Deloitte - Investing in CE 2011 - China - FINAL

Investing in Central Europe Opportunity knocks
Contents
1. Investing in Central Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Introduction TheInvestment Process Why Central Europe Existing Ties, Potential Opportunities 2. Comparison of Selected Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Basic Facts Main Macroeconomic Data GDP Growth in CE Taxation 3. Country Guides for Bulgaria, Czech Republic, Hungary, Poland, Romania and Slovakia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 General Overview of Economy Tax Structure Legal Entities Labour and Wages Education Infrastructure TheMost Active Industries / Sectors Industrial Parks Investment Incentive Foreign Direct Investment (FDI) Expatriates Life Weather and Climate 4. About Deloitte Central Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Introduction Our Expertise 5. Contact us . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Investing in Central Europe
Introduction
Thekey drivers for investors making cross-border direct investments are usually either to gain access to new and growing markets, or to reduce costs. Thecountries of Central Europe (CE) score highly on both. Thecountries of theCE region comprised in this publication include Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia and Serbia. Over thepast years, thecountries of CE have made significant changes to their tax, accounting and legal systems in order to attract foreign investments. Thegovernments in most CE countries are offering different types of incentives to make their country more attractive. Over thepast few years, thevolume of foreign direct investment in CE has grown significantly; thebenefits are obvious political stability, availability of highly skilled and inexpensive labour, attractive tax regimes, favourable macroeconomic indicators, growing markets and proximity to thecustomer base of old Europe, etc. Theaccession of 8 of the17 countries of Central Europe to theEuropean Union on 1 May 2004 and another 2 countries on 1 January 2007 has greatly accelerated thevolume of foreign direct investment (FDI) flowing into CE. In addition to thepolitical, economic and social factors that are differentiating theCE region, there are nuances specific to theCE business culture. Thetradition of doing business in CE countries may be somewhat different from theChinese or western business style that most investors are used to and investors are often confronted with anapproach not previously encountered in their home country. Especially in thecase of foreign investors looking for government investment incentives, building relationships, properly managing thenegotiation process and communication with therelevant government bodies are often thekey success factors.
Estonia
Latvia
Lithuania
Poland
Czech Republic Slovakia Moldova
Hungary Romania Slovenia Croatia Bosnia - Herzegovina

Montenegro
Serbia Bulgaria
Macedonia Albania
TheInvestment Process
Thestage of theinvestment will dictate, in large part, what issues are most relevant to theinvestor. Accordingly, this will also dictate thetypes of services that we seek to provide to theinvestor. This is thebasic approach of our FDI service line. Based upon our understanding of theforeign investors investment, we try to pin-point where they stand on theinvestment timeline. We can then focus our attention on theissues we think are most relevant to theforeign investor right now. We have prepared ahigh-level summary of certain issues to give you anidea asto where you may need to focus. We have also indicated how we feel we can be of assistance. Some of themost relevant issues facing aforeign investor during thestart-up period are: Structuring theinvestment Establishing alegal entity to do business Determining theavailability of investment incentives Analysing business processes from acustoms and VAT perspective
1. Planning expansion/ relocation
Labour efficiencies Costs efficiencies Free access to theEU Growing local market Availability of Investment incentives
2. Consider thecompetitive advantages of CE region
Bulgaria Czech Republic Hungary Poland Romania Slovakia Serbia
3. Select themost suitable country in CE region
Regional analysis Access to your market infrastructure Availability of workforce Industrial Parks/Office Space
4. Choose thebest location based on important factors
Legal structure Tax structure Investment incentive procedure HR issues Customs issues VAT issues Payroll/Bookkeeping issues Financing
5. Set up alegal entity for your investment
Compliance with local laws Business Modeling Business relationship management Group Transaction
6. Continue with your operational phase
7. Plan further expansion of your production services
Why Central Europe?
Theaccession of 10 Central European countries into EU has created many opportunities for foreign investors. This section describes some of more significant factors that make this region attractive. European Union Membership Low Labour Costs Favourable Tax Environment Availability of Investment Incentives GDP Growth Improving Infrastructure
CE members of theEU: Population Country Bulgaria Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Slovenia Slovakia
Source: Eurostat, 2010
Population (million) 7.6 10.4 1.3 10.0 2.2 3.3 38.1 21.3 2.0 5.4
European Union (EU) Membership

CE free access to theEU market On May 1, 2004 eight countries from Central Europe joined theEU. In terms of thenumber of countries, this enlargement was thelargest in thehistory of theEU. Within theenlarged EU, thenew member states account for about 16% of thepopulation, 9% of theoverall GDP (measured in purchasing power standards) and 15% of total employment. There has been also thelast enlargement on 1 January 2007, when Bulgaria and Romania joined theEU. New member states in Central Europe are undergoing arapid transformation process. Thecountries in this region such asBulgaria, theCzech Republic, Hungary, Poland, Romania and Slovakia share common characteristics and, in many ways, can be considered asone Central European market. All of them are already members of theOECD, NATO and theEU, all of which are critical factors that many foreign investors consider when deciding whether to locate their production facilities in this region. EU membership has transformed these countries into acustoms free zone and in 2007 after joining theSchengen Area all remaining borders will be completely removed. Itwill allow total free movement of capital, goods, people and services within the27 EU member states. Assuch, Central Europe is becoming amajor part of theEuropean and global business environment. Therecent high inflow of foreign direct investment (FDI) is theresult of thefavourable location-specific conditions of Central Europe. Ithas also been decoded that Croatia, pending thefinalization of its Accession Treaty with theEU, shall join theEU in 2013.
Lower Labour Costs

Central Europe access to ahighly skilled and affordable workforce One of thekey economic variables considered in thecontext of competitiveness, outsourcing and production-location decisions is labour cost and its availability. With theEU accession and therelated foreign investment into CE, labour cost competitiveness has become aneven more important issue. Economic surveys demonstrate that labour costs vary enormously among theEU member countries. In addition, bureaucratic rules for businesses, overstated regulation in many fields, excessive high labour costs, too strong unions and ineffective labour codes in Western Europe are driving factors for many companies to seriously consider relocating their operations into CE. Theformer low cost countries within theEU such asIreland, Portugal and Spain are no longer considered aslow cost countries. Given thenew European mobility, companies in these countries are relocating some of their production activities to thecheaper part of theEU. Before 1989, there was astrong base of different industries spread through thewhole region that had been supported by acompetitive education system with major focus on technical fields such aselectro-technics, math and chemistry. This has become animportant argument for deciding to place new investment into CE that provides not just low cost but also skilled labour. In addi-tion, multi language-speaking youths in CE have incrementally been increasing. Major foreign companies have successfully established or relocated their shared service centers, customer and call centers, software and ITcenters into CE. This demonstrates that CE is also asuitable place for services oriented activities.
Minimum wages in selected EU member states asof 2009 and 2010 (EUR) Country Bulgaria Romania Lithuania Latvia Hungary Estonia Slovakia Czech Republic Poland Portugal Slovenia Spain United Kingdom France Belgium Luxemburg
Source: Eurostat, 2010
Corporate income tax Country Bulgaria Hungary* Romania Czech Republic Poland Slovakia Corporate tax rate 10% 10%/19% 16% 19% 19% 19%
2009 122.71 149.16 231.70 254.13 268.09 278.02 295.50 297.67 307.21 525.00 589.19 728.00 995.28 1321.02 1387.50 1641.74
2010 122.71 141.00 231.00 253.00 271.00 278.00 307.00 302.19 320.00 554.17 597.00 738.85 1076.00 1343.00 1387.00 1682.76
Source: TheEconomist Intelligence Unit, 2010, amended in accordance with therelevant changes in 2011. Notes: *Thecorporate income tax rate is 10% up to tax base of HUF 500 million,19% for tax base in excess.
Availability of Investment Incentives

CE provides financial support to foreign investment One of thekey tools used by thenew EU member states in CE to attract foreign investments is theprovision of investment incentives. Since thecountries of CE initially lacked financial resources to offer such direct incentives assubsidies, they have mostly focused their efforts on providing investors with fiscal incentives in theform of tax relief, by using funds provided by theEU, or favorable trade provision. In most cases they have offered combinations of trade and tax incentives and have also been offering direct incentives over thepast 6-7 years aswell. In general, thetrend in theCE region over thepast years has been to offer thesame level of tax incentives to foreign investors who meet thesame criteria. Itshould be noted that all forms of investment incentives constitute state aid and before any incentives can be provided to investors, theEuropean Commission in Brussels must approve them. Typically thevast majority of investment incentive schemes have already been approved by theEuropean Commission but mainly for larger investments case-by-case (individual) prior approval by theEuropean Commission is still necessary. Individual countries within CE have appointed their governmental bodies with administration and proper procedures and also to assist foreign investors with their requests.
Favourable Tax Environment

CE low corporate tax rates attract foreign investors Many Central European countries have sharply slashed their tax rates to attract foreign investment. These significant reductions in thecorporate income tax rates in Central Europe are becoming one of thedriving factors behind therelocation of manufacturing and service oriented business activities into this region. Independent economists praise these countries for theimplementation of tax reforms by reducing companies tax burden asaneffective way to attract foreign investment and to spur sustainable economic growth. According to independent economists further reduction of corporate tax in CE might continue asithas recently been expressed by national governments. Corporate tax rate cuts bring large benefits from attracting foreign investment inflows to thecountries in CE. This continuing trend will make this region attractive for foreign investments in thelong run.
GDP growth in CE
Over thelast years before thefinancial crisis, CE experienced aremarkable economic transformation. Theregion underwent very dynamic developments and theindustrial and agricultural sectors shrank in relation to GDP astheservices sector grew rapidly. Now, theeconomies are expected to recover modestly in 2010 from thedeep recession in 2009, and to grow faster in 20112014, albeit at rates below those in 2005-2008. GDP growth in CE Country Bulgaria Czech Republic Hungary Poland Romania Slovakia Real GDP growth (2009) -5.0% -4.1% -6.3% 1.7% -7.1% -4.7% Real GDP growth forecast 2010 -0.1% 1.4% 0.3% 3.4% -2.0% 3.8% 2011 2.6% 2.0% 2.5% 3.8% 1.7% 3.3% 2012 3.8% 3.3% 3.5% 3.2% 4.3% 3.6% 2013 4.2% 3.1% 3.3% 3.4% 4.8% 3.8% 2014 4.0% 2.9% 3.1% 3.6% 5.0% 4.2%
Source: TheEconomist Intelligence Unit, 2010
Improving infrastructure
There is agood level of infrastructure in theCE region favourable connections to theEuropean-wide transportation network and thegood internal rail and road network are key factors that attract foreign investors coming to this region. In addition major increase of air traffic has launched major expansion of capacities and services at international airports.
Existing Ties, Potential Opportunities
Overview
In addition to thedetailed country guides of themost populous geographies provided in thefollowing chapter, this section will more closely investigate Hungary, Poland, theCzech Republic and Serbia in terms of their existing ties with and potential opportunities for Chinese investors. Trade exposures of thethese countries towards China have somewhat different characteristics. They are similar in terms of having anegative trade balance with China, dominated by steadily increasing import of goods and services, however thelevel of such imports are also influenced by size and maturity of thelocal economies. In this respect, Serbia can be considered asarelatively premature country with practically no export to and only marginal import from China.
Development of trade balances of selected Central European countries with China, EUR mn
1,800 900 0 0
2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010
-2,000
-4,000
-6,000
-8,000
-10,000
-12,000
-14,000
Hungary
Poland
Czech Republic
Serbia
Export
Import
Trade balance
-2000
-4000
-6000
-8000
Interestingly, Hungarys export to China is comparable to Polish exports, despite thesignificant difference in size of theHungarian and Polish economies. However in all of these countries, theshare of export to China is well below 2% of total, indicating that China is still not aprimary destination of goods and services of local companies and there should be room to develop. Theexport of these four countries were halted in 2008 due to thegeneral slowdown in CE economies, however theincrease in Chinas share in respective exports of these countries from 2009 onwards indicate thestrength of theChinese economy which these CE countries managed to benefit from. On theother hand, China is amajor source of import for these countries, and except for Serbia, theshare of import from China has been steadily increasing over thelast four years, despite thecrisis. Companies There has been anincreasing number of Chinese investments in theregion over thepast decade. Several companies established presence mainly in thefield of technology and manufacturing. Huawei and ZTE are two examples, having either manufacturing facilities or major servicing agreements in all four countries. Recently announced investment plans by Chinese companies indicate that upcoming investments might be refocused to sectors like energy, infrastructure and transportation, and these countries provide anumber of opportunities to accommodate such interests both in terms of planned privatizations, private deals and infrastructure investments.
Export of selected CE countries to China, EUR mn 3,500 3,500 3,000 3,000 2,500 2,500 2,000 3,500 2,000 1,500 3,000 1,500 1,000 2,500 1,000 500 2,000 500 0 1,500 0 1,000 500 0 1,8% Chinas share in export 1,6% 1,8% 1,4% 1,6% 1,2% 1,4% 1,8% 1,0% 1,2% 1,6% 0,8% 1,0% 1,4% 0,6% 0,8% 1,2% 0,4% 0,6% 1,0% 0,2% 0,4% 0,8% 0,0% 0,2% 0,6% 0,0% 0,4% 13% 0,2% 12% 13% 0,0% 11% 12% 2006 Hungary 2007 Poland 2008 2009 2010 Serbia
5 326 607 721 866 1,145 4 528 4 489 1,051 6 599 1,231 6
924
640
741
715
901
2006 Hungary
2007 Poland
2008
2009
2010 Serbia
Czech Republic
Czech Republic
Chinas share in import 10% 11% 13% 9% 10% 12% 8% 9% 11% 7% 8% 10% 6% 7% 9% 5% 6% 8% 4% 5% 7% 4% 6% 5% 4% 2006 Hungary 2007 Poland 2008 2009 2010 Serbia
Czech Republic
10
Hungary
Reinforced relationships After amore than 40-year pause, theHungarian prime minister made avisit to China in 2003 with theaim of reinforcing economic and political relationship of thetwo countries. In thefollowing year theChinese President Hu Jintao visited Hungary and elevated bilateral ties to thelevel of friendly cooperation partnership. In thesame year thefirst Chinese - Hungarian Bilingual Primary School was founded in Hungary - still one of akind in Central Europe. From then on Chinese-Hungarian relations have started to develop dynamically, thenumber of exchange programs has increased, and cooperation in all areas have become more intense asunderpinned by theincreasing level of Chinese investments in Hungary. Development of economic ties between thetwo countries was also reflected by theincreasing number of Chinese companies establishing operations in Hungary. Apart from traditional trading activities, many companies have arrived to Hungary in thefield of technology, manufacturing and energy. One of themost significant ones is Huawei Technologies, currently planning anEUR 400mn investment in Hungary.
Chinese FDI in Hungary, EUR mn 30 30 25 25 20 20 15 15 10 10 5 5 0 0 2004 2005 2006 2007 2008 2009 18.7 19.4 17.8 23.3 26.6
25.3
Hungarian export to China, EUR mn 1,200 1,200 1,000 1,000 800 800 600 600 400 400 200 200 0 0 640 741 715 901 1,145
2004
2005
2006
2007
2009
Source: Hungarian Central Statistics Office
Major Chinese companies in Hungary

Company Description
50 50 40 2010 Sales (EUR mn) 144.2 Year of found 2003 Note
Bank of China HUA WEI Technologies Hungary BYD Electronic Hungary Navismart Hungary GreenSolar Equipment Manufacturing Kaito Hungary Regy Metal UTC Overseas Hisense Hungary
40 30 TheBank of China in Hungary stands for trade and economic development between China and Hungary. 30 TheBank of China (Hungary) is involved in corporate banking, personal banking, trade finance, interna20 tional settlement and treasury business etc. 20 Huawei is aleading telecom solutions provider. Through continuous customer-centric innovation, 10 thecompany has established end-to-end advantages in Telecom Networks, Global Services and Devices. 10 BYD Electronic Hungary deals with manufacturing and trading0 mobile phone components. BYD of 0 Company Ltd (China) specializes in IT, automobile and new energy. -10 Navismart is one of theleading transport company for plastic and chemicals in bulk container in Central -10 and East Europe. Current services are including railway shuttles from Germany, Slovenia, Italy, to Hungary. -20 GreenSolar Equipment Manufacturing Ltd. develops, manufactures and delivers turn-key manufacturing -20 lines for low-cost mass-production of thin film solar modules. Thecompany is theofficial distributor of Landlite lighting products. Thecompany deals with waste recycling. In 2010 itwas acquired by TIGER YEAR Group Ltd. 1,000 UTC Overseas, Inc. is aninternational freight forwarding company offering tailored door to door logistics 1,000 services. 800 TheHisense Group provides awide range of products and services in thefield of multimedia, home appliances, telecommunications and information technology. 800 600 600 400 400 200 200
28.3 16.7 9.4 4.6 2.2 1.2 0.7 0.1
2005 2005 2005 2009 1992 2008 2009 2004 2 2
Note: 1 - Total assets of Bank of China in 2010 Note: 2 - 2009 sales figures
11
Premier visits 2009 marked the60th anniversary of theestablishment of diplomatic relations between China and Hungary, and itwas commemorated with multiple visits by high-level Chinese officials to Hungary. On themeetings parties explored opportunities in thefields of ITand info-communications sectors, high-tech research, renewable energy, insurance, tourism and environmental protection. Since 2010 Hungary has been specifically focusing on expediting economic relationship with China. In 2011 thenewly elected Hungarian Prime Minister, Viktor Orbn and Chinese Premier Wen Jiabao agreed to tighten relations and pursue balance in bilateral trade. Ajoint committee was established by theNational Development Ministry of Hungary in theinterest of forging along-term cooperation agreement with China, to serve theexpansion of Chinas investments in Hungary and theregion. Hungarian National Development Minister Tamas Fellegi has been appointed government commissioner in charge of ChineseHungarian relations. His tasks include promoting initiatives aiming to broaden and boost theintensity of Hungarian-Chinese economic and trade cooperation with anemphasis on deepening bilateral economic links and trade exchange, and thepromotion of Chinese investment projects that create jobs in Hungary.
Thegovernment also expressed its interest in contributing to thestrengthening European-Chinese links. In December 2010 important steps in several areas have been taken to strengthen economic cooperation between Hungary and China on Tamas Fellegis official visit to Beijing, including potential cooperation in transportation, infrastructure construction sector and project financing. In June, 2011 Hungarian Prime Minister Viktor Orbn and Chinese Prime Minister Wen Jiabao signed 12 bilateral agreements during anofficial visit by theChinese premier to Budapest. Thedocuments covered investment, infrastructural construction, finances, commodity exchanges, and culture in atotal amount of $1.8 billion. Some of these planned projects are summarised in thetable below.
Major Chinese investments in Hungary

Company Industry Investment amount (EUR mn) Year of investment Short description TheChinese isocyantes producer Wanhua Industrial Group has acquired 96% of BorsodChem Zrt, theleading Central European isocyanate and PVC producer from private equity investors, Permira and Vienna Capital Partners. Wanhua also repaid and restructured theEUR 1bn debt of Borsodchem. Wanhua supports BorsodChem's currently ongoing construction of anew TDI-2 (toulene di-isocyanate) and nitric-acid plant. TheHUA WEI Technologies Hungary announced its plans to further develop its Hungarian manufacturing facilities and establish its second largest international logistic center in Hungary. TheChina BBCA Group Corporation plans to build agreenfield citricacid factory in Szolnok, Central Hungary in cooperation with thelocal municipality of Szolnok who provides the20 hectares industrial property for theinvestments. LGREAT Solar and its Hungarian partner, Orient Solar is developing asolar cell manufacturing factory in Berettyjfalu, Hungary. Operational from Autumn 2011, total employees of thefactory will reach 1,300 by 2013. In connection with this investment, a14.000 sqm production hall will be built, where 800 thousand solarcells with total 200 MW capacity will be produced annually. In May 2011 anunnamed Chinese investor has signed aletter of intent to develop aLED techonolgy based manufacturing and developing factory with thecity of Miskolc, North-East Hungary. In 2011 CANYI New Lighting announced its plans to build amanufacturing plan for energy-efficient lighting in Hungary.
Yantai WanHua Polyurethane Co.Ltd.
Chemical manufacturing
1230
2011
HUA WEI Technologies
Technology
400
n/a
China BBCA Group Corporation
Biotechnology
65
2013 (expected)
LGREAT Solar
Energy
11
2011
n/a
LED technology
10
n/a
CANYI New Lighting
Technology
n/a
n/a
12
1,200 1,200 1,000 1,000 800 800 600 600 400 400 200 200 0 0
Czech Republic
Mutual relations In December 2005, Jiri Paroubek and Wen Tia-pao, prime ministers of theCzech Republic and China respectively, executed 14 agreements defining general conditions of mutual cooperation in economic, political and cultural areas. One of theagreements was theagreement on promotion and protection of investments between theCzech Republic and China that initiated theinflow of Chinese capital. Themutual economic relations between theCzech Republic and China are supported by CzechInvest, theinvestment and business development agency of theMinistry of Industry and Trade, which has arole to attract foreign direct investments to theCzech Republic. Since 1993, CzechInvest has mediated foreign direct investments of total EUR 55m from thefollowing Chinese companies: Shangai Mailing, Changhong, Shanxi Yuncheng PlateMaking Group, MAJAK-SOFTWARE, Balong and YAPP Automotive Parts. In July 2009, theagreement on cooperation between CzechInvest and theChina Council for thePromotion of International Trade was concluded. Ithas been guarantying mutual recommendation of business opportunities and contacts, organization of joint trade missions, exchange of information and other support in order to attract new Chinese investors to theCzech Republic. CzechInvest is actively promoting theCzech Republic asanideal target country for Chinese investments, e.g. itparticipated in theChinese Outbound Investment Summit, one of themost important summits for Chinese foreign investors. Thenumber of Chinese companies establishing operations in theCzech Republic has been increasing steadily of thepast decade. Most significant ones are operating in thetechnology, automotive manufacturing and environmental industry.
Chinese FDI in theCzech Republic, EUR mn 48.7 50 50 40 40 30 30 20 20 10 10 0.5 0 0 -10 -10 -20 -20 2004 2005 2006 2007 2008 2009 9.4 -12.2 -19.2 30.0
Czech export to China, EUR mn 1,000 1,000 800 800 600 600 400 400 200 200 0 0 599 528 326 489 924
2004
2005
2006
2007
2009
Source: Czech Statistics Office 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0
1,500 1,500 1,200 1,200 900 900 600 600 300 300 0 0
13
Major Chinese companies in theCzech Republic

Company YAPP CZECH AUTOMOTIVE SYSTEMS Co., s.r.o. (YAPP Automotive Parts Co., Ltd.) Fenchem EU Ltd. Longway Czech s.r.o. (90% Longwei Hong Kong Company Limited, 10% Shanghai Baolong Sales Company) Yuncheng Plate-making CZ s.r.o. (Shanxi Yuncheng Platemaking Group Joint-Stock Co., Ltd) Shanghai maling (Czech) a.s. Description YAPP is engaged in theproduction of plastic fuel tanks in Mlada Boleslav. Its products are supplied to leading car makers such asVolkswagen, AUDI, GM, Ford, PSA, Hyundai and Kia. Total investment of USD 12.75m. Fenchem is anactive participant in thehealth and beauty industries. Fenchem decided to open new office in Ostrava Vitkovice,Czech Republic to supply better services for central Europe costumers. Total investment is estimated at value of USD 3.3m. 2010 Sales (EUR mn) Year of found Note
n/a
2010
n/a
2010
Thecompany is active in theautomotive industry. Itis importer and distributor of wide range of products and components for cars, bikes, utility vehichles and trucks, eg: parking systems, xenon headlight, etc.
0.2
2008
{1}
Czech Yuncheng Plate making Co., Ltd is aprofessional rotogravure cylinder making company with 2 working lines and anannual output of 12,000 cylinders. Company's products include: pre-press, bases, gravure rollers, etc. Thecompany, subsidiary of SHANGHAI MALING AQUARIUS Co., Ltd., is engaged in production and sale of canned meat products and ready-made meals under thebrand Mailing and Guding, respectively. Distribution for theCzech Republic is secured through theSHANGHAI MALING FOOD a.s. More than 90% is exported to theEU countries, Asia and USA. Total investment USD 29m. Huawei is aleading telecom solutions provider. Through continuous customer-centric innovation, thecompany has established end-to-end advantages in Telecom Networks, Global Services and Devices. Owned by Huawei Technologies Coperatief U.A. One of theworlds biggest LCD TV manufacturers. Thefactory, established by Changhong in 2005, is located in theIndustrial Zone of Nymburk city, 42 km east of Prague. There are 4 assembly lines with production up to 1 million LCD TV's per year. Total investment USD 10.89m. ZTE Corporation is aglobal provider of telecommunications equipment and network solutions operating in more than 140 countries. Itoffers awide choice of products ranging from voice, data, multimedia and wireless broadband services. Kinloon Technology invested into their manufacturing project in Litvinov regarding theproduction of small motorcycles initially for theGerman market. Thecompany is engaged in therecycling of PET, LDPE (Low Density Polyethylene), ABX (acrylonitrilebutadiene- styrene) and other plastics. Its main objective is to conduct supplies of PET to theparent company China Textile Export Import Co. Ltd., Shanghai, China. Recycling center is situated in Sadska near Nymburk. Thecenter processes up to 50 % of PET coming from sorted household waste in theCzech Republic.
n/a
2007
0.2
2006
{2}
Huawei Technologies (Czech) s.r.o. Changhong Europe Electric s.r.o.
64.1
2005
{1}
n/a
2005
ZTE CZECH s.r.o. Kinloon s.r.o. (Kinloon Technology)
1.0
2005
n/a
2004
WANSIDA Int. s.r.o.
n/a
2001
Note: 1 - 2009 data Note: 2 - 2008 data Source: Company, CzechInvest, Comercial register, Press Release
14
Attractiveness of theCzech Republic Chinese appetite to invest in theCzech Republic has been increasing though itis still limited. Themain issues remain thevisa requirement and insufficient representation of theCzech Republic in China. At thebeginning of 2011, CzechInvest moved its office from Hong Kong to Shanghai. This step is assumed to attract more potential investors and higher number of Chinese investments in thefuture.
Thehighest interest is expected from Chinese companies engaged in technological, energy, biotechnical, construction and electro-engineering industries. Chinese investments in theCzech Republic are coming from both already existing and newly incoming Chinese companies. Thekey Chinese investments in theCzech Republic are listed in thetable below:
Major Chinese investments in theCzech Republic

Company Industry Investment amount (EUR mn) Year of investment Short description Fenchem is anactive participant in thehealth and beauty industries. Fenchem announces theopening of aSAM-e facility in theCzech Republic to supply Europe with its SAMe-way ingredient. With theestablishment of Fenchems European head office in Czech Republic in 2010, theopening of theCzech plant fits into theoverall growth strategy of Fenchem in thearea of nutraceuticals for both human and animals. YingKe, Chinese law firm with presence in CEE through its subsidiary YingKe Varnai in Hungary, is considering its expansion to theCzech Republic. Changhong, theLCD TV manufacturer, is planning to broaden its activities in theCzech Republic. Itplans to invest in theproduction of white goods and to move part of its R&D section from China to theCzech Republic, aswell. Shanghai mailing, producer of canned meat products, is planning following investments in theCzech Republic. Firstly, itis planning to invest in machine equipment and extension of storage and production line capacity in upcoming years. Secondly, Shanghai mailing will do overall extension of its production facility within a5 year period. Huawei is aleading telecom solutions provider. Business development plans of Huawie Czech subsidiay are in line with thecompany's global strategy. Thecompany is considering to broaden its activities in 2 new segments: ICT solutions for enterprises and state administration and consumer elecrtonics (smart phones and tablets). In 2011 CANYI New Lighting announced its plans to build amanufacturing plan for energy-efficient lighting in Hungary.
Fenchem EU Ltd.
Healthcare, Food
11
2011
YingKe Changhong Europe Electric
Business Services
2011
Electronics
10
2011-2016
Shanghai maling (Czech) a.s.
Food
up to 40
2011-2016
Huawei Technologies (Czech) s.r.o.
ICT
n/a
n/a
CANYI New Lighting
Technology
n/a
n/a
15
1,000 1,000 800 800 600 600 400 400 200 200 0 0
Poland
Polish Chinese trade relationships Therelations between Poland and China are inter alia formally regulated by thetreaty signed during thevisit of Chinas president Hu Jintao on 8th June 2004 (in force since 27 April 2005) on theeconomic cooperation. Both countries agreed to foster thedevelopment of economic cooperation by utilizing aneconomic potential of each country for strengthening of thebilateral economic relations. In 2006 Polish Information and Foreign Investment Agency (PAIiIZ) and China International Investment Promotion Agency signed theMemorandum concerning mutual promotion of investments. Asaresult of this session, two working groups were established in order to remove barriers to foreign investments in these countries. After 2004, theactivity of theChinese investors has increased substantially. Thevalue of foreign direct investments increased gradually from 0.3 million in 2004 to 38.7 million in 2008. Value of FDI in 2009 declined somewhat due to theeconomic crisis. Between 2006 and 2010 Polish export to China has been increasing very dynamically (CAGR 19%). During his visit to China in October 2008, Polish Prime Minister Donald Tusk stated that political and economic relations between Poland and China should be widened. TheVice-Minister of theMinistry of Economy stated that themost prospective areas of cooperation are environmental protection, sewage treatment, mining industry, tourism, and paper industry. Chinese investors appetite for investing in Poland has been remarkably increased after successful participation of Poland at EXPO exhibition in Shanghai in 2010 (about 8 million people visited thePolish exhibition, and around 600 articles appeared in Chinese press commenting that event). In 2010, PAIiIZ assisted in signing of thecontracts related to five projects worth 109 million. Itis nearly two times more than theseven projects completed in theyears 2007 - 2009, which were worth nearly 62 million. Meanwhile, in thecurrent year, they have already managed to sign acontract for 63 million. Currently PAIiIZ is negotiating investment agreements with 16 Chinese companies.
Chinese FDI in Poland (2004-09; in EUR mn) 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 38.7 32.6
14.5
0.3 2004
0.8 2005
0.4 2006 2007 2008 2009
Volume of Polish export to China (2006-09; in EUR mn) 1,500 1,500 1,200 1,200 900 900 721 600 600 300 300 0 0 607 866 1,231 1,051
2004
2005
2006
2007
2009
Source: National Bank of Poland
Some uncertainty in Polish Chinese business relationships has been introduced by COVECs failure to complete highway construction. In September 2009, COVEC - theChina Overseas Engineering Group Company - won atender to build 49 kilometers of theA2 highway linking thePolish and German capitals Warsaw and Berlin. COVEC offered to build two sections of thehighway for PLN1.3 billion (330 million). However asCOVEC failed to pay Polish subcontractors, thecontract has been cancelled. COVEC commented that theactual cost of theA2 highway project has far exceeded its expectations. Nevertheless according to theChinese ambassador in Poland Sun Yuxi - Chinese investors appetite is still high. Yuxi stressed that theinfrastructure sector offers thelargest potential for mutual cooperation, which will continue. Two other areas considered asthemost promising for Chinese investors are railway and energy sector.
16
Major Chinese investments in Poland According to thePolish Ministry of Economy, thecumulative amount of Chinese investments in Poland reached some 237 million at theend of 2008. Among thebiggest investors were TCL Polska (LCD TV sets; about 80 million), TPV Display Polska (about 41 million), GD (Guangdong) Poland, which runs theEuroazjatyckie Centrum Handlowe wholesale distribution centre near Warsaw ( 33 million) and Min Hoong Development (real estate in Warsaw and Sopot; 33 million).
Major Chinese investments in Poland

Investor name Country of registration Country of origin Investment amount (EUR mn) Year of investment Activities(class) Manufacture of electrical machinery and apparatus; Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods; Theproduct of company includes cylinders used for plastic and paper packages like cigarette, alcohol and all kinds of decoration paper, wall paper, leather, labels and lids. Manufacture of metals and metal products; - Forging, pressing, stamping and roll forming of metal; powder metallurgy; Hotels and restaurants; - Hotels; Company name
TCL Belgium SA
Belgium
China
80,00
2004
TCL Operations Polska - yrardw
China Shan Xi Yun Cheng Group Plant Making Ltd.
China
China
10,00
2007
YUNCHENG (POLAND) Sp. zo.o. - d
Dong Yun
China
China
NA
2007
Dong Yun (Poland) sp. zo. o. - d Min Hoong Development Co. Pte. Ltd. Poland Sp. zo. o. - Sopot GD Poland Investment Sp. zo. o. - Wlka Kosowska Victory Technology Polska sp. zo. o. Gorzw Wielkopolski TPV Displays Polska sp. zo.o. - Gorzw Wielkopolski Atletic Group sp zo.o. - Koszalin
Min Hoong Development Co. Sino Frontier Properties Ltd. Suzhou Victory Precision Manufacture Co TPV Technology Ltd
China
China
33,00
1991
China
China
33,00
1994
Construction; - Building of complete constructions or parts thereof; civil engineering; Manufacture of rubber and plastics; - Manufacture of plastic products; Manufacture of electrical machinery and apparatus; Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods; Production of bicycles
China
China
NA
2007
China
China
41,00
2007
Atletic Group
China
China
initial investment 3,00"
2005
Potential Chinese investments in Poland

Civil part of HSW S.A. is aconstruction machinery manufacturer. Itspecializes in theconstructing and theselling of crawler dozers, wheel loaders, backhoe loaders and pipelayers, landfill compactors. Itoffers spare parts, service and other technical and engineering services. Production of components used to construction of wind farms
Liugong Machinery Ltd
China
China
rumoured PLN 250m (~EUR 60m)
2011
Civil part of HSW
Shanghai Electric
China
China
NA
2011
NA
17
Serbia
Development of bilateral and commercial cooperation In Serbia, China recently largely targeted heavy construction and energy projects, such asthermal plants and hydro plants, but also thegas and oil sectors, renewable energy including construction of wind farms and infrastructure investments such asconstruction of roads and railways. Over thepast several years, theSerbian government and thegovernment of thePeoples Republic of China have been working on thedevelopment of both political and economical relations between thetwo countries. Several agreements have been signed including anaccord for establishing astrategic partnership between thetwo countries with agoal of further advancing bilateral relations and economic cooperation, and anagreement for aneconomic and technological cooperation in thearea of infrastructure in theyear 2009. During theyear 2010, Serbia and China signed anagreement on understanding and cooperation between thetwo countries within theenergy sector. Recently in 2011, new agreements were signed over deepening of thetwo countries strategic partnership, especially in thearea of economic cooperation, and economic and technical collaboration between thetwo countries, aswell asChinas ten million Yuan donation to Serbia for medical supplies and vehicles. Asone of themost recent developments, China has granted aUSD 300 million preferential loan for thedevelopment of thethermal power plant Kostolac which is scheduled to be build over thenext two and ahalf years. Also at this point, all requirements for therealization of anew bridge between Borca and Zemun have been completed. Further, theSerbian government is extending aninvitation for China to be involved in theconstruction of roads in Serbia and other infrastructural projects.
Major Chinese companies in Serbia

Company Description Huawei is aleading telecom solutions provider. Through continuous customer-centric innovation, thecompany has established end-to-end advantages in Telecom Networks, Devices, and Cloud Computing. In Serbia itis only involved in distribution. ZTE Corporation is apublicly-listed global provider of telecommunications equipment and network solutions operating in more than 140 countries. Itoffers awide choice of products ranging from voice, data, multimedia and wireless broadband services. In Serbia itis only involved in distribution. Distribution of wide range household products. 2010 Sales (EUR mn) na Year of found 2007 Note
HUAWEI Technologies d.o.o.
ZTE Corporation TIAN SHI YING XIAO d.o.o. Note: {1} 2009
na na
2005 2008 {1}
Major Chinese investments in Serbia

Company Industry Investment amount (EUR mn) Year of investment Short description Thegovernment of theRepulic of China has approved Serbia apreferential loan of 300 million dollars for therenovation of theexisting and theconstruction of new plants at "Kostolac" thermal power plant. This investment is intented for therenewal of "B1" and "B2" blocks, theconstruction of thedesulphurisation system, aswell astheconstruction of infrastructural objects, aport, arailroad track and roads for theneeds of future projects. All conditions have been met to commence therealization of thenew bridge from Zemun to Borca. Thenew bridge will be 1.5 km long, 29.10 meters wide and 22.8 meters high, with six traffic lanes and adjoining pedestrian-bicycle paths. Feeder roads and interchanges will be 21.6 km long. Thenew bridge will move freight traffic from Belgrade's core, and also enable development of thecity on theother side of theriver. Theagreement on theconstruction of thebridge is worth 170 million, 85% of which will be provided by theChinese Exim Bank in aloan, while theremaining 15% will be paid by theRepublic and theCity of Belgrade.
Potential: China National Machinery Import & Export Corp.
Heavy Manufacturing
Estimated 300
2011
Potential: China Road and Bridge Corporation
Construction
Estimated 144
2011
18
Investment opportunities in Central Europe for Chinese companies
Upcoming investment opportunities in selected CE countries

