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New law affects launching of Ltd firms

DESPITE the European Union’s vision of making it easier and cheaper to launch a new company, businesses and analysts say Slovakia is going in the opposite direction. A recent measure requiring new businesses to deposit €5,000 into a special account will complicate things for people wanting to start a new company.

(Source: SME)

DESPITE the European Union’s vision of making it easier and cheaper to launch a new company, businesses and analysts say Slovakia is going in the opposite direction. A recent measure requiring new businesses to deposit €5,000 into a special account will complicate things for people wanting to start a new company.

The Justice Ministry argues that this revision of the Commercial Code simply makes the wording of the original legislation more precise. Business experts and the political opposition view it as yet another obstacle to starting a new business. They add that since the deposit is actually easy to avoid, the revision will fail in its goal to combat tax evasion and unfair business practices.

Matúš Pošvanc, analyst with the F. A. Hayek Foundation, considers the revision to be another complication when doing business, from an administrative, financial and regulatory framework.
“This is a typical measure which the cabinet should not do to support the business sector,” Pošvanc told The Slovak Spectator.

Róbert Kičina, executive director of the Business Alliance of Slovakia (PAS), views the revision as a partial increase of transaction costs when launching a company, i.e. making the establishment of commercial companies more complicated. He added that while the revision was adopted to fight tax evasion and unfair business practices, in practice it will not have any significant impact, as it will be quite easy to avoid.

Based on the revision, which parliament adopted on October 18, those launching a limited liability company will have to deposit €5,000, or a portion of it, in a special bank account. The revision is effective as of December 1, 2013.

According to the Justice Ministry, the aim of the revision is to prevent ‘fictive’ payment of money deposits. It stresses that the revision does not introduce a new duty, but only states the existing duty more precisely, Alexandra Donevová, the ministry’s spokesperson, told The Slovak Spectator.

“Simply said, the possibility to cheat when launching a Ltd company becomes more difficult,”
Donevová said, as cited by the SITA newswire after parliament adopted the revision.

According to the Justice Ministry, for businesspeople who want to launch a functional company and meet its obligations, nothing changes. Possible complications could only arise in cases when, for example, a business entity which simulates doing business via a Ltd company wants to eliminate responsibility for future debts.

Kičina expects that small business entities just starting their businesses will feel the impact of the revision the most, as these usually have limited financial resources. On the other hand, he does not expect the impact to be huge and to affect the launch of new companies.

Pošvanc expects that this will only create more problems for honest businesspeople, while the measure will not have any effect on unscrupulous businesspeople, since their primary intention is to conduct business unfairly in the first place.

Kičina and Pošvanc do not believe that the revision will solve the matter of ‘white horses’, i.e. a situation when a person with no valuable assets is left as the owner of an indebted company, resulting in the company’s creditors being unable to get their investments back.

“The obligatory deposit may deter some cheaters from launching new companies, but this does not solve the problem with white horses almost at all,” said Kičina. “Also, after this change each owner of the company will retain the right to transfer the company to somebody else. Moreover, the condition to deposit €5,000 in a bank account when launching a company does not mean at all that this sum will also remain in the company.”

Pošvanc believes that entrepreneurs launching companies only to “make a profit” on taxes have enough resources and time to adapt to this measure.

The Justice Ministry plans to reform the institute of the minimum basic capital of Ltd companies to support small and medium-sized businesses and facilitate the creation of new businesses. For the time being it is working on the wording of the new legislation, which is to be submitted for interdepartmental review by the end of June 2014.

So far, the idea is to have two types of limited liability companies: one with obligatory basic capital and the second with one €1 capital, but with stricter conditions for creation and keeping cash in the company, the Sme daily wrote.

According to Pošvanc, such a proposal would be beneficial only when it would reduce red tape and regulations linked with the launch of companies.

“In some other states it is possible today to launch a corporate company via the internet and with minimum capital,” said Pošvanc. “I do not see a single reason why this cannot also work in Slovakia. To say otherwise, I think that the given proposal is not ambitious enough.”

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