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Law to make it harder to start a firm

WHILE businesses in Slovakia are calling on the government to make doing business in Slovakia easier and less bureaucratic, they see the latest planned change as going in the opposite direction. The Justice Ministry has drafted a revision to the Commercial Code, which when made into the law, will oblige founders of limited liability companies to deposit €5,000 with a bank. At present, companies have only to declare that they have deposited this sum.

Businesses are complaining about more red tape.(Source: SME)

WHILE businesses in Slovakia are calling on the government to make doing business in Slovakia easier and less bureaucratic, they see the latest planned change as going in the opposite direction. The Justice Ministry has drafted a revision to the Commercial Code, which when made into the law, will oblige founders of limited liability companies to deposit €5,000 with a bank. At present, companies have only to declare that they have deposited this sum.

With this change the Justice Ministry aims to prevent ‘fictitious’ payments of monetary investments when launching limited liability companies, and claims that the revision does not bring any new burden, but only strengthens the existing obligation. The draft revision has undergone interdepartmental review and, if adopted by parliament, should become effective as of October 1.

“The essence of the change is that it would be necessary to deposit a monetary investment into capital stock when launching a limited liability company at a special account in a bank,” Justice Ministry spokesperson Jana Zlatohlávková told The Slovak Spectator. “The aim of the change to the law is to prevent ‘fictitious’ payment of monetary investment by company members.”

Based on the current legislation the founder of a limited liability company, in Slovak spoločnosť s ručením obmedzeným (s.r.o.), must only declare that he or she has settled the monetary investment, with the minimal sum being set at €5,000. After the adoption of the Justice Ministry’s revision, limited liability company owners will have to submit a document from a bank or an account statement showing that the money was deposited. The money in the account will remain frozen until the company is registered. Afterwards access to the money will be restored for possible spending.

Zlatohlávková added that the revision does not change the base sum of the capital stock, i.e. €5,000, adding that the revision does not bring any new burden, but only strengthens the existing law.

“Such a measure will make speculative launching of companies more difficult,” said Zlatohlávková. The ministry believes that the change will help to ensure that limited liability companies will settle their debts to the state or suppliers. “For those businessmen who want to launch a truly functioning company and properly pay compulsory monetary investments to capital stocks, [this amendment] does not change anything.”

The business community opposes the planned change. Róbert Kičina, executive director of the Business Alliance of Slovakia (PAS), told The Slovak Spectator that the change will increase transaction costs when launching a limited liability company.

“The impact of the measure on the fight against fraud will be, alas, very small since it will be relatively easy to avoid this measure,” Kičina told The Slovak Spectator. “The solution is rather to tighten sanctions against company executives who violate the law.”

Kičina does not believe that this revision will meet its goal of compelling limited liability companies to pay off their debts. According to him, entrepreneurs may use the deposited money for purchasing assets and, thus, the capital stock would not remain in the company in the form of money. A better solution would be for the company executive to guarantee the company’s obligation with his or her personal assets.

Kičina told the TA3 news channel that the trend should be rather the opposite, i.e. to facilitate entry into doing business. He added for the Sme daily that the government should focus on those who commit fraud and not introduce measures that will hit everybody including decent entrepreneurs. Viola Kromerová, general secretary of Slovenský Živnostenský Zväz (SŽZ), agreed, adding for the Plus Jeden Deň daily that while on one hand the state wants people to be employed, on the other hand it puts a knife to their necks.

Lucia Žitňanská, former justice minister, does not believe that the change will increase the chance of creditors getting their money, arguing that the fact that somebody had €5,000 in the account at the moment when the company was registered does not mean that he or she will have it the following day or month, Sme wrote.

Juraj Karpiš, an analyst with the INESS economic think tank, told the Topky.sk news website that he considers the change to be another useless burden on doing business and launching companies in Slovakia. Ivan Štefanec, an MP for the opposition Slovak Democratic and Christian Union (SDKÚ), shares this opinion, adding that in more developed countries companies are being launched electronically and without any personal contact.

Experts expect that those planning to launch a limited liability company but who lack €5,000 will borrow the necessary money for one or two weeks until the company is registered. They also forecast a wave of launches of so-called ‘ready-made’ companies, i.e. companies launched under the current scheme and to be offered for sale after the new legislation becomes valid, Sme wrote.

€1 Ltd?

According to Zlatohlávková, it is necessary to view the draft revision in the context of other measures planned within the action plan of the fight against tax fraud. Next year there is a plan to submit a change which will create a precondition for two kinds of limited liability companies - with the compulsory stock capital exceeding a certain sum, for example €25,000, and with the stock capital of one euro, but stricter conditions for creating and keeping the stock capital.

“The need of a reform of the institute of the minimal stock capital of a limited liability company should be perceived especially as an element to support small and medium-sized businesses and facilitate the start of doing business,” said Zlatohlávková. “The importance of the reform will rest in reduction of the launching deposits of partners, while greater attention should be paid to stricter and more in-depth definition and application of the obligation of statutory bodies.”

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