Central & Eastern Europe
An Ever Emerging
By Jiri Majer, CEO of Accace Group
When doing business especially at international level, a lot of time and effort is spent on ensuring compliance with local legislative frameworks and ever-changing regulations.
Our overview is aimed to provide initial information on local legislative frameworks in CEE comprising the legal forms of business, social and health security systems, labor law specifics, details of taxation systems and other aspects that are important in the light of investment intentions at a regional level.
The countries that will be covered in our overview are (in alphabetical order): Czech Republic, Hungary, Poland, Romania and Slovakia.
The present analysis has been prepared with the contribution of experts from CEE countries and it intends to provide support to decision makers and to facilitate the selection of the most appropriate market to expand, invest or even change the operations center.
Legal forms of business and minimum capital
Given the multiple possibilities one has when choosing which entity to incorporate in a given country in CEE region, we will explain what are the advantages and disadvantages in each legislation. First let’s de ne main legal forms of business that exist under brief variations in each jurisdiction: Unlimited Partnership, Limited Partnership, Limited Liability Company, Joint Stock Company, Branch and Representative Office.
CEE legislation is familiar with all of the listed forms while differentiating between share capital required and number of days for registration with local authorities (see graohic):
As shown in our internal records, there is a high percentage (75%) of Customers that choose to enter a new market through limited liability company due to low costs and short time required for incorporation. There is indeed a significant difference when it comes to share capital as it ranges from EUR 45 in Romania to EUR 5000 in Slovakia.
Employment and labour law rules
When it comes to employment rules and regulations, each of the 5 CEE countries tries to claim its leading position due to permissive and harmonized legislation as well as high level of education and language skills of labor force. Nevertheless it is more than one aspect that needs to be taken into consideration and it all comes to what the investor intends to achieve; there are pros and cons in each legislation and they need to be analyzed and compared from an industry specific point of view rather than regionally.
Establishment term for LLC:
Romania: 3 working days
Poland : 2-8 weeks
Slovakia: 5 working days
Hungary: 5 working days
Czech Republic: 2 weeks
The main provisions which are mandatory to be included in a labour contract, according to labour law in Czech Republic, Hungary, Poland, Romania and Slovakia are: parties, duration of the contract, work and remuneration conditions, the place where the work is performed, evaluation criteria of the employee, the occupation, the risks of the job, number of vacation days, number of days applicable for the notice, number of working hours per day and per week, probationary period, the date of commencement of work. Any omission can lead to annulment of the agreement and huge penalties imposed by local authorities.
The most common conditions among the 5 countries are the number of working hours (40 hours per week in whole region) and holiday’s entitlement in one year (20 days per year). When it comes to holiday entitlement we have also differentiation among some countries with regard to age and years worked in a company; for example in Hungary the term can reach up to 40 days depending on the age and in Slovakia 25 days for employees older than 33 years.
A very important aspect when it comes to employment is represented by the social contributions. If we take into consideration the payroll taxes’ percentages as specified by local legislations, the situation in the region is as follows:
However, due to complex local characteristics of each of the 5 countries’ legislation, it is sometimes hard to understand how each of the contributions is computed and what will be the overall cost for the employer in the end.
Therefore, for a better under- standing of payroll costs in Czech Republic, Hungary, Po- land, Romania and Slovakia we have prepared an estimation of what are the real costs of a company:
Taxation in Central and Eastern Europe – rates and conditions
Considering the complexity and dynamics of the local fiscal environment, it is always recommend able to consult a local tax advisor before taking any decision which may affect your company on the long term or even you, as an individual working abroad. Here are a few reasons why:
In addition to the general corporate income tax rates, as presented in the figure below, there are a few characteristics that make the difference in terms of company taxes in our region, such as: special taxes, reduced tax, payment specifications or specific industry benefits.
For example in Hungary, where normally CIT is 19%, a company may benefit from a reduced corporate income tax if the taxable base is lower than EUR 1,736,666. In addition, the State is also offering development tax benefits and incentives are provided to sport organizations/ lm production companies.