Country Company Industry Petroleum products and fuels 2010 Sales (EUR mn) 1,670 Short description Cepro is aninternational government owned company engaged in thetransportation, storage and distribution of crude oil products; and operation of EuroOil filling stations. Thecompany has eighteenth fuel depots. TheCzech Post is anational postal service provider. Itdelivers letters and packages reaching every part of theworld. TheCzech Post also provides financial services to its clients. Thecompany has alarge ITinfrastructure including intranet and extranet applications. There are currently more then 4000 post offices across theCzech Republic. Ceske aerolinie a.s. (Czech Airlines) is theCzech national airline company based at Ruzyne International Airport, Prague. Thecompany is engaged in theprovision of scheduled and non-scheduled flights, cargo, handling, catering and aircraft maintenance services. Theairline connects to major European destinations and to transit points in North America, Asia, theMiddle East and North Africa and carries in excess of two million passengers each year. Lesy esk Republiky, S.P. is aCzech state-owned forestry management company involved in theadministration of forests and designated water courses and streams. Itmanages 54% of all forests in theCzech Republic, which covers 1,392,000 hectares of state forest land, and approximately 20,000 kilometres of designated water courses and streams. Budweiser Budvar is agovernment owned company and one of themost successful food-processing companies in theCzech Republic. Almost ahalf of its production is exported into more than 50 countries on all continents. In 2009, Budweiser Budvars sales reached 1.28 million hectolitres of beer. KORADO belongs to leading world manufacturers of steel radiators with more than 25 million customers worldwide. TheMinistry of Finance of theCzech Republic holds minority share (34%) in thecomapny. AES Tisza 2 Power Plant was commissioned with 900 MW built-in capacity, asagreen-field project, in 1977-78. Thecondensing power plant is fuelled using hydrocarbons (natural gas, fuel oil, inert gas). Hungarian assets of amajor international energy group are potentially up for sale. Including: (1) natural gas distribution assets; (2) arecently installed gas power plant of 1000MW and (3) anenergy trading holding company. Malv Hungarian Airlines, thenational airline of theRepublic of Hungary, was established in 1946. Today with its scheduled passenger, cargo and charter operations, Malv is known asone of theleading airlines in theCentralEastern European region. No 3 life and non life insurance company on thePolish market owned by KBC is up for sale from September 2011. Life and non life GWP (gross written premium) amounted to EUR 500mn and EUR 630mn in FY10, respectively. Kredyt Bank established in 1990 is the8th biggest bank in Poland based on total assets (4.5% market share). Itis auniversal bank with 375 branches. KBC, its strategic shareholder since 2001 is considering theexit. Note
Czech Republic
CEPRO
{1}
Czech Republic
Czech Post
Postal and courier activities
802
Czech Republic
Czech Airlines
Air transport
769
{1}
Czech Republic
Lesy R
Forestry, Woods administration
294
{1}
Czech Republic
Budweiser Budvar
Food & Beverages
80
Czech Republic
Korado
Manufacturing
62
Hungary
AES
Energy
250
Hungary
Major international energy company
Energy
1,000
Hungary
MALV
Transportation
400
Poland
Warta
Insurance
270
{2}
Poland
Kredyt Bank
Banking
10,952
{3}
Note: {1} 2009 data; {2} Figure refers to Net Asset Value; {3} Figure refers to Total Assets Source: Companies, Comercial register, Press release
19
20
Comparison of Selected Data
21
Comparison of Selected Data
All these factors may represent agreat challenge to investors coming to CE and dealing with these can often lead to wasting valuable time and inefficiencies in theinitial investment stages.
Basic facts 2010 Population (million) Area (km) Capital city Main language Currency Membership Bulgaria 7.4 111002 Sofia Bulgarian Lev (BGN) EU, NATO, OECD, WTO Czech Republic 10.5 78866 Prague Czech Czech Koruna (CZK) EU, NATO, OECD, WTO Hungary 10.0 93030 Budapest Hungarian Hungarian Forint (HUF) EU, NATO, OECD, WTO Poland 38.2 322575 Warsaw Polish Polish Zloty (PLN) EU, NATO, OECD, WTO Romania 21.5 238391 Bucharest Romanian Leu (RON) EU, NATO, OECD, WTO Slovakia 5,4 49036 Bratislava Slovak Euro (EUR) EU, NATO, OECD, WTO Serbia 7,3 77474 Belgrad Serbian Serbian Dinar (RSD) UN, PfP, BSEC, CEFTA
Main macroeconomic data 2010 Inflation GDP per capita GDP growth Export statistics (bn) Import statistics (bn) Unemployment rate Minimum wages (EUR) Bulgaria 2,4% $6 450 0,2% $20,6 $23,9 9,5% 122,7 Czech Republic 1,5% $18 232 2,3% $126,4 $123,5 9,0% 297,7 Hungary 4,9% $13 024 1,2% $93,3 $87,1 11,2% 271,0 Poland 2,6% $12 280 3,8% $162,3 $170,2 12,1% 320,0 Romania 6,1% $7 540 -1,3% $52,2 $60,3 6,9% 141,0 Slovakia 1,0% $16 042 4,0% $68,0 $67,8 12,5% 307,0 Serbia 6,3% $5 820 1,8% $9,8 $16,1 17,2% 133,7
Source: TheEconomist Intelligence Unit, 2010 * Primary, secondary and tertiary sector respectively, Economist Intelligence Unit estimates
22
GDP growth in CE Country Bulgaria Czech Republic Hungary Poland Romania Slovakia Serbia Real GDP growth (2009) -4,8% -4,5% -6,6% 1,5% -7,0% -4,4% -2,7% Real GDP growth (2010) 0,8% 2,1% 1,3% 3,7% -1,2% 4,0% 2,2% Real GDP growth forecast 2011 3,5% 1,9% 3,1% 4,3% 1,5% 3,4% 3,4% 2012 4,2% 2,9% 3,3% 4,5% 3,7% 4,0% 4,9% 2013 4,7% 3,1% 3,3% 3,5% 4,8% 4,7% 5,3% 2014 4,4% 3,1% 3,3% 3,8% 4,7% 4,7% 5,1%
Taxation 2010 Personal tax Corporate tax VAT VAT reduced rate Bulgaria 10% 10% 20% 9% Czech Republic 15% 19% 20% 10% Hungary 16%** 10% / 19%** 25% 18% / 5%**** Poland 18% / 32%*** 19% 22% 7% Romania 16% 16% 24% 9% Slovakia 19% 19% 20% 10% / 6%*****
Source: TheEconomist Intelligence Unit, 2010, amended in accordance with therelevant changes in 2011. Notes: *Asof 2011, 16% flat rate applies to agrossed up basis that includes thesocial security contribution payable by theemployer (27%). **The corporate income tax rate is 10% up to tax base of HUF 500 million, 19% for tax base in excess. ***Income of up to PLN 85.528 is taxed at arate of 18%, whereas above this amount thetax rate of 32% applies. ****An 18% rate is applicable to basic food products and to hotel accommodation services and a5% rate applies to pharmaceuticals, certain medical equipment, books and newspapers. *****10% primarily health care related goods, 6% for basic commodities such ashoney, milk and meat.
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24
Country Guides
If yours is amultinational business, you need to have access to objective and informed insights for many jurisdictions. Understanding theins and outs of doing business around theworld is adaunting task. Deloitte Central Europe has developed these short country guides to help you find your way, covering important business and human resources topics like investment climate, personal and business taxation, labour law, legal entities etc.
Investing in Central Europe 25
Bulgaria
1. General Overview of Economy

Before therecent economic crisis, Bulgaria, aformer communist country that entered theEU on 1 January 2007, had experienced macroeconomic stability and strong growth. Since amajor economic downturn in 1996 that led to thefall of thethen socialist government, thepublic policy became committed to economic reform and responsible fiscal planning. Minerals, including coal, copper, and zinc, play animportant role in industry. In 1997, macroeconomic stability was reinforced by theimposition of afixed exchange rate of thelev against theGerman D-mark - thecurrency is now fixed against theeuro -and thenegotiation of anIMF standby agreement. Low inflation and steady progress on structural reforms improved thebusiness environment. In 2009 theGDP of Bulgaria shrank by 5% which was mainly theresult of thedecline in foreign direct investment due to theglobal economic crisis. Before that theeconomy of thecountry enjoyed asteady growth of over 6% for four consecutive years. In 2010 theGDP of Bulgaria is expected to have amodest growth of around 0.2%. Political system According to theConstitution of Bulgaria, adopted by theGreat National Assembly on July 13, 1991, Bulgaria is aparliamentary democratic republic in which thesovereign power belongs to thepeople who exercise itthrough their representative bodies, elected by direct and secret ballot. Every Bulgarian citizen over theage of 18 has theright to elect or to be elected. TheNational Assembly, elected for aperiod of four years, is thesupreme body of state power. TheNational Assembly enacts, amends and rescinds thelaws, appoints and dismisses theGovernment and theDirectors of theBulgarian National Bank, draws up thestate budget, adopts theresolutions for holding referenda, constitutes, transforms and abolishes ministries.
Bulgarian tax residents are subject to Bulgarian tax on their world-wide income, whereas non-residents are subject to Bulgarian tax only on their Bulgarian source income. According to theTax on Income of Individuals Act (TIIA) effective asof 1 January 2007, thefollowing individuals, irrespective of their nationality, are considered asBulgarian residents for tax purposes: (i) individuals who have apermanent address in Bulgaria1 (ii) reside in thecountry for more than 183 days in any given 12-month period (iii) have been sent abroad by theBulgarian State, by Bulgarian state bodies and organizations, by Bulgarian enterprises (thefamily members of theindividual are also included); or (iv) whose centre of vital interests is in Bulgaria. Bulgarian personal income tax on employment income aswell asthestatutory insurance contributions due by theemployees is withheld and paid monthly by theemployer through thepayroll. Bulgarian personal income tax return for therespective year should be filed with therevenue authorities by 30 April of thefollowing year. If anindividual files his/her annual tax return by 10th of February of thefollowing year, he/she can utilize a5% discount on theportion of his/her outstanding liability paid within thesame deadline. In case they have not utilized this option, thesame discount of theoutstanding annual liability is available if: both thetax return is submitted electronically and thetax due is paid by 30 April of thefollowing year. Certain individuals are exempt from fling anannual tax return. Certain income of residents and/or non-residents is not taxed with theannual tax return. Itis taxed separately, on ascheduler basis, with specific fat final tax which varies from 5 to 10 %. Subject to personal income tax is thegross taxable income including thebasic compensation and all taxable benefits less theallowed deductions (Bulgarian and foreign mandatory social security and health insurance contributions due by theindividual; voluntary pension contributions, life/health/unemployment insurance subject to certain conditions/limitations; standard fat deductions applicable to businesses, independent professions/ activities, dependant services, etc).
2. Tax Structure
10% fat tax rate applies both to personal and corporate income. Personal Income Tax for anIndividual Compensations received for work in Bulgaria or for provision of services performed in Bulgaria are considered income from Bulgarian source, regardless of whether delivered by aBulgarian or aforeign employer and regardless of whether theremuneration is paid in Bulgaria or abroad. Therefore, such compensations are subject to personal income tax in Bulgaria, unless aDouble Tax Treaty provides for anexemption.
1 Individuals who have apermanent address in Bulgaria but their centre of vital interests is not in thecountry are not considered Bulgarian tax residents.
26
Corporate Income Tax Bulgarian corporate income tax is charged on thebasis of thefinancial result of thetaxpayer asper its profit and loss account, adjusted with certain non-deductible items and tax allowances, asprovided for in thelaw. Companies are liable for corporate income tax at therate of 10% and are required to make monthly or quarterly advance tax payments during theyear. Advance tax payments are calculated on thebase of net income for theprior year. Corporate income tax liabilities are reported annually through filing anannual tax return by 31 March of thefollowing year. Companies are also obliged to prepare annual financial statements and statistical reports to be filed with theNational Statistical Institute. Certain expenses occurred by thetaxpayers are subject to one-off tax - entertainment expenses; in-kind fringe benefits; maintenance, repair and exploitation of vehicles for management activities. Aspecial tax rate is applicable for budgetary institutions, ship operating companies aswell ascompanies engaged in games of chance and gambling. Adiscount of 1 per cent of theannual corporate income tax but not more than BGN 1,000 is available if: both theannual tax return is submitted electronically and theannual tax due is paid on or before 31st day of March of thefollowing year.
Themost appropriate types for carrying out business in Bulgaria are: alimited liability company and ajoint stock company. Companies may also open abranch office. All of these have to be entered into thecommercial register. Limited liability company - OOD Itis acommercial company with share capital owned by its shareholders whose liability is limited to theamount of theshares subscribed. Alimited liability company may be founded by one or more persons, including foreign natural or legal persons. Theminimum capital is BGN 2. Contributions to theshare capital may be paid in cash or in kind. Thestatutory bodies of thelimited liability companies are thegeneral meeting of shareholders, which must be held at least once ayear, and themanaging director(s). Asole shareholder limited liability company is called EOOD. Itis owned by anatural or legal person. Thesole shareholder exercises thepowers of thegeneral meeting and (a) managing director is appointed to run thecompany. Alimited liability company must prepare abalance sheet and financial statements each year. Joint stock company - AD Itis acommercial company with share capital owned by its shareholders whose liability is limited to theamount of theshares they subscribe. Ajoint stock company can be founded by one (EAD) or more persons, including foreign natural or legal persons. Theminimum share capital of ajoint stock company is BGN 50,000. Ashare capital higher in value is required for theestablishment of special types of companies like banks, insurance companies, etc. Branch Foreign legal entities registered abroad and allowed to perform commercial activities in thecountry of their registration can register abranch office in Bulgaria. No authorized capital is required to open abranch. Abranch is not alegal entity. Branches are obliged to maintain accounts asanindependent company. Abranch of aforeign company must prepare abalance sheet. Representative Office Itis regulated by theInvestment Incentives Law. Foreign persons who are entitled to engage in business activity under thelegislation of their own countries may set up arepresentative office which is registered with theBulgarian Chamber of Commerce and Industry. Representative offices are not legal persons and may not engage in economic activity.
3. Business Establishments
Bulgarian legislation allows for thefollowing types of business organizations: anunlimited (general) partnership; alimited partnership; alimited liability company; ajoint stock company; alimited partnership with shares; asole trader; abranch; aholding; aco-operation; arepresentative office.
27
Bulgaria
4. Labour and Wages

Regular Working hours: 8 hours aday. A48 hour rest period is required during a7-day period, normally thehalf of itis on Sunday. Annual paid leave: not less than 20 working days. Retirement age: Anindividual to claim Bulgarian pension for insurable length of service and age should comply with theso called point system, where: for male thetotal points should be 100 (age of minimum 63 years + length of service equal to thedifference up to 100). For women thepoints are less - 94 (age of minimum 60 years + length of service equal to thedifference up to 94). Entitlement to pension may be acquired with 15 years insurable length of service of which 12 years of actual service and attainment of theage of 65 years (both for men and women). Minimum monthly gross salary: BGN 240 (approximately EUR 123). Average monthly gross salary: BGN 640 (approximately EUR 327)2 Social security: All Bulgarian residents and non-residents working in Bulgaria are subject to statutory insurance contributions unless abilateral or multilateral social security agreement applies and provides otherwise. Asof 1 January 2007 Bulgaria became aMember State of theEuropean Union. Thus, theCommunity provisions on thecoordination of thesocial insurance schemes apply with respect to residents of EU/EEA/Switzerland, aswell asto some eligible third-country nationals in some cases. Also Bulgaria has anumber of bilateral Social Security agreements with countries outside EU/EEA. Thesocial insurance contributions are calculated on thebasis of thegross remuneration received by theemployee subject to amaximum cap of earnings of BGN 2,000 per month (BGN 24,000 annually). Theaggregate rates of statutory insurance contributions are split up between theemployer and theemployee in acertain proportion.
Asfrom 1 January 2010 thefollowing rates apply for statutory social insurance contributions: Type of contribution Pension Fund Contribution* Universal Pension Fund* Labour Accident and Occupation Diseases** Common Illness and Maternity Fund Unemployment Fund Health Insurance Total Employer 7.1% 2.8% 0.4% - 1.1% 2.1% 0.6% 4.8% 17.8% - 18.5% 1.4% 0.4% 3.2% 12.9% Employee 5.7% 2.2% Overall rate 12.8% 5.0% 0.4% - 1.1% 3.5% 1.0% 8.0% 30.7% - 31.4%
*Employees born before 1960 are liable for Pension Fund Contribution of 16% split between theemployer and theemployee asfollows 8.9% : 7.1% and do not pay thecontribution to theUniversal Pension Fund of 5%. **The rate for Labour Accident and Occupational Diseases Fund varies between 0.4% 1.10% depending on thetype of theeconomic activity performed.
Labour contracts According to theLabour Code theemployment contract may be concluded for anindefinite period of time or, alternatively, asanemployment contract for afixed term. Anemployment contract is considered to be concluded for anindefinite period unless explicitly agreed and stated otherwise. Anemployment contract concluded for anindefinite period may not be changed to afixed-term contract unless explicitly requested by theemployee, and stated so in writing. Anemployment contract for afixed term may be concluded only under circumstances and conditions explicitly provided for under Bulgarian Labour Code.
2 Asper thepublicly available information provided by theNational Institute of Statistics for theperiod April - June 2010.
28
Employment contract for atrial period In cases when thework requires theability of theemployee who will perform itto be tested, his final appointment may be preceded by acontract providing for atrial period of up to 6 months. Such acontract may also be concluded in thecase when theemployee wants to make sure thejob is suitable for him. Termination Theemployment contracts should be terminated in writing, grounded on explicitly provided by Bulgarian Labour Code termination grounds and following theapplicable formal termination procedure. Most of these procedures could be regarded asemployee protective ones. In any case, thedismissed employee has theright to file aclaim against theemployer in thestate courts and claim thedamages in cases of unfair dismissal. There are some categories of employees that enjoy protection against dismissal (for example absent employees (e.g. on sick leave, pregnant, nursing mothers, military assignment), employees suffering of explicitly listed diseases, mothers of children up to three years of age, etc.). Termination notice periods may not be less than 30 days and may not exceed 3 months. Thetermination period for fixed term employment contract is 3 months but not more than theremainder of theemployment term. Theemployment contracts could be terminated upon mutual consent of theparties. In case that thetermination of theemployment contract is upon initiative of theemployer, hecould offer acompensation of not less than four gross monthly salaries of theemployee. In addition to other statutory compensations, upon dismissal due to closing down of theenterprise or part of it, staff reduction, etc., theemployee is entitled to aspecial additional compensation from theemployer. This compensation is due only if theemployee is unemployed after thetermination of theemployment contract. Upon termination of theemployment relationship after theemployee has acquired theright to apension for insured service and age, irrespective of thegrounds for thetermination, heis entitled to compensation by theemployer in theamount of his gross labour remuneration for aperiod of two months. However, if theemployee has worked with thesame employer for thelast ten years or more, hewill be entitled to compensation equal to his six months gross labour remuneration.
Immigration regulations Bulgarian immigration legislation divides theexpatriates in two categories: EU, EEA or Swiss nationals, and third-country nationals. Third-country nationals Thework and residence regimes for third-country nationals are more restrictive and aim at protecting theinternal labour market. Not all third-country nationals are allowed to enter Bulgaria and remain in thecountry without avalid entry visa (aso called visa-less stay). To work and reside in Bulgaria they need awork permit, along-term visa D and aresidence permit. Employment: third-country nationals need Bulgarian work permits to legally work in thecountry. Awork permit is required for theexpatriate both to be employed under local (Bulgarian) labour agreement and to be seconded to thecountry by aforeign employer. To approve awork permit theemployment authorities have to be convinced that theemployees who are foreign citizens are not over 10% of thetotal work force of theBulgarian employer. Awork permit is valid for amaximum term of one year and may be subsequently renewed under certain conditions. There are several categories of third-country nationals, who are exempt from thework permit requirement, namely: individuals who are registered with court resolution asexecutives of aBulgarian company/Branch office, general managers of representative offices, expatriates who have aBulgarian permanent residence permit etc. Residence: upon obtaining aBulgarian work permit or being registered asanexecutive / general manager, theexpatriate should apply for along-term visa D (immigration visa). Such visas are issued by theConsulate Sections to theBulgarian Embassies abroad. Thevisa D is amultiple entry visa and may be valid for aperiod of 180 days within 6 months. When theexpatriate obtains his visa D, he/she is entitled to apply for aBulgarian long-term residence permit. Theresidence permit is issued for amaximum term of one year and can be subsequently renewed. In certain specific cases, third-country nationals may obtain abusiness visa. Thebusiness visa is aspecial type of multiple entry visa, issued to third country nationals, who need to visit thecountry for attending business meetings or project implementation. Itis valid for amaximum period of 90 days within 6 months, 1 year or in exceptional cases 5 years. Thebusiness visa does not allow third-country nationals to legally work in thecountry.
29
Bulgaria
EU, EEA or Swiss nationals Employment: expatriates and their family members, who are EU, EEA or Swiss nationals, do not need awork permit to be legally employed in thecountry. Residence: EU, EEA or Swiss nationals may enter and reside in Bulgaria only with their national passport or ID card for aperiod of up to three months. Upon expiry of thesaid three-month period, they should apply for aBulgarian long-term residence certificate. Thelatter may be issued for amaximum term of five years, depending on theduration of theassignment of therespective individual in thecountry. Family members of EU, EEA or Swiss nationals, who are thirdcountry nationals, follow thestatus of their family member and can exercise their right of free movement. Such persons need along-term visa D, but theprocedure for its obtaining is simplified and currently is free of charge. Upon obtaining visa D, theexpatriate is entitled to apply for aBulgarian long-term residence permit. Thelatter will be valid for aterm, equal to theterm of their EU family member Bulgarian long-term residence certificate.
Private education at primary and secondary levels, although not significant in numerical terms, is growing fast: in 2009/106 there were 129 private schools, with 11,861 pupils.
rose considerably in the post-communist period, from 183,500 in 1990/91 to 238,301 in 6. Infrastructure 2005/06. The annual number of university graduates rose strongly up to 2002, when there Bulgarias 45,500 graduates, although is had fallen back to developed, were around transport infrastructurethisreasonably well 41,500 in 2005. Private education at primary and secondary levels, although not significant in numerical terms, is but has suffered from low spending and poor maintenance in growing fast: in 2005/06 there were 102 private schools, with 9,912 pupils, more than a thepost-communist 1992/93. twelve fold increase sinceperiod. Gradual improvement in communica-
tion routes should 6. Infrastructure
arise from two factors: first, thedevelopment of European transport corridors (four of which are set to pass Bulgaria's transport infrastructure is reasonably well developed, but has suffered from low through Bulgaria); and second, investments period. Gradual improvement in spending and poor maintenance in the post-communistaided by aninflux of communication routes to be invested in transport underdevelopment of European EU funds (6bn is should arise from two factors: first, the theinfrastructransport corridors (four of which are set to pass through Bulgaria); and second, investments ture by an influx of 2007-2015). aided programs forEU funds (6bn is to be invested in transport under the infrastructure
programs for 2007-15).
5. Education
Theeducational system, traditional in style, has generally been considered anational asset. However, inadequate funding and low teacher morale in thepost-communist period have led to some erosion in its quality. Furthermore, theshortage of Westernstyle business education, particularly in finance and marketing, has generally been more serious than in themore advanced transition countries, although this is progressively being corrected. Thecountrys elite foreign-language secondary schools, especially theEnglish-language schools of Sofia and Plovdiv, have produced asteady supply of fluent and well-educated linguists for foreign companies and have provided much of thecountrys political elite. Thenumber of teaching staff has gradually declined, dropping from 126,048 in thesystem asawhole in the2000/2001 educational year to 106,024 in 2009/2010. Afurther drop can be expected: teachers have been involved in pay disputes with theMinistry of Education and Science in recent years, and gradual pay rises are to be accompanied by arestructuring program. Thenumber of students in technical colleges and institutions of higher education rose considerably in thepostcommunist period, from 183,500 in 1990/91 to 283,236 in 2009/10. Theannual number of university graduates rose strongly up to 2002, when there were around 45,500 graduates and then fell back to 41,500 in 2005. Since then there was anew sharp increase with thenumber reaching 50,400 in 2009.
Railways Rail is a significant domestic mode of transport for freight, although road transport now Roads accounts for a larger (and increasing) share of the total. In 2005 there were 6,025 km of rail Bulgaria had of these km main lines (of which, in turn, 69.3% were electrified). track; 4,154 km 37,300were of roads in use at end-2001-an increase Investment, plannedend-1994. All but 3,000 km were on the continuing overhaul and of 400 km since at around 1.2bn in 2007-15, will focus hard-surfaced, repair of existing infrastructure, on upgrading rolling stock, and on modernization work, such with motorways accounting for 324 km. Theproportion of as further electrification of track and double tracking. Both business and railway officials have been vocal about the system's problems:decreased significantly in of main track road surfaces categorized asgood in late 2006, around two-thirds was deemed to be in unsatisfactory condition and the 7,083 rail cars at the disposal of 2004 and 2005, and at end-2005 only 70.1% of motorways Bulgaria State Railways (BSR) are reckoned to be around 1,470 short of the number needed to meet freight needsof 2007. were rated above Category IV. At and 34% overall in roads
theend Shipping of
2009 there were 19,435 km of roads rated above Category IV, 418 km of which motorways. Development plans focus on upgrading and on investments-especially in motorwaysto integrate thecountrys road system with theinternational network, although implementation has so far been slow, owing to policy and legal disputes. Aninfrastructure strategy adopted in 2006 envisages theconstruction of 717 km of motorways in the2006-15 period. Bulgarias government is planning atotal investment of about BGN 1.7 billion in infrastructure construction in 2011. TheBGN 1.7 B in question will come from EU funds and thestate budget. Of those, BGN 1.2 billion will be
30
invested in theconstruction of roads and highways, and therest will be invested in municipal infrastructure projects. Currently thegovernment is emphasizing on theconstruction of Trakia, Lulin, Maritsa and Struma highways. Theconstruction of 120 km of new highways is in progress. Railways Rail is asignificant domestic mode of transport for freight, although road transport now accounts for alarger (and increasing) share of thetotal. In 2009 there were 4,150 km main lines (of which, in turn, 68.3% were electrified). For theperiod 2000-2009 theState has invested more than BGN 2.1 billion (EUR 1.074 billion) in thesector. However most of this money was needed to support theoperations of thestate-owned company in charge of thesystem. Investment, planned at around 1.2bn in 2007-15, will focus on thecontinuing overhaul and repair of existing infrastructure, on upgrading rolling stock, and on modernization work, such asfurther electrification of track and double tracking. Both business and railway officials have been vocal about thesystems problems: in late 2006, around twothirds of main track was deemed to be in unsatisfactory condition and the7,083 rail cars at thedisposal of Bulgaria State Railways (BSR) are reckoned to be around 1,470 short of thenumber needed to meet freight needs in 2007. Shipping Bulgaria has five main ports, of varying degrees of modernity. Thelargest are Varna and Burgas, both on theBlack Sea; Varna mainly handling containers, grain and bulk goods, and Burgas crude oil and some bulk commodities. There are three sizeable ports on theDanube (Ruse, Lom and Vidin), and 24 smaller sea and river ports. Of all modes of transport, sea transport has declined theleast since 1989, perhaps because itis theleast dependent on thevagaries of thedomestic economy. Thegeographic position of theports is their key advantage. However all of them need renovation. There has been some modernisation of theports, but much more needs to be done if thesector is to become more internationally competitive. Varna has ambitions to rival Romanias Constanta, but its plans include avery costly relocation of Varna East port and theconstruction of three new terminals; Lom already upgraded its South Pier and is seeking to exploit its position on theEUs north-south Corridor IV by investing in two new terminals. Asystem of 25- or 30-year concessions is intended to play animportant role in upgrading ports and terminals, with concessions on afew of thecountrys smaller ports already awarded or in thepipeline. Air transport Air is theleast significant mode of freight transport, carrying just 21,000 tons in 2005 (although thetotal was three times higher than in 2002). Currently there are five air carriers engaged in
theState Aviation. Bulgaria Air (thecarrier that emerged from thesale of national carrier Balkan Airlines) handles most business. Recently itbought four new airplanes aiming to improve its image. Sofia airport, which handled 1.6m passengers in 2004, has undergone a210m upgrade to provide itwith thecapacity and modern facilities needed to deal with theexpected rise in demand for international air travel. Bulgaria has two other major airports, at Varna and Burgas. A400m investment across both airports is planned to cope with anexpected rise in passengers to 8m in 2040, from 2.7m passengers in 2004. In response to demand for both cargo and tourist-oriented low-cost passenger transport, thegovernment recently added Gorna Oryahovitsa and Rousse (in northern Bulgaria) to its list of airports able to accept international air traffic. Some of theairports or parts of them are to be awarded concessions. Telecommunications Bulgaria entered thepost-communist era with one of thehighest densities of analogue fixed telephone lines in theformer Soviet bloc. Although thequality of theequipment which used to support thenetwork was less impressive than its density, ithas improved greatly in recent years. Thefixed-line monopoly of theBulgarian Telecommunications Company (BTC) ended in 2005, when alternative fixed-line operators were given access to its network. Over ten alternative operators had been licensed by late 2006 but their market share is small. Mobile penetration has risen rapidly in recent years, with subscriber numbers at over 10.5m at end-2010, compared with 0.7m at end-2000 and 4.73m at end-2004. Thepenetration rate was 80% at end-2005 and in 2010 itwas reported to have risen to 140% (greater than theaverage for theEU). Each of thethree mobile operators has alicence for universal mobile telecommunications service (UMTS, or third-generation mobile). Heavyweight foreign firms are playing anincreasing role in Bulgarias telecoms sector. TheInternet Internet penetration is rising and has already reached half of thepopulation of thecountry. Of thepeople aged between 16 and 74, 40% use Internet regularly (every day or once in aweek). Above 20% of theemployees in thecompanies used computer on their workplace at theend of 2009. Theshift from dial-up connections to high-speed local area networks (LANs), cable networks, and asymmetric digital subscriber line (ADSL) connections is supporting higher Internet usage. In thecoming years, increasing digitalization of thenetwork, better regulation, increased competition and higher foreign investments should improve thecountrys ability to take advantage of theInternet.
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Bulgaria
Themedia High levels of literacy and of television and radio ownership have boosted theinfluence of themedia. There are six television channels that are at present licensed asnational terrestrial broadcasters. Two state radio channels broadcast nationally, and theprivate sector has several national licensed radio channels. Therange of newspapers available is wide for amarket of Bulgarias size (none of thepapers are state-owned). At national level these include: 24 Chasa (24 Hours) and Trud (Labour), thetwo largest-circulation dailies owned by German WAZ Group; Standart, Monitor, Sega, apopular left-of-centre daily; Duma, adaily, which has arelatively low circulation and is affiliated to theBulgarian Socialist Party (BSP);, Pari, afinancial daily; Dnevnik, afinancial daily; and theweekly Capital, which is widely regarded asthemost intellectually serious publication. Asof early 2010 importance of thestate owned electronic media is limited. State-owned national channel BNT has ashare of 8-10 % among viewers. Nova TV (owned by theMTG Group) is second with 16-18% being well behind theleader BTV (part of CME Group) which currently has over 35% of themarket. Apart of thetop 3, there are numerous cable and regional TV operators with various political and content focuses, which provide wide choice for domestic audience. Similar is situation on radio market. Since 1989 senior-level appointments in thestate-owned electronic media have been politicized and subject to various forms of government pressure, although thecruder forms of control and censorship have been absent. Privately owned electronic and print media have not been subject to systematic state control, but journalistic standards are uneven and self-censorship is perceived aswidespread. Thefact that most newspapers are affiliated either to political parties or to business groups has been afurther complication; regulatory bodies for theelectronic media have sometimes taken intrusive or eccentric decisions; and thelegal environment is not always conducive to robust expression.
but production continues to suffer from thelong-term effects of post-communist neglect of many orchards and vineyards. Grapes are used mainly for wine, amajor export oriented mostly to European markets and Russia. Europe represents apotentially promising market for poultry and other meat exports, but difficulties in meeting EU sanitary regulations remain aconstraint. Agriculture is dominated by theprivate sector, which accounted for 98.4% of thesectors gross output in 2004. Theprivate sector includes asizeable number of co-operatives operating on privately owned land-although at around 1,520 in 2005 these numbered 23% fewer than two years earlier. These now have more in common with Western-style co-operatives than with thepost-communist co-operatives that were in operation for much of the1990s. According to official statistics, thelabour force in agriculture (including fisheries and forestry) averaged 801,900 in 2005, with thesector accounting for alittle less than one-quarter of total employment: those employed under labour contract, however, accounted for only 8.4% of thetotal-no doubt areflection of thecontinued importance of small family farms. Currently over 60% of thepeople working in thesector are over theage of 55. Mining and semi-processing Bulgaria has awide variety of metallic and non-metallic mineral resources. Lead-zinc and copper deposits are sufficient to support large non-ferrous metallurgical works, notably at Kurdzhali and Pirdop. Several significant gold deposits exist and have attracted foreign investors. Proven deposits of more than 50 non-metallic minerals exist, among them refractory dolomites, quartzite, kaolin, marble, refractory clay and gypsum. In recent years mining experienced revival from thelow base achieved in thecourse of post-communist era restructuring. This development is underpinned from high prices of non-ferous metals, aswell asincreased demand for building materials and quarrying products by booming construction industry. Iron and manganese ore are extracted, although output of iron ore covers only afraction of thesteel industrys requirements. Manufacturing Bulgarias manufacturing industry is theproduct of heavy industrialization in thesocialist period. Bulgarian industry was therefore hit particularly hard by thedisintegration of theCouncil for Mutual Economic Assistance (CMEA, or Comecon, thecommunist states economic bloc) and sudden exposure to aworld market in which many of its specialist products were uncompetitive. Themanufacturing sector returned to growth in 2000, with exporting industries performing most strongly.
7. TheMost Active Industries/Sectors

Agriculture Bulgaria had 5.3m ha of utilised agricultural land in 2005, down from 5.7m ha in 1999. Of this, 3.1m ha was classified asarable. Land prices in Bulgaria are far lower than those in theEuropean Union. Theaverage price per decare in 2010 varied between BGN 220 and BGN 320 (EUR 112 164). Bulgarias chief grain crop is wheat, grown mainly in Dobrudzha in thenorth-east. Thecountrys harvests of barley and maize are also substantial. Major industrial crops include sunflowers, tobacco and sugarbeet. Tomatoes, cucumbers and peppers are important exports. Apples and grapes are significant fruit crops,
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Thesector recorded very strong growth in output in theperiod 2003 2005. However in thelast few years themanufacturing levels decreased and in November 2009 themanufacturing output was 10.8% less than in November 2008. Performance across individual sectors has been highly uneven. Food-processing, including tobacco-processing, was important historically, but has suffered from theshrinkage of former Soviet markets. There have been several successful foreign investments in thesector, although these have so far been oriented mainly to theinternal market. Significant foreign investment helped clothing exports, largely to theEU, boom until 2004. However, these fell back in 2005 astheEU removed restrictions on imports from China, before amild revival began in 2006. Increased competition from low-cost producers appears to be reinforcing Bulgarian firms tendency to move up thevalue-added chain by positioning themselves asflexible and logistically convenient producers, rather than relying purely on price competitiveness. In 2009 both theimport and export of clothing products fell by 20%. Theoil refining industry has developed on thebasis of exports and adomestic market that, until recently, was fairly well protected. Thechemicals industry was thebeneficiary of heavy investment in thecommunist period, but was vulnerable thereafter to thecyclical nature of thebranch, to international competition and, in some cases, to rises in theprice of natural gas-which is used asboth feedstock and fuel. Ferrous metallurgy, anindustry in which thegiant combine at Kremikovtsi, which is now in liquidation, used to account for 90% of Bulgarias production, has suffered from delayed privatisation and technical obsolescence. Underpinned by foreign investments, transport machinery and electrical & optical industries are leading recovery in machine building in therecent years. Among sub-sectors, stronger growth was recorded by ship-building, production of spare parts and components for automotive industry, etc. Production lines in which thecountry is strong are hydraulic machines, fridges, optical equipment, etc. Thedefense industry was hit hard by thedemise of theWarsaw Pact and theclosure of lucrative markets in thedeveloping world-in some cases reacting to thelatter by murky and politically damaging deals with objectionable regimes. Currently itis downsized, mostly privatized, mostly by management-employee buy-outs (MEBOs) of dubious value, and its overall importance for manufacturing is limited. Some plants have found new uses in civilian and NATO-oriented production, and ongoing modernization of Bulgarias armed forces in accordance with NATO requirements will lead to work for others in theroles of subcontractors or offset partners. Disputes over theuse of Russian technologies have bedeviled many plants for much of thepost-communist period.
Construction Construction was theeconomic branch worst affected, in volume terms, by post-communist decline, collapsing in 1991 to less than one-third of its 1989 level of activity, and reaching alow point of less than one-quarter of its 1989 level of output in 1997. Construction activity has grown consistently since then. Gross value added (GVA) in construction rose by over 14% in both 2004 and 2005. Construction activity has contributed significantly to recent economic expansion in Bulgaria. From anexpenditure perspective, much of thehigh level of stockbuilding in thenational accounts represents construction projects. Until 2009 thesector was undergoing aboom, with housing, industrial and commercial construction all growing strongly. Thefinancial crisis put anend to this leaving many small construction firms struggling to survive. Worst affected was theconstruction of buildings which is due to thelack of investment. During thesecond quarter of 2010576 buildings were finished and ready to be used which is 20% less than thenumber for thesame period of 2009. Infrastructure projects, financed by theState are becoming asignificant part of thecontribution sector and are likely to become more important in thenext couple of years. Financial services Until 1996 thebanking system was weak. State banks lend to loss-making state industries, and these credits grew steadily asloans were rolled over and unpaid interest was added. In theprivate sector, collusive relations between banks and entrepreneurs resulted in thegranting of large loans with little or no collateral and no prospect of repayment. Aspart of theprogram of reforms linked to theintroduction of thecurrency board in 1997, theBulgarian National Bank (theBNB, thecentral bank) introduced stronger banking supervision and tighter prudential rules. Abank privatisation program was executed with buyers being mostly respectable international groups and, till theend of 2004 thestate controlled only one bank with negligible market presence. Process of banking consolidation began. Themerger of Bank Austria Creditanstalt (BA-CA) German parent HVB Bank with Bulbanks Italian owner UniCredit resulted themerger of their local subsidiaries Bulbank, HVB Bank Biochim and Hebros Bank and creation of thebiggest local bank Unicredit Bulbank. DSK Bank (OTP Group, Hungary), UBB (NBG Group, Greece) and thenew bank emerging after Greek EFG Eurobank merges Postbank with recently acquired DZI Bank are other large banks in thecountry. Theshare of foreign banks in thedomestic credit market has increased from 38% in 1999 to 83.5% in 2010. With foreign banks able to open branches in Bulgaria subject to notification rather than approval of thecentral bank, in line with theacquis communautaire (thebody of EU law), theEU membership process has anchored external interest in theBulgarian banking sector.
Bulgaria
Foreign investment has improved themanagement of local banks and increased their profitability. Improvements in thebanking system have bolstered confidence, and money that had been kept outside of thebanks in hard currency has returned. Although thebanks were very cautious in their lending decisions after 1997, they have become much more willing to lend since 2003, leading to concerns in thecentral bank and theIMF that credit has been growing too rapidly. Factors behind theincrease in loan availability include improved bank capacity for assessing creditworthiness, amore stable business environment and theability of some banks to attract foreign funds on theback of relatively high Bulgarian interest rates. Thecentral banks measures to restrict lending growth were removed with EU accession in January 2007. Therecent worsening of themacroeconomic environment made thebanks in Bulgaria more cautions especially when lending to theconstruction sector. They, however, remained stable during thecrisis despite theincrease in thebad debts account. Theinsurance market is still relatively underdeveloped, but is growing quickly. Foreign involvement was severely limited until aWestern-style insurance law passed in mid-1997 opened up themarket. In 2005 06 insurance sector underwent structural change, with key players on thelocal market being bought by KBC, Generalli, Wiener Staedtische and Uniqa. Commitments made by Bulgaria during theEU membership negotiation process have also helped to create demand for products such ascompulsory motor insurance, and forecasts of strong personal income growth are supporting expectations of further growth in demand for insurance. Asof 1 January 2011 anew tax on insurance premium will start to apply. After reaching 2.4 billion in 2008, thepension funds dropped to 1.6 billion at theend of 2009. Apension reform is being debated which includes increasing themandatory contribution rate and theretirement age. Thecapital market is small and is likely to remain so. With theincreased attractiveness of themarket around EU accession, in late 2006 early 2007 themarket experienced boom. Initial Public Offerings (IPOs) became aviable source for fund-raising and many local companies turned to it. Themarket is promising, providing investors with exposure to economy from theone hand regulated up to theEU standards and from theother hand with significant catch-up potential.
Themajor difficulty in theindustrial property market is thesize of theavailable plots. Most plots for sale are small and acquiring alarger than 10 acres plot close to major roads and with appropriate infrastructure proves to be very difficult. Thedemand of industrial plots close to major cities and/or major motorways is several times higher than thesupply. Because of its economic importance themajor interest is for plots around Sofia where anumber of international companies and manufacturers are building productions and warehouse facilities for their Bulgarian and regional operations. Most plots around theround ring (theSofia M25) are already acquired by various companies and themarket is looking at thewestern parts around thecapital, aswell aspoorly developed northern surroundings of Sofia. Most attractive seem to be theareas around themotorways going south towards Greece and north-west towards theSerbian border. Thedecrease in theconstruction activity asaresult of theeconomic downturn, however, has lowered theinterest for industrial plots. Out of thecapital most dynamics in theBulgarian industrial property market are thecities of Stara Zagora, Plovdiv with thenew Kuklen industrial zone and Russe with theoptions for cheap transportation along theDanube river. Even more companies are interested in building up their warehouse for their regional and European operations. With its strategic geographical location Bulgaria attracts many companies setting up their distribution centers to operate in theBalkans. Warehouses occupancy varies between 50-70% for theold warehouses and 95-97% for thenewly build ones. In Sofia only 2% of thewarehouses are not occupied and theaverage rent is 5/sq.m.
9. Investment Incentives
Themain thrust of thegovernments incentive policy is to manage thedevelopment of afree-market economy. Foreign investors have free access to theprivatization program, which comprises both theprivatization of state-owned companies and thegranting of concessions for theuse of state-owned assets. Tax incentives Under theprovisions of Corporate Income Tax Act some general tax incentives are applicable. They are mainly related to investment in depressed regions and employment of disable and unemployed people, namely: Manufacturing companies operating in depressed regions with high level of unemployment are entitled to corporate income tax exemption subject to certain conditions, provided in thelaw.
8. Industrial Parks
After theresidential property boom in Bulgaria of 2003 and 2004, theend of 2005 and 2006 were registering increased activity and interest in theindustrial property market.
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Companies are entitled to certain deductions for hired employees: (i) who have been registered asunemployed for aperiod exceeding one year prior to their current employment; or (ii) have been unemployed and are of more than 50 years of age; or (iii) are disabled unemployed persons. Companies employing disable individuals are entitled for corporate tax exemption upon meeting therequirements set in thelaw in proportion to thenumber of people with disabilities to thetotal of number of employees. Companies may apply for obtaining EU grants for some eligible investment projects. VAT Act provides for beneficial treatment with respect to input VAT deduction for import of goods under special investment projects, subject to meeting certain requirements. Free-trade zones Free-trade zones offer some tax and customs benefits to foreign investors. Free-trade zones have been established at Ruse, Burgas, Vidin, Plovdiv, Svilengrad, and Dragoman. Theimport and export of goods to and from, aswell asbetween, these areas could be exempt from customs duties, VAT, excise duties upon meeting certain conditions. Incentives and foreign investment strategy Bulgarias government is committed to thedevelopment of afree-market economy; thefollowing are designed to attract foreign investments in thecountry. 1. Opportunity for foreign investors to tender for concessions to use state-owned assets. 2. Liberalization of theimport and export regimes. 3. Guaranteed repatriation of profits. 4. Foreign investors enjoy thesame rights asdomestic investors. 5. Internally convertible currency. Doing business in Bulgaria, however, has its challenges. Thecountry must deal with still low living standard of most of its residents and theuncertainties that have accompanied economic reforms. New legislation affecting business life is rapidly developing, and itis therefore essential that foreign investors plan carefully and obtain expert advice from thevery beginning of their business dealings in Bulgaria.
10. Foreign Direct Investment (FDI)

