Slovakia to Become European Tax Haven

With the introduction of a flat tax, part of a large scale overhaul of Slovakia’s tax system, the government is transforming the country into a tax haven for central Europe -- a “Monaco on the Donau.”

The Slovakian parliament gave its final approval to the bill at the end of October, and it went into effect on Jan. 1, 2004. The new scheme replaces the previous progressive income tax, which ranged from 10 to 38 percent, with a new 19 percent flat tax. Now, all will hand over the same percentage of their income, from the green grocers to the multi-millionaire. What’s more, corporate tax and value-added tax rates have been likewise simplified to 19 percent.

It is hoped that the new, and lower, rates will lure foreign investment and high-earning Europeans to the former Eastern-bloc country. Judging by initial reactions, it could do just the trick.

“Is it really just 19 percent,” asked Stefan, a resident of Hainburg, a town on the Austrian side of the Donau River, asked when questioned by Deutsche Welle. Stefan, who goes over the border to a jazz club every Thursday in Bratislava, Slovakia’s capital, said that he might be tempted. “If that’s the case, I’ll gladly relocate my permanent residence to Slovakia,” he said.

The Slovakian government is hoping that kind of sentiment will prove infectious and draw other individuals and large corporations to the country.

Problematic results?

Slovakia is embarking on a risky experiment, which could prove to be a big success or a massive failure. The plan is not without its risks. The affects on the working class could be problematic. Many daily staples, which until now have been subject to a value-added tax rate lower than 19 percent, could become more expensive, and no one can predict the long-term impact the move will have on the country’s national budget. Meanwhile, government corruption and bureaucracy could scare off foreign investors despite the sweetened tax deal.

But the pull of foreign investment seems to have helped overcome any lingering doubts. In terms of foreign investment, the new corporate tax rate will undeniably prove attractive, say the Slovakian politicians who backed the bill. They point to the fact that Slovakia’s close neighbors have been watching the developments with suspicion as proof. Indeed, firms in neighboring countries, like Austria and the Czech Republic, have not only inquired about opening branches and factories, but also about relocating their official headquarters.

High hopes for the auto industry

Among the numerous investment areas, the Slovakian government has set its sights on luring more automobile manufacturers. And some German companies have already taken the bait, including Volkwagen, which has become Slovakia’s largest employer. More than 9,300 people work in the company's Bratislava plant, which produces the Polo, Golf and Touareg models. Porsche also produces parts of its Cayenne model in Slovakia.

On the horizon, Peugeot is building a factory, which is expected to bring 3,500 jobs. And Slovakia's economics minister, Pavol Rusko, is engaged in direct negotiations with Hyundai. If he reaches a successful deal, the new Hyundai plant could bring a further 4,000 jobs. The secondary affects of automotive investment are equally important. The numerous suppliers that will open in the vicinity of the factories will bring even more jobs.

This influx of jobs could male strides towards reducing the country’s high unemployment rate. The national average is 18.5 percent, but in areas along the eastern border with the Ukraine can run as high as 25 percent.

More goodies for investors

A number of other changes are also likely to prove attractive to foreign investors. The previous restrictions on the privatization of “strategically important” national industries like energy, which deemed that they must be sold off only in the “national interest,” have been lifted.

And real estate may seem more attractive: properties sold, regardless of their value, will henceforth be subject to a 3 percent tax, which replaces a higher progressive tax rate.

German firms could benefit

Germany is Slovakia’s No. 1 trading partner -- both in imports and exports, and the changes could prove advantageous to the many firms already represented there and those considering making the move.

In addition to the automotive firms, German companies are active in other industries. Deutsche Telekom subsidiary Slovenske Telekomunikacie and the Allianz subsidiary Slovenska Poistovna represent the telecommunications and insurance industries. In the energy sector, the German firms E.ON, RWE and Ruhrgas are providing services. And in the publishing business, the Passauer Verlagsgruppe owns the country’s most important regional papers and one national daily.

Those companies, along with Slovakia’s neighbors, will be watching the developments closely to see if the gamble pays off -- and who wins big.