The Slovak Republic is the newest state in Europe. It was established after the split of the former Czechoslovakia and became fully independent and a sovereign state on 1 January 1993.

The new republic is a member of the UN and the Council of Europe, and is applying for full membership of the EU. After the fall of the Communist regime in November 1989 the priority of economic reform was transition from the centrally planned economy to a market economy. Radical economic reform started in January 1991 with the following six basic steps:

• price liberalisation;
• internal convertibility of the currency;
• political and macro-economic stability;
• extensive privatisation;
• liberalisation of foreign trade;
• opening the country up to foreign trade.

Slovak economy - basic data

On the macro-economic level encouraging results have been achieved in the last two years and we expect that the development of the economy will continue in the same vein. In the micro-sphere we feel the deficit of internal capital sources is preventing the achievement of sustainable growth in investment. For Slovakia this means the necessity to develop activities to attract sources from abroad.

This assumes the establishment of a balanced and integrated system involving both internal and foreign capital for promoting investment. The basic principle is to create equal conditions for both local and foreign entities, starting from the point of their equal position and equal rights in applying for support provided by the state. Taking into account the development of budget investments, it is currently not possible to support investment further by providing territorial deductions or by offering advantages to entrepreneurs. Currently there are several legal regulations in existence governing the promotion of investment.

The Charter of Fundamental Rights and Freedoms is based on the concept of equal conditions in business for all business entities. Individual possibilities for investment promotion relate to both local and foreign entrepreneurs according to the provisions of relevant legal regulations.

The Slovak Republic has bilateral agreements with individual states on the promotion and protection of investments, and on prevention of double taxation.

The bodies of state administration within their capacity and within the framework of valid laws, their legal regulations and also within this overview of legal regulations, promote the development of business entities in the following areas:

• tax matters;
• subsidies from the state budget;
• guarantees for loans;
• depreciation of tangible and intangible property;
• promotion of employment;
• use of profit and transfer of dividends;
• protection of competition.

Tax matters

Any loss which occurred in the nearest previous taxation period is deductible from the tax base, and that applies equally for five consecutive taxation periods. If during these five years the taxpayer suffers another loss this cannot be deducted from the tax base. Therefore only one loss can be deducted which directly precedes the taxation period when the taxpayer reported a profit and a tax base.

Tax deductibles are: donations, two per cent at most, provided to communities and legal persons with headquarters on Slovak territory for funding science and education, culture, schools, fire prevention, to support youth and safety of the population, for social welfare, healthcare, environmental, humanitarian, charitable or religious purposes, for churches recognised by the state and religious associations, for physical education and sports.

Taxpayers without a permanent residence or a headquarters on the territory of the Slovak Republic, or those not spending the required number of days here, are liable to a tax duty relating only to income resulting from sources on the territory of Slovakia. In these cases special income tax rates apply.

In compliance with the new concept of economic policy for the area of monetary and financial policy, interest on foreign currency deposits and passbooks denominated in foreign currency and yields on state bonds are tax-exempted.

Imported goods, exempted from tax duty according to valid regulations on exemption of non-money deposits from import duty, are also exempted from VAT.

Subsidies from the state budget

Guarantees for loans

Depreciation of tangible and intangible property

Promotion of employment

Use of profit and transfer of dividends

For companies with foreign capital participation 100 per cent transfer of dividends is allowed for the foreign partners from abroad.

Taxation of dividends is governed by conditions and rates resulting from agreements on preventing double taxation. In case such a bilateral agreement is not made, the tax rate is 15 per cent.

Protection of competition

Present status of direct foreign investment in Slovakia

Increment to foreign investments from the end of 1994 until 31 December 1995 reached SK5,339.3 million, which in relative terms represents 132.3 per cent growth.

To evaluate the dynamics of development in the volume of input foreign capital, we compare data from previous years.

If we skip 1992, which we cannot consider objectively because in 1991 the input volume of direct foreign investment was still very low in Slovakia, then we can state that the dynamics of the year-to-year increment to growth in direct foreign investments in Slovakia in 1993 and 1994 were relatively balanced. The period from 1995 indicates a certain slowdown.

The influx of foreign investment is still quite low - at the end of 1995 capital was concentrated mainly in the retail, financial and industrial sectors. In the distribution of foreign investment in Slovakia so far there has been a serious problem in some regions. Investment is concentrated in Bratislava - 56 per cent - but the conditions are also favourable for investment in central and eastern Slovakia (low prices, low labour costs, many companies with a good tradition, etc). Slovakia, despite strong economic growth, has attracted relatively few foreign investments. There are assumptions that this will change after the completion of the second wave of privatisation and increased demand from new owners for capital for the purpose of restructuring.

Privatisation

Resolutions of the government of SR No 280/1992 of June 1992 and No 443/1992 of August 1992 determine the principles of the privatisation process and division of companies into two waves of privatisation.

The first wave - characterised by a non-standard voucher method. Its goal was to provide the opportunity to the highest number of citizens over 18 years of age to take part in the privatisation of state enterprises. Another advantage of this method was supposed to be a quick change of company ownership. Both goals were actually achieved, but without a real effect on common individual owners and prosperity for large enterprises. The first wave included 706 state enterprises and joint stock companies with 100 per cent state ownership and a total value of SK165 billion. This wave was completed in March 1994.

The second (final) wave - standard methods of privatisation of state enterprises were used (direct sale to a predetermined owner, public tender). This was accelerated mainly in the second half of 1995 and was finished in 1996. In total, 614 direct sales to predetermined owners were approved by the end of March 1996 (85 per cent) and the rest, 15 per cent, was privatised through public tender.

The second wave is making speedy progress. This will be followed by a more step-by-step privatisation of strategic companies in the following sectors: banking and insurance, telecommunications, healthcare, railways and urban infrastructure.

Restructuring of companies

The Slovak Republic offers foreign investors:

• a qualified labour force, with a high percentage with a university education;
• labour costs significantly lower than those in Western Europe;
• a tradition in manufacturing and precise machinery engineering;
• free access to European markets for industrial products;
• a favourable position in Central Europe, ideal for further co-operation with the developing economies of Eastern Europe and the EU;
• good road and river connection to these markets;
• stable macro-economic environment, stable currency, and a very low foreign debt per capita.

Karol Cesnek was Deputy to the General Director of the Central Office SEP, Bratislava (an energy enterprise) from 1989 to 1994, and was General Director until 1996, when he gained his present position as Minister of the Economy