In 2013 GDP privatization, the Warsaw Stock Exchange grew by 1.7 % and in 2014 accelerated became one of the best performing markets to 3,3%, while 2015 estimate reaches 3,5% in the EU. Also, fnancial sector in Poland did (IMF). Of the total GDP, the services sector not face a single bankruptcy or deleveraging generates approx. 64%, industry 31% and problems widespread in other EU agriculture 5%. economies.
75 Investing in Central Europe | Your move in the right direction
However, in 2013-2020 Poland again will be Most of the executive power is in the hands The Tax System and Regulations the biggest benefciary of EU funds that will of the Prime Minister, who is free to select All taxes in Poland are imposed by strengthen domestic entrepreneurs to reap his co-workers members of the Council the tax law acts which set the rules the rewards of membership via booming of Ministers. The cabinet he selects must for imposing taxes, their rates and duties, exports to the EU. The new EU Multiannual be approved by the Sejm by granting him as well as the responsibilities of taxpayers. Financial Framework gives Poland 105.8 the vote of confdence. The Minister of Finance may be authorized billion euro of which 72.9 billion would by an Act to issue regulations. All legislation be earmarked for implementation The Constitutional Court can rule on is published in Official Journal of Laws of the cohesion policy, and 28.5 billion the unconstitutionality of laws or other (Dziennik Ustaw – Dz. U.) and/or in Offcial for the agricultural policy. This means that in legislation. Journal of the Republic of Poland (Monitor the years to come Poland will be the largest Polski – M.P.). The Tax Ordinance (Tax Code benefciary of the EU cohesion policy 2. Tax structure – Ordynacja podatkowa) is the most general funds among all Member States. Although The taxation system is uniform across tax regulation which defnes: the EU budget for 2014–2020 is generally the Republic of Poland, and only small •• the tax administration structure; smaller than the previous one, Poland will differences may appear in local taxes. In receive almost 4 billion euro more than in general, foreign companies and individuals •• Advance Pricing Agreements; the current feld’s framework for 2007–2013. pay the same taxes as Polish legal entities •• general and individual tax rulings; or private individuals (with some exceptions Political system applicable to non-resident individuals). •• general taxation regulations, e.g. Poland is a parliamentary democracy The exceptions to this rule may result from payment deadlines and tax arrears (tax with a bicameral Parliament, consisting international treaties signed by Poland underpayments); of the Sejm (the lower house) and (Agreements on the Avoidance of Double •• tax liabilities of third parties; the Senate. The 460-member Sejm is Taxation). elected under a proportional representation •• tax information; electoral system for a four-year term. When The main taxes in Poland are: •• tax proceedings; sitting in joint session, members of the Sejm •• Corporate income tax (CIT); and Senate form the National Assembly. •• fscal confdentiality; The National Assembly is formed on rare •• Personal income tax (PIT); •• exchange of tax information with other occasions, such as taking the oath of office •• Tax on goods and services (VAT); countries; by a new president. •• Excise duty; •• tax certifcates. The Senate has 100 members elected •• Tax on civil law transactions; for a four year term in 40 multi-seat Other relevant legislation includes constituencies under a rare plurality bloc •• Real estate tax; the Corporate Income Act, Personal voting method, where several candidates Income Act, Value Added Tax Act, Civil Law •• Stamp duty. with the highest support are elected from Transactions Act (for capital duties and each electorate. transfer tax), Local Taxes Act (including, All companies intending to conduct business e.g. real estate tax). Parliament passes tax activities are given a tax identifcation The President is elected directly by popular legislation with a simple majority of votes. number (NIP) after registration with vote for a fve-year cadence, and his powers the appropriate local Tax Office. include calling a referendum, choosing the date of elections or using his veto to stop legislation.
76 Investing in Central Europe | Your move in the right direction
Taxes in Poland are generally administered may apply for individual tax rulings usually with a foreign tax credit granted, by: to the Minister of Finance (in practice, unless a tax treaty provides otherwise. Non- directly to the selected, authorized Directors residents (companies having their registered •• Tax Offices – units supervising of the Tax Chambers) or the local tax seat or place of management abroad) are the collection of taxes in their territories. authorities (with respect to the local taxes). liable to CIT only with respect to income They also issue individual administrative earned in Poland. decisions in taxation cases. Obtaining the ruling can help to avoid •• Fiscal Audit Offices – units that perform certain negative consequences in the event The amount of income (loss) is determined taxation and procedural audits of fscal of the tax authorities taking a different on the basis of accounting books, with accounting. view on a matter in the future, i.e. fscal adjustments made according to tax law. penal responsibility and penalty interest. •• Tax Chambers – supervise the tax The individual tax ruling remains valid until A branch of a foreign company is generally offices and are empowered to review changed by the tax authorities (possible taxed the same as a subsidiary, unless the administrative decisions of tax offices only in specifc situations; change comes otherwise provided in a tax treaty. and fscal audit offices. into effect starting from next settlements •• The Minister of Finance – is responsible period, e.g. next year for CIT) or when In general, a calendar year is deemed to be for Polish budgetary policy and the underlying provision of law is changed a tax year. However, a taxpayer may change supervises the entire taxation system. rendering the ruling irrelevant or when its tax year by notifying the appropriate the actual facts of the case or planned tax office and indicating a different period •• Some taxes are administered by the local events (presented in the motion for tax as a tax year. authorities, e.g. real estate tax. ruling) are changed. As a result of the accession Taxpayers may appeal to the Tax Chamber Moreover, if: to the EU, Poland has implemented against the decisions of the local Tax Office the Parent Subsidiary Directive (PSD), or Fiscal Audit Office. An appeal against •• during a tax audit the tax authorities the Merger Directive and the Interest a decision of the Tax Chamber may be question tax consequences Royalty Directive (IRD). directed to the Regional Administrative of the transaction covered by a tax ruling Court. Taxpayers are also entitled to resort and assess additional tax, Double Tax Treaties to the Supreme Administrative Court •• these consequences occurred after Polish PIT and CIT regulations provide that to review judgments of the Regional obtaining the ruling, a credit method of avoiding double taxation Administrative Courts. is used, unless the specifc double tax •• the taxpayer acted according to this treaty states otherwise. Poland has signed Rulings ruling, Double Tax Treaties with 91 countries. Most Two types of tax ruling are available in •• the taxpayer will not be obliged to pay of the treaties signed by Poland are based Poland: general and individual. General the tax assessed by the tax authorities. on the 1977 OECD Model Convention, rulings (issued by the Minister of Finance) although some exceptions appear in several are aimed to ensure that application Corporate Income Tax (CIT) treaties. of the tax law by the tax authorities is Pursuant to the Polish tax law, capital uniform; general rulings may be applied companies (corporations), companies Taxable income by all taxpayers. Individual rulings, which in organization, organizational units and Taxable income comprises all revenues may only be applied only by the taxpayer limited joint-stock partnerships (with earned in a tax year, both fnancial and obtaining the ruling, are issued by the exception of other partnerships) operating (with some exceptions) decreased selected Directors of the Tax Chambers having their registered seat or place by tax-deductible costs. A company’s (based on the authorization made by of management in Poland are subject profts consist of business / trading income, the Minister of Finance) upon written to corporate income tax on their worldwide passive income (e.g. dividends, interest and request – the taxpayer has to set out income (tax residents). Income derived by royalties) and capital gains. Business income the actual facts of the case or planned residents from sources abroad is generally earned abroad is aggregated with other events, the question(s) and present its subject to CIT under the same rules income and is subject to Polish CIT. own opinion on the issue. The taxpayers as income earned from Polish sources,
77 Investing in Central Europe | Your move in the right direction
Depreciation / amortization Dividends paid by Polish companies •• if a tax treaty exists between Poland and Fixed assets and intangibles are to non-residents the shareholder’s country of residence, subject to depreciation / amortization In the case of dividend payment to the EU the withholding tax rate depends on if the projected useful economic life resident companies, European Economic the tax treaty. The rate ranges from 0% of the asset is longer than one year and Area (EEA) resident companies and to 15%. Application of the decreased rate they are related to the taxpayer’s taxable Swiss companies the exemption from may depend on other conditions, usually income. Fixed assets and intangibles assets withholding tax will apply upon the condition the level of shareholder(s). with a value up to PLN 3,500 may be directly of at least 10% (25% for Swiss companies) expensed. As a rule, tax depreciation / shareholding for an uninterrupted period The decreased rate of withholding tax amortization is calculated on a straight- of at least 2 years. specifed in the tax treaty is available line basis. However, the reducing balance provided that the dividend payer has a valid basis may be used for certain categories The two-year period condition can be certifcate of residence of the dividend of assets. Certain assets, such as land and fulflled after the dividend is paid. recipient. works of art, cannot be depreciated for tax purposes. To beneft from a reduced rate, the foreign Dividend received by the Polish recipient should provide the Polish payer companies from foreign companies Rate with a certifcate of tax residence issued As a rule, dividends received by Polish Income (tax base) that is calculated in by the tax authorities in the recipient’s tax residents from foreign companies are accordance with the tax provisions is subject home country (if the said certifcate does aggregated with other taxable revenues to CIT at a rate of 19%. As partnerships not provide for the period of its validity, it subject to CIT under the general rules. (with the exception of limited joint- is considered to be valid for a period of 12 However, the withholding tax payable stock partnerships) are tax transparent, months from the date of its issueance). abroad may be credited against CIT liability revenues / tax-deductible costs generated Additionally, the dividend receipient has in Poland (although the credit must not by a partnership are added to each to provide the Polish tax remitter with exceed CIT attributable to the dividend type partner’s revenues / tax-deductible costs a signed statement confrming that it is income). in proportion to their interest in that not exempt from tax on all its income partnership; thus, the partnership’s income at the state of tax residence, regardless In case of dividend payment received is effectively taxed at the level of each of the income’s source. from EU resident companies, EEA partner. resident companies and Swiss companies, The above exemption is also available if the exemption from withholding tax will Relief for the purchase of new the dividend is received by the foreign apply upon the condition of at least 10% technologies permanent establishment of the dividend (25% for Swiss companies) shareholding At the beginning of 2016, a new tax relief recipient from EU / EEA. for an uninterrupted period of at least 2 for research and development (R&D) was years. The two-year period condition can introduced. Thanks to this, taxpayers gained If the aforementioned exemption does be fulflled after the dividend is paid. This the possibility of additional tax deduction not apply, dividends paid to non-residents exemption is also available for EU and EEA of up to 30% of selected costs incurred are subject to withholding tax. The rate companies if they conduct their business for R&D. of withholding tax depends on whether activity through a permanent establishment there is a tax treaty between Poland and located in Poland and the received Taxation of dividends the shareholder’s country of residence: dividend is connected with the permanent As a rule, income arising from establishment.The exemption is not •• if no tax treaty exists between Poland participation in the profts of a legal entity applicable if the dividend income is received and the shareholder’s country with its registered office or the place as liquidation proceeds. of residence, the withholding tax rate is of management in Poland, including 19%; or the income from dividends, is taxed with the withholding tax at the rate of 19%.
78 Investing in Central Europe | Your move in the right direction
Furthermore, the Polish tax regulations also •• the defnition of a controlled foreign To obtain a lower treaty rate provide for underlying tax credit related corporation generally embraces or to elimitanate WHT taxation based on to dividends (and other dividend-type income the following entities: (i) entities whose double tax treaty, the payment recipient excluding liquidation proceeds) received by registered office is located in a country must provide the tax remitter with a valid a Polish company from an entity which: applying harmful tax competition, (ii) certifcate of its tax residence issued by entities whose registered office is located in the respective tax authorities. •• is not a resident of EU, EEA state a country with which Poland or European or Switzerland; however Union has not signed an agreement Additionally, according to the CIT Act, •• Poland has concluded a double tax treaty forming the grounds for obtaining tax starting from July 1st, 2013 interest and with the country of dividend payer’s tax information (e.g. a double tax treaty), and royalty payments may be in some cases residence. (iii) foreign entities that meet the criteria exempted from withholding tax (based on predefned in the Act – in simple terms: implemented IRD). In principle, in order This underlying tax credit is available upon primarily those generating passive to beneft from the above exemption, the condition of at least 75% shareholding revenues that are subject to a rate the following conditions should be met: for an uninterrupted period of at least 2 lower than 14.25% (potential exemption •• the said payments are made years. The two-year period condition can be or exclusion of such revenues from by a taxpayer having its place fulflled after the dividend is paid. taxation), of the registered office or place •• certain tax exclusions of controlled foreign of management in Poland or (under Taxation of Controlled Foreing corporations, e.g. in case they carry out certain conditions) by a Polish permanent Corporations (CFC) “actual business activity” or if they do not establishment of a company being Please note that as of 2015 new rules exceed a certain revenue threshold (EUR a taxpayer in another EU country on its regarding taxation of CFC entities were 250k) are permitted, world-wide income; introduced to Polish tax law. Key assumptons of those rules are as follows: •• the possibility to deduct in Poland the tax •• the said payments are made paid in by a controlled foreign corporation for the beneft of a company which is •• the CFC regulations provide for 19% tax on in the country of its seat/ management a taxpayer in another EU/EEA country the income generated by CFC corporation and availability of other preferences / or Switzerland on its world-wide income; at the level of a participating Polish deductions. taxpayer, •• the recipient of the said interest payments is a company mentioned •• the amendments are aimed to counteract Taxation of interest, royalties and above or (under certain conditions) its PE the shifting of assets that generate passive intangible services situated in EU; revenues, such as revenues from dividend, Generally, interest paid to foreign tax resident copyrights and interest, to countries with is subject to a withholding tax at a rate •• there is at least a 25% direct shareholding preferential tax regimes, of 20%, unless a relevant double tax treaty relation between the recipient and provides for a reduced tax rate. Similarly, the payer (i.e. the recipient has at •• in principle, analogous CFC provisions the 20% withholding tax applies to royalties least 25% of shares in the payer apply to taxpayers falling within the scope and certain intangible services (such or the payer has at least 25% of shares of both Polish income tax acts (CIT, PIT), i.e. as consulting, accounting, market research, in the recipient), and the shares are held companies seated in Poland and natural legal services, advertising, management and or will be held uninterruptedly for at least persons that are Polish tax residents, control, data processing, human resources, a 2-year period; guarantees and other services of a similar •• this beneft is also available when nature), unless a relevant double tax treaty the recipient of the interest (royalties) is provides otherwise. In general, payments a sister company of a Polish company for intangible services are classifed under paying the interest (royalties), provided double tax treaties as business profts that the parent company directly holds that are not subject to withholding tax in at least 25% of shares in both sister the source country. companies uninterruptedly for at least 2 years.
79 Investing in Central Europe | Your move in the right direction
The two-year period condition can be Carrying Losses Forward After the creation of the tax capital fulflled after the interest (royalty) is paid. If Losses incurred by a taxpayer may be group, the companies forming that group the shares are disposed of before the lapse carried forward and set off against income should additionally satisfy the following of 2-year holding period, the exemption over 5 following tax years from the year requirements: expires and the company paying the interest the loss is incurred, but only up to 50% •• none of the companies included in (royalties) is required to pay the 20% of the loss may be utilized in a given tax the group can singularly beneft from withholding tax or may apply the WHT rate year. Losses cannot be carried back. income tax exemption resulting from resulting from a relevant double tax treaty The right to carry losses forward is always non-CIT act; and, as the case may be, it may be also linked to the entity that incurred the losses, obliged to pay penalty interest. rather than to the entity’s specifc assets. •• the annual level of tax proftability Thus, the tax losses are not transferable of the group cannot be less than 3%; The above mentioned regulations apply with assets or the business (e.g. even if •• companies closed up in the tax capital to companies incorporated in EU member whole taxpayer’s operations are transferred group cannot maintain non arms’ length states, and to the companies from the Swiss to/merged into another entity). relations with related companies from Confederation. The list of the above outside the group. companies is specifcally provided in Tax Capital Group The tax capital group formed and registered an enclosure to the CIT Act. The CIT Act allows for the creation of a “fscal with the relevant tax authorities is treated union” (or tax capital group), under which as a separate entity for CIT purposes, Generally, the entity paying out interest, companies in a capital group are treated which results in particular in the following royalties or remuneration for purchase as a single taxpayer for CIT purposes. advantages: of intangible services is obliged to withhold and remit to the tax authorities the WHT The basic requirements for obtaining •• the losses of some of the members at the moment of payment. According the status of a tax consolidated group are of the tax capital group can be offset to the defnition included in the Polish the following: against the taxable income of its other CIT Act “payment” means fulfllment members; •• the capital group may be established only of the obligation to repay the debt in any by limited liability companies or joint stock •• the regulations on transfer pricing do form, including set-off or capitalization companies seated in Poland; not apply to transactions between of the interest. companies within the group; •• the average share capital of each member It should be stressed that according to CIT company should amount to at least PLN •• donations between companies within Act, interest, royalties or remuneration 1,000,000; the group are deemed to be a tax- for purchase of intangible services received deductible expense for the donor; •• the holding company should hold at least in connection with activity realized by 95% of the shares in the remaining group •• the simplifcation of tax formalities, permanent establishment of foreign entity companies; as only one company in the group in Poland is basically treated as a taxable prepares a joint tax return. income of such a permanent establishment •• subsidiary companies cannot be and subject to taxation under general rules. shareholders in the holding company or in Tax on Civil Law Transactions In such a case entity performing payment other subsidiary companies in the group; The following acts/actions are subject to tax may not remit the tax, however, relevant •• none of the members of the group may on civil law transactions: certifcate of residence as well as written have tax arrears in taxes which are state statement confrming that the said •• contract of sale and exchange of things income; payments are connected with activity and property rights; of permanent establishment should be •• the tax capital group need to be •• contracts of loan (of money or things provided by a foreign entity. established for a period of at least three designated only as to their kind); tax years by means of a notarial deed; the agreement must also be •• contracts of donation – in the part fled with the tax office which issues relating to the donee taking over debts an administrative decision and registers and burdens or obligations of the donor; the capital group if all the conditions are •• contracts of annuity; met. 80 Investing in Central Europe | Your move in the right direction
•• contracts of division of inheritance and •• to secure a debt whose amount is not Interest deductibility limit contracts of dissolution of co-ownership determined – PLN 19; According to thin cap regulations, – in the part relating to repayments the limit of indebtedness above which or additional payments; (d) on partnerships / companies deeds: the part of the interest may not be treated as tax-deductible amounts to the value •• • establishment of mortgage; •• 0.5% of the value of the contribution to the partnership or 0.5% of taxpayer’s equity. •• • establishment of usufruct of the company’s share capital; for consideration, including irregular Restricted entities usufruct, and servitude for consideration; •• 0.5% of the increase in the contribution Thin cap limitations apply to the interest or 0.5% of the increase in the share on the loans obtained from: (i) the direct •• contracts of irregular deposit; capital; parent and sister companies as well as (ii) •• partnerships / companies deeds (articles •• 0.5% of the amount of the additional the companies which indirectly hold at least of association); payments; 25% of shares and (iii) from the companies in which the same entity holds directly Moreover, any amendments to the above- •• 0.5% on the annual market value or indirectly at least 25% of shares which listed acts resulting in the increase of the tax of the usufruct of objects or property holds also directly or indirectly at least base are also subject to tax on civil law rights vested in the partnership without 25% of shares in the given taxpayer. transactions as well as court judgments and consideration, etc. For the purpose of determining the amount settlements having the same result as above Tax liability shall be borne inter alia: of shares held indirectly by the particular transactions or amendments to the above •• in the case of contract of sale – by entities, the transfer pricing regulations will transactions (which result in the increase the buyer; apply. of the tax base). •• in case of loan agreement – by Equity In principle, the tax liability arises upon the borrower; For the thin cap purposes, the value performance of an act / transaction in •• in case of partnerships / companies of the equity should be determined civil law. The taxpayer is obliged to submit deeds – by the partners, and in case at the end of the month preceding the tax return and to pay the tax within of other partnership or company deeds – the month in which the interest is paid. 14 days from the day when the tax liability by the partnership or company. While the equity is an accounting law arose, unless the tax is collected by a tax term (Polish “kapitały własne”), the CIT remitter (i.e. by notary public). A notary public is a remitter of the tax law introduces modifcations to this term. when civil law transactions are executed in Namely, the value of the equity shall not The exemplary tax rates are as follows: the form of a notarial deed. include the revaluation reserves and the part of equity derived from the received (a) on contracts of sale: Thin capitalization subordinated loans. Moreover, the value of equity shall be reduced by the amount •• of the real estate, other tangibles The Polish CIT Act contains provisions of the share capital which was not actually and selected property rights related restricting interest tax-deductibility. transferred to that capital, which was to the real estate – 2% of their fair market covered by the shareholder’s receivables value; (1) Thin cap restrictions Starting from January 1, 2015, the thin resulting from the loans and the interest •• of other property rights – 1% of their fair cap method which will be applicable on such loans or which was covered by market value; automatically, unless the taxpayer chooses the intangible assets which are not subject the alternative thin cap method (please see to amortization for the CIT purposes. (b) on loan agreements – 2% of the amount details below). of the loan (0% in case of loans from direct shareholders of capital company);
(c) on the establishment of mortgage:
•• to secure existing debts – 0.1% of the amount of secured debt;
81 Investing in Central Europe | Your move in the right direction
(2) Alternative thin capitalisation method Transfer Pricing •• EUR 100,000 – if the value of the transaction As of January 1, 2015, the taxpayers are 1) Transfer Pricing – current does not exceed 20% of the share capital allowed to choose the thin cap method regulations defned in accordance with the regulations alternative to the one described above. In General on thin capitalization; or the alternative method, interest on the loans In principle, the Polish transfer pricing •• EUR 30,000 – if the transaction concerns granted by related or unrelated entities rules are based on the OECD Transfer provision of services, sales or use is recognized as tax-deductible cost in Pricing Guidelines. As such, they introduce of intangibles; or the given year in the amount not exceeding the concept of the “arm’s length” level the tax value of the assets (excluding of transfer prices. If related parties conclude •• EUR 50,000 – in all other cases. intangible assets) multiplied by reference transactions on terms that differ from rate of the Polish National Bank increased market practice and, as a result, the Polish The recent judgements issued by Supreme by 1.25 percentage point. At the same entity discloses taxable income lower than it Administrative Court have presented time, the value of the tax-deductible would otherwise have disclosed, the taxable a stance according to which when the sum interest recognized in a given year should income of this entity will be adjusted in of all transactions with a given related not exceed the value of 50% of operating accordance with this principle. entity exceeds thresholds presented income. above, the taxpayer is obliged to prepare Transfer pricing requirements apply also the transfer pricing documentations In this method the interest encompasses all to Polish permanent establishments covering all of the transactions concluded costs of fnancing incurred by the taxpayer, of foreign entities. with such related entity. Consequently, such as commissions, bonuses, late such approach requires documenting payment fees (but does not include According to the Polish tax regulations two even minor transactions if the sum charges arising from derivative fnancial entities are considered to be related if there of all transactions e.g. related to provision instruments). is the direct or indirect ownership of at least of services, sales of intangibles or granting 5% of shares between them. access to intangibles exceeds the specifed The interest classifed as tax non-deductible materiality threshold. costs based on the alternative thin cap The relationship shall be deemed to exist method may be deducted for tax purposes also where subjects or persons performing The duty to prepare statutory in the next 5 tax years, however, within managerial, supervising or inspecting documentation also relates to transactions the limit calculated for a given year. Please duties are connected by family, capital and where the payment is made directly note that such deduction is possible property links or the links resulting from or indirectly to an entity having its registered only if the taxpayer continues to apply employment relationship. Such relationship office in a tax haven. In these cases the alternative thin cap method in such shall also be deemed to exist where any the threshold amounts to EUR 20,000. period. of the above persons combines managerial, supervising or inspecting duties. Additionally, since 1st January 2014 limited It must be noticed that the taxpayers who joint-stock partnerships are considered legal decide to choose the alternative thin cap Statutory transfer pricing documentation - entities subject to corporate income tax. method are obliged to inform in writing current regulations As a result, the transactions between these a competent head of the tax office about In order to facilitate transfer pricing companies and their related parties are choosing of such method. The alternative audits, the regulations put on taxpayers subject to the transfer pricing regulations method should be applied at least for 3 the requirement to prepare special and documentation. consecutive tax years, only after that period documentation concerning the terms the change of the calculation method would of transactions concluded with related Apart from the above, according to current be possible. parties (a statutory transfer pricing legislative considerations, statutory transfer documentation). The current requirement pricing documentation is going to be relates to each transaction with related obligatory also with respect to agreements entity (both cross-border and domestic), constituting partnerships (in case the total where the total amount arising from value of contributions in kind exceeds the contract or the amount actually paid in EUR 50,000 or EUR 20,000 in case one the tax year exceeds: of the partners in an entity from tax haven country). 82 Investing in Central Europe | Your move in the right direction
The statutory transfer pricing Advance Pricing Agreements (APA) The fee is 1 percent of the transaction documentation must be prepared in The provisions related to the APA procedure value, up to the limit of EUR 1,250 – 50,000 Polish language and presented within came into force on 1st January 2006. They (depending on the type of APA). The fee 7 days of the tax authorities’ request. If allow taxpayers to verify the correctness for prolongation of APA amounts to half the authorities fnd out that the taxpayer’s of the pricing methodology applied in of the fee for application for the agreement. proft is higher (or the loss is lower) than the domestic / cross-border related declared in connection with related party party transactions and ascertain its up- Taxpayers requesting APAs in Poland transactions, and the taxpayer does not front acceptance of the transfer pricing must choose one of the pricing methods, provide them with the statutory transfer methodology by the tax authorities. describe how it will be applied, indicate pricing documentation, the difference the circumstances which may influence between the proft declared by the taxpayer There are three kinds of APA’s: the correctness of the pricing methodology, and the proft determined by the authorities prepare documentation used as a basis •• unilateral; is subject to 50% taxation. for setting the level of transactional prices, •• bilateral; and inter alia agreements and other documents In July 2013 the “Ordinance of the Minister indicating the intentions of both parties and •• multilateral agreements. of Finance of 10th September 2009 on propose tax years to be covered by the APA. the Mode and Procedure of Determining Before submitting the APA application, Legal persons’ Income by Estimation and In April 2015, the Ministry of Finance the taxpayer may request that the Ministry on the Mode and Procedure of Eliminating proposed a number of material changes of Finance clears doubts regarding Legal Persons’ Double Taxation in to the Polish advance pricing agreements the individual case, in particular if it is Connection with the Adjustment of Profts regulations which came into force on 1st useful to seek an APA, what information is of Associated Entities” has been signifcantly January 2016. The main changes comprise: necessary, what is the procedure and when changed. The changes reflected the update the decision can be expected. •• indication that the APA decision pertains of the OECD Transfer Pricing Guidelines to the “terms and conditions” agreed and implemented conclusions developed The APA application can be submitted by between related parties, not exclusively by the EU Joint Transfer Pricing Forum. the Polish entity only. The fee should be to “transactions” – the changes aim The changes include: paid within 7 days afterwards. In the case to remove selected limitations regarding •• introduction of the regulations on of any doubts regarding the pricing method the object and scope of agreements; the business restructuring, chosen by taxpayer or documents enclosed •• extension of the catalogue of entities that to the application, the Ministry of Finance •• the most adequate method rule, may apply for an APA (i.e. entities without may request additional explanations. In legal personality); •• defnition of low value added services, the end, the taxpayer receives a decision with a validity of no more than 5 years. •• clarifcation of an obligatory APA •• transfer pricing methods for R&D Upon request it can be extended for further application elements and addition services, 5-year periods. of a description of critical assumptions, •• defnition and examples of shareholder i.e. boundary conditions for using a given costs, The proceedings should be fnalized pricing method; as follows •• obligatory elements of the comparability •• introduction of the new procedure i.e. analysis and transfer pricing methods •• unilateral APA – no later than in 6 months, renewal of an APA decision replacing used by the tax authorities during the procedure of extension of APA validity •• bilateral APA – no later than one year, and transfer pricing audits, period; •• multilateral APA – no later than in 18 •• possibility of conducting dispute months. resolution procedures to avoid double taxation involving three countries.
83 Investing in Central Europe | Your move in the right direction
•• limited roll-back of the APA: the APA 3) Branches of Foreign Companies •• introduction of a three-tiered approach decision to be binding from the date Foreign companies have been able to transfer pricing documentation, of submitting the APA application to establish branches in Poland since 1st i.e. local documentation (“Local File”), to the Ministry of Finance – this change January 2000. The range of activities of these documentation for groups of companies allows the APA decisions to cover branches is limited to the scope of activities (“Master File”) and a report on global the period between the fling of the APA of the foreign entity. Establishing a branch allocation of income and tax within request and the issuing of the decision; it requires registration in the National Court the group (“Country-By-Country adjusts the Polish law to the regulations Register. Branches are subject to similar tax Reporting”); of other countries; rules as those imposed on limited liability •• further instruction which taxpayers and joint stock companies. •• new rules on delivery of decisions on must maintain what category cancelation of APA proceedings by of documentation, i.e.: Foreign companies may also operate in the Ministry of Finance to the head Poland in a form of representative offices. ––Local File should be prepared by of the tax office or director of the tax The range of activities of representative the taxpayers whose revenues or costs inspection office, whichever is proper offices is limited to representation and exceed the equivalent of EUR 2 M in for the taxpayer; advertising. the year preceding the tax year that •• clarifcation that several transactions / the transfer pricing documentation is cost sharing agreements may be covered 4) Significant changes to come into to be prepared for; by one APA application – in such case force on the date of submission ––taxpayers whose revenues or costs each transaction / agreement is subject of the tax return for the 2017 i.e. in exceed the equivalent of EUR 10 M to a separate fee due to the Ministry general, as of 31st March 2018 in the year preceding the tax year will of Finance. be obliged to prepare respective Transfer pricing documentation benchmarking studies; 2) Tax information requirements ––Master File should be additionally Taxpayers conducting transactions with According to action 13 of the OECD’s BEPS prepared if the taxpayer’s revenues foreign parties are subject to certain Action Plan, aimed at re-examining transfer or costs exceed the equivalent of EUR 20 notifcation requirements. In particular: pricing documentation requirements — and M in the year preceding the tax year; in particular providing for more information •• where a taxpayer and a related ––the largest Polish entities whose from taxpayers, Poland is introducing foreign entity engage in transactions consolidated revenues exceed signifcant changes in such area of transfer exceeding EUR 300,000 in the tax year, the equivalent of EUR 750 M in the year pricing. The above mentioned changes the tax authorities must be informed preceding the tax year, will be obliged also extend the scope of the information about of the transaction within three months to produce Country-By-Country Report, related-party transactions to be provided from the year end; i.e. a report on the income and tax paid in to tax offices, which might streamline by subsidiaries, their places of conducting •• where the foreign entity has the process of selecting entities for tax business as well as their permanent an enterprise, a representative office audits and the tax audits themselves. establishments; or an establishment in Poland, the tax authorities must be informed if the value The changes that are to be implemented •• the materiality criterion has been defned of a transaction exceeds EUR 5,000. include, in particullar: in quantitative and qualitative terms, i.e. transactions are deemed material •• modifcation of related parties’ defnition Other transactions may have to be disclosed for taxpayers, if in the year preceding – related parties should be understood at the tax authorities’ request. the analysed tax year the taxpayer’s as entities that possess interest (direct revenues or costs exceeded the following or indirect) in the capital of another thresholds: entity which is equal to not less than 25% (current regulations indicate ––EUR 2 M but not more than EUR 20 the threshold of 5%); M – transactions or other events of the same kind whose total value exceeds the equivalent of EUR 50,000 increased by EUR 5 000 per each EUR 1 M
84 Investing in Central Europe | Your move in the right direction
of revenues or costs in excess of EUR 2 M •• indication that the new transfer pricing Moreover, due to economic downturn are considered material; documentation requirements will also the VAT rates with respect to majority ––EUR 20 M but not more than EUR apply to taxpayers that conduct their of goods and services were increased 100 M – transactions or other events business operations without having starting from 1 January 2011. The general of the same kind whose total value legal personality (e.g. partnerships), principles of the system are presented exceeds the equivalent of EUR 140 000 giving them the possibility to appoint below, including new signifcant regulations increased by EUR 45 000 per each EUR a partner responsible for drafting implemented in 2016. 10 M of revenues or costs in excess the documentation. of EUR 20 M are considered material; VAT is a broad-based tax levied on The above described changes will the supply of goods and services in Poland. ––EUR 100 M – transactions or other have a signifcant impact on the scope A Polish entity is required to register events of the same kind whose total of the taxpayers’ responsibilities in for VAT once its annual turnover on value exceeds the equivalent of EUR 500 connection with the preparation of transfer transactions subject to VAT exceeds PLN 000 of revenues or costs are considered pricing documentation. The changes extend 150.000 (if the entity starts business activity material. the scope of the information about related- during the year, the limit is calculated •• an obligation for the taxpayers to draw party transactions to be provided to tax as proportion of number of days of running up tax documentation not only in offices, which might streamline the process business activity in the year and the limit respect of their transactions with related of selecting entities for tax audits and for whole year). Foreign entrepreneurs parties but also concerning other events the tax audits themselves. have to register for VAT in Poland before recognized in the books of accounts they start any VAT-able activity in Poland where such events have a material That transfer pricing documentation (except for limited clearly enumerated impact on the taxpayers’ income (loss) compliant with new requirements should cases). Generally, VAT is imposed on every amount, as well as other events the terms be prepared not later than until the date supply of goods and services at the base of which have been determined of submission of the tax return for the 2017 or reduced VAT rate, unless the transaction (or imposed) with their related parties, i.e. in general, as of 31st March 2018. is exempt from Polish VAT. including the contracts for fnance Furthermore, according to the implemented management (e.g. cash pooling), cost regulations, the Country-By-Country The base rate of VAT is 23% and is charged sharing agreements, agreements related Report should be prepared for the tax year on most goods and services. A reduced VAT to incorporation of entities that are not beginning after 31st December 2015 (but rate of 8% is imposed on the sale of such legal persons, joint venture contracts and later than 1st January 2017) and should be products or provision of services as: other comparable agreements; fled to the tax office within 12 months after •• selected foodstuffs (not being subject the end of the year. •• introduction of the new content to 23% VAT rate); of transfer pricing documentation VAT Rates and Regulations •• specifc medicines and goods used in (depending on the above-mentioned General rules health care; materiality criterion); Generally, the Polish VAT regulations are •• catering and restaurant services; •• introduction of the new CIT TP form based on EU VAT Directives. The VAT accompanying the annual tax return regulations were subject to signifcant •• veterinary services; containing detailed information changes in 2014. The changes concerned •• selected services related to TV and radio of related-party transactions as well mainly various aspects and areas of VAT broadcasting; as other events on account of which dues regulations, such as taxpoint recognition, are paid to entities seated in tax havens input VAT recovery, etc., which were •• selected transport services; (an obligatory form for taxpayers whose aimed at further adjusting the Polish VAT •• municipal services (e.g. mains water revenues or costs within the meaning regulations to EU Directive principles. supply, sewage treatment, street of the accounting regulations exceed maintenance, plowing etc.); the equivalent of EUR 10 M in the tax year); •• fertilizers.
