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New tax incentives ignore local firms

Domestic firms have been left in the lurch after what had promised to be a move to put them on a level playing field with foreign investors was rejected by the government at a session May 10. The cabinet had been expected to approve a new tax incentive plan for investors that would have improved conditions for foreign companies and given some tax holidays to domestic firms.
Government representatives said after the decision that they had taken the move in light of the current squeeze on the revenue side of the state budget, and had shied away from a plan that would have seen a large dip in cash inflows from corporate tax.


Global giants like Coca Cola may take advantage of the FDI package...
photo: TASR

Domestic firms have been left in the lurch after what had promised to be a move to put them on a level playing field with foreign investors was rejected by the government at a session May 10. The cabinet had been expected to approve a new tax incentive plan for investors that would have improved conditions for foreign companies and given some tax holidays to domestic firms.

Government representatives said after the decision that they had taken the move in light of the current squeeze on the revenue side of the state budget, and had shied away from a plan that would have seen a large dip in cash inflows from corporate tax.

"There isn't large space to create tax incentives for domestic investors taking into account the sustainabliity of the public finance deficit. We believe that we can get more from foreign investment into Slovakia when we offer incentives to them than we could by offering the same incentives to domestic investors," said Ján Jursa, plenipotentiary for the government for negotiations with the Organisation for Economic Cooperation and Development (OECD), who helped draw up the original draft.

Analysts were disappointed that the government had opted for something which they saw was obviously a 'quick-fix' solution to the budget problem.

Miloš Božek, analyst at J & T Securities in Bratislava, said that the government had gone for an option that would see a short term benefit, but would not create any long term gain.

"Obviously they wanted a fuller budget now. A high number of companies could have qualified [for the tax holidays and incentives in the proposed plan], and so that would have brought down corporate revenues," said Božek.


...while local companies like Baldovská mineral water have been ignored.
photo: TASR

"It's a shame though, because they [the government] had talked about it a lot and then seemingly backed out of it. It's bad PR for them," he added.

Renata Blahová, head tax advisor with BMB partners, a Bratislava-based tax advisory firm, said that allowing domestic companies to qualify for the holiday would be detrimental to corporate income tax the year following the law's introduction.

Speaking before the government rejected the proposal, Blahová said: "They [the government] shouldn't open it [the tax incentives] for just any Slovak company, because otherwise they will lose the tax potential of Slovak companies. What many existing companies will do is re-establish their existing company so that they will qualify for the tax break. And if all tax paying companies do this, then we won't have any income to the state."

Blahová added that the future success for the incentives programme was dependent on the application of long-term controls. However, she added that such controls would be very difficult to enforce in the Slovak business environment.

Under existing tax incentives legislation, eligible firms receive a 100% rebate on payable taxes for five years. The new draft will see a lowering of the minimum share assets of a new company with a 75% stake owned by a foreign investor to 100 million and 50 million crowns dependent upon the unemployment rate in the region.

Cabinet also stuck with the original plan to raise the tax holiday period to 10 years. Until now, foreign investors could take advantage of the tax benefits if they invested 5 million euros or, in regions with the unemployment rate above 15%, 2.5 million euros. The cabinet proposed decreasing the unemployment rate for halving the necessary share assets from 15 to 10%.

Another step aimed at boosting foreign investment inflow is the offering of subsidies of between 40,000 and 160,000 crowns according to the unemployment rate in a region if jobs are created for previously unemployed people.

The new incentive package will also see the removal of two of the previous eligibility criteria for an investing firm. The investment no longer has to be in the manufacturing sector and, more importantly, the condition that the investor must export at least 60% of its production has been removed. The condition had automatically ruled out investors looking to supply to domestic contractors.

Deputy Premier for the Economy Ivan Mikloš said that the new incentives were drawn up after FDI into Slovakia failed to reach government expectations last year. He added that the new package would place Slovakia on the same footing as its central European neighbours in what it could offer to investors.

The package is slated to be introduced by September 30 at the latest.

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