In Romania on the other side, the approach in terms of incentives is different and only businesses such as night bars, nightclubs, discos, casinos and sports betting directly or in association, are actually taxable at a lower rate of 5%, if the due corporate income tax is lower than 5% of the income derived from such activities.
In Slovakia, where the corporate income tax rate is the highest, the law specifies that dividends paid out of profits related to tax periods starting 1 January 2004 are not subject to tax. Moreover, there are no real estate transfer tax and no thin capitalization rules in place.
Value Added Tax: rates and conditions
Still, based on the specific conditions regulated by the Fiscal legislation in each of the 5 countries, these rates may be significantly lower (5%-18%) or even 0. The country with the most significant reduced VAT rate is Poland with 5% and 8%, with possibility of full exemption if the taxable turnover is lower than EUR 37,500 in the previous fiscal year.
Similar reduced rates are applied in Romania (5%, 9%), but only for specific goods and services (e.g. financial – banking, insurance, real estate transactions, etc.). Hungary has also 2 special VAT rates: 5% and 18% which apply under strict local conditions, while Slovakia and Czech Republic have only one reduced VAT rate of 10% and respectively 15%.
While in Hungary and Poland VAT registration is mandatory no matter of the company’s turnover, in Czech Republic, Romania and Slovakia the law specifies the threshold for VAT registration:
- Czech republic: turnover exceeding approx. EUR 36,463 for a period of 12 consecutive calendar months (voluntary and group VAT registration are also possible)
- Romania: turnover above EUR 65,000 (voluntary Romanian VAT registration is not allowed for non-resident companies)
- Slovakia: turnover of EUR 49.790 for a period of 12 previous consecutive calendar months. Still, VAT registration is mandatory for foreign taxable persons without registered office or x establishment in Slovakia before it carries out activity which is subject to VAT in Slovakia and „reverse charge” mechanism is not applied. The voluntary VAT registration is possible as well.
Advantages of Investing – Where, Why and How
Central and Eastern European markets have evolved consider ably as more and more countries in this region have joined the European Union and found them selves obliged to continuously raise the standards of their business environment in order to keep up with the early members.
We have already mentioned a few of the best Central and Eastern European destinations for establishing a new business or developing an existing one, as well as why an investor should choose these countries. A few of these advantages you may also find in the figure above.
- 19% CIT rate Stable economic growth
- One of the strongest consumer markets in Europe
- Main communication routs
- Wide range of investment incentives – 14 special zones
- Highly educated & skilled workforce
- EU subsides for the companies
- 19% CIT rate
- Strong consumer market
- Highly educated employees
- 5% reduced VAT for real estate transactions (special conditions)
- 50% supplementary deduction or CIT tax purposes applicable to eligible R&D activities
- PIT exceptions for IT programmers under certain conditions
- EU subsides for companies
- Tax losses
- CIT rate only 10%
- Development benefits for significant investments
- R&D benefits for eligible entities
- Tax incentives for royalty income, film production companies and sport organizations etc.
- CIT rate of19%
- Very good geographical position & infrastructure
- Highly educated workforce
- Low labor cost
- Safe investment environment
- Transparent investment incentive system
- Lowest VAT rate
- Highly educated workforce
- No real estate transfer tax
- General tax-free allowance
- Private sector contributes app. 80% to GDP
- Very good geographical position
Therefore the only question remaining is: How? How can an investor ensure that once he has done the research and has made the decision of developing a business in Central and Eastern Europe, he will have all necessary knowledge and resources in order to establish it, maintain it and still focus on its core?
The answer is simple: through Outsourcing! Outsourcing has the advantage of unifying all services a company needs (corporate, legal, tax, IT, accounting, payroll and HR) under one roof, in order to comply with local legislation and avoid unnecessary risks. In addition to the irreplaceable value brought by outsourcing experts in terms of know-how, an investor should also take into consideration the fact that he will also benefit from a series of already tested technological solutions, saving him time and financial resources on a long term – enabling him to focus on his growth strategy.
Source: The Outsourcing Journal “ITO&BPO GERMANY FORUM ISSUE Q4/14”