Foreign Direct Investment in Bulgaria for theperiod January June 2010 amounted to EUR 358.5 million (1% of GDP) compared to EUR 1,600 million (4.8% of GDP) attracted in January June 2009.
11. Expatriate Life

Now that Bulgaria is afully fledged member of theEuropean Union, greater numbers of international businesses have established operations in thenations capital Sofia and asaresult thelevels of inward migration from international professional expatriates has stepped up agear. There are now many expats living in Sofia who herald from theUK, Ireland, America and Germany for example, and if youre considering going to join them youre going to want to know all about thethings to do for expatriates living in Sofia outside of working hours. There are no special rules regarding taxation of expatriates in Bulgaria. They are taxed according to thegeneral rules applicable.
12. Weather and Climate

Bulgarias most comfortable temperatures are found mid May to mid September. Thecountrys climate is influenced by theMediterranean and Black Seas, making for generally mild conditions throughout thecountry. Summer days rarely get too hot. In themountains and in theevenings, temperatures are about 10 degrees F/5 C cooler than in therest of thecountry, on average. Thewinter can be bitterly cold, snowy and damp, but health spas are open, skiing is good, and theconcert season is in full swing. Be sure to take asweater, even in thesummer, for cool evenings. Asof 1 April 2011 Bulgaria will apply reduced VAT rate of 9 per cent for eligible tourist services.
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Czech Republic

TheCzech Republic is one of themost stable and prosperous of thepost-Communist states of Central Europe. Growth is supported by exports to theEU, primarily to Germany, and astrong recovery of foreign and domestic investment. Domestic demand is playing anever more important role in underpinning growth asinterest rates remain low. Accession to theEU gives further impetus and direction to structural reform. Intensified restructuring among large enterprises, improvements in thefinancial sector, and effective use of available EU funds should strengthen output growth. Political system TheCzech Republic is aparliamentary democracy with abicameral Parliament. TheChamber of Deputies has 200 seats and is elected by popular vote under adirect representation system with a5% entry threshold. Aside from legislative powers, theChamber of Deputies gives and rejects confidence to thecabinet and approves thestate budget. TheSenate has 81 seats and is elected by amajority system for six-year terms with one-third of theSenators being replaced every two years. Itapproves laws proposed by theChamber of Deputies. Theformal head of state is thePresident, who is largely aceremonial figure, but has thepower to appoint theGovernor of theNational Bank and members of theConstitutional Court. ThePresident is elected by both chambers of theParliament. Thehead of theexecutive is thePrime Minister, appointed by thePresident. ThePM appoints Ministers with approval from thePresident. TheConstitutional Court can rule on theunconstitutionality of laws or other legislation.
In addition to taxes, some local charges and compulsory social security and health insurance are applied in theCzech Republic. Key features Those liable to pay corporate income tax are all legal entities, including foreign companies with permanent establishment (mostly branches) in theCzech Republic. Thecorporate income tax base is thetrading result (i.e. profit or loss) which is adjusted in accordance with theIncome Taxes Act. Partners in general partnerships and general partners in limited partnerships are taxed on their share of thepartnerships taxable income. Taxable income derived from partnerships is subject to corporate or personal income tax, depending on whether thepartner liable for thetax is acompany or anindividual. Acompany is treated asaresident if ithas aregistered office or place of management in theCzech Republic. Resident companies are liable to tax on worldwide income. Acompany that has neither aregistered office nor aplace of management in theCzech Republic is treated asanon-resident. Non-resident companies are subject to Czech corporate income tax only if they receive income or gains from Czech sources and provided that theCzech Republic has theright to levy taxes in terms of anapplicable double taxation convention. TheCzech taxable period is thecalendar year or theeconomic year. Thedeadline for filing theannual tax return is theend of thethird month after theend of thetaxable period. This deadline may be extended to theend of thesixth month if thetax return is prepared and submitted by aregistered tax advisor under aPower of Attorney. ThePower of Attorney must be filed at theFinancial Office by theend of thethird month after theend of thetaxable period. Companies that are subject to statutory audits have thefiling deadline automatically extended to theend of thesixth month after theend of thetaxable period. Czech entities are entitled to deduct expenses that are incurred to generate, assure and maintain theincome of theentity. Particular expenses are disallowed or may be deductible up to alimited amount. Atax loss may be carried forward for offsetting against taxable profits, but no later than thefifth subsequent taxable period. Awithholding tax at therate of 15% is levied on dividends paid to both domestic and foreign participants. This tax may be reduced under theterms of therelevant double taxation treaty binding for theCzech Republic. Awithholding tax at therate of 0% is related to dividends paid out by asubsidiary company, which has its place of business in theCzech Republic,
2. Tax Structure
Principal Taxes Personal Income Tax Corporate Income Tax Value Added Tax TheCzech tax system also includes excise duties which are imposed on particular goods. Real estate tax is levied on plots of land and on construction. Thereal estate transfer tax is levied on thesale or transfer of real estate. Theroad tax is payable for vehicles used for commercial purposes. There is also aninheritance and gift tax in theCzech Republic.
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to theparent company in any EU Member State, Switzerland, Norway or Iceland. Dividend distributions between two Czech companies are exempt from thetax under similar conditions. Further, therate of 0% is related to thedividend income of theparent company, which has its place of business in theCzech Republic, derivable from asubsidiary company in any EU Member State. For all these exemptions, certain conditions have to be met (e.g. shareholding of at least 10% for theperiod of 12 months). From 2008, dividends arising to aCzech tax resident company and to acompany that is atax resident in another EU Member State, Norway or Iceland are also exempt if paid by asubsidiary that: is atax resident in anon-EU country with which theCzech Republic has concluded aneffective double taxation treaty; has aspecific legal form; satisfies theconditions for thedividend exemption under theEC Parent-Subsidiary directive; and is subject to ahome country tax comparable to Czech corporate income tax at arate of at least 12%. TheInterest/Royalty Directive is fully applicable to interest payments to any EU Member State, Switzerland, Norway or Iceland. There is atransitional period for royalties allowing theCzech Republic to apply awithholding tax up to 10% (depending on therelevant double taxation treaty) until 31 December 2010. Interest and royalties paid to atax non-resident are subject to a15% withholding tax under theCzech Income Taxes Act. Theexemption in compliance with theInterest/Royalty Directive also does not apply to interest that is treated asdividends according to thethin capitalization rules except interest paid to atax resident of theEuropean Economic Area. Capital gains on sale of securities and participations are exempted from thetax if conditions similar to those required to qualify for thedividend exemption under theEC Parent-Subsidiary are satisfied. All transactions with related parties must be conducted at arms length. If theTax Authorities find that acompany does not deal with related parties at arms length principles, theTax Administrator will adjust thecompanys tax base accordingly. Thin capitalisation rules are applied in theCzech Republic and restrict thedeductibility of interest and other financial costs (inclusive of guarantee fees, credit facility fees etc.) on loans and credits asdefined in theCzech Income Taxes Act. Thelimitation of thedebt/equity ratio is 4:1 (6:1 for banks and insurance companies). Theratio applies on debt provided or secured (e.g. by aguarantee) by arelated party. Under theCzech Income Taxes Act, theremuneration paid to anemployee by acompany should be regarded asincome from adependent activity.
Acompany (employer) is generally regarded astheCzech taxpayer of personal income tax from dependent activities and is obliged to settle thetax liability on behalf of its employees. Acompany withholds advance tax payments from theemployees income on his/her behalf each month of his/her activity in thecompany. Anemployer prepares anannual reconciliation of advance payments, provided that theemployee asks for thereconciliation of advance payments, and provided that theemployee asks for thereconciliation in writing no later than by the15th of February following thecalendar year for which thereconciliation is prepared. If theemployee does not ask acompany for theannual reconciliation, thetax liability of theemployee is treated asfulfilled by thewithheld advance payments. If theemployee receives, except for theemployment income, other income exceeding CZK 6,000 during thetaxable period, he/she will be obliged to file anindividual income tax return. Advance income tax payments are always calculated based on thelast known tax liability. They are not, therefore, payable in thefirst year. If thelast tax liability was lower than CZK 30,000, tax advances are not payable. VAT is levied on domestic taxable supplies, theimportation of goods, theacquisition of goods from another EU country, and thepurchase of specified services from foreign companies. TheVAT base is usually thebasis of consideration for goods sold or services rendered, including customs duties, clearance and transportation costs, and excise duties (if applicable). Acompany must be registered for VAT if its taxable supplies exceed CZK 1,000,000 for aperiod of 12 successive calendar months or purchases of goods from other EU countries exceeds CZK 326,000 per calendar year. Acompany can register voluntarily even if its turnover fails to reach theabove amounts if itrenders taxable supplies in theCzech Republic. There is aregular VAT system in theCzech Republic. Thestandard rate of 20% applies to themajority of industrial goods, services and real estate transfers. Areduced VAT rate of 10% is applied to selected goods (agriculture products, foodstuffs and pharmaceuticals) and selected services. These rates apply equally to branches and subsidiaries. Excise duties are levied on hydrocarbon fuels and lubricants, spirits, beer, wine and tobacco products. There is auniform real estate transfer tax at therate of 3%. This tax is applied when real estate is sold or transferred.
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Czech Republic
Double taxation treaties TheCzech Republic has concluded aconsiderable number of double taxation treaties. In most cases, thedouble taxation treaties concluded by theCzech Republic follow theOECD model. TheCzech Republic, asalegal successor to Czechoslovakia, has adopted thetreaties concluded by Czechoslovakia in its legislation. Current tax rates Corporate income tax Personal income tax Value added tax 19% 15% Standard rate: 20% Reduced rate: 10% Real estate transfer tax Withholding taxes On dividends 15%, if not reduced by arelevant double taxation treaty 0%, if certain conditions are met 3%
On royalties
15%, if not reduced by arelevant double taxation treaty 0% applicable from 1 January 2011 (until 30 December 2010, theCzech Republic may tax royalties up to arate of 10%)
Royalties paid out by aCzech company to anEU/Swiss/Norwegian/Icelandic related party based on theEU Interest/Royalty Directive
Social Security and health insurance Thesocial security and health insurance system comprises pension, state employment, and general health and sickness insurance schemes. Social security contributions are compulsorily paid by employers (legal entities or individuals who employ at least one employee), employees and self-employed persons. Health insurance contributions are compulsory for everyone who has permanent residence in theCzech Republic or is anemployee of Czech resident employer, excluding persons whose contributions are paid by thestate. Both obligatory social security and obligatory health insurance contributions settled by anemployer are generally considered asdeductible expenses for tax purposes. Therates of contribution for social security and health insurance are asfollows at present: Employer Pension insurance Employment insurance Sickness insurance Health insurance Employee Pension insurance Employment insurance Sickness insurance Health insurance Self-employed person Pension insurance Employment insurance Sickness insurance (voluntary) Health insurance 28.0% 1,2% 1,4% 13.5% 6.5% 0% 0% 4.5% 21.5% 1.2% 2.3% 9.0%
Dividends paid out by asubsidiary company to aparent company within theCzech Republic or to theEU/Switzerland/Norway/Iceland or from theEU parent or subsidiary company (based on theEU Parent Subsidiary Directive) Dividends paid out by asubsidiary to aparent company from thenon-EU country to theCzech Republic/EU/Norway/Iceland On interest
0%, if certain conditions are met 15%, if not reduced by arelevant double taxation treaty 0%, if certain conditions are met
Interest paid out by aCzech company to anEU/Swiss/Norwegian/Icelandic related party based on theEU Interest/Royalty Directive
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Person without taxable income Health insurance 13.5%
Person voluntarily participating in apension insurance scheme Pension insurance 28%
TheSingle Administrative Document (SAD) is used for releasing theimported and exported goods for therespective procedure or for terminating theprocedure. Thesimplified procedures may be applied for all customs procedures and can save asignificant amount of cost and time for importers and exporters. Thenew Computerised Transit System (NCTS) and Import and Export Customs System (ICS and ECS) enable paper-less communication between theoperators and customs authorities. Annex A Double taxation treaties (as15 July 2010): Albania Armenia Australia Austria Azerbaijan Belgium Belarus Bosnia and Herzegovina Brazil Bulgaria Canada China Croatia Cyprus Denmark Egypt Estonia Ethiopia Finland France Germany Georgia Greece Hungary Iceland India Indonesia Ireland Israel Italy Japan Jordan Kazakhstan Korea (Republic of) Korea DPR Kuwait Latvia Lebanon Lithuania Luxembourg Macedonia Malaysia Malta Mexico Moldova Mongolia Morocco Netherlands New Zealand Nigeria Norway Philippines Poland Portugal Romania Russian Federation Serbia and Montenegro Singapore Slovak Republic Slovenia Spain South Africa (Republic of) Sri Lanka Sweden Switzerland Syria Tajikistan Thailand Tunisia Turkey Ukraine United Arab Emirates United Kingdom United States Uzbekistan Venezuela Vietnam Former Yugoslavia (relates to Bosnia Herzegovina until 31 December 2010)
Customs System Since 1 May 2004, theCzech Republic has been aMember state of theEuropean Union. This fact influences customs arrangements significantly. TheCzech Republic, like other new Member States, has completely adopted customs rules applied in theEU. At present, theCzech Republic participates in thesingle market of theEU. Customs controls at theinternal borders of theEU and customs formalities have been abolished for themovement of goods inside theEU. Just asthefree circulation of goods within theEuropean Union is theinternal aspect of theCustoms Union, theCommon Customs Legislation and Tariff is theexternal aspect. TheCzech Republic applies Common Customs Tariffs using theCombined Nomenclature of theEU, which is based on theHarmonised Commodity Description and Coding System. Therates of customs duties are quite low in thefield of industrial materials and semiproducts. Thesimple average rate of duty for industrial products is less than 5%. Being amember of theWTO Information Technologies Agreement (ITA), theEU eliminated customs duties for ITA products. In addition, requests for duty suspensions can be submitted by any importer of raw materials, semi-finished products or components that are not available within theEU. Customs duties can be even lower due to theextensive application of customs preferences resulting from Free Trade Agreements concluded with abroad range of countries (Norway, Iceland, Switzerland, Liechtenstein, Macedonia, Croatia, Albania, Algeria, Tunisia, Israel, Morocco, South Africa, Lebanon, Jordan, Syria, Egypt, Mexico, Chile, etc.). Customs unions have been created with Turkey, Andorra and San Marino. Furthermore, theCzech Republic grants preferential treatment to goods originating in developing and least developed countries. These customs preferences are conditioned by proving origin of thegoods. According to customs regulations, all standard customs procedures, including procedures with aneconomic impact, can be used: therelease into free circulation, customs warehousing, inward processing (suspension system or drawback system), processing under customs control, temporary admissions, outward processing, transit and exportation.
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Czech Republic
Income Taxes Act and VAT Act Amendments TheCzech government presented theamendments to theVAT Act and theIncome Taxes Act to Chamber of Deputies on 7 October 2010. If itis approved at all levels, itwill become effective on 1 January 2011. Below we highlight selected changes. Changes in theIncome Taxes Act Most changes are proposed to reduce thegovernment budget deficit in line with thecontinuing reform of public finance. Corporate Tax Theexemption of income in theform of interest and other yields from bank deposits arising to savings and credit unions aswell asdividend income arising to apension fund shall be cancelled. Individuals Theexemption of certain income (service-related requisites granted to professional soldiers, benefits granted to theformer President of theCzech Republic) shall be cancelled. Further, itis proposed to reduce theamount of tax relief granted to working pensioners. To ensure thecompatibility with theEU primary law, theapproach to products that are used to save for retirement shall be unified. Tax reliefs in connection to pension insurance products shall be extended to pension institutions abroad (EU, Norway and Iceland). VAT and Excised duties Accounting Act
Theamount of thereserve fund must be laid out in thefounding documents and may not be less than aset percentage of starting capital (20% for thea.s.). If thereserve fund is not created at companys establishment itmust be created in accordance with theby-laws (statutes) of thecompany; in thefirst year thecompany makes profit shall be contributed at least 20% of thenet profit, but not more than 10% of theregistered capital, to thereserve fund; thereserve fund shall be supplemented annually with 5% of thecompanys net profits until thestipulated level is reached. There are no restrictions on thenumber of shareholders, or on their nationality or residence. Sole founder of thea.s. can be only legal entity (company). Ana.s. must have asupervisory board of at least three members (thenumber of members must be divisible by three without remainder), elected by theshareholders at thegeneral meeting. If theannual average number of full-time employees exceeds 50, then theemployees shall elect at least one-third (but no more than one-half) of themembers of thesupervisory board. Management is conducted by theboard of directors. Theboard must have at least three members (which does not apply to acompany with one shareholder), elected by theshareholders at thegeneral meeting to aterm of up to five years. Theboard of directors is responsible for day-to-day management of thecompany, preparation of annual financial statements and corporate reports, and maintenance of thecompanys accounts etc. Shares may be registered or bearer, and both types are transferable. There is no minimum value or other limitation placed on thevalue of individual shares. Employee shares issued free of charge must not total more than 5% of theregistered share capital. Preferred shares may be distributed up to atotal value of 50% of thetotal registered share capital of thecompany. Interest-bearing shares are not permitted. Asimple majority of voting shares is enough for most decisions. At companies with registered share capital under CZK 100,000,000 shareholders holding at least 5% of shares of thecompany may request from theboard of managers that certain items be added to theagenda of ageneral meeting or that themanagement of thecompany be investigated (status of minority shareholder). At companies with registered capital over CZK 100,000,000 thestatus of minority shareholder requires theshareholding of at least 3% of shares of thecompany. Generally aquorum is obtained at thegeneral meetings when shareholders holding at least 30% of thecompanys equity are present.
3. Legal Entities
Generally, there are four permissible business company forms in theCzech Republic: joint stock company (akciova spolecnost a.s.); limited liability company (spolecnost srucenim omezenym - s.r.o.); limited partnership; and unlimited partnership. In addition, also European company (SE) may be established in theCzech Republic. Below are therequirements of ana.s. and ans.r.o., themost popular company forms. Joint Stock company (a.s.) Minimum amount of registered capital is CZK 2m, for thecompany with apublic offer of shares CZK 20m. Theamount of thecash contribution at thetime of formation may not be less than 30% of theshare capital. Theshare capital of thecompany must be secured completely by subscription. Theamount of capital contributed in kind must be declared in writing in thefounding document and must be evaluated by court sworn expert.
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Limited Liability company (s.r.o.) Minimum amount of registered capital is CZK 200,000; minimum contribution for individual equity holders in thecompany is CZK 20,000. At least 30% of each partners contribution in total at least CZK 100,000 - must be paid on foundation of thes.r.o. In theevent thecompany is established by one founder theregistered capital must be fully paid off. Theamount of thereserve fund must be laid out in thefounding documents and may not be less than aset percentage of starting capital (10% for thes.r.o.). If thereserve fund is not created at companys establishment itmust be created in accordance with theby-laws (statutes) of thecompany; in thefirst year thecompany makes profit shall be contributed at least 10% of thenet profit, but not more than 5% of theregistered capital, to thereserve fund; thereserve fund shall be supplemented annually with 5% of thecompanys net profits until thestipulated level is reached. Thenumber of partners is limited to 50; there are no restrictions on nationality or residence. Pursuant to theso called Anti Chaining Rule asingle partner s.r.o. cannot form or be asingle partner of another s.r.o. Asupervisory board may be set up but is not required by law. Present legislation stipulates only that rules of organisation and direction be set forth in thearticles or contract of incorporation, which must be officially registered. Management may be conducted by one or several managers, elected by thecompanys equity holders. Themanager(s) is responsible for day-to-day management of thecompany, preparation of annual financial statements and corporate reports, and maintenance of thecompanys accounts etc. Asimple majority is sufficient for most decisions; however, atwo-thirds or three-quarters vote in support is necessary e.g. to change thearticles of incorporation.
Employees rights Theemployment relationship governed by Czech law is regulated by Labour Code No. 262/2006 Coll. (hereinafter theLabour Code) that came into effect on 1 January 2007. The Czech Labour law generally grants more legal protection to theemployee and endeavours to achieve amore equal position of theparties in theemployment relationship. TheLabour Code, therefore, considerably restricts theliberty of thecontract in theemployment relationships. Thenew Labour Code complies in general with EU norms. Itcontains thebasic definitions for thediscrimination and antidiscriminatory rules, thesexual-harassment provision, equal treatment of EU national and Czech individual employees, and specific EU rules on trade unions. Itwas planned that in detail these questions will be regulated by aseparate act. Due to nonacceptance of this anti-discrimination act, theLabour Code will be amended this year and these provisions will be included in theLabour Code. TheLabour Code also prohibits rules that repeatedly closed time-limited employment contracts by employers, since these are forbidden under EU law and allows temporary-employment contracts to be renewed for aperiod of up to two years. Once this threshold has been met, thecontract would automatically become indefinite (that is, theposition would be made apermanent one), with exceptions for seasonal businesses. Theminimum annual holiday is four weeks. Working hours Theofficial workweek has been 40 hours. TheLabour Code sets strict limits on overtime work thetotal overtime work may not exceed 8 hours per week in average in theperiod lasting no longer than 26 weeks, not including theovertime work for which compensatory time off was provided. Employees must be paid anaverage wage and plus at least 25% over theachieved wage for overtime work. Wages and benefits Theminimum-wage law is set out in Government Order 567/2006 Coll, and amounts to CZK 8,000 per month or CZK 48.10 per hour since 2007. Theminimum wage is set at subsistence level; actual wages paid are much higher. Theminimum wage is paid to only 23% of employees, according to theMinistry of Labour and Social Affairs (Ministerstvo prace asocialnich veci), but itis important for calculating minimum bases for health-insurance and social-security contributions. Some unions (for example, agriculture and construction unions) negotiated higher minimum wages directly with their employers.
4. Labour and Wages

Employment market TheCzech Republic has ahighly skilled workforce, particularly in technology and engineering. Educational and literacy levels are high. Companies report few difficulties in recruiting skilled and unskilled workers, particularly in industrial areas where unemployment is highest. Finding workers is difficult only in Prague and parts of western Bohemia, where theunemployment rate hovers around 4%. There is also adearth of individuals with management and financial expertise.
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Czech Republic
Theaverage monthly wage in year 2009 amounted to CZK 23,488. Monthly wages paid by foreign-owned companies averaged much more, at around CZK 30,000. Thestate provides thesocial-security system, which includes pensions, maternity benefits, and health and social security insurance. To finance these benefits, employers must contribute theequivalent of 34% of gross wages to thestate social-security and health funds. Payments are made monthly to separate socialsecurity and health offices, organised by district. Workers pay anadditional 12.5% of gross wages (deducted from thegross wage) to thefunds. Further benefits specifically covered in theLabour Code include thefollowing: Vacation: Employees who have worked at least 60 continuous working days with agiven company are entitled to paid annual vacation (on apro-rata basis related to thenumber of days worked in thecalendar year). Theminimum annual vacation is four weeks. Where awork contract lasts for less than one year, one-twelfth of theannual holiday is accrued for each 21 days worked. Maternity: Maternity leave lasts 28 weeks (37 weeks for women giving birth to more than one child at thesame time). This may be extended asaparental leave at therequest of themother until thechild reaches three years of age. During maternity leave, themother has no right to wages but qualifies for sickness benefits. Fathers also may apply for maternity or parental leave of up to three years. Sick pay: If anemployee is absent from work because of illness, he/she is provided by wage compensation by theemployer for thefirst 14 calendar days. This compensation is granted form thefourth working day of temporary incapacity. From thefifteenth working day, asick payment from thesocial security insurance is paid to theemployee. Thesick payment amounts to 60% of thedaily assessment base in 2010. In case of work injury, employees are entitled to compensation on losses of wage, compensation on pain and loss of social assertion, compensation on expenses occurred with thetreatment and material damage. For thedeath of anemployee, due to work injury, thedependent spouse would receive alump-sum payment of CZK 240,000 and each dependent child receives CZK 240,000. Parents of thedeceased living with him/her in thesame household receive CZK 240,000. Thesurvivors are also entitled to other compensatory payments.
Unemployment: Benefits are provided for up to five/eight/ eleven months (depending on theage of unemployed person) at 65% of theprevious net average wage for thefirst two months of unemployment, 50% for thenext two months and 45% for theremaining period, up to thelimit of 58% of theaverage wage in theCzech Republic for thefirst till thethird quarter of theprevious year.
5. Education
TheCzech Republic combines anoutstanding level of general education with strong science and engineering disciplines. For generations theCzech education system has generated high class, technical problem-solving skills in environments where standard solutions were impossible. School education is compulsory from ages 6 to 15 (elementary and lower secondary school). After 9 years students may continue at three basic types of upper secondary school: vocational training centres, secondary schools and grammar schools (gymnazia). Undergraduate and graduate studies are offered by colleges (offering 3 to 4-year bachelor programmes. TheCzech education system has avery strong position in upper secondary education, which serves asthefoundation for advanced learning and training opportunities, aswell aspreparation for direct entry into thelabour market. In 2003 thepercentage of adult population that had completed at least secondary education in theCzech Republic was among thehighest in all OECD countries. 86% of theCzech population aged 24-64 had completed at least upper secondary education in 2003, compared to anOECD average of 66%. (Source: Education at aGlance 2005, OECD). Vocational education and training are thoroughly integrated into both secondary and higher education institutions, and enrolment in vocational education is exceptionally high by OECD standards. TheCzech Republic also has avery good position in tertiary education. There has been anincrease in university-level skills in theadult population, asmeasured by educational attainment. While public universities offer programmes ranging from economics, statistics and public administration to finance, accounting, international relations and marketing, anumber of private institutions specialize in business administration courses. Several institutions and universities offer high-quality MBA programmes and are affiliated with foreign universities and colleges.
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6. Infrastructure
TheCzech Republic provides free and flexible choice in continuing education. Private training providers and non-profit organisations co-exist and complement secondary schools and universities. According to recent research, themost frequently taught courses include use of PCs, accounting, management, finance, marketing and foreign languages.
6. Infrastructure
Road network TheCzech Republic already has thebest road network in theregion. Thecentral government has administrative authority for developing and maintaining motorways totalling 691 km and 360 km of speedways (rychlostn silnice), aswell as5,850 km of national highways. Regional governments are responsible for secondary and local roads, which amount to 15,000 km and 34,000 km, respectively. TheState Transport Infrastructure Fund spent CZK 50 bn on new motorway and national highway sections in 2009 (including EU money) , up from just CZK 46 bn in 2008 . Electronic tolls for vehicles over 3.5 tons is already effective, provided by company Kapsch (microwave technology), covering some 1,300 km of roads. Theexpansion of thetoll system is planned but will most likely work asahybrid of microwave and satellite technology. Railway network TheCzech transport and communications system is good by east European standards but below thequality commonly found in western Europe. Therailways are animportant means of transport, with anetwork of 9,478 km. Shipping and air transport River transport, along the303 km of rivers that are navigable, is comparatively unimportant; its main use is for theinternal movement of goods on theVltava and Labe river, north of Prague. Thenational air carrier, Czech Airlines (5,465,000 passengers in 2009), has similarly small domestic significance, given thecountrys compact size. Company is to merge in to holding with Ruzyn Airport ( 11,643,000 passengers in 20009) to form stronger entity. Both companies were planned for privatization in 2008 2009. Telecommunications Number of fixed telephone lines peaked in 2001 2002 and is steadily decreasing, counting 2,264,000 participants in 2008. Mobile phone penetration is more than 1 active sim card per citizen = 13,571,000 in 2008. There were 17% of people with broadband internet access in 2008, 60% had acomputer in 2009.
Road network The Czech Republic already has the best road network in the region, and significant additional investment is planned. The central government has administrative authority 7. TheMost Active Industries/Sectors 500 km, as well as 5,500 for developing and maintaining motorways totalling about km of national highways. Automotive Industry Regional governments are responsible for secondary and local roads, which amount to 15,000 km and 34,000 km, respectively.
Theautomotive industry has been themost important producThe State Transport Infrastructure Fund spent Kc12.5bn on new motorway tion sector of theCzech Republic. Italready accounts for 22% of sections in 2004, up from just Kc7bn in employs compares with Kc52bn CSU manufacturing output and2003. This146,000 people (2008spent in 2004 on all transport including railways and waterways. Electronic tolls for lorries will be data). introduced in the Czech Republic from January 1st 2007, with the system in operation
on 970 km of main roads by 2008, and eventually covering 2,000 km.
Key Players in theautomotive industry Railway network The Czech transport and in theCzech automotive good by are European standards Some of thekey players communications system is industry east major but below the quality commonly found in western Europe. The railways are an OEMs that are significantly boosting all automotive output in important means of transport, with a network of 9,444 km, of which 2,843 km are theCzech Republic. Skoda aCzech brand owned by theGerman and passenger electrified. Ceske drahy (Czech Railways; CD), the state-owned freight service provider, transported 181m passengers in 2004, up from SignifiVW group has amajor production facility in Mlada Boleslav.174m in 2003, although freight traffic fell in this period, from 93.3m to 88.8m tonnes, as transport by cant portion of its output goes to thelocal and Central European lorry grew rapidly following Czech accession into the EU in May 2004. markets. Other car producers are theTPCA (Toyota-Peugeot-Citroen Automobile) and Hyundai Motors with combined production of 983,992 motor vehicles in 2009 (3.6% increase compared with 2008) and combined revenues CZK 265 bln in 2009. Themost important players among theautomotive suppliers are subsidiaries 16 of multinational companies, such asBosch, Continental, Magna, SAS Autosystemtechnik and many others. Engineering Electrical engineering with its robust growth is becoming theCzech Republics biggest industry - overtaking thecountrys traditional industrial sectors of steel production and engineering.
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Czech Republic
Electrical and electronic industry Thegrowth of theelectrical and electronic industry since thesecond half of the1990s in theCzech Republic was based on thegrowth of both domestic consumption and export. In 2000, revenues from thesale of their own products and services in all branches reached CZK 185bn. In 2004, therevenues totaled CZK 436bn which, in current prices, amounts to more than aredoubling of thevolume of production. In that period, theworkforce in theelectrical industry increased by 35,000 (i.e. 22%). Domestic consumption of electrical industry production reached, in accordance with new methodology, CZK 328bn in 2000 and, in 2004, grew up to CZK 428bn, i.e. more than a30% growth. Traditionally, thelargest share of consumption was accounted for by heavy-current technology and by electronic components. Thelargest accumulation of consumption was observed in electronic components. Theelectrical industry is primarily marked by: thecomplementary character of its production in creating prerequisites for thecompetitiveness of other branches of themanufacturing industry and power industry; ahigh proportion of imported materials, components and parts for production and assembly; awide range of technological processes; ahigh proportion of supranational capital in new investment projects, especially in connection with theintroduction of advanced technologies; theuse of logistic networks of supranational companies; ahigh proportion of science and research used in theproduction of computational and digital communications technology and theneed for highly-qualified employees in research and in production. Financial Services Thecore of thecommercial banking sector comprises four large banks that had their roots in thecommunist era, with three of thefour hived off from theCzechoslovak State Banks enterprise lending operations in 1990. Together, thefour - Komercni banka (KB), Investicni apostovni banka (IPB), Ceska sporitelna (CS) and theformer foreign-trade bank, Ceskoslovenska obchodni banka (CSOB) - accounted for 80% of all banking sector assets in 1994. These banks inherited alarge volume of non-performing loans from thecommunist period (including foreign-trade credits to developing and Soviet-bloc countries, and domestic credits for private and co-operative housing construction). Successive governments led by theCivic Democratic Party (ODS) in 1992-97 resisted their full privatisation owing to fears that, once in private hands, they would cease to support domestic enterprises.
Sizeable stakes were sold during voucher privatisation, but theresulting ownership structures were not conducive to restructuring. Thebanks controlled investment funds, which in turn controlled large parts of theformerly state-owned enterprise sector. Theresult was anon-transparent web of cross-ownership and continued insider lending that helped large enterprises avoid restructuring while adding to thestate-owned banks bad-loan portfolios. Construction Aswith therest of theeconomy, construction was almost entirely state-controlled under communism and has quickly been returned to private ownership. By 1996 more than 99% of all construction enterprises were in theprivate sector, which grew rapidly from 1990 both asaresult of privatisation and through theestablishment of new, often small, firms. However, theconstruction of larger apartment blocks fell dramatically with theend of thecentrally planned system, hitting larger enterprises, and output contracted by almost 50% during thelatter half of the1990s, with thesectors share in value added falling to 6.3% in 2004, from 11.5% in 1990. Thedecline nonetheless appears to have bottomed out with theonset of anincrease in demand for construction of greenfield production facilities, benefiting larger firms. Overall construction output rose by 8.9% in 2003, asconstruction activities to repair damage caused by theAugust 2002 floods continued, and annual growth accelerated to 9.7% - apost-independence high - in 2004, before easing to 4.2% in 2005. Retail Following privatisation, Czech-owned companies consolidated alarge number of small outlets into retail chains. However, asCzech investors lacked marketing and management skills, and their shops were often not in prime locations, they soon succumbed to foreign competition. Several European retail chains have invested heavily in theCzech retail market. Foreign companies have also spearheaded themove from small outlets to larger department stores and out-of-town hypermarkets. Theretail market was worth US$23.1bn and accounted for 13.3% of total employment in 2003. Higher wages, restrained unemployment, and improved access to consumer credit (consumer loans are growing rapidly) have led consumers to spend actively. Most consumer goods are manufactured locally. Thelocal industries making consumer goods, especially thesectors producing white goods and personal computers (PCs), have received huge foreign investments in thepast decade. Retail sales grew by 25.6% in volume terms between 1998 and 2002, and by afurther 5% year on year in 2003, before slowing to 2.5% theslowest rate since 1998 - in 2004.
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8. Industrial Parks
Due to aconsiderable inflow of FDI into thecountry in recent years, theavailability and choice of office space has improved significantly. Most projects in thecountry are open-field constructions, with theexception of some reconstructions of objects in cities. TheCzech Republic boasts anexcellent network of over 150 industrial zones, which are located on theoutskirts of virtually every town of regional importance.
Available Incentives Five-year full corporate income tax relief for Greenfield investments, five-year partial tax relief for Brownfield investments. Provision of industrial (infrastructure) property at adiscount. Financial support for thecreation of new jobs. Financial support for there-qualification of employees. Thetotal amount of investment incentives is determined separately for each investment project in accordance with valid EU rules. For theCzech Republic, themaximum level of public support commitment is 40% of thetotal amount of investment in tangible and certain intangible assets.
TheCzech Republic introduced investment incentives for manufacturing sector that are available to domestic and foreign investors. TheAct on Investment Incentives came into force in May 2000. Anew amendment is valid asof 2 July 2007. Theinvestment incentives provided before amendment entered into force remain unchanged. Manufacturing Industry TheCzech Republic has introduced aprogram designed to support themanufacturing industrys investment in advanced technology. Conditions of Eligibility Theinvestment must be made in thelaunch of new production (Greenfield investment) or in theexpansion of existing production (Brownfield investment). Aminimum investment of CZK 100 million (approximately USD 5 million) within 3 years; in regions with anunemployment rate 25% higher than national average rate, CZK 60 million (approximately USD 3 million); in regions in which unemployment rate exceeds theaverage national unemployment rate by 50%, theminimum investment must be at least CZK 50 million (approximately USD 2.5 million). At least 60% of theof thetotal value of theinvestment (tangible and intangible fixed assets) must be made in machinery equipment that will be acquired at amarket price, intended for production purposes and produced not more than 2 years before theacquisition. Theinvestment must be financed through own equity of theinvestor in thevalue of at least CZK 50 million and in aregion with ahigh unemployment rate in thevalue of at least CZK 30 million and CZK 25 million, respectively (profit from theinvestment may not be used to fulfill this condition). Theinvestment must be retained for at least five years. Theinvestment must be environmentally friendly.

Thestock of inward foreign direct investment (FDI) in theCzech Republic was US$121.9bn at theend of 2009. Thestock of inward FDI asashare of GDP stood at around 64%, and thestock per head, at US$11,939, was thethird-highest in theregion, behind Estonia and Hungary. Thecountry now has only afew state enterprises left to sell, themost important being theenergy company, CEZ, but thegovernment has not set atarget date for its sale. Although privatization opportunities will soon dry up, steady inflows of FDI should come from reinvested earnings of foreignowned firms and some new greenfield investment. TheNetherlands is thelargest foreign investor, with 31.6% of theinward FDI stock at theend of 2008 (thelatest available data). Germanys commercial and industrial links with theCzech Republic have long made itthesecond-largest inward investor, with 14.4% of theinward FDI stock at theend of 2008. Asignificant portion of FDI inflows into theCzech Republic has been concentrated in services (about 53.7% of total FDI at theend of 2008), and disproportionately in thecapital, Prague, and other large cities. Manufacturing has been thesecond-largest beneficiary (with 34.6% of thetotal), especially in industries that have driven therises in industrial output and exports of recent years: transport equipment (particularly automotives and related components), chemicals, metal products, food products, and electrical and optical equipment. More investment is being directed towards more high-tech sectors and to research and development. (Source: Economist)
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Czech Republic
11. Expatriate Life

Although in most respects life in theCzech Republic has rapidly approached Western standards of living, thecost of living remains substantially lower than in Western Europe. According to theUnion Bank of Switzerland average prices of goods and services in Prague are only 43.8% of those in Zurich. Domestic purchasing power in Prague is 33.3% of Zurichs level, which is thehighest purchasing power in CE. With respect to accommodation Prague and all larger cities boast awide range of rented furnished and unfurnished accommodations for expatriates and their families, ranging from centrally-located apartments to spacious villas in leafy suburbs. Many real estate agencies offer relocation services for acharge of one to two months rent. Prague and many cities in theCzech Republic are famous for their architectural heritage, museums, theatres, cinemas, galleries, historic gardens and cafes.