85 Investing in Central Europe | Your move in the right direction
A reduced VAT rate of 5% is imposed on Starting from 1 July 2016, Standard Audit In the situation when a foreign entity (from the sale of such products as: File for Tax (SAF-T) regime has been outside the European Union) not registered implemented to the Polish tax system. SAF-T for VAT purposes in Poland purchases •• selected foodstuffs (not being subject enables tax authorities to receive (in a form goods/services in Poland, based on certain to 8% or 23% VAT rates); of a xml fle) a complete list of all taxable rules defned in the decree of the Ministry •• books and magazines for experts. transactions (sales, purchases, stocks, of Finance, it may apply under several invoices etc.). The regime allows Polish conditions for a refund of input VAT incurred A reduced 0% VAT rate is levied (under tax authorities to run their own analytical on purchases in Poland, on a reciprocity specifc conditions) on the intra-Community tests and tax calculations ahead of tax basis. Foreign entities within the EU may supply of goods, exports of goods, as well audits. Although complete SAF-T is required apply for a refund of input VAT by submitting as some international transport services from Polish-based companies, a company electronic VAT refund applications. and services related to international without its economic seat in Poland but VAT transportation. registered in Poland is required to issue Gambling tax certain parts of SAF-T. The economic activity in the area A reduced 0% VAT rate may be applied of games of chance and mutual betting to some domestic supplies, e.g. equipment The new requirement did come into force is in general VAT exempt. Instead of this, for selected ships and airplanes. Selected in 1 July 2016 for large companies. In the entrepreneurs conducting this type health care, fnancial, insurance, educational particular, a large taxpayer is considered of activity are subject to gambling tax. and cultural services etc. are exempt to be a taxpayer with more than 250 from VAT, which accordingly prevents employees or with more than EUR 50 Excise Duty the taxpayer from recovering input VAT million of net turnover and EUR 43 million Excise duty is a consumption tax levied incurred in relation to such services. of assets (if employing less than 250 people) on certain goods which could be divided in at least of the previous two fscal years. into four general groups: energy products, The tax due to the Tax Office is calculated Small and medium taxpayers (generally electricity, alcohol beverages and tobacco as the surplus of output VAT charged on less than 250 employees) will be required products (including tobacco „greenleaf“). sales over recoverable input VAT stated on to implement the requirement by 1 July Excise duty is also imposed on cars. purchase invoices. 2018. The excise duty legislation is set out in Transactions between VAT taxpayers VAT that is due must be paid by the 25th a number of EU Directives, which means must be documented with a VAT invoice. day of the month following the month that each EU Member State may charge Sales to individuals who do not conduct (quarter) in which the VAT obligation arises. its own rates of excise duty along with business activities must be registered by differences in local country policy (e.g. with a fscal cash register if the turnover with Although Polish VAT law is generally regard to exemptions). individuals exceeds a specifc threshold. This compliant with the 112 EU Directive, it threshold generally amounts to PLN 20,000 contains various country-specifc provisions The following activities are subject to excise (approx. EUR 4,700) but sales of several kind and requirements, which are not common duty: of goods need to be registered in a fscal in other local VAT regimes. These are •• the production of excise goods; cash register independent of the value usually very troublesome for foreign of sales during the year. entrepreneurs. In consequence VAT and •• the movement of excise goods outside Intrastat compliance is often a challenge and a tax warehouse; Registered VAT taxpayers are obliged is being outsourced to frms experienced in •• import of excise goods; to submit monthly VAT returns (or quarterly Polish VAT settlements. Deloitte offers such VAT returns) to the appropriate tax office assistance. •• intra-Community acquisition of excise and keep registers of purchases and goods excluding intra-Community sales subject to VAT. In addition, EC Sales acquisition to a tax warehouse; and Purchase Lists and Intrastat (in case the statutory thresholds are exceeded) declarations must be submitted by the taxpayer with respect to its intra-EU transactions. 86 Investing in Central Europe | Your move in the right direction
Excise regulations indicate some other the difference between the sale price and The status of a Polish tax resident implies activities which may be subject to excise cost of acquisition of the shares borne by that the total worldwide income received duty. the taxpayer. by a given individual is subject to taxation in Poland taking into account relevant There are special rules concerning taxation The following sources of income are also provisions of double tax treaties. Polish of electricity, gas and coal, which are subject to a 19% flat rate tax: residents for personal income tax purposes chargeable at the moment of supply to end are obliged to disclose in their Polish tax •• interest, user. returns also private income such as interest, •• dividends, dividends, royalties, capital gains, sell of real Excise duty is calculated either estate, rental income or income derived •• proceeds from investment funds, etc. as a percentage of the value of goods from personal business activity (including (or the customs value of the commodities) participation in civil partnership and limited Personal Income Tax (PIT) or on a volume basis (fxed rate per unit). partnership). in case the above income is Under the Polish PIT Act, individuals may derived from abroad it should be reported be subject either to limited or unlimited tax The production of excise goods must in and taxed in Poland taking into account liability in Poland. The tax status of a given general be performed in a tax warehouse relevant double tax treaty provisions individual depends solely on whether he (excluding electricity, gas, coal and cars). to avoid double taxation of this income / she has his / her place of residence in in two countries (Poland as a country Poland. Up to 1 January 2007, the term The holding and movement of excise goods of residency and the other country being “place of residence” was not defned under is subject to strict controls and special the source country of given income). the Polish PIT Act and the common practice procedures apply. In respect of excise was to turn to its Civil Code defnition, which goods, there is possible to apply the excise An individual regarded as a Polish tax stipulated that the “place of residence” was duty suspension procedure. However, non-resident is, on the other hand, subject a place in which given individual stays with there are some conditions (documentation to Polish taxation only on income derived the intention to stay permanently. Starting requirements, excise guarantee) which from Polish sources (including income from from 1 January 2007, the amendment should be fulflled in order to apply this employment exercised in Poland) subject to the PIT Act introduced the defnition procedure. to provisions of given double tax treaty. of residency for PIT purposes. Polish tax non-residents are entitled to 20% Currently, intra-EU movement of excise flat taxation on specifc types of income Given person is considered to have a place goods under duty suspension procedure is (e.g. fees received under the civil law of residence in Poland if he / she: based on an electronic system “EMCS”. contracts or board fees payable on the basis •• has closer economic or personal links of resolution of shareholders) as opposed Please note that from 1st of January with Poland (centre of vital interest), or to progressive taxation of 18% and 32%. 2016 r. a major amendment of excise •• stays in Poland for a period exceeding tax act comes into force and thus some The tax year for individuals is equal 183 days in calendar year. of the abovementioned facts may change. to the calendar year.
Polish PIT Act provisions on tax residency Tax on Income Derived From Capital In general, cash and benefts in-kind status should be applied taking into (Natural Persons) received by an individual constitute his / her provisions of double tax treaties concluded As a rule, capital gains derived in Poland taxable income, unless a particular income by Poland. are subject to a 19% flat rate tax. From 1 is tax exempt in Poland according to Polish January 2005, capital gains also realized domestic law and the appropriate double Individuals not having their place outside of Poland are subject to 19% flat tax treaty (if relevant). of residence in Poland are viewed as Polish rate tax (previously, they were subject tax non-residents subject to limited tax to progressive taxation). Income derived liability in Poland, whereas those having from the sale of shares is subject to a 19% their place of residence in Poland are flat rate tax and should be declared in regarded as Polish tax residents subject the separate annual tax return PIT-38 to unlimited tax liability in Poland. disclosing the capital gains realized during the given tax year. Subject to tax is only 87 Investing in Central Europe | Your move in the right direction
Examples of income exempt from taxation •• payments made to taxpayer’s Individual Additionally please note that under in Poland: Pension Insurance Account (Indywidualne Polish PIT Law regulations, it is possible Konto Zabezpieczenia Emerytalnego to allocate 1% of the annual tax liability •• amounts due to the individual with – IKZE) decreasing taxable income to a selected Polish welfare organization. respect to business trips (per diems, (deduction limited to the annual amount It does not influence the fnal tax liability travel and accommodation expenses), which, as per respective legislation, may of the individual (funds are transferred up to the limits defned in the provisions be transferred to IKZE), by the tax office based on the taxpayer’s of the Polish law, suggestion indicated in the annual tax •• interests on loans drawn for housing •• amounts paid by the employer for raising return). purposes (under specifc conditions if of the professional qualifcations of its the loan was granted between 1 January employees (e.g. the value of courses and PIT rates for 2015 are as follows: 2002 and 31 December 2006). trainings which have been undertaken in order to raise professional qualifcations Polish tax brackets valid in 2015 Selected possible deductions from tax: as agreed by employer). 18% of taxable base less PLN •• 7.75% of the assessment basis up to PLN Selected possible deductions from income of healthcare contributions paid by 85 528 556.02 for tax purposes (decreasing taxable base): an individual in a given calendar year over PLN PLN 14 839,02 plus 32% for either his or her national healthcare •• employee’s contributions paid 85 528 of excess over PLN 85,528 insurance in Poland or mandatory to the obligatory Polish social security contributions for health insurance system, paid in another EU or EEA countries As a rule, the PIT rates indicated •• mandatory social security contributions or Switzerland provided that they were in the above table are applicable due in other EU, EEA countries not deducted for tax purposes in this to an individual’s total income. or Switzerland paid in the given year other countries and were not due on provided that they were not deducted the income exempt from taxation in Notwithstanding the above, the Polish for tax purposes in this other country and Poland; PIT Act provides for flat / linear taxation were not due on the income exempt from •• Child tax deduction in the amount on certain sources of income (which taxation in Poland, of PLN 1 112,04 per year per child – applies instead of progressive taxation). •• donations granted for Polish and amount applicable for 1st and 2nd child. The following items are subject to a flat tax equivalent organizations in the EU states Deduction increases to PLN 2 000,04 rate: or EEA countries conducting activities for 3rd child and PLN 2 700,00 for 4th •• capital gains – 19%, in the feld of public welfare, donations and each next child. Deduction for one granted for religious purposes (except child is not applicable if individual’s •• income from the sale of real estate for donations to natural persons) income threshold exceeds PLN 56 000,00 which was purchased from 1 January and the volunteer blood donations – (PLN 112 000 for married tax payers and 2009, provided that it is not related total deduction from the said types lone parents).This deduction is applicable to the business activity carried by a given of donations limited up to a level of 6% for parents bringing up children under person; if the sale of the real estate takes of the individual’s income, 18 years of age or children under 25 place after fve full calendar years from years of age, if they study at school or at the date of purchase or the sale takes •• donations for church charity purposes the university. place before fve full calendar years (applicable only to church legal entities) but specifc conditions (allowing for tax no deduction limit provided (some exemption) are met, no tax is levied, additional conditions must be met to take otherwise 19% tax on the proceeds from advantage of this deduction), the sale of the real estate,
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•• Polish source income derived by non- As a rule, every taxpayer is obliged to fle Tonnage tax residents from independent artistic, an annual tax return disclosing his aggregate As from 1 January 2007, based on literary, scientifc, educational and annual income derived during given tax the Tonnage Tax Act, the qualifed ship- journalistic activities, copyrights and year. The deadline for fling the tax return owners performing certain commercial inventions, as well as from personal (except for income subject to lump sum tax) shipping activities in international traffic are service contracts, specifc task contracts, and paying the annual tax liability is 30 April entitled to subject their incomes to tonnage managerial contracts, or similar contracts of the year following the tax year for which tax instead of income tax. and from board member fees – 20%, the return is fled. Please note that since tonnage tax is •• income derived from conducting Taxpayers may fle the annual tax return regarded as a sort of public aid (income business activities in Poland – 19% jointly with their spouses if the following subject to tonnage tax is out of scope of CIT (provided that the entrepreneur declares conditions are met simultaneously: / PIT taxation) the Tonnage Tax scheme his choice of 19% fat tax rate by the date should be authorized by the European as determined in PIT Act; otherwise he is •• spouses are subject to marital co- Commission. The respective authorization subject to taxation of his business activity ownership for the entire tax year (no was granted in the decision of 18 December income under general rules, i.e. progressive prenuptial/postnuptial agreement was put 2009 C 34/07 (ex N 93/2006). (18% and 32%) taxation. in place between spouses indicating how their assets would be allocated in case In its decision the Commission considered Apart from the above, according of divorce), that the scheme is compatible with to the provisions of the Act on lump-sum •• spouses are married for the entire tax year, the internal market and can contribute to taxation of certain revenues earned by private the Community’s interest in the feld individuals, the taxpayer may enjoy lump-sum •• neither of the spouses conducts business of maritime policy, however the Act of 2006 taxation on certain sources of income if he activity proceeds from which are taxed at which introduced the tonnage tax, required chooses to apply this taxation system instead linear or in accordance with the provisions adjustments. of applying the progressive taxation governed on lump sum taxation (including by the provisions of PIT Act. Lump-sum participation in partnerships). Therefore, on the 27th of December taxation may be applicable to such income as: 2012, Polish President signed amendment Additionally, to qualify for joint fling: •• revenues derived from renting real to the Polish Tonnage Tax Act, which adjusts estate (if such tax regime is chosen by •• both spouses should be subject the Polish legislation to the European the taxpayer by the due date) 8.5% total to unlimited tax liability in Poland (Polish Commission’s decision. gross proceeds (applicable as of 1 January tax residents), or 2010), Accordingly, the qualifed ship-owners are: •• one spouse should be subject to unlimited •• revenues derived from performance tax liability in Poland and the other •• individuals and legal entities being of certain types of business activity. spouse should be subject to unlimited the Polish tax residents performing tax liability of another EU or EEA country commercial shipping activities in Tax is generally due on a monthly basis (under or Switzerland (possessing certifcate the international traffic listed in certain circumstances, an entrepreneur of tax residency issued by this other the Tonnage Tax Act, may pay taxes due on a quarterly basis). country) and at least 75% of their world- •• foreign tax residents (i.e. individuals Polish employers are obliged to calculate, wide income should be taxable in Poland as well as legal entities) performing withhold and pay the tax advances due on or both spouses should be subject the above activities in Poland, which their employees’ remuneration to the tax to unlimited tax liability of another EU for the purposes of performing these office relevant for the employer’s place or EEA country or Switzerland, should activities use the vessels of the minimum of the registered office. possess certifcates of tax residency capacity of 100 gross register tons (GT) issued by this other country and at least each. Individuals who receive income from abroad 75% of their world-wide income should be are personally responsible for the payment taxable in Poland. of monthly tax advances due on this income (there is no obligation to fle monthly tax returns).
89 Investing in Central Europe | Your move in the right direction
The main activities that can be taxed Inheritance and gift tax General Anti-Avoidance Rule (GAAR) with tonnage tax are transportation Polish tax system includes also Starting from 15 July 2016 r. new of passengers and cargo as well as selected an inheritance and gift tax imposed amendments to Tax Ordinance Act which offshore operations. Please note that on the acquisition (e.g. via donation, introduce General Anti-Avoidance Rule some other commercial activities (e.g. inheritance, etc.), by the individuals, (GAAR) into Polish tax law entered into force. lease of the containers, ship management of property located in Poland and property The GAAR shall apply transactions if they services) may also be subject to tonnage rights exercised in Poland. Acquisition meet all (logical conjunction) the following tax provided that they are related of movables and property rights exercised three conditions: to the activities mentioned above. Certain in Poland is excluded from taxation if •• they are performed primarily in order activities however (e.g. fshing or fsh at the moment of agreement neither to obtain a tax beneft, processing, the construction of ports the donator nor the donee were Polish or repair of port infrastructure) can never be nationals or had permanent residence in •• they are contrary to the subject matter taxed with tonnage tax. Poland. and objective of the provision of the tax act, and Generally, the tonnage tax base is calculated Other taxes •• they are performed in an artifcial way. as a multiplication of the daily rate Other taxes include inter alia: (determined in the Tonnage Tax Act and •• real estate tax, If these conditions are met, the given depending on the capacity of a given vessel) transaction(s) / action(s) do not result in and the period of exploitation in a given •• road vehicle tax (imposed only on trucks obtaining the said tax beneft. month of the all ship-owner’s vessels subject and buses), to tonnage tax. The standard tonnage •• agricultural tax, A transaction shall be deemed to be tax rate is 19%. Income (in the part not performed primarily in order to obtain a tax re-invested in the ownership, renovation, •• forestry tax, beneft if other aims of the transaction / modernization or reconstruction of another •• bank tax (starting from 1 February 2016), action, as indicated by a taxpayer, shall be vessel within 3 years) from the sale of ships deemed insignifcant. is subject to taxation with the application •• retail sales tax (starting from 1 of 15% tax rate. September 2016). A transaction shall be deemed to be performed in an artifcial way if under The Polish tonnage tax scheme is also Please note that local governments/ existing circumstances it would not be a subject to a lock up period. Therefore, bodies are entitled to establish rates performed by a person who acts reasonably it is only possible to enter the tonnage for certain local taxes. However, those rates and is guided by lawful goals other than tax regime for a fxed period of 10 years. cannot exceed the maximum limits set by obtaining a tax beneft being contrary A choice must be made until 20 January the Parliament or regulations of the Minister to the objective of the provision of the tax of the frst year of the tonnage taxation of Finance. act. period or in the case of a shipping company commencing the activities Stamp Duty The GAAR is to be limited to cases when subject to tonnage taxation in the course Stamp duty is chargeable on certain a taxpayer achieved an aggregate “tax of the tax year, until the day preceding submissions and administration acts, beneft” in excess of 100.000 PLN in a given the day of commencing these activities. including: settlement period. •• performance of an official acts in individual matters on notifcation or on request,
•• issuance of a certifcate on request,
•• issuance of a permission (permit, concession),
•• other documents, e.g. power of attorney.
Rates vary from PLN 1 to PLN 12,750. 90 Investing in Central Europe | Your move in the right direction
3. Legal Entity The minimum initial capital for a joint stock The on-going operations of the company Principal forms of doing business company is PLN 100,000, 25% of which are carried out by the management board The Polish law provides for two types must be paid up before registration. which is also a representative and executive of capital companies: A joint-stock company may be founded body of the company. The management by at least one individual or legal person board must consist at least of one member, •• a limited liability company (spółka who must sign the Company Statute. After depending on the wording of the articles z ograniczoną odpowiedzialnością – the Company Statute is signed and before of association. abbreviated as “Sp. z o.o.”), and its formal registration, the company may •• a joint-stock company (spółka akcyjna – start operating as a “joint-stock company in The shares of a limited liability company abbreviated as “S.A.”). organization”. do not take the form of a document and cannot be listed on the stock exchange. Capital companies have legal personality Reserve capital is 8% of annual net profts, There are no limitations with respect and may acquire rights and incur obligations until reserve reaches one-third of share to the transferability of shares, unless in their own name, as well as sue and be capital. The minimum value of a single articles of association provide otherwise (e.g. sued. share is PLN 0,01 (1 grosz). Shares may be by introducing preemption rights). registered, bearer, common or preferred. Joint-stock company (S.A.) The incorporation of a limited liability Management of joint-stock companies is Capital companies are separate taxpayers company requires undertaking the following more formalized than in case of limited subject to CIT, as well as they are taxpayers steps: (i) drafting the articles of association liability companies and they are relatively of VAT and other taxes in an ordinary in the form of a notarial deed, (ii) appointing expensive to run. This type of company is fashion. the company’s governing bodies, (iii) frequently used where this form is required paying the entire share capital or providing by the law (e.g. banks, insurance companies) Limited liability company (Sp. z o.o.) the company with in-kind contribution or where the company is planning floatation A limited liability company is the most (the minimum amount of the share on capital markets. popular form of conducting business capital amounts to PLN 5,000 which is activity in Poland, as its shareholders do an equivalent of approx. EUR 1,200 – 1,500), The on-going operations of the company not bear liability for the company’s debts (iv) registering the company in the register are carried out by the management board and, at the same time, its management of entrepreneurs of the National Court which is also a representative and executive is less formalized and it is less expensive Register. body of the company. The management to run in comparison with the joint-stock board must consist of at least one member, companies. Limited liability companies may Prior to its formal registration, the company depending on the wording of the Company be used for any purpose allowed by law. may operate as “limited liability company in Statute. They are often used as special purpose organization”. vehicles, holding companies and as national The supervisory board in a joint-stock operating companies controlled by Starting from 2012, as an alternative, company is mandatory. It should consist international corporations. the formation and registration of the limited of at least three (in public joint-stock liability company is possible based on companies fve) members appointed by The supervisory board, as a general rule, a simplifed internet procedure, by using the general meeting. The board exercises is optional in limited liability companies. If official forms and standard corporate permanent supervision over all areas appointed, it is the main body responsible documents. of the activities of the company. for controlling the business of the company. The main responsibility of the supervisory The shareholders are not liable board is to examine the company’s fnancial for the company’s obligations; a joint- statements, the reports of the management stock company is solely liable for its own board on the company’s operations as well obligations. In certain situations also as to provide day-to-day supervision the members of the management board of the company’s affairs. may be held liable.
91 Investing in Central Europe | Your move in the right direction
Establishing a branch Similarly as in the case of a branch, Skilled labor is generally concentrated or representative office foreign entrepreneurs may open around bigger cities, specifcally in According to the Polish law, foreign their representative offices in Poland. the regions of Warsaw, Gdansk, Wroclaw, entrepreneurs may set up branch offices The major difference between the branch Krakow, Silesia and Poznan. The eastern on Polish territory, to carry out business and the representative office is that border regions still suffer from the highest activity. A branch constitutes an internal part a representative office may be used only structural unemployment in the country and of the foreign enterprise and cannot acquire for running the marketing and advertising low levels of investment. English-language rights or incur obligations in its own name, activities of a foreign entrepreneur in skills are now a basic requirement for most sue or be sued. The scope of business Poland. The representative office does not white-collar positions. activity of the branch may not go beyond constitute a separate legal entity and is the foreign entrepreneur’s scope of activity. treated as part of a foreign enterprise. It Employees’ rights and remuneration cannot acquire rights or incur obligations, Poland’s Labor Code as well as a large Some special regulations (both Polish sue or be sued. Setting up a representative number of other labor law acts, regulate and European Union) regarding opening office requires registration in the Register working hours, work safety, minimum wage, of the branch may be applicable in the case of Representatives Offices of Foreign non-discrimination in employment and of specifc industries. The branch is not Business Entities kept by the Minister collective bargaining, personnel fles and a separate taxpayer of income tax in of Economy. employment termination. Contracts may be Poland. Polish income tax provisions refer concluded for an indefnite period of time to the foreign enterprise as a taxpayer and 4. Labor and wages or for a defnite period (including also the branch is normally considered as their The employment market contract for substitution of an employee permanent establishment in Poland. Should The unemployment rate in Poland according during her/his absence at work). Any such that be the case, only income related to the Central Statistical Office (Glowny contract may be preceded by a contract to the activities of this branch in Poland is Urzad Statystyczny) stands at 8.8% at concluded for a trial period. subject to 19% CIT. A foreign entrepreneur the end of June 2016. (not the branch) is also a taxpayer with Employers must provide at least respect to VAT in an ordinary manner. If The labor market in Poland shows the minimum terms and benefts specifed the branch is employing, then it must be the growing number of qualifed staff, in the Labor Code, modifying them registered for tax purposes (i.e. acquire relatively low labor costs, yet high working only to provide more favorable terms a NIP number). standards and quality of work. In recent for employees. Some issues with regard few years an increased interest of young to the employment relationship may be people studying technical and industry also regulated in collective-bargaining oriented specializations can be observed. agreements, either single-enterprise Human resources directors see an increase or industry-wide. Accordingly, they also in skilled staff available on the market may provide only for more favorable terms and point out the positive changes in for employees. Industry-wide agreements the curriculum, which goes hand in hand must be registered with the Ministry with growth and development in the profle of Labor and Social Policy and single- of the companies. Consequently, fnding enterprise agreements with a regional labor local managers is becoming less difficult. inspector.
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Trade Unions, if present in the company, 5. Education There are currently 19 fully accredited have some influence on dismissal Since 1989, the Polish system of higher traditional universities in Poland, 23 of employees and other labor issues, but education has done much to catch up and technical universities, 9 medical universities their role is mainly consultative. Wage broaden its curriculum. The state sector’s and 5 universities specialized in economics. bargaining is almost always conducted activities have been complemented by In addition to these institutions there at the enterprise level. Workers who are a thriving private sector, as both sectors are then 10 agricultural academies, 4 not members of a recognized union are expanded to meet a rapid increase in pedagogical universities, a theological still entitled to have their rights protected demand. The participation rate in higher academy and 2 maritime service by a union. Unions must give employers education has also increased sharply. universities. Amongst these there are 8 relevant information about members Number of university students increased higher state academies of music. Public in the workplace; failure to comply with from 403th in the academic year 1990/91 academic institutions are supplemented the request releases the employer from to 1,677th in academic year 2012/13, by a number of private educational the agreement with the union. a fgure that compares well with western institutions. Altogether there are over 500 Europe. In 2013 there were 453 HEI (higher higher education entities in Poland being Discrimination based, in particular, on sex, education institutions) in Poland. one of top rates in Europe. The OECD’s nationality, race or union membership is International Student Assessment illegal. As academic salaries fell behind in Programme, ranks Poland’s educational the 1990s, many teachers with tenured system as the 23rd best in the world, Working hours posts in the state system also worked in which is around OECD average. According The standard average working time cannot the private university-level schools, of which to Pearson Report in 2014 Poland’s be longer, on average, than 8 hours per there were 305 in 2012/2013. Today there educational system was ranked 10th in day and 40 hours a week. If it happens that are approx. 320 non-public universities the World and 5th in Europe. these limits are exceeded, the employee is which provide education to almost 1/3 entitled to extra remuneration for overtime of Polish students. Some 305 of them are 6. Infrastructure in the amount of either 50% premium vocational schools, while 15 are academic Infrastructure Road network or 100% premium for each hour of work, schools. The poor state of the road network is depending on when the overtime work was one of the weakest aspects of Poland’s performed. Of 1,6 million of students in 2012/13, almost infrastructure. There are a few stretches 450 th were at private institutions, where of highways and expressways (3100 Wages and benefits the most popular specializations were km in January2015) and two-lane roads The Council of Ministers set the gross business and administration, with a lower connecting most major cities (1800 km). minimum monthly wage at PLN 1850 interest in pedagogy and social sciences. Road improvement and motorway building as of 2016. There is only one minimum Today, according to the Main Statistical have been critical components of Polish wage across all sectors, regions and Office (GUS) there are approx. 36th foreign government infrastructure projects. occupations. Average wages in the public students learning in Polish HEIs, which is However, many practical difficulties including sector are higher than those in the private 7 th more than last year. Governmental land purchase and other planning problems sector, PLN 4371 and PLN 3572 respectively objective for 2010 is 5% foreign students in – can be a restrain for the government (data for 2014). Currently, more and more Poland. Universities (both public and private) to implement new motorways development Poles in managerial positions earn salaries have also started to cater to the needs programs. Though, in recent years – road comparable to expatriate personnel. of working students by providing part-time, construction projects has increased due evening and weekend studies. to EU Funds for infrastructure investments. Three major motorways connecting the entire country will be completed before 2017.
93 Investing in Central Europe | Your move in the right direction
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.
As the sections of the A1 and A4 highways have been cancelled, they are not expected to be accomplished before the end of 2016. The A4 project has been divided into sections and separate tenders were announced. Austrian Strabag and Polish Budimex have jointly won a tender to build a 41km section of the A4 highway from Rzeszow to Jaroslaw (SE Poland). Works are worth approx. 170 mn EUR and consist of 3 three highway interchanges and 78 bridges. Works are supposed to start in October 2015 and to be completed by 2016.
