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A VARIETY OF GOVERNMENT OFFICIALS SAY THAT JUNE CHANGES IN TAX HOLIDAY REGULATIONS WILL HELP INVESTORS

Government defends shifting tax breaks

RECENT legislative measures aimed at harmonising Slovak tax incentives with European Union (EU) norms should be beneficial to investment, say government representatives.
The comments come after a period of uncertainty and confusion among investors as laws relating to tax holidays were amended in June to put new conditions on receiving state support, as well as having legal basis moved from the Income Tax Law to the State Aid Law.
However, state representatives maintain the changes are a minor matter inevitable in adjusting Slovak legislation to EU entry requirements, and that such a step should have a positive long-term impact on Slovakia's investment environment.


AUTO component maker Plastic Omnium expected eventual change in tax policy.
photo: TASR

RECENT legislative measures aimed at harmonising Slovak tax incentives with European Union (EU) norms should be beneficial to investment, say government representatives.

The comments come after a period of uncertainty and confusion among investors as laws relating to tax holidays were amended in June to put new conditions on receiving state support, as well as having legal basis moved from the Income Tax Law to the State Aid Law.

However, state representatives maintain the changes are a minor matter inevitable in adjusting Slovak legislation to EU entry requirements, and that such a step should have a positive long-term impact on Slovakia's investment environment.

"There is no change whatsoever," said Willy Siegl, the European Commission's pre-accession adviser with the Slovak State Aid Office.

"Investors, and particularly foreign investors, have the opportunity to receive tax holidays as in past years. The change was actually one sentence, and this sentence was not even a change of the system, it was only for clarification," said Siegl.

"It is an unimportant change, because it only harmonises our tax relief programs with State Aid Law, in line with the EU's interpretation," agreed Finance Minister František Hajnovič.

Under the previous system, a company's qualification for tax breaks was based on two articles of the Income Tax Law. Both paragraphs established what insiders say was an automatic system under which a company had to fulfil clear conditions in order be eligible for tax relief.

Ján Jursa, who negotiated for the government during accession proceedings to the Organisation for Economic Cooperation and Development (OECD), explained that the main criteria for claiming tax breaks had to do with an investor's capital equity.

However, said Siegl: "Since 1997, Slovakia has committed itself to applying EC rules on state aid. And then you provide the tax holiday, so you have to make sure that this holiday is in compliance with accepted state aid rules."

"The companies that started using tax holidays under [the earlier system] will still be able to keep them; but that relief is now subject to additional conditions, which are mainly based on investment and geographical location. The EU has certain limitations on the amount of state aid [a firm can receive]," said KPMG partner Mark Gibbins.

Siegl reiterated that the change is inevitable for Slovakia's EU entry and that investors should benefit from cooperation with the State Aid Office.

"What the office does, is give a certificate to a company that, when it receives tax holidays, its in compliance; the company also has the legal certainty to know that the European Commission agrees with it, and with accession, the company can be sure that it will be recognised within the EU," said Siegl.

"What we are doing is a kind of service for them, that they can be sure. It is an additional benefit to the investor, that there will be no problem after EU accession. And for that you need a kind of certificate from the state aid authority," he said.

In spite of suggested long-term benefits, the immediate impact of the change on investors is not yet known.

"It's quite early to say; the point is that you need to do calculations for each individual case, to see which people lose out, compared to what they thought they were going to get before. Until we have calculations on a case-by-case basis with the investors, you can't say for certain whether anyone's going to lose out," said Gibbins.

The change, however, means defining tax holidays as state aid, which has already caused some concern among some of Slovakia's largest foreign investors who have benefited greatly from tax holidays, including Volkswagen and US Steel, who operate in the EU-defined 'sensitive industries' of automobile manufacturing and steel production, respectively.

Sensitive industries cannot be supported by state aid, according to EU legislation.

While Slovak negotiators and VW officials say they have reached a satisfactory agreement, negotiations with U.S. Steel are still continuing.

Head of VW Slovakia's board of directors Jozef Uhrík said: "In this case, the credibility of this country was in doubt for big investors who are watching the development of our organisation. I think that a very skilful deed was achieved here, and neither the EU nor this country will have to pay for it."

U.S. Steel has declined to comment before negotiations are over. However company spokesman Andrej Filanda said that, "nothing suggests that this issue should not be settled successfully."

Among companies currently enjoying tax relief, there have been mixed reactions, with some calling the changes frustrating and confusing and others respecting the government's decision.

Radomír Jakubec from the Malacky-based Plastic Omnium auto component maker said that: "The changes were surprising, but this government has a right to do it, even if it was without former notice. We have not been touched by it yet, but we have been aware from the beginning that it would have to change and we would have to apply [for state aid]."

In spite of the changes, specialists say that state aid and tax breaks are not among the top priorities of foreign investors when deciding on their future investment locations.

"I am not afraid for our country - we have such low level of labour and production costs that it would be absurd if we did not attract foreign investors anyway," said Marián Vitkovič from the Economy Ministry's business environment section.

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