TheCzech climate is mixed. Continental influences are marked by large fluctuations in both temperature and precipitation, while moderating oceanic influences diminish from west to east. In general, temperatures decrease with increasing altitude but are relatively uniform across thecountry at lower elevations. Themean annual temperature at Cheb in theextreme west is 45 F (7 C) and rises to only 48 F (9 C) at Brno in southern Moravia. High temperatures can reach 91 F (33 C) in Prague during July, and low temperatures may drop to 1 F (-17 C) in Cheb during February. Thegrowing season is about 200 days in thesouth but less than half that in themountains. Annual precipitation ranges from 18 inches (450 millimetres) in thecentral Bohemian basins to more than 60 inches on windward slopes of theKrkonose Mountains of thenorth. Maximum precipitation falls during July, while theminimum occurs in February. There are no recognizable climatic zones but rather asuccession of small and varied districts; climate thus follows thetopography in contributing to thediversity of thenatural environment.
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Hungary

Hungary has made thetransition from acentrally planned to amarket economy, with aper capita income one-half that of theBig Four European nations. Hungary continued to demonstrate strong economic growth and acceded to theEuropean Union in May 2004. Theprivate sector accounts for over 80% of GDP. Foreign ownership of and investment in Hungarian firms are widespread, with cumulative foreign direct investment totaling more than EUR 48bn since 1989. Hungarian sovereign debt was upgraded in 2000 and together with theCzech Republic holds thehighest rating among theCentral European transition economies; however, ratings agencies have expressed concerns over Hungarys unsustainable budget and current account deficits. Hungary was severely hit by thefinancial crisis, with thebudget deficit becoming extremely difficult to finance, and theHungarian forint quickly losing value. Thecountry received anEUR 20billion credit facility from theIMF which helped stabilize thesituation at theend of 2008. Asstipulated in theagreement with theIMF, thegovernment introduced severe austerity measures in 2009 to reduce thebudget deficit to therequired levels, and thebudget situation has been stable since then. In 2010 thepublic sector deficit accounted for about 3.9% of GDP, and currently thecentral bank rate is 6.00%. In October 2010 theinflation was 4.2%. Unemployment has persisted around the10.9% level, but Hungarys labour force participation rate of 57% is one of thelowest in theOECD. Germany is by far Hungarys largest economic partner. Policy challenges include increasing thecurrent slow rate of GDP growth, job creation and orchestrating structural reforms in thepublic sector. Political system Hungary is aparliamentary democracy with aunicameral Parliament, called theNational Assembly (Orszaggyules). TheNational Assembly has 386 seats and itis elected by popular vote for afour-year term by adirect proportional system with a5% threshold. Itis thehighest organ of state authority and initiates and approves legislation sponsored by thePrime Minister. ThePresident of theRepublic, elected by theNational Assembly for a5-year term, has alargely ceremonial role, but powers also include appointing thePrime Minister and choosing thedates of theparliamentary elections. ThePrime Minister selects cabinet ministers and has theexclusive right to dismiss them. Each cabinet nominee appears before one or more parliamentary committees in consultative open hearings and must be formally approved by thePresident. TheConstitutional Court has power to challenge legislation on grounds of unconstitutionality.
2. Tax Structure
Corporate Tax Hungarys corporate tax rate is 10% up to HUF 500 million corporate income tax base and 19% on theexceeding amount. Although thecorporate income tax rate is lower than in many other European countries, itis balanced at least in part by relatively high personal income taxes and social charges, which increase employment costs. Act LXXXI of 1996 on Corporate Tax and Dividend Tax (theCorporate Tax Act or CIT Act) is theprimary legislation governing corporate taxation. Ithas been modified each year since itcame into force in 1997, most recently in June 2011. TheCorporate Tax Act must be interpreted in harmony with theAccounting Act (Act C of 2000). Asof July 1, 2007 aminimum tax base was introduced. Companies, thepre-tax profit or tax base of which does not exceed 2% of their total revenue less thecost of goods and intermediated services and revenue attributable to aforeign PE, should either pay corporate tax considering this minimum tax base or may choose not to apply theabove provision if itmakes thedeclaration defined in theAct on Tax Procedure. Thetaxpayer has to file this declaration along with thetax return. Entities falling under thescope of theAccounting Act are required to keep double-entry book-keeping, upon which taxation is based. Companies must generally use double-entry book-keeping. Branch offices have no specific tax advantages over subsidiaries other than allocation of overhead expenses without invoicing. Asustained effort has been made to ensure that thetax laws applied to branches are thesame asthose applied to domestically registered subsidiary companies. Shareholder financing Financing can be provided to aHungarian company in various ways: contribution to registered capital, contribution to capital reserve, loans and supplementary payments. If theregistered capital of thecompany is changed in any way (increased or decreased), anofficial company court registration procedure is required. Theregistered capital change takes effect on thedate when itis registered by thecourt. Funds can be provided by theshareholder to theregistered capital of thecompany either asacontribution in cash, or asacontribution in kind. Theamount provided ascontribution in cash corresponding to theincrease of theregistered capital needs to be paid in theHungarian bank account of thecompany. T
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heshareholder is responsible towards thecompany that theindicated value of thecontribution in kind does not exceed its real value asof thedate when itis provided. Apart from registered capital, funds can also be contributed by theshareholder to thecapital reserve of thecompany. Thecapital reserve is not part of theregistered capital of thecompany, but itis part of its equity. Pursuant to theAccounting Act, capital reserve may only be provided simultaneously with aregistered capital increase (thecapital reserve itself is not registered in thecompany registry, though). Thecapital reserve increase corresponds to thedifference between theface value of theregistered capital and theamount of funds actually provided by theshareholder (similarly to ashare premium). Theincrease of thecapital reserve does not have direct tax consequences in Hungary. Theshareholder can also provide funds to thecompany asloans. However, in this case theHungarian thin-capitalisation rules must be observed. Taxable income defined Thebasis of thecomputation of thetaxable income (tax base) for corporate income tax purposes is theaccounting profit or loss, which is then adjusted by several increasing and decreasing items in accordance with therelevant provisions of theCIT Act. In determining thetaxable base, allowable deductions from theprofit-and-loss statement include thefollowing: provisions built up for expected liabilities and recaptured costs accounted for asrevenue in thetax year; write-back of unplanned depreciation that increased thecorporate tax base in previous tax years; dividends received accounted for asrevenue (except for dividends from acontrolled foreign company); theincome realised by theshareholder/member (that is, aparticipating company, not anindividual shareholder) that exceeds theacquisition value or book value of theinvestment received upon termination of theinvestment without legal successor, reduction of theregistered capital or qualified transformation (adomestic transformation based on thedefinition of theMerger Directive) of theinvestment. However, acertain part of this amount might increase thetax base if investments acquired through atransformation are sold or contributed. Thepositive difference between theincome and expenditure accounted for in relation to theredemption of own shares may be deducted from thetax base. Uncollectible receivables, if they meet therequirements defined in theAccounting Act, and theincome accounted for in relation to uncollectible receivables, which increased thecorporate tax base in previous years, is also
deductible. 100% of theallocated direct cost of research and development (R&D) decreased by thevalue of R&D subcontractors fees and R&D funds received, are deductible (double dip scheme). Anemployer having less than 20 employees may deduct thesalary paid to aperson but maximum theannual minimum wage, Ft936,000 in 2011, if this employee has adisability of 50% or more asdetermined by thecompetent medical board (applicable if theperson is exempt from paying rehabilitation contributions, pursuant to Act IV of 1991 on Furthering Employment and Provision for theUnemployed). Under certain circumstances, unrealized foreign exchange gain is temporarily deductible from thecorporate tax base. To ease financing of small and medium-sized enterprises, atax credit is granted. Itis equal to 40% of annual interest payable on investment loans with alimit of HUF 6 million per tax year. Thebenefit can be used for theduration of theloan, until its expiration and until theasset that was financed by theloan is in thebooks of thetaxpayer. Business entertainment expenses increase thetax base. TheAccounting Act provides for astrict definition of irrecoverable receivables (bad debts) under theCorporate Tax Act, which maintains that irrecoverable receivables except for receivables expired or receivables that cannot be forced in alegal procedure, are deductible for corporate tax purposes. 20% of theface value of receivables overdue for more than ayear are also deductible. Under theCIT Act, provisions made for future liabilities and expenses (accounted for asexpenses in thetax year) increase thetax base. However, these amounts may be deducted from thetax base in thefollowing year (when accounted for asrevenue). Under thethin-capitalization rule, according to theAct on CIT, interest paid or accounted for on that part of theliabilities that is in excess of theborrowers equity asmulti-plied by three is not deductible for corporate income tax purposes (thedebt to equity ratio is 3:1). For thepurpose of this rule, equity is calculated asanaverage daily balance of registered capital, capital reserve, retained earnings and tied-up reserves (or own sources corresponding to these). Liability means theaverage daily balance of outstanding loan (except for bank loans), outstanding closed securities signifying acreditor relationship and bills payable (with theexception of bills payable to suppliers). Any liabilities in connection of which interest is paid are generally included in thedefinition of liabilities for thin capitalization purposes. Thethin-capitalisation rule also applies between unrelated parties.
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Due to theabove rules, thinly capitalised companies have fewer options to acquire financing from bridging loans. Thenumber of available financing forms is further reduced since thedefinition of liabilities also includes privately issued bonds and bills of exchange. Thepre-tax profit must be adjusted when theinterest is recorded in thebooks asexpenditure or aspart of thehistorical cost of apurchased asset, in accordance with theaccounting rules. Thereference to historical costs means that thethin-capitalisation rule applies to loans that were used by thecompany to purchase or manufacture acapital asset, and theinterest on such loans is part of thehistorical cost until theasset is capitalised. 50% of royalty revenue is deductible from thecorporate income tax base, but thetotal deduction may not be more than 50% of thepre-tax profit. TheCIT Act includes theconcept of costs not in theinterests of theenterprise, largely to cover items that are of potential abuse for tax-evasion purposes. Travel expenses may not be deducted if thetrip was not exclusively for business purposes. Theconsideration for aservice in excess of net Ft200,000 if theuse of such services contradicts therequirement of reasonable management is also not deductible. Non-deductible costs also include expenses due to subsidies, assumed liabilities and assets given free of charge to non-Hungarian companies, aswell asreceivables waived against related parties. Certain income, such asdividends, received from controlled foreign companies that would normally be exempt is taxable; while certain expenses incurred, such asimpairment, which are deductible under general rules, are non-deductible if incurred in relation to acontrolled foreign company. In addition, undistributed profit of thecontrolled foreign company is also taxable at thehands of theHungarian resident shareholder. Acontrolled foreign company is aforeign company in which aHungarian individual directly or indirectly holds at least 10% of shares or most of theforeign companys income derives from Hungary, and theforeign company is effectively taxed at less than 10%. Acompany incorporated in anEU or OECD member state or acountry that has concluded atax treaty with Hungary is not acontrolled foreign company if ithas real economic presence in that foreign country. Tax losses may be carried forward indefinitely. No upfront approval is required for thecarry forward of tax losses provided that these losses are generated in accordance with theprinciple of exercising thelaws within their meaning and intent.
Thetax procedures applicable to foreign companies differ depending on whether thecompany has apermanent establishment in Hungary. Both Hungarian-registered subsidiaries and permanent establishments of foreign-registered companies must apply Hungarian accounting rules. Hungarian-registered companies are taxable under ordinary domestic rules on their worldwide income. Hungarian permanent establishments of foreign-registered companies are taxed only on their Hungarian source income, but thesame tax rules apply to them under domestic legislation. Depreciation may be included in thecosts of thepermanent establishments activities. Branches of foreign companies in Hungary are subject to taxation at conditions similar to those of domestically registered companies. Depreciation Accounting depreciation of assets is generally calculated by thestraight-line method, under which thesame percentage of theoriginal value of theasset is deducted each year. Tax depreciation is more stringently regulated, with thelaw setting themandatory rates for most asset types. This can be more than accounting depreciation, resulting in anet deduction. Thegeneral rate of tax depreciation for machinery and equipment is seven years (14.5% per year). Athree-year tax depreciation period (33.33% per year) applies to computers, office equipment, advanced industrial equipment, and many types of environmental protection, medical and laboratory equipment. Motor vehicles are depreciated over five years (20% per year). Anowner of assets leased to another party may use accelerated depreciation up to 30% (33.33% on some types of asset) of theacquisition cost of theleased assets (5% of acquisition cost for buildings). Tax depreciation can be accelerated by applying a50% rate instead of a33% or 14.5% rate to computers, computer accessories and new tangible assets purchased or produced in 2003 or later. Equipment used for film and video production may be amortized at a50% rate. For buildings, tax depreciation is set at 50 years (2% per year) for structures of long duration, 3% for those of medium duration and 6% for those of short duration. Buildings that are leased out are depreciable at 5% per year, and theequipment in thebuildings at 30% per year. Industrial and agricultural structures are depreciable at annual rates of 2% and 3%, respectively. Other structures depreciate at annual rates ranging from 2% to 20%.
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Other fixed assets not specifically included in thedepreciation table are tax-depreciated at 14.5% per year. Non-depreciable assets include registered land (except some land that has been used for waste disposal) and works of art. Write-off periods tend to correspond to international standards. Companies may set aside atax-deductible reserve for thepurpose of general development up to 50% of thetaxpayers entire pre-tax profits, or up to HUF 500 million in atax year and make animmediate deduction by this development reserve from their tax base. However, no tax depreciation can be applied to theequipment or other assets acquired through thedevelopment reservethis regime in fact results in accelerated depreciation. Although theAccounting Act recognizes thelower of cost or market principle, thelaw contains special rules for asset revaluation that may be followed, among other purposes, to measure theeffect of inflation. Enterprises may revalue certain assets at thebalance sheet date. These include liquid assets, intellectual property, tangible assets, except investments and financial investments, except for securities loans. In revaluing assets, where market value is less than book value, thedifference must be accounted for asanadded depreciation expense above theamount planned. Where themarket value is greater than book value, thedifference can be accounted for in avaluation reserve under theequity account and asavaluation adjustment under therelevant asset account. Generally, therevaluation increases thevaluation reserve if theadjustment value of thecurrent year exceeds that of theprevious year (up to thevalue of thereserve adjustment); itdecreases thevaluation reserve if theadjustment value of thecurrent year is less than that of theprevious year. Thevalue adjustment must be performed separately for all assets, and revaluations are not included asincome in thetaxable base. Profit repatriation There is no withholding tax on dividends paid to any foreign companies based on domestic legislation. Itis irrespective of thefact, when theprofit from which thedividend is paid was incurred. Capital gains taxation Gains arising from thesale of assets are treated asordinary business income. There is no difference in thetax treatment of earnings from long- and short-term holdings. In thecourse of atransformation (change of business form, merger or demerger) thetaxpayers are entitled to revaluate their assets and liabilities. Any gain or loss resulting from therevaluation is taxable or deductible respectively generally at thelegal predecessor. However, in thecase of aqualified transformation thelegal predecessor may opt not to tax or deduct thegain or loss.
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In that case thelegal successor has to determine its tax base asif thetransformation has not happened. At thetime of disinvestments, capital gains decrease thetax base for capital reduction, qualified transformation or liquidation. This tax relief is only temporary for transformation, since when withdrawing capital from thetransformed company, thetax base must be increased by theamount accounted for asexpense but only up to theamount of thecapital gain that has formerly decreased thetax base. Based on theparticipation exemption regime, thecapital gain realized upon thesale of participations is tax exempt from corporate income tax if thefollowing requirements are met: theparticipation is at least 30%; thetaxpayer has reported theacquisition of theparticipation to theHungarian Tax Authority within 30 days of theacquisition; thetaxpayer has held theparticipation for at least 1 year. Theabove rule can be applied by Hungarian companies to their participations in both Hungarian and foreign entities. However, any capital loss or loss in value accounted for such participations are non-deductible. Theregime, combined with thetax exemption of dividend and thelack of withholding taxes, makes Hungary avery attractive location for holding companies. Theshareholder of acompany whose Hungarian real property exceeds 75% of theaggregate market value of assets shown in its financial statements (a company owning real estate) is subject to Hungarian taxation when transferring theshares in thecompany, assuming amember (shareholder) of thecompany is aforeign resident in acountry with which Hungary has not concluded adouble tax treaty, or thetreaty allows thetaxation of thecapital gains in Hungary. Thetax is payable by non-resident shareholder who gains income from thealienation of ashare in thecompany that owns real estate. Tax liability is incurred asof theday of alienating theshare or thedecrease of registered capital by means of divestment. Thetax base is thepositive amount of theconsideration at thetime of alienation or decrease of thecompanys registered capital, less thepurchase price of theshare and justified expenses associated with theacquisition or holding of theshare, while thetax rate is 19%. Foreign income and tax treaties Foreign-source income is taxable in Hungary, with acredit granted under domestic law for foreign tax paid, even if there is no tax treaty with thecountry of source. Hungarys tax treaties provide for either credit for theforeign tax paid or anexemption of theforeign income.
Hungary has bilateral tax treaties or similar agreements with 70 countries. Hungary does not impose withholding tax on dividends, interest or royalties paid to companies in treaty countries. 30% of withholding tax was levied on interest, royalty and service fee payment to non-treaty countries in 2010, but this provision has been abolished asof January 1, 2011. Transfer pricing Hungarian transfer pricing rules specify that transactions between associated entities should be concluded at thesame price asanequivalent transaction between unrelated partners. If anindividual or anorganisation, directly or indirectly, has more than 50% ownership or voting rights in another entity, or direct or indirect management control of another entity, then theentities are associated. For private individuals, thelaw also includes family members. If theprice applied between associated enterprises differs from themarket price, either thetaxpayer or thetax authority can adjust thetax base to reflect themarket price. Hungarys transfer pricing rules are generally based on OECD guidelines. Thefollowing transfer-pricing methods may be used: comparable uncontrolled price method, theresale-minus method and thecost-plus method, and, asof 2011, thetransactional net margin method and theprofit split method aswell. If none of these methods leads to aproper result, thetaxpayer may apply any other defensible method. If theprice applied between associated enterprises differs from themarket price, thetaxpayer or thetax authorities may adjust thetax base to reflect themarket price. If thetax authorities make anadjustment, however, they may impose afine of up to 50% of theadditional tax liability and thetaxpayer may also have to pay late payment interest. AMinistry of Finance decree, regulates thedetails of therequired content of transfer-pricing documentation. Branch offices are subject to thesame arms-length pricing requirements asall enterprises in Hungary, whether for prices between branch and parent or between multiple branches in Hungary. Thetax authorities have increased their scrutiny of transfer pricing in thepast years. VAT Theprimary legislation governing turnover and sales taxes is Act CXXVII of 2007 on value-added tax (VAT). Due to theEU Accession, theHungarian VAT regulation was aligned to theEU regulation. Supply of goods and services performed in Hungary aswell asimportations are subject to value added tax (VAT). Thegeneral rate of VAT is 25%. Certain products and services are subject to reduced rates of 18% and 5%. For example, human medicines and books are to 5% VAT. Dairy and bakery products are subject to 18% VAT.
In general, input VAT of business related costs are deductible, but there are certain goods and services, theinput VAT of which cannot be deducted, e. g.: goods/services, which have been utilized for purposes other than business activities or have been utilized for VAT exempt activities; fuel utilized directly for theoperation of motor vehicles; passenger cars and related services; food and beverages. Each company acts asacollector, deducting theVAT ithas paid from theamount received and surrendering this to thegovernment. Domestic sales and imported products and services are subject to VAT; exported products are tax exempt. Services deemed to have been provided outside Hungary do not fall under thescope of theact. Repayment of reclaimed VAT of HUF 500,000 or more is due within 45 days. Branch offices of foreign companies in Hungary are subject to VAT. All related firms and their branches in Hungary are eligible for group taxation and are collectively regarded asasingle taxpayer. Services and products provided within theVAT group are not subject to VAT. Gifts or goods furnished free of charge are considered aprovision of goods or services under theVAT Act and are charged VAT based on their full market value. Rights and intangibles are also liable for VAT. VAT must be paid on anarms-length basis (that is, at market prices) if thebuyer is part of thesame corporate group or has acertain relationship with theseller. In general, therent of real estate is atax exempt activity, however, taxpayers may opt to be taxed under thegeneral VAT rules. Therenting of residential real estate remains exempt from VAT without having theoption for taxation under thegeneral rules. Thevalue of intellectual property rights (IPR) in addition to thevalue of storage media is included in theVAT base of imported software. Taxpayers have to file annual VAT returns if their total amount of tax to be accounted for does not exceed HUF250,000 and they do not have anEU VAT registration number. If thetotal amount of tax to be accounted for exceeds 1 million, theVAT return must be submitted monthly. Otherwise, theVAT return and payment are due quarterly.
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Asaresult of theforeign-exchange liberalisation in 2001, theforint has become fully convertible; thus Hungarian entities can agree on paying in any currency other than forint. Although invoices may be denominated in, and payments may be made in, foreign currencies, taxes should be reported and paid in forint. Exchange rates quoted by theNational Bank of Hungary (thecentral bank) or by other commercial bank may also be used when converting theVAT base and also theVAT liability into forint. TheAct on Excise Tax (Act CXXVII of 2003) applies to alcoholic beverages, petroleum and tobacco products. After Hungarys EU accession (May 1st 2004), theconsumption tax on cars was abolished and anew type of tax called registration tax was introduced. Thepurpose of theregistration tax is thesame asthat of theconsumption tax, but thetax liability will be defined asfixed amounts instead of percentages. Other taxes Corporate taxpayers also face avariety of social security taxes. Employers of more than 20 persons must also pay arehabilitation contribution of HUF 964,500 (in 2011) multiplied by thenumber of handicapped employees that should be employed less thenumber actually employed per year. Hungarian law dictates that employers fill at least 5% of staff positions with handicapped persons. Solidarity tax The4% solidarity tax, which had been introduced in 2006 was abolished asof 1 January 2010. Special tax on financial institutions, energy, retail and telecommunication companies In order to raise sufficient revenues to finance areduction in corporate and personal income tax rates, while maintaining thebudget deficit at therequired levels, thegovernment introduced special taxes on thefinancial, energy, retail and telecommunication sectors asof 2010. Credit institutions are subject to a0.15/0.5% tax on their adjusted balance sheet total in 2010 (asof 2011, the0.5% rate will be increased to 0.53%). Asof 2011, anew special tax on credit institutions has been introduced, which is 30% of their pre-tax profit, but capped at theamount of thespecial tax paid on their adjusted balance sheet total. Theamount of thenew income based special tax can be deducted from theother special tax, resulting in no additional tax payment.
Insurance companies were required to pay 6.2% special tax on their income from insurance fees in 2010, while asof 2011 progressive rates has been introduced (1.5/3/6.4%). Investment companies, stock exchanges, commodity traders, venture capital fund management companies, and investment fund management companies are also obliged to pay special tax. Asof 2010 thegovernment imposed aspecial tax (so called crisis tax) on theenergy, retail and telecommunication companies aswell. Thetax is based on thenet sales revenues of these taxpayers. Thetax rate in case of energy companies is 1.05%, in case of retail companies progressive rates of 0/0.1/0.4/2.5% apply, and for telecommunication companies progressive rates of 0/2.5/4.5/6.5% have been established. Theabove special taxes can be deducted from thebase of theregular corporate income tax asanexpense. Contribution on interest subsidies Asof January 1, 2007 credit institutions are required to pay a5% contribution on theinterest income received with respect to theloan portfolio directly or indirectly affected by subsidies. Tax compliance and administration Corporate income tax is assessed on anannual basis; payment is submitted with annual tax returns. Most returns are due by May 31st following theincome year. Advance tax payments based on theprevious years profits are due monthly for companies whose tax liability exceeded HUF 5 million in thepreceding year. All other companies must make quarterly advance payments, with atop up payment required by December 20th (at least up to 90% of theexpected tax). Thetax year may be different from thecalendar year for aconsolidated Hungarian branch or subsidiary of aforeign company if theparent uses adifferent tax year. Personal Tax Taxable income and rates Asof 2011, theHungarian personal tax system, governed by thelaw on Personal Income Taxation, is flat with a16% rate. This flat rate applies to 127% of thetotal tax base (including thesocial security contribution payable by theemployer), resulting in aneffective flat tax rate of 20.3%. In addition to theabove, there are certain type of income that are taxed separately.
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Residents are subject to tax on their worldwide income and nonresident individuals are subject to personal income tax only on their Hungarian-source income (including income from employment, business activities or real-property transactions in Hungary). Hungary has abolished most social security exemptions for expatriates and their employers. If aHungarian company employs aforeign individual, social security charges on both theemployee and theemployer are due in Hungary. Any exemptions from Hungarian social charges are based on theconditions of theassignment structure, EU social regulations or bilateral social security agreements. A14% health tax applies on income withdrawn from abusiness, dividends (taxable at 25% rate), income from securities lending, capital gains and income exceeding HUF 1 million from renting out real property. Asof 2011, thesystem of thetaxation of other types of remunerations (in-kind benefits, dividend, interest, etc) was substantially overhauled. Thebenefits in kind that fell under the54% personal income tax rate in 2010 are subject to the16% personal income tax rate aswell in 2011, but 27% health care contribution is also payable. Thebasis of thepersonal income tax and health care contribution is thevalue of thebenefit in kind multiplied by 1,19 (i.e.: theeffective rates of personal income tax and health care contribution will be 19,04% and 32,13%, respectively). Most benefits in kind which were subject to favorable tax rates in 2010 are subject to personal income tax at aneffective rate of 19.04% (16% on abase that comprises thevalue of thebenefit multiplied by 1,19), but social security or health care contribution are not payable in this case. Dividend and interest incomes are subject to the16% fat tax rate aswell asof 2011. Determination of taxable income For Hungarian residents, thelaw defines income for tax purposes asworldwide income from any source (income from employment, thecarrying on of abusiness, capital gains, income from investments, among others). For nonresidents, only Hungariansource income is taxable. Hungarian-source income is defined asincome received domestically or offshore for activities performed in Hungary, or income earned from Hungarian assets. Gross income is considered thetaxable base, which must be aggregated with income from other sources (excluding income taxed separately such asdividend income, capital gains, among others).
Categories of tax-exempt income include employment income at minimum wage levels (because of atax credit for low-income earners), benefits paid under thestate social welfare provisions or by social insurance, allocations for childcare and state pension income, student scholarships and tax refunds. Total tax credits may not exceed HUF 100,000 and generally are not available for individuals with anannual income of more than HUF 3.4 million or HUF 6.5 million (except for housing tax credits). Astandard tax credit of 16% of salary applies, up to HUF 12,100 per month, but this is reduced at higher income levels. Theincome ceiling on this credit is HUF 3.960 million per year (tax credit). Professional training, business travel and accommodation qualify asbusiness expenses if properly supported by invoices. Housing provided by aHungarian firm is taxable aspart of employment income if evidenced by anemployment contract. For foreign employees seconded to Hungary without anemployment contract with aHungarian firm, housing could be considered asnon-taxable benefit. Asof 2011, anew family tax allowance was introduced. Families with one or two children are entitled to atax base decrease of HUF 62,500 per child monthly and HUF 206,250 per child for families with three or more children. Residency Residents are liable to Hungarian personal income tax on their worldwide income (unlimited tax liability). Meanwhile, nonresident individuals pay Hungarian personal income tax only on their Hungarian-source income (eg income received for activities performed in Hungary) (limited tax liability) regardless of where that remuneration is paid from and thelocation of thebank account into which itis deposited. Furthermore, non-resident individuals may also be liable to Hungarian income tax on any income that is taxable in Hungary based on double-tax treaties. For thedetermination of Hungarian tax residency, various criteria should be examined. Individuals with Hungarian citizenship (excluding dual citizens with no permanent residence in Hungary) and foreigners with aHungarian settlement permit are tax residents. Aforeigner without aHungarian settlement permit is also considered tax resident if that person has apermanent home exclusively in Hungary. If theindividual has apermanent home in another country in addition to one in Hungary or has no permanent home in Hungary, theindividual is regarded asaHungarian tax resident if that persons centre of vital interests is in Hungary.
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If theindividuals centre of vital interests cannot be determined, theindividual is regarded asaHungarian tax resident if theindividual has ahabitual abode in Hungary (for instance, if he/she stays in thecountry for more than 183 days in acalendar year). AnEEA national also would be deemed tax resident if his/her stay in Hungary exceeds 183 days in thecalendar year. Double tax treaties, which override local legislation, may affect theresidence status. Special expatriate tax regime There is no special expatriate tax regime. However, from 2009 itis generally also possible for any entities (not only for employers) to send individuals on business trips with anassignment letter. In case of such anassignment letter thecosts of travel and certain meal expenses might be considered tax free.
Company limited by shares (Rt) Minimum capital is HUF 20 million in case of public Rt (nyRt.) and HUF 5 million in case of private Rt (zRt.). Theshare capital of thecompany must be secured completely by subscription. With certain exceptions, theamount of capital contributed in kind must be declared in writing and must be audited by certified auditors. There are no restrictions on thenumber of shareholders or founders, or on their nationality or residence. AnRt must have asupervisory board of at least three members, elected by theshareholders. Theperson elected must inform in writing those companies of which heor she is already anexecutive officer within 15 days of acceptance of anew position. There are strict regulations on conflicts of interest. Except when acquiring shares in apublic Rt, anexecutive officer may not acquire interest in another company pursuing identical activities. Furthermore, no person may be anexecutive officer in another company pursuing anidentical activity unless specified in thecompanys articles of association approved by thesupreme body of thecompany. Acompanys supreme body may confer theright of general representation upon anemployee appointed by it, asaso called company secretary. Management is conducted by theboard of directors (igazgatosag), consisting of 311 members elected by theshareholders at thegeneral meeting. Theboard is responsible for preparing financial statements and balance sheets of thecompany and for producing anannual report. No restrictions apply regarding nationality or residence of directors (except for banks, where at least two members of theboard must be Hungarian residents for foreign-exchange purposes). There is aregistration fee of HUF 600,000 in thecase of public companies limited by shares and HUF 100,000 in thecase of private companies limited by shares and limited liability companies. Upon theincrease of theinitial capital 40% of theabove fees is payable. Bearer shares are freely transferable. Thetransfer of registered shares issued by aprivate Rt may be limited in thedeed of foundation. Foreigners may acquire both types of shares. Preference shares may be distributed up to avalue of 50% of thetotal share capital of thecompany.
3. Legal Entity
Principal forms of doing business Under theAct on theInvestments of Foreigners in Hungary, with few exceptions specified in theAct, foreigners are entitled to carry out business activity in Hungary only if they register abranch or establish aHungarian company. Under theterms of theCompanies Act, acompany in Hungary may be established under avariety of legal forms. Themost common for foreign investors are thecompany limited by shares (reszvenytarsasag - Rt) and thelimited-liability company (korlatolt felelossegu tarsasag - Kft). These organisational forms correspond closely to theGerman AG (Aktiengesellschaft) and GmbH (Gesellschaft mit beschrnkter Haftung). Foreign investment may take two other legal forms: thelimited partnership (beteti tarsasag - Bt) and thegeneral partnership (kozkereseti tarsasag - Kkt). These latter forms of organisation require unlimited legal liability. All members of aKkt are jointly and severally liable; at least one member of aBt must have unlimited liability. Owing to less stringent registration and operating procedures and to lower minimum capital requirements, most new privatesector firms incorporating in Hungary now choose theKft form. For anoutline of Rt and Kft requirements, see below. AKft may be formed by one owner. Itis not permitted to solicit others publicly to become owners. Initial capital may not be increased until all quotas are fully paid. AKft may not be fled for registration until at least half of each cash contribution has been paid. If upon theestablishment theamount of in-kind contributions reaches half of theinitial capital, all of thein-kind contribution has to be transferred. All outstanding cash contributions must be fully paid no later than one year from registration. All outstanding in-kind contribution has to be transferred within three years.
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Simple majority is enough for most decisions; however, amajority of at least 75% is necessary for major decisions, such asamending thearticles of association, deciding on transformation or termination without legal successor of thecompany or modifying therights attached to theshares, or transforming classes of shares. Shareholders representing at least 10% of shares with voting rights may ask theboard of directors to add certain items to theagenda of ageneral meeting or to have themanagement of thecompany be investigated. Limited-liability company (Kft) Minimum capital is HUF 500,000. There are no restrictions on thenumber of shareholders or founders, or on their nationality or residence. Asupervisory board of at least three members must be established if theannual average number of employees exceeds 200. In that case one-third of themembers of thesupervisory board must be elected by theemployees. Management can be conducted by one or several managing directors elected by themembers for adefinite term; alternatively, thearticles of association may provide that all equity holders are entitled to manage theKft asmanaging directors. Companies must appoint at least one auditor if theturnover is more than HUF 100 million in thepreceding two years and theaverage number of employees of thepreceding two financial years exceeds 50 persons. Public Rts have extensive publishing and disclosure obligations. Quotas have aminimum par value of HUF 100,000. Theamount of capital contribution must be divisible by HUF 10,000. Every quota holder has one quota, though several persons together may constitute asingle quota holder. Asimple majority is usually sufficient for most decisions; however, amajority of at least 75% of thequota holders is necessary, for instance, to change thearticles of association or to remove amanaging director. Establishing abranch Since January 1st 2000 all foreign companies functioning in Hungary must have established either alocally registered company or abranch office (foktelep) under Act CXXXII of 1997 on Branch Establishments. Foreign frms have been able to establish abranch office in any sector since January 1st 1998, under Act CXXXII. Abranch office in Hungary qualifies asanentity without legal personality; therefore theforeign firm bears responsibility under Hungarian law. (Kkts and Bts are also without legal personality under Hungarian law.)
Thefnancial-sector modifcations to Act CXII of 1996 on Credit Institutions and to Act CXI of 1996 on Securities permit branches. Under theamendments, capital requirements for branches in thefinancial sector are identical to those for domestically registered companies: HUF 2bn for abank, HUF 1bn for aninvestment company and HUF 100 million for asecurities-trading company. Abranch may engage only in activities that comply with thelaws of both Hungary and thecountry of theparent company. Legislation in all areas (for instance, tax law) has been drafted with theexpressed intent to create alevel playing field for branch offices - that is, neither giving them advantages over domestically registered companies nor subjecting them to disadvantages. Theprocedure for registering abranch office is very similar to that of aKft, with some differences. Abranch office may be founded only if anagreement has been concluded between Hungary and thecountry where theseat of theforeign firm is located. Reporting to theCourt of Registration is theresponsibility of theperson(s) authorised to sign on behalf of thebranch office.
4. Labour and Wages

Theemployment market Unemployment in Hungary is still below theEuropean Union average; thenational average rate of unemployment were steadily around 6%, however in 2010 itrose to 10.9% according to theHungarian Central Statistical Office (ithas arisen because of thefinancial crisis like in other European countries). Thegovernment and theNational Bank of Hungary (thecentral bank) have expressed confidence that theeconomy still has reserves of idle labour, particularly in underdeveloped regions like thecountrys north-east and south-west. Activity rates are still low, but asthedemand for labour grows, persons who are now economically inactive can be expected to enter thelabour force. Unemployment varies widely by region: thehighest rates are in north-eastern Hungary; thelowest are in theborder region with Austria. Unemployment and lower levels of economic development are generally more pronounced in theeastern half of thecountry. In contrast, there is now ashortage of labour in some of themoredeveloped regions. Apersistent problem has been long-term unemployment, and nearly half of theunemployed falls in this category. Although theHungarian workforce is generally skilled and well educated, many of theunemployed are unskilled or older workers who might be difficult to retrain and place elsewhere. Asevere housing shortage in most parts of thecountry limits labour mobility, with Budapest themost-affected area. Professional relocation is still uncommon in Hungary.
Hungary
Certain white-collar skills can be in short supply, though this situation continues to improve. Western firms may have trouble finding and retaining local employees with skills in finance or accounting, human resources, purchasing and electronic data processing. Employees with both business skills and proficiency in Western languages can be diffcult to recruit, and they command premiums over average Hungarian salary levels, but this is also improving. Many Hungarian firms encourage middle and senior management to take foreign-language courses (particularly English). Although Hungarian firms often provide younger whitecollar employees with access to subsidised traditional college or university courses, foreign firms generally offer in-house, directed training. Another trend among foreign firms is to support employees in obtaining alocal MBA or similar professional education. Turnover and absenteeism among shop-foor staff are sometimes still problematic, largely because of workers holding second jobs, thehigh ratio of female employees with families (who must attend to family responsibilities) and frequent sick days. Staff members in joint ventures or foreign-owned firms are considered less vulnerable to high turnover and absenteeism because of better overall pay and working conditions. Asspecified in Act LXXXI of 1997 on Social Security Pensions, theofficial retirement age is set in atransition to 65 years for all persons. Early retirements are still common, however, where firms seek to reduce staff levels with asfew lay-offs aspossible. Labour Code Act XXII of 1992 (theLabour Code) is thebasic legislation governing labour law in Hungary. Thepresent Labour Code is modelled on EU practice and has been amended several times to align legislation with EU regulations. Some foreign investors have commented that domestic labour and social security legislation provides too many benefits to workers at too great acost to management, considering Hungarys present stage of development and productivity. Although social charges have been reduced in recent years, they remain high in percentage terms. Working hours Thestatutory number of weekly working hours is 40; this may not exceed 48 hours, including overtime. Employees are entitled to two non-working days per week, one of which must be Sunday. Sunday workers must receive 150% of their regular daily wage and be provided with another day off thesame week. Exemptions to this rule may apply to special working schedules, but employers must provide adequate rest time for workers. Workers must be paid minimum premiums of 15% for night work and 50% for overtime work. Themaximum overtime can be 200 hours annually, i.e. 300 hours if provided so by thecollective agreement.
Each employee is entitled to aregular vacation every calendar year. Theduration of thevacation is 20 days. However, thenumber of vacation days is increasing with theage of theemployee so that when theemployee is 45 years old theduration of regular vacation is 30 days. Supplementary vacation days are given if theemployee has children. Following thelegislation, thesocial security contributions are mandatory for Hungarian employees. Thereformed pension system has currently four pillars, thus thesystem comprises of amandatory public scheme, aprivate scheme, avoluntary scheme and apension insurance scheme. Therules of thesystems are asfollows: Individuals must contribute to thepublic and to theprivate scheme, furthermore they may contribute to thevoluntary schemes, with exception of compulsory contribution to theprivate one for employees who enter thelabour market. From employers itis requested to pay a24% pension, 2% health care and 1% unemployment contribution, which is calculated on thebasis of thewages and salaries of theemployees. Employees are obliged to pay 10% pension, 6%health care and 1.5% unemployment contribution. From 1 November 2011 theemployers will be obliged to pay to thepublic scheme of thepension system instead of theprivate scheme asarestrictive measure from thegovernment. Other serious amendments are expected in thefuture regarding thepension system, however thedetails have not yet been confirmed at thetime of thepresent update. Wages and benefits TheLabour Code sets abasic minimum wage in hourly and monthly terms for all types of work and themonthly minimum salary requirement must be adhered to. Theprevailing minimum wage is HUF 73,500 per month and HUF 423 per hour in 2010 (thecurrent minimum wage is HUF 78,000 per month). Following Hungarian sources, theaverage monthly gross salary in 2010 was HUF201,200. TheLabour Code allows arange of other specific minimum-wage levels and guidelines for certain types of work (for example, by skill level, degree of responsibility and industry). Salary levels vary widely. Wages in thestate sector or at wholly Hungarian-owned enterprises are generally lower than at joint ventures. Skilled white-collar labour commands apremium, particularly for qualified information-technology specialists. There are also wide disparities among different regions of thecountry: salary levels in Budapest and thewestern counties are higher than in thedepressed eastern regions.
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6. Infrastructure
Hungarian Labour Code adopted theprinciple of equal wage for equal work, meant to address discrepancies between wages for male and female employees. Theimplementing legislation is Act XVI of 2001. Italso forbids discrimination based on gender, age, or nationality. Hungary is signatory to and adheres to ILO conventions protecting worker rights.
5. Education
Educational attainments are comparable to those of western Europe. Ahigh standard of general education has been important in attracting foreign employers to Hungary, especially in new-technology sectors. However, some foreign investors in themanufacturing sector have complained that thesystems in place for training skilled industrial labour are weak. Governments have often focused on higher education at theexpense of primary and secondary schooling, with state spending continuing to hover at around 5% of GDP - broadly average for theEU25. Schooling is compulsory for children between theages of six and 16, and in broad terms thestructure of theeducational system remains little changed from thepre-transition period. General elementary or primary school is usually followed either by vocational school (for thetraining of skilled workers), vocational secondary school (which offers amixture of vocational and academic study), or thepurely academic gymnasium. Thegymnasium remains theprimary feeder of students to universities, although various types of universities often accept students from vocational secondary schools. In 1990/91, 44% of secondary school students were in vocational schools; but by 2003/04 this had fallen to 23%. Thepercentage of secondary students in vocational secondary schools increased from 33% in 1990/1991 to 43% in 2003/04, and thepercentage continuing to gymnasium rose from 24% to 34%. Higher education expands rapidly University and college education expanded rapidly in the1990s. Enrolment rates are fairly high for theregion: in 2001, according to Eurostat (theEUs statistical office), there were 25% more students in tertiary education in Hungary; however thenumber of thestudents has decreased recently. According to Hungarian Central Statistical Office thenumber of students in tertiary education 2009/2010 reached more than 370.000. Theroutes forming apart of European transport corridors are Road network Hungary has 6.8 km of roads plans to construct additional motorgiven preference. There areper 1,000 sq km of land area, which it wants to increase to 27 km by 2015, approaching the average among current EU members. Currently, there are ways continuously, although therethe asetback networkbudgetary 700 km of motorways; the density of is motorway due to is low by international restrictions. at less than emphasis is on thebuilding of new high- part of European comparison, Themain half of the EU average. The routes forming a transport corridors are given preference. of basic plans to construct quality roads, with apossible neglectThere are maintenance. additional 430 km of motorways by the end of 2006, and foresees a similar programme for the years Thefinancial viability of such highly ambitiousthe building of plans immediately afterwards. The main emphasis is on construction new high-quality roads, has been questioned,of basic maintenance. scheme based on of such highly with a possible neglect but anew funding The financial viability ambitious construction plans takes much of thecosts offbudget. public-private partnerships has been questioned, but a new funding scheme based on
public-private partnerships will take much of the costs off-budget (provided that the scheme wins EU approval). The motorways running south-west and south-east from Themotorways runningand Serbia, respectively) are also under development, as are Budapest (toward Croatia south-west and south-east from several bridges over the Danube Serbia, respectively) were Budapest (toward Croatia andand Tisza, and non-motorway inter-city roads and ringroads. The road network is extensive, but only around half of Hungary's roads are paved. A also developed in thenear past, asare several bridges over improve the situation, government road building programme extending up until 2015 will although many important inter-urban roads will continue roads just theDanube and Tisza, and non-motorway inter-city to haveand two lanes.
ring-roads. Theroad network is extensive, but only around half of Railway network Hungarys roads are paved. covers the whole country and it s well connected to the In Hungary, the railway network
international railway network. State-run domestic railway system operated by MAV is widely used for industrial cargo shipping. However, lately the road transport has replaced Railway network form of freight transport, reflecting both the improvements in main railways as the primary
In Hungary, therailway network covers thewhole country and itis well connected to theinternational railway network. Staterun domestic railway system operated by MAV is widely used for industrial cargo shipping. However, lately theroad transport has replaced railways astheprimary form of freight transport, reflecting both theimprovements in main road provision and past lack of investment in thestate-owned railway network. Thetotal length of railway lines is 8,057 km.
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6. Infrastructure
Road network Hungary has 6.8 km of roads per 1,000 sq km of land area, which itwants to increase to 27 km by 2015, approaching theaverage among current EU members. Thetotal length of roadway lines is 160,057 km. Currently, there are 858 km of motorways; thedensity of themotorway network is low by international comparison, at less than half of theEU average. Of themeasure of goods shipped domestically in 2009 about 90% went by road and 10% by rail (these data also include pipeline deliveries, which accounted for 3,6% of thetotal). When international traffic is included, however, themodal split is slightly more even between road and rail, at 65% and18%, respectively, with pipeline deliveries accounting for 12% of total freight traffic.
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Air transport In recent years, theair traffic has grown rapidly, particularly thepassengers transport. This increase occurred after theintroduction of thediscount airlines, which theHungarian airport authorities were forced to allow due to non-discriminatory terms upon EU accession. In 2010, theair travel accounted for roughly 80% of total international long-distance passenger traffic. Hungary has several domestic and international airports built throughout thecountry. Thelargest one is in Budapest named Ferihegy Airport. Budapest, is striving to build thesecond biggest airport among thecountries in theregion in terms of thenumber of thepassengers. Larger Hungarian cities maintain airports for private aircraft and for domestic fights aswell. Telecommunications Thanks to investments in telecoms infrastructure, most of itfrom foreign investors, Hungary now has one of thebest telecoms systems in theregion. At thestart of the1990s Hungary had one of Europes least-developed telecoms networks, with aninstalled base of less than 1m main lines, apenetration rate of only nine lines per 100 inhabitants, and acall completion rate of less than 40%. In 2009 there were 11.8m mobile subscriptions. Thecountrys incumbent telecoms provider, Magyar Telekom, now controlled by Deutsche Telekom (Germany), still dominates thescene, and is thelargest carrier not only in fixed-line services, but also in mobile telephony and theInternet.
Premium segment German car maker Mercedes-Benz also launched aEUR 800m Greenfield investment in East Hungary and will produce over 100.000 new Aand B class (medium segment) cars per year asfrom 2012. With theadvent of vehicle manufacturing in Hungary, athriving network of suppliers and components manufacturers has also developed, including many from theEU, theUS and Japan. Heavy vehicles also have astrong production base in Hungary, although firms in this segment have experienced difficulties, including adramatic weakening of theUS dollar during thecredit crisis and thefollowing recession. Raba, adomestically owned firm based in Gyor, animportant supplier of heavy-duty axles worldwide, is constantly increasing its market share in theFormer Soviet Republics. Nabi, abus manufacturer, once hailed asasuccess story, is struggling to make acomeback from financial difficulties. Stadler, theSwiss railway maker will however increase its existing workforce and continue to invest in railway manufacturing in theEast Hungary with another app. EUR 20m investment asfrom 2011. Manufacturing Hungarian manufacturing has transformed radically in thetransition period. Formerly characterized by large, heavy industrial plants, dependent on cheap energy imports and sheltered from competition, Hungarian industry today is largely modern and efficient, thanks in large part to theearly entry of foreign investors. Industry suffered amajor decline in output during the1990s. Manufacturing output declined asevere 54% in 198992, and entered strong and sustained recovery only in 1997, after economic stabilization measures introduced in 1995 showed positive effects. Hungary electronics manufacturing ranks first in thecentral/ east-European region and is well placed globally, having thus thebiggest growth potential among industries in Hungary. This is led in part by segments brought to Hungary by foreign investors asgreenfield investments - such asmobile telecommunications and other high-technology equipment, for which Hungary has become something of acentre. Theelectronics manufacturing industry has thebiggest growth potential among Hungarys industries and contributes at least 15% of Hungarys GDP, including spillover effects on other GDP generating sectors. Transport equipment is thesecond most significant manufacturing sector, led by theautomotive industry. Other manufacturing sectors with high export levels have alonger tradition in Hungary, such asthechemicals and food industries, although these two have gone through major restructuring and modernization while thepharmaceutical sector is strong showing agood mixture of successfully transformed Hungarian and some of theworld largest pharmaceutical companies.
7. TheMost Active Industries/ Sectors