Also for S3 and S7 expressway segments Strabag/Heilit+Woerner were awarded Poland will spend over 10 bln eur from its Rail Network a design-and-build contract worth approx. own budget and additional 11 bln euro The rail network in Poland is about 19,000 40 mn EUR to build a 8 km bypass around from the EU Funds (Connecting Europe km long, is generally electrifed, and the vast Koscierzyna (northern Poland). As part Facility’ instrument) between 2014 and majority was built before World War II. Due of the project, the consortium will build 2010 roads investments. All the highways to the average age of the network and lack three traffic lanes and one additional lane. and expressways under construction will of sufficient maintenance, many sections be fnished, especially those belonging are limited to speeds below 100 km/h (62 Source: Poland Infrastructure Report - to European TEN-T network. mph) even on trunk lines. There are no Infrastructure And Construction - Q4 2015 high-speed lines and some 500 km (310 Under this program the EU wants to focus mi) allow 160 km/h (99 mph), most notably Road network on 9 communication corridors construction the Central Trunk Line (CMK), which links Motorways and express roads are part running throughout the whole EU territory, Warsaw to Katowice and Kraków, with some of national roads network. As of 4Q of 2014 two of which running through Poland: Baltic- sections on an alignment that would permit Poland had 412,264 km of public roads. Adriatic and North Sea-Baltic corridors. 200 km/h (120 mph) but not operated at Although Poland is missing the minimum A1 Tri-city-Czech Republic Highway, A2 that speed. required density of motorways and Germany-Belarus Highway and A4 Germany- expressways, the total length of roads is Ukraine Highways are all listed as so called In 2008, the government announced relatively high and according to GDDKiA TEN-T key-projects. The list also includes S3 the construction of a dedicated high speed national roads condition report in 2012, Świnoujście-Wrocław Expressway, S1/S69 line based on the French TGV model and 62% of national roads were confrmed to be Silesia-Slovakia Expressway, S8/S61 Warsaw- possibly using TGV style trainsets, by 2020. in “good” condition, handling 11.5 tons per Lithuania Expressway, S7 Gdansk-Warsaw The Y-shaped line would link Warsaw axle loads. 4,808 km (2,990 mi) of the Polish Expressway and S8 Wrocław-Warsaw to Łódź, Poznań and Wrocław at speeds routes were classifed as a part of TINA Expressway. of up to 320 km/h (200 mph). This includes European transport corridors. an upgrade of Central Trunk Line to 250 km/h (160 mph) (or more) as this line has an LGV-like profle. Since 2015 electric
94 Investing in Central Europe | Your move in the right direction
ED250 Pendolino trains, purchased by PKP Air Transport In total there are 15 operating civil Intercity started to operate with speed 200 The national airline, LOT Polish Airlines, airports in such cities as Wrocław, Poznań, km/h on certain parts of Central Trunk Line. was partially privatized in 1999, when Rzeszów, Łódź, Bydgoszcz, Szczecin, Lublin the SAirGroup (based around Swissair) or Gdynia. Because of Euro 2012 football Polskie Koleje Państwowe (PKP), a state- bought an initial 37.6% stake. The collapse championships a number of airports owned corporate group, is the main of SAirGroup in 2001 returned LOT around the country had been renovated provider of railway services, holding to state ownership, and in 2002 LOT drew and redeveloped. This includes the building an almost complete monopoly in rail closer to Germany’s Lufthansa by joining of new terminals with an increased number services as it is both supported and partly the Star Alliance network of airlines. LOT of jetways and stands at both Copernicus funded by the government. There are three is facing growing competitive pressures, Airport in Wrocław and Lech Wałęsa Airport main PKP companies: as EU membership has compelled Poland in Gdańsk. The latest modernized domestic to liberalize access to its airspace. Recently airport in Poland is situated in Rzeszów. •• PKP PLK owns and maintains European Commission approved on state infrastructure including lines and aid for the company. The low fare airlines Water Transport stations; have been quick to move in, with easyJet On the Baltic Sea coast, a number •• PKP Intercity provides long-distance (UK), Ryanair (Ireland), Wizzair (Poland/ of large deep water seaports exist to serve connections on the most popular routes. Hungary) all offering flights from a variety the international freight and passenger Trains are divided into the categories: of airports in Poland. OLT Express (Poland), trade. They serve large ships, also the ro-ro EuroNight, EuroCity, Express InterCity regional carrier, declared bankruptcy in passenger ferries of Unity Line, Polferries (generally faster and more expensive) 2012 after its license was suspended by and Stena Line which connect Poland and TLK (interregional fast trains, slower Polish Aviation Authority. with Scandinavia. The ports of Szczecin- than EN/ EC/EIC/Ex but cheaper) and Swinoujscie and Gdynia have seized new international fast trains; Poland is also battling with other countries market opportunities, for example, catering in the region to become the regional the world biggest container docking in Polish •• PKP Cargo provides cargo rail transport. transport hub for east-central Europe, DCT port in 2013. In 2012, Polish ports In 2013 PKP Cargo raised 1,42 bil PLN on but rapid growth in passenger numbers handled 7 mln tonnes of cargo, respectively. a Warsaw Stock Exchange. in recent years has exposed the lack Riverine services operate on both domestic of capacity at Polish airports. The busiest coastal routes and on almost 3,812 km Poland has registered fve rail improvement airport in Poland, Warsaw’s Okecie (10 of navigable Polish rivers and canals. Most projects (8 bn PLN) to receive EU funding 574 539 passengers in 2014 and approx. notable canals in Poland are the Danube– from the Connecting Europe Fund (CEF). 50 thousand tonnes of cargo per year), Oder and Elbląg canal. Additionally late 2014 the European is the main international hub for LOT Commission was reported to reserve 200m and currently serves as the destination EUR for the fve rail projects. Polish rail for around 75% of all major international operator PKP Intercity is also undertaking flights into Poland. Poland’s second-busiest a broad investment plan. The programme airport is in Krakow (3 806 801 passengers) has been fnancially supported by and the third in Gdansk (3 238 064). the European Investment Bank (EIB), under The airport in Katowice is also developing the 2007- 2013 MFF, with 578 mn EUR rapidly (2 668 421). in loans provided, including 186 mn EUR approved in December 2013 for upgrading rolling stock.
Source: Poland Infrastructure Report - Infrastructure And Construction - Q4 2015
95 Investing in Central Europe | Your move in the right direction
Telecommunications 7. The Most Active Industries/Sectors Automotive Industry Although Poland’s telecommunications Manufacturing Poland is well on the way to becoming infrastructure has improved immensely Years 2010-2015 are a period of gradual a major car manufacturing centre, with since 1989, progress has been uneven, with recovery of the Polish economy after several components manufacturers also use of cellular telephones rising rapidly (56 the slowdown observed in 2009. setting up plants in the country. This might million active SIM cards at the end of Q2 The economic results show very well help Poland get back on the pre-crisis 2014 resulting in over 147% SIM cards compared to other European Union production level. penetration), but the number of fxed countries, placing Poland among European telephony main lines has been decreasing leaders of growth. Fiat of Italy is the major Western investor in (11.8 million in 2005 to 6.8 million at the end the industry (57% market share), and has of 2013). The former state monopolist, In 2011, the industrial sector observed had a presence in Poland for many years Telekomunikacja Polska (TPSA, rebranded a slight improvement; the economic as a producer of small cars from its base in to Orange Polska in 2012), has been situation both inside and outside Bielsko-Biala in the south-west of Poland. privatized, with France Telecom buying of the common EU market led to a gradual Skoda (owned by German Volkswagen) and the largest share. Various other companies recovery in demand for industrial Renault of France, although they have no have entered the fxed phone market production in EU countries. In Poland, production in Poland, are also prominent on with Netia being an alternative fxed-line the growth of industrial output in 2011 the domestic market. operator actively consolidating the market. reached a level which exceeded the EU Although prices have reduced considerably average. Thanks to the growing economic Opel / General Motors of the US (21% and availability has increased, the fxed-line activity among major trade partners (mainly market share), which built a greenfeld market is still dominated by TPSA (55% Germany), Polish industrial sector grew assembly plant in the Gliwice special users and 50% revenues). during this period at a rate of 7.2% per economic zone (SEZ) in Silesia, is another annum. Companies engaged in the food leading producer and its success has Mobile phones market in 2013 remained processing and cars manufacturing contributed to the unexpected resilience dominated by four players: T-Mobile Polska keep playing a predominant role in of the Katowice region. (27,5% SIM cards), Orange Polska (27,12%), the production industry. The most important Plus (25%) and Play (19%). sector in Poland is the food industry, The VW Group (22% market share) has representing more than 15% of the whole a signifcant presence in western Poland Fixed broadband penetration in Poland production, followed by the automotive and is also a notable car producer. In early is lower than in many EU countries with and metallurgy (10% each). In 2012, Poland 2014 VW announced decision to build some regions being visibly underdeveloped produced 4.5 million computer units, which another factory in Greater Poland with (however, their situation should improve was over 10 times more than in 2005. planned investments of 800 mln euro and in the next years thanks to planned employment as of 2300 people. Production investments). This led to a high percentage Poland is one of the largest manufacturers will start in 2016 and ability of 100 thousand of population using mobile internet access. of household appliances and electronic cars annually should be reached in 2019. All mobile phone operators in Poland use appliances in Europe. GSM and UMTS. There are three major Automotive industry consists of nearly 900 competitors managing comparable market Remaining state ownership in companies, of which 460 hold the ISO/TS shares, T-Mobile, Orange (within the same manufacturing is concentrated in sectors 16949 certifcate. Quality and high technical group as TPSA) and Plus GSM. The fourth like defense equipment, shipbuilding and potential of Polish staff is also confrmed mobile network operator, Play, entered branches of the chemicals sector. The state by the number of R&D centres created the market in 2007 and acquired over 8 also retains a considerable stake in oil by: TRW, Tenneco, Valeo, Delphi, Wabco, million customers by the end of 2012. All refning. Faurecia, MBtech and Eaton. mobile operators provide 3G services with 4G (LTE) broadband being currently offered by Plus GSM and Cyfrowy Polsat (the largest satellite DTH platform in Poland). LTE spectrum was obtained also by T-Mobile and Play in 2013 and other LTE spectrum tenders are foreseen. 96 Investing in Central Europe | Your move in the right direction
The major suppliers are: Bridgestone, BMI predicts passenger car sales in the EU It also demonstrates the immense problems Goodyear, Hutchinson, Brembo, Kirchhoff, to expand 5.3% in 2015 to 13.2mn units facing the rural economy and rural society Nexteer Automotive, Isuzu Motors, Lear followed by average annual growth of 2.8% in general in Poland. There are around 2 Corporation or Pilkington, Saint-Gobain. until 2019. This will ensure demand for cars million farms, all privately owned, and most Moreover Poland is the 3rd largest bus productions resulting in passenger output of them small sized (the average farm size is manufacturer in Europe with plants growth as of 14.7% in 2015 and annual only 8 ha). Farms exceeding 15 ha account of Solaris, Scania, Man or Autosan. growth of circa 3.6% until 2019. It is worth for almost 10% of all farms and cover almost mentioning, however, that 542 th units half of total agricultural area. Around half According to BMI forecasts, total 2015 forecasted for 2015 stays low below the pre- of all farms are run on a subsistence basis, vehicle sales in Poland will rise by 6.2%, crisis high of 840 th units in 2008. yielding little or no produce for the market. to 416,221 units. This results from expected 5% increase in passenger car sales caused These trends are further confrmed by Poland is the leading producer of potatoes, by private consumption increase and investments being announced by major apples and rye in Europe and is one a 12.5% commercial vehicle registrations car manufacturers in Poland. In October of the world’s largest producers of sugar increase. BMI forecasts vehicle output 2014 GM announced plans to add a third beets and triticale, rapeseed, grains, to expand 15.3% in 2015 to 692,000 units shift at Gliwice Opel Astra and Cascada hogs, and cattle. Poland is a net exporter and grow annually by some of 4.4% between plant. Also Fiat announced the stable level of processed fruit and vegetables, meat, and 2016 and 2019, reaching 820,317 vehicles. of 50-60% of capacity production at Tychy dairy products. Growing export, added investments and plant would not be decreased as existing strengthening domestic market will ensure Ford Ka production would be replaced Construction domestic production of both passenger and with new models - Fiat 500 and Lancia In the second half of the 1990s, commercial commercial vehicles growth till 2018. Ypsilon - production. Fiat also expected construction activity was concentrated in to increase annual production by 61% until a handful of major cities notably Warsaw, There are limited number of car 2018 by investing nearly 800 million USD Poznan, Gdansk and Krakow as they manufacturers in Poland and production into modernization Tychy plant, however and their surrounding regions attracted focuses on passenger (78%) and project was suspended. In 2015 Tata Motors the majority of inward investment, as well commercial (19% of total 2014 vehicle announced its decision to build Jaguar as a substantial share of new hotels, offices production) segments. Leading passenger factory either in Slovakia or Poland. and housing developments. Construction cars manufacturers are Fiat (600 th.units), activity was weaker elsewhere, because General Motors (207 th units), while light Source: PAIZ, PZPM, EMIS / BMI Poland Autos Report other regions missed out on inward - Q3 2015 commercial vehicle production is dominated investment and also because of the lack by Volgswagen (170 th. units). Heavy vehicles of progress in motorway construction. Agricultural Production (buses) are mostly produced by MAN, Construction slowed sharply from 1999, The size of the agricultural made it one Volvo, Scania and Solaris and for heavy as high interest rates discouraged corporate of the most challenging issues in terms truck output MAN and Jelcz are the leading investment. of employee numbers in Poland’s EU producers. accession negotiations. Although agriculture generates a small percentage of GDP Automotive sector in Poland is heavily (3,8%), it still accounts for around 16% export-oriented and approx. 90% of employment. The high level of agricultural production units are sold in Europe, employment (even if much of it is, in especially Germany, Italy, Spain, United effect, hidden unemployment) relative Kingdom and France. BMI prognoses weaker to agriculture’s share in GDP shows that sales in France, however Germany, Italy and substantial scope for restructuring exists. UK car demand seems to be boosting Polish car production.
97 Investing in Central Europe | Your move in the right direction
Despite the strong growth of the economy subsidises young people, combined with to 16,2 billion PLN and in 2013 to 15,4 billion as a whole in 2004, the construction the strengthening zloty, are expected PLN. sector has been slow to recover, with to support industry growth. In addition, signs of sustained growth only emerging in increasing population wealth will Banking groups from Germany, France, the frst half of 2005. In years 2006-2007 support demand for more housing. Over Italy, the Netherlands and the US have construction sector was developing fast the medium term the growth expectations a strong presence in Poland. For many owing to both Euro 2012 and EU funded in the construction sector remain steady, Western institutions, the route into Polish investments in infrastructure and growing averaging 3.9% per annum between banking was through buying stakes in housing market. This was to some extent 2015 and 2019. This comes due to new the state-owned regional banking network. limited by 2008 fnancial crisis, but since EU funding schemes for infrastructure, Subsequent consolidation in the west then the construction production was a recovery in the housing market specifcally European banking market has led to a wave growing constantly until 2012 as the main as well as general economic recovery. Bank of mergers of their Polish subsidiaries. One infrastructure investments for Euro 2012 Gospodarstwa Krajowego (BGK) declared of biggest M&A transactions was merger were under completion. Poland became to lend around 2.6 bn USD to support of Pekao and BPH in 2007, which produced a safe heaven for the large international the government’s infrastructure related a new market leader Bank Pekao (UniCredit) construction companies in the recession plans. Equity fund Polskie Inwestycje controlling at the start some 27% market times. In consequence, growing market Rozwojowe SA is also planning to support share. In the recent years there were competition had stimulated increase of raw country’s infrastructure needs. interesting capital moves on the Polish material prices forcing many companies market to quote the merger of Raiffeisen to perform its construction projects at very Source: Publication: BMI Research - Industry and Polbank, dynamic entry of Santander Forecast Scenario low or sometimes negative margins. This Consumer Bank into the Polish market, led to huge losses revealed by the sector transformation of Multibank into mBank, Financial Services in 2012 and relatively large number merger of DnB Nord and Getin Bank oa The fnancial services sector in general is of bankruptcies of both sub and general purchase of Nordea by PKO BP. Also new well regulated. The banking sector is mostly contractors. Currently, the industry is banking projects such as Allianz Bank, in private hands and survived the economic awaiting for launch of new road and railway Alior Bank and Meritum were developed. downturn in 2008-2009, although currency infrastructure as well as energy plants Currently there are almost 70 banks depreciation and inter-bank money market construction tenders expected to take place operating in Poland. standstill brought sector breakdown. In in nearest years. 2009 most toxic derivatives have been Traditional Industries either settled or expired, and the system Growth in the Polish construction market Steel Production enjoyed higher liquidity. Overall, the fnancial in 2014 was reported at 4.7%, while it is Output of crude steel in Poland fell sharply, services sector has so far escaped the crises expected to reach 3.9% in 2015. A new from ca. 20 million tons in the early 1980s that have hit severely some other post- wave of EU funding, the housing market to just 8,4 million tons in 2012. One communist economies. revival with low interest rates and a forecast of the major reasons for such signifcant strong performance of rail and road sectors decrease was global crisis which resulted 2009 was difficult for the entire fnancial are strengthening this positive outlook. in demand’s decline. A very important services industry in Poland. Banks operating However one cannot forget the road factor affecting the steel industry at the end in Poland recorded total revenues of 50 building scandals, with many international of the year 2012 were growing fnancial bn PLN and profts of almost 9 bn PLN contractors placing complaints against problems, in particular in the construction (compared to 13 bn PLN in 2007). Network GDDKiA (the road building authority), as well sector. This negative effect is also visible in expansion stopped and performance as contributing to major bankruptcies 2013. The crude steel production in Poland audits led to staff restructuring and shut domestically. Still, both road and residential in the period of frst six months of 2013 down of less proftable branches. Some building markets appear to grow, with remained on the level similar to analogous banks (AIG, GMAC) made changes in the number of new constructions soaring. period of 2012 and amounted to 4,5 million ownership, while other (Noble, Getin, Fortis) Residential construction sector will rise tons. implemented consolidation to cut the costs. 5.8% rise per annum over 2015- 2019 In 2010 Irish AIB sold its Polish subsidiary, due to economic recovery and demand proftable BZ WBK to Santander Bank. In growth. The government’s ‘Apartments 2012 net proft of the sector amounted for Youth’ scheme, which incentivises and 98 Investing in Central Europe | Your move in the right direction
The Polish steel market had total revenues The biggest steel player is ArcelorMittal Poland will remain an important player of $5.5bn in 2013, representing a compound Poland (AMP), which has so far invested in the European coal market. It is both annual growth rate (CAGR) of 6.6% between over 5 billion PLN. Other players include: a major producer and major consumer 2009 and 2013. In comparison, the Russian CMC Poland Sp. z o.o., CELSA huta of coal. Poland is the ninth- largest hard coal and Czech markets grew with CAGRs of 7.6% Ostrowiec Sp. z o.o., Stalprodukt S.A., ISD producer in the world and the largest coal and 6.9% respectively, over the same period, Huta Częstochowa Sp. z o.o., Alchemia S.A., producer in the EU. It is the eighth- largest to reach respective values of $48.1bn and Cognor S.A., Huta Pokój S.A. i Huta Łabędy coking coal exporter in the world. Poland $3.6bn in 2013. S.A. remains the 10th largest coal consumer in the world and is the second largest in Market production volume increased with In May 2014 Polish steelworks produced the EU, mainly owing to its reliance on a CAGR of 2.8% between 2009 and 2013, 389 tonnes of pig iron, that is 34,5% more coal for electricity generation. Around 90% to reach a total of 8 million metric tons in than in May 2013 and 726 tonnes of crude of electricity generation in Poland is derived 2013. The market’s volume is expected to rise steel which is 15% increase towards from coal. to 8.8 million metric tons by the end of 2018, corresponding period. representing a CAGR of 2.0% for the 2013- Despite Poland’s huge dependency on 2018 period. Source: EMIS Steel Market Overview coal for electricity generation, domestic coal production hardly stands harsch The Polish steel market has undergone Mining and Semi-processing competition due to cheaper Russian, some restructuring in recent years resulting Although Poland remains one of the world’s Colombian and US coal imports. in small plant closures on environmental signifcant coal producers, mining and Restructuring efforts aiming at limitation grounds and sale of steelworks to foreign quarrying output has been falling relatively of state funding, also had influence on investors. As a result of this process eleven to total industrial production. Poland’s production slowdown in the last decade. Polish facilities are run by fve multinational deep-coal mining industry has been frms. These include ArcelorMittal and under pressure throughout the transition Kompania Węglowa S.A., with 15 production other Spanish, Ukrainian and US frms, with period as demand has fallen. At the same units, over 60,000 employees and a coal the Polish Government now only having time, the strength of the trade unions output of 40 million t, is Poland’s largest a minimal ownership role. in the sector has kept labor costs high, coal production company. The company Steel production is concentrated in despite the sector’s parlous fnancial state. produced over half of Poland’s production the south of the country, with 70% A restructuring plan backed by the World volume of 79 million t of coal in 2012. of the Polish steel industry’s production Bank has led to a sharp fall in employment Poland is also Europe’s leading metallurgical capacity concentrated in two plants: Huta in the industry. The industry gained some coal producer, due, in part, to Jastrzebska Katowice and Huta Sedzimira, which are temporary respite in 2004 as world coal Spółka Węglowa S.A., with an output of 9.5 along with four other branches located in and coke prices rose sharply, but a return million t in 2012 and 13,6 million t in 2013 . Świętochłowice, Sosnowiec, Chorzów and to more normal market conditions The large volume production of metallurgical Zdzieszowice owned by ArcelorMittal Group. re-emphasized the need for further coal allows Poland to be one of the leading ArcelorMittal, with operations in Romania restructuring. Today Polish coal mines are coke producers in the EU (8.6 million t in and the Czech Republic as well as in Poland, important players in the world coal industry, 2012). has become the major force in Central but coal extraction decreases; in 2012 it European steel production. fell to 139 mil t and in 2013 to 136 mil t. JSW intends to increase production capacity Expectations for 2018 are 148 mil t. to 14 mn tonnes per annum (mntpa) by Polish steel market foregoes further 2015 and LW Bogdanka plans to increase consolidation process which covers not only Low efficiency in Polish coal mines and lower production capacity to 11.5 mntpa by steelworks but also vertical consolidation. level of coal price brought industry to a deep the end of 2014. These efforts together with Mergers are carried out for manufacturers crisis. Expected annual increase of coal government restructuring and privatisation and suppliers of ores or distributors. Such output would not exceed 1,0 %. plans could constitute the base for change structures are very favorable for the market of negative trends. and allow the companies to be much more competitive.
99 Investing in Central Europe | Your move in the right direction
In October 2014, JSW (the largest coking Retail sector The retail sector in Poland is expected coal miner in the EU) announced it had The value of Polish retail market is estimated to grow faster in the coming few years (4- decreased its 2014 production plans by at nearly 100 billion Euro (BMI CSF) and 6% vs. recent 2-3%, according to research 9% due to low coal prices. The Polish is expected to increase up to 120 billion frm PMR) due to improving economy and government announced in October that it Euro in 2015. Retail sales reached 4000 rising affluence. At the same time, the share would split proftable and unproftable coal Euro per capita. The sector accounts of food production in retail sales is expected mines, so that investments into proftable for almost 17% of Polish GDP. The industry to decrease gradually. Poles have generally ones could be carried on, while unproftable has longterm positive dynamics resulting (aprox. 60%) moved to discount stores, ones would either be restructured or closed from the ongoing domestic demand and bigger markets have adopted priding down. The whole industry employs over consumption, which provides a further policies characteristic for discount shops. 100 thousands people, and due to crisis in development prospects. Despite the well- the industry, these jobs are at danger. established and organized retail chains, From the real estate point of view, the retail the market still features high market market in Poland is reaching saturation and Apart from coal, Poland also produces fragmentation and a high number of small its growth is slower than in previous years. signifcant quantities of copper and silver, businesses. Even mid-sized cities are reaching levels which are mined by a single enterprise, of signifcant saturation. However, property KGHM Polska Miedź. In 2012 the company There are total 345 thousand stores in consultancy JLL expects the Polish shopping maintained the frst place in the ranking Poland, about 90% of them with space centres market would be growing by 12% in of the largest silver producers with 5.2% smaller than 100 square metres, yet number 2015 to reach 13.2 million sq m. percent of global production. In 2010 of large stores is gradually increasing. KGHM launched its new strategy which Source: EMIS Insight - Poland Retail Sector Report_ Overview considers involvement in new technologies Retail sales are important part of the Polish and mining companies’ acquisitions. KGHM economy. Retail accounts for nearly 20% 8. Technology and industrial parks1 now undertakes numerous acquisition of the country’s value added. Also downturn In the last ffteen years technology and projects in Europe and Canada regarding experience proved signifcance of retail industrial parks has been increasingly among others a producer of silver and to the economoy. The last few years have used in Poland as development-oriented two producers of copper. In 2011 KGHM highlighted the importance of this sector. solutions, addressed both to Polish and successfully fnalized acquisition of Quadra. In the years 2008-2009 internal demand foreign businesses. Annual production of copper fluctuates and individual consumptioin together with around 500-550 thousand tons. strong business confdence managed Industrial and technology parks have many to ease the negative effect of global crisis. similar features (mission, objectives, forms There are foreign investments into Polish Consumer confdence was also streghtened of action, organization, etc.). Each park has coal mine sector. New World Resources by the frst injection of EU funding which its own individual character, resulting from (NWR) is now developing two coal projects inproved purchase power and individual the regional, social, cultural and economic in Poland, one with thermal coal (Morcinek) wealth. Today, we are facing recovery in conditions and available growth factors. and another with coking coal (Debiensko). the economy, which also results from The latter one contains the EU largest coking increased and strengthened private The most frequently designated purposes cole deposit (190 mnt). These projects consumption/ of the functioning parks are: are said to determine long-term mining perspective in the country. Also Australian •• to ensure favorable conditions mining company Balamara Resources is for technology development companies, said to announce increase engagement •• facilitating better cooperation between in the Mariola Thermal Coal project in science and business, Poland. The project currently has resources of 77.1mn tonnes and is expected to start •• to support the economic development in 2016. of the region.
Source: EMIS: Poland Mining Report - Coal: Perfect Storm Facing Sector 1 Based on: Setting up, managing and evaluating EU Science and Technology Parks, EC Directorate-General for Regional and Urban policy 2014; Innovation Centers in Poland – The study report 2014, Polish Agency for Enterprise Development 2014; other publicly available articles in the Internet and press. 100 Investing in Central Europe | Your move in the right direction
According to the most recent information The main obstacle, which parks have 9. Investment Incentives there are 42 actively functioning technology to face is the lack of fnancial resources. Enterprises investing or expanding their parks in Poland. In total there are 1109 Nevertheless, Polish technology parks activity in Poland may apply for various types entities functioning within parks of which adapt quickly to changing directions of co- of incentives, such as investment incentives, 45% are technological companies. fnancing activities, as well as possibilities research and development grants, revolving To the parks with the largest number of developing innovative projects through fnancial instruments (e.g. preferential of tenants it can be included: Wrocław reaction in terms of offering pro-innovative loans) and tax credits (incl. real estate Technology Park, (with 161 entities), Kraków services or flexible adjustment of their tax exemptions, CIT exemptions relating Technology Park and Poznań Science and development strategies – in some cases investments in Special Economic Zones, tax Technology Park. even changing formula of their functioning credits for purchase of new technologies in into industrial parks. form of intangible assets). The total area for rent in all polish parks equals to 154 490 m2. This space is Taking into account the assumptions Support can be obtained from both National designated mainly for office and laboratories of new fnancial perspective 2014-2020, and European Union Funds. Levels of aid purposes (52% of all parks in Poland offer the following directions of technology parks are established separately for each aid laboratory space). Majority of parks are very development in Poland are expected: scheme. Investment grants are in most well equipped in basic, IT and laboratory cases recognized as regional aid19. Total aid •• strengthening the cooperation infrastructure. granted for a specifc project cannot exceed with external institutions, e.g. other the maximum aid intensity for a given region technology parks and clusters, In Polish technology parks and their tenants in Poland (see Regional Aid Map of Poland work approximately 12 000 people in total. •• launch of the new business areas, e.g. for the period 2014-2020). Employers are mainly small and medium business incubator, seed fund, grant sized enterprises and foreign enterprises. fund and loan fund for entities which Grants are credited to the investors’ account However, already 10% of all parks’ residents implement innovations, as either reimbursement of incurred are spin-off and spin-out companies which costs (periodical payments) or as advance •• development of advisory services – are developing very fast. payments, which allow effective fnancial foreign cooperation brokerage services, liquidity management of the project. internationalization, industrial design Polish technology parks offer their tenants services, implementation of new services a broad range of services, which number is Regional Aid Map / products, advisory assistance in still growing. These services can be divided The Regional Aid Map in Poland the technology implementation, support into three main groups: for 2014-2020 is based on and reflects in the development of product prototype the 16 administrative units of Poland known •• business advisory, education and training / fnished product for testing, as “voivodships”. Additionally, Mazowieckie services, •• infrastructure development – the launch voivodship was divided into 6 sub-units. •• pro-innovation services (provided of new buildings, preparation of the next to innovation companies related land properties for sale to potential The total value of available co-fnancing to the support of R&D, knowledge and companies which meet innovation depends on: / or technology commercialization, criterion, etc. •• the location of the investment (regional patenting, etc.), aid intensity level), •• services in terms of obtaining fnancial aid. •• the value of the investment (eligible costs),
•• the size of the enterprise (large, medium, small, micro),
•• a special algorithm is applied to estimate the aid level for large projects (with eligible costs exceeding EUR 50 M).
101 Investing in Central Europe | Your move in the right direction
Regional Aid Map of Poland until the 31th of December, 2020
pomorskie warmińsko- podregion mazurskie zachodnio- podregion ostrolęcko- pomorskie ciechanowsko- siedlecky polski kujawsko- podlaskie pomorskie
mazowieckie wielkopolskie lubuskie podregion warzawski- podregion łodzkie zachodni warszawski wschodni M.st. Warszawa dolnośląskie lubelskie
świętokrzyskie opolskie śląskie
podkarpatskie podregion małopolskie radomski
50% 35% 25 % 20% 15 %
The ultimate purpose of regional state reach up to 50% of the eligible investment in particular for innovative, research and aid is to support economic development costs (for large enterprises). If more than development projects, infrastructure and employment. The regional aid one investment incentive is applied, investments, projects in the feld of eco- guidelines set out the rules under which the cumulative intensity of the aid cannot efficiency, processes optimization and European Union Member States can exceed the maximum level for a given area. investments in the feld of social inclusion. grant state aid to companies to support investments in new production facilities The current thresholds are valid until Most of legal documents concerning in the less advantaged regions of Europe the 31st of December, 2017. Since January the New Financial Framework 2014-2020, or to extend or modernize existing the 1st, 2018, 10% threshold will become including the Operational Programmes have facilities. The guidelines also contain rules applicable for Warsaw. The other regions been already accepted by the European for Member States to draw up regional will maintain the same level until the 31st Commission and currently some of ancillary aid maps (the geographical areas where of December, 2020. documents specifying terms of fnancing, companies can receive regional state aid, like Detailed Priorities Descriptions, are and at which intensities In case of micro-, small and medium sized being prepared by Polish authorities. First enterprises, the aid intensity levels are of calls for proposals under New Financial After January the 1st 2018 treshold increased respectively by 20, 20 and 10 Framework have already been started for Warsaw will decrease from 15% to 10%. percentage points. and next should be announced with target frequency by the end of 2015 / at Different types of regional aid, such European union funds the beginning of 2016. as investment grants and CIT exemptions The allocation under the European Union in SEZ, can be accumulated by investors up Funds for the Financial Framework 2014- to the maximum intensity level, which are 2020 amounts to EUR 82.5 billion, which is shown on the Regional Aid Map of Poland. the biggest national allocation among the EU The map indicates that the intensity can 28 Member States. Funding will be allocated
102 Investing in Central Europe | Your move in the right direction
New Financila Framework 2014 – 2020: Funding Instruments
Types of potential incentives
Tax credits Grantd and preferential loans
• Special Economic Zones International EU funds National funds will exist unitl 2026 programs for 2014 – 2020 • New oportunities (from 2015/2016): International cooperation new R&D tax credits programs in the area of • Real estate tas exeption science and R&D activities
EU funds National Fund EU funds EU funds manged on National Center Ministry of for Environment manged on state manged on European level for R&D Economy Protection (central) level regional level (including 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
Furthermore there are available development, R&D works, implementation Companies investing in R&D infrastructure national incentives, described below, in of pilot and demonstration lines and may also beneft from OP SG - Programme the “NATIONAL FUNDS” part. implementation of new technology. Projects includes measures for supporting creation that focus on the practical application and development of R&D departments, Operational Programme Smart Growth of research and development works’ results laboratories, etc. Those interested in (OP SG) 2014-2020 in the market will be supported in the areas internationalization and promotion of their OP SG is mainly dedicated to supporting identifed as National Smart Specialization. products and services will fnd adequate R&D works, development of new According to the OP SG, entities interested calls as well. technologies and innovation, as well in developing a cooperation between as increasing SME’s competitiveness. business and research institutes in key R&D Entrepreneurs can apply for cash grants sectors and technologies may expect to be and revolving instruments supporting supported as well. various types of actions. Companies interested in R&D activities are able to apply for support covering all stages of innovation
103 Investing in Central Europe | Your move in the right direction
Operational Programme Infrastructure Regional Operational Programme (ROP) The Programme is intended and Environment (OP IE) 2014-20 Every voivodship applies a new Regional for entrepreneurs planning investments in The main objective of the Programme is Operational Programme that provides the following priority sectors: automotive, to support economy which is resource- support to local undertakings. aviation, electronics, agri-food industry, efficient, environmentally friendly and biotechnology, R&D, and modern services conducive to social and territorial A list of activities which may be supported sector (BPO, IT, SSC) or, in case of “major”21 cohesion. Entrepreneurs can expect within ROP includes i.a.: scale production, investments in other support for projects covering efficient sectors. Many large enterprises, such •• R&D and innovation, management of resources which make as Cadbury, Dell, Fiat, Ford, Gillette, companies more economically competitive. •• increase of SME’s competitiveness, LG, Samsung, Sharp, Shell, Toshiba, The scope of support under OP IE concerns Toyota, Volkswagen have benefted from •• production and distribution of renewable investments in the area of transition the Programme. energy, to a low carbon economy in all sectors, implementation of environmentally friendly •• creation of new workplaces, Preferential loans/grants – National solutions (e.g. energy efficiency), as well and Voivodship funds for environmental •• development of products and services as promotion of sustainable transport protection and water management. based on ICT technologies. and removal of bottlenecks in key network Support is granted for ecological projects infrastructures. of a national signifcance and scope H2020 as well as regional actions important due In Poland it is also possible to participate Operational Programme Digital Poland to environmental requirements. Types in the biggest EU research and innovation (OP DP) of projects eligible for a loan / grant include: programme - Horizon 2020. The European OP DP is a programme dedicated renewable energy sources (wind, solar, Commission allocated nearly EUR 80 billion to support the digitalization of Poland, biomass and biogas, geothermal energy), to provide enterprises and research units which is convergent with the objectives green investment schemes (biogas plants, cooperating within international consortia of the European Digital Agenda and refers CHP biomass plants and biomass heating with funds necessary for their development to new areas of economy comparing plants) and waste management (recycling in line with Europe 2020 Strategy. Also SME to the former Financial Framework. In order of waste, waste disposal, utilization are allowed to participate by themselves. to achieve them, companies will be able of waste). Co-fnancing is available in The maximum level of fnancing under to apply for cash grants. Entrepreneurs the form of grants and preferential loans. the programme may reach up to 100% considering investment involving of eligible costs. construction, extension or alteration of network and telecommunications National funds infrastructure, providing broadband Internet Programme for supporting investments access with parameters of 30Mb/s and of major importance to the Polish more (100Mb/s preferred), may expect economy for the years 2011–2020 (PGG) support for their projects. Also, companies The objective of the Programme interested in the creation of services and is to provide additional funding applications that use open content, open for investments which are strategically source software and open services may important to the Polish economy and apply for support under the Programme. generate numerous new workplaces. The detailed scope of support is negotiated individually with the competent public authorities.
