On July 1, the Slovak government began trying to attract large foreign investors with ten-year tax break enticement, but market analysts say that the measure's numerous restrictions and selective approach of preferring large businesses will spoil its final effect.
"The aim ..is to create conditions for a higher influx of foreign capital to strategic industries, improve the trade balance on the export side and create new jobs," the Finance Ministry said in its statement on June 11, after passing the measure which did not need Parliamentary approval.
However, reactions to it were not as warm as the government had hoped.
"Well, the [regulation] will not scare investors away," said Juraj Renčko, an analyst with the Forecasting Institute at the Slovak Academy of Science. "If they decide to come, it will surely please them. But this is not a factor that will attract them to Slovakia. It will not dramatically increase foreign investment."
But Jozef Černák, general director of the Slovak Agency for Foreign Investment, sounded happy about the provision. "The tax holidays are a positive change in the Slovak economy," he said. "Because the influx of foreign investment is not high enough, we welcome that this is aimed at strategic investors who are ready to purchase investment property."
Slovakia has been battling external trade imbalances since 1994, when it last witnessed a foreign trade surplus. Three consecutive annual shortfalls have fuelled a current account deficit. The trade deficit increased to 8.828 billion Sk last April, from 6.312 billion Sk in March.
This is not likely to change, Renčko said, pointing to numerous restrictions the government laid down in allowing for the tax break. To apply for tax breaks, a new entity must have a basic capital of at least 300 million Sk ($8.57 million). Initially, the company has to spend one billion Sk on buying investment property, and then it has to spend an additional 300 million every year during the tax holiday. The company must increase its annual production by at least 5% every year and must export at least 90% of its output.
Černák said he already knew of one investor that may be interested in fulfilling the obligations for the tax break.
"We know that Motorola may be interested," Černák said.
Smaller firms likely won't be interested, simply because they won't qualify. "In my opinion, [the measure is aimed at] very large investors," said Dragschits Halas, Commercial Attaché at the Austrian Embassy, whose country is the second biggest foreign investor in Slovakia after Germany with approximately 1,500 Slovak-Austrian joint ventures. "It would be more attractive for small and medium enterprises if they were included. I do not know of any Austrian firms interested right now," she added.
Renčko seconded this opinion by suggesting that the new provision was very selective. "It seems that this is a selective measure which supports only some enterprises, but is not really applied generally."