Why come to Slovakia?

INSIDERS agree that the most important benefits of doing business in Slovakia are the low cost yet highly skilled labour force; a favourable 19-percent tax rate; and relatively low real estate prices with the added bonus of zero real estate transfer tax.

INSIDERS agree that the most important benefits of doing business in Slovakia are the low cost yet highly skilled labour force; a favourable 19-percent tax rate; and relatively low real estate prices with the added bonus of zero real estate transfer tax.

But that's not all foreign investors are taking advantage of. Additionally, Slovakia's high unemployment rate easily accommodates the need for labour, which is generated by significant foreign direct investments (FDI). And the strategic central location of Slovakia in Central Europe with gateways to both the developed economies of Western Europe and the awakening economy of Ukraine is another draw. Furthermore, Slovakia has a strong industrial background, a crucial feature for certain types of manufacturing.

So far, Slovakia has lured investments in manufacturing, the automotive sector, and call and service centres.

In contrast to the Far East, which has unbeatable production costs for low-margin, low-tech products, Slovakia is suited to engineering centres. The country's large number of skilled labourers, machinists and engineers as well as a strong tradition in machinery ensures that value-added products can be built at a reasonable price.

The availability of a skilled bilingual staff, the low cost of employment, tax incentives and ample quality office space has resulted in the development of call, outsourcing, administration and group service centres in Slovakia.

Steve Gawronski and Stanislav Rusinko are tax partner and FDI manager, respectively, from Deloitte. They say that Slovakia has managed to position itself favourably by building up a critical mass of companies in a specific sector, which attracts other foreign companies in the same sector. According to them, Slovakia's automotive and electronics industries are surging ahead because of this.

Clare Moger, senior tax manager, and Michaela Gábiková, tax consultant, both from PricewaterhouseCoopers, emphasize the corporate benefits of Slovakia's tax reforms. "In addition to the advantageous tax rate, dividends are not subject to Slovak tax. Corporate tax losses can be deducted without any significant limitations and tax-non-deductible items have been significantly reduced. Furthermore, there are thresholds for social insurance contributions in Slovakia, which is not the case in most European countries."

The PricewaterhouseCoopers experts say that all of this makes Slovakia a popular location for investors. "Nevertheless, each potential investor should take various aspects into consideration. As well as tax matters, investors should also consider labour costs and availability, potential suppliers, the proximity of potential markets to the planned investment, and transport links."

Mark Davidson, senior tax consultant with Ernst & Young, thinks Slovakia still has many investment and business opportunities left to exploit, compared with the more static and saturated markets in the EU-15. Davidson highlighted Slovakia as an investor-friendly business environment, mentioning the "the world's top reformer" status given to Slovakia by the World Bank in its "Doing Business in 2005 report".

Apart from business benefits available to all foreign investors coming to Slovakia, special state assistance packages are available. These include corporate tax credits for up to 10 years and grants for retraining employees or employing those registered as unemployed at local labour offices.

"The government may also help indirectly by providing funds to help obtain the desired plot and build the required infrastructure [electricity, gas or water connections]. In some cases, it may even be possible to negotiate the purchase or lease of a manufacturing site at a discount with a local municipality," added PricewaterhouseCoopers' Moger and Gábiková.

Mark Gibbins, tax partner, and Van Mumby, senior tax manager from KPMG Slovensko Advisory emphasized that investors have a greater chance of obtaining these incentives if their investments are located in areas of higher unemployment.

Experts emphasize that granting special state aid is at the discretion of the Slovak government, and in most cases the European Commission in Brussels must approve it. There is no automatic entitlement to state aid, even if the investor meets the prescribed conditions in the law.

Whether, and in what amount, state aid is granted usually depends on the amount and nature of the investment, its location and the number of new jobs it will create. Investments into facilities that use new technology, attract other investors to Slovakia, or create a large number of jobs in regions of high unemployment tend to be viewed favourably.