104 Investing in Central Europe | Your move in the right direction
National Centre for Research and Special permit is required to beneft from Apart from the above incentives, companies Development – NCRD the abovementioned tax incentives. Such investing in the SEZ are often granted NCRD is one of the most signifcant sources permit is issued by the SEZ Management, on exemptions from real estate tax by local of fnancial support for R&D activities behalf of the Minister of Economy. authorities. Conditions of individual which directly result in the development exemptions are a subject of negotiations of innovativeness. Tasks of NCRD There are fourteen Special Economic with granting institutions. include the management and execution Zones in Poland. Each of them consists of R&D programmes meant both of a number of sub zones. This means that R&D tax Incentives for entrepreneurs and research units. SEZ areas in Poland are spread across Tax relief for research and development Also, the Centre carries out tasks related the country. Infrastructure within those Please note that as of 2016 new rules to the implementation of European Funds areas is well developed, which makes them regarding tax relief for research and allocated for the development of science very attractive for investors. In case of large development (R&D) were introduced and higher education sectors in Poland, projects, investors may apply for granting to Polish tax law. Starting from 1 January as well as various international programmes. the SEZ status to the location they 2016 r, entrepreneurs have gained Projects implemented by NCRD are funded specifcally choose. the possibility of additional tax deduction mainly from the EU funds. There are also of up to 30% of selected costs incurred seven strategic, interdisciplinary areas SEZs have resulted in investments for R&D. of research and development supported of the total value over EUR 24,8 billion from national funds: and over 213,000 new jobs. The number A new tax relief, enabling taxpayers of investors in SEZs is growing fast, to deduct from the taxable base certain •• lifestyle diseases, new drugs and especially since Poland’s accession qualifed expenditures incurred for R&D regenerative medicine, to the European Union. activities. The Act contains a closed list •• new material technologies, Additionally, SEZs are supposed to attract of such expenditures, like wafe and even more investments in close future, employee contribution, acquisition •• environment, agriculture and forestry, as their functioning has been prolonged of materials and raw materials, expertises, •• social and economic development, from the end of 2020 until the end of 2026. opinions, advisory and equivalent services, acquisitions of R&D results performed by •• security and defense of the state. Eligible activities include both manufacturing scientifc units, use of research equipment and services (also modern services, such as: and depreciation of fxed assets and Available on an ongoing basis R&D, IT, BPO, call centers). Manufacturing intangible assets , which should also qualify Investment of major scale is an investment investments in SEZs include numerous as tax-deductible costs under the general planned in any sectors with at least PLN sectors, such as automotive, electronics, tax rules. Deduction may be made up 750 million eligible costs and resulting in household appliances, plastic products, to a certain limit depending on the type the creation of at least 200 new jobs or at wooden products, metallic and non- of cost and/or type of taxpayer, namely: least PLN 500 million eligible costs and metallic products. Tax incentives in SEZs resulting in the creation of at least 500 new ––For employment costs: up to 30%, (the amounts of CIT reliefs) are recognized jobs. regardless of the taxpayer status. as regional aid and they cannot exceed ––For other qualifed expenditures: the maximum aid intensity for a given Tax incentives up to 20% for small and medium region of Poland (see Regional state aid Special Economic Zones (SEZ) enterprises, and up to 10% for large map of Poland). Eligible expenditures Tax incentives in the form of corporate enterprise. comprise investment expenses for tangible income tax exemptions are available and intangible assets. Alternatively, eligible for investors in Special Economic Zones expenditure can be calculated based on (SEZs). SEZs are designated areas in two-year labor costs of newly employed Poland, where investors can run businesses staff. (manufacturing and services) on preferential terms (generally, tax exemptions amounting up to 70% of investment expenditures).
105 Investing in Central Europe | Your move in the right direction
The Act predicts particular conditions Selected European and multinational R&D 9. Foreign Direct Investment (FDI) for using the tax relief: initiatives The value of global foreign direct investment ––expenses incurred for research and The 7th Framework Programme aimed (FDI) improves, although a pre-crisis level development, at supporting scientifc and research has not yet been reached. According activities, as well as the CIP Programme, to the latest World Investment Report by ––eligible costs are separated in designed to improve the competitiveness UNCTAD (2015), Poland is Europe’s 8th and the accounting records, and innovativeness have ended. They the world’s 20th most attractive economy.. –– eligible costs have not been returned will be replaced by new programmes Globally, the value of greenfeld projects fell to the taxpayer in any form, e.g. a grant, in the Financial Framework 2014-2020: in 2014, yet in Poland it raised by 64%. ––taxpayer is not operating on the basis Horizon 2020 and COSME. Horizon 2020 In 2012, foreign direct investments in of permit within a special economic as a successor of the 7th Framework Poland have created 67% more jobs than zone, Programme has officially entered into force in 2011. The sheer number of new jobs (13 ––deduction of eligible costs incurred in as of January 1, 2014, with a total budget 111 posts) made Poland one of the leaders the year of expenditure (entirely or in of EUR 80 B. on the continent after the Great Britain parts in following 3 years in case of loss and Russia and ahead of both Germany or income is less than the amount Entrepreneurs may expect several and France. FDI inflow in Poland in 2014 entitled to deduction). improvements in the Programme aimed accounted to EUR 12 495 M. at, e.g. simplifcation of the procedure Taxpayer is entitle to qualify project that or unifcation of the criteria. Support under In 2013 Polish Statistical Office (GUS) have not been succesful or have been the Programme will be granted for projects recorded in Poland 26 128 companies with abandoned. Moreover, the tax relief allows including development work prototyping, foreign capital. Among 1 489 new entities for qualifying procts in progress, also project testing or experimental production with foreign capital the majority (1 214 launched in previous years. Furthermore, in different sectors (i.e. automotive, companies) were greenfelds. Among all the new regulation predicts a major pharmaceutical, FMCG, transport, the companies, the major group (84.9%) was simplifcation, as no books record broken communication technologies, energy constituted by small enterprises, i.e. those down into the projects are require, but only sector). Horizon 2020 helps to connect employing up to 49 people. The greatest types of costs. research activities and the market by importance, however, had 1 219 large e.g. supporting innovative enterprises in enterprises (employing over 250 persons), The Act seeks to support the venture developing technological breakthroughs which accounted for 54.2% of share capital capital sector by introducing a defnition into viable products with real commercial and 72.2% of employment. The most of the venture capital company potential. of entities conducted business activity (Polish: spółka podwyższonego ryzyka) which, related to trade, repair of motor vehicles if it meets certain requirements, will be (28.4%), manufacturing (19.5%), science and exempt from income tax on the disposal technology (9.1%) and real estate activities of shares held in R&D companies, on (9.0%). condition that the shares are acquired in 2016 or 2017.
Tax relief for companies with R&D center status On a monthly basis, entities with the R&D center status can make appropriations to the innovation fund corresponding to 20% of their revenue, which reduces the tax base.
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In 2013 the companies polled by GUS 11. Weather and climate employed 1 628 500 people. The most Poland has a temperate climate numerous group among all (almost 46,3% characterized by relatively cold winters of all employees) worked in manufacturing and warm summers. Winters become companies, while 23,9% were employed in increasingly severe inland from the Baltic trade and repairs of motor vehicles. coast, with January temperatures averaging -1° C (30 F) in the north and going 10. Expatriate life as low as 5° C (23 F) in the southeast. July Poland is one of the major destinations temperatures range from 16.5° C (62 F) near for travellers. Its beauty can be admired in the coast to 19° C (66 F) in the south. Rainfall both its old cities and in the wild scenery varies with altitude, ranging from less than of its national parks and nature reserves. 51 cm (20 inches) a year to as much as 127 Polish cities are cultural treasures in their cm (50 inches) in the southern mountains. own rights, showcasing unique examples of gothic, baroque, renaissance, and neoclassical architecture. Warsaw is a cosmopolitan center with museums, shops, and fne restaurants. Krakow is In addition to a variety a smaller city with well-preserved historical buildings, a charming central square, and a vibrant market that wins visitors over of wonderful natural and historic instantly. The Tatras mountain range are a summer and winter sports playground sites, Poland has retained its of dramatic beauty. The Mazurian Lakelands are also natural gems in Poland’s topography. In addition to these wonderful strong tradition and history natural and historic sites, Poland has retained its strong tradition and history while embracing modern and while embracing modern and democratic institutions. democratic institutions.
107 Investing in Central Europe | Your move in the right direction
RO
108 Investing in Central Europe | Your move in the right direction
Romania
1. General overview of economy The increase of the minimum wage from The president of the country is Klaus With a population of almost 20 million RON 700 (EUR 155) to RON 1,250 (EUR Iohannis, elected in November 2014. He estimated for 2015, Romania is one 277) in the past four years has meant relief was the candidate of the Liberal Christian of the fastest-growing economies in the EU, for households and for the economy, and is Alliance (LCA), comprising the National which is opening up new opportunities one of the positive things that happened in Liberal Party (NLP) and the Democratic for investors. There is great potential to be past years. For almost three years, Romania Liberal Party (DLP). The prime minister an export-orientated manufacturing and has been one of the fastest three growing is nominated by the president, and service center country with an educated, economies in the European Union, which is the cabinet is nominated and headed by accessible labor force and unfettered access fghting to avoid a prolonged stagflation. the prime minister. President Klaus Iohannis to the EU’s single market. appointed a former EU commissioner, Political system Dacian Ciolos, to lead a technocrat Romania’s macroeconomic situation is Romania’s political system is a Parliamentary government until the next parliamentary stable, with low inflation and external Democracy. The Romanian Parliament elections, which are scheduled defcits. Romania had one of the highest exercises the legislative powers while for November 2016. The results of the June growth rates in the European Union (EU) the main executive powers are attributed 2016 local elections point to the return in in 2015 at 3.7 percent, driven primarily by to the government. The president November 2016 of a government headed the domestic demand. Over the last 26 years, of the Republic is elected for a mandate by the social-democrats in alliance with its the country has made considerable progress of fve years, while the Parliament is elected allies in the National Union for the Progress in developing the institutions for a market for a mandate of four. The president guards of Romania (UNPR) and the Association economy. Joining the European Union (EU) the observance of the Constitution and acts of Liberals and Democrats (ALDE). in 2007 was a driving force for reform and as a mediator between different powers in modernization. the state (legislative, executive and judiciary), as well as between the State and society. Domestic demand continues to be the key The Parliament includes the Chamber driver of growth in 2016 as fscal relaxation of Deputies and the Senate, elected through and deflation help real disposable incomes direct suffrage. The election law establishes to rise, leading to strong consumption the number of deputies and senators. growth. Private investment is rising on The Parliament passes constitutional the backs of lower corporate borrowing rates laws (which concern the revision and stronger business confdence. The GDP of the Constitution), organic laws (endorsed growth is forecasted at 4.2% in 2016, based by the majority suffrage of each chamber) on strong domestic demand and less and ordinary laws. The Government of a drag from net exports. (executive body) is invested by the Parliament on the basis of its governmental program.
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2. Tax structure Tax year The deadline for submitting the fnancial Resident / Non-resident The tax year is the calendar year statements for the previous year is: or the period during which the entity existed •• Within 150 days after the end Resident - any Romanian legal entity, if it was set up or ceased to exist during of the fnancial year for legal entities, any foreign legal entity having its place the calendar year. state-owned companies, research and of effective management in Romania, any development national institutes, entities legal entity with its registered office in Taxpayers can opt for a year different without legal personality pertaining Romania set-up according to European from the calendar year i.e., the tax year will to non-resident legal entities; legislation and any resident individual. correspond to the fnancial year if the latter is different from the calendar year. •• Within 120 days after the end Non-resident - any foreign legal entity, of the fnancial year for other legal any non-resident individual and any other Financial Statements entities (e.g. not for proft associations, foreign entities, including undertakings Any company that fulfls two out public institutions, etc.). for collective investment, without legal of the following three criteria (i) total value personality, which are not registered in of assets of EUR 3,650,000 (ii) a net turnover The entities without any activity from Romania, according to the law. of EUR 7,300,000 and (iii) average number their incorporation date until the end of employees during the fnancial year of 50 of the fnancial reporting year should A resident individual – any Romanian should prepare annual fnancial statements, not prepare annual fnancial statements. resident individual if at least one which comprise the following: However, a statement for this purpose of the following criteria is met: should be submitted within 60 days from •• Balance sheet; the end of the fnancial year to the territorial 1. The individual has the domicile •• Proft and loss account; units of the Ministry of Finance. established in Romania; •• Statements of changes in equity; 2. The centre of vital interests is located in The entities undergoing liquidation should Romania; •• Cash flow statement; submit an annual accounting reporting within 90 days from the end of each 3. The individual is present in Romania •• Explanatory notes to the annual fnancial calendar year to the territorial units for a period or periods which statements. of the Ministry of Finance. cumulated exceeds 183 days in any 12 consecutive months, ending in The companies, which do not fulfl two out The legal entities with a prior year turnover the relevant calendar year; of the above-mentioned three criteria, shall exceeding RON 220,000 should submit prepare short annual fnancial statements 4. The individual is a Romanian citizen interim unaudited fnancial statements. that comprise: working abroad as an official or employee of Romania in a foreign •• Balance sheet; Corporate taxation country. As a general rule, resident entities are •• Proft and loss account; subject to corporate income tax in Romania A non-resident individual is any individual •• Explanatory notes for the short annual (except for the entities falling under who does not meet the specifc rules fnancial statements; the micro-enterprise tax regime). Residents mentioned above, as well as any individual are taxed in Romania for their worldwide •• Optionally, the statement of changes in foreign citizen with a diplomatic or consular income. equity and/or the cash flow statement status in Romania, foreign citizen who is may be prepared. an official or employee of an international Non-resident companies are taxed only on and inter-governmental organization their derived from Romania (e.g. through registered in Romania, foreign citizen who is branches, permanent establishments, etc.). an official or employee of a foreign state in Romania and their family members.
110 Investing in Central Europe | Your move in the right direction
Taxable base •• Deferred tax income booked by Examples of limited deductibility expenses: The corporate income tax rate is at 16%. taxpayers who apply the IFRS; •• Interest expenses and net foreign The corporate income tax is computed by •• Amounts received as a result exchange losses under certain applying the 16% tax rate to the taxable of the refund of the contribution quota conditions; result (i.e. accounting result adjusted of shareholders/associates, as a result with non-taxable income, non-deductible •• Entertainment expenses up to the limit of capital reduction, as provided by law. expenses and other items similar to income of 2% of the accounting proft, adjusted and expenses). by entertainment and corporate income Deductibility of expenses tax expenses; Under the general deductibility rule, Non-taxable income expenses are deductible if they are incurred •• Social expenses, up to the limit of 5% Examples of non-taxable income: for business purposes. of the salary fund; •• Dividends received from a Romanian •• Expenses with meal tickets and holiday legal entity; The Romanian Tax Code provides three vouchers within the limit provided by categories of expenses: deductible •• Dividends received from a foreign the law; expenses, limited deductible expenses and legal entity, from a state with which non-deductible expenses. •• Expenses with provisions under certain Romania has concluded a Double Tax conditions; Treaty, if the receiving Romanian entity Examples of fully deductible expenses: holds at least 10% of the share capital •• 50% of car-related expenses for cars of the foreign entity for an uninterrupted •• Salary expenses and expenses similar (max. 3,500 kg, max. 9 seats) not used period of at least one year; to salaries, irrespective of the tax solely for business purposes, Expenses treatment applied from a personal are fully deductible for vehicles used for: •• Capital gains from the valuation/ income tax perspective; emergencies, security services, courier revaluation/ sale/ assignment of shares services, remunerated services (e.g. taxi) held in a Romanian or foreign legal •• Registration taxes, subscription and or vehicles used by sales or acquisition entity located in a state with which contributions to commercial chambers, agents; Romania has in place a Double Tax employer organisations and syndicates; Treaty, if the ownership conditions are •• Advertising expenses for promoting Depreciation expenses of the cars (max. fulflled (at least 10% of the share capital, the company, products or services; 3,500 kg, max. 9 seats) are deductible within for an uninterrupted period of minimum a limit of RON 1,500 per month. 1 year); •• Transport and accommodation expenses for business trips in Romania or abroad; •• Technological losses, within the limits set •• The proceeds obtained from by the internal consumption norm; the liquidation of a Romanian or foreign •• Research expenses and development legal entity, located in a state with expenses which are not booked •• Expenses for the operation and which Romania has concluded a Double as intangibles; maintenance of cars used management Taxation Treaty if the ownership or administrative personnel, limited •• Expenses with assigned receivables conditions are fulflled (at least 10% to one vehicle per person; according to the law; of the share capital, for an uninterrupted •• Taxes, contributions and subscriptions period of minimum 1 year); •• Commercial penalties; to non-governmental organisations •• Income from reversal or cancellation •• Expenses with the impairment of shares or professional associations in of provisions / expenses that were and bonds under certain conditions. connections to taxpayers’ economic previously non-deductible and from activity, up to the limit of EUR 4,000 per the recovery of previously non-deductible year. expenses;
•• Favorable differences in the value of participation titles, following the capitalization of reserves, benefts or share premiums;
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Among non-deductible expenses: Tax Consolidation Newly set-up legal entities should register There is no consolidation or group taxation as micro-enterprise taxpayers, except •• Corporate income tax expenses, income provided by the Romanian legislation under for the ones with a share capital of at least taxes paid in foreign countries, deferred the corporate income tax related provisions. EUR 25,000 which may opt to register tax; as corporate income tax payers. •• Expenses with withholding tax born by Submission of returns and payment the Romanian taxpayer on behalf of non- Corporate income tax liabilities should be The tax is computed by applying 1%, 2% residents, for income obtained from computed, declared and paid on a quarterly or 3% to any revenues obtained, except Romania; basis by the 25th of the month following for certain types of income specifcally the quarter it relate to. This requirement excluded by the law from the taxable •• Fines, interest and penalties due applies only for the frst three quarters base. The tax rate is established based on to the Romanian or foreign authorities, of the year (no compliance obligations the number of employees. except for those related to commercial for the fourth quarter). Taxpayers may also agreements concluded with state opt for the prepayments system (i.e. four A micro-enterprise becomes a proft authorities; equal instalments followed by the annual taxpayer if during a fscal year a micro- •• Management, consultancy, assistance regularization). enterprise books income higher than EUR or other service expenses performed 100,000 or the percentage of the income by a non-resident located in a state with Annual tax returns should be fled by from management and consulting activities which Romania does not have a legal the 25th of the third month following exceeds 20%. The change is applicable instrument for exchange of information, if the reporting year. This is also the deadline starting with the quarter in which one the transaction is artifcial; for the fnal tax payment. of these limits is exceeded.
•• Expenses related to non-taxable Micro-enterprise taxation Capital gains tax revenues; A legal entity is subject to micro-enterprise Companies do not have to pay a separate •• Expenses related to corruption deeds; tax regime if the following conditions are capital gains tax in Romania. cumulatively met as at 31st December •• Sponsorship expenses. However, of the previous tax year: The capital gains are included in the proft a tax credit may be claimed in and loss account, on which 16% corporate amount of the lower between 0.5% •• Has an annual turnover of less than EUR income tax is applied. of the turnover and 20% of the corporate 100,000; income tax liability. The tax credit can be •• The share capital is owned by individuals/ Capital gains obtained by non-residents carried forward for the next seven years. legal entities, other than the state and from the following transactions are subject •• Expenses with written-off receivables, local authorities; to 16% corporate income tax: for the part not covered by tax provisions. •• Was not under liquidation; •• Sale / rental of real estate located in Under certain conditions, such expenses Romania; are fully deductible. •• Obtains income from activities other than those specifcally provided by the tax •• Sale of shares in Romanian legal entities; Tax losses law as non-qualifying (e.g. banking, •• Income from the exploitation of natural Tax losses are available to be carried insurance/reinsurance, gambling, natural resources; forward and offset against future taxable resources exploration / exploitation, etc.); profts for the next seven consecutive years. •• Income from the sale of rights in relation •• The management and consulting income Tax losses cannot be carried back. to natural resources. is of maximum 20% of total income.
Under certain conditions, the capital gains If during a year, a micro-enterprise fails related to the sale of shares are tax exempt. to meet one of the above criteria, it will become a corporate income tax payer beginning with the following year.
112 Investing in Central Europe | Your move in the right direction
Revaluation of assets Withholding tax There are certain specifc derogations from Reserves from the revaluation of fxed As a general rule, income obtained by non- the standard withholding tax rate, such as: assets, including land, performed after residents from Romania is subject to 16% •• Dividends paid by a Romanian legal 1st of January 2004, which are deducted withholding tax, respectively 5% for dividend entity or by an EU entity headquartered for corporate income tax purposes through income (starting 2016). in Romania to an entity resident in tax depreciation or at the moment when an EU Member State are exempt from the assets are written-off, are taxable at Income obtained by non-residents from withholding tax in Romania, provided the moment in which the tax depreciation Romania is subject to 50% withholding tax that the receiver of dividends holds is deducted or upon disposal of the related if the revenue is paid to a state with which for an uninterrupted period of at least 1 assets. Romania does not have a legal instrument year minimum 10% of the share capital for exchange of information and if such of the payer of dividends; Thin capitalization and interest income is paid in relation to artifcial capping rules transactions. •• Interest and royalties paid between The deductibility of interest expenses related legal entities, subject and net foreign exchange losses related The income obtained by non-residents from to the conditions provided by the Interest to loans is limited under the criteria Romania, subject to withholding tax, may and Royalty Directive, are exempt detailed below. Such limitations do not comprise inter alia: from withholding tax in Romania, apply to interest expenses and net foreign provided that the benefcial owner •• Interest paid by a Romanian resident; exchange losses related to loans granted of the interest and/ or royalties holds at by credit institutions, non-banking fnancial •• Royalties paid by a Romanian resident; least 25% of the capital of the subsidiary institutions or lease companies. for a period of at least two years; •• Commissions paid by a Romanian •• The National Bank of Romania’s reference resident; •• Income from gambling is subject to 1% interest rate – for RON denominated withholding tax; •• Income for services performed in loans (i.e. currently 1.75%); Romania; Tax treaties •• 4% annual interest rate – for foreign •• Liquidation proceeds of a Romanian legal Romania has signed over 85 Double Tax currency denominated loans. entity. Treaties. Different rates of withholding tax can apply to interest, dividends Any interest expenses exceeding the above Romania has implemented in the domestic and royalties, depending on the terms limits are permanently non-deductible tax legislation the provisions of the EU of the treaty with the particular country. for corporate income tax purposes. Parent-Subsidiary Directive and Interest & The tax treaty provisions are applicable Royalties Directive. if the benefciary of the income makes In addition to the above capping rule, available a certifcate of tax residency the deductibility of interest expenses The Romanian tax legislation provides to the payer by the income payment date. is subject to limitations based on the application of the most favorable the computation of the debt/equity ratio. legislation between the domestic legislation Interest expenses and net foreign exchange and the relevant double tax treaties and losses are deductible, within the above thus, the standard withholding tax rate may mentioned limitations, if the debt/equity be reduced if certain conditions are fulflled. ratio is lower or equal to 3 and the company is in a positive equity position. Otherwise, the interest expense and related net foreign exchange losses are non-deductible. These amounts can be carried forward to future periods until the thin capitalization criteria is met.
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Transfer pricing Advance tax ruling availability Judicial stamp duty is levied on claims and Romanian tax law provides for transfer The National Agency for Fiscal requests fled with courts and the Ministry pricing rules and principles in line with Administration may issue advanced tax of Justice, depending on the value the OECD guidelines. The law stipulates rulings (ATR) at the request of taxpayers. of the claim. Quantifable claims are taxed that transactions between related parties The ATR is an administrative fscal document under the regressive tax mechanism. should be carried out at arm’s length prices. referring to a future fscal situation Non-quantifable claims are taxed at fxed In view of establishing the transfer prices, of a taxpayer and is binding for the tax amount levels. A judicial stamp duty may the taxpayer carrying out transactions with authorities, provided that the taxpayer has also be levied at the transfer of real estate related parties is liable, upon tax authorities’ complied with its terms and conditions. property under certain circumstances. request, to prepare and present, within certain timeframes, a transfer pricing fle. The advanced tax ruling is valid only as long Extra-judicial stamp duty is charged as the relevant legal provisions are not for the issue of various certifcations such As of fscal year 2016, large taxpayers amended. as identity cards, car registrations, etc. carrying out intra-group transactions with annual values over certain thresholds, have Advance pricing arrangements (APA) are Value added tax (“VAT”) the obligation to prepare the transfer pricing available for taxpayers looking to confrm The Romanian VAT legislation is harmonized fle annually. In this case, the legal deadline the conditions and approaches to be used with the VAT Council Directive 2006/112/EC for the preparation is the legal deadline for establishing transfer prices for a fxed on the common system of value added tax for the submission of the annual corporate period of time. For transactions carried (“VAT Directive”). income tax return, for each fscal year, while out between affiliated parties, an APA is the deadline for submitting the transfer compulsory and opposable to the tax VAT is generally charged on transactions pricing fle is of maximum 10 days from authorities and guarantees that the tax with goods and services having the place the request date. authorities will accept the transfer pricing of supply in Romania. methodology applied by the taxpayer. Other categories of taxpayers or large The current VAT standard rate is 20%. From taxpayers that do not meet the thresholds The deadline for issuing an APA is: 1 January 2017, the standard VAT rate will imposed have the obligation to prepare be reduced to 19%. •• 12 months in the case of a unilateral and submit the transfer pricing fle upon agreement; request. The deadline for submitting There are two reduced rates of VAT: 9% and the transfer pricing fle is 30 to 60 days from •• 18 months in the case of a bilateral/ 5%. the request date. multilateral agreement. The reduced rate of 9% is applied to certain In determining the price, the following The agreement is issued for a period transactions such as: methods are provided by the Romanian tax of up to 5 years (in exceptional cases it is •• Supplies of all sort of prosthesis, except legislation: possible to be issued for a longer period). for dental plates; The agreement only produces future effects •• Comparable Uncontrolled Price Method (there are some exceptions). •• Supplies of orthopedic products; (CUP); •• Drugs for human and animal use; •• Cost Plus Method (CPM); Stamp duty Stamp duty is payable on most judicial •• Accommodation in hotels and similar •• Resale Price Method (RPM); claims, issue of certifcates and licenses structures, including the rental of land •• Transactional Net Margin Method as well as documentary transactions that for camping; (TNMM); require authentication. There are two types •• Supply of the following goods: foodstuffs, of stamp duty, which include the following: •• Proft Split Method (PSM); including non-alcoholic beverages, meant •• Judicial stamp duty; for human and animal consumption, alive •• Any other method accepted under OECD animals and birds of domestic species, guidelines, with the further amendments •• Extra-judicial stamp duty. seeds, plants and ingredients usually used and add-ins. to prepare foodstuffs, products usually used to supplement or substitute foodstuffs;
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•• Restaurant and catering services, In Romania, the transfer of all assets or part •• Supplies of wood and wood materials; excluding alcoholic beverages; of the assets of a company or of liabilities •• Supplies of certain cereals and technical as well, as a result of a sale or a contribution •• Supply of drinking water and irrigation plants (applicable until 31st December in kind to the share capital of a company water for agriculture; 2018); is out of VAT scope provided that certain •• Supplies of fertilizers, pesticides, conditions are met. The transfer of assets •• The transfer of greenhouse gas emission seeds and other agricultural products or part thereof via a merger or spin- certifcates (applicable until 31st for seeding or planting, as well as supplies off always falls outside the VAT scope if December 2018); of agricultural services (e.g. ploughing, the recipient is a taxable person established •• The supply of electricity to a taxable sowing, etc.) in Romania, without any other additional person established in Romania conditions having to be met. whose principal activity in respect Since the 1st of January 2016, the reduced of the purchase of electricity is to resale VAT rate of 5% applies for the following The transfer of a business as a going it and whose own consumption supplies: concern may be taxed, provided the taxation of electricity is negligible (less than 1% is not made with fscal purposes. •• Supply of school books, books, of the electricity purchased) (applicable newspapers and magazines, except until 31st December 2018); The fscal period is usually the calendar for those intended solely or mainly month. For taxable persons registered •• The transfer of green certifcates for advertising purposes; for VAT purposes having annual turnovers (applicable until 31st December 2018); •• Tickets to museums, castles, historical below EUR 100,000 the fscal period •• Supplies of buildings, parts of buildings monuments, fairs and expositions, is the calendar quarter. Also, subject and any type of land; movie-theatres (cinemas), sportive to the approval of the Romanian tax events, etc. Supply of buildings as part authorities, taxpayers may choose •• Supplies of investment gold performed of the social policy, including the land other fscal periods (i.e. semester, year), by taxable persons that have opted on which they are built. The building depending on the nature and frequency for taxation of their supplies; supplied as part of the social policy of their activity in Romania. •• Supplies of mobile phones, integrated include, among others, the supply circuits, laptops, games consoles of buildings intended to be used Taxpayers applying the calendar quarter or tablets will apply only if the value as retirement homes, foster home and as reporting period have to switch of the delivered goods on one invoice centers for recovery and rehabilitation to monthly reporting if carrying out is at least RON 22,500 (without VAT), of disabled children, the supply intra-Community acquisitions of goods in (applicable until 31st December 2018). of buildings to city halls with the purpose Romania. Compliance rules provide that VAT of subsidized renting-out to certain registered entities fle periodical VAT returns The condition for applying such persons or families of special economic with the relevant tax authority by the 25th simplifcation measures is that both condition, as well as the supply of the month following the reporting period. the supplier and the benefciary are of buildings with a maximum utilizable registered for VAT purposes in Romania space of 120 m2 and a value exceeding Simplifcation measures are available (i.e. RON 450,000 (excluding VAT) where the benefciary of the supply will account Starting with 1 January 2015, Romania has the buyer is a private person. for the related VAT under the reverse- implemented Mini One-Stop Shop (“MOSS”) charge mechanism), for certain transactions, simplifcation measure which allows taxable Exports of goods, intra-community supplies such as: persons to register in one Member State of goods and other specifc operations are •• Supplies of goods such as waste for all supplies of telecommunication, VAT exempted with deduction right, based materials, residues and recyclable television and radio broadcasting services on specifed documentation, while fnancial materials (iron scrap, non- ferrous and electronically supplied services made services are generally VAT exempted scrap, recyclable paper, cardboard, to non-taxable persons. MOSS allows without possibility to recover the input tax rubber, plastic, and glass waste, etc.) taxable persons to avoid registering in each incurred. and materials resulting from their Member State of consumption, following manufacturing (cleaning, polishing, etc.); the change of the place of supply rules.