Automotive industry Starting almost from scratch at thebeginning of the1990s, thevehicle manufacturing sector has become avital source of foreign investment, accounting for 15% of industrial output in 2004, with total production valued at US$9.3bn. Two major greenfeld investments account for Hungarys output of passenger cars and automotive components: Audi Hungaria (owned by Germanys Volkswagen) and Magyar Suzuki (Japan). Audi Hungaria, thecountrys largest exporter, has been themain engine supplier to theVolkswagen group since 1994, and made nearly 1.5m engines, aswell asover 23,000 vehicles, by 2004. In 2010 Audi initiated theextension of its production facilities which will amount to EUR 900m of investment. Upon thecompletion of these plans Audi is aiming to produce -entirely in Gyr- 125.000 passenger cars every year. Magyar Suzuki thesecond biggest manufacturer produced over 140,000 vehicles at its Esztergom plant in theyears before thecrisis of 2008. Opel Hungary (owned by theUSs General Motors) previously produced passenger vehicles, but now concentrates on transmissions and components and is investing EUR 500m between 2011-2014 to double its capacities thus becoming number one GM manufacturing site in Europe for new generation small- and mid-sized petrol and gasoline engines.
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Information and communication technology Theavailability of comparatively cheap, technically skilled labour and nearby EU markets has attracted anumber of leading electronics and software firms to Hungary. Thecountry has became amajor European manufacturing centre for mobile telephone handsets, led by output at theKomarom factory of Nokia (Finland) and at contract manufacturers Elcoteq (Finland) and Flextronics (Singapore). Nokia has also chosen Budapest for its largest software development centre outside Finland, encouraging similar moves by other mobile and electronics producers. Among indigenous firms, specialists such asGraphisoft, which has become amajor world supplier of architectural software, are generally perceived to have amore stable future than those competing directly with major multinationals. Over 95% of information technology (IT) production is exported. Despite undoubted successes, rising labour costs and avolatile forint have raised competitiveness concerns, asillustrated by the2002 decisions of Flextronics to relocate production of theMicrosoft Xbox to China, and of IBM to close its hard disk factory in Szekesfehervar. Although these incidents were seen ascalling investor confidence into question, therestructuring of global production capacities more often works in Hungarys favour. There are signs that anincreasing number of Asian companies, including Chinese firms, are relocating some electronics production to Hungary in order to serve EU markets. Chemicals and pharmaceuticals Hungary inherited animportant pharmaceutical industry from thecommunist period. Thecountrys pharmaceutical companies have their own research and development (R&D) activities, but are generally too small to run research programs on ascale that can reliably generate new proprietary drugs. However, Hungary has become animportant low-cost production base for patented compounds manufactured under license, aswell asfor high-quality branded generic substitutes for out-of-patent drugs. Thelargest pharmaceutical company and theonly major manufacturer not controlled by aforeign investor, Richter Gedeon, is aleading producer of generics and active ingredients, and is one of themost important foreign drug suppliers on theRussian market. Its active ingredient production has led to extensive exports to theUS and Japan. Richter Gedeon recently acquired PregLem aswiss, and Grnenhalt aGerman pharmaceutical company . Although Hungarys pharmaceutical market is of suffcient size to have attracted leading international producers, political interference in pricing has been aregular occurrence under both left- and right-of-centre governments, significantly adding to business risk. Sanofi-Aventis, theFrench pharmaceutical company, Israeli-owned Teva, one of theworld largest generic pharmaceutical company, French owned Egis, aswell asGSK are all have significant production capacities in Hungary and most of them have continued to invest hundreds of millions of euro in Hungary even during theeconomic crisis in recent years.
Thechemicals sector was already amajor industry before Hungarys transition, and thetwo largest companies - Borsod-Chem and TVK - have complementary buyer-seller roles. TVK, now controlled by theHungarian oil and gas company MOL, is more closely linked to theoil and petrochemical value chain, asamajor supplier of polyethylene, polypropylene and other products. BorsodChem, which makes PVC resin and higher value-added Isocyanides is, since February 2011, fully owned by Wanhua Industrial Group making in theworld 3rd largest isocyanides producer. BorsodChem and TVK have both become important European players on themarkets that they serve, and co-ordinated, large-scale investment programs have been completed at both companies. Chemicals account for over 7% of total industrial production and 2% of Hungarys exports. Agriculture Agriculture and viticulture have traditionally played animportant role in theeconomy, asHungary has afavourable climate and fertile soil. Hungary has nearly 5.9million ha of agricultural land, or 63% of thecountrys total surface area. Including forests, total productive land area rises to 7.7million ha; about 75% of productive land is now privately owned. Itis self-sufficient in most agricultural product groups, and exports show aconsistent and substantial surplus over imports. Major crops include wheat, maize and barley; sunflower seeds; sugarbeet; and avariety of vegetables and fruits. Animal husbandry and dairy production are also important. Numerous small family operations are expected to join anew wave of co-operatives, or exit commercial farming for practical purposes. Ironically, even astheviability of small, inefficient farms is called into question with EU membership, theimplementation of theCAP has resulted in anincrease in thenumber of registered farmers to approximately 300,000 from 218,000 earlier. This is aresult of theCAPs more generous fxed subsidies, which are provided per hectare of arable land, even on small plots. Financial Services After anearly recapitalization program followed by comprehensive privatization that brought in foreign strategic partners, Hungary has one of theregions most advanced banking sectors. Privatization of themajor banks began in themid-1990s, and most had been sold to foreign investors by theend of 1996. Thelargest Hungarian Bank OTP, theNational Savings Bank is more than 90%-owned by foreign investors. Thetrend of declining state shareholdings has been accompanied by acorresponding increase in foreign ownership, from 14.9% in 1994 to above 85% in direct and indirect foreign ownership by 2010. Thefinancial crisis hit Hungary hard since half of its household and public dept has been denominated in foreign currencies resulting thecountry being highly leveraged and susceptible to volatilities in theglobal economy.
Hungary
Shared Service Centres Over thepast 10 years, close to 100 shared service centres have opened up, and even extended later on, operations in Hungary (primarily in Budapest). While initially larger scale lower value added services have been moved to Hungary mostly from theUS and Western Europe (billing, accounting, etc.) over thepast years several companies have set up Centres of Excellence and have decided to leave only some strategic functions in their US or West-European headquarters. This industry has now employs over 30,000 people, mainly people with colleges or university education speaking one or more foreign languages and serving customers often across Europe or even around theworld out of Hungary. Companies representing awide range of industries and include Morgan Stanley, British Petroleum, Diageo, Lexmark, IBM, Vodafone, Tata, Grundfos, British Telekom, T System of Deutsche Telekom, GE Money Bank, Flextronics, ExxonMobil, Ericsson, Celanese - to name afew.
Tax incentives Development Tax Allowance (DTA) Hungary welcomes foreign direct investment (FDI) and implements policies to encourage it. Development tax allowance, whereby up to 80% of thecorporate income tax payable every year for aperiod of 10 years can be foregone, could be made available. If theamount of DTA would exceed theamount that could be available based on EU rules for aproject with EUR 100 million of eligible expenditure, thecompany would need to is applied for aproject with less than EUR 100 million of eligible expenditure, itcould be obtained automatically in so far asall conditions set out in thelaw are met. However, if theeligible expenditure of theproject for which theDTA is applied for exceeds EUR 100 million even if thevolume of DTA would remain below theamount that could be available for aproject with eligible expenditure of EUR 100 million, thedecision of theMinistry for National Economy is required. DTA can be available under various grounds: Investments over HUF 3bn (approx. EUR 12m), **investment over HUF 1bn (approx. EUR 4m), theinvestment has been installed and operated in preferred regions (northern Hungary, thenorthern and southern Great Plains, thecentral and southern Trans- Danubian planning/strategic region aswell asthesmall regions of Celldmlk, Letenye, riszentpter, Tt, Vasvr and Zalaszentgrt within thewestern Trans-Danubian planning/strategic regions) - or settlements belonging to asmall region. For both DTA under both grounds, thetaxpayer shall either increase thenumber of employees by at least 150 (or 75 in underdeveloped regions), or to increase thewage costs by at least 600 times (or 300 times in underdeveloped regions) theannual minimum wage. - **investment up to alimit of HUF 100m (EUR 400,000) if used for environment protection (self-contained investment), certain broadband Internet service, provision of food-hygienic conditions, film and video making, aswell asbasic research, applied research, or experimental development. ** Job creation investments (irrespective of thenumber of jobs created or thelocation of theinvestment within Hungary) Investments of small- and medium-sized enterprises (SMEs) over HUF 500m (EUR 1.9m) if theenterprise within thenext four years increases thenumber of employees with 20 in case of small-sized enterprise and with 50 in case of middle-sized enterprise, or increases thewage costs by at least 50 times in case of small-sized enterprise and by at least 100 times theannual minimum wage.
8. Industrial Parks
Hungary offers thewidest selection of industrial parks in theregion: investors can choose from more than 209 (according to thedata from 2009) operating industrial parks on thebasis of their business, professional, or cultural demands. Establishing abusiness is facilitated by highly favourable conditions, including management that is familiar with local circumstances, support from municipalities, and various tax benefts. Another very important point is that investments are usually implemented in afairly short period of time (afew months). Industrial parks in Hungary: Several large multinational companies have some part of their operations in industrial parks in Hungary. Up to thepresent, HUF 2,574 bn capital has made its way to these parks. Theparks produce 51% of industrial exports, which accounts for HUF 4,100 bn. Theproductivity of activities performed in industrial parks is over 70% higher than theindustrial average, and just 15% less than theaverage productivity in theEuropean Union. Nearly half of industrial parks are situated by motorways, and investors can expect professional logistics services almost everywhere.
In so far asaninvestor would apply for investment incentives and/or non/-refundable cash grant for investment projects, various EU and Hungarian rules would need to be complied with, and approval may need to be solicited either by Hungarian entities and/or from theEuropean Commission in Brussels.
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Processing and distributing agricultural products may also benefit from certain investment incentive based on theprovision of thegovernment decree. Tax allowance for small- and medium-sized enterprises Small- and medium-sized corporate tax payers are supported by aspecial tax allowance. Taxable income may be reduced by thevalue of investments in assets. Deduction is limited to theamount of profit before tax and also to HUF 30m (EUR 120,000). 40% of theinterest on aninvestment loan (including financial leasing), is deductible from thecorporation tax payable (limited to HUF 6m/EUR 24,000 per year). Maximum intensity ratios Thevolume of tax benefit is capped by themaximum intensity ratio defined in EU regulation minus all other forms of state aid (i.e. cash grand). Maximum intensity ratios defined by regions (until December 31, 2013): 10% in Budapest 30% in Pest County and in Western Transdanubia 40 % in Central Transdanubia 50% in all other regions of Hungary Should aProject is considered aso-called large project (with eligible expenditure in excess of EUR 50 million within aperiod of 3 years); aid intensity ratio is calculated asfollows: Up to EUR 50m eligible expenditure no further restriction in addition to theregional aid intensity ratio applicable For thepart of eligible costs falling between EUR 50-100m of eligible expenditure 50% of themaximum aid intensity ratio is applied For thepart above theEUR 100m of eligible expenditure 34% of theaid intensity ratio applied Example: Maximum intensity ratio for anEUR 135m investment in Budapest (10%): 50 million * 10% + (100-50 million) * 10% * 50% + (135-100 million) * 10% * 34% - in total EUR 8.69 million of total aid (be itcash grant and/or tax incentive, or any other aid) could maximum be made available. Defined by sectors: Sensitive sectors are described in accordance with EU regulations, for which state aid is either not allowed or allowed in even less amount/ under further conditions than defined above.
R&D Tax Incentives Hungary has introduced years ago one of themost favourable R&D tax incentive regime in theOECD countries and is currently studying how to make theexisting regime even more attractive or even to introduce new rules. CASH GRANTS Beyond tax incentives, various non-refundable cash grant opportunities exist either from funds provided by theEU to Hungary, or from Hungarian budgetary sources. Cash grants from EU co-financed funds During theperiod between 2007-2013, over EUR 22 billion has been provided by theEU to Hungary help realizing various objectives and theset of objectives have been reshuffled in 2010 (in theframe of theso-called Szecheny Plan) by placing job creation and economic growth. To this end, afew billion euro has been allocated for thecorporate sector (to alarge extent only for small- and medium-sized enterprises) until theend of 2013 to apply with project plans for specific calls for grant applications. R&D projects, capacity extension projects, greenfield investments are amongst themost favoured projects. Conditions aswell astheamount of grant available by thevarious calls for grant applications differ but grant amounts typically can go up to afew million euro. Calls for grant applications are typically open for afew months and applications must be made before theproject starts. Thestarting date is defined differently depending on thenature of theproject but typically application must be made before thestarting of any construction work, or first legally binding order of any equipment within theProject, or thefirst working day of thefirst employee to be recruited in thecontext of theProject, whichever occurs theearliest. Government Decision based (VIP) Cash Grant, Training Grant, Job Creation Grant theVIP Package For strategic investments (usually investments with at least of EUR 10 million in some cases above EUR 25 million), theGovernment has been operating for years agrant scheme available all year around, and itis depending on thediscretionary decision of theGovernment whether aspecific project, upon application, would receive agrant offer and if so what theamount would be. Such offers are typically negotiable, theinvestor usually have 3 months to decide whether to accept theoffer or not, or itcould, upon making further commitments (in terms of number of new employees, sales volume, investment costs, etc.), request for anincrease of thegrant offer.
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Hungary
Government Decision based cash grant is frequently combined with DTA and training and/or job creation grant. Training grant is capped at EUR 2 million and theexact amount depends on various factors from thevolume and nature of training to be performed, thetype and amount of eligible training costs occurred or thenumber of new employees to be recruited in thecontext of theProject. Therules applicable for theGovernment Decision based cash grant are currently under review and amended/new rules may well be published in thesecond half of 2011. Government Decision based R&D Project Grant Since R&D projects are of special importance, specific set of rules have been developed to offer cash grant for R&D projects notably for companies which consider to set up new or expand existing R&D centers in Hungary having at least EUR 10 million of eligible costs and creating at least 10 new R&D positions. Upon current rules, R&D project grant could go up to 20% of eligible expenditure including thegross wage costs of newly recruited researchers. Other national grants Avariety of grants are available primarily for joint application by agroup of companies and/or universities/research institutes for therealization of specific, notably R&D, projects.
11. Expatriate Life

Thequality of life that Hungary offers foreign investors and employees in Budapest and throughout thecountry is animportant factor when businesses consider locating here. Expatriates working in Hungary for extended periods have so far not been disappointed: they have found living in Hungary pleasant and Budapest exciting and less expensive than other major European capitals. Moreover, thecountry boasts arich and internationally recognised culture, distinctive cuisine, superb wines, acenturie sold spa tradition, excellent schools, and numerous leisure activities and facilities. With its millennium-old culture and aweinspiring technological legacy, itis not surprising that many world businesses make Hungary their central European home.

Theclimate in thesoutheast of Hungary is very different to theclimate of North- and West-Hungary and is similar to theclimate of theMediterranean. Thesummers are long, hot and nearly without rain. Thetemperature is rising up to 38 degrees. Autumn stays like theIndian summer warm and without much rain. October is still agood month for canoeing. Start of thecanoeing season is themiddle of April. Higher rainfall is at thebeginning of June but without rain periods over several days.

Hungary welcomes foreign direct investment (FDI) and implements policies to encourage it. Thecountry started to see adecline in FDI during 2003, attributable to several factors: competition for investment from other emerging markets increased; local labour costs were rising; and there were fewer potential acquisition targets, since thebulk of privatisations were already completed. To make matters worse, accession to theEuropean Union forced Hungary to modify its corporate tax-holiday scheme, completely scrapping some measures. But FDI inflow picked up in 2004, reversing thedecline. Cumulative FDI stood at 64,2 bn in 2010, furthermore 75% of this amount flows from theEuropean Union Thelargest foreign investors in terms of FDI in 2010 were Germany (22.2%), Austria (14.5%), theNetherlands (13.4%), Luxemburg (10.7%); France (6.1%) and theUnited States (4.1%)according to theMinistry for National Economy. According to data from 201060% of FDI had gone into service sector (e.g. 9% into real estate, 11% into theautomotive industry, 8.8% into financial services and 9.4% into telecommunications).
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Poland