Analysts imply that in the future, Slovakia will cease its monopoly on business advantages when other countries step up - mainly Ukraine, the Balkan states and others. Additionally, as more FDI flows into Slovakia, state incentives for investors will likely decrease.

"Romania has introduced a 16-percent flat rate for corporate and income taxes and a 19-percent standard VAT rate effective January 1, 2005. It also has generally lower labour costs than in Slovakia. In the medium term, Slovakia should seek a greater diversification of investments and expand, if possible, knowledge-based investments rather than those that are manufacturing oriented," explained KPMG Slovensko's Gibbins and Mumby.

Davidson, from Ernst & Young, pointed out that the Far East, Romania and Bulgaria have had lower labour costs than Slovakia for a good while now and, in this respect, nothing has changed. He stressed that the key to Slovakia's future ability to attract investment cannot be solely cost-differentiation, but rather "cost plus x factor". This could be quality, technology, professional business culture, or, in the case of the tourist industry, natural beauty.

Deloitte's Gawronski and Rusinko added: "It should not be overlooked that foreign investors value economic and political stability as well as transparency in legislation and in legislative procedures as much as other advantages. Certain investors remain unsure how certain areas of Slovak law will pan out, and how steps in the investment process are administered. "This is where Slovakia should focus if it wishes to join the more 'developed' countries in Europe."

Moger and Gábiková from PricewaterhouseCoopers think Slovakia should continue to set the pace in making reforms and stay flexible enough to respond quickly to potential changes in the business environment. "Hopefully, Slovakia will also become a country that makes more outward investments, not simply a place in which foreign investments are made. If so, it could potentially benefit from the economic boom in countries with lower production costs and those offering attractive location benefits for foreign investors."

Davidson from Ernst & Young agrees: "Slovakia offers three key benefits: EU membership, an investor-friendly environment, particularly with regard to taxation, and a skilled and highly educated workforce at very reasonable rates. Slovakia has to capitalize on these current competitive advantages by attracting as much investment as it can now, prior to any proposed EU-wide tax harmonisation and further EU enlargement. It must also continue to invest in education, particularly IT literacy," he said.

When the grass is greener
Companies thinking about relocation can recognize the right time to move

MOVING production is not an easy task.
photo: TASR

A COMPANY usually starts looking to move when the conditions elsewhere are more favourable than its current site. A move can be motivated by lower costs, a better overall political and business environment, or a desire to follow its clientele.

However, moving production facilities is not a simple task - even if conditions elsewhere seem too good to be true. Big Four experts emphasize that every decision to change locations must be thoroughly planned and all the risks assessed.

Risks include exit costs - breaching the conditions for obtaining specific location benefits that the current country provides. Breaking these agreements could result in having to repay those benefits, plus penalties.

And investors might face an undeveloped infrastructure in the advantageous country and long distances to customers or new markets. The cheap labour that a country offers may not necessarily be qualified.

Timing issues, such as a slump in the property market, could make any real estate disposal expensive. Furthermore, there could be costs associated with potential ecological clean-ups depending on the nature of production. Redundancy costs also tend to be high, and laying off a large number of employees can damage brand or company reputation.

Moving locations can be risky if the new location is outside the protection of certain established legal frameworks. The economic and political stability of the new location, together with any cultural differences, will also have to be taken into account.

There could also be inefficiencies due to start-up costs, training the new workforce and unforeseen red tape.

Experts stress the need for local information and expertise during the assessment process. Sending several project managers to Poland, Hungary, Czech Republic and Slovakia for a few weeks is often not enough to provide the investor with the insight required to correctly assess the relevant opportunities and risks.

Most governments or national investment agencies provide resources and information specifically for foreign investors seeking sites best suited to their proposed activities. Coupled with these resources, a new investor can also seek advice and guidance from professional advisors with local expertise and in-depth knowledge of the local conditions.

In terms of obtaining state aid, experts advise starting negotiations with governments at an early stage, in order to agree to everything up front before the investment commences.

Source: Deloitte, Ernst & Young, KPMG Slovensko Advisory, PricewaterhouseCoopers

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