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Non-resident companies may request •• Insurance fund for work related accidents •• Salary income tax exemption applied for the refund of the input VAT incurred and professional diseases: between to individuals working in research and in Romania under the provisions 0.15% and 0.85% applied on the total development felds (applicable starting of the 9th Directive (2008/9/EC) – in salary fund, considering the core activity with August 2016, if certain conditions case of EU established companies and of the company. are met by the employer and employee). 13th Directive (86/560/EEC) – in case •• Medical leave fund contribution: of non-EU established companies (subject 3. Legal entities 0.85% applied to the total salary fund. to reciprocity arrangements between The general legal framework with respect The computation base for the contribution countries). Romanian registered companies to Romanian Companies is provided by is capped at the level of twelve times will submit for a VAT refund request under Companies’ Law no. 31/1990. Under the law the national minimum salary per economy the local procedure. there are fve types of companies described (i.e. RON 1,250 starting with May 2016). below as follows: Income tax and social security •• Guarantee fund for salary debts •• Partnerships; contributions contribution: 0.25% applied to the total Employees in Romania are liable to pay gross salary fund. •• Limited partnerships; social security contributions as a percentage •• Disabled person contribution: 4% •• Partnership limited by shares; of the gross salary, as follows: multiplied with the average number •• Joint Stock Companies; •• Social security contribution: 10.5% of employees and 50% of the minimum of the gross monthly salary/earnings, salary per economy. The contribution is •• Limited Liability Companies. the taxable base being capped at payable by companies with more than the level of fve times the average gross 50 employees that do not hire disabled Basically any person can participate salary (i.e. RON 2,681 as of 1 January persons. Alternatively, the contribution to the creation of companies provided they 2016); equivalent can be used by companies have not been convicted for specifc criminal to purchase goods or services from offences. •• Health fund contribution: 5.5% of total institutions where disabled people work. gross monthly salary/earnings. . Starting Partnerships, limited partnerships and with January 2017 the health fund The standard income tax rate is 16% partnerships limited by shares form contribution will be capped at 5 times for most of the types of income derived a separate corporate entity from their the average gross salary established by by individuals (including salary income). shareholders but all of the shareholders law. However, for the income derived from in case of a partnership or only some •• Unemployment fund contribution: 0.5% dividends a tax rate of 5% applies starting of them in case of limited partnerships of total gross monthly salary/earnings. with January 2016 and also, different tax and partnerships limited by shares, are rates may apply for income derived from unlimitedly liable for the company’s debts. Employers in Romania are liable to pay real estate transactions, depending on social security contributions as a percentage the value and holding period In the case of joint stock companies and of the salary paid to employees as follows: limited liability companies, the shareholders’ Employment related tax incentives liability is limited to the amount they had •• Social security contribution: between as per Romanian tax law invested, i.e. the subscribed and unpaid 15.8% and 25.8% of the total salary fund Employees tax incentives are also worth share capital. (depending on the work conditions; 15.8% mentioning, the most relevant being: for normal working conditions) capped Due to the advantages they offer, joint at the level of fve times the medium •• Special IT exemption from the salary stock and limited liability companies are gross salary (i.e. RON 2,681 starting income tax (applicable for salary income the most common types of companies used with 1 January 2016) and multiplied with derived from software development in Romania. the number of employees. activities, if certain conditions are met both at the level of the employee and •• Health fund contribution: 5.2% applied employer). to the total salary fund.
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Limited Liability Company Transfer of shares Joint Stock Companies Shareholder structure The shares issued by a limited liability Shareholder structure Companies’ Law provides that this type company may be transferred between The minimum number of shareholders of company may be established by at least the shareholders without restrictions. required by law to set up this kind two shareholders. The maximum number of company is two. In case that the company of shareholders allowed by law for a limited The transfer of shares to third parties is has only one shareholder for a duration liability company is 50. subject to: exceeding nine months, then any interested person may claim the dissolution of that i. the approval of the shareholders As an exception from the said rule, respective company. holding at least three quarters the law stipulates the possibility to establish of the share capital; The shareholders a limited liability company having only one Similar to the provisions established may not derogate from the above shareholder, named sole shareholder for limited liability companies, mentioned restriction by inserting limited liability company. The formation the liability of the shareholders is capped at a contrary provision in the articles of sole shareholder limited liability company the subscribed and unpaid share capital. of association or by any other is subject to some legal restrictions, such as: agreement. The law does not impose a maximum limit •• a natural person or a legal entity cannot ii. any interested person may fle regarding the number of shareholders be sole shareholder in more than one an opposition before the expiry for joint stock companies. limited liability company. of a 30-day opposition term, which •• a sole shareholder limited liability starts running from the publication Share capital company cannot be sole shareholder in in the Official Gazette of Romania For joint stock companies, the minimum another limited liability company. of the shareholders decision mentioned share capital required by law is RON at point (i) above. 90,000. This amount may be modifed The shareholders of a limited liability by the government so that the minimum company are liable for the debts share capital must always remain at least at The transfer of the shares becomes of the company but their liability is capped the level of RON equivalent of EUR 25,000. effective only after the expiry of the 30-day to the subscribed and unpaid share capital. opposition term or, in case an opposition is fled, at the date the rejection Share capital of the opposition request is communicated. The minimum share capital is RON 200 and may be divided into shares having The transfer of shares must be registered a minimum value of RON 10. in the Trade Registry and in the shareholder register of the company. The shares issued by a limited liability company are incorporable assets and Encumber of shares cannot be represented by negotiable The shares issued by a limited liability fnancial instruments. company may be validly mortgaged only with the approval of the shareholders The shareholders must entirely pay holding at least three quarters of the share the subscribed capital upon the moment capital. of the incorporation of a limited liability company. A limited liability company is a closed corporation, cannot be formed by public subscription or be registered on the stock exchange markets and cannot issue bonds.
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Joint stock companies may issue bearer 4. Labor and wages Legal framework shares or nominative shares (materialized The 2003 labor code has been amended The Romanian employment legal framework or dematerialized). The shares issued may in line with demands from employers is governed by Law no. 53/2003 – regarding be preferential shares or regular ones and for a more flexible labor market, but rigidities the Labor Code (“the Labor Code”), Law they can be converted one into another. remain. Average net monthly wages remain no. 62/2011 regarding social dialogue However preferential shares cannot exceed low by east European standards, but they on the collective bargaining agreement, one quarter of the share capital. have been rising fast in recent years. Prior Law no. 168/1999 on labor conflicts and to the economic crisis and ensuing deep Government Ordinance no. 25/2014 Generally the preferential shares do not recession in Romania, there was a threat regarding the employment and transfer allow the holder to vote in the general that this rapid wage growth could erode of foreigners in Romania. Also there are meeting. Joint stock companies may also some of Romania’s attractiveness. Wage collective bargaining agreements concluded issue bonds for raising capital. growth was muted in 2010-13, given the slow at the level of activity sectors, group recovery from the economic crisis and cuts of employers and employer which are Upon the moment of the incorporation in public-sector wages, although real wage applicable in employment relations. of a joint stock company the shareholders growth has risen in 2014 as inflation has must pay at least 30% of the subscribed fallen. Signifcant payroll taxes continue Working hours capital. The difference may be paid in to increase the overall cost of labor. Labor By law, the normal duration of full-time 12 months from the incorporation date productivity has been picking up in recent employees’ work time is 8 hours per day in the case of cash contribution, or two years, and is expected to improve alongside or 40 hours per week (5 working days). years in the case of in kind contribution. substantial industrial restructuring. The maximum legal duration of the work The shares issued by a joint stock time cannot exceed 48 hours per week, company may be also acquired by a public Shortages of professional, skilled and including extra hours. As an exception, subscription. In this case the shareholders semi-skilled workers will become a growing the duration of the work time, including must pay in cash 50% of the subscribed problem over the next few years and the extra hours, may be extended capital and the other half in 12 months from will pose a challenge to foreign investors to over 48 hours/week, provided that the incorporation date of the company. as increasing numbers of young Romanians the average of the working hours, calculated seek employment abroad. This is already for a reference period of three calendar Transfer of shares a problem in some sectors, and may become months, does not exceed 48 hours/ Generally the shares of a joint stock worse after the removal of restrictions on week. For youngsters up to the age of 18, company are freely transferable between the employment of Romanian nationals in the duration of the working time is 6 hours the shareholders or to a third party. some EU states in coming years. per day and 30 hours per week. However the shareholders may restrict the transfer of the sharers by inserting some One of Romania’s main attractions The work time is regularly, distributed, to 8 limitations into the articles of association. for foreign investors is low wages. However, hours per day, 5 days per week, followed by the employment taxation system can almost two rest days. For certain sectors of activity, A joint stock company cannot acquire its triple the cost of taking on an employee. companies or professions, collective own shares or grant fnancial assistance Payroll taxes were increased in the late or individual negotiations, or specifc laws (e.g. loans or security) for the acquisition 1990s in the hope of raising revenue. In may settle a daily duration of the work of its shares, except for some limited cases, fact, these increases shrank the collection time, shorter or longer than 8 hours. A daily expressly provided by law. base as a result of the expansion of informal duration of a 12-hour working day shall be activities and the widespread practice followed by a 24-hour rest period. The transfer of shares takes place by of under-declaring wage payments. declaration performed by the transferor The introduction of a flat 16% income tax was Specifc provisions are provided with and the transferee or by their proxies in aimed at bringing part of the grey economy respect to individualized work schedules, the shareholders’ register, unless other into the official economy. Social-security to the extra time work, to the night work, methods are provided by the articles contributions are excessive, despite a series as well as to the organization of the work of association. of reductions in recent years. First-time conditions. investors in Romania should ensure that they accurately calculate the all-in cost of labor when drawing up their business plans. 118 Investing in Central Europe | Your move in the right direction
All employees are guaranteed their rights The seasonally adjusted unemployment rate Aside from the official schooling system, to a paid annual rest leave. The minimum in the frst semester of 2016 in Romania there are private school for all educational duration of the annual paid rest leave is, was 6.5%, with 2.2 percentage points lower levels (from kindergarten to universities). according to the Labor Code, 20 working than the EU 28 average for the same period, Universities and other higher education days. reported by Eurostat. In the same time, institutions are autonomous and are the seasonally adjusted unemployment rate granted by the law the right to establish and Specifc provisions are also enforced with for EA (19 countries) was 10.2%, down from implement their own development policies, regard to the vocational training leaves. 10.9% in 2015, and from 11.6% in 2014. This within the general provisions of the in-force is the lowest rate that has been recorded in legislation. Wages and benefits the euro area since May 2012. Salary: Discriminations are banned in The school educational cycle starts at the setting and granting of a salary, on such In the frst semester of 2016, the average the age of six or seven and ends with criteria as gender, sexual behavior, genetic net nominal wage grew by 12.8% year on the twelfth grade, when pupils graduate features, age, nationality, race, skin color, year 2015 and by 20% year on year 2014. the baccalaureate. The cycles are: ethnicity, religion, political option, social It is largely as a result of the increases in •• Pre-school or Kindergarten – organized background, disability, family situation the minimum gross salary in 2014 and 2015 for children aged 3-6, is optional under or responsibility, trade union membership (totaling 47% increase from January 2014 the age of six. Children need to attend or activity. The salary consists of the base to January 2016 %). These frst increase in one year of kindergarten before entering salary, indemnities, increments and other 2014 directly affected approximately 33% public schooling. At the age of six, bonuses. Salaries are confdential and of all wages and indirectly drive up other children must join the “preparatory employers are bound to take all steps wages. Low inflation, driven by year-on-year school year”, which is mandatory in order to keep confdentiality. declines in world oil and food prices, kept to enter the frst grade. average inflation in 2015 down to -0.6%, Under Article 41 of the Romanian resulting in an increase in average real •• Primary school– organized for pupils Constitution refers to the minimum wage wages of 12.2%. The rise in real wages aged 6/7-10 includes grades I to IV. for the purpose of social protection. From had a smaller impact on retail trade and •• Lower secondary (gymnasium) grades V May1, 2016 the national monthly minimum marketed services. Retail turnover grew by to VIII for pupils aged 10-14. gross base salary guaranteed to be paid, only 2% year on year, on both a gross and for a full-time working schedule (an average adjusted basis. Further growth in nominal •• Upper secondary (high-school) – grades of 169.333 hours per month), was set at wages is expected in the next year following IX to XII/XIII for pupils aged 15-18/19, RON 1,250 (around EUR 277). some discussions on the increase in has the following branches: theoretical, the minimum wage in the frst part of 2017. technological and vocational (art, sport, Vacation: All employees are guaranteed theology). their right to a paid annual rest leave. 5. Education •• Professional education lasts between six The minimum duration of the annual In the Romanian education system, months and two years and is organized paid rest leave is, according to the Labor schooling is compulsory until the tenth by technical and vocational high schools, Code, 20 working days. In case of special grade (which corresponds to the age which prepare pupils for the current family events (employee’s marriage, child’s of sixteen or seventeen) and it starts local workforce. The pupils graduating marriage, child’s birth etc.), employees at the age of six or seven. The Ministry professional schools get a “qualifcation are entitled to paid days off, not included of National Education implements certifcate”. Graduates can then continue in the duration of the rest leave. The law, the legislation and general administration their studies in the upper-secondary the applicable collective labor agreement and management of the education and cycle, a technological or vocational high or internal regulations settle the special training system at the national level. school, in a low frequency program. family events and the number of paid days In exercising its specifc attributions, off. Romania has 12 National holidays. the Ministry of National Education cooperates at the central level with other Ministries and institutional structures subordinated to the Government.
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•• Post high-school non-university education: lasts between one to three years and is organized by post-high schools preparing the pupils for the current job market. Higher education, including university and post- university education.
•• Higher education in Romania is made accessible by public and private institutions. These include universities, academies and colleges organized in specialized departments. In accordance with its objectives, university education comprises: short university education offered by university colleges (three years), long university education (four to six years) and postgraduate university education (one to two years).
6. Infrastructure Romania’s infrastructure consists of 103,671 kilometers (64,276 miles) of road, 11,385 kilometers (7,058 miles) of rail, and 3.84 million main telephone lines. On July 2015, the European Commission has Rail Transportation infrastructure in Romania approved Romania’s master plan envisaging The rail network, which is the main mean is state property and is administered by investments worth EUR 43.6 billion in road, of internal transport for passengers and the Ministry of Transports. The quality rail, air, and water transport infrastructure freight, covers 20,077 km, the seventh- of telecommunications infrastructure is through 2030. The total value of projects largest railway network in EU, but only expected to continue to improve following identifed in the General Transport Master 38% of the system is electrifed. Following the liberalization of the fxed-line network. Plan amounts to EUR 45.451 billion, years of falling volumes, the number The e-commerce sector is growing, albeit which includes investment projects in of passengers seems to have stabilized at from a small base, but it is stimulated the transport infrastructure of Romania around 500,000 per day. by the personal computer and mobile for the road, rail, air, sea and multimodal penetration. sector. Annual cargo traffic volumes are about 70m tonnes, mainly of coal, oil products, common Road For the Romanian Government the priorities metals, cement, quarry products, chemicals As of July 2015, Romania has 696 km are to develop the motorway network and agricultural items. Caile Ferate Romane of motorway in use, with another 230 km such as: Sibiu-Pitesti, Sibiu- Brasov, Brasov (CFR) is the official state railway carrier under construction. The EU accession - Bacau, Targu Neamt- Pascani - Iasi - of Romania. CFR is divided into separate of the country in 2007 and the improved Ungheni, Brasov – Comarnic (PPP), Pitesti companies, amongst which: CFR Calatori, utilization of the allocated EU funds in - Craiova (PPP) or Suplacu de Barcau- Bors, responsible for passenger services; CFR recent years enabled Romania to speed the equivalent of 1094.80 km of highway, Marfa, responsible for freight transport; CFR up the expansion of its highway network. with an estimated cost of EUR 8.8 million Infrastructura, manages the infrastructure In Romania, it is necessary to have a valid / km, taking into account that the length on the Romanian railway network; and vignette not only on motorways but also of 118 km of motorways will be built in Societatea Feroviara de Turism, or SFT, when passing other roads belonging the mountains. which manages scenic and tourist railways. to the national road network.
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Metro Ports are administered by national Household spending in Romanian Bucharest is the only city in Romania companies, under the authority communications services are maintained that has an underground railway system, of the Ministry of Transports and at comparatively high rates, almost double comprising of both the Bucharest Metro Infrastructure. There are a few exceptions, the EU average. At the end of 2015 and the light rail system of the Regia namely Sulina, Turnu Magurele and Zimnicea there were over 700 active providers Autonoma de Transport Bucuresti (RATB). ports, which are administrated by local of fxed Internet services, more than 250 One new metro line is under construction, authorities. suppliers of retransmission TV and nearly and another one is currently extended. 40 providers of fxed telephony services. The works for a metro line that will connect Air transport The mobile operators are Orange Romania, the airport with the city center is planned Romania has a well-developed airport Vodafone Romania, Telekom Romania to start in 2017. infrastructure compared to other countries Mobile Communications and RCS&RCS. in Eastern Europe, with 16 commercial Shipping airports in service, most of them opened In 2015, there were 23.1 million users Romania has six major for international traffic. Four of the airports of mobile telephony, according to ANCOM, ports, of which Constanta is (OTP, BBU, TSR, CND) have runways of 3,100– the national regulator. The penetration the most important to the country’s future. 3,500 metres in length and are capable rate of mobile telephony services per 100 The Port of Constanta connects the Western of handling jumbo jets. Six of the airports inhabitants reached 116.4% at the end European and Central European developed (BCM, CRA, IAS, SBZ, SCV, SUJ) have runways of 2015 but the number of fxed lines and countries with the raw material suppliers of 2,400–2,700 meters in length, while of active SIM cards registered in the medium from the Community of Independent the rest of them have runways of 2,000– term are on a downward trend. States, Central Asia and Trans Caucasus. 2,200 meters (6,562–7,218 ft.) in length. It is one of the largest European ports The Internet and the largest Black Sea port, attracting The main airport of the country is Bucharest In Romania, broadband internet has been 70% of the inland waterway international Henri Coanda International Airport available since 2000, through coaxial cable, and transit traffic, 40% of the railway (OTP), located in Otopeni, 16.5 km north and recent speeds range between 2 Mbit/s international and transit traffic and 12% of Bucharest’s city center. In 2015, 9.27 and 1000 Mbit/s. In May 2016, over 15 of the road international and transit traffic. million passengers transited the Henri million connections to the Internet were Maritime transport through the port Coanda International Airport, an 11.6% registered. Romania’s country domain is of Constanta absorbs half of total export record increase compared to last year. .ro and there are over 600 000 domains and import volumes, while road haulage and registered under .ro. The .eu domain is also rail freight have overall equal shares, road is The national carrier of Romania is TAROM, used, and it is shared with other European more heavily used for inland border exports a full service airline that flies to domestic Union member states. to EU countries. and international destinations in over 20 countries. In 2007, Romania has signed Over 92% of internet fxed market is In Romania, the Danube River is an “open sky” agreement, which allows served by a number of six providers, and the country’s most important trade route. any airline operator from the EU to set up networks are concentrated with proftable It has a length of 1,075 km, approximately business wherever it wants. As a result, areas overlap, characterized by the density 44% of its whole navigable length. TAROM is facing growing competition from of application. The number of internet lines The Romanian Danube is divided into two low-cost airlines. At present, 31 airlines increase is similar to those seen in other EU structurally different sectors: the River are operating on Otopeni, connecting countries. There is a remarkable appetite Danube and the Maritime Danube. Several the country to 70 destinations. for internet speeds, which are among ports situated along the Maritime Danube, the highest in the world. Based on Net namely Galati, Braila, Tulcea and Sulina, Telecommunications Index report at the end of frst half of 2013, allow the access of both river and maritime Telecommunications sector in Romania Timisoara had the highest download speed vessels, so they also serve international sea has enjoyed sustained rates of growth and in the world, the second Romanian city that trade. Romania has made signifcant progress in appeared in the ranking was Constanta, and all of the information and communications the capital Bucharest was on 19th place. technology (ICT) subsectors, including basic telephony, mobile telephony, Internet and IT.
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The use of mobile internet in Romania Digital is going mobile and this trend is 7. The Most Active Industries/Sectors is very high - it doubled in the second more visible as we look towards younger Energy semester of 2015, compared to the previous generations, with 76% of urban 16-24 years Romania is a country that is “rich in poor year. 4G internet is available in Romania and old and 64% of urban 25-34 years old using resources” with a balanced mix of primary the 4G connections have increased from internet on their mobile devices on a daily energy vectors and a relatively good 800.000 connections in 2014 to 2.7 million basis. standing in terms of external energy in 2015. dependence – the third country in the EU Mobile advertising now accounts for 33% in terms of proportion of imported energy The Romanian e-commerce market of total digital advertising and will reach sources in the total primary energy mix – consists of approximately 4,500 online 55% by 2018, following the rapid shift in some 23%. stores, 1,000 more than in 2012, according digital media usage and planning strategies, to the estimates given by the main players. according to Media Factbook Romania. If The country is in the midst of defning its Of the total number of e-shops, over 1,000 in 2005 the investments in digital media energy strategy that is expected to be are enrolled in and certifed by the RomCard represented 1% of the total net media fnalized toward last quarter of 2016. In 3D Secure standard, compared to 781 market estimate, ten years later, in 2015, it June 2014, the government announced stores in 2012. reached 17%. that a new royalty law for oil and gas companies would be introduced in 2015 The media Radio market increased marginally in and would apply only to new oil and In Romania, the daily media consumption advertising revenues (5% vs. 2014). gas concessions, and would therefore routine shows TV and Internet as the most The Radio channels audience performance not affect existing companies. Under used media channels, with Internet reconfrmed in 2015 Radio ZU as the leader Romanian law, royalties are collected outperforming the other traditional in Bucharest with 15% average rating and as a percentage of the production value, media, due to its easiness to access Kiss FM as leader at urban level, with 13%. with royalties varying from 3.5% to 13.5% any kind of information and facilitate The radio scene is dominated by private for oil and natural gas depending on the size instant connection to friends or business FM stations - there are six private national of the resources. community. networks: Europa FM, Digi FM, National FM, Radio 21, Pro FM, and Radio Trinitas. The market for electricity for non-residential Despite the current high TV usage habits, Print market continued to drop, being customers has been fully deregulated and digital media consumption level has influenced by the continuing decline the road map for gas deregulation is on increased signifcantly during the last years. of the press distribution networks and track. However, energy sector privatization Although the access from the PC or laptop fnancial difficulties of Zirkon Media, one has stalled since the authorities completed remains the most preferred, mobile devices of the biggest press distributors. In terms several initial public offerings (IPOs) in key as smartphones and tablets are growing of gross (rate card) advertising revenues, state-owned energy companies, including rapidly, with internet access on smartphone Ringier was ranked frst, followed by Nuclearelectrica (which generates 20% having the most dynamic evolution (50.2% in Adevarul Holding and Mediafax. 2015 of Romania’s electricity), Romgaz (which 2015 vs. 26.4% in 2011). reflected slightly different readership produces 45% of Romania’s natural gas) and trends among the print types, with a 5-6% power supply and distribution company, For television, 2015 was another year drop for dailies and less than 4% drop Electrica, in 2014. Plans for a stock- of growth. CME remains leader with 48.3% for weeklies. According to the National exchange listing of power producer, share of advertising revenues, followed by Institute of statistics, a number of 59 daily Hidroelectrica, in 2016 have fueled hopes INTACT with 26.4%, Dogan Media 10% and papers are published in Romania, compared that the government will resume energy Prima Broadcasting Group 3.4%. In terms to 81 in 2006, and 3267 other publications, privatization. of ratings performance, 2015 registered compared to 2180 in 2006. same top 3 as in 2014: Pro TV leader, followed by Antena 1 and Kanal D and talent shows continued to dominate TV programming, „Romanian got talent” and „Vocea of Romania”, broadcasted by Pro TV, being the most watched.
122 Investing in Central Europe | Your move in the right direction
Nuclear energy is a central plank water or wind. In 2012 an ordinance modifed Agriculture of the government’s energy policy. In 2015, the green energy support scheme to reward In Romania, agricultural sector represents Nuclearelectrica has signed a memorandum solar power producers with six green a basic branch of the national economy, of understanding (MOU) with China General certifcates for every mw generated, the most having signifcant economic and social Nuclear (CGN) for the development, generous of all the support schemes importance and implications. Romania has construction, operation and decommissioning for green energy producers. a wide range of soil types with high theoretical of units 3 and 4 of the Cernavoda nuclear potential, about 60% of arable land having power plant. Consumer business a good and medium fertility. The Romanian After subdued growth in 2009-13, total agricultural area stands for 61.7 % Oil & Gas the demand drove a revival in private of the country’s territory, and the arable land Romania is Central and Eastern Europe’s consumption in Romania in 2015. Low represents 63.9% of the total agricultural most oil-rich country; it has estimated global food and energy prices, along with land. The surface of arable land per inhabitant crude oil reserves of about 400m barrels. government tax cuts, boosted private is about 0.42 ha. Most of the agricultural land The estimated depletion period is 12 years. consumption and retail sales growth last year. belongs to the private sector: 96 %. The country is also the Central and Eastern Europe’s largest producer of natural gas. The structure of consumer spending is The main challenge that Romania is facing Natural gas reserves are around 630bn cube likely to change signifcantly over the next nowadays is the existence of high number meters and the estimated depletion period decade, with the ratio of food and beverages of subsistence and semi-subsistence peasant for gas is about 55 years. This situation may in total spending declining in line with households featured by a small area size change with new discoveries on the Black Sea a steady rise in middle-income earners and of 1.72 ha and respectively of 3.3 ha, with shelf. a signifcant increase of sales of consumer plots excessively scattered, with low fnancial electronics and information technology (IT) resources and a low degree of agricultural The oil and gas sector has three main products as broadband is expanded across machinery endowment. segments: production and storage (Romgaz, the country. OMV Petrom, Depomures, Amromco Energy, The cereal sector has a high share, about Amgaz); transportation (Transgaz); and The structure of the retail sector evolves 62%, because of the good soil quality distribution and supply (E.ON Gas Distributie towards Western patterns in larger towns. for these plants and also of the national and Distrigaz Sud Retele, E.ON Gaz Romania Modern retail now accounts for over half demand for these agricultural products. and GDF Suez Energy Romania). Romgaz of sales, after substantial foreign investment. In Romania the areas and the production and OMV Petrom are the main producers, Online sales stood at EUR 1.5bn (US$1.7bn) of technical plants, sugar beet and oil crops accounting for about 97% of total domestic in 2015, up from EUR 1.1bn in 2014. are in line with the national tradition of crop production. The e-commerce market is posing a threat cultivation. Because the costs are moderate to organized retailers. regarding crop technology, the maize Renewable Energy represents an easy plant to cultivate and Frequent changes in legislation have Modern retail, comprising cash and carry with a law degree of mechanization on small affected the renewable-energy sector and stores, hypermarkets, supermarkets, discount parcels. the investors. The EU’s mandatory directive and retail stores, is the dominant form sets a target that renewable energy sources of retail, with a market share of around 57% in Starting with 1 January 2014, Romania is should account for 20% of fnal energy 2015, up from 41% in 2008, according to GfK, obliged to deregulate its property market consumption in Romania by 2020. In addition a market research company. The market is under terms of its EU accession treaty. This to hydropower, Romania has underutilized dominated by 12 international companies has removed restrictions on land acquisitions renewable potential in wind, solar, biomass that together have more than 1,600 units by foreigners. However, enterprising investors and geothermal energy. and generated revenue of about EUR 8.5bn from abroad have already purchased 10% in 2015. The Kaufland discount hypermarket of the agricultural land in the country via Generating energy from wind has potential chain and Lidl discount stores are the biggest locally registered companies. In terms (estimated at about 8,000 gwh), given the size players. Other major players are Carrefour of funding, in 2012 Romania managed of the country, its low population density (France), Auchan (France), Mega Image to draw EUR 2.4 billion. For the period 2014- and its mountainous and coastal areas. (The Netherlands), Cora (France/Belgium) and 2020, Romania has at its disposal a EUR 7.2 Solar energy is expected to make a small Prof (Poland). billion budget from European funds for rural contribution, albeit much less than from development. 123 Investing in Central Europe | Your move in the right direction
Manufacturing Pharmaceutical and healthcare market Romania introduced an insurance-based Romania has set up a number Romania offers benefts of a universal health system involving the CNAS in of government incentives and grants, healthcare system. The state fnances 1998. The CNAS is funded by compulsory as well as free zones and industrial parks, primary, secondary and tertiary healthcare. contributions from employees (5.5% to attract outside interest. There are also tax Public health campaigns are independently of the gross wage) and employers breaks: one particular initiative that experts fnanced by the Government of Romania. (5.2% of the gross wage), which meet say should beneft manufacturing is a tax The Ministry of Health of Romania is the charges of public and private healthcare incentive for those investing in production required to manage and supervise providers. The claimants on the system equipment. the public healthcare sector. are approximately twice the number of contributors. The state covers Automotive In the major urban areas, medical facilities charges for people under 18, students, Romania is the ffth-largest vehicle producer are generally well equipped, with good the unemployed, low-income families in East-Central Europe, after the Czech private healthcare available as well. In rural and pregnant women, but many citizens Republic, Slovakia, Poland and Hungary, and areas and small towns, healthcare is sub- remain uninsured and can access only basic the 11th largest in the EU. Its output consists standard. The medical system has been services. of cars, which are produced at the Dacia affected by a lack of medical staff. This is due factory in Pitesti (owned by Renault, France) to the low wages and the attractive working Pharmaceutical sales were worth and at a plant in Craiova (owned by Ford, conditions in Southern and Western Europe. an estimated EUR 3.74bn in 2013, around US), and auto parts, with several producers the same as the Hungarian market, spread across the country. The industry Although the private sector has expanded which has a population half the size. At directly employs over 130,000 people. since 2004, the healthcare system an estimated 150, drug consumption remains almost entirely state-owned. per head is among the lowest in Europe After a steep fall in 2008-13, Romania’s Private medical insurance is affordable (the west European average is around 420 vehicle market recovered strongly in 2014- for the top half of income earners, but and the central and east European average 2015. New passenger-car registrations rose beyond the reach of the rural population, is about 200). by 15.7% in 2015, and new commercial which has the most need for improved vehicle registrations increased by 29.2%, medical services. The National Social and Prescription drugs account for about 85% according to the European Automobile Health Insurance fund (CNAS) provides of total pharmaceutical sales in value Manufacturers’ Association (ACEA). 73% of state fnance; the rest comes from terms. The main sellers in value terms The Dacia brand dominates the market, the Ministry of Health and direct allocations are antibiotics and digestive remedies. with 34.5% of domestic sales in 2015, from the state budget. Private expenditure The highest-selling category of drugs according to APIA, up from 32.5% in 2014. comprising co-payments, private insurance relates to cardiovascular illness, followed by Dacia’s sales are recorded separately from and out-of-pocket expenditure account oncology-related drugs, then by treatments those of its parent company, Renault, which for the remaining 22%. for the digestive tract and metabolic imports cars into Romania and had a market problems. share of 6.1% in 2015, slightly down on Per-head spending on healthcare the previous year. was estimated at EUR 476 in 2013, approximately half the level in Poland. On The strongest increase was registered on a purchasing power parity basis, health the segment of car part producers, whose spending per head is approximately half revenue soared from EUR 5.4 billion. the level of the ten EU accession states The country is a viable location for auto (regional average) and 25% of the EU parts producers, due to its geographical average. location and highly qualifed employees (due to the proximity of technical universities). The Continental group dominates the auto parts makers segment.