After joining theEU in May 2004, Poland became the10th EU economy in terms of nominal GDP. Since then, growing at theaverage rate of 4.8 percent itprogressed to theeight biggest EU economy producing 327 billion euro of goods and services in 2010. At theyear of global recession in 2009, Poland was theonly EU economy registering positive GDP dynamics (1.7 percent) fueled by domestic consumption and public investments. Theformer was attributed to continued wage growth in line with labour productivity, while thelatter came asaresult of EU structural funds, which Poland is thebiggest beneficiary among thenew EU members. Theglobal crisis underlined microeconomic dichotomy in Poland, where theefficient and private enterprise strong growth of profits, employment, and investments, while state-owned underperform in terms of productivity, overpaid labour, and financial losses. Restructuring and privatization of state sensitive sectors (e.g., banks, insurance, coal, steel, and energy), while vigorously initiated still pays theprice of years of negligence. Weakening of global FDIs and financial investors confidence was substituted by expansion of IPOs and privatization via theWarsaw Stock Exchange, which became one of thebest performing market in theEU. Also, financial sector in Poland did not face asingle bankruptcy or deleveraging problems widespread in other EU economies, not to mention cases of Greece or Ireland. Even so, much remains to be done. Polands agricultural sector remains handicapped by surplus labour and inefficient small farms. Legal and bureaucratic obstacles are hampering development of small- and mediumsized companies and Poland is still being ranked no better than 70th in theDoing Business reports. Last but not least, there are increasing tensions in public finance both on therevenue and expenditure sides. Complicated, costly, and inefficient tax system from theone hand and amplifying expenditures on health care, education, social transfers, and bureaucracy may reflect lack of both concept of economic reforms and political willingness to deal with theforthcoming challenges. However, in 2007-2013 Poland again will be thebiggest beneficiary of EU funds that will strengthen domestic entrepreneurs to reap therewards of membership via booming exports to theEU. Political system Poland is aparliamentary democracy with abicameral Parliament, consisting of theSejm (thelower house) and theSenate. The460-member Sejm is elected under aproportional representation electoral system for afour-year term. When sitting in joint session, members of theSejm and Senate form theNational Assembly. TheNational Assembly is formed on rare occasions, such astaking theoath of office by anew president.
TheSenate has 100 members elected for afour year term in 40 multi-seat constituencies under arare plurality bloc voting method, where several candidates with thehighest support are elected from each electorate. ThePresident is elected directly by popular vote for afve-year term, and his powers include calling areferendum, choosing thedate of elections or using his veto to stop legislation. Most of theexecutive power is in thehands of thePrime Minister, who is free to select his co-workers members of theCouncil of Ministers. Thecabinet heselects must be approved by theSejm by granting him thevote of confidence. TheConstitutional Court can rule on theunconstitutionality of laws or other legislation.
2. Tax Structure
Thetaxation system is uniform across theRepublic of Poland, and only small differences may appear in local taxes. In general, foreign companies and individuals pay thesame taxes asPolish legal entities or private individuals (with some exceptions applicable to non-resident individuals). Theexceptions to this rule may result from international treaties signed by Poland (Agreements on theAvoidance of Double Taxation). Themain taxes in Poland are: Taxes on civil law transactions; Corporate income tax (CIT); Personal income tax (PIT); Tax on goods and services (VAT); Excise duty; Stamp duty; Real estate tax All companies intending to conduct business activities are given atax identification number (NIP) after registration with theappropriate local Tax Office. TheTax System and Regulations All taxes in Poland are imposed by thetax law acts which set therules for imposing taxes, their rates and duties, aswell astheresponsibilities of taxpayers. TheMinister of Finance may be authorized by anAct to decree regulations. All legislation is published in official publications [Journal of Laws (Dziennik Ustaw Dz. U.) and theOffcial Journal of theRepublic of Poland (Monitor Polski M.P.)].
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Poland
TheTax Ordinance (Tax Code Ordynacja podatkowa) is themost general tax regulation which defines: thetax administration structure; Advance Pricing Agreements; tax rulings; general taxation regulations, e.g. payment deadlines and tax arrears (tax underpayments); tax liabilities of third parties; tax information; tax proceedings; fiscal confidentiality; exchange of tax information with other countries; tax certificates. Other relevant legislation includes theCorporate Income Act, Personal Income Act, Value Added Tax Act, Tax on civil law transactions (for capital duties and transfer tax), Local Taxes Act (including e.g. real estate taxes). Parliament passes tax legislation with asimple majority of votes. Taxes in Poland are generally administered by: Tax Offices units supervising thecollection of taxes in their territories. They also issue individual administrative decisions in taxation cases. Fiscal Audit Offices perform taxation and procedural audits of fiscal accounting. Tax Chambers supervise thetax offices and are empowered to review theadministrative decisions of tax offices and fiscal audit offces. TheMinister of Finance is responsible for Polish budgetary policy and supervises theentire taxation system. Some taxes are administered by thelocal authorities, e.g. real estate tax. Taxpayers may appeal to theTax Chamber against thedecisions of thelocal Tax Office or Fiscal Audit Office. Anappeal against adecision of theTax Chamber may be directed to theRegional Administrative Court. Taxpayers are also entitled to resort to theSupreme Administrative Court to review judgments of theRegional Administrative Courts. Thetaxpayers may also apply for tax rulings to theMinister of Finance or thelocal tax authorities (with respect to thelocal taxes). Obtaining theruling can help to avoid certain negative consequences in theevent of thetax authorities taking adifferent view on amatter, i.e. fiscal penal responsibility, penalty interest.
Corporate Income Tax (CIT) Legal entities and organizational units (with theexception of partnerships) are subject to corporate income tax. Taxpayers that have their registered office or theplace of management in Poland are liable for CIT on their global income (unless Double Tax Treaty modifies this rule). If acorporate taxpayer does not have its registered office or theplace of management, in Poland, tax is only levied on income derived in Poland, unless double tax treaties state otherwise. Having satisfied several conditions, companies may establish afiscal union agroup of companies treated asasingle CIT taxpayer (theconcept of afiscal union is discussed in more detail in point 2.2.3.5 of this Guide). Taxable Income and Tax Rates Taxable income is theaggregate of all revenues earned in atax year both financial and operational (with some exceptions), net of tax deductible costs. Income decreased by additional specifc expenses (e.g. tax losses carried forward, deductible donations) constitutes thebasis for thecalculation of taxation. Generally, tax-deductible costs are expenditure borne in thecourse of generating taxable revenue. Some expenditure, however, is not tax-deductible (e.g. representation costs, some kinds of administrative or contractual penalties, etc.). Fixed assets and intangibles are subject to depreciation / amortisation write-offs. Where their value does not exceed PLN 3,500, they can be recognised astax-deductible in total in themonth in which they are brought into use. Certain assets, such asland and works of art, cannot be depreciated. Income (tax base) that is calculated in accordance with thetax provisions is subject to CIT at arate of 19%, which ranks among thelowest in Europe. Revenues / deductible costs generated by apartnership are added to each partners revenues / deductible costs in proportion to their interest in thepartnership; thus, theincome is effectively taxed at thelevel of each partner. At thebeginning of 2006, anew relief for thepurchase of new technologies was introduced. Thanks to this, taxpayers can decrease their tax base by theexpenditure incurred for that purpose (in theamount not exceeding 50% of this expenditure) whereas they may still depreciate thevalue of purchased technologies in full. Additionally, theminimum period for thedepreciation of costs of completed research works has been decreased to 12 months. Thecalendar year is generally thetax year. Taxpayers may however, select adifferent tax year covering 12 consecutive calendar months.
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Taxation of Dividends Dividends paid by thePolish companies to other Polish companies Income arising from participation in theprofits of alegal entity with its registered office or theplace of management in Poland, including theincome from dividends, is taxed with thewithholding tax at therate of 19%. Moreover, exemption from thewithholding tax is available in case thedividend recipient has at least 10% of shares of thecompany paying thedividend for anuninterrupted period of at least 2 years. Thetwo-year period condition can be fulfilled after thedividend is paid. Theabove exemption is also available if thedividend is received by theforeign permanent establishment of thedividend recipient. Dividends paid by thePolish companies to theforeign companies In thecase of dividend payment to theEU resident companies, EEA (European Economic Area) resident companies and Swiss companies theexemption from withholding tax will apply upon thecondition of at least 10% (25% for Swiss companies) shareholding for anuninterrupted period of at least 2 years. Thetwo-year period condition can be fulfilled after thedividend is paid. Theabove exemption is also available if thedividend is received by theforeign permanent establishment of thedividend recipient. Theresidence of thedividend recipient should be confirmed with thecertificate of thetax residence issued by recipients tax administration. If no aforementioned exemption applies, dividends paid to nonresidents are subject to withholding tax. Therate of withholding tax depends on whether there is atax treaty between Poland and theshareholders country of residence: if no tax treaty exists between Poland and theshareholders country of residence, thewithholding tax rate is 19%; or if atax treaty exists between Poland and theshareholders country of residence, thewithholding tax rate depends on thetax treaty. Therate ranges from 0% to 15%. Utilizing thedecreased rate may depend on other conditions, usually thelevel of shareholding. Thedecreased rate of withholding tax specifed in thetax treaty is available provided that thedividend payer has acertifcate of residence of thedividend recipient.
Dividend received by thePolish companies from foreign companies Asarule, dividends received by Polish tax residents from foreign companies are aggregated with other taxable revenues subject to CIT under thegeneral rules. However, thewithholding tax payable abroad may be credited against CIT liability in Poland (although thecredit may not exceed CIT attributable to thedividend-type income). In case of dividend payment received from EU resident companies, EEA resident companies and Swiss companies, theexemption from withholding tax will apply upon thecondition of at least 15% (25% for Swiss companies) shareholding for anuninterrupted period of at least 2 years (asfrom 1 January 2009 therequired shareholding level for EU and EEA residents will be decreased to 10%). Thetwo-year period condition can be fulfilled after thedividend is paid. This exemption is also available for EU and EEA companies if they conduct their business activity through apermanent establishment located in Poland and thereceived dividend is connected with thepermanent establishment. Theexemption is not applicable if thedividend income is received asliquidation proceeds. Furthermore, thePolish tax regulations also provide underlying tax credit related to dividends received by aPolish company from anentity which: is not aresident of EU, EEA state or Switzerland; however Poland has concluded adouble tax treaty with thecountry of its tax residence. This underlying tax credit is available upon thecondition of at least 75% shareholding for anuninterrupted period of at least 2 years. Thetwo-year period condition can be fulfilled after thedividend is paid. Taxation of Interest, Royalties and Intangible Services Generally, interest paid to foreign tax resident is subject to awithholding tax at arate of 20%, unless arelevant double tax treaty provides for areduced tax rate. Similarly, the20% withholding tax applies to royalties and certain intangible services (such asconsulting, accounting, market research, legal services, advertising, management and control, data processing, human resources, guarantees and other services of asimilar nature), unless arelevant double tax treaty provides otherwise. In general, payments for intangible services are classified under double tax treaties asbusiness profits that are not subject to withholding tax in thesource country.
Poland
Additionally, theamendment to theCIT Act of 18 November 2004 implementing theInterest and Royalty Directive provides that thewithholding tax rates applicable to theinterest and royalties in some cases will be subject to agradual reduction according to thefollowing timetable: from 1 July 2005 until 30 June 2009 theapplicable rate was 10%; from 1 July 2009 until 30 June 2013 theapplicable rate currently amounts to 5%; asof 1 July 2013 theexemption applies. In principle, in order to benefit from theabove reduction in tax rates, thefollowing conditions should be met: thesaid payments are made by ataxpayer having its place of theregistered office or place of management in Poland or (under certain conditions) by aPolish permanent establishment of acompany being ataxpayer in another EU country on its world-wide income; thesaid payments are made for thebenefit of acompany which is ataxpayer in another EU country on its world-wide income, or (under certain conditions) such acompanys permanent establishment located in another EU country; thefinal recipient of thesaid interest payments is acompany which is ataxpayer in another EU country on its world-wide income; there is at least a25% direct shareholding relation between therecipient and thepayer (i.e. therecipient has at least 25% of shares in thepayer or thepayer has at least 25% of shares in therecipient), and theshares are held or will be held uninterruptedly for at least a2-year period; this benefit is also available when therecipient of theinterest (royalties) is asister company of aPolish company paying theinterest (royalties), provided that theparent company directly holds at least 25% of shares in both sister companies uninterruptedly for at least 2 years. If therequirement to hold theshares for 2 years is not satisfied at thetime of payment of theinterest (royalties), benefit can still be gained from thereduction (theexemption). However, if theshares are disposed of before the2-year period lapses, theexemption expires and thecompany paying theinterest (royalties) is required to pay thewithholding tax according to arelevant double tax treaty and, asthecase may be, itmay be also obliged to pay penalty interest. Theabove mentioned regulations apply to companies incorporated in EU member states, and to thecompanies from theSwiss Confederation. Thelist of eligible companies is provided in anenclosure to theCIT Act.
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Generally theentity paying interest, royalties or remuneration for purchase of intangible services withholds and remits thetax at themovement of payment. According to thedefinition included in thePolish CIT Act payment means fulfillment of theobligation to repay thedebt in every form, including set-off or capitalization of theinterest. Acertifcate of residency is needed in order to apply areduced tax rate, or to refrain from withholding thetax in accordance with adouble tax treaty, or to apply benefts resulting from theimplementation of theInterest and Royalties Directive. Itshould be stressed that according to CIT Act interest, royalties or remuneration for purchase of intangible services received in connection with activity realised by permanent establishment of foreign entity in Poland is basically treated asataxable income of such apermanent establishment and subject to taxation under general rules. In such acase entity performing payment should not remit thetax, still, relevant certificate of residence aswell aswritten statement that theanalysed payments are connected with activity of permanent establishment should be provided by theforeign entity. Carrying Losses Forward TheCIT regulations allow taxpayers to carry losses forward to future years. Itis not possible to carry losses back and offset them against income in prior years. Losses may be offset against theincome generated in thefollowing five tax years. Themaximum amount of agiven years loss offset in any single tax year may not exceed 50% of this annual loss. Theright to carry losses forward is always linked to theentity that incurred thelosses, rather than to theentitys specific assets. This means that thetax losses are not transferable with assets or thebusiness (e.g. if thewhole of agiven taxpayers operations are transferred to another entity). Furthermore, only in thecase of mergers can thetax losses of thesurviving companies still be utilised, whereas thetax losses of theacquired companies are forfeited. If themerger results in theestablishment of anew company, thetax losses of themerging companies cannot be utilised. Group Company Regulations TheCIT Act allows for thecreation of afiscal union (or tax consolidated group), under which companies in acapital group are treated asasingle taxpayer of CIT.
Thebasic requirements for obtaining thestatus of atax consolidated group are thefollowing: thecapital group may be established only by limited liability companies or joint stock companies with registered offices in Poland; theaverage share capital of each member company should amount to at least PLN 1,000,000; theholding company should hold at least 95% of theshares in theremaining group companies; subsidiary companies cannot be shareholders in theholding company or other subsidiary companies in thegroup; none of themembers of thegroup can have tax arrears in taxes which are state income (this condition is deemed to be satisfied if amember of thegroup pays thetax arrears together with penalty interest within 14 days of correction of thetax return / receipt of thetax decision); theholding company and thesubsidiaries have agreed to establish thecapital group for aperiod of at least three years by means of anotarial deed; theagreement must also be fled with thetax office which issues anadministrative decision and registers thecapital group if all theconditions are met. After thecreation of thetax consolidated group, thecompanies forming this group should additionally satisfy thefollowing requirements: none of thecompanies included in thegroup can singularly benefit from income tax exemption not resulting from CIT act; theannual level of tax profitability of thegroup cannot be less than 3%; companies from thegroup cannot maintain relations with companies from outside thegroup resulting in aviolation of thetransfer pricing restrictions. Thefscal union formed and registered with therelevant tax authorities is treated asaseparate entity for CIT purposes, which results in particular in thefollowing advantages: thelosses of some of themembers of thetax consolidated group can be offset against thetaxable income of its other members; theregulations on transfer pricing do not apply to transactions between companies within thegroup; donations between companies within thegroup are deemed to be atax-deductible expense for thedonor; thesimplification of tax formalities, asonly one company in thegroup prepares atax return.
Thin Capitalisation ThePolish CIT Act contains provisions on thin capitalization, restricting thedebt / share capital ratio to 3:1. Interest paid on loans in excess of this ratio is not tax-deductible. When calculating thedebt-to-equity ratio, some additional debts to direct and indirect shareholders are taken into account. These regulations apply when loans are granted to acompany by: ashareholder owning directly at least 25% of thevoting shares; shareholders jointly owning directly at least 25% of thevoting shares; another company, if thesame shareholder owns directly at least 25% of thevoting shares in each of thecompanies. Theterm loans for thepurposes of thin capitalization regulations is broad and includes debt securities, deposits and irregular deposits. Thethin capitalization restrictions cover loans granted by foreign aswell asPolish tax residents for CIT purposes. Transfer Pricing General In principle, thePolish transfer pricing rules are based on theOECD Transfer Pricing Guidelines. Assuch, they introduce theconcept of thearms length level of transfer prices. If related parties conclude transactions on terms that differ from market practice and, asaresult, thePolish entity discloses taxable income lower than itwould disclose otherwise have disclosed, thetaxable income of this entity will be adjusted in accordance with this principle. Transfer pricing requirements apply also to Polish permanent establishments of foreign entities and foreign permanent establishments of Polish entities. Statutory transfer pricing documentation In order to facilitate transfer pricing audits, theregulations put on taxpayers therequirement to prepare special documentation concerning theterms of transactions concluded with related parties (statutory transfer pricing documentation). Therequirement comprises each transaction with related entity (both cross-border and domestic), where thetotal amount arising from thecontract or theamount actually paid in thetax year exceeds: EUR 100,000 if thevalue of thetransaction does not exceed 20% of theshare capital defined in accordance with theregulations on thin capitalization; or EUR 30,000 if thetransaction concerns services, sales or use of intangibles; or EUR 50,000 in all other cases.
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Poland
Theduty to prepare statutory documentation also relates to transactions where thepayment directly or indirectly goes to acompany having its registered office in atax haven. Thethreshold is EUR 20,000 in these cases. Thestatutory transfer pricing documentation must be prepared in Polish. Taxpayers must present itwithin 7 days of therequest of thetax authorities. If theauthorities find out that thetaxpayers profit is higher (or theloss is lower) than declared in connection with related party transactions, and thetaxpayer does not provide them with thestatutory documentation, thedifference between theprofit declared by thetaxpayer and theprofit determined by theauthorities is subject to 50% taxation. Advance Pricing Agreements (APA) Theprovisions related to theAPA procedure came into force on 1 January 2006. They allow taxpayers to verify thecorrectness of thepricing methodology applied in thedomestic / cross-border related party transactions and ascertain its up-front acceptance of thetransfer pricing methodology by thetax authorities. There are three kinds of APAs: unilateral; bilateral; and multilateral agreements. Before submitting theAPA application, thetaxpayer may request that theMinistry of Finance clears doubts regarding theindividual case, in particular if itis useful to seek anAPA, what information is necessary, what is theprocedure and when thedecision can be expected. TheAPA application can be submitted by thePolish entity only. Thefee should be paid within 7 days afterwards. In thecase of any doubts regarding thepricing method chosen by taxpayer or documents enclosed to theapplication, theMinistry of Finance may request additional explanations.. In theend, thetaxpayer receives adecision with avalidity of no more than 5 years. Upon request itcan be extended for further 5-year periods. Theproceedings should be finalized asfollows (i) unilateral APA no later than in 6 months, (ii) bilateral APA no later than one year, and (iii) multilateral APA no later than in 18 months. Thefee is 1 percent of thetransaction value, up to thelimit of EUR 1,250 50,000 (depending on thetype of APA). Taxpayers requesting APAs in Poland must choose one of theOECD methods, describe how itwill be applied, indicate thecircumstances which may influence thecorrectness of thepricing methodology, prepare documentation used asabasis for setting thelevel of transactional prices, inter alia agreements
and other documents indicating theintentions of both parties and propose tax years to be covered by theAPA. Tax information Taxpayers conducting transactions with foreign related parties are subject to certain notifcation requirements. In particular: where ataxpayer and arelated foreign entity engage in transactions exceeding EUR 300,000 in thetax year, thetax authorities must be informed of thetransaction within three months from theyear end; where theforeign entity has arepresentative offce or permanent establishment in Poland, thetax authorities must be informed if thevalue of transactions exceeds EUR 5,000. Branches of Foreign Companies Foreign companies have been able to establish branches in Poland since 1 January 2000. Therange of activities of these branches is limited to thescope of activities of theforeign entity. Establishing abranch requires registration in theNational Court Register. Branches are subject to similar tax rules asthose imposed on limited liability and joint stock companies. Foreign companies may also operate in Poland in aform of representative offces. Therange of activities of representative offces is limited to representation and advertising. VAT Rates and Regulations Generally, thePolish VAT regulations are based on EU VAT Directives. However, theVAT regulations are subject to signifcant changes in 2011. Due to economic downturn theVAT rates with respect to majority of goods and services are increased starting from 1 January 2011. In addition certain VAT regulations had to be adjusted in order to better comply with EU directives (scope of VAT exemptions, rules of free of charge delivery of goods, etc.).. Thegeneral principles of thenew system are presented below. VAT is abroad-based tax levied on thesupply of goods and services in Poland. APolish entity is required to register for VAT once its annual turnover on transactions subject to VAT exceeds PLN 150.000 (if theentity starts business activity during theyear, thelimit is calculated asproportion of number of days of running business activity in theyear and thelimit for whole year). Foreign entrepreneurs have to register for VAT in Poland before they start any VAT-able activity in Poland (except for limited clearly enumerated cases). Generally, VAT is imposed on every supply of goods and services at thebase or reduced VAT rate, unless thetransaction is exempt from Polish VAT. Thebase rate of VAT is 23% and is charged on most goods and services.
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Areduced VAT rate of 8% is imposed on thesale of such products or provision of services as: selected foodstuffs (not being subject to 23% VAT rate); specific medicines and goods used in health care; catering and restaurant services; veterinary services selected services related to TV and radio broadcasting selected transport services; Municipal services (e.g. mains water supply, sewage treatment, street maintenance, plowing etc.); fertilisers. Areduced VAT rate of 5% is imposed on thesale of such products as: selected foodstuffs (not being subject to 8% or 23% VAT rates); books and magazines for experts. Areduced 0% VAT rate is levied (under specific conditions) on theintra-Community supply of goods, exports of goods, aswell assome international transport services and services related to international transportation. Areduced 0% VAT rate may be applied to some domestic supplies, e.g. equipment for selected ships and airplanes. Selected health care, financial, insurance, educational and cultural services etc. are exempt from VAT, which accordingly prevents thetaxpayer from recovering input VAT incurred in relation to such services. Thetax due to theTax Office is calculated asthesurplus of output VAT charged on sales over recoverable input VAT stated on purchase invoices. Transactions between VAT taxpayers must be documented with aVAT invoice. Sales to individuals who do not conduct business activities must be registered by afiscal cash register if theturnover with individuals exceeds aspecific threshold. This threshold generally amounts to PLN 40,000 (approx. EUR 10,000) but sales of several kind of goods need to be registered in afiscal cash register independent of thevalue of sales during theyear. Registered VAT taxpayers are obliged to submit monthly VAT returns (or quarterly VAT returns) to theappropriate tax office and keep registers of purchases and sales subject to VAT. In addition, EC Sales and Purchase Lists and Intrastat (in case thestatutory thresholds are exceeded) declarations must be submitted by thetaxpayer with respect to its intra-EU transactions.
VAT that is due must be paid by the25th day of themonth following themonth (quarter) in which theVAT obligation arises. Although Polish VAT law is generally compliant with theSixth EU Directive, itcontains various country-specific provisions and requirements, which are not common in other local VAT regimes. These are usually very troublesome for foreign entrepreneurs. In consequence VAT and Intrastat compliance is often achallenge and is being outsourced to firms experienced in Polish VAT settlements. Deloitte offers such assistance. In thesituation when aforeign entity (from outside theEuropean Union) not registered for VAT purposes in Poland purchases goods/services in Poland, based on certain rules defined in thedecree of theMinistry of Finance, itmay apply under several conditions for arefund of input VAT incurred on purchases in Poland, on areciprocity basis. Foreign entities within theEU may apply for arefund of input VAT by submitting electronic VAT refund applications. Gambling tax Theeconomic activity in thearea of games of chance and mutual betting is out of scope of VAT. Instead of this, theentrepreneurs conducting this type of activity are subject to gambling tax. Excise Duty Excise duty is aconsumption tax levied on certain goods which could be divided into four groups such as: energy products, electricity, alcohol beverages and tobacco products. Excise duty is also imposed on cars. Theexcise duty legislation is set out in anumber of EU Directives, which means that each EU Member State may charge its own rates of excise duty along with differences in local country policy. Thefollowing activities are subject to excise duty: theproduction of excise goods; themovement of excise goods outside atax warehouse; import of excise goods; intra-Community acquisition of excise goods excluding intraCommunity acquisition to atax warehouse; Excise regulations indicate some other activities which may be subject to excise duty. There are special rules concerning taxation of electricity, itis chargeable at themoment of supply to end user.
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Poland
Excise duty is calculated either asapercentage of thevalue of goods produced (or thecustoms value of thecommodities) or on avolume basis (fixed rate per unit). Theproduction of excise goods could be performed exclusively in atax warehouse (excluding electricity and cars). Theholding and movement of excise goods is subject to strict controls and special procedures apply. In respect of excise goods, there is possible to apply theexcise duty suspension procedure. However, there are some conditions (documentation requirements, excise guarantee) which should be fullfilled in order to apply this procedure. Currently, intra EU movement of excise goods under duty suspension procedure is based on apaper process. However, anew electronic system EMCS is being implemented in Poland and will be binding asof 1st January 2011. Tax on Income Derived From Capital (Natural Persons) Asarule, capital gains derived in Poland are subject to a19% fat rate tax. From 1 January 2005, capital gains also realized outside Poland are subject to 19% fat rate tax (previously, they were subject to progressive taxation). Income derived from thesale of shares is subject to a19% fat rate tax and should be declared in theseparate annual tax return PIT-38 disclosing thecapital gains realized during thegiven tax year. Thefollowing income is also subject to a19% fat rate tax: interest 19%; dividends 19%. proceeds from investment funds, etc. Personal Income Tax (PIT) Under thePolish PIT Act, individuals may be subject either to limited or unlimited tax liability in Poland. Thetax status of agiven individual depends solely on whether hehas his place of residence in Poland. Up to 1 January 2007, theterm place of residence was not defined under thePolish PIT Act and thecommon practice was to turn to its Civil Code definition, which stipulated that theplace of residence was aplace in which given individual stays with theintention to stay permanently. Starting from 1 January 2007, theamendment to PIT Act introduced thedefinition of residency for PIT purposes.
Given person is considered to have aplace of residence in Poland if he/ she: has closer economic or personal links with Poland (centre of vital interest), or stays in Poland for aperiod exceeding 183 days in calendar year. Provisions on tax residency should be in Poland is currently determined with theuse of thedouble tax treaty concluded by Poland. Individuals not having their place of residence in Poland are viewed asPolish tax non-residents subject to limited tax liability in Poland, whereas those having their place of residence in Poland are regarded Polish tax residents in Poland subject to unlimited tax liability in Poland. Thestatus of aPolish tax resident implies that thetotal worldwide income received by agiven individual is subject to taxation in Poland. Polish residents for personal income tax purposes are obliged to disclose in their Polish tax returns private income such asinterest, dividends, royalties, capital gains, real estate rental income or income derived from business activity rendered personally (including participation in civil partnership and limited partnership). Theabove income should be reported and taxed in Poland taking into account relevant double tax treaty provisions. Anindividual enjoying Polish tax non-resident status is, on theother hand, taxable in Poland only on income derived for work performed on thePolish territory, or from other Polish sources and is entitled to 20% taxation on specific types of income (e.g. fees received under thecivil law contracts or resolution of shareholders) asopposed to progressive taxation at 18% and 32%. Thetax year for individuals is equal to athecalendar year. In general, cash and benefits received by anindividual constitute his taxable income, unless aparticular income is tax exempt in Poland according to Polish domestic law and theappropriate Double Tax Treaty (if relevant). Examples of income exempt from taxation in Poland: amounts due to theindividual with respect to business trips (per diems, travel and accommodation expenses), up to thelimits defned in theprovisions of thePolish law; amounts paid by theemployer for raising only theprofessional education of its employees (e.g. thevalue of courses and trainings which have been undertaken in order to raise professional qualifications asagreed by employer).
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Selected possible deductions from income: Polish social security contributions or EU (EEA) statutorily due social security contributions paid in thegiven year provided that they were not deducted for tax purposes in this other country and were not due on theincome exempt from taxation in Poland; donations granted for Polish and equivalent organizations in theEU states or EEA countries or Switzerland conducting activities in thefield of public welfare, donations granted for religious purposes (except for donations to natural persons) and thevolunteer blood donations up to alevel of 6% of theindividuals income; donations for church charity purposes (applicable only to church legal entities) no deduction limit provided (some additional conditions must be met to take advantage of this deduction); contributions paid to thePolish social security system; expenses incurred by anindividual for using Internet in theplace where theindividual lives, up to thevalue of PLN 760 (asof 1 January 2011 theInternet deduction will be applicable not only to theexpenses incurred in theplace of individuals residence); expenses incurred for rehabilitation purposes (some additional conditions must be met to take advantage of this deduction) interests on loans drawn for housing purposes (under specific conditions if theloan was granted between 1 January 2002 and 31 December 2006). Selected possible deductions from tax: 7.75% of theassessment basis of statutory due healthcare contributions paid by anindividual in agiven calendar year for either his or her national healthcare insurance in Poland or in another EU or EEA countries or Switzerland provided that they were not deducted for tax purposes in this other countries and were not due on theincome exempt from taxation in Poland; Child tax deduction in theamount of PLN 1112,04 per year per child. This deduction is applicable for parents bringing up children under 18 years of age or children under 25 years of age enrolled into aschool or university. Additionally please note that under Polish PIT Law regulations, itis possible to allocate 1% of theannual tax liability to aselected Polish welfare organization. Itdoes not influence thefinal tax liability of theindividual (funds are transferred by thetax office based on thetaxpayers suggestion indicated in theannual tax return).
PIT rates for 2011 are asfollows: Polish tax brackets valid in 2011 up to PLN 85528 over PLN 85528 18% of taxable base less PLN 556.02 PLN 14839,02 plus 32% of excess over PLN 85,528
Asarule, thePIT rates indicated in theabove table are applicable to anindividuals total income. Notwithstanding theabove, thePolish PIT Act provides for fat / linear taxation on certain sources of income (which applies instead of progressive taxation). Thefollowing items are subject to afat tax rate: capital gains (see point 2.2.6) 19%; income from thesale of real estate which was purchased from 1 January 2009, provided that itis not related to thebusiness activity carried by agiven person; if thesale of thereal estate takes place after five full calendar years from thedate of purchase or thesale takes place before five full calendar years but specific conditions are met, no tax is levied, otherwise 19% tax on theproceeds from thesale of thereal estate; Polish source income derived by non-residents from independent artistic, literary, scientific, educational and journalistic activities, copyrights and inventions, aswell asfrom personal service contracts, specific task contracts, managerial contracts, or similar contracts and from board member fees 20%; income derived from conducting business activities in Poland 19% (provided that theentrepreneur declares his choice of 19% fat tax rate by thedate asdetermined in PIT Act; otherwise heis subject to taxation of his business activity income under general rules). Apart from theabove, according to theprovisions of theAct on lump-sum taxation of certain revenues earned by private individuals, thetaxpayer may enjoy lump-sum taxation on certain sources of income if hechooses to apply this taxation system instead of applying theprogressive taxation governed by theprovisions of PIT Act. Lump-sum taxation is applicable to such income as: revenues derived from renting real estate (if such tax regime is chosen by thetaxpayer by thedue date) 8.5% total gross proceeds (applicable asof 1 January 2010); revenues derived from performance of certain types of business activity;
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Poland
Tax is generally due on amonthly basis (under certain circumstances, anentrepreneur may pay taxes due on aquarterly basis). Polish employers are obliged to calculate, withhold and pay thetax advances due on their employees remuneration to thetax office relevant for theemployers place of theregistered office. Individuals who receive income from abroad are personally responsible for thepayment of monthly tax advances due on this income (there is no obligation to file monthly tax returns). Asarule, every taxpayer is obliged to file anannual tax return disclosing his aggregate annual income at theend of thetax year. Thedeadline for fling thetax return and paying theannual tax liability is 30 April of theyear following thetax year for which thereturn is fled. Taxpayers may file theannual tax return jointly with their spouses if thefollowing conditions are met simultaneously: both spouses are subject to marital co-ownership for theentire tax year (no prenuptial/postnuptial agreement was put in place between spouses indicating how their assets would be allocated in case of divorce), both spouses are married for theentire tax year, neither of thespouses conducts business activity taxed at linear or fat rate (including participation in partnerships). Additionally, to qualify for joint fling: both spouses should be subject to unlimited tax liability in Poland (Polish tax residents) or one spouse should be subject to unlimited tax liability in Poland and theother spouse should be subject to unlimited tax liability of another EU or EEA country (possessing certificate of tax residency issued by this other country) and at least 75% of their world wide income should be taxable in Poland or both spouses should be subject to unlimited tax liability of another EU or EEA country, should possess certificates of tax residency issued by this other country and at least 75% of their world wide income should be taxable in Poland. Tonnage tax Asfrom 1 January 2007, based on theTonnage Tax Act, thequalified ship-owners performing certain commercial shipping activities in international traffic are entitled to subject their incomes to tonnage tax instead of income tax. Please note that since tonnage tax is regarded asasort of public aid (income subject to tonnage tax is out of scope of CIT / PIT taxation) theTonnage Tax Act should be authorized by
theEuropean Commission. Therespective authorization was granted in thedecision of 18 December 2009 - C 34/07 (ex N 93/2006). Thequalified ship-owners are: individuals and legal entities being thePolish tax residents performing commercial shipping activities in theinternational traffic listed in theTonnage Tax Act, foreign tax residents (i.e. individuals aswell aslegal entities) performing theabove activities in Poland, which for thepurposes of performing these activities use thevessels of theminimum capacity of 100 gross register tons (GT) each. Themain activities that can be taxed with tonnage tax are transportation of passengers and cargo aswell asselected offshore operations. Please note that some other commercial activities (e.g. lease of thecontainers, ship management services) may also be subject to tonnage tax provided that they are related to theactivities mentioned above. Generally, thetonnage tax base is calculated asamultiplication of thedaily rate (determined in theTonnage Tax Act and depending on thecapacity of agiven vessel) and theperiod of exploitation in agiven month of theall ship-owners vessels subject to tonnage tax. Thestandard tonnage tax rate is 19%. Income (in thepart not re-invested in theownership, renovation, modernization or reconstruction of another vessel within 3 years) from thesale of ships is subject to taxation with theapplication of 15% tax rate. Double Tax Treaties Polish PIT and CIT regulations provide that acredit method of avoiding double taxation is used, unless thespecific double tax treaty states otherwise. Poland has signed Double Tax Treaties with 84 countries. Most of thetreaties signed by Poland are based on the1977 OECD Model Convention, although some exceptions appear in several treaties. Tax on Civil Law Transactions Thefollowing acts are subject to tax on civil law transactions: contract of sale and exchange of goods and property rights; loan agreements; donation agreements to theextent related to taking over debts, encumbrances or theliabilities of thedonor; annuity agreements;
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agreements on division of inheritance and agreements on thedissolution of co-ownership to theextent related to therepayments or additional payments; establishment of mortgage; establishment of usufruct for consideration (including irregular usufruct) and servitude for consideration; irregular deposit agreements; partnerships / companies deeds (articles of association); amendments to theabove transactions resulting in theincrease of thetax base; court judgments and settlements having thesame result asabove transactions. In principle, thetax liability arises at thetime when thetransaction takes place. Thetaxpayer is obliged to submit thetax return and to pay thetax within 14 days from theday when thetax liability arose, unless thetax is collected by atax remitter. Theexemplary tax rates are asfollows: on contracts of sale: of thereal estate, other tangibles and selected property rights related to thereal estate 2% of their fair market value; of other property rights 1% of their fair market value; on loan agreements 2% (0.5 % on theloan granted by thedirect shareholder) in partnership of theamount of theloan; on theestablishment of mortgage: to secure anexisting liability 0.1% of theamount of thesecured liability; to secure aliability of anunfxed amount PLN 19; on partnerships / companies deeds: 0.5% of thevalue of thecontribution to thepartnership or 0.5% of thecompanys share capital; 0.5% of theincrease in thecontribution or 0.5% of theincrease in theshare capital; 0.5% of theamount of theadditional payments; 0.5%. on theannual market value of theusufruct of objects or property rights vested in thepartnership without consideration.
Thetaxpayers are determined taking into account thenature of agiven civil law transaction, e.g.: contract of sale thebuyer; loan agreement theborrower; partnerships / companies deeds partners in case of thecivil law partnership and thepartnership / company in all of theremaining cases. Anotary public is aremitter of thetax when civil law transactions are executed in theform of anotarial deed. Local Taxes and Charges Local taxes include: real estate tax; road vehicle tax (imposed only on trucks and buses); agricultural tax; forestry tax; dog ownership tax. Local communities are entitled to establish rates for certain taxes. However, these cannot exceed themaximum limits set by theParliament or decrees of theMinister of Finance. Inheritance and donations tax Polish tax system includes also aninheritance and donations tax imposed on theacquisition, by theindividuals, of goods located in Poland and property rights executed in Poland among others through inheritance, donation and usucaption. Stamp Duty Stamp duty is payable on certain submissions and administration acts, including: official acts; certificates; permits; other documents, e.g. power of attorney. Rates vay from PLN 1 to PLN 11,000.
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3. Legal Entity
Principal forms of doing business Companies can take avariety of forms, including joint stock company (SA - Spolka Akcyjna) and very popular - limited-liability company (Sp zo.o. - spolka zograniczona odpowiedzialnoscia). Aform reserved for specifc occupations like architects, lawyers or doctors is aprofessional partnership company. Joint Stock company (SA) Theminimum start-up capital for ajoint stock company is PLN 100,000, of which 25% must be paid up before registration. One or more founding members, who must sign anarticle of association, can establish ajoint stock company. Reserve capital is 8% of annual net profits, until reserve reaches one-third of share capital. Thecompany must be founded by at least one natural or legal person. Single shareholder limited liability company cannot establish ajoint stock company where itwill be theone and only shareholder. Once thecompany has been established, one shareholder may buy out others. There are no residence or nationality requirements unless otherwise stipulated in theinternational agreement to which Poland is aparty. Asupervisory board with at least three members, each appointed for aterm of up to five years, is required. Both: no residence or nationality requirements, but thechairman of theboard for banks registered in Poland must have aworking knowledge of Polish. Theminimum value of share is PLN 0,01 (1 grosz). Themost common type of shares are registered, bearer, common or preferred. Limited-liability company (Sp zo.o.) Theminimum capital required to establish alimited-liability company is PLN 5,000. Alimited-liability company may have asingle shareholder (subject that single shareholder limited liability company cannot establish alimited liability company where itwill be theone and only shareholder). If share capital exceeds PLN 500,000 and there are more than 25 shareholders, thecompany must have asupervisory board (or supervisory commission) with at least three persons. Theminimum share value is PLN 50. Shares do not exist in adocument form and assuch can only be theregistered ones. There are no residence or nationality requirements asto themembers of themanagement board however work permit may be required in certain circumstances.
Establishing abranch or representative office Abranch may be established by foreign investors provided that there is areciprocity rule between theRepublic of Poland and thecountry of theinvestors origin (this requirement does not apply to theentrepreneurs coming from EU and European Economic Area member countries asthey can establish branches regardless of thereciprocity rule). TheLaw on Freedom of Economic Activity of July 2004 stipulates that abranch should be registered in theNational Court Register under thename of theinvestor plus translated into Polish alegal form of aforeign investor with addition branch in Poland. Abranch may conduct only those activities that are related to thebusiness of theforeign investor. Abranch is entitled to generate income. Foreign investors may also establish arepresentative office which should be registered with aseparate register at theMinistry of Economy. Arepresentative office is permitted to conduct only thefollowing activities: advertising and promotion of theparent company.
4. Labour and Wages

Theemployment market Theunemployment rate in Poland - according to theCentral Statistical Offce (Glowny Urzad Statystyczny) - stood at 18% at theend of 2005. Poland boasts askilled and educated workforce. Consequently, finding local managers is becoming less difficult. Skilled labour is generally concentrated in central and northern Poland, specifically in theregions of Warsaw, Gdansk, Silesia and Poznan. Theeastern border regions suffer from high structural unemployment and low levels of investment. Therecent rise in unemployment has diminished labour mobility among middle managers. English-language skills are now abasic requirement for most white-collar positions. Employees rights and remuneration Polands Labour Code aswell asahuge number of other labour law acts, regulates working hours, work safety, minimum wage, non-discrimination in employment and collective bargaining, personnel files and employment termination. Contracts may be concluded for anindefinite period of time, for adefinite period (including also contract for substitution of anemployee during her/his absence at work) or for thetime of completion of aspecific task. Any such contract may be preceded by acontract concluded for atrial period. Employers must provide at least theminimum terms and benefits indicated in theLabour Code, modifying them only to provide more favourable terms for employees. Collective-bargaining agreements may not deal with issues already covered in theLabour Code or those having to do with termination, workplace order and discipline, and maternity leave.
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Industry-wide agreements must be registered with theMinistry of Labour and Social Policy (www.mpips.gov.pl), and company agreements with aregional labour inspector. TheTrade Union Law protects thecountrys trade unions. Unions enjoy considerable influence on termination and other labour issues. Wage bargaining is almost always conducted at theenterprise level. Workers who are not members of arecognised union are still entitled to have their rights protected by aunion. Unions must give employers relevant information about members in theworkplace; failure to comply with therequest releases theemployer from theagreement with theunion. Discrimination based on sex, nationality, race or union membership is illegal. Polands labour law is more stringent than is typical in Europe. Enforcement can be rigorous and inspections by state authorities frequent. Labour courts tend to side with employees. Working hours Thestandard average working time cannot be longer than 8 hours per day and 40 hours aweek. If ithappens that these limits are exceeded, theemployee shall be entitled to extra remuneration for overtime. Overtime may not exceed four hours aday and 150 hours per calendar year per worker. Thelegal rate for overtime work is a50% premium for each extra hour and a100% premium for each hour of work provided on Sundays, statutory holidays or in thenight. Wages and benefits TheCouncil of Ministers set thegross minimum monthly wage at PLN 1317.00. There is only one minimum wage across all sectors, regions and occupations. Wages in theprivate sector are far higher than those in thepublic sector. Currently, more and more Poles in managerial positions earn salaries comparable to expatriate personnel.
Since 1989, thePolish system of higher education has done much to catch up and broaden its curriculum. Thestate sectors activities have been complemented by athriving private sector, asboth sectors expanded to meet arapid increase in demand. Theparticipation rate in higher education has also increased sharply. Number of students increased from 403th in theacademic year 1990/91 to 1.930 th in academic year 2007/08, afigure that compares well with western Europe. Asacademic salaries fell behind in the1990s, many teachers with tenured posts in thestate system also worked in theprivate university-level schools, of which there were 326 in 2007/2008. Of the1.93 million of students in 2007/08, 659 th were at private institutions, many of which are business schools (23% of all students). Universities (both public and private) have also started to cater to theneeds of mature students by providing part-time, evening and weekend studies. There are currently 17 fully accredited traditional universities in Poland, 21 technical universities, 9 medical universities and 5 universities for thestudy of economics. In addition to these institutions there are then 10 agricultural academies, 4 pedagogical universities, atheological academy and 2 maritime service universities. Amongst these are the8 higher state academies of music. All of these public academic institutions are supplemented by anumber of private educational institutions. Altogehter there are almost 500 higher education entities, which is one of top rates in Europe. TheOECDs International Student Assessment Programme, ranks Polands educational system asthe23rd best in theworld, which is around OECD average.
6.Infrastructure 6. Infrastructure
5. Education
AsthePolish education system was geared to theneeds of acentrally planned economy (and, in particular, to heavy industry) itwas unable to provide much training in areas such asfinance and information technology (IT) that are important to anemerging market economy. Aswith other public services, theeducation sector suffered from asharp fall in pay and status relative to other parts of theeconomy in the1990s, although teachers pay have been improved more recently.
Road network The poor state of the road network is one of the weakest aspects of Poland's infrastructure and a major handicap to business and economic development. The sharp rise in private car ownership has also put pressure on the country's roads. There are only a few short stretches of motorway (405 km at the end of 2003, up from 358 km at Investing cities. Road improvement75 the end of 2000), and two-lane roads connect most majorin Central Europe and motorway building were to have been critical components of the any newly elected Polish government. However, many practical difficulties - including land
Poland
Infrastructure Road network Thepoor state of theroad network is one of theweakest aspects of Polands infrastructure and amajor handicap to business and economic development. Thesharp rise in private car ownership has also put pressure on thecountrys roads. There are only afew short stretches of motorway (916 km at theend of 2009,), and two-lane roads connect most major cities (1200 km). Road improvement and motorway building were to have been critical components of theany newly elected Polish government. However, many practical difficulties - including land purchase and other planning problems restrained governments from implementing new motorways development programs. In recent years due to EU Funds for infrastructure investments road construction spending saw increase. Three major motorways connecting theentire country are being built. Many road intersections are in aplanning fase either with contracts signed or construction in progress. Most of them are planned to be executed by mid 2012 to be ready for Euro 2012. By theend of 2012, eight of ten largest Polish cities will be connected by amotorway network, being apart of Paneuropean transport network. Road network Motorways and express roads are part of national roads network. Asof December 2008 Poland had 383,313 km of public roads, of which 122,080 km were unpaved. Thequality of thePolish road transport system has been stalling thecountrys economic development by slowing down themovement of goods and people. In 2007 only 3% of Polish roads met EU standards. Although thetotal length of roads is relatively high, Poland is missing theminimum required density of motorways and expressways. 4,808 km (2,990 mi) of theroutes were classified aspart of TINA European transport corridors. According to GDDKiA national roads condition report of 2008, 25% of national roads conformed handling of 11.5 tons per axle loads. Railway network Theexpress passenger services of Polish State Railways (PKP) are of ahigh quality, with good intercity links to neighboring European cities such asPrague, Berlin and Vienna, and to Polish cities en route. No high-speed lines exist in Poland though some 500 km of track allow traveling at 160 km/h, especially on theCentral Trunk Line (CMK) that links Warsaw with Katowice and Krakw. In 2008, thePolish government announced theconstruction of adedicated high speed line based on theFrench TGV model and possibly using TGV style trainsets by 2020. TheY-shaped line would link Warsaw to d, Pozna and Wrocaw. This line would allow speeds of up to 320 km/h (200 mph). This project includes also anupgrade of Central Trunk Line to 250 km/h (160 mph) (or more) asthis line features anLGV-like profile.
Asof 2008, EuroCity and EuroNight direct sleeping trains have started operating between Moscow and Amsterdam, Basel and Munich via Warsaw and Poznan These trains consist of sleeping coaches from various rail operators being added to thetrain asitpasses through their operation area. Polish State Railways have recently started investing in track, signaling systems and stations. TheCompany is being restructured, with infrastructure being separated from inter-city and local train operations. TheEuropean Commission will put pressure on thegovernment to liberalise transport services, but thegovernment is likely to want to retain astrong influence on strategic sectors such asthenational rail network. Thelack of competition in this field is on of thereasons for this bad condition of Polish State Railways. Air Transport Thenational airline, LOT Polish Airlines, was partially privatised in 1999, when theSAirGroup (based around Swissair) bought aninitial 37.6% stake. Thecollapse of SAirGroup in 2001 returned LOT to state ownership, and in 2002 LOT drew closer to Germanys Lufthansa by joining theStar Alliance network of airlines. LOT is facing growing competitive pressures, asEU membership has compelled Poland to liberalise access to its airspace. According to thelatest announcements, British Airways may be interested to become amajor stakeholder in theupcoming 2011 LOT privatisation. Thelow fare airlines have been quick to move in, with easyJet (UK), Ryanair (Ireland), Wizzair (Poland/Hungary) and SkyEurope (Slovakia) all offering fights from avariety of airports in Poland. Poland is also battling with other countries in theregion to become theregional transport hub for east-central Europe, but rapid growth in passenger numbers in recent years has exposed thelack of capacity at Polish airports. Thebusiest airport in Poland, Warsaws Okecie (8,282,035 passengers and 50,143 tonnes of cargo per year), is themain international hub for LOT and currently serves asthedestination for around 75% of all major international fights into Poland. Polands second-busiest airport is in Krakow and thethird in Katowice. Theairport in Gdansk is also developing rapidly. Other Polish cities, like Wrocaw, Gdask, Krakw and Pozna all have major international airports. In preparation for theEuro 2012 football championships anumber of airports around thecountry is being renovated and redeveloped. This includes thebuilding of new terminals with anincreased number of jetways and stands at both Copernicus Airport in Wrocaw and Lech Wasa Airport in Gdask.
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Water Transport On theBaltic Sea coast, anumber of large deep water seaports exist to serve theinternational freight and passenger trade. They serve large ships, also thero-ro passenger ferries of Unity Line, Polferries and Stena Line which connect Poland with Scandinavia. Theports of Szczecin-Swinoujscie and Gdynia have seized new market opportunities, catering, for example, to tankers which carry oil from theMiddle East. In 2010, Polands two largest ports, Gdansk and Szczecin-Swinoujscie, handled 24.8 m tonnes of cargo and 19.2 m tonnes of cargo, respectively. Riverine services operate on both domestic coastal routes and on almost 3,812 km of navigable Polish rivers and canals. Most notable canals in Poland are theDanubeOder and Elblg canal. Telecommunications Although Polands communications infrastructure has improved immensely since 1989, progress has been uneven, with use of cellular telephones rising rapidly (44,96 million mobiles being used at end of 2009, which amounts to 99,2% of market penetration), but thenumber of thelandlines is decreasing, especially in thecountryside (12.3 million at thebeginning of 2006, in 2007 only 10.3 million). Theformer state monopolist, Telekomunikacja Polska (TPSA). has been mostly privatised, with France Telecom buying thelargest share. Various other companies have entered thefxed phone market, but generally aiming for niches (e.g. Netia covering mostly business). Although prices have reduced and availability has increased considerably since theintroduction of competition, thefixed-line market is still dominated by theTPSA. Diffculty to get thefxed line resulted in mobile cellular telephone use boom. All mobile phone operators in Poland use GSM. There are three major competitors managing comparable market shares, T-Mobile, Orange Polska and Plus GSM. Thefourth network, Play Mobile, owned by Netia and Novator Telecom, started offering UMTS network services in early 2007. All mobile operators have UMTS services in themajor cities, with nationwide coverage to be implemented soon.

Manufacturing Manufacturing led theeconomys recovery after thesystemchange recession in 1989-91. Itbriefly weakened in 2000-01 in Polands first conventional cyclical downturn, but then began to grow increasingly strong from mid-2002, on theback of rising export. Within manufacturing, heavy industry (and especially steel) has generally found itdifficult to adapt to new market conditions, but some sectors have seen notable success. These include themotor industry and thefurniture sector. Theproduction of construction materials is also asuccess story, even if domestic construction is only now emerging from aprolonged downturn. Thefood and drinks sector is thelargest branch of manufacturing. Remaining state ownership in manufacturing is concentrated in theproblematic sectors of defense equipment, shipbuilding and branches of thechemicals sector. Thestate also retains aconsiderable stake in oil refining. Automotive Industry Poland is well on theway to becoming amajor car manufacturing centre, with several components manufacturers also setting up plants in thecountry. Fiat of Italy is themajor Western investor in theindustry, and has had apresence in Poland for many years asaproducer of small cars from its base in Bielsko-Biala in thesouth-west of Poland. Skoda (owned by German Volkswagen) and Renault of France, although they have no production in Poland, are also prominent on thedomestic market. Opel/General Motors of theUS, which built agreenfeld assembly plant in theGliwice special economic zone (SEZ) in Silesia, is another leading producer and its success has contributed to theunexpected resilience of theKatowice region. TheVW Group has asignificant presence in western Poland and is also anotable car producer. In 2009 Opel started production of Astra IV in Gliwice and Fiat in Tychy increased production to 500 th cars. Total investment in Polish automotive sector amounted to 28 bn USD. Automotive industry consists of nearly 900 companies, of which over 300 are foreign shared. There are 400 suppliers, including Delphi, Eaton, Bridgestone, Hutchinson, TRW, Isuzu, Lear or Pilkington . Poland is the3rd largest bus manufacturer in Europe with plants of Solaris, Scania, Man or Autosan. Itis expected that in theupcoming months Poland will experience agrowing interest from producers and parts suppliers of electric cars.
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Poland
Agricultural Production Thesize of theagricultural sector in employment terms made itone of themost troublesome issues in Polands EU accession negotiations. Although agriculture generated asmall percentage of GDP (3,8%), itstill accounts for around 16% of employment. Thehigh level of agricultural employment (even if much of itis, in effect, hidden unemployment) relative to agricultures share in GDP shows that substantial scope for restructuring exists. Italso demonstrates theimmense problems facing therural economy and rural society in general in Poland. There are around 2 million farms, all privately owned, and most of them very small (theaverage farm size is only 8 ha), poorly equipped, and often run by elderly farmers. Farms exceeding 15 ha account for almost 10% of all farms and cover almost half of total agricultural area. Around half of all farms are run on asubsistence basis, yielding little or no produce for themarket. Poland is theleading producer in Europe of potatoes and rye and is one of theworlds largest producers of sugar beets and triticale, rapeseed, grains, hogs, and cattle. Poland is anet exporter of processed fruit and vegetables, meat, and dairy products. Construction In thesecond half of the1990s, commercial construction activity was concentrated in ahandful of major cities - notably Warsaw, Poznan, Gdansk and Krakow - asthey and their surrounding regions attracted themajority of inward investment, aswell asasubstantial share of new hotels, offices and housing developments. Construction activity was weaker elsewhere, because other regions missed out on inward investment and also because of thelack of progress in motorway construction. Construction slowed sharply from 1999, ashigh interest rates discouraged corporate investment. Despite thestrong growth of theeconomy asawhole in 2004, theconstruction sector has been slow to recover, with signs of sustained growth only emerging in thefirst half of 2005. In years 2006-2007 construction sector was developing fast owing to both Euro 2012 and EU funded investments in infrastructure and growing housing market. This was significantly limited by 2008 financial crisis, though production of construction materials is now growing stronger, suggesting that thereal level of construction activity, taking into account thegrey economy, may be more robust than theoffcial fgures suggest. Thecement industry was privatized in thefirst half of the1990s and is dominated by aGerman-Belgian group, Heidelberger/ CBR, theLafarge group of France, theDyckerhoff and Miebach companies (both of Germany), and Rugby and Readymix of theUK. Financial Services Thefinancial services sector in general is well regulated.. Thebanking sector is mostly in private hands and survived theeconomic downturn in 2008-2009, although currency depreciation and inter-bank money market standstill brought
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sector breakdown. In 2009 most toxic derivatives have been either settled or expired, and thesystem enjoyed higher liquidity. Overall, thefinancial services sector has so far escaped thecrises that have hit severely some other post-communist economies. 2009 was difficult for theentire financial services industry in Poland. Banks operating in Poland recorded total revenues of 50 bn PLN and profits of almost 9 bn PLN (compared to 13 bn PLN in 2007). Network expansion stopped and performance audits led to staff restructuring and shut down of less profitable branches. Some banks (AIG, GMAC) made changes in ownership, while other (Noble, Getin, Fortis) implemented consolidation to cut thecosts. In 2010 Irish AIB sold its Polish subsidiary, profitable BZ WBK to Santander Bank. Banking groups from Germany, France, Italy, theNetherlands and theUS have astrong presence in Poland. For many Western institutions, theroute into Polish banking was through buying stakes in thestate-owned regional banking network. Subsequent consolidation in thewest European banking market has led to awave of mergers of their Polish subsidiaries. One of biggest M&A transactions was merger of Pekao and BPH in 2007, which produced anew market leader Bank Pekao (UniCredit) controlling at thestart some 27% market share. In therecent years there were also new banking projects developed; Polbank, Allianz Bank, Alior Bank and Meritum. Currently there are almost 70 banks operating in Poland. Traditional Industries Steel Production Output of crude steel fell sharply, from 20 million tonnes in thelate 1980s to just 9,7 million tonnes in 2008 (7,2 in 2009). Some restructuring took place in the1990s, with afew smaller plants closed on environmental grounds, and one major steelworks, Huta Warszawa, sold to anItalian concern, Lucchini (Huta Warszawa was acquired by Luxembourgs Arcelor in mid-2005). Steel production is concentrated in thesouth of thecountry, with 60% of output coming from two plants: Huta Katowice and Huta Sedzimira, which have been consolidated into asingle company, Polskie Huty Stali (PHS). PHS was fnally privatised in late 2003, sold to theUK-based LNM (now Arcellor Mittal Steel). Arcellor Mittal Steel, with operations in Romania and theCzech Republic aswell asin Poland, has become themajor force in central European steel production. Polish steel market foregoes further consolidation. Centrozom was acquired by KGHM Ecoren and Zomrex remains within Arcelors interest. Arcelor itself is expected to acquire Cognor, in order to enlarge distribution market share. 2011 is expected to be profitable for theindustry with at least 10% growth. Distributors expect higher demand for steel products due to infrastructure and Euro 2012 investments.
Mining and Semi-processing Although Poland remains one of theworlds significant coal producers, mining and quarrying output has been falling relatively to total industrial production. Polands deep-coal mining industry has been under pressure throughout thetransition period asdemand has fallen. At thesame time, thestrength of thetrade unions in thesector has kept labour costs high, despite thesectors parlous financial state. Arestructuring plan backed by theWorld Bank has led to asharp fall in employment in theindustry. Theindustry gained some temporary respite in 2004 asworld coal and coke prices rose sharply, but areturn to more normal market conditions re-emphasized theneed for further restructuring. Today Polish coal mines are important players in theworld coal industry. Kompania Wglowa is thesecond European coal producer (2009 revenue: 11,627 bn PLN) and other big producers enjoyed sound results. Jastrzbska Spka Wglowa which is thefirst state owned mine listed on theWarsaw Stock Exchange since July 2011; closed 2009 with 4.07 bn PLN revenues and Kato-wicki Holding Wglowy with revenues amounting to 4.15 bn PLN). Themost efficient Polish coal mine Bogdanka was recently anobject of anunssuccesful takeover by Zdenek Bakala and his NWR. Following that, industry experts expect that Polish coal mine sector may merge to form anational coal holding able to compete on global markets. Mining market is expected to reach avalue of 4.37 bn US$1 by 2014, ascompared with 12.32bn US$ in 2009. In thelong run Poland is expected to reduce its dependancy on coal in order to theEU CO2 emission limit by cutting current level by 20%. Apart from coal, Poland also produces significant quantities of copper and silver, which are mined by one enterprise, KGHM Polska Miedz. In 2010 KGHM launched its new strategy which considers involvement in new technologies and mining companies acquisitions. KGHM now undertakes numerous acquisition projects in Europe and Canada regarding among others aproducer of silver and two producers of copper. Thecompany announced recently net profit of PLN 1017.59 mn in Q3/2010 vs. PLN 382.20 mn profit ayear earlier. Retail sector Western retailers are already very active in Poland. Privatisation has moved thefastest and furthest in retailing. Western retailers and other services providers have also entered thePolish market, making use of relaxed property rules to set up large out-oftown stores. There were almost 500 hypermarkets in Poland at end of 2009. French groups such asAuchan, Gant and Carrefour, and theSwedish furniture supplier IKEA are active in thePolish market. Theretailer Tesco has also entered themarket, expanding rapidly through thetakeover of theGerman HIT group. Other present brands include Biedronka (Jernimo Martins), Castorama (DIY), Electroworld (consumer electronics), E.Leclerc, Intermarch, JYSK (furniture, dcor, etc.), Kaufand,
Leroy Merlin (home improvement and gardening articles), Lidl, Makro Cash & Carry, Media Markt (consumer electronics), Praktiker (DIY), Real, Selgros and Cash & Carry. Hypermarket sales reached over PLN 30 bn in 2009, up 17% on previous year theowners of small shops have been campaigning vigorously against theinfux of foreign competition, and thegovernment has come under intermittent political pressure to introduce measures, perhaps through theplanning system, to limit thegrowth of thelarge foreign chains. According to thefindings by market research company Nielsen during thelast fve years thenumber of small shops has fallen from 74,000 in 2005 to 54,000 in 2010.
8. Technology and Industrial Parks

