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Still nearly an 'investor's paradise'

THOUGH the Robert Fico government has made changes to major tax, labour and social security laws that have not really pleased the business community, market watchers and investment professionals say Slovakia is still attractive for foreign investors.

THOUGH the Robert Fico government has made changes to major tax, labour and social security laws that have not really pleased the business community, market watchers and investment professionals say Slovakia is still attractive for foreign investors.

The arrival of the Samsung high-tech firm, and subsequently its suppliers, proves that the country remains competitive in the investment battlefield, according to the country's investment agency, the Slovak Investment and Development Agency (SARIO).

SARIO completed projects worth €607 million in 2006, and during the first half of 2007, projects worth €700 million were completed.

This proves the country's investment vigour, the agency said.

"Slovakia is still a good place to invest in," Todd Bradshaw and Radoslav Krátky of PricewaterhouseCoopers (PWC) said in an e-mail interview. "Naturally, each political party has its own visions and priorities. But the country has maintained a simple, principle-based and transparent tax system that has not changed dramatically since the last elections."

Four major changes have affected the business environment in Slovakia since Fico's government took power. As of the beginning of this year, people with above-average income - which is about Sk46,700 (€1,400) - pay more in income tax. There are also higher income taxes for self-employed people whose annual tax base exceeds approximately Sk500,000.

The flat VAT rate of 19 percent ceased to be flat when the parliament lowered the VAT on medicine and medical aids to 10 percent last year. The same drop is now planned for books.

As of October, the monthly minimum wage - which is also the base for calculating payroll taxes in Slovakia - will jump to Sk8,100 from Sk7,600.

And a new Labour Code took effect on September 1. Among other changes, the code gives more powers to the unions, limits overtime work, toughens conditions of fixed-term employment contracts and limits the use of trial periods before signing a permanent-status contract with the employee.

Companies choose to invest in Slovakia using long-term financial projections, which they often reassess when there are changes in the cost structures, said Bradshaw and Krátky, a partner and manager at the PWC firm, respectively.

Investors and Slovak businesses are very sensitive to the proposed changes to the social security legislation because this increases the cost of employing people and most investments are labour intensive, they said.

Tax isn't everything

A recent study that PricewaterhouseCoopers carried out with the World Bank concluded that, in general, simpler tax systems promote economic growth and burdensome ones can be deterrent and lead to tax evasion, Bradshaw and Krátky told The Slovak Spectator.

Martin Lenko, an analyst with VÚB Bank, listed Slovakia's flat 19-percent income tax rate as a selling point for Slovakia. But its tax-free dividends, geographical location, improving infrastruc-ture and relatively cheap and qualified labour are also major incentives for investors, he said.

The growing car and component production industry also adds to the country's shine, he said. The resulting clusters can bring along additional advantages, such as better logistics planning.

"Though some other countries may offer lower tax rates - for example, Romania has a 16-percent income tax rate and 19-percent VAT - this factor is not the only decisive one that investors take into consideration in their strategic decisions on foreign markets," Lenko told The Slovak Spectator.

However, the eventual reintroduction of taxation on dividends that has been announced would deter investors, Lenko said. And the Labour Code changes, which have moved the balance slightly in favour of employees at the expense of employers, seem to be a minor problem, he added.

The new tax legislation currently being discussed in the parliament would re-introduce thin capitalisation rules - where the proportion of loans to equity is high.

For example, the law would limit the amount of tax that can be deducted on interest on group loans for companies, according to Bradshaw and Krátky.

This change would probably require some investors to change the way they finance their operations in Slovakia, which could be an expensive process, they added.

In general, proposals and statements that could spread uncertainty among investors have had the most negative influence on the business environment, market watchers say.

Many of the proposals on changes to tax and labour legislation have been reappearing in different variations, without making investors feel that the amendment process has been wrapped up, said Robert Prega of Tatra Banka.

"Attempts to re-introduce different VAT rates and exemptions is harmful and ineffective," Prega told The Slovak Spectator.

Changes to the Labour Code and the proposal that would increase the ceiling for the maximum calculation base for transfers to the social security provider have had the most negative impacts on businesses' confidence, Prega said.

Currently, the maximum calculation base is three times the average monthly salary.

Slovakia already has one of the highest payroll taxes within the OECD countries, said Prega. Further tax hikes would notably worsen Slovakia's chances in competing for investments with a higher added value, he added.

However, the tax changes have not yet been extensive enough to threaten Slovakia's highly competitive position within Europe, he said.

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