124 Investing in Central Europe | Your move in the right direction
Real Estate and Constructions The National Bank of Romania (NBR) is Banks Romania is the largest market in terms responsible for banking system regulation The banking sector of Romania is made of scale, and is attracting an increasing and payment system supervision. up of around 40 banks, out of which nine number of investors. This is reflected The NBR works on a permanent basis are branches of foreign banks. At the end in the massive growth in investment with the International Monetary Fund, of 2014, the structure of the Romanian activity over the past year. After the crisis, the European Central Bank and specialized banking sector included two banks with the industry has recovered largely, due consultants from the World Bank, as well fully or majority state-owned capital, to the national program Prima casa as with other organizations, in developing three institutions with majority private (First home) loan, which is backed-up by banking policies and procedures. From domestic capital, 25 banks with majority the Romanian government. The program 1 January 2007, when Romania joined foreign capital, 9 branches of foreign banks allows people to buy their frst home with the European Union, the NBR became and a credit cooperative organization. a bank credit with only 5% advance. part of the European System of Central The weight of the assets of the credit Banks (ESCB), and the NBR’s Governor institutions with foreign capital against The Real Estate industry in Romania is on became a member of the General Council the total assets of the Romanian banking the rise and has a vast scope for foreign of the European Central Bank (ECB). system went up from 83% in December investment. The foreign investors in Romanian economy has stabilized after 2011 to 90% in December 2014. Romanian property are taking the advantage 2009 – 2010 fnancial crises, largely due of the existing low real estate prices in to NBR efforts to keep macroeconomic The advance of domestic savings Europe, which is inevitable to increase in parameters under control. compensated for the reduction of fnancing the future. from parent banking institutions. According Other government bodies have more to the NBR data, the exposure of parent Advantages of investing in Real Estate in targeted roles. The Bank Deposit Guarantee banking institutions to their affiliates in Romania: Fund is the national deposit insurer. Romania shrank by about 16% in 2014. The Insurance Supervisory Commission •• The demand for real estate properties oversees insurers, while the Private Pension NPLs have been signifcantly reduced, greatly outstrips the supply; thereby Scheme Supervisory Commission regulates but further restructuring needs to be there is great scope for rise in the prices pension providers. The National Securities carried out. In mid-2014, the National Bank of the properties. It thus presents a great Commission has authority over investment of Romania (NBR) launched a program opportunity for foreign investors to earn funds, brokerage frms, other market to stimulate NPL write-off, by increased profts. operators and the BSE. provisioning and requiring the write-off •• Romania has a strong currency; of fully provisioned NPLs, while allowing the benefcial exchange rate means even In September 2015, the European banks to retain legal claims against better buying power for investors. Commission launched an action plan borrowers even if the loans were written off. to create a Capital Markets Union across •• The central bank of Romania is the EU, with the aim of improving access Financial markets remained stable, but implementing 100% mortgage scheme to Europe’s fnancial markets. Proposals fnancial intermediation is still to be for property buyers, this will further push include making it easier for companies reinvigorated. Despite a fall in recent years, the property prices by about 15%. to issue shares, removing obstacles for fund the share of foreign currency-denominated managers seeking to operate across loans was still high at 56% in 2014, leaving Financial services borders and reinvigorating securitisation the banking sector exposed to exchange Romania has developed a well-regulated markets. rate risk. Credit growth remained subdued fnancial market. The country is subject on the back of foreign banks’ deleveraging, to numerous EU fnancial sector reforms high corporate leverage, and a lack that apply to both euro zone and non- of lending opportunities amid still-low euro zone members and that are being growth. introduced with the aim of reducing the risk of a repeat fnancial sector crisis.
125 Investing in Central Europe | Your move in the right direction
The regulatory constraints at European The insurance market is dominated by Starting with 25 February 2015, Bucharest level regarding lending, the predilection international groups such as Vienna Stock Exchange operates and administrates for saving, the reluctance to apply for new Insurance Group (VIG, Austria), Uniqa AeRO, an alternative trading system. This loans contemplating the lack of trust in (Austria), Allianz (Germany), NN Asigurari enables the development of companies the development of the economy in times de Viata (Netherlands) and Alico. There that access fnances via the capital market. of crisis and the restructuring of banks’ were 35 insurance companies operating in AeRO brings to investors’ attention portfolios have made that the ratio loans/ 2015, down from 39 in 2012. The top ten companies such as SMEs and start-ups with deposits in the banking sector be less than companies account for around 82% of gross development potential. AeRO is dedicated one. The ratio granted loans/raised deposits premiums in local-currency terms, and to funding the companies that do not fulfll stood at 93.56% in June 2015. the top fve hold more than 50%. the size or the length-of-operation criteria in order to be listed on the regulated market. The banking sector has proven its structural Foreign direct investment up to 100% stability during the year 2014, and carried is permitted in the Romanian insurance The Sibex-Sibiu Stock Exchange (Sibex S.A. out a loan portfolio optimization via industry, but non-admitted insurance is not in Romanian) was established as a private an ample process of balance sheet cleaning permitted in Romanian insurance industry. company in December 1994, with and, during 2015, has been granting loans However, insurers from EU and EEA 33.24 million lei share capital, and was at a pace almost similar to the one before member states are permitted to operate in the frst Romanian exchange authorized by the crisis. the country without a license. Romanian National Securities Commission (RNSC). Currently there is an ongoing Insurers Asset managers merger between Bucharest Stock Exchange The Romanian insurance industry is Like other EU countries, Romania has and Sibiu Stock Exchange. regulated by the Financial Supervisory a three-tier pension system. In this Authority (ASF). The Financial Supervisory framework, the frst pillar is a state-provided 8. Industrial parks Authority (ASF) is the national authority plan, the second is a mandatory funded Industrial parks in Romania have competent to enforce and monitor scheme with private managers, and the third been promoted through government the observance of the directly applicable is voluntary, privately managed savings. ordinance, as the authorities showed regulatory acts issued by the European The second pillar was created in 2007 serious commitment to boosting business Union, in the felds provided by this and the third pillar began operating from investments in the Romania. The title regulation, and for the transposition into the middle of that year. The pension system of industrial park is granted by an order the national legislation of the provisions will lead to a greater role for private pension of the Minister of Administration and Interior issued by the EU Council, EU Parliament, funds and health insurance companies, pursuant to assessing the documentation European Commission and by other which should become signifcant institutions lodged only by a partnership. European authorities. in the future. Establishment of an industrial park is based The Romanian insurance market has Financial markets and instruments on the association in participation between great growth potential. The main features The stock exchange in Romania Bucharest central and local public administration of the insurance activity are dynamism, Stock Exchange (BSE). As of January 2015, authorities, economic agents, research diversity of the insurance types, and also there are 83 companies listed on BVB’s institutes and/ or other interested partners. insurer inventiveness. Insurer tries to make regulated market with a total market The purpose of setting up industrial the insurance products more and more capitalization of €30 billion ($33.5 billion). In parks is to stimulate economic and social attractive and efficient for the insured, 2013, the main index BET went up by 26.1%, development, to perform the transfer especially in times of crisis. Rising life placing BVB as the 14th best performing of technology, to induce investment inflows. expectancy was a key growth driver in stock exchange globally. the Romanian life segment during 2010- 2014 and is projected to increase further with improvements in health measures.
126 Investing in Central Europe | Your move in the right direction
Industrial park license can be granted Currently in Romania, there are over 70 10. Investment Incentives to companies acting solely in the industrial industrial parks, according to the Ministry Romania’s attractiveness for investment is parks feld, called the managing companies of Economy, most of them in central boosted by: one of the largest markets in (“Administrator –Company”). None and western part of the country, which Central and Eastern Europe; its strategic of the business entity associates that offers easy access to Europe. More and geographic location at the crossroads use the utilities and/ or infrastructure more companies have shown interest of the traditional commercial and energy of the industrial park may hold control, in such parks because of the variety routes connecting the EU, Asia and directly or indirectly, over the Administrator- of fscal facilities. In order to fully develop the Balkans; extensive sea and river Company. The exploitation of industrial an industrial park, an initial investment is navigation facilities; a well-educated, yet parks is performed by Romanian legal needed which may vary from EUR 10 million cheap labor force, and an extensive network entities and branches or representative up to 30 million; however the projects may of double tax treaties. offices of foreign legal entities, based on easily and rapidly attract investments of up commercial agreements concluded with to EUR 250 million. Upon the country’s accession to the EU the Administrator-Company. on 1 January 2007, Romania took steps Although some of the industrial parks to strengthen tax administration, enhance The following benefts are granted operate below capacity, there are successful transparency, and create legal means for establishing and developing an industrial examples such as Tetarom Cluj, ICCO, to resolve contract disputes expeditiously. park: Metrom, Prejmer Brasov, Automecanica Its membership has also helped solidify Medias and Ploiesti West Park. About institutional reforms by subjecting •• Exemption from the payment of fees the latter, the company that developed it, government policies to EU scrutiny and thus charged for changing the purpose Alinso Group, says it is the largest logistics offering reassurance to potential investors. or for withdrawing the land related center in South-Eastern Europe, in which However, judicial weakness, legislative to the industrial park from the agricultural they invested a total of EUR 750 million. unpredictability, corruption and bureaucratic circuit, for the partnership holding inefficiencies, among others, continue the title of industrial park. 9. Outsourcing market to mark the investment environment. •• The local authorities may grant tax The Romanian outsourcing industry is Better absorption of funding from deductions, pursuant to decisions growing ahead of the rest of the economy. the EU would contribute to investment in of the local or county councils, for the real The availability of qualifed resources, high infrastructure, thereby boosting export estate properties and lands transferred language profciency and a low cost labor potential over the longer term. Even if to the industrial park for usage purposes, market are placing Romania on the ninth Romania’s absorption of EU structural as well as other facilities, in accordance place at global level and on second place funding has improved over the past with the law. among Central and Eastern European year and is likely to progress further in countries. The Romanian market includes the coming years, administrative defciencies •• According to article 257 (1) in the Fiscal over 250 companies with activities in (especially in local government) and Code, no tax is levied on the land inside the business service sector, with half the need for the government to co fnance an industrial park, and pursuant to article of the market being held by Share Service projects is limiting prospects for a signifcant 250 paragraph 9 in the Fiscal Code, Centres (SSC). More than 170.000 people are increase in the absorption rate. there is no tax levied on the buildings working in the outsourcing industry, either or facilities inside industrial parks either. in outsourcing call centers, customer care Capital inflows are free from constraint. •• The initiative was in line with other or in BPO. The country attracts clients due Romania concluded capital account incentives, mostly fscal, which Romania to the high level of technical and language liberalization in September 2006 with has sought to provide in recent years skills of workers – there are more than the decision to permit non-residents and to small and medium sized enterprises six university centers in the country, 106 residents abroad to purchase derivatives, or to certain types of economic activity universities and 631 faculties, providing treasury bills and other monetary in areas identifed as disadvantaged or in qualifed employees for the outsourcing instruments. A broad range of (both tax free trade zones. industry. An increase in demand is expected and non-tax) investment incentives is in the future, as many of the companies available to local and foreign investors. already on the market have announced that Tax incentives include special incentives they are either hiring people or expanding for expenses related to R&D, dividend their service portfolios. tax exemption under certain conditions, 127 Investing in Central Europe | Your move in the right direction
corporate tax exemption for reinvested 11. Foreign Direct Investment (FDI) 12. Expatriate life proft in equipment and machinery, Since the arrival of President Klaus Iohannis For travelers, Romania offers something reduced VAT rate of 5% for the sale at the end of 2014, investor confdence has for everyone: beautiful landscapes, of buildings under a social policy project risen and is reflected in a rise of foreign museums, spas, old cities, castles, and local tax exemptions for businesses investment of 60% compared to the previous restaurants, shopping, cinemas, malls and located in industrial parks or scientifc and year, reaching EUR 3 billion in 2015. Until more. There are many great places to visit technological parks. 2020, Romania will receive EUR 40 billion in Romania, such as: the Danube Delta, of grants by the European Commission. Sighisoara Citadel, Rasnov citadel, Bran In addition, there are employment The technocratic Government’s fght against Castle, the painted churches in Moldavia incentives for special categories, as well corruption has accentuated the country’s and the Olt Valley, Peles Castle in Sinaia, as state aid schemes for large investments. business friendly image, attracting investors. the Merry Cemetery (Cimitirul Vesel) in Under certain conditions, the state may Sapanta, Sibiu, etc. cover the salary costs and related social The distribution of foreign direct investment contributions for a limited period of time. by sector shows a lead of the industrial Largest urban centers in Romania are A private investor in Romania may beneft sector (more than one third of the total), Bucharest (Capital City), Cluj-Napoca, from business aid from EU funds (structural other activity sectors, such as banking and Timisoara, Brasov, Constanta, Iasi, Craiova, and cohesion); incentives often take insurance, wholesale and retail, energy, Ploiesti. Accommodation in Romania differs the form of development grants. construction and telecommunications have signifcantly between the capital, Bucharest, attracted investors as well. The regions, and the rest of the country. Single-family Romania has six Free Trade Zones (FTZs), which attract the most foreign capital, are houses are common in villages and small all located in ports with one exception, (in order of importance): Bucharest (more towns, whereas blocks of flats and housing the newly established Arad-Curtici FTZ. than 60% of the total), the country’s center estates are more frequent in big cities. All Because of its location, the latter could and the south. Romania has numerous over the country, you can fnd houses and become one of the most attractive advantages: in addition to a large domestic flats for rent. The cost of rental varies a lot for investors. General provisions include market, the country has a strong industrial depending on the location, ease of access, unrestricted entry and re-export of goods tradition, coupled with a cost of labor condition of the property, etc. and an exemption from customs duties among the lowest in the EU. This has and VAT. The law also permits the leasing been the reason for the development The central characteristic of the Romanian or transfer of buildings or lands for terms of a signifcant industrial sector, particularly cuisine is its great variety. The cuisine was of up to 49 years to corporations or natural car making, but also services. influenced by repeated waves of different persons, regardless of nationality. Foreign- cultures: the ancient Greeks, with whom owned frms have the same investment There were more than 200,000 active Romanians traded; the Romans, who gave opportunities as Romanian entities in companies with foreign shareholders in the country its name; the Saxons, who FTZs. Since 1 January 2007, the European Romania in 2015, and almost half of them are settled in southern Transylvania; the Turks, Community Customs Code applies owned by investors from fve countries: Italy, who for centuries dominated Romania; to Romania’s FTZs. with the largest number of investors (more as well as Slavic and Magyar neighbors. than 40,000), Germany with almost 21,000 The main ingredients used by Romanian companies, Turkey with 14,000 companies, chefs are meats such as pork, beef and Hungary with 12,800, and China with 11,600 lamb, fsh, vegetables, dairy products and frms. France, U.S., Austria, Israel and Greece fruit. are also in the top 10 in terms of number of Romanian frms controlled by investors from these countries. Netherlands, which is the biggest source of foreign investments in Romania by the value of the capital invested, is only 16th by the number of companies. The total amount invested by foreign shareholders in Romanian companies was EUR 41.3 billion, at the end of April 2015.
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There are lots of festivals and public holidays Winters are cold, with temperatures below in Romania, especially during the summer 0ºC, especially at night when temperatures or winter seasons. Some are linked can dive down to -15ºC. Frosty winds to the widely practiced Orthodox religion, are common and snow covers most some mark life events, and others represent of the country from December to mid- stages in the agricultural calendar. March. Very warm clothing is recommended in winter. The main public holidays are Easter, New Year’s Day, Labor Day on May 1st, Rusaliile (celebrated 50 days after Easter), The Assumption of the Blessed Virgin Mary into Heaven on August 15th, National Day on December 1st, and Christmas on the 25th and 26th of December, each with many public celebrations and unique festivals of their own.
13. Weather and climate Romania has a temperate climate with four distinct seasons. 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 Romania where 37ºC is often reached in July and August.
Temperatures are always cooler in the mountains where it tends to be more humidity and rainfall all year round, as fog and mist are more common at higher altitudes. On the coast, summers are pleasant and winters are mild. In autumn, days are generally warm with cool evenings. October brings a display of colorful autumn foliage, but it can also be quite cold and rainy. Most rain falls in the autumn and in the spring.
129 Investing in Central Europe | Your move in the right direction
SK
130 Investing in Central Europe | Your move in the right direction
Slovakia
1. General Overview of the Economy Political System 2. Tax structure Since joining the EU in 2004, the Slovak Slovakia is a parliamentary democracy with Tax Administration economy has undergone dynamic a unicameral Parliament - the National Registration requirements development. Slovakia has received praise Council of the Slovak Republic (“Council”). An entity or individual that obtains a license for the implementation of signifcant to perform, or starts performing business economic reforms. The Slovak economy The 150-seat Council is the highest activities in Slovakia, is obliged to register has undergone rapid growth thanks legislative body of Slovakia. MPs are elected with the relevant Tax Authorities by the end to fnancial sector stability, integration for a four-year period under a proportional of the calendar month following the month into the OECD and NATO, the adoption representation system and the Council has in which the entity obtained permission of the euro and continuous improvement budgetary and legislative powers. or authorization to perform business of the business environment. The steady activities. inflow of FDI demonstrates that Slovakia The Slovak head of state is the president, has become a popular destination who is elected by a direct popular vote Statutory time limit to assess additional for foreign investors. This is especially true for a fve-year period. Although the position tax in the industrial and business services is mostly ceremonial, the president can use Slovak tax law allows the tax authorities sectors, which have seen a big inflow of FDI his veto to return legislation to the Council. to review tax periods for a fve-year period in recent years. from the end of the calendar year in which Most executive power lies with the head the tax return should have been fled. With Slovakia has an export-oriented economy, of government, the prime minister, respect to the Slovak Tax Administration its main trade partners are Germany and who is usually the leader of the largest Act, effective from 1 January 2010, a seven- the Czech Republic. The service sector parliamentary party. The prime minister year period replaces the fve-year period is the main contributor to GDP, with is appointed by the president. The rest for a tax audit if a tax loss was recorded by a share of over 60%, followed by industry of the cabinet is appointed by the president a taxable person. (over 35%) and agriculture. GDP growth on the recommendation of the prime is projected at 3.4% for 2016, down minister. The application of the respective provisions from the record high of 10.4% in 2007. relates to fnancial year 2010 onwards. Unemployment continues to be signifcant A 13-member Constitutional Court has at 9.45%, particularly in the south and east the power to overturn legislation on of the country. grounds of unconstitutionality.
131 Investing in Central Europe | Your move in the right direction
If, prior to the expiration of such a time Generally, expenses recorded by a taxpayer The following statutory conditions must limit, the tax authorities initiate an action are tax deductible if it can be documented also be met to claim a deduction: to assess tax, another fve-year period that they were spent on generating, •• recording of eligible costs separately commences from the end of the year in ensuring and maintaining taxable income, from other cost items in the tax entity’s which the taxpayer was notifed of such unless they are: accounting books; an action. In this case, the tax may be •• partially deductible up to a certain limit additionally assessed no later than 10 •• preparation of an R&D project in writing, determined either by the Income Tax Act years after the end of the year in which (ITA) or by a special law (e.g. the Act on •• report basic data on the R&D project in the duty to fle a tax return arose. In cases Travel Allowances); or the CIT return, where double tax conventions are applied, the statute of limitation expires after 10 •• specifcally stated as non-deductible in •• submit a R&D project for which the costs years from the end of the year in which the Income Tax Act. were incurred to the tax administrator in the tax return was due. the event of a tax audit; Some expenses are only deductible after •• exclude claims for deductions Tax returns being paid. for services and intangible outcomes As a rule, the tax year coincides with of R&D for which support was provided the calendar year. Taxpayers can Advance payments from public funds, except for costs from select the fscal year as their tax year Advance payments of corporate income the Slovak Academy of Sciences, or legal for corporate taxes. For certain types of tax tax must be paid on a monthly or quarterly entities performing R&D established by (e.g. VAT and excise duties), the tax period basis, depending on the company’s tax central state administrative authorities. is the calendar month or calendar quarter. liability in the previous tax period. They are Corporate income taxes are assessed on paid on a monthly basis if the taxpayer’s Transfer Pricing the basis of annual returns, which must tax liability for the previous tax period As of 1 January 2015, transfer pricing be fled within three months of the end exceeded EUR 16 600, or quarterly if rules apply to both domestic and foreign of the taxation period. Taxpayers must it was between EUR 2 500 and EUR 16 related party transactions. Related parties also calculate and pay the calculated tax 600. The tax administrator can rule on are either economically, personally by the fling date. Taxpayers must fle a different payment of advance payments. or otherwise related. An economic an additional tax return if they become relationship is defned as direct or indirect aware that their tax liability is higher than Tax credit ownership, or voting rights of more declared in the tax return A tax credit is available as a reduction than 25% and a business relationship of corporate tax liability. Taxpayers can between related individuals. A personal Corporate Income Tax be provided with tax relief for 10 years relationship is defned as participation Corporate income tax rate up to an amount approved by the Slovak in the management or control Since 1 January 2014, the corporate government for a specifc investment of the other party, including via persons income tax rate is 22%. A reduction project (see Section 9 for further details). or shareholders of the company and their of the corporate income tax rate to 21% related individuals. “Other relationship” from FY 2017 is currently being considered. R&D tax super deduction means a commercial relationship As of 1 January 2015, R&D expenditures established to decrease the tax base Tax base calculation can also be a tax-deductible item. A tax or increase the tax loss. Tax is paid on taxable proft as reported entity may reduce its tax base directly in the fnancial statements according in the tax return for the relevant taxable If the difference between the prices to Slovak Accounting Standards and period in a total amount of: agreed between a Slovak entity and adjusted for deductible and non- •• 25% of R&D total expenses (staff, a foreign or domestic related party and deductible items. The tax base of taxpayers depreciation, operating costs, etc.) the arm’s length price is not sufficiently using the double-entry bookkeeping justifed (and supported by appropriate system is assessed on an accruals •• 25% of R&D staff costs of new graduates documents), such a difference will be basis. Further adjustments are required (younger than 26) subject to additional taxation and penalties for taxpayers applying IFRS rather than •• 25% of the incremental annual increase if the transfer pricing adjustment increased Slovak Accounting Standards. of total R&D expenses the tax base in Slovakia.
132 Investing in Central Europe | Your move in the right direction
The adjustment is determined with There are three types of documentation: Taxpayers granted specifc investment reference to the conditions that would incentives under Act No. 561/2007 •• full documentation (Masterfle and arise between independent persons in The Investment Incentives Act must comply localfle) must be prepared by IFRS a similar business or fnancial relationship with the arm’s length principle. If they fail reporters or entities meeting specifc (independent relationship principle). to do so, the companies will lose the right requirements (e.g. companies applying The following methods are used to utilize their granted tax credits. If these a signifcant tax loss carry forward to determine the adjustment: were already partially or wholly utilized, exceeding EUR 300 000 a year or EUR the taxpayer is obliged to refund them. •• price comparison (comparable 400 000 for 2 consecutive years) uncontrolled prices method, resale price •• short documentation should be prepared Thin capitalization method, cost plus method); by micro-entities or entities only New thin capitalization rules were introduced •• comparison of profts; or undertaking domestic transactions on 1 January 2015, which apply to all related party (foreign and domestic) interest •• combination of the above-stated •• basic documentation should be prepared expenses incurred from 1 January 2015 based methods or any other reasonable by all other companies. on all (new and old) loan contracts, as follows: method, in accordance with the principle of independent relationships. The taxpayer is obliged to submit transfer •• The tax non-deductible part of interest pricing documentation within 15 days expense must be derived from the indicator Transfer pricing documentation is required of the date of receiving such a request calculated as a sum of the accounting result for material related party transactions from the tax authority. Transfer pricing of the debtor before tax and the amount (hereinafter “Controlled Transactions”) documentation must be submitted in of interest expense and fxed assets Transfer documentation describes the Slovak language. However, upon depreciation charges included in this the pricing methodology for the taxpayer’s the taxpayer’s request, the tax authority accounting proft. related party transactions, including its may allow transfer pricing documentation •• Interest expense towards related parties relationship with related parties, the prices to be submitted in a language other than exceeding 25% of the above-stated indicator for services, loans and credit granted. Slovak. is considered as a tax non-deductible The documentation should demonstrate expense. that the pricing of the Controlled If documentation is not submitted when Transactions is in compliance with required, a penalty of up to EUR 3 000 •• Back-to-back loans are also covered by this the arm’s length principle. per request may be assessed. Penalties provision. are tax non-deductible. If documentation The documentation content depends is not provided, the tax authorities will Tax treatment of losses on the circumstances and conditions also perform their own economic analysis Tax losses are deductible from the tax base. applicable to the taxpayer’s individual and may adjust the price to the most The taxpayer may utilize tax losses incurred Controlled Transactions and the transfer unfavorable point of the arm’s length from FY2014 onwards for four consequent pricing method applied. range. Adjustments may result in additional taxation periods after the taxation period in tax with applicable penalties and late which the tax loss was declared. Losses may The documentation should be prepared payment interest. not be applied retrospectively. separately for each Controlled Transaction, or jointly for a group of Controlled Transactions, i.e. a group of Controlled Transactions that are closely related, are of the same kind, made under identical conditions, or are comparable from the function and risk perspective.
133 Investing in Central Europe | Your move in the right direction
Minimum monthly wages in selected EU member states as of 1 January 2012, 2013 and 2015
Depreciation period Category Type of asset (years)
1 4 Computers, cars and certain tools, etc.
2 6 Machinery and equipment, furniture, vehicles for special purposes, etc.
Manufacturing technology, e.g. electric motors, generators, turbines, ovens, 3 8 etc.
4 12 Production equipment, e.g. steam boilers and auxiliary equipment etc.
5 20 Manufacturing buildings, civil engineering structures
6 40 Non-manufacturing (administrative) buildings and structures
Depreciation which the fxed assets are fully depreciated Collateral tax Generally, fxed assets are depreciated for tax purposes. If a Slovak tax resident (company for tax purposes by the owner, or lessee or individual) makes a payment abroad of the tangible or intangible fxed asset. Withholding taxes (except for payments made to taxpayers Withholding taxes are paid on interest, in EU Member States) and these payments Intangible fixed assets royalties and other payments, e.g. lease relate to specifc Slovak-sourced income, Intangible assets are capitalized and rentals. Double tax treaties concluded by Slovak tax residents are obliged to secure depreciated if the value of the intangible is Slovakia normally reduce withholding tax 19% or 35% of the payments, unless more than EUR 2 400 and if their expected rates. Treaty rates can be applied directly if the payment is subject to withholding useful life exceeds one year and they the contractual parties meet respective tax tax, or unless the non-resident taxpayer were purchased or created by an activity residency criteria. If interest and royalties submits a confrmation issued by the Slovak of the taxpayer. The intangibles specifed are paid to residents of other EU Member tax administrator that it pays advance above may be depreciated in accordance States and certain conditions are met, such tax payments in Slovakia. The taxpayer is with Slovak accounting rules. payments are not subject to withholding obliged to remit withholding taxes within 15 tax. The basic Slovak withholding tax days of the following month for the previous Tangible fixed assets rate is set at 19%. From 1 March 2014, calendar month to the relevant tax Tangible assets are capitalized and depreciated a withholding tax rate of 35% must be authority. If taxes are not paid on time, or in if their value is more than EUR 1 700 and if their applied to payments made to taxpayers an incorrect amount, the tax authorities expected useful life exceeds one year. of non-contractual states (in general, states may claim the due tax (including penalties) that have not concluded a double tax treaty from the Slovak taxpayer that did not A Company depreciates assets using with Slovakia). comply with the law. the straight-line method. Assets listed in category 2 or 3 may be depreciated using Dividends Considerations for groups the accelerated method. Once the method Dividends paid as a distribution of proft Slovak tax law does not provide for each asset has been selected, it may after tax, generated after 1 January 2004 are for consolidated tax returns. Each company not be changed for the entire depreciation not subject to Slovak taxation. must fle its own tax return and pay its own period. The accelerated method allows taxes. Losses can only be deducted from for higher depreciation claims in the early the tax base of the entity that incurred years of an asset’s life. The tax depreciation the loss. of tangible assets in some taxable periods may be interrupted and then continued as if the taxpayer had not interrupted depreciation to prolong the time period in
134 Investing in Central Europe | Your move in the right direction
Value Added Tax VAT rate VAT transactions statements Registration The standard VAT rate is 20% (19% prior A new obligation for Slovak VAT payers All individuals or legal entities that to 1 January 2011). As of January 2007, arose from January 2014 – fling of a VAT perform economic activities in Slovakia the VAT Act introduced a reduced VAT rate transactions statement. This statement are regarded as taxable persons. A taxable of 10%. This reduced rate only applies includes information from individual person with its seat, place of business to certain food products, books, antibiotics invoices with respect to the following or fxed establishment in Slovakia is and certain pharmaceutical and sanitary transactions: obliged to register for VAT purposes if products as stated in Annex 7 to the VAT •• local supplies of goods and services; it exceeds a turnover of EUR 49 790 in Act. the 12 preceding consecutive calendar •• local supplies of specifc products months. In general, turnover consists of all VAT returns to which the local reverse-charge performed taxable supplies in Slovakia. The standard assessment period is mechanism applies (e.g. agricultural A taxable person may apply for voluntary the calendar month. If a turnover of less products, mobile phones, VAT registration. than EUR 100 000 in the previous 12 microprocessors, iron and steel months is made by a registered VAT goods, etc.) if (i) the tax base stated on A foreign entity without a registered office, payer, the tax period can be chosen to be the invoice exceeds EUR 5 000 and (ii) place of business or fxed establishment in a calendar quarter. both the supplier and customer are VAT Slovakia performing taxable transactions registered in Slovakia; with a place of supply in Slovakia is obliged VAT returns must be submitted by the 25th •• input transaction where the recipient to register for Slovak VAT purposes prior day of the month following the tax period of the goods or services is obliged to pay to starting a business activity which is concerned. If returns are submitted VAT; subject to VAT in Slovakia, however, there monthly or quarterly, payment in full are some exceptions in the legislation must accompany the return, i.e. the VAT •• local purchases of goods and services (e.g. when the VAT obligation is shifted for a relevant tax period is payable by (with the right to deduct the input VAT); to the customer). the 25th day of the following month. If •• correction invoices (both received and the 25th day is a weekend/public holiday, issued). As of 1 October 2012, in certain it must be paid on the next working day. circumstances at the time of VAT The VAT liability is regarded as paid by VAT transactions statements must be registration, taxable persons are required the statutory deadline if the bank transfers fled electronically with the Tax Authorities to transfer a guarantee payment (in cash debits the money from the company’s bank along with the VAT return. Under specifc or a bank guarantee) to the tax authority’s account by the deadline. conditions if no transactions were bank account, which is held for 12 months. performed, a VAT transactions statement The tax authority determines the amount As of 1 January 2014, all VAT payers are for the respective month need not be of the tax guarantee payment from EUR 1 obliged to fle all submissions electronically fled. The deadline for the VAT transactions 000 to EUR 500 000. (including VAT returns) with the Slovak Tax statement is the deadline for the VAT Authorities. A hard copy fling of a VAT return return, i.e. the 25th of the month following The applicant must transfer the guarantee is no longer possible. the month of the VAT liability. payment within 20 days of receipt of a decision of the tax authority. The tax guarantee payment is used for any outstanding debts relating to the frst 12 months after the guarantee payment was paid. Generally, the remaining amount of the interest-free guarantee payment is paid to the registrant within 30 days of the end of the above 12-month period.