Thenew initiatives, such ascreation of industrial parks, technology parks, entrepreneurship and technology incubators simplify start-up of new enterprises, development of existing ones, especially in theSME sector, technology transfer aswell ascommercialization of theresearch results. Thegeneral idea of these activities is to set up aproper infrastructure and awide range of administrative, book-keeping, legal, advisory and other services for entities running their startup activities within thearea of apark or incubator. According to PAIiIZ in Poland, there are at least 60 industrial and technology parks operating. Major cities like Poznan, Katowice, Krakw, Lubin, d, Opole or Gdansk host either technology or industrial parks. Such initiatives are gaining momentum in many other Polish cities. Thenew projects regarding theestablishment, development or modernization of industrial, science and technology parks in Poland are supported by European Funds. Themanagement institutions of thepark may apply for co-financing from various Operational Programs for 2007-2013. Parks may obtain arefund even up to 85% of theeligible costs related to: preparation and realization of theparks strategy; investment in expansion of thetechnical infrastructure; promotion of theparks activity. With regard to theexpansion of activities, parks may receive co-financing for actions aimed towards: searching for new, innovative enterprises; potential and innovative ideas evaluation; capital investment in anewly created enterprise. Additionally, under each aid scheme thepark may simultaneously apply for training grants related to theprojects.
Poland
Enterprises that invest or expand their activity in Poland may apply for various types of tax and non-tax investment incentives such asinvestment grants, R&D grants, training grants, tax incentives (incl. tax exemptions) and many others. Companies which already operate in Poland and do not plan any expansion may still enjoy training grants for their employees in Poland and R&D tax incentives for current R&D activity. Support comes from both domestic and European Union sources. However, levels of aid are set up separately for each aid scheme and do not depend on theinvestors origin. Investment grants are in most cases recognized asregional aid. Total aid granted for aspecific project cannot exceed themaximum aid intensity for agiven region in Poland (see Regional state aid map of Poland). Investment incentives constitute aid that is non-refundable (in most cases) and free of additional costs. Grants are credited to theinvestors account in aform of reimbursement of incurred costs (periodical payments) or in aform of prepayment, which allows for effective financial liquidity management of theproject.
European Union Funds In thecurrent programming period 2007-2013, Poland is themajor beneficiary of EU funds. Thetotal budget set for support to investments made by enterprises was several times higher than thebudgets for previous years (2004 2006), and itamounted to almost EUR 80 billion. In accordance with thestrategic directions of EU economic development for theyears 2014-2020, itis expected that thepool of funds for Poland under theStructural Funds will also be significant. Funding will be allocated in particular for highly innovative projects, research and development projects, projects in thefield of eco-efficiency projects and social inclusion.
Sources of support
EU Funds
Polish Government Grants (PGG)
Tax incentives
European and multinational Initiatives
Preferential Loans Environmental protection and renewables
R&D investments Training Shared Services Centers (incl. R&D Centers) Innovative investments Environmental protection, renewable Special Economic Zones R&D Tax Incentives
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Currently, most of theEU funds provided for theperiod 20072013 have been exhausted, but still calls for proposals under thefollowing areas are expected to be announced: 1. Innovative investments Investments of aninnovative nature aimed at establishing anenterprise, its development, production diversification, or implementation of afundamental change in theoverall production process together with theuse of innovative technological solutions. Employees trainings, including e-learning and post-graduate studies (also MBA), and related advisory, internship and traineeship. Industrial research and development activities conducted by entrepreneurs to develop new \ significantly improved products and/or processes and/or services. Investments in themodern services sector (shared service centers, ITcenters, R&D centers).
2. Training 3. Research & Development 4. Service centers
Regional Aid Map Thetotal value of aid that aninvestor obtains cannot exceed themaximum aid intensity level for agiven region of Poland and itdepends on: location of theinvestment (aid intensity level); investment value (eligible expenses); enterprise size. Different types of regional aid such asinvestment grants and CIT exemptions in SEZ can be accumulated by investors up to themaximum aid intensity level. TheRegional Aid Map in Poland for 2007-2013 was set at thelevel of 16 administrative units of Poland known asvoivodships. In case of medium-sized and small enterprises, these intensities are increased by 10% and 20% respectively. R&D tax incentives Polish R&D tax incentive system (implemented on 1 January 2006) is currently much less effective than those implemented by other EU member states. Recently thedebate on creation of new R&D tax incentive system is conducted in Poland, however, no specific declarations has been made yet by thegovernment. Companies involved in R&D activities may deduct from their CIT base up to 50% of expenditure incurred for theacquisition of new technologies in theform of intangible assets (e.g. proprietary rights, licenses, rights under patents or utility models, know-how etc.). In thecase of loss thetax beneft may be used during thesubsequent 3 tax years. On amonthly basis, entities with theCBR status can make appropriations to theinnovation fund corresponding to 20% of their revenue, which reduces thetax base.
Thetax benefit is addressed to all entities operating in Poland and acquiring new technologies, except for taxable persons using thefat rate method and enterprises which carry out business activity in special economic zones. Eligible costs include expenses incurred for theacquisition of innovative technologies that are not used worldwide for aperiod exceeding 5 years, which needs to be proved by anopinion issued by anindependent scientific unit. Thelist of eligible expenditures includes only costs of acquired technological solutions in theform of intangible assets. Therefore, thecosts of internal R&D works aswell ascosts refunded from other public aid sources do enterprise size. Different types of regional aid such as investment grants and CIT exemptions in SEZ can be accumulated by investors up to not qualify tax benefit. the maximum aid intensity level.
The Regional Aid Map in Poland for 2007-2013 was set at the level of 16 administrative units of Poland known as voivodships.
Regional Aid Map of Poland (2007-2013)
In case of medium-sized and small enterprises, these intensities are increased by 10% and 20% respectively. R&D tax incentives Polish R&D tax incentive system (implemented on 1 January 2006) is currently much less effective than those implemented Investing in Central Europe 81 by other EU member states. Recently the debate on creation of new R&D tax incentive system is conducted in Poland, however, no specific declarations has been made yet by the government. Companies involved in R&D activities may deduct from their CIT base up to 50% of expenditure incurred for the acquisition of new technologies in the form of intangible assets (e.g. proprietary rights, licenses, rights under patents or
Poland
Special Economic Zones (SEZ) Tax incentives in theform of corporate income tax exemption are available for investors in Special Economic Zones in Poland. Special Economic Zones (SEZs) are designated areas in theterritory of Poland, in which business activities (manufacturing and services) can be conducted on preferential terms. There are fourteen Special Economic Zones in Poland. Each SEZ consists of anumber of sub zones which means that areas of SEZs in Poland are presently scattered across thecountry. Infrastructure within areas of SEZs in Poland is well developed and makes them very attractive for investors. Thenumber of investors in SEZs is growing fast, especially since theaccession of Poland to theEuropean Union. SEZs have already attracted more than 1376 investments (status asat theend of 1Q 2011), including multinational companies like Bridgestone, Dell, Delphi, Electrolux, Fiat, General Motors, Gillette, Guardian, Isuzu, LG, Michelin, Motorola, Philips, Shell, Toyota, Volkswagen, Whirlpool and others. Thetotal value of theinvestments implemented within SEZ exceeded PLN 74 billion at theend of 1Q 2011. In order to beneft from tax incentives in SEZs, aspecial permit has to be obtained from theSEZ Management acting on behalf of Minister of Economy. Eligible activities include both manufacturing and services (also modern services, such as: R&D, IT, BPO, call centers). Manufacturing investments in SEZs include numerous sectors, such asautomotive, electronics, household appliances, plastic products, wooden products, metallic and non-metallic products. Tax incentives in SEZs (theamounts of unpaid CIT) are recognized asregional aid and they cannot exceed themaximum aid intensity for agiven region of Poland (see Regional state aid map of Poland). Eligible expenditures are comprised of investment expenses for tangible and intangible assets. Alternatively, eligible expenditure can be calculated based on two-year labour costs of newly employed staff. Apart from theabove incentives, companies investing in theSEZ are often granted exemptions from real estate tax by local authorities. Polish government grants (PGG) Theobjective of thegovernmental support programme is to provide additional funding to investments which are strategically important to thePolish economy and which generate many new workplaces. Adetailed scope of thesupport is negotiated individually with thecompetent Polish public authorities. Programme can be applied for entrepreneurs planning.
investments in thefollowing priority sectors: automotive, aviation, electronics, R&D, biotechnology and modern services sector (BPO, IT, SSC) or in case of major scale production investment in other sectors. Till theend of 2009 more than 50 programmes were constituted for large project of multinational companies including Cadbury, Dell, Fiat, Ford, Gillette, LG, Samsung, Sharp, Shell, Toshiba, Toyota, Volkswagen. Preferential loans/grants Environmental Protection and Water Management Fund Support for ecological project of national level signifcance and scope aswell asregional actions important due to environmental requirements. Types of projects eligible for aloan/grant include inter alia: renewable energy sources (wind energy, biomass and biogas, geothermal energy), green investment scheme (biogas plants, CHP biomass plants and biomass heating plants), waste management (recycling of waste, waste disposal, utilization of waste) and environmental management (ISO certifcates). Co-fnancing is available in form of preferential loans up to 75% of eligible costs or grant - depending of supporting scheme. Selected European and multinational R&D Initiatives 7 Framework Programme - Theprogram aims to support multinational cooperation in science and research in selected ten thematic areas, including eg. Information and communication technologies and Nanosciences, nanotechnologies, materials and new production technologies. Competitiveness and Innovation Framework Programme (CIP) - supports innovation activities (including eco-innovation) and provides better access to fnance in theregions. TheCIP is divided into three operational programmes: TheEntrepreneurship and Innovation Programme (EIP) TheInformation Communication Technologies Policy Support Programme (ICT-PSP) TheIntelligent Energy Europe Programme (IEE) Multinational Initiatives run by National Centre for Research and Development NCBIR is anational project coordinator designated for several European and Multinational initiatives such aseg: NCBiR - MATIMOP. (Polish-Israeli competition for research and development projects, focusing on developing innovative products and technology with real prospects for commercial applications) and EUREKAs Eurostars Programme (thefrst European support programme specifcally dedicated to SMEs and focuses on international collaborative research and innovation projects.
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Poland was very successful in attracting foreign direct investment (FDI) in the1990s. Its market size, membership in theOECD (1996) and NATO (1999), aswell asits recent membership in theEuropean Union (May 2004), have made itattractive to foreign investors. Cumulative FDI infows reached 128.834 mln EUR asof 2009, according to thePolish Agency for Information and Foreign Investment (Panstwowa Agencja Informacji iInwestycji Zagranicznych - PAIiIZ). In 2009, FDI amounted to 8.942 mln EUR, which is just abit less than theprevious year (10.206 mln EUR). FDI peaked in 2007 at 17.242 mln EUR, mainly on theback of large privatisations. During I-IX 2010. According to initial assessments som 5.300 mln EUR was invested in Poland from abroad. Most of 8.942 mln EUR FDI located in Poland in 2009 were invested in entities dealing with: Food processing (1.711 mln EUR), Business process outsourcing (1.644 mln EUR), Financial internediation (1.617 mln EUR), Trade and repairs (948 mln EUR), Production and distribution of energy, gas and water (856 mln EUR), Transport manufacturing (524 mln EUR). Most investments came from Germany (2.137 mln EUR), France (1.375 mln EUR), Luxembourg (1.250 mln EUR), Sweden (940 mln EUR), USA (895 mln EUR), Austria (586 mln EUR), Netherlands (478 mln EUR), Italy (459 mln EUR) and Spain (393 mln EUR).
11. Expatriate Life

Poland is one of themajor destinations for travellers. Its beauty can be admired in both its old cities and in thewild scenery of its national parks and nature reserves. Polish cities are cultural treasures in their own rights, showcasing unique examples of gothic, baroque, renaissance, and neoclassical architecture. Warsaw is acosmopolitan center with museums, shops, and fne restaurants. Krakow is asmaller city with well-preserved historical buildings, acharming central square, and avibrant market that wins visitors over instantly. TheTatras mountain range are asummer and winter sports playground of dramatic beauty. TheMazurian Lakelands are also natural gems in Polands topography. In addition to these wonderful natural and historic sites, Poland has retained its strong tradition and history while embracing modern and democratic institutions.

Poland has atemperate climate characterized by relatively cold winters and warm summers. Winters become increasingly severe inland from theBaltic coast, with January temperatures averaging -1 C (30 F) in thenorth and going aslow as- 5 C (23 F) in thesoutheast. July temperatures range from 16.5 C (62 F) near thecoast to 19 C (66 F) in thesouth. Rainfall varies with altitude, ranging from less than 51 cm (20 inches) ayear to asmuch as127 cm (50 inches) in thesouthern mountains 70
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Romania

Romania entered the1990s arelatively poor country, even by Balkan standards, largely aresult of thefailed Ceausescu economic policies of the1970s. However thecollapse of theCeauescu regime in 1989 and its accession to theEuropean Union have led to animproved economic outlook. In 2007, when Romania joined theEuropean Union (EU), itbecame thesecond-largest market in Central Europe and theseventh-largest in theEU. With apopulation of over 21 million, itis anemerging economy with one of thehighest growth potentials in theregion. Romanias adoption of acontroversial flat-rate income tax of 16 per cent in 2005 has been vital in driving both economic growth and foreign investment. In 2001-2007, economic growth averaged anannual 7 per cent, placing thecountry among thefastest-growing economies in Europe. Romania was one of thelast EU economies to enter recession, with q/q growth turning negative only in thethird quarter of 2008. Itwill also be one of thelast EU economies to exit recession and make asustained recovery. Real GDP shrank by 7.1% y/y in 2009 and is estimated to have contracted by afurther 2% in 2010, reflecting thenegative impact on private consumption of thegovernments planned cuts in wages and employment, and theincrease in VAT. Although exports grew, this was offset by thegrowth of imports in absolute terms. TheFOB-CIF commercial deficit reached around EUR 4.1 billion in Q2 2010. Itis doubtful that q/q growth will be sustained in thesecond half of this year asthefull impact of thegovernments ambitious austerity package is felt. Under thepresent scenario, economic growth is forecast to stay below thepotential in theyears ahead and Romania will reach its precrisis GDP level no sooner than 2014. TheIMF estimates that thecurrent-account deficit, which fell to 4.5% in 2009 after reaching 13.5% of GDP in 2007, will widen to 5.1% this year and to 5.4% of GDP in 2011, compared with aregional level of 4%. Should itbe largely covered by net inflows of foreign direct investment (FDI), ahigher current-account deficit can be considered beneficial, asitwould allow Romania to maintain ahigher level of investment without alarge increase in external debt. Thesurplus of thenet current transfers (both public and private sector) fell 39% y/y in January-August 2010 to EUR 1.8bn. According to thelatest official information, Italy has ashare of 43% in remittances from abroad, Spain 31% and Greece 7%. Besides lower remittances of theRomanian workers, net current transfers were affected by lower inflows of European funds.
FDIs will finance less than 40% of theC/A deficit this year. They will be directed mainly towards areas with significant growth potential at theend of thepresent recession (energy, IT&C, agriculture). In August 2010, headline inflation (CPI) continued to surpass theupper bound of theinflation target. Consumer prices grew by 7.8% yoy, bringing cumulative inflation (in January-September 2010) to 6.3% ytd. This increase was mainly explained by theVAT rate hike (from 19% to 24%), introduced on July 1st 2010. Meanwhile, thetight budget coupled with potential fiscal consolidation will be key factors putting downward pressure on prices in thefollowing months. Asaresult, according to aforecast by theNational Bank of Romania, theCPI will fall back within thetarget band in 2011. Disinflation is set to continue in 2011-15, but theinflation is not expected to fall to Western European levels within theforecast period. Depreciation of theleu will generate further inflationary pressures later in 2010 by driving up theprice of imported energy and raw materials. Wear-end inflation is estimated to reach 8.1% in 2010 (averaging 6.1% for theyear on thenational measure). Provided that fiscal and incomes policies are tightened and that wage growth is curtailed, inflation should fall to around 3.5% by theend of 2011, inside thecentral banks target band and to 2.4% by December 2015, asRomania strives to meet theconditions for entry into theEUs exchange-rate mechanism (ERM2). However, this will still be higher than therates prevailing in most old and new members of theEU. Thegovernment secured a24-month stand-by agreement with theIMF in March 2009, which is supported by theEU, theEuropean Investment Bank (EIB), and theEuropean Bank for Reconstruction and Development (EBRD). Itis worth Eur 19.5bn (about US$27bn) in total and is themain factor shaping economic policy. TheIMF agreement requires thegovernment to narrow thebudget deficit; to make cuts in public-sector wage costs, pensions and social security benefits; to reduce staffing levels in thepublic sector and reform public-sector wages; and to reform thepension system. Romanian authorities are determined to continue therelation with theIMF after 2011 and aprecautionary stand-by arrangement is themost likely scenario at present. This will enable thegovernment to draw further funding only in theevent of adownturn in domestic or global economic conditions (or both). Acontinuation of theagreement with theIMF in thenext years is good news for thecapital markets and opens thedoor for asuccessful issuance of euro mid-term notes on theglobal markets.
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In September 2010 registered unemployment rate (domestic methodology) remained constant for thefourth month in arow at 7.4%. While this could be seen asasign of astabilization of theprivate segment of thelabour market, theunemployment outlook remains rather pessimistic due to therightsizing process in thegovernment sector. Asthegovernment could begin to cut payrolls and thefavorable summer seasonal effect in agriculture and construction will vanish, unemployment could climb to around 8.5% at theend of 2010. Economic growth will not be strong enough to reduce significantly theunemployment rate and our forecast shows that itwill remain above pre-crisis levels in thenext years. Real wages will be negative both in 2010 and 2011. Political system Romanias political system is aParliamentary Democracy. TheRomanian Parliament exercises thelegislative powers while themain executive powers are attributed to thegovernment. Thepresident of theRepublic, who is elected for amandate of five years (while theParliament is elected for amandate of four years), guards theobservance of theConstitution and acts asamediator between different powers in thestate (legislative, executive and judiciary) aswell asbetween theState and society. TheParliament includes theChamber of Deputies and theSenate, elected through direct suffrage. Theelection law establishes thenumber of deputies and senators. TheParliament passes constitutional laws (which concern therevision of theConstitution), organic laws (endorsed by themajority suffrage of each chamber) and ordinary laws. According to thearticle 74 of theConstitution, theEducation Act is anorganic law. TheGovernment (executive body) is invested by theParliament on thebasis of its governmental programme. Thenational legislature is made up of abicameral parliament composed of theSenate (137 seats) and theChamber of Deputies (332 seats). Both chambers are directly elected from 41 multimember constituencies, comprising 40 counties and themunicipality of Bucharest. Thelast national elections were on November 30th 2008 (legislative) and on November 26th and December 6th 2009 (presidential). Thenext parliamentary election is scheduled for late 2012 and thenext presidential election is scheduled for late 2014.
Thenational government consists of aCabinet, headed by theprime minister, nominated by thepresident. Thegovernment is acoalition of theDemocratic Liberal Party (DLP) and theHungarian Union of Democrats in Romania (HUDR), supported by independent and ethnic minority representatives. Theopposition parties are: Christian Democrat-New Generation Party (CD-PNG); Conservative Party (CP); Greater Romania Party (GRP); National Liberal Party (NLP); National Union for theProgress of Romania (UNPR); Social Democratic Party (SDP). Currently thePresident of Romania is Traian Basescu, thePrime Minister Emil Boc (DLP) and theDeputy Prime Minister Marko Bela (HUDR).
2. Tax Structure
Resident/Non-resident Resident is considered to be any Romanian legal entity, any foreign legal entity having its place of effective management in Romania, any legal entity with its registered office in Romania, set up according to European legislation and any resident individual. For associations between Romanian legal entities and foreign individuals or entities, which do not give rise to alegal person, thetax is computed and paid by theRomanian legal entities on behalf of thepartners. Tax year Thetax year is thecalendar year. Thedeadline for submitting thefinancial statements for theprevious year is: within 150 days after closing of thefinancial year for national companies, autonomous regies, research and development institutes; within 120 days after closing of thefinancial year for all other legal entities a;
** Please note that for thenext year all dates may suffer changes.
Thepersons that did not pursue anactivity, except for trading companies, aswell asthose undergoing liquidation, according to thelaw, shall submit astatement for this purpose, within 60 days asof theend of thefinancial year, with theterritorial units of theMinistry of Economy and Finance. All companies must also produce half-year (asat 30 June of thecurrent year) unaudited financial statements. Companies are required to file comprehensive tax returns monthly or quarterly. Corporate tax is paid quarterly (banks pay annual corporate income tax based on quarterly advanced payments).
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Romania
Thecompanies that fulfill two out of thefollowing three criteria: total value of theassets of EUR 3,650,000 net turnover of EUR 7,300,000 and averange number of employees during thefiscal year of 50 should prepare annual financial statements that comprise: - Balance sheet - Profit and loss account - Statements of changes in equity - Cash flow statement - Explanatory notes for theannual financial statements. Corporate taxation Resident entities are subject to tax on worldwide income. Nonresident companies are taxed only on their earnings in Romania (through branches, permanent establishments or associations, which do not create anew legal person). Corporate tax is chargeable at aflat rate of 16% on accounting profits determined according to theRomanian Accounting Standards, adjusted for certain items under tax legislation. Thus, thetaxable profit of aRomanian legal entity is calculated asthedifference between theincome derived from any source and theexpenses incurred in obtaining thetaxable income throughout thefiscal year, deducting non-taxable income and adding non-deductible expenses. Thenon-taxable income expressly includes: Dividends received by aRomanian legal entity from another Romanian legal entity; Revenues from reversal or cancellation of provisions / expenses that were previously non-deductible and recovery of expenses that were previously non-deductible; Non-taxable income expressly provided in agreements and memoranda approved by law; Expenses are considered deductible if they are directly related to deriving income and correspond to taxable income. Asregards thedeductibility criteria, theRomanian Fiscal Code provides that expenses may be considered asdeductible expenses, limited deductible expenses and non-deductible expenses. Among thedeductible expenses: Expenses made for acquisition of packaging; Expenses incurred for marketing and advertising with aview to promote thecompany; Research and development expenses that do not meet therequirements to be recognized asintangible assets for accounting purposes;
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Transport and accommodation expenses for business trips in Romania or abroad incurred by employees and directors and secondees whose costs are covered by theRomanian company; Expenses incurred for professional training and development of employees; Write-off of receivables in certain conditions. Among non-deductible expenses: Business entertainment and protocol expenses, which exceed thelimit of 2% applied to thedifference between revenues and deductible expenses other than profit tax expenses and protocol expenses; Fines or penalties due to Romanian authorities or foreign authorities; Expenses with luncheon vouchers over thelimit established by theGovernment (RON 8,72 for 2010); Contributions to non-mandatory pension funds over certain legal limits (EUR 400 per year, per employee) are non-deductible expenses; Contributions to private health insurance over certain legal limits (EUR 250 per year, per employee) are non-deductible expenses; Social expense, which exceed thelimit of 2% of thesalary fund realized; Other expenses related to salaries which are not taxable to individuals; For theperiod 1st May 2009 31st December 2010, fuel expenses are non-deductible for corporate income tax purposes. Asanexception, fuel expenses are granted deductibility if these are incurred in relation to vehicles that are used for certain activities (e.g. sales activities, paid transportation services, rental activities, security services, repairs, courier activities etc.) Sponsorship expenses are not deductible, but they can be taken asacredit from theprofit tax liability provided that thefollowing conditions are met: - They are within thelimit of 3 of theturnover, and - Do not exceed 20% of theprofit tax due. Any tax differential arising from corporate profit tax incentives is treated astaxpayers reserves that cannot be used for share capital increases, offsetting losses incurred or distribution to shareholders. Tax losses incurred may be carried forward for five years and are not updated for inflation. Thecarry back of losses is not allowed. For losses incurred after January 1, 2009, thecarry forward period is extended to 7 years.
Advance tax ruling availability TheNational Agency for Fiscal Administration may issue advanced tax rulings (ATR), at therequest of taxpayers. TheATR is anadministrative fiscal document referring to afuture fiscal situation of ataxpayer and is binding for thetax authorities, provided that its terms and conditions have been complied with by thetaxpayer. Theadvanced tax ruling is valid only aslong astherelevant legal provisions are not amended. Thedeadline for issuing anAPA is: 12 months 18 months in case of aunilateral agreement; in case of abilateral/multilateral agreement.
Asof 1st May 2009, revaluation reserves for fixed assets, including land, performed after 1 January 2004, which are deductible for corporate income tax purposes by way of depreciation or expenses with alienation/write-off of theassets, will be taxed simultaneously with thededuction of thetax depreciation or at themoment of thedisposal or write-off of therelated fixed assets. Withholding tax (subject to tax treaties) Payments to: Resident Companies Non-resident Companies Interest 16% / 10% Dividends 16%/0% 16% / 0% Royalties 16% / 10%
Theagreement is issued for aperiod of up to 5 years (in exceptional cases itis possible to be issued for alonger period). Theagreement produces effects only for thefuture (there are some exceptions). Capital gains tax There is no separate capital gains tax payable in Romania by companies. Companies record capital gains in theprofit and loss account, on which normal profits tax is payable. Foreign companies that sell their interest in Romanian companies may be taxable on any capital gain made.Capital gains obtained by nonresidents from thesale of real estate located in Romania or from thesale of shares held in Romanian legal entities are subject to corporate income tax (i.e., 16%). Income from real estate properties also include, inter alia: Income from sale/transfer of participation titles held in alegal entity, if minimum 50% of its fixed assets are either directly or through several legal entities real estate properties located in Romania; Income obtained from exploitation of natural resources located in Romania, including thegain obtained from thesale/ transfer of any right related to these resources, etc. Revaluation of assets In order to determine thefiscal value of land, respectively theun-depreciated fiscal value of fixed assets, theaccounting revaluations performed after 1 January 2007, aswell astheun-depreciated part of accounting revaluations performed between 1 January 2004 and 31 December 2006 existing asat 31 December 2006 were to be considered. Also, accounting revaluations performed until 31 December 2003, asprovided by law, are considered for fiscal purposes.
Dividends distributed to local companies are subject to awithholding tax of 16% starting 1 July 2010, also dividends distributed to foreign companies and/or non-resident individuals are subject to 16% withholding tax, unless areduction under adouble tax treaty or theParent-Subsidiary Directive is available. In case theholding percentage is at least 10% and is maintained for aperiod of at least 2 years, no dividend tax is applied. In general, income obtained by non-residents from Romania is subject to withholding tax. Theapplicable withholding tax rate is 16%. Such income may comprise: Dividends paid by aRomanian legal entity; Interest paid by aRomanian resident; Royalties paid by aRomanian resident; Commissions paid by aRomanian resident; Income for services performed in Romania; Income from liquidation of aRomanian legal entity. Derogations From theabove mentioned withholding tax rate, there are certain derogations, such as: Dividends paid by aRomanian legal person to alegal person resident in another EU member state or in astate member of theEFTA or to apermanent establishment of acompany from anEU member state or from one of theEFTA member states, shall be taxed at arate of 10%. In case theparent company has aholding of at least 10% in thecapital of thesubsidiary and such holding is maintained for aperiod of at least two years thedividends would be exempt;
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Interest and royalties paid between related legal entities, subject to theconditions provided by theInterest and Royalty Directive are subject to awithholding tax of 10% until January 1, 2011. Starting this date such income would be exempt provided that thebeneficial owner of theinterest and/or royalties holds at least 25% in thecapital of thesubsidiary and such holding is maintained for aperiod of at least two years. Income obtained from gambling is subject to awithholding tax of 25%. Tax treaties Romania has signed over 82 Double Tax Treaties. Different rates of withholding tax can apply to interest, dividends and royalties, depending on theterms of thetreaty with theparticular country. Thetax treaty provisions are applicable if acertificate of fiscal residence is made available by theincome beneficiary by theincome payment date. Thin capitalization Romanian companies can generally deduct interest expense, subject to thin capitalisation rules. Thelevel of deductibility for loans obtained from companies, other than banks, their branches, credit co-operatives, leasing, mortgage companies and other non-banking financial institutions is limited to: TheNational Bank of Romanias (NBR) reference interest rate for loans denominated in Romanian currency (i.e. RON). 6% annual interest rate for foreign currency denominated loans. Thegovernment can update this level periodically. Any interest expenses which exceed this cap are permanently non-deductible for corporate income tax purposes. In addition to theabove capping rule, thedeductibility of interest expenses is subject to limitations based on thecomputation of thedebt/equity ratio. Interest expense and foreign exchange net losses are fully deductible where thedebt/equity ratio is lower or equal to three and thecompany is in apositive equity position. Otherwise, theinterest expense and related net losses from foreign exchange differences are non-deductible. Unlike theabove-mentioned threshold, thenon-deductible interest expenses and foreign exchange differences can be carried forward to future periods, subject to thesame thin capitalization test until their full deductibility. These limitations are not applicable to banks, non-banking financial institutions. Transfer pricing Romanian Tax law provides for transfer pricing rules and principles, in line with theOECD guidelines. Thelaw sets out that transactions between related parties should be carried out at arms length prices.
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In view of establishing thetransfer prices, thetaxpayer carrying out transactions with related parties is liable, upon tax authorities request, to prepare and present, within certain timeframes, afile of thetransfer prices. In determining theprice, thefollowing methods are recommended by theRomanian profits tax regime: Comparable Uncontrolled Price Method (CUP) Cost Plus Method (CPM) Resale Price Method (RPM) Any other method accepted under OECD guidelines Stamp duty Stamp duty is payable on most judicial claims, issue of certificates and licenses, and documentary transactions which require authentication. There are two types of stamp duty, which include thefollowing: Judicial stamp duty Extra-judicial stamp duty Judicial stamp duty is levied on claims and requests filed with courts and theMinistry of Justice, depending on thevalue of theclaim. Quantifiable claims are taxed under theregressive tax mechanism. Non-quantifiable claims are taxed at fixed amount levels. Ajudicial stamp duty may also be levied at thetransfer of real estate property under certain circumstances. Extra-judicial stamp duty is charged for theissue of various certifications such asidentity cards, car registrations, etc. Sales taxes/VAT (inc. financial services) TheRomanian VAT legislation is harmonised with theEU VIth Directive. VAT is generally applied to transactions involving goods and services for which theplace is deemed to be in Romania. Thecurrent VAT standard rate is 24%. Exports of goods and other specific operations are VAT exempted with deduction right, based on specified documentation, while financial services are generally VAT exempted without possibility to recover theinput tax incurred. Thefiscal period is usually thecalendar month. For taxable persons registered for VAT purposes whose previous yearend turnover did not exceed EUR 100,000, thefiscal period is thecalendar quarter. Also, if certain conditions are fulfilled, taxpayers may choose for other fiscal periods (i.e. semester, year).
Taxpayers who submit quarterly VAT returns and perform anintracommunity acquisition of goods in Romania have theobligation to switch to themonthly submission of theVAT returns. VAT compliance provides for periodical submission of VAT returns (i.e. Statement 300) with thecompetent tax authority by theVAT registered entities and periodical payment of VAT, due by the25th of themonth following thereporting period. Taxpayers have also to submit: Intrastat statements due by the15th day of themonth following theone for which thestatement is prepared; EC Sales Lists (i.e. Statement 390) due by the15th day of themonth following theone for which itis prepared; Invoices Lists (i.e. Statement 394) due by the25th day of themonth following thesemester for which itis prepared. Taxable persons not registered for VAT purposes are required to pay VAT and to submit aspecial VAT return for services rendered by non-residents, which have asadeemed place of supply Romania. These obligations must be fulfilled by the25th day of themonth following theone when theservices are supplied. There are two reduced rates of VAT, 9% and 5%. Thereduced rate of 9% is applied to certain transactions such as: tickets to museums, castles, historical monuments, fairs and expositions, movie-theatres (cinemas), etc.; supply of school books, books, newspapers and magazines, except for those intended solely for advertising purposes; supplies of all sort of prosthesis, except for dental plates and of orthopedic products; drugs for human and animal use; accommodation in hotels and similar structures, including therental of land for camping. Thereduced rate of 5% applies to thesupply of buildings aspart of thesocial policy, including theland on which they are built. Thebuilding supplied aspart of thesocial policy include, among others, thesupply of buildings intended to be used asretirement homes, foster home and centers for recovery and rehabilitation of disabled children, thesupply of buildings to city halls with thepurpose of subsidized renting-out to certain persons or families of special economic condition, aswell asthesupply of buildings with amaximum utilizable space of 120 m2 and avalue exceeding RON 380,000 (excluding VAT). Payroll and social security taxes Employers in Romania are liable to pay social security contributions asapercentage of thesalary paid to employees asfollows:
CAS (social security contribution): generally between 20.8% and 30.8% of salary fund, depending on thelabour conditions. Health fund: 5.2% of salary fund. Unemployment fund: 0.5.% of salary fund. Labour Chamber commission: 0.25%-0.75% of salary fund. Insurance fund for work related accidents and professional diseases: 0.15%-0.85%of salary fund. Medical leave fund: 0.85% (capped) of salary fund. Thecomputation base for thecontribution is capped at thelevel of twelve times thenational minimum salary. Guarantee fund for salary debts: 0.25% of salary fund. Disabled person contribution: 4%*No. of employees*MSE x 50%. Thecontribution is payable by companies with more than 50 employees that do not hire disabled persons. Alternatively, thecontribution equivalent can be used by companies to purchase goods from institutions where disabled people work. (MSE - Minimum Salary per Economy).
3. Legal Entities
Thegeneral legal framework with respect to Romanian Companies is provided by Companies Law no. 31/1990. Under thelaw there are five types of companies described below asfollows: Partnerships; Limited partnerships; Partnership limited by shares ; Joint Stock Companies; Limited Liability Companies; Basically any person can participate to thecreation of companies provided that was not condemned for specific criminal offences stipulated in thelaw. Partnerships, limited partnerships and partnerships limited by shares forms aseparate corporate entity from their shareholders but all of theshareholders in case of apartnership or only some of them in case of limited partnerships and partnerships limited by shares, are liable for thecompanys debts. In case of thejoint stock companies and thelimited liability companies, theshareholders liability is limited to theamount they had invested, i.e. thesubscribed share capital. Due to theadvantages they offer, joint stock and limited liability companies are most common types of company used in Romania.
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Limited Liability Company Shareholder structure Companies Law provides that this type of company may be established by at least two shareholders. Themaximum number of shareholders allowed by law for alimited liability company is 50. Asanexception from thesaid rule, thelaw stipulates thepossibility to establish alimited liability company having only one shareholder, named sole shareholder limited liability company. Theformation of sole shareholder limited liability company is subject to some legal restrictions, such as: anatural or legal entity cannot be sole shareholder in more than one limited liability company. asole shareholder limited liability company cannot be sole shareholder in another limited liability company. Theshareholders of alimited liability company are liable for thedebts of thecompany but their liability is capped to thesubscribed share capital. Share capital Theminimum share capital is 200 RON and may be divided into shares having aminimum value of 10 RON. Theshares issued by alimited liability company are incorporable assets and cannot be represented by negotiable financial instruments. Theshareholders must entirely pay thesubscribed capital upon themoment of theincorporation of alimited liability company Alimited liability company is aclose corporation, cannot be formed by public subscription or be registered on thestock exchange markets and cannot issue bonds. Transfer of shares Theshares issued by alimited liability company may be transferred between theshareholders without restrictions. Thetransfer of shares to third parties is subject to theapproval of theshareholders holding three quarters from theshare capital. Theshareholders may not derogate from theabove mentioned restriction by inserting acontrary provision in thearticles of association or by any other agreement. Thetransfer of shares must be registered in theTrade Registry and in theshareholder register of thecompany.
Joint Stock Companies Shareholder structure Theminimum number of shareholders required by law to set up this kind of company is 2. In case that thecompany has only one shareholder for aduration exceeding 9 months, then any interested person may claim thedissolution of that respective company. Similar with theprovisions established for limited liability companies, theliability of theshareholders is capped to thesubscribed share capital. In case of ajoint stock companies thelaw does not impose amaximum limit regarding thenumber of shareholders. Share capital In case of joint stock companies, theminimum share capital required by law is 90,000 RON. Thesaid amount may be modified by thegovernment so that theminimum share capital to always remain at least at thelevel of RON equivalent of EUR 25,000. Joint stock companies may issue bearer shares or nominative shares. Theshares issued may be preferential shares or regular ones, and they can be converted one into another. However preferential shares cannot exceed one quarter of theshare capital. Generally thepreferential shares do not allow theholder to vote in thegeneral meeting. For raising capital, joint stock companies may also issue bonds. Upon themoment of theincorporation of ajoint stock company theshareholders must pay at least 30% of thesubscribed capital. Thedifference may be paid in 12 months from theincorporation date, in case of cash contribution or 2 years in case of in kind contribution. Theshares issued by ajoint stock company may be acquired by apublic subscription. In this case theshareholders must pay in cash 50 % of thesubscribed capital and theother half in 12 months from theincorporation date of thecompany. Transfer of shares Generally theshares of ajoint stock company are freely transferable between theshareholders or to athird party. However theshareholders may restrict thetransfer of thesharers by inserting some limitations in to thearticle of association. Ajoint stock company cannot acquire its own shares or grant financial assistance (e.g.: loans or security), for theacquisition of its shares, excepting in some limited cases, expressly provided by thelaw. Thetransfer of shares property takes place by executing anassignment agreement and by its registration in theshareholders register.
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4. Labour and Wages

