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BUSINESS FOCUS - TAX & AUDIT - SLOVAKIA MUST NEGOTIATE DELICATELY THROUGH THE MINEFIELD OF INCENTIVES VERSUS STATE AID

Investors still chase incentives

OFFICIALS claim that Slovakia has achieved its goal of creating a favourable business environment and that the country does not need to provide further investment incentives to attract investors.
However, recent large investments in Slovakia showed that additional incentives are still important decision-making factors. Without them Slovakia would not have successfully courted PSA Peugeot Citroen or Kia, for example. Experts point out that getting special incentives are more-or-less a question of individual negotiation with the government.

OFFICIALS claim that Slovakia has achieved its goal of creating a favourable business environment and that the country does not need to provide further investment incentives to attract investors.

However, recent large investments in Slovakia showed that additional incentives are still important decision-making factors. Without them Slovakia would not have successfully courted PSA Peugeot Citroen or Kia, for example. Experts point out that getting special incentives are more-or-less a question of individual negotiation with the government.

"Investment incentives are still needed, mainly because foreign investors require them. They expect them and all the neighbouring countries are providing them. If Slovakia does not provide investment incentives, it would considerably weaken its competitive position in the region," Petr Spáčil, senior tax manager with Ernst & Young in Bratislava told The Slovak Spectator.

Peter Chrenko, country managing partner and head of tax services with Ernst & Young added that investors want to keep their profit margins, and one way to achieve this is to reduce costs by moving production further east.

He continued: "We need to be aware that in some cases we are competing with countries like China and India. For logistic and customs reasons manufacturers prefer to stay closer to their customers and so they prefer central Europe. But at the same time they want to reduce relocation expenses by getting something back immediately, or at least having an early return, for example, cash grants."

Chrenko implied that incentives are also a good tool to bring investors to less developed or high unemployment areas, which helps create jobs relatively quickly.

Alexandra Spišáková, senior consultant from PricewaterhouseCoopers Tax said that her firm believes that "incentives are an effective measure to lure investors into highly depressed areas to create large numbers of new jobs - at least until the unemployment rate is reduced."

A potential investor should first research Slovak legislation to find out whether his business is entitled to special incentives. The outcome, however, is still dependant on the negotiation process with officials.

According to Spišáková the current Act on Investment Incentives differentiates between regions with an unemployment rate of up to 10 percent, and those with a rate of 10 percent or higher.

The volume of investments in a region with higher unemployment requires a minimum of Sk200 million (€4.83 million), while in a region with lower unemployment the volume must be twice this amount before an investor is qualified to ask for investment incentives.

"Of course, as investment incentives are not an entitlement, simply meeting the legal requirements does not guarantee that an investor will receive incentives. Even though Slovak law does not specifically state which industries are preferred, EU legislation suggests restricting - or even completely excluding - certain industries, such as steel, synthetic fibres, or the automotive industry, from state aid," Spišáková added.

In addition, the Slovak Agency for Investment and Trade Development (SARIO) evaluates applications for incentives and has a scoring system that gives investment points for various factors.

Spišáková said the SARIO system makes it clear that industrial production is preferred over service sectors. However, this does not exclude an applicant of less preferred industries from receiving incentives if it performs well in other areas, such as job creation.

"The Slovak government makes decisions to grant the incentives and the European Commission must then approve them. However, the approval process as a whole is rather subjective," she said.

Spáčil thinks that relevant Slovak legislation is sufficiently specific, but at the same time reasonably flexible in respect to which investors can qualify and which incentives can be granted.

Chrenko added: "We must keep in mind that provisioning incentives is at the discretion and judgement of the government, to achieve the above-mentioned goals, and therefore everything is about negotiations."

Experts emphasise that investment incentives are under strong EU regulation. Slovakia, as an EU member, is obliged to fulfil them. However, the difference between investment incentives, which are allowed, and state aid, which the EU rejects as unfair competition, is vague.

According to Chrenko all EU countries need to follow the rules and are reviewed for their compliance. "There are examples when the Slovak government had to renegotiate initial commitments," he said.

Spišáková added: "EU rules automatically apply in Slovakia. Still, it is important to remember that it is sometimes difficult to determine even what is, or is not, state aid."


Incentives, Slovak style


The Slovak Spectator asked experts which of the incentives that Slovakia is allowed to use are most attractive to investors, and whether Slovakia is using its full potential where incentives are concerned.


Petr Spáčil, senior tax manager, Ernst & Young:

The main Slovak investment incentives are (1) corporate tax credits, (2) cash grants for new investments, (3) cash grants for new jobs, (4) cash grants for training of employees, and (5) support for building the infrastructure, for example, industrial parks. Investors mainly prefer cash grants but the state is often reluctant to provide it.

The deal depends, to a large extent, on negotiations. There are signs that the state is currently willing to support a number of investments more "generously": big investments; investments located in eastern or central Slovakia; and those with high added value, such as research and development and design and service centres. The tax credit is valuable only to investors who are expecting high profits over a relatively short time after starting the investment.


Alexandra Spišáková, senior consultant, PricewaterhouseCoopers Tax:

Cash contributions for new jobs, and for retraining, are attractive incentives to large investors that stimulate employment, yet who may not generate taxable profits immediately. Others prefer corporate tax incentives.

The incentives that Slovakia offers largely depend on the size of the investment, which might deter smaller investments that could nevertheless bring high added value, such as service centres. Such investors do not necessarily purchase a substantial amount of fixed assets but they usually employ a highly educated workforce, and create a significant number of new jobs. We understand that the Slovak Economy Ministry is going to tackle this particular incentive issue in the near future.

We believe that many investors would appreciate government transparency in the incentive application process. It would also help potential applicants predict a result, which is currently difficult to do. Also, many potential investors would appreciate a timeframe for the approval process. The lack of clarity on this issue deters some investors.

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