135 Investing in Central Europe | Your move in the right direction
Liability for VAT payment •• for the acquisition of goods from other VAT refund for foreign entrepreneurs Effective from 1 October 2012, the VAT Member States, the taxpayer has Foreign entrepreneurs without a place payer to who the goods/services are/will an invoice issued by the supplier; of business, branch or permanent be supplied is liable for the VAT stated in establishment registered in Slovakia, which •• for importation, the taxpayer possesses the invoice if the supplier: are not VAT-registered in Slovakia and the underlying customs declaration and which incurred Slovak VAT may request •• did not pay this VAT; or the import VAT has already been paid a refund. If such persons have incurred to the customs authorities. •• became unable to pay this VAT; VAT in Slovakia on the purchase of goods or services, or on the import of goods, Input VAT that relates to VAT-exempt and the VAT payer knew, should have they are entitled to a refund, provided they taxable supplies cannot be deducted and known, or could have known about this meet the conditions stipulated in the VAT becomes an expense of the taxpayer. Such fact by the tax point date. The customer Act, i.e.: supplies are for example: is obliged to pay VAT (or part thereof) •• They are registered for VAT in their that was not paid by the supplier •• fnancial services (e.g. the provision country of establishment and their by the deadline. The tax authority of consumer loans); country of establishment provides VAT of the supplier decides as regards •• insurance services; or refunds to Slovak entities (reciprocity assessing the VAT payment to the customer principle valid for entrepreneurs from as the guarantor and a VAT payment •• supply and lease of real estate under third country); and is due within eight days of the delivery certain conditions. of a decision to a customer. If the VAT •• The goods or services purchased, is then paid by the supplier, the VAT VAT exempt supplies with the right or goods imported must be used paid by the customer will be returned to deduction include: for the foreign entrepreneur’s business to the customer. activities abroad. •• delivery of goods to other Member States to a person registered for VAT purposes Claiming input VAT During the period for which a VAT in another Member State; In general, a taxpayer is entitled to deduct refund is claimed, the foreign person VAT on goods and services used during his •• transfer of own goods by a taxable must not have made any sales of goods business performed as a VAT-registered person to another Member State or supplies of services in Slovakia (with payer. However, input VAT cannot be for one’s own business purposes; certain exceptions, e.g. transport services deducted from supplies linked with and complementary services relating •• international transport of passengers; or certain supplies which are VAT-exempt to exported goods and goods under without the right to deduction and from •• export of goods or services. a customs regime, a supply of goods with certain specifc purchased supplies (e.g. installation or assembly). refreshments and entertainment, etc.). VAT refund In Slovakia, under normal circumstances A refund can be claimed not later than six To qualify for an input VAT deduction, a VAT refund is processed automatically. months (valid for entrepreneurs from third the following conditions must be met: If a taxpayer is in a VAT refund position country), or not later than nine months for a certain month (month A), the tax (valid for entrepreneurs from another EU •• a taxable liability arose for the taxpayer authority will wait for the VAT position country) after the end of the calendar year performing business activities; of the following month (month A+1) in which the VAT was incurred. Generally, •• for domestic supply, the taxpayer has and offset the VAT due (month A+1) VAT is refunded within six months an invoice issued by a supplier; against the deductible VAT (month of the submission of an application. A). The outstanding balance will be •• for services and goods where reimbursed within 30 days of the fling a reverse charge mechanism is applied, of a VAT return for month A+1. If the VAT the entry of the VAT in the company’s return is subject to a VAT audit by the tax records for VAT purposes is sufficient authority, the extra VAT deduction will for the deduction; be reimbursed within 10 days of audit completion.
136 Investing in Central Europe | Your move in the right direction
Customs legislation The concept of economic employment As the Slovak Republic is a Member State was introduced from 1 January 1999 and of the European Customs Union, the EU also applies to employees seconded by customs legislation is directly applicable in a foreign company to a Slovak company. It the Slovak Republic as in other EU Member is no longer important in relation to income States. The customs duty rates for goods tax prepayments whether it is a foreign are unifed in all EU Member States. or a domestic employer that pays a foreign employee for their work. If a Slovak The customs code allows the use company issues orders regarding how of the following customs procedures when the work should be done, it is considered trading with third countries: to be the employer of the expatriate even if the expatriate receives a salary from •• release into free circulation; abroad. •• transit regime (external and internal transit); An economic employer has a duty to make income tax prepayments to the tax •• storage (customs warehousing and free authorities as regards a foreign individual’s zones); Slovak personal income tax. •• processing (inward processing and outward processing of goods); The personal income tax rates from 2013 are: •• specifc use (temporary admission and end-use); •• 19% on a monthly tax base up to EUR 2 918.526 •• export of goods. •• 25% on a monthly tax base exceeding Taxation of Individuals EUR 2 918.526 Slovak tax residents are liable for personal income tax on their worldwide income. The tax base is calculated as the gross Slovak tax non-residents are only liable salary decreased by the mandatory for personal income tax on Slovak-sourced employee social security contributions and income. Any individual with a permanent tax-deductible allowances. home registered in Slovakia or who spends more than 183 days in a calendar year in Slovakia is considered to be a Slovak tax resident.
A person commuting to the Slovak Republic on a regular basis (also daily) only for the purpose of performing dependent activities is not considered a Slovak tax resident solely because he spends more than 183 days here, ie the 183-day rule does not apply to commuters.
137 Investing in Central Europe | Your move in the right direction
Social security contributions The social security system in Slovakia consists of social security contributions and health insurance contributions. If individuals are on the Slovak payroll, the monthly social security withholding is undertaken by the employer on a monthly basis.
Social security contributions in Slovakia are relatively inexpensive and are capped for 2016 at:
Assessment base Contributions (%) Insurance system in Slovakia Max (EUR) Employer (%) Employee (%) Self-employed (%)
Old Age Pension* 4 290 14 4 18
Sickness Insurance 4 290 1.4 1.4 4.4
Disability Insurance* 4 290 3 3 6
Accident Insurance gross income 0.8 0 0
Health Insurance 4 290 10 4 14
Unemployment Insurance 4 290 1 1 2 (voluntary)
Reserve Fund 4 290 4.75 0 4.75
Guarantee Fund 4,290 0.25 0 0
TOTALS 35.2 13.4 47.15
Local taxes include a number of payments An initial tax return must be fled by The tax base is determined based (real estate tax, dog tax, accommodation the 31 January following the year in on the area of land in square meters tax, etc.) administered by municipalities. which the Real Estate was acquired. No (for the land tax) and/or the area other tax return need be fled unless the buildings cover (for the tax on buildings) The most important tax is the real estate the conditions for the levy of the tax are and the basic tax rate. tax, which is assessed on land, buildings changed (eg change of type of land, sale and flats (hereafter “Real Estate”). In of property) or if the taxpayer applies The tax base for land and buildings general, the owner of the Real Estate is for a tax exemption. The tax administrator is determined based on the status the payer of the real estate tax. (municipality) assesses the tax by the end of the property owned as of January 1 of May each year. Usually, the tax is due of the relevant tax period. The individual within 15 days of receiving the assessment tax rates and coefficients are declared of tax levied by the municipality. However, it annually by individual municipalities and is possible to agree with the municipality on can vary greatly. the payment of tax in several instalments.
138 Investing in Central Europe | Your move in the right direction
3. Legal entities Joint Stock Company A SJSC cannot be established by a public Some legal form of undertaking business in The minimum registered capital of a JSC subscription of shares or undertake public Slovakia must be established by a foreign is EUR 25 000 divided between a number trading without prior transformation investor when making an investment in of shares with a certain value. Slovak to a regular joint-stock company. Slovakia. The most common legal form law recognises private and public JSCs. for conducting business in the Slovak A JSC can be created by one shareholder, General Partnership Republic is via a limited liability company provided that such a shareholder is a legal Under the Commercial Code, a general (hereafter “LLC”, “spoločnosť s ručením entity. The total number of shareholders is partnership is a partnership in which two obmedzeným”, “s.r.o.”) or a joint stock in general unlimited. or more parties conduct business under company (hereafter “JSC”, “akciová a common business name and bear joint spoločnosť, “a.s.”). Both these types of legal The administrative obligations and several liability for the obligations entity provide the investor with limited of a JSC are more complex than those of the partnership with all their properties. liability in the Slovak Republic, however, of an LLC. For example, a JSC must create A General Partnership as a partnership is there are differences, which the investor a Supervisory Board, which has a certain established for a mutual business purpose should be familiar with. As of January 2017 level of control over the Board of Directors and it must be established by at least two a new type of a JSC will be introduced – (BOD). parties – natural persons and/ or legal a simple joint stock company (hereafter entities – foreign or local. There is no a “SJSC”, “jednoduchá spoločnosť i. Joint Stock Company with variable registered capital requirement (although it na akcie”, “j.s.a.”) combining certain registered capital is possible to make a contribution) and all features of the LLC and JSC. There is also A joint stock company with variable partners may represent the company. the option to create a general partnership registered capital is also known as a SICAV (“verejná obchodná spoločnosť”, “v.o.s.”) (Société d’investissement á Capital Variable) Limited-Partnership Company and a limited-partnership company (hereafter “SICAV”,“akciová spoločnosť s This is an entity where one (“komanditná spoločnosť“, “k.s.”). premenlivým základným imaním”) or more members are liable up to the amount of their unpaid contribution Limited Liability Company A SICAV may only be established to the registered capital registered in The minimum registered capital of an LLC for collective investment under the Commercial Register (limited partner) is currently EUR 5 000. An LLC can be the Collective Investment Act and one or more members are liable established by between one shareholder with all their property (general partner). and 50 shareholders. A natural person may ii. Simple Joint Stock Company It represents a hybrid of a limited liability be a sole founder or a sole shareholder The provisions on SJSC will become company and a general partnership. in a maximum of 3 LLCs. An LLC with one effective as of 1st January 2017. The limited partner is obliged to make shareholder may not be the sole founder a capital contribution in an amount set or the sole shareholder of another LLC. The minimum required registered capital by the memorandum of association, with This limitation also applies to foreign is EUR 1 and the intention is to create a minimum of EUR 250. LLCs. While this provision may complicate a suitable legal form primarily for start-ups. a Slovak holding structure, it is relatively easy to deal with. The Articles of Association for a SJSC may allow the issue of various classes of shares An LLC is an administratively-easy entity with different specifc rights attributable to operate. One executive, who is initially to the respective shares. Various appointed in the corporate documents classes of shares reflect the position (i.e. Founding Deed or Memorandum of shareholders and their rights within of Association), represents the company (i.e. founders, investors, the LLC individually. Thus, a formal board employees, etc.). of directors is not needed. In addition, there is more flexibility regarding the allocation of profts and distribution of cash among owners.
139 Investing in Central Europe | Your move in the right direction
4. Labor and wages The Labor Code governs employment The Labor Code also specifies Slovakia is no longer considered a low- relations in Slovakia. Under this code, the minimum wages for Slovak wage country, local wage costs are still an employment relationship is founded workers. The minimum wage is far lower than in countries further west, by a written labor contract between EUR 2.328 / hour (EUR 405 / month) but compared to CE countries, Slovakia’s the employer and the employee, and additional increases are set ranking as regards wage costs continues which represents a mutual agreement for the following conditions: to rise. In certain sectors, e.g. ICT, pharma of the contractual parties. and banking jobs Slovakia had the highest salary + minimum increase of average salaries in 2015 in the CE region. The labor relationship is created from In contrast, wages in the retail sales, the day agreed upon in a labor contract overtime work 25%* wholesale, and hotel and restaurant as the frst day of work. An employment work during state holiday 50%* sectors were one of the lowest. relationship may be concluded for a defnite or an indefnite period. A trial night work 20%** There are big differences as regards period may be agreed in a labor contract, hazardous work 35%* wage levels between individual regions in the duration of which is a maximum Slovakia. Bratislava region has the highest of three months (or six months *of employee’s average salary wage levels, due to its proximity for managers or leading employees) and to Vienna, its status as a capital city and may not be extended; a trial period must **minimum hourly increase for night work is the high inflow of foreign investment in be agreed in writing to be valid. During calculated from minimum hourly wage the Bratislava region. The eastern regions this trial period, either party can terminate of Slovakia have the lowest salary levels. the labor relationship immediately without Source: Deloitte Slovakia, 2016 The disadvantages of this region are ramifcations. weak infrastructure and the low volume of foreign investment. Generally, working time in Slovakia is The law strictly limits reasons limited to 40 hours a week. It is possible for the termination of a labor contract Labor Legislation to require, or to agree on overtime by an employer by written notice. Most investors will hire Slovak employees with an employee. An employer may The minimum notice period is one as part of their investment in Slovakia. (subject to some exceptions) require month and is the same for employer The Labor Code has undergone a series from an employee an additional 8 hours and employee. The notice period of amendments to make it more “employer of overtime a week during a period for an employee who has worked for at friendly”, although many changes have of a maximum of four consecutive least fve years for the same employer is also been made to increase employee months (a maximum of 12 months can be a minimum of three months. protection. Therefore, before hiring agreed). The total overtime requested by employees in Slovakia, an investor must an employer may not exceed 150 hours The minimum annual holiday for employees be familiar with the labor legislation and per calendar year. An employer may agree is four weeks. Employees older than 33 prepare employment contracts and HR additional overtime work with an employee, are entitled to fve weeks’ annual holiday. policies accordingly. There follows a general however, total overtime may not exceed The Labor Code also specifes the length discussion of the most relevant aspects 400 hours per calendar year. of maternity leave, which is 34 weeks (37 of the Labor Code. We recommend that weeks if the mother is a single parent and an investor obtain legal counsel to review 43 weeks if the mother gives birth to more this area in more detail. than one child). Both men and women are entitled to a retirement pension at the age of 62.
140 Investing in Central Europe | Your move in the right direction
Cross-Border Cooperation When Assigning Employees for Work Performance As of June 2016, a new regulation (Act No. 351/2015) became effective in Slovakia, governing cross-border cooperation as regards assigning employees to perform work as a provision of services. It was adopted to harmonize Slovak law with EU legislation (Directive 2014/67 of the European Parliament and of the Council on transposing Directive 96/71/EC concerning the posting of workers in connection with the provision of services).
Based on this law, the employer and the hosted employer have several obligations which must be followed, mainly:
•• notifcation obligations towards the National Labor Inspectorate; 5. Education 6. Infrastructure •• keeping of records of posted employee/s Prior to 1989, when Slovakia became part Highway and Road Network in the structure stipulated by law; of the free market economy, the education Slovakia’s frst- and second-category system was characterized by a strong focus roads are in reasonable condition. There are specifc requirements with on technical felds such as mathematics, 464 km of motorway and 245 km respect to an agreement on the assigning physics, electrical engineering and of expressways are currently operational, of an employee, ie workplace specifcation, chemistry. The Slovak education system but the motorway network is currently type of work to be performed, start provided technical knowledge and many under construction and is expected to be and termination of the assignment, students graduated in subjects like about 715 km in length by 2022. Gaps in and pay conditions. It is, however, also mechanical and electrical engineering, civil the motorway network between Bratislava recommended to include other information engineering, chemical production, and and Kosice is one of the reasons that there which may be necessary with regard military and energy production. is a current difference in the economic to the work to be performed, and other development of eastern Slovakia when requirements applicable in the country As of 2015, there were 2 113 primary compared with the Bratislava region. from which the employee is being assigned. schools and 720 secondary, middle and associated middle schools in Slovakia. In addition to the motorway network, As the posting of employees is a complex As of 2015, 91% of the Slovak population express roads and frst-class roads connect topic addressed by several regulatory aged 25-64 had completed secondary all parts of Slovakia and neighboring requirements in relation to the limitation or higher education. countries. of a period of assignment, interaction with the National Labor Inspectorate, There are 35 universities and colleges and written documentation governing in Slovakia. Approx. 119 000 students the posting of employee/s, we recommend were enrolled at these universities in discussing individual cases with legal 2015, a signifcant number of students counsel. It should also be noted that in are studying at economic and technical the event of non-compliance with the law, faculties. Almost 50% of the current, penalties of EUR 2 000 to EUR 20 000 may younger generation are expected be imposed on both the employer and to complete university education. the hosted employer. 141 Investing in Central Europe | Your move in the right direction
Railway Network 7. Main Industries/Sectors Engineering The railway network in Slovakia is a result Automotive Industry In the past, Slovakia was a major of 150 years of development and numerous 1,038,503 cars were produced in Slovakia in manufacturing centre for the member political agendas. Slovakia is a transit 2015 – and the automotive sector remains states of the Warsaw Pact. Slovakia country as regards railway transport. a key industry. Slovakia’s location in Central produced extensive amounts of armory, The main international railway routes are Europe, its EU membership, skilled labor, heavy weapons and machinery. Mechanical directly linked to rail lines in Slovakia. Many competitive production costs, taxes and and electrical engineering have a long local companies and foreign investors other factors have influenced remarkable tradition in Slovakia and this provides use the railway extensively as the main growth in the automotive sector. According foreign investors with many opportunities transport means. One of the main to the Automotive Industry Association such as a pool of qualifed and available advantages of the Slovak railway network in of the Slovak Industry (AAI), there are more workers, existing infrastructure and the eastern part of Slovakia is the existence than 300 automotive suppliers in Slovakia. potential acquisition targets. of a broad-gauge rail line, with the same Currently, about 80 000 people are directly gauge as the Russian network. employed in this industry. Key market players Slovakia’s history of manufacturing bearings Air Transport Key market players attracted the second-largest European There are 8 international airports in Volkswagen was the frst automotive bearing manufacturer, INA. The German Slovakia, Bratislava and Kosice are manufacturer to locate in Slovakia in company, Danfoss, which has been the busiest. Current trends show signifcant 1991 by the acquisition of the Slovak producing compressors in Slovakia since interest in the development of Bratislava car component manufacturer, BAZ. 2001, extended its production in Povazska international airport. It is ideally located The company has grown into one Bystrica by relocating its Danfoss Bauer 65 km from Vienna and 193 km from of the most sophisticated production and Danfoss Gearmotor divisions from Budapest, but for many years has been plants in the VW Group. In January 2003, Germany. Whirlpool has a large washing underutilized. Its recent, rapid growth has Slovakia was the winner in a Central machine manufacturing facility in the north- been driven by low-cost airlines. Bratislava European site selection competition eastern city of Poprad. Poprad is also airport was reconstructed in 2010. for another major producer. A joint venture home to the rail wagon production facilities between PSA Peugeot and Citroen selected of the Slovak company, Tatravagónka. Other Water Transport Trnava (approx. 50 km from Bratislava) notable Slovak engineering companies Approximately 200 km of the River Danube as the site of a new production plant. include Kinex in Bytča and Tatramat in forms the western border of Slovakia, and The Korean company, KIA Motors, chose Poprad. Over the past few years, companies the capital city of Bratislava is located on Žilina for its frst production facility in such as Mobis in Gbelany, Emerson Electric the Danube. Europe. A sizeable network of suppliers in Nové Mesto nad Váhom, the Brazilian complements the three car producers. company Embraco in Spišská Nová Ves The Danube is a 3 500 km trans-European The leading position of Slovakia as a global and Johnson Controls International have artery between the northern European car producer will be further strengthened recorded growth. Other major foreign states and the Black Sea on the Romanian as another car manufacturer, Jaguar companies include ZF Sachs in Trnava, coast. There are two ports on the Slovak Land Rover, plans to build a plant in Nitra. Volkswagen Electrical systems in Nitra and section – Bratislava and Komárno. The start of production is planned in 2018. BSH Drives and Pumps in Michalovce.
Investment opportunities Electronics Industry Having such a critical mass of car The electronics industry is a traditional producers makes Slovakia a very attractive industry in Slovakia. Along with place for supply chain companies, many the automotive sector, it is one of which are already in Slovakia. Together of the strongest sectors of the Slovak with other neighboring countries, economy. The sector employs a signifcant the production capacity of the Central part of the Slovak workforce. European region was almost 3.5 million cars in 2015.
142 Investing in Central Europe | Your move in the right direction
Key market players International Business Services Investment opportunities Samsung Electronics and Foxconn are In addition to moving manufacturing facilities International business services are a very the two largest electronics producers in to Slovakia, global companies are also active sector in the Slovak economy. Global Slovakia. relocating administrative support services competition from low-cost countries has to Slovakia. This recent trend is driven by forced many international companies Other signifcant producers are Whirlpool, an available and inexpensive workforce that to reduce their overheads by transferring Hansol, Emerson, Bosch Siemens, is highly trained in IT, fnance and has good part of their business activities to low cost Panasonic, and Yazaki. language skills. In addition, the low individual territories. Slovakia, with its language and IT tax rates and social insurance levies and skills and low-wage labor force, is a popular Information and Communication easy access to Vienna and Bratislava airports location for such services. Technology (ICT) make Bratislava an attractive place for such Slovak IT frms compete successfully administrative centres. Multinational Chemical Industry on international markets eg solutions companies can provide a consistent This sector comprises the production for the business, banking, and fnancial level of support at these consolidated of chemicals, agrochemicals and pesticides, sectors, and for government, telecom, administrative centres in Slovakia for their chemical fbres, coating composition, manufacturing, and SMEs. Major growth entire European operations. This sector pharmaceuticals and other chemical areas in the Slovak market include hardware, includes a broad range of services, including: products. The chemical industry is software, IT and telecommunications particularly dependent on the import •• professional consulting services; services. of raw materials. Foreign capital began •• back-office support services; entering the Slovak market in the early Key telecommunications players 1990s via the establishment of new •• data processing; Three international mobile operators companies and joint venture operations. operate on the market – Telefonica O2, •• fnancial services; Orange and T-Com. The latter two, along Key market players •• online services; with smaller local and international players, The main heavy chemical plants are also provide fxed broadband internet •• software development; Chemko in Strazske, Duslo in Sala; Nexis access. Fibers in Humenne (chemical fbres); •• technical support services; Slovnaft in Bratislava and Petrochema in Key IT players •• customer service call-in centres. Dubová (petrochemical production); and The sector comprises big international Chemosvit in Svit and Slovensky Hodvab in players, eg HP, IBM, Acer, and regional and Major shared services and call centres in Senica (synthetic fbres). local companies - Eset, Sygic, Asseco and Slovakia Soitron. The most popular location for shared services in Slovakia is Bratislava as the capital Investment opportunities city already hosts several shared and call Despite a relatively-short history centres, ie Dell, IBM, Amazon, AT&T, Hewlett of outsourcing IT processes, more than ten Packard, Johnson Controls, Kone, Henkel, years after the West began this process, Kraft Foods, T-systems, Accenture, Siemens, insiders predict IT success in Slovakia. IT Lenovo and others. services have been outsourced in Slovakia for about fve years, and actual results have started to be achieved around three years ago.
143 Investing in Central Europe | Your move in the right direction
Metallurgical Industry 8. Industrial parks 9. Grants and Incentives Slovakia has a long metallurgical tradition. Slovakia has experienced Investment Incentives Extensive military output substantially a signifcant inflow of FDI since 2001. The availability of investment incentives contributed to the development of Slovak As the privatisation process is essentially represents makes investing in Slovakia metallurgy during the socialist era. After complete, the majority of new foreign particularly attractive. Investment 1989, a rapid decline of military production investments are green- and brown-feld incentives are provided to support caused the decline of metallurgy projects. This process has created a high investments in economically less- production. Slovakia’s steel production is demand for suitable land with good developed regions in Slovakia. not expected to change signifcantly b due logistics and the required infrastructure. The incentives are provided in accordance to mandatory EU production quotas. with the Act on Investment Incentives One of the priorities of the Slovak and are subject to approval procedures. The key market players government, and of local municipalities, The current rules are based on The largest company in the steel sector is to support the development of new the applicable legal regulations of Slovakia is U.S. Steel Košice. Other companies are industrial parks that can accommodate and EU legislation. Železiarne Podbrezová, Slovalco in Žiar this demand. The land in industrial parks is nad Hronom, and Bekaert Hlohovec and zoned for construction with all the required In general, the forms and intensity Kovohuty in Krompachy. permits and utility connections required of investment incentives depend on by a foreign investor. Foreign investors can the type of investor project, the volume Rubber Industry either buy or lease the land. Despite this of investment, and the geographical The rubber industry is closely tied uniform vision, the structure of industrial location of the investment. to automotive producers in Slovakia and parks varies in Slovakia, with some owned abroad. directly by municipalities and others by According to the valid legislation as of July private owners. As a result, the pricing 2016, Slovakia can provide the following Key market players structure and degree of development can investment incentives: The Matador Group in Púchov brings vary drastically among the parks. •• tax credit (for up to 10 years); together several companies. Its core business is in the manufacturing The most highly-developed industrial parks •• cash grant for the purchase of assets; of tyres and industrial rubber products. are typically used by the major automotive •• cash contribution for the creation of new The German company, Continental companies and their suppliers. These jobs; and Matador, which acquired a branch investments provide signifcant reasons of Matador, is also a tyre producer. for the development and reconstruction •• transfer of land (owned by of industrial parks. the municipality/state) at lower than Investment opportunities in traditional market value; industries The above-stated industries represent The incentives can be applied either a signifcant opportunity for foreign to a new project (a greenfeld investment) 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 establishment or the expansion of an existing one. The benefciary of the investment incentives can only be a Slovak legal entity with its registered seat in the Slovak Republic, however, an application can be fled by the parent company.
144 Investing in Central Europe | Your move in the right direction
Industrial projects:
Minimum investment amount Required Own equity Minimum amount of new headcount Location Large machinery and Large SMEs SMEs increase (district) enterprises equipment enterprises
Lower than average SK EUR 10 mil. EUR 5 mil. 60% EUR 5 mil. EUR 2.5 mil. 40 unemployment rate
Higher than EUR 5 mil. EUR 2.5 mil. 50% EUR 2.5 mil. EUR 1.25 mil. 40 average
35+ % higher EUR 3 mil. EUR 1.5 mil. 40% EUR 1.5 mil. EUR 0.75 mil. 40 than average
Least developed EUR 0.2 mil. EUR 0.1 mil. 30% EUR 0.1 mil EUR 0.05 mil. 10 districts*
Note: The unemployment rate in the district where the investment is located is compared to the average in Slovakia for the year preceding the year in which the application is fled.
SK CA NO SL BJ TS SP ML KM BY DK KK SB SV HE ZA PP LE PU PB LM PO MT RK VT SN IL SO GL MI TN TR BR KE PD BB RV KS RA TV SI MY NM BN ZH DT SE PE PN TO ZV PT ZC RS TT HC ZM BS MA LC PK NR KA VK SC GA LV BA SA NZ DS KN
*Districts in Bratislava region are excluded from the investment aid scheme
145 Investing in Central Europe | Your move in the right direction
Technological and strategic centres
Technological centre Strategic services shared services - research & development activities centre
Minimum investment (mil. EUR) 0.5 0.4
Minimum university-educated staff 70% 60%
Minimum amount of costs covered by equity 50% 50% (mil. EUR)
Minimum number of newly created jobs 30 40
Maximum intensity of incentives
35% (45%)
25% (35%)
0%
146 Investing in Central Europe | Your move in the right direction
For the investment plans of SMEs, 10. Expatriate life the maximum aid intensity can be The inflow of FDI into Slovakia has brought increased by 10% for medium-sized and many expatriates and their families to live 20% for small enterprises and work in Slovakia. Expatriates mostly live in the cities and larger towns. The major The SME category comprises enterprises expatriate communities are in Bratislava, with fewer than 250 staff with an annual Žilina and Košice. The living conditions are turnover not exceeding EUR 50 million, similar to the standards in larger cities in and/or an annual balance sheet total not Western European countries and the cost exceeding EUR 43 million. Please note that of living is far lower outside of Bratislava. this defnition is applied relatively strictly, A wide selection of high-standard and especially as regards owner structures. luxury apartments and houses for rent are available in Slovakia. Applications are fled with the Ministry of Economy of Slovakia (MoE). They consist 11. Weather and climate of several steps - fling the initial investment Slovakia has a mild continental climate, with plan, which is reviewed by the MoE cold, dry winters and warm (sometimes and other relevant institutions. After hot), humid summers. Temperatures vary the review, the Ministry prepares an offer according to elevation in the mountainous of investment incentives to the investor. areas. The warmest and driest regions If the investor agrees, the application are the southern plains and the eastern for investment incentives can be fled. lowlands. Heavy snow with signifcant Consequently, a decision on granting accumulation is common at higher the incentives is issued by the MoE. elevations in the Tatra Mountains during The process can take 5-9 months in total. the winter months.
R&D stimuli Bratislava, the capital, has average The conditions for granting and using temperatures ranging from -2º C in January the R&D incentives are stipulated in the Act to 25º C in July. on Stimuli for Research and Development. These can be applied for the establishment of a new workplace undertaking R&D activities or for the extension of an existing workplace.
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 of project feasibility studies;
•• income tax relief granted for a proportional part of the tax base.
147 Investing in Central Europe | Your move in the right direction
“In the context of Foreign Direct Investment, the Social Progress Index results might serve prospective investors as a “lighthouse” in understanding on-ground social progress conditions as a ground for their investments. Additionally, the SPI results enable us to track social progress and look at it from a risk or opportunity perspective regarding their business outlook. The FDI recipient country, however, should create conditions in which joint actions between central/regional governments, business and other societal actors could create shared value in the economy and society. This might eventually turn into an additional competitive advantage factor.”
148 Investing in Central Europe | Your move in the right direction
The Social Progress Index and Foreign Direct Investment in the CE Region
Authors: Julia Patorska, Rafał Rudzki, Damian Olko, Marianna Palczewska
Executive Summary dimension at large1. Signifcance of those Central Europe continues to be one variables for further CE development will of the best locations for foreign direct be growing, which is a direct consequence investments (FDI). It combines a relatively of moving towards more innovation-based liberal and vibrant business environment, and sustainable economies. affordable costs of labor, low corporate taxes and an improving infrastructure. Most In the context of FDI, the SPI results developed regions – usually those with might serve to prospective investors capital cities – also provide a well-educated as a “lighthouse” in understanding workforce and innovative spirit. However, on-ground social progress conditions in order to avoid the “middle income trap”, as a ground for their investments. more needs to be done in terms of social Additionally, the SPI results enable progress, which is the base for inclusive and to track social progress and look at it from sustainable economic growth. the risk or opportunity perspective for their business outlook. On the other hand, The Social Progress Index 2016 results show the FDI recipient country should create that CE governments could reflect, in more conditions in which joint actions between detail, how to better use public policy and central/regional governments, business co-operation with other actors incl. business and other societal actors should create in addressing issues related to e.g. health shared value in the economy and society and wellness, personal freedom and choice, that might eventually turn into an additional tolerance and inclusion, access to advanced competitive advantage factor. education components and an opportunity
1 See Social Progress Index results and framework: https://www2.deloitte.com/global/en/pages/about-deloitte/articles/spi-results-central-europe.html 149 Investing in Central Europe | Your move in the right direction
FDI inflows and transition in CE region From the social perspective, the situation Back in 1989, economies in Central Europe was even worse than expected from GDP (CE) were stuck in a deep, structural fgures. Shortages and food rationing crisis. Along with the former Soviet Union, (for instance – meat in Poland) together after 1980 the region experienced a “lost with low incomes resulted in massive decade”, which translated into the signifcant immigration and falling life expectancies. fall of living standards. On the onset Moreover, socialist regimes largely of economic and political transition, GDP prevented any independent bottom-up per capita (PPP) ranged from around of social cooperation, in the form of free 30% (Bulgaria, Poland, Romania) to 50% entrepreneurship, independent labor and (Hungary, Czech Republic) of that recorded employer unions, not to mention other in the United States. In terms of labor NGOs. productivity, the gap was even bigger. In 1993, GDP per hour worked in Poland equaled 27% to that of the US, while in the Czech Republic and Hungary – slightly above 40%.2
Figure 1. Convergence of GDP per capita (PPP) towards the USA (100%)
120%
100%
80%
60%
40%
20%
0% 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
Germany Ireland Spain Czech Republic Slovak Republic Portugal Poland Hungary Romania
Source: Deloitte analysis, based on IMF World Economic Outlook
2 According to the OECD data (GDP per hour worked) 150 Investing in Central Europe | Your move in the right direction
Building market economies in CE required event for the whole region that spurred three major sets of policies: macroeconomic GDP growth and convergence toward stabilization, microeconomic liberalization advanced economies. Despite a common and institutional reforms. Scope and view, empirical evidence suggests that pace of abovementioned reforms varied EU’s Cohesion Policy (aid for regions and signifcantly. According to the IMF’s agriculture) was not a main driver.4 Instead, report, “…countries that undertook more a major engine of growth was the Single front-loaded and bold reforms were Market with a regulatory framework, which rewarded with faster recovery and income is a guarantee of “4 freedoms” – movement convergence.”3 Poland illustrated well this of people, capital, goods and services. Apart case, while Romania suffered from excess from econometric studies, this conclusion economic and social costs due to stalled is supported by record of “old cohesion macroeconomic adjustment and public countries” – Greece, Ireland, Italy, Portugal sector reforms Accession to the European and Spain.5 Among them, only Ireland Union was another groundbreaking managed to join the most developed economies, despite large contraction caused by an unsustainable credit boom.