Thecollapse of thecommunist economic system has resulted in significant changes in thesize and composition of thelabour force. Although theworking-age population increased between 1989 and 2000, total employment fell by more than 2.2m, to 8.6m at theend of 2000. In thesecond quarter of 2010 total occupied population is of 9.5m. Thelabour force participation rate (working-age labour force asaproportion of thepopulation of working age) fell from 80% in theearly 1990s to around 60% in theearly 2000s. Thelargest job losses have been in industry, where employment fell from 4,169,000 in 1989 to 2,004,000 in 2000, with thegreatest redundancies being seen in large enterprises. Because of revised definitions and coverage, following reweighting after the2002 census, data from 2002 onwards are not comparable with those from previous years. According to thenew data, total employment has remained at much thesame level in recent years, averaging 9.2m in 2002-06. Employment in theagricultural sector has fallen, from around 40% of thetotal to 30%, while that in industry has remained fairly stable. Employment in theconstruction sector, which has been experiencing aboom in recent years, has increased by more than 1 percentage point to 5.5% of thetotal. Employment in hotels and restaurants, trade, real estate and other services has increased from about 30% of theoverall total to 40% over thepast five years. Unemployment peaked in 1999, reaching 11.8% in December of that year, and has declined steadily since then. Itcontinued to fall in 2005, to 523,000 or 5.9% of thelabour force in December, and further still in 2006 to around 5.1% in December. Unemployment has increased lately, due to theeconomic crises and inherent lay-offs and closures in large, loss-making state-owned enterprises. Unemployment rate in thesecond quarter of 2010 was of 6.8%, lower than theprevious quarter, but higher than thesame quarter of theprevious year. Romania still has alow rate of unemployment compared with other transition economies, which can be attributed partly to therelatively slow rate of reform and restructuring. In addition, many displaced workers return to thecountryside, where there is significant over-employment and hidden unemployment. There has also been anincrease in thenumber of people of working age seeking employment abroad and remitting earnings to their families at home. Clear regional patterns of unemployment have emerged. High rates of persistent long-term unemployment are recorded in counties affected by factory closures and restructuring, whereas unemployment is falling in counties with low rates of pre-existing unemployment. For example, unemployment rates in Alba, Gorj, Mehedinti, Teleorman, Vaslui have been consistently high, at 9-14%. Themost significant gains in employment in 2010 were recorded in theretail and wholesale trades, Other sectors in which employment expanded in recent periods include post and telecommunications, research and development, financial intermediation, and thepublic sector, including public administration and health and social assistance. Salaries in theprivate business sector in Romania have increased averagely by 14% compared to thefirst month of theprevious year and following mass layoffs. Despite job cuts and reductions of salary budgets in 2009, Romanian employers did not stick to thesame policy regarding thespared personnel. On thecontrary, at thestart of theyear theamount of theaverage salary was by 14% higher than ayear back, even though budgets for staff remuneration was reduced by 5% and thenumber of employees was decreased by 18%, according to adraft report by Pay Logic on salary trends in theperiod January 2009 - January 2010. Thetendency reflects last years development of 25 private companies in theautomobile, healthcare and financial industries, aswell asin sectors of retail trade and services. Companies prefer to hire fewer but more efficient employees and pay better. Indeed theemployees worked harder and theamount of overtime work grew by 38% over theperiod considered according to Pay Logic acompany specializing in professional human resources management services. Yet, why are employers reluctant to hire more people in view of thelooming economic recovery, evidenced by increased overtime work? Theanswer is simple: employers still prefer to use sieved staff that has proved its merits over ayear of crisis instead of hiring new people, who would yet need to acquire sufficient competence. Still thegood employees were not better paid than ayear earlier asaverage remuneration dropped in January 2010 compared to thesame period of theprevious year, thereport says. Yet there are worse situations like at manufacturing companies where salaries dropped by 24% over thereported period although staff reduction exceeded theaverage rate in thesectors monitored (-22%), while employees worked overtime (-39%). Employees in theproduction sector reduced their sick and paid leave (-39%) in comparison with theaverage level of 30%. Those, who preserved their jobs during thecrisis are not necessarily just lucky asthefact that thecompany kept them might not be incidental. In 2009 employers laid off employees, who were problematic, i.e. did not perform efficiently Pay Logic points out. Experts noticed that those, who remained, had adifferent attitude to their job, put more effort and thequality of their work improved. To put itin anutshell, they realized they had ajob that would allow them to pay off their obligations to thebanks Pay Logic adds. Furthermore, discontinuing previous fluctuation
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of staff, companies have started taking more interest in investing in their employees qualification. Legal framework TheRomanian employment legal framework is governed by Law no. 53/2003 regarding theLabour Code (the Labour Code), Law no. 130/1996 on thecollective bargaining agreement, and Law no. 168/1999 on labour conflicts and Emergency Government Ordinance no. 56/2007 regarding theemployment and transfer of foreigners in Romania. Also there are collective bargaining agreement concluded at thenational level and other collective bargaining agreements concluded at thelevel of industry, group of employers and employer which are applicable in employment relation. Working hours According to thelegal provisions in force, thenormal duration of full-time employees work time is 8 hours per day or 40 hours per week (5 working days). Themaximum legal duration of thework time cannot exceed 48 hours per week, including extra hours. Asanexception, theduration of thework time, including theextra hours, may be extended to over 48 hours/week, provided that theaverage of theworking hours, calculated for areference period of three calendar months, does not exceed 48 hours/week. For youngsters up to theage of 18, theduration of theworking time is 6 hours per day and 30 hours per week. Thework time is regularly, distributed, to 8 hours per day, 5 days per week, followed by two rest days. For certain sectors of activity, companies or professions, collective or individual negotiations, or specific laws may settle adaily duration of thework time, shorter or longer than 8 hours. Adaily duration of a12-hour working day shall be followed by a24-hour rest period. Specific provisions are provided with respect to individualized work schedules, to theextra time work, to thenight work, aswell asto theorganization of thework conditions. All employees are guaranteed their rights to apaid annual rest leave. Theminimum duration of theannual paid rest leave is, according to Labour Code, 20 working days. Specific provisions are also enforced with regard to thevocational training leaves.
Wages and benefits Salary: Discriminations are banned in thesetting and granting of asalary, on such criteria asgender, sexual behavior, genetic features, age, nationality, race, skin color, ethnicity, religion, political option, social background, disability, family situation or responsibility, trade union membership or activity. Thesalary consists of thebase salary, indemnities, increments and other bonuses. Salaries are confidential, employers being bound to take all steps to keep confidentiality. TheRomanian Constitution refers under Article 41 to theminimum wage asameans of social protection. Starting with January 1, 2007, thenational monthly minimum gross base salary guaranteed to be paid, for afull-time working schedule (anaverage of 170 hours per month), is set through Government Decision no. 1051/2008 at RON 600. Vacation: All employees are guaranteed their right to apaid annual rest leave. Theminimum duration of theannual paid rest leave is, according to Labour Code, 20 working days. According to CLA, theannual paid rest leave is minimum 21 working days. Asanexception, theCollective Labour Agreement concluded at thenational level for 2007-2010 provides apaid rest leave of 24 working days, in case of employees under 18, whereas for newly-hired employees, for thefirst year of activity registered in theEmployment Card, these are entitled to apaid rest leave of minimum 20 working days. In case of special family events (employees marriage, thechilds marriage, thechilds birth etc.), theemployees are entitled to paid days off, not included in theduration of therest leave. Thelaw, theapplicable collective labour agreement or internal regulation settles thespecial family events and thenumber of paid days off.
5. Education
Thegeneral legal framework to organise, administrate and provide education in Romania is established through theConstitution, theEducation Law (Law 84/1995, republished, subsequently amended and completed) organic law, ordinary laws and governmental ordinances. Specific procedures and regulations are established through Government Decisions and Orders of theMinister of Education, Research and Innovation. Implementation of thelegislation and general administration and management of theeducation and training system is ensured at thenational level by theMinistry of Education, Research and Innovation. In exercising its specific attributions, theMinistry of Education, Research and Innovation cooperates at thecentral level with other Ministries and institutional structures subordinated to theGovernment.
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Universities and other higher education institutions are autonomous and are guaranteed by thelaw theright to establish and implement their own development policies, within thegeneral provisions of thein-force legislation. TheMinistry of Education, Research and Innovation coordinates theactivity of theuniversities and other higher education institutions, complying with theprinciples of university autonomy. Institutions belonging to State Pre-tertiary education (pre-primary, primary, secondary and post-secondary non-tertiary education) are subordinated to theMinistry of Education, Research and Innovation through County School Inspectorates. These inspectorates ensure observance of thelegislation and evaluation of theeducation system and process, aswell astheimplementation at county level of education policies, established at central level. In 2008/2009 school year, thestructure of theeducation system was thefollowing: Pre-primary education organized for children aged 3-6/7. Pre-primary education is not compulsory; Primary education (compulsory) organized for pupils aged 6-7/10 and including grades Ito IV; Lower secondary education - organized in two successive cycles (both compulsory): - Gimnaziu grades Vto VIII for pupils aged 10-14; - Liceu - lower cycle or, alternatively, Scoala de arte i meserii (Arts and Trades School) grades IX and X for pupils aged 14-16; Upper secondary education, organised in: - Liceu - upper cycle (non-compulsory) grades XI to XII/XIII for pupils aged 16-18(19) - Preceded by acompletion year - for graduates of coala de Arte i Meserii (Arts and Trades School); Post secondary non-tertiary education, including post-high schools and foremen schools; Tertiary education, including university and post-university education. Compared to 2000, when public expenditure was 3.5% of theGDP, in 2009, public expenditure on education rose to 6% of GDP in 2009, thesame asin 2008. Thebudget for 2009 amounted to Eur 7 billion and for 2008, thebudget for education reached Eur 9 billion. Theschool population declined by 3.9% in 2009/2010,compared to 2006/2007. There have been sweeping changes in thestructure of theeducation system in recent years. Most progress has been made in reform of educational and professional training; increasing
institutional capacity; modernization of curriculums; evaluation and certification; and international recognition of diplomas and certificates. Thenumber of teaching staff in higher education has doubled during thetransition, but resources have failed to keep pace with demand, so that expenditure per student has halved. This has affected theprovision of equipment, including of information technology (IT). Unless concerns about underfunding and low pay are addressed, thecrisis in education could deepen. There are already recruitment shortfalls in certain subjects and few graduates are entering theprofession. Qualified teachers are turning to private educational institutions or leaving theprofession all together in search of better pay and better working conditions. Therestructuring of thenational system of education and thenew legislative regulations in education have led to thereorganization of theeducation network units in Romania. Asaresult of thereform measures within thenational system of education, during 2006-2009, thenumber of educational units decreased by 240 (2.8%, respectively). Thenew configuration of theeducation network was correlated to thesize of school population and to theconditions offered by theexisting material resources in order to provide aqualitative educational process. Due to thereduced school population, thenumber of graduates has decreased, except for thesecondary school, where during 2008/2009 was registered a38.6% increase compared to 2006/2007, and a35.4% increase compared to 2007/2008. At theend of theacademic year 2008/2009, thelargest number of graduates was college-level institutions (over 214,000 persons), 71.2% higher compared with the2006/2007 academic year. Educational attainment levels in Romania are similar to those of other countries in theregion. Some 14% of thepopulation has ahigher educational qualification; 21% graduated from secondary school; 11% graduated from elementary school and 1.3% did not graduate from any school.
(Source: Economist Intelligence Unit 2009 Country report)
Theaverage rate of theschool dropout in Europe is 14 percent and Romania is slightly over this rate, with 16 percent, according to European Commissioner for Education, Culture, Multilingualism, Sport, Media and Youth Androulla Vassiliou.
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6. Infrastructure
All transportation infrastructure in Romania is theproperty of thestate, and is administered by theMinistry of Transports, except when operated asaconcession, in which case theconcessions are made by theMinistry of Administration and Interior. Road and rail Romania total road network is estimated to be 198.930 km long, out of which 321 km of highways, 16.177 km of national roads, 34.668 km of county roads, 27.781 km of local roads and 119.988 km of streets (inside and outside thecities), according to Romanian National Company of Motorways and National Roads. Currently Romania has theleast developed motorway among all EU member states, thetotal number of km estimated to be finished in 2011 is 411. Nevertheless, theconstruction of anextensive motorway network is among thetop priorities for thegovernment. There are plans to build another 800 km of motorways in afirst stage which by optimistic forecasts will be ready by 2012. Currently Autostrada Transylvania is thelargest motorway project in Europe with alength of 588 km from Bucharest to Oradea (near theHungarian border). Underwritten by US$ 2.5bn of state loan guarantees, the415-km road is to be built by US company Bechtel and is expected to take between seven and nine years to complete, and to generate significant employment during its construction, aswell asthrough subsequent improved links with EU markets. Work on themotorway resumed in mid-2006, after asuspension for one year caused by legal and funding difficulties. Theauthorities still have difficulties in finding funds for continuing theconstruction of thehighway and for 2011 there are no financial resources for theworks .Theproblem for theauthorities is that thecancellation of themotorway would incur penalty charges of more than EUR 1bn. Other motorways projects under construction include: CernavodaMedgidia (19 km) and MedgidiaConstanta (32 km), part of theA2 (Autostrada Soarelui) motorway. TimisoaraArad (32 km) and Arads ring-road (12 km), part of theA1 motorway (BucharestNadlac) are another projects estimated to be completed in 2011. In thesame year, Constantas ring-road should be ready. Therail network, which is themain means of internal transport for passengers and freight, covers 14,217 km, thefourth-largest railway network in Europe, but only 35% of thesystem is electrified.Following years of falling volumes, thenumber of passengers seems to have stabilized at around 500,000 per day.
Road and rail traffic volumes are about 70m tones, mainly of Annual cargo
coal, investment in common metals, cement, quarry products, Public oil products, essential transport infrastructure took second place to investment in large-scale prestige projects in items. chemicals and agricultural the 1970s and 1980s, with the result that road and rail networks are among the least extensive in Europe. Their state of disrepair constitutes a major obstacle to economic development. Caile Ferate Romane (CFR) is theofficial state railway carrier of
Romania has a notoriously bad road system and had only one functional motorway, which ran Romania. CFR is divided into four separate companies: CFR Calafor less than 120 km, before it embarked in 2004 on a large-scale programme of road tori, responsible for passenger services; CFR Marfa, responsible modernisation and motorway construction. Romania committed itself to building 287 km of for freight transport; a further 784 km under construction in its negotiations with the EU. motorway by 2007, withCFR Infrastructura, manages theinfrastrucExpenditure on motorwayrailway network;the next eight years is estimated at more than ture on theRomanian construction over and Societatea Feroviara 12bn (US$16.3bn), with expenditure of 2.6bn planned for 2004-07. The emphasis will be de Turism, the network of manages with a and tourist railways. on replacing or SFT, which local roads scenic network of motorways for long-distance travel.
Currently, CFR Marfa is in theprocess of privatization by selling
The motorway constructionexchange. will stretch both the financial resources and the theshares on thestock programme capacity of the construction sector; the impact on the fiscal deficit over the medium to long term could be heavy. There is some concern also that the government may be starting too Railways incurred losses caused its decline in market The government is seeking many projects at once and spreading by resources too thinly.share, World Bank advice on the equipment, and historical non-payment introduction of more overstaffing, outdated prioritisation of construction projects and the competitive bidding procedures.
by many loss-making state-owned enterprises. Therailways
This move follows the award to a US construction company, Bechtel, of a contract worth could not finance maintenance and investment in facilities and 2.5bn for the Railways covered thelosses byBrasov in centralarrears to the Hungarian equipment. construction of a motorway from accumulating Romania border at Bors, but without a competitive tender being held. The construction of the east-west to thestate and through debt to (Turkey) is the country's largest motorway by Bechtel and Enka Insaat other creditors. Asaresult, infrastructure project. Underwritten by US$2.5bn of state loan guarantees, the 415-km road is expected to take theGovernment launched arailway reform program in 1996 between seven and nine years to complete, and to generate significant employment during its supported by World Bank, EBRD, EU-PHARE. construction, as well as through subsequent improved links with EU markets. Work on the
Currently, aseries of maintenance and modernization works are underway and railway infrastructure investments in Romania is expected to amount to EUR 7 bln in thenext 5 years. Shipping ThePort of Constanta is themain Romanian port and is located at theintersection of thetrade routes connecting theWestern European and Central European developed countries with theraw material suppliers from theCommunity of independent states, Central Asia and Transcaucasus. Itis one of thelargest European ports and thelargest Black Sea port.
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Along theRomanian Black Sea shore there are other two commercial maritime ports: Mangalia and Midia. Furthermore, all ports are directly connected with theDanubeBlack Sea Canal, which ensures theconnection with theDanube, thePoarta Alba-Midia Navodari Canal. In Romania, theDanube River has alength of 1,075 km,approximately 44% of its whole navigable length. TheRomanian Danube is divided into two structurally different sectors: theRiver Danube and theMaritime Danube. Several of theports situated along theMaritime Danube, namely Galati, Braila, Tulcea and Sulina, allow theaccess of both river and maritime vessels, so they also serve international sea trade. Ports are administered by national companies under theauthority of theMinistry of Transport. There are afew exceptions, namely Sulina, Turnu Magurele and Zimnicea ports, which are administrated by local authorities. Theinland waterway network presently has alength of 1,700 km and is comprised of: TheDanube from Bazias to Sulina; Secondary navigable branches of theDanube; Navigable canals. Air transport Romania has atotal of three international and 16 domestic airports. Four new domestic airports are planned, and theone at Cluj-Napoca is being upgraded to international standards. Bucharests international airport at Otopeni is undergoing amajor upgrade. In November 2010, Schengen Area evaluation committee experts visited International Airport Henri Coanda in Otopeni, near capital Bucharest, to assess thecountrys progress regarding airspace. TheBucharest Airports National Company said in apress release that theevaluation team made up of auditors from ten Schengen member states assessed on Monday thetechnical measures taken to separate thepassenger flow intra and extra Schengen on theHenri Coanda airport. TheSchengen experts will also visit theTraian Vuia Airport in Timisoara and two border crossing points at Moravita, Timis County (western Romania). Tarom, theNational Air Transport Company, has a70% market share and in thefirst 7 months of 2010, thecompany had 1,120,037 passangers, with 9,743 flights to both internal and external destinations. Tarom has yet to set adate for privatisation.
In 2007 Romania has signed anopen sky agreement, which allows any airline operator from theEU to set up business wherever itwants. Asaresult, Tarom is facing growing competition from low-cost airlines. Thelow cost airlines operating in Romania are: Wizz Air, Blue Air, Germanwings, easyJet, Ryanair, Vueling, Wind Jet, Air Lingus and Baboo, Air Berlin, Flyniki. Telecommunications Romania is one of thefastest-growing ITmarkets in eastern Europe. Thecountry has made significant progress in all of theinformation and communications technology (ICT) subsectors, including basic telephony, mobile telephony, Internet and IT. Telecommunications companies, such asOrange Romania (French-based) and Vodafone Romania (UK-based) are in 2010 among themost profitable in thecountry.The telecoms market (fixed telephony, mobile telephony, theInternet and other datatransmission services) was worth anestimated 4 bn in 2009 . Thetelecoms sector has been deregulated, expanded and modernised and has grown especially rapidly over thepast two years. Thefixed-line telephony market was liberalised on January 1st 2003, breaking themonopoly of thenational operator, Romtelecom, in which aGreek company, OTE, has a54.01% stake. In November 2010, theRomanian state announced plans to sell its 46% stake in Romtelecom and invited OTE representatives, themajority shareholder of theoperator, to make anoffer by theend of theyear, theCommunications Ministry announced. Romanian telecom operator Romtelecom, registered anoperating loss of 13.9 million Euro in thethird quarter of 2010 and its revenues dropped by 6.5%, to 181.5 million Euro, because of austerity measures and rising unemployment. Fixed lines numbered 5.29m at theend of 2009, representing apenetration rate of 24.7 per 100 people, according to data from theNational Communication Authority (ANC). This compares with 25.2 per 100 people in Poland and 17.2 per 100 people in theCzech Republic. Telephone density varies considerably from county to county, ranging from around 50% in thecapital, Bucharest, to about 10% in Dimbovita county. Thenew fixed networks, dubbed alternative fixed lines by theANC, have been developing rapidly at theexpense of theformer monopoly, Romtelecom, but Romtelecom remains thedominant player. Itcontrols most of thelocal access market, accounting for about 65% of thetotal number of fixed lines, although its portfolio has shrunk.
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Strong demand has led to extremely impressive growth in mobile telephony over thepast five years. Mobile penetration surpassed fixed-line penetration in 2001, and by theend of 2009 thenumber of mobile subscribers was estimated at 29.6m, representing apenetration rate of around 138%. Themobile telephone market was worth anestimated US$4.1bn in 2008, but thevalue of themarket fell to anestimated US$3.5bn in 2009, adecline of about 15%, owing to thedeleterious effect of theeconomic crisis on incomes. Thecombined revenue of thetop operators (Orange, Vodafone, Cosmote - which acquired Telemobil/Zapp in June 2009 - and RCS&RDS - with its Digi Mobil brand) fell by about 13% compared with 2008, although thetotal number of mobile subscribers increased by about 900,000. This compared with anincrease of 5.7m in 2007 and 4.5m in 2008 (although much of this growth was boosted by thelarge operators offering prepaid cards asbonus schemes to existing customers). In February 2008 Nokia opened its first mobile-telephone assembly plant in Romaniain theTetarom IV Industrial Park, 20 km from Cluj-Napoca in central Romaniaafter investing EUR 60mln. By September 2008 Nokia was employing 1,600 people at theplant. Companies supplying parts to Nokia are considering building production facilities close to theplant. TheInternet Although Internet penetration, at about 36% in 2009, is low compared with other European countries, thegrowth rate of thesector is significant, at anestimated average of 20% per year in 2006-09, according to data from theANC. Much of this growth has come because of thegrowing number of mobile connections, which may give aflattering picture, given that thereported figures give thenumber of users with Internetenabled handsets, rather than actual users of themobile Internet access service. Thenumber of Internet access connections rose to 7.8m in 2009, from 6.9m in 2008, of which 2.8m were fixed broadband Internet access connections and 4.6m were active mobile connections. TheInternet access and data transmission market just managed to keep growing in 2009, despite therecession, and was worth about US$1.1bn, compared with US$1bn in 2008. Growth in recent years has been driven by thegrowth of broadband connections, asmore businesses seek high-speed and quality transmissions. Broadband connections accounted for 36% of all Internet connections by theend of 2009 (including fixed and mobile Internet access).
Thenumber of Romanian (.ro) domains has grown rapidly in recent years, rising by 25% year on year, to 430,000, at theend of 2009, compared with 68,000 at theend of 2004. Revenue from online advertising is expected to increase significantly over thenext five years, owing to increasing Internet penetration and theincreasing emphasis that companies place on this asamarketing tool. Companies such asHome.ro, Romania Online and others selling advertising on their hosted sites are set to reap therewards. According to aranking issued by Internet World Stats, Romania ranks 8th according to internet users. Thetotal number of Internet users in Romania was 7,43 billion at theend of 2009, while Sweden and Belgium rank 9th and respectively 10th. Germany ranks first with 55.2 billion Internet users. Thelargest internet service (ISPs) providers are Astral Telecom (now part of UPC Romania), RDS (part of theRCS group) and theInternet division of theformer telephone monopoly, Romtelecom. Aswell asthese operators, themain mobile communications playersOrange (France), Vodafone (UK) and Zapp (taken over in 2009 by COSMOTE of Greece)offer mobile Internet access, Zapp being theleader in this market segment. There has been strong consolidation of themarket in recent years, with many local ISPssuch asCanad System, DNT, FX Internet, Kappa, PCNet and TotalNetbeing acquired by larger players such asAstral (which was later acquired by UPC Romania) and RCS. This trend of consolidation is set to continue. In December 2009 there were about 1,065 active Internet providers, down from 1,100 in 2008, 1,338 in 2007 and 1,412 in 2006. Further strong growth in this segment is expected asaresult of falling prices, increased computer penetration, and more competitive offers from cable television companies and mobile providers of broadband Internet. Themedia Since 1989 afree press has flourished and new media outlets have proliferated and at present Romania has one of themost dynamic media markets in southeastern Europe.For most households, thebroadcast media are themain sources of information. Public television broadcasts through two mainland channels (TVR 1, ageneral interest channel, and TVR 2, which focuses on cultural and educational programmes) and two international satellite channels (TVR International and TVR Cultural). There are several regional public television channels, but TVR 1 is theonly national channel covering almost thewhole country. There are several private competitors at national level, themost important being ProTV, Antena 1 and Prima TV. Thefirst two have more
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viewers in thecities than public television. There are many other private stations broadcasting nationally by satellite and there are more than 100 local private TV stations. Theprinted media in Romania has seen fallen readership during 2009-2010 ending in April this year, shows arecent National Readership Study (SNA). Among thefew publications which managed to increase their readership reach during this period were tabloid, Click, with anincrease of 4.2 percent, daily Financiarul, with 1.9 percent, Marie Claire glossy magazine, with 4.5 percent, Gazeta Sporturilor, theSunday edition, with 4.1 percent. Central daily newspapers have seen decreases in readership but they kept their position in thetop. Thefirst place was occupied by tabloid Libertatea, with 1.25 million readers each issue, but with adrop of 7 percent compared to January 2009 January 2010 period. Itwas closely followed by Click, with 1.26 million readers each issue. Thethird is another tabloid, CanCan, with 905.000 readers each issue. Sports newspaper Gazeta Sporturilor comes forth, with 731,000 readers and adrop of 1.2 percent in its readership. Adevarul ranks fifth, ageneral daily newspaper with 638,000 readers, followed by Jurnalul National, with 615,000 readers. Evenimentul Zilei quality newspaper had a449,000 readership but suffered aloss of 9.5 percent in readership. Ziarul Financiar, on eof themain business newspapers, has 197,000 readers each issue, adrop of 9.2 percent, followed by Gandul, with 180,000 readers and adrop of 11.8 percent. Business magazines were also down in readership. Saptamana Financiara reported adrop of 8.7 percent to 264,000 readers each issue, while Capital dropped 14.2 percent, to 205,000 readers per issue. Business Magazine had adrop of 2.2 percent, to 87,000 readers each issue. Theoverall Romanian media market dropped by 37 percent in value in 2009, reaching alevel below theone in 2006 and affecting all themarket segments, according to therecentlyreleased Media Fact Book which focused on ad spending in Romania last year. Theprint market saw a55 percent decline, followed by outdoor, with a40 percent drop. TV advertising declined by 34 percent and radio by 28 percent.
Internet based media was theleast affected, with only 19 percent in drop, according to Initiatives Medias report. Thelocal media market is expected to reach EUR 308 million in 2010, from EUR 339 million in 2009. Themarket peak was in 2008, when itreached EUR 540 million. In 2010, TV advertising will lead, with EUR 209 million, still downwards compared to last year. Theprint market will only reach EUR 27 million, down on EUR 37 million compared to 2009. Radio will make aEUR 23 million market, while outdoor advertising, EUR 35 million. Internet and cinema advertising will together reach EUR 14 million, being theonly market segment to display growth. Actually, thegrowth of online is thebiggest and most important trend, both in terms of usage, content dimension and complexity, writes thereport.

Agriculture Along with Romanias accession to theEU, 2007 brought anew era in thelocal agricultural economy and therural development. Theaccession represented for Romania themost important pressure factor for fast reform in theindustry. Unfortunately, thelocal rural environment, dominated by Agriculture, is still poorly integrated into themarket economy. In terms of agriculture production, in Romania thelargest sector was held in 2009 by thevegetal crops. Itamounted to 60% out of thetotal production, compared to 39% represented by theanimal industry and 1% represented by agricultural services. In 2009 theestimated cereal production was higher than theone in 2007, but lower than 2006 and 2008. Compared to 2008 results, in 2009 cereal production was considerably lower, however thefruit and vegetable production was higher. In terms of forestry, 2009 saw adecrease in raw wood demand, thesurface of theforest land occupying 0.4% more territory than in 2008. Thecontribution of agriculture, forestry and fishery industry to theGDP rose up to 6.5% in 2008, while in other EU member states this figure revolves around 1.7%. Out of the23.8 Mil Ha representing thecountrys territory, theagriculture surface amounts to 61.7%. Thus, Romania ranks 7th in Europe in regards to agriculture area (after France, Spain, Germany, Poland, UK and Italy) and 5th in regards to tillable area (after France, Spain, Germany and Poland). Agricultural, forestry and fishery segments employment amounted to 2.76m in 2007 and accounted for 30.5% of total employment. Local rural economy presents asadominant feature thehigh level of subsidence farms, which produce mainly for self consumption, trading randomly on themarket.
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Romanias agriculture sector is considered to be themost important beneficiary of EU funding. Bureaucracy and little access to information can only lead to low absorption rate of the7.5 billion Euro allocated during 2007-2013 under theCommon Agricultural Policy. Manufacturing Thestrategy of heavy industrialization during thecommunist era left Romania with aconcentration of relatively obsolete plants in themetallurgical, heavy engineering and chemical industries. Production of sophisticated consumer goods and machine tools was neglected, and engineering products failed to meet thequality standards of theworld market. In the2006-2009 timeframe, theindicators of theindustrys turnover registered apositive evolution. Themost significant growths were seen in thefollowing domains: electric equipment manufacturing, plastic and rubber masses productions, manufacturing of road transport vehicles, metal construction and other metal products (except automobiles, machinery and installations), wood processing (except furniture). Recent developments brought adecline in thelocal market, much more visible than in other EU countries. Exports increased to 55% and 58% in 2008 and 2009 respectively, astheproduction levels lowered. After themarket contracted with theeconomic crisis, its recovery may come from targeting less affected markets with stronger economies, while also attempting therecovery of thelocal steel consumption through heavy investments. Foreign investors entering thelocal steel market started out in 2007-2008 with record profits and high prices, only to witness slowly but surely thedecline of thedemand both locally and globally. Such high rolling times are not expected to occur in thefuture. Nowadays foreign companies see theneed to bring supplementary funds not only to cover looses but also to improve operations. Theautomotive industry takes off Theautomotive industry has attracted theattention of many foreign investors of theyears, asone of themost profitable segments of thelocal industry. Theindustry although may be considered still in its early stages, ithas seen rapid growth throughout theyears, ranking fourth largest producer in theregion, after theCzech Republic, Poland and Slovakia. Theindustry accounts for more than 5% of thetotal manufacturing output. Around 120,000 people are directly employed in theautomotive industry while significant others work for tier-two or tier-three suppliers. Anadvantage of manufacturing in Romania is that thecompanies benefit from low labour costs and highly skilled and specialized workforce. Another factor of importance is
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countrys proximity to main European markets. Thelocal market disposes of awide network of suppliers and components manufacturers, consisting of traditional local suppliers and foreign-owned companies, with theforeign-owned companies producing mainly for export. Despite along history in theautomobile production business, thelocal industry has only taken off along with thetakeover of Automobile Dacia by Renault France in 1999. Nowadays Dacia accounts for 80% of domestic production. Thecompany managed to become asuccess on foreign markets with theintroduction of theLogan model, which led to 150% increase in car exports in 2005, and further 40% year-on-year increase in 2006. 2008 saw amajor foreign company entering themarket, when Ford US bought Automobile Craiova. According to thecompanys officials, thetotal investment in theplant will raise up to 1 billion Euros by 2011, employing at thesame time up to 9,000 people. Thecompany forecasts 300,000 units production by 2013, with around 90% going to export. Din terms of economy, further contraction is expected in 2010 following the7.1% in 2009. Asaresult of thecontraction and thegovernments fiscal austerity measures, consumer demand for non-essential goods, including automotives, will remain at low levels in theshort term. Despite thereports from theRomanian Agency for Foreign Investments about new companies willing to invest in thelocal market, theautomotive industry is expected to remain at aslow pace on short term. Arecovery is only foreseen on medium term, provided investments are attracted through low labour costs, skilled labour force, investment-friendly government policies and geographic proximity to large automotive markets. In 2011-14 growth is expected to average about 4.6% per year, and new passenger car sales are forecast to grow by around 16.9% per year over thesame period. Pharmaceuticals benefit from FDI In theBusiness Environment Ratings for 2009, Romania has moved up two places on therankings table to reach fourth position among the20 Central and Eastern European (CEE) key markets surveyed asapart of thePharmaceuticals & Healthcare Business Environment Rankings. Romanias current position reflects therobust nature of thecountrys pharmaceutical industry and thestrong growth ithas made in recent months. We envisage that sales of pharmaceutical products are set to increase over thenext five years, with sales of prescription drugs and overthe-counter (OTC) medications expected to grow from US$3bn to US$5.46bn, thus representing acompound annual growth rate (CAGR) of 12.74%.
Romanian pharmaceutical production has benefited from inflows of FDI for modernisation of what remains arelatively backward industry by European standards. Foreign pharmaceutical firms entered themarket through direct imports, licensing-in agreements, acquisitions-for example, GlaxoSmithKline (UK/ US) bought a65% stake in Europharm, and Lek (Slovenia) bought a90% stake in PharmaTech-and privatisations (Gedeon Richter of Hungary bought amajority stake in Armedica). FDI in thesector is leading to quality improvements, and, with more factories meeting good manufacturing practice (GMP) standards, improving export prospects. Imported drugs are growing rapidly, from 45% of themarket by value in 1996 to about 80% currently. However, imports account for only about 20% of themarket by volume, with domestic producers largely concentrating on theproduction of low-value generic drugs whose patent has expired, while imports are concentrated on more sophisticated drugs. Romanias pharmaceuticals market is characterised by high growth and increasing levels of foreign direct investment ahead of planned EU accession. Generics represent around 30% of themarket by value, although their share is likely to slip astheoperating conditions in thecountry improve for foreign players. Theover-the-counter (OTC) market is underdeveloped, accounting for a20% share of thetotal, mirroring thehistorical reliance on public healthcare system for medicines. Domestic manufacturers produced about 1,500 types of drugs for domestic consumption and 690 for veterinary use in 2005. Domestic producers are generally small and have struggled to raise theinvestment required to meet GMP standards, which have been arequirement for operation since theend of 2003. Drug market in Romania in thefirst quarter of 2010 increased by 21.4% to EUR 602.1 million,sustained evolution of prescription products. On theproduction side, there are only afew significant domestic players left, and during thenext few years these are expected to be acquired by foreign companies-attracted by Romanias relatively large market, fast growth and low cost base. Thegovernment is attempting to consolidate smaller domestic producers into theexpanding majority state-owned pharmaceutical company, Antibiotice Recent data suggests that theRomanian pharmaceutical market has shown strong resilience to theeconomic downturn in 2009. Data released by market research firm IMS Health shows that pharmaceutical sales grew 20% year-on-year (y-o-y) to reach RON3.5bn (US$1.2bn) in thefirst five months of 2009,
reinforcing data released by theCegedim Consultancy Group which measured Q109 growth at 22.5% y-o-y. Itis believed that full-year growth rates will be less impressive, although we project that outside theCommonwealth of Independent States (CIS) countries, Romania should be thefastest-growing market in local currency terms during 2009. In other developments, some of Romanias leading private healthcare providers have announced plans to invest EUR80mn (US$113mn) over thenext three years in anattempt to expand their networks in thecountry. These include healthcare providers such astheUnirea Medical Centre, Romar Medical and MedLife. Latest figures suggest that themarket for medical equipment in Romania could reach avalue of more than EUR200mn (US$282mn) by 2012, up 50% from theEUR139mn (US$196mn) estimated for 2009. Growth in this area will be supported by theprivate sector, which has gained considerable momentum in recent years, aswell asby thepublic sector, where efforts towards de-centralisation, (expected to begin next year), will open thepathway for tenders being made for hospital equipment. Firms most likely to compete in themedical equipment market that supplies big hospitals are leading US manufacturer GE Healthcare (currently with 40% of thetotal market), theGerman conglomerate Siemens, also with 40% of market share, and leading Dutch multinational Philips, with theremaining market share of 20%. Meanwhile, GSK Europharm announced that itwill produce adrug used to treat HIV-AIDS in Brasov, north-west of Bucharest by theend of theyear. Thedrug will be scheduled for export asof thefirst quarter of 2011 after theconclusion of all registration procedures. Themedicine is thesecond product to have its production transferred from other GSK manufacturing plants to thefacilities based in Romania. Stabilisation measures delay industrial upturn Following theinitial post-1989 recession and recovery, theclosure of loss-making plants in themid-1990s contributed to afurther decline in industrial output of nearly 30% between 1997 and 1999. Industrial output started to recover in 2000, expanding by 25% between theend of 1999 and theend of 2004. Thegrowth of gross industrial output slowed to 2% in 2005 but recovered strongly in 2006, growing by just under 8%, with manufacturing output increasing by more than 8%. Labour productivity in manufacturing industry rose by more than 10%. There were also clearer signs of changes in thestructure of manufacturing output in 2006, with several sectors recording double-digit rates of growth while others declined.
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Industrial labour productivity continued to demonstrate impressive growth, rising by 9.9% year on year in 2007. In 2009 compared to 2008, theindustrial production (gross series) was lower by 5.5%, caused by thedecrease in extraction (-12%) and processing industries (-6.5%). Declining sectors tended to experience falls in labour productivity asfalls in output were not accompanied by equivalent falls in employment, indicating that further restructuring and areduction in theindustrial labour force can be expected in thefuture. Industrial production (adjusted for seasonality and thenumber of working days) rose by 0.1% month on month and by 4.9% year on year in August 2010, and by 4.1% year on year in thefirst eight months. Adjusted manufacturing output remained flat in August 2010 compared with July 2010, but rose by 6.2% year on year. Construction Theconstruction works have doubled in volume terms in 2008 compared to thebase level reached in 2002-2006, but in themeanwhile, asaresult of theeconomic downturn, thesector has lost ground. Yet theactivity in January-August 2010, asestimated by thestatistics offices index, remains 25% above thelevel in thesame period of 2006. Theoutlook for thesector remains however rather bleak for now and theconstructions activity might return to thebase level of 2006 unless thekey drivers see major changes in thecoming quarters (2010-2011). If theconstraints for thesectors developments were until late 2008 in thesupply side and to certain extent in theenvironment region, while thedemand drivers were strong and positive, thegeneral outlook has changed dramatically meanwhile. Strong demand for all kind of construction works have pushed up theprices paid by developers (government included) for financing and to contractors and by contractors for construction materials and labour. Theconstraints came in theform of production capacities, workforce available and formal contracting of loans. After theglobal financial sector crisis and thefinancial inflows evaporated, in line with theexternal demand and thehopes for fast growth rates everywhere, theconstraints moved in thedemand region; serious constraints remained however related to theenvironment which seem to be neutral to thegrowth
cycle and hinders all kind of processes from thejudicial procedures (litigations) to administrative procedures (permits) and financing procedures particularly when itcomes to funds from theEU budget. Thestructure of theconstruction market has changed only slightly from 2006 to 2008, while its total value nearly doubled. Speaking of thenarrow segments of themarket however, there might be dramatic changes from 2006 to 2008. Themoney spent for theconstruction of collective residential buildings (blocks of buildings) surged by 3.4 times to nearly EUR 1.8bn. On theother hand, thefunds earmarked for theconstruction or upgrade of airports (this section do not include theairports buildings) shrunk by 40% to only EUR 9mn. Thediscrepancy reveals thedifferent involvement of theprivate sector (collective residential buildings) and state (administration, airports) in theconstruction market, asinvestors. Theconstructions market will shrink by 30-40% y/y in 2010 from EUR 12.6bn last year to stagnate at thebest next year, according to theline association of construction companies ARACO. Themarket will not return to high growth rates sooner than 4 to 5 years, according to ARACOs expectations. Theconstruction firms blame thelack of financing, and thelack of public financing in particular. Smoothing thetrend to iron out theeffects of theVAT rate hike which took place on 1st July 2010, theconstruction activity remains slightly below thelevel of 2007 - which is neither unexpected, nor particularly bad. Thedynamics of new constructions remains particularly negative asvery few projects are started in 2010 and thebulk of theactivity is generated by constructors striving to complete sections of old projects. Thescarce financing in both public and private sector remains themain downward driver for thesector. Prospects for thefuture thus depend on thegovernments ability to resume infrastructure works and make its due payments to constructors, aswell on theresumption of thebank financing of EU-funded infrastructure projects. Thereal estate market is expected to linger for thecoming years except for thegovernments announced plan for building homes in therural area for school teachers and medical doctors. Basically, theactivity in constructions lost dramatically ground since itpeaked in early 2009 but itis still at ahigh level compared to theaverage of 2000-2006.
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Theshare of those who report lowering number of contracts was 50-60% higher than those that report rising number of contracts since last fall which means that thepessimist ones were in therange of 75% to 80%. Financial services Throughout the1990s state banks continued to grant soft credits to loss-making industries, and thefinancial sector was rocked by asuccession of scandals that affected thesavings of large numbers of thepopulation. Privatisation and restructuring of thebanking sector started late, in 1998, with thesale of thestates holding in theRomanian Development Bank (BRD) to Socit Gnrale (France); thelatter increased its holding further in November 2004. Thesale of BRD was followed by thedisposal of thestates share in Banc Post, and theagricultural bank, Banca Agricola. Thesecond-largest bank, Bancorex, was placed under administration in 1999 and was absorbed by Banca Comerciala Romana (BCR). Theprivatisation of BCR was acondition of thestand-by agreement with theIMF secured in October 2001, but proved difficult to accomplish. Thegovernment finally announced thesale of a61.88% stake in BCR to Erste Bank of Austria in December 2005. Erste Bank acquired thegovernments holding of 36.88% and a25% share previously held by theEuropean Bank for Reconstruction and Development (EBRD) and theInternational Finance Corporation (IFC, theprivate-sector arm of theWorld Bank Group) in October 2006 for 3.75bn (US$5bn), of which 2.2bn went to thegovernment. Asaresult, theshare of stateowned banks in total net banking sector assets has fallen from 75% in 1998 to 7.5% in 2006. Erste Bank, which has extensive operations in central Europe, has announced plans for amajor