Figure 2. GDP per capita (PPP) convergence towards USA and average FDI inward flow, 1995-2014
30.0%
Ireland 25.0%
TA 20.0%
Poland Slovak Republic 15.0% 1995-2014) GDP PER CAPI
PP, 10.0%
( Romania Hungary Czech
TOWARDS 5.0% Republic THE USA
IN 0%
(PPP) 0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% Germany -5.0% Spain CONVEERGENCE Portugal
- 10.0% AVERAGE FDI INWARD FLOW (% OF GDP, 1995-2014)
Legend: Vertical axis shows GDP convergence towards GDP per capita (PPP) in the US (1995-2014, percentage points) Source: Deloitte analysis, based on IMF World Economic Outlook and UNCTAD
3 IMF, 25 years of transition: post-communist Europe and the IMF, 2014 4 Marzinotto B., The growth effects of EU cohesion policy: a meta-analysis, 2012 5 Shankar R., Shah A., Lessons from European Union Policies for Regional Development, 2009 151 Investing in Central Europe | Your move in the right direction
Ireland’s superior performance results from technology and knowledge spillovers, of FDI into tradable sectors – manufacturing the credible macroeconomic stabilization though empirical studies are inconclusive, and business servicing, taking advantage prior to the credit bubble, structural regarding presence of such an effect or its of geographical proximity to Western reforms and coherent policy of attracting magnitude. Europe.8 As the IMF reports, other FDI.6 Empirical literature regarding FDI in crucial factors that stimulated FDI inflow Central Europe came to the conclusion Although a larger part of economic literature were: the depth of structural reforms that inward flows supported GDP growth agrees on the positive effect of the FDI that improved business environment, and convergence as well as exports.7 inward flows, there is a growing body an incumbent industrial base and The main channel of impact is productivity of evidence that the sectoral composition privatization.9 improvement, as workers move from local of FDI matters. The Czech Republic, Poland frms to more efficient foreign units. Besides and Slovakia attracted a relatively big part direct impact, FDI might generate
Figure 3. Average annual export growth and average FDI inward flow, 1995-2014
12.0%
10.0% Hungary
Poland Czech 8.0% Slovak Republic Ireland 995-2014) Romania Republic (1
6.0%
GROWTH Germany RT Spain
EXPO 4.0% Portugal ANNUAL 2.0% AVERAGE 0% 0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%
AVERAGE FDI INWARD FLOW (% OF GDP, 1995-2014)
Source: Deloitte analysis, based on IMF World Economic Outlook and UNCTAD
6 Gerald J.F., 4. Lessons from 20 Years of Cohesion, 2006 7 Polasek W., Sellner R., Does Globalization affect Regional Growth? Evidence for NUTS-2 Regions in EU-27, 2011; EC, Study on FDI and regional development, Final report, 2006; Damijan J. et. al., FDI, Structural Change and Productivity Growth: Global Supply Chains at Work in Central and Eastern European Countries, 2013 8 According to P. Bogumil (2014) study, the most positive impact came from FDI in the manufacturing and tradable services, as they enhanced export and productive base of the recipient countries. 9 IMF, 25 years of transition: post-communist Europe and the IMF, 2014 152 Investing in Central Europe | Your move in the right direction
Apart from total inward flows and sectoral As far as CE is concerned, some experts and The same process is expected with composition, fnal impact on recipient economists argue that a large part of inward reference to the attracting FDI, especially economy is a function of its absorptive FDI has not spurred innovation due those that create jobs with high value- capacity. Ability to catch and adopt to poor local policies and lack of sufficient added. Although after 1989 foreign positive externalities from FDI (technology, capacities.10 The latter applies not only companies invested in the region mostly knowledge, organizational know-how etc.) to an evident political myopia, but also more because of rapidly growing markets and/ by domestic business depends on quality complex and long-term issues like low levels or a low-cost labor force, they were quite of assets (in a broad sense) – particularly of social capital, institutional inertia and vulnerable to the excess political and social human capital, social capital and institutions. positions in global value chains. With closing risks. Most evident examples are Belarus This fact allows for explanation, why Ireland gap in terms of GDP per capita, social and and the Russian Federation, where social achieved economic and social convergence, institutional defciencies will increasingly and institutional development is particularly and at the same time Greece, southern hinder further development of CE countries. low, which signifcantly limits their regions of Italy, Portugal and Spain fell attractiveness for foreign capital. behind.
Figure 4. FDI inward stock and Social Progress Index (overall score)
90.0%
80.0% Bulgaria
Estonia 70.0% Hungary ) 60.0% Croatia Czech Republic 50.0% Slovakia GDP, 2014
OF Ukraine Latvia Poland (% 40.0% Romania
STOCK 30.0% Lithuania Slovenia WARD Belarus
IN 20.0% Russian FDI Federation 10.0%
0% 60.00 65.0070.00 75.0080.00 85.0090.00
SOCIAL PROGRESS INDEX (OVERALL SCORE, 2016)
Source: Deloitte analysis based on Social Progress Index and UNCTAD
10 Gorzelak G., Growth – Innovation – Competitiveness: to Foster Cohesion in Central and Eastern Europe (GRINCOH), 2015 153 Investing in Central Europe | Your move in the right direction
Social and Economic Map of CE region Figure 5. Wage-adjusted labor productivity in manufacturing (as %, 2014)As Despite signifcant progress since 1989, CE countries are still catching-up with Western Europe (in this context, the EU members before the 2004 enlargement). Outbreak of the global fnancial crisis in 2008 and subsequent Eurozone debt crisis hastened convergence process, especially towards most affected countries like Greece, Italy, Portugal and Spain. 139
Relatively low wages and moderate growth of labor costs after 2008 127 162 helped the CE region in maintaining comparative advantage in many branches 184 of manufacturing. Wage-adjusted labor productivity in Bulgaria, Hungary, Poland 166 158 and Romania stays much higher than in Germany, France or Mediterranean N/A countries (Figure 5.). Although CE 189 157 193 governments were also forced to run conservative fscal policies, they managed 153 132 to escape from prolonged recession. This 163 148 was due to, among others, an export- oriented FDI, that were established earlier 122 143 212 or settled recently. 180 147 151 131 186
153 143 147
Legend: Wage-adjusted labor productivity is apparent labor productivity divided by average personnel costs (expressed as a ratio in percentage terms). In other words, it is gross value added in manufacturing divided by labor costs.
Source: Deloitte analysis based on the Eurostat
154 Investing in Central Europe | Your move in the right direction
Substantial improvement in terms Export-oriented, manufacturing FDI came of infrastructure and accessibility from into the western areas of Hungary, Poland, Western Europe also spurred FDI inflow, Romania and Slovakia or capital cities11. making productivity disparities more Except for coastal cities like Varna (Bulgaria) important. In other words, new roads, and Constanta (Romania), but also inland railroads and airports created potential Podkarpackie voivodeship (Poland), eastern for further integration through global value peripheries of CE are lagging behind. chains. Within the Single Market, new Recorded (as well as expected) economic and modernized infrastructure enhanced and social progress is much slower, hence intensity of competition. those regions continue to receive large cohesion aid from the EU budget.
Figure 6. Barriers to trade and investment, OECD Indicators of Product Market Regulations
1.57
0.84
0.59
0.38 0.40 0.40 0.33 0.34 0.36 0.35 0.24 0.24
Poland HungaryGermany France
2003 2008 2013
Source: Deloitte analysis based on the OECD
11 Dogaru T. et. al., The Geography of Multinational Corporations in CEE Countries: Perspectives for Second- Tier City Regions and European Cohesion Policy, 2014 155 Investing in Central Europe | Your move in the right direction
Together with infrastructural investments, Coherent conclusions might be drawn from Besides flow of capital and companies CE made an effort to remove institutional looking at other indices that aim to measure between regions and countries, another barriers for market exchange. After competitiveness, business environment important source of socio-economic accession to the EU, governments in or economic freedom – investment and convergence (or divergence) is migration. Budapest, Warsaw and other liberalized trade regulations in the CE are business- Apart from economic factors, there is visible many regulations regarding foreign friendly. This is supplemented with correlation between the Social Progress investments and trade. According government support, mostly in the form Index level and population density change to the OECD indicators, in 2013 Poland of the Special Economic Zones (SEZ) (in fact, close to net migration) among and Hungary had more favorable business that reflect intensive competition for FDI regions. Correlation is present both within environment for foreign companies between regions and countries. countries (NUTS 2 regions) and for whole than Germany and France (Figure 6). population of CE regions (Figure 7).12 What is interesting, even after the global fnancial crisis, the biggest economy in the EU became slightly less liberal in terms of foreign investment and trade.
Figure 7. Population density change in NUTS 2 regions and Social Progress Index
15%
10% Bulgaria
Czech Republic 5% 2006-2014) Hungary (%, Poland 0% 40 45 50 55 60 65 70 Romania CHANGE
Slovakia -5% DENSITY ON
-10% POPULATI
-15% SOCIAL PROGRESS INDEX (OVERALL SCORE, 2016)
Source: Deloitte analysis based on the Eurostat and Social Progress Index
12 The assumption here is following: birth and death rates are uniformly distributed among NUTS 2 regions and there were no territorial changes. Another important assumption is inertia of social progress, in other words – distribution of SPI in 2006 is similar to that in 2014. 156 Investing in Central Europe | Your move in the right direction
Similarly to the high labor mobility and wage Table 1. Relative performance on each of the SPI components equalization, migrations allow for a quicker process of social convergence – people Social Progress Czech simply move to the areas which are safer, Bulgaria Hungary Poland Romania Slovakia Index Republic less polluted or more tolerant instead of “waiting for reforms” or endogenous Overall SPI Score 72,1 82,8 76,9 79,8 72,2 79,0 change in their previous place of living. Basic Human Needs1 The message for investors is straightforward Foundations – if FDI requires a well-educated workforce of Wellbeing or is intended to serve markets in proximity – social factors are crucial determinants Opportunity for population change and human capital development. FDI driven by locally specifc Nutrition and Basic 2 assets and capacities will become more Medical Care and more important in the CE, which is Water and Sanitation consequence of falling competitiveness in terms of low value-added production. This Shelter qualitative forecast is based on assumption Personal Safety that region will manage to escape from “middle income trap” and further approach Access to Basic most advanced economies. Knowledge
The Czech Republic is the richest and Access to Information most socially developed country among and Com. 6 analyzed. It outpaced regional peers Health and Wellness in almost all the SPI components, except for “Access to Information and Environmental Communication” and “Personal Right”. Quality Bulgaria and Romania are usually on Personal Rights the opposite side, ranked as 5th or 6th. Costin Borc, Deputy Prime Minister of Romania Personal Freedom and acknowledges that country must adopt Choice structural reforms that will enhance its human capital growth: Tolerance and “We must rethink our active labor market Inclusion policies and training programs, in order to help Access to Advanced Romanian workers be even more competitive. Education Last but not least, Romanian manufacturing has tremendous potential. That potential can Legend: blue color represents lowest values, dark green – highest. only be fully realized if local companies can manage to integrate into the global supply Source: Deloitte analysis based on Social Progress Index 2016. chain of the foreign companies that are operating in the country.”13
13 http://emerging-europe.com/intelligence/eu-membership-and-transition-into-market-economies-have-helped- cee-achieve-social-progress/ 157 Investing in Central Europe | Your move in the right direction
With reference to the SPI outcomes What is important, is that improvement presented in Table 1, CE governments could in the abovementioned areas is unlikely develop strategies that will address issues to happen just as a side-effect of GDP especially related to: growth. Economic factors are necessary prerequisites, though they should be •• Opportunity (SPI dimension); supported with structural reforms •• Health and Wellness (SPI component); and active policies. Evidence for such a hypothesis might be found in the most •• Personal Freedom and Choice (SPI advanced economies, which signifcantly component); differ in many areas like healthcare •• Tolerance and Inclusion (SPI component); provision, access to advanced education etc. Similarly, the richest regions in CE (with •• Access to Advanced Education (SPI capital cities) are “outliers” on the scatterplot component). with GDP per capita and SPI value (Figure 8). This might suggest that their economic development does not translate into social as it could.
Figure 8. GDP per capita in NUTS 2 regions and Social Progress Index
60 000
50 000 Bulgaria
Czech Republic 40 000 STANDARD, Hungary R Poland ) POWE 30 000 RO Romania EU SING , Slovakia 014 RACH (2 20 000 PU IN TA
10 000 GDP PER CAPI 0 40 45 50 55 60 65 70
SOCIAL PROGRESS INDEX (OVERALL SCORE, 2016)
Source: Deloitte analysis based on the Eurostat and Social Progress Index
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Social reforms as a way of optimizing Possible adjustment of policy towards FDI an impact of FDI inflows in CE region in Poland is one of the minor elements After the subprime crisis and Eurozone debt which constitutes the Plan for Accountable crisis, global perception of risk changed Development. Mateusz Morawiecki, Deputy substantially comparing to the period Prime Minister and main author of the new between 1989 and 2007. Leveraged risk strategy, often emphasizes that it will deliver aversion is one of the causes of persistent more socially-balanced economy: low level of investments (both domestic “The social component is of crucial and capital flows).14 It is a serious challenge importance if the Plan is to be implemented for the CE region, as Poland, Romania successfully. The nation’s well-being is not and other countries still have relatively confined to statistical and economic indicators small productive stock of capital and alone and, as the government; we have accumulated private savings. Institutions to make sure that these numbers translate like the EBRD and the IMF have noticed into tangible improvement in the quality regional problems of low investment and of life for Polish people. Therefore, to provide productivity slowdown and they recommend the foundations for sustainable and long-term tackling them by reforming labor markets, development, its benefits must be spread social policies, judiciary systems and public across the population more inclusively. This sector.15 means, for example, better education, higher wages and job quality, improved social As CE economies no longer have easily- cohesion and a better access to infrastructure. accessible reserves for growth, some Only by broadening the middle-class, in this of them started to adjust their policies way, will we be able to build not only a modern towards FDI or more broadly – industrial country, but a modern nation as well”.18 policies.16 For instance, in Poland, there is a growing debate concerning real social and economic returns from the Special Economic Zones, though large change in related public policies is rather unlikely.17 According to officials, reforms in this area might address quality of attracted FDI – new incentives should promote R&D, high value-added jobs and cooperation with local companies.
14 Lewis, C. et al., Investment Gaps after the Crisis, OECD Economics Department Working Papers, No. 1168, OECD 2014 15 IMF, Central, Eastern, and Southeastern Europe: How to Get Back on the Fast Track, 2016; IMF, Central, Eastern, and Southeastern Europe: Reconciling Fiscal Consolidation and Growth, 2015 16 According to E. Berglof (2015), “state intervention has increased signifcantly, also in Central Europe, following the global fnancial crisis, with many governments trying to create their own development institutions and becoming more targeted in their support to industry. The jury is still out whether these initiatives will yield the desired results”. 17 Polish government declared more selective approach regarding FDI as well as attempt to build strong links with domestic companies and innovation system. 18 http://emerging-europe.com/intelligence/eu-membership-and-transition-into-market-economies-have- helped-cee-achieve-social-progress/ 159 Investing in Central Europe | Your move in the right direction
Similar processes are present across •• What are the major social factors, SPI informative value is based on the fact the whole EU, as European Commission that might affect FRR from risk and that investors constantly seek for any piece supports policies aimed at transforming opportunities perspective; of information data that might enhance economies into more sustainable and their model forecasts for return and •• What are the potential areas of impact, socially inclusive. In this context, SPI might risk. Sovereign or corporate credit rating that local communities, businesses serve prospective investors as a “lighthouse”, – one of the fundamental tools for risk or politicians might particularly value, making easier to negotiate with central and management – in case of the FDI is only which will be promoted or defended local authorities. To put in a fnancial terms, a starting point of analysis. Although (ERR). communities and politicians hosting FDI are rating agencies might take into account Examples of social impact and joint social more and more interested in maximizing some political and social factors that have and FDI impact on society and economy are Economic Rate of Return (ERR) instead an impact on country and business solvency, presented below in Table 2. of Financial Rate of Return (FRR) that is their opinions might be too general major guide for capital providers. Hence, SPI for particular investors. might inform managers and investors about:
Table 2. SPI as a matching device between investors and other stakeholders
Potential joint impact Potential impact of social Social Progress Index of FDI and social reforms The CE best The CE worst reforms on inward FDI risk (chosen variables) on recipient economy and performer performer and return society
Lower risk of social unrest Greater possibility to attract and violence that might affect cooperating businesses and Personal Safety business; lower risk regarding Czech Republic Bulgaria investments (agglomeration and local staff health; higher labor network effects) productivity
Access to Information Higher labor productivity on-the- Higher TFP spillover as an effect Slovakia Bulgaria and Communications job and lower costs of recruiting of greater market efficiency
Higher labor productivity Higher labor productivity Personal Freedom and as an effect of lower corruption spillover, potentially higher Czech Republic Bulgaria Choice and more flexible workers and labor supply that leads to talent entrepreneurs pooling
Higher labor productivity Higher labor productivity spillover, potentially higher Tolerance and Inclusion as an effect of better matching in Czech Republic Romania labor supply that leads to talent labor market, diversity and trust pooling
Higher labor productivity Access to Advanced Higher labor productivity and as an effect of greater human Czech Republic Bulgaria Education knowledge spillover, capital
Source: Deloitte based on Social Progress Index data
160 Investing in Central Europe | Your move in the right direction
Similarly, benchmark risk-free rate is hard Possibility of market failures such In general, social risks might transform to asses in the current economic conditions, as incomplete asset markets lead into investment risks (and, therefore, have as bond markets are highly distorted due to an inability of diversifying all an impact on FDI inflows and outflows) in to massive interventions from central banks. of the possible risks (states of the nature). the short-term, medium-term or long-term. Even if we might reject this hypothesis, This pertains, particularly, to risks that Some of them may endanger the expected there is still an issue of assessing proper are created by government policies rate of return (FRR) directly or through risk premia for underlying investment or regulations. High social progress can the democratic system, rent-seeking activity projects that includes sets of sector-specifc, limit those risks, for instance, by limiting or distortionary public policies. regional, political and social risks. Therefore, the propensity for corruption in public the Social Progress Index is especially administrations or judiciary systems. valuable, as it allows for specifying and As a consequence, companies function in assessing social risks which often are not a more transparent and stable business easy or cheap to hedge. environment, where property laws are protected and contracts enforced.19
Figure 9. Social risk and FDI inward stock – short-, medium- and long-term possible causal relation
Short-term
Investment FDI inward Social risk risk stock
Example: social unrest, riots, labor strikes
Medium-term
Investment FDI inward Social risk Political risk risk stock
Example: e.g. “targeted” or sectoral protectionism, discrimination of foreign capital (de iure or de facto), excess regulatory burden, fiscal measures etc.
Long-term
Economic Investment FDI inward Social risk Political risk risk risk stock
Example: populist social policies that pose a threat to public finances (and thus increase a risk of tax hikes or sovereign default). In the worst case scenario, the underlying social issues might be tackled in a highly ineffective way, in terms of GDP cost, number of jobs etc. Another example might be policies that intend to limit or disable free movement of capital, people, goods and services – horizontal protectionism.
Source: Deloitte
19 Of course capital market often takes into account those risks, pricing some assets with premium or discount. Though, capital market efficiency is subject to large debate, because it is largely depended on many specifc factors, including liquidity, free-floating etc. Problem of incomplete asset markets might be pronounced when investor attempts to fnance long-term project that is vulnerable for interest rate shocks and other risks, related to politics and regulations. 161 Investing in Central Europe | Your move in the right direction
To sum it up, SPI might be regarded Together with a growing debate on GDP by investors as a proxy of social risk – limitations as an indicator of development the bigger the progress, the lower the risk. and social well-being, there is a need From the investor’s point of view, there is to provide a coherent and comprehensive a certain maximum accepted level of social set of indicators. The Social Progress Index risk, above which the FDI will not come. will not substitute GDP and other “pure” Social risk below this threshold determines economic measures, though it supplements (together with other variables, like market them. Its signifcance and accuracy efficiency) the level of transaction costs, regarding CE development paths will be as well as insurance (hedge) costs. growing, which is a direct consequence of moving towards more innovation-based The SPI is also very useful tool for local, and sustainable economies. regional and national authorities. Possible applications are not limited to identifying As far as FDI is concerned, the SPI might and monitoring social risks, but also serve prospective investors as a “lighthouse”, interplay between them and institutions, making easier to negotiate with central and which might exacerbate or alleviate local authorities. More specifcally, it can problems. There is no doubt that sooner provide an answer to following questions: or later social progress and preferences •• What are the major social factors that have an impact on business sector, public might affect fnancial rate of return and policies and regulations. risk?
Conclusions •• What are the potential areas of impact Central Europe continues to be one that local communities, businesses of the best locations for FDI. It combines or politicians might particularly value, a relatively liberal and vibrant business support or stimulate? environment with affordable costs of labor, low corporate taxes and an improving The SPI might be regarded by investors infrastructure. Most developed regions as a proxy of social risk and potential – usually those with capital cities – also for growth. This relies on the fact that provide a well-educated workforce and sooner or later social characteristics have an innovative spirit. However, in order an impact on the business sector, public to avoid the “middle income trap”, more policies and regulations. needs to be done in terms of social progress.
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References
1. Berglof E., New structural economics 9. IMF, 25 years of transition: post- meets European transition, Institute communist Europe and the IMF, of Global Affairs, LSE, 2015 James Roaf, Ruben Atoyan, Bikas Joshi, Krzysztof Krogulski and an IMF staff 2. Bogumil P., Composition of capital team, 2014 inflows to Central and Eastern Europe (CEE) — is Poland different?, ECFIN 10. IMF, Central, Eastern, and Southeastern country focus, 2014 Europe: How to Get Back on the Fast Track, Regional Economic Issues, May 3. Damijan J. et. al., FDI, Structural Change 2016 and Productivity Growth: Global Supply Chains at Work in Central and Eastern 11. IMF, Central, Eastern, and Southeastern European Countries, 2013 Europe: Reconciling Fiscal Consolidation and Growth, Regional Economic Issues, 4. Dogaru T. et. al., The Geography Nov 2015 of Multinational Corporations in CEE Countries: Perspectives for Second-Tier 12. Lewis, C. et al., Investment Gaps City Regions and European Cohesion after the Crisis, OECD Economics Policy, 2014 Department Working Papers, No. 1168, OECD Publishing, 2014 5. EC, Study on FDI and regional development, Final report, Report by 13. Marzinotto B., The growth effects of EU Copenhagen Economics in cooperation cohesion policy: a meta-analysis, No. with Professor Magnus Blomström, 2012/14. Bruegel Working Paper, 2012 2006 14. Polasek W., Sellner R., Does 6. Emerging Europe, http://emerging- Globalization affect Regional Growth? europe.com/intelligence/eu-membership- Evidence for NUTS-2 Regions in EU-27, and-transition-into-market-economies- 2011 have-helped-cee-achieve-social-progress/ 15. Shankar R., Shah A., Lessons from 7. Gerald J. F., 4. Lessons from 20 Years European Union Policies for Regional of Cohesion, [in:] Mundschenk S., Stierle Development, World Bank Policy M. H.,Stierle-von Schütz U., Traistaru- Research Working Paper Series Vol. Siedschlag J. (eds.), Competitiveness 2009 and Growth in Europe: Lessons and Policy Implications for the Lisbon Strategy, INFER Advances in Economic Research Series, 2006
8. Gorzelak G., Growth – Innovation – Competitiveness: to Foster Cohesion in Central and Eastern Europe (GRINCOH) , DG Regio - ERSA Seminar, 2015
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Our integration has allowed us to manage FDI Site Selection Services We offer our clients a broad range of fully regionally and deliver locally, adding value To assist foreign investors in their initial, integrated tax services. Our approach to our services and allowing them to be and most critical, stages of their investment combines insight and innovation from performed in the most efficient manner. At process, we have developed a specialized multiple disciplines with business and Deloitte Central Europe we are dedicated service line focused on the specifc industry knowledge to help your company to fnding solutions for our clients: needs of FDI. We are offering a uniform, excel globally. solutions which create value for them. Our coordinated approach and a full range •• International Corporate Tax Services; mission has been, and continues to be, very of FDI specifc services across the whole CE simple: to help our clients and our people region. •• Local Corporate Tax Services; excel. Our vision is to be the standard •• Indirect Tax Services – VAT and Customs of excellence. Our FDI specifc services include but are not Duty; limited to: All the Central Europe offices of Deloitte •• Transfer Pricing Services; •• Country analysis and sector overview; refer to one or more of Deloitte Touche •• Merger and Acquisition Services; Tohmatsu Limited, a UK private company •• Site selection (in co-operation with our limited by guarantee and its network site selection team in Brussels, Belgium); •• Personal Tax Services; of member frms, each of which is a legally •• Investment incentives advisory and •• Global Employer Services; separate and independent entity. management; •• Employee Beneft Services; To sum it up, SPI might be regarded •• Negotiation support with local/national •• Bookkeeping; by investors as a proxy of social risk – government, municipalities; etc. the bigger the progress, the lower the risk. •• Business Process Outsourcing; •• Business assistance to other service lines From the investor’s point of view, there is (Tax & Legal, Financial Advisory Services, •• R+D and Government Incentives; a certain maximum accepted level of social Audit & Advisory incl. Enterprise Risk risk, above which the FDI will not come. •• Payroll Services; Services and Consulting Services). Social risk below this threshold determines •• Customs and Global Trade; (together with other variables, like market Tax & Legal Services efficiency) the level of transaction costs, •• Legal Services. Keeping up with changing tax as well as insurance (hedge) costs. requirements, opportunities, and risks With over 1,700 legal professionals in 74 can pose a challenge to any organisation, Our Expertise countries around the globe, Deloitte Legal from a local business to a multinational At Deloitte Central Europe we believe in offers competent yet pragmatic advice in company. Your tax planning must keep having strong industry practices to support both national and international business pace with – and even help shape – your our service line expertise. Many of our law. Deloitte Legal is able to provide company’s operations. This means industry experts have worked in key industry holistic guidance around strategic business that your tax experts must manage all sectors. They developed the know-how decisions as well as offer support services of the intricate details in local jurisdictions and experience to understand industry- that can increase efficiency and reduce while understanding and strategically specifc issues and are ready to share their the cost of some routine legal activities. planning the global flow of transactions. resources and knowledge of best practices. By utilising our industry practices, we are Deloitte Legal offers services in able to provide value-added, industry- the following areas: specifc services to our clients. •• Commercial law solutions
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Financial Advisory Services Audit & Advisory Services Consulting Services For the past years, governments In a world where business is confronted Our professionals can help you throughout Central Europe have with new challenges at an unprecedented to plan, grow and structure your business dramatically reformed their economies by speed, the need for solid fnancial reporting to address key issues such as strategy, moving commercial enterprises from state and forecasting has never been more technology and change management. We control to private ownership. A myriad critical. Annual audits are start, but they are provide integrated consulting services of opportunities and pitfalls have arisen not enough. When it comes to coping with focused on large national entities, for local entrepreneurs and foreign market analysts and wary shareholders multi-national corporations, growth multinationals, and traversing this new with 24-hour trading at their fngertips, you organisations, and public sector entities. landscape can be difficult. The potential need to know where you stand today. for growth in Central Europe is enormous, With our unique, collaborative approach, but this region also presents unique Our network of Audit and Enterprise we offer not only industry and functional challenges not found in more developed Risk Services professionals provide business performance knowledge, but also markets. a range of audit and advisory services the insight of others through our consulting to assist clients in achieving their business alliances. We work closely with clients Whether you are interested in privatisation objectives, managing their risk and to improve business performance, drive strategies, cross-border acquisitions, improving their business performance – shareholder value and create a competitive, corporate fnance transactions, anywhere in the world. We offer credibility, sustainable advantage, regardless of where development and venture capital, business assurance and independence. Our Audit & in the world your business takes you. We and asset valuations, value enhancement Advisory services include: provide the following services: strategies or corporate recovery or fraud •• Statutory & International Audits; •• Strategic Planning and Management investigations, our Financial Advisory Including Balanced Scorecard; Services professionals can help you. Areas •• Financial Statement Transformations; of specialisation focus on: •• Performance Improvement and Cost •• Financial Reporting; Reduction; •• Mergers & Acquisitions – Transaction •• Review of Accounting Systems and services; •• Process Optimisation; Internal Controls; •• Post-Merger integration; •• Customer Relationship Management; •• Sarbanes-Oxley Compliance & Advisory; •• Strategic Acquisition or Investor Search •• Supply Chain Management; •• Accounting Consultation; and Analysis; •• Production Management; •• Training; •• Privatisations; •• Cost and Corporate Performance •• Financial Due Diligence; •• Project Finance and Debt Raising; Management; •• Audit Committee Services; •• Commercial/Financial Due Diligence; •• Treasury Management; •• Control Assurance; •• Business, Real Estate and Equipment •• Selection and Implementation Valuations; •• Internal Audit Services; of Information Systems;
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Chinese Services Group CE German Desk The Chinese Services Group (CSG) We facilitate investments expansion serves as the unifying force to market, of companies from German speaking facilitate and deliver Deloitte professional countries in the CE region. For several services to both Chinese companies years, we have delivered professional expanding overseas and multi-national services like audit, consulting, as well corporations investing into China. as risk, legal, fnancial and tax advisory Operating as a platform to leverage services to companies with German origins Chinese expertise, bridge the culture gap, by establishing and developing their and to ensure client service excellence, businesses in all seventeen CE countries. the Global CSG, in coordination with Our expertise and strong relations with our the Chinese frm, complements a multi- peers from Deloitte in Germany, Austria “Over last few years, the value member frm, multi-industry, multi- and Switzerland allows for the creation of German, Austrian and functional and multi-disciplinary approach. of a cross-border and multi-functioning Swiss investments was joint strategy for our clients. How we can add value particularly high in Poland, The German desk was established to help Czech republic, Hungary and •• By facilitating access to industry experts foreign investors in unveiling the great and key decision makers throughout Slovakia. But there is still potential of the CE region and provide China; them with world-class professional services great potential in the region •• By serving as a channel to communicate facilitating cross-border operations. that can be discovered by time-sensitive regulations and updates foreign investors. We ensure on China for your business; client service excellence and •• By leveraging China as a “door-opener” facilitate foreign organizations and assuming a high profle on the subject, we provide local expertise to carry out their businesses in cutting across geographies and sectors. the Central Europe, providing them with professional services that are aligned with both local regulations and legal framework or requirements toward fnancial reporting including German, Austrian and Swiss GAAP as well as International Financial Reporting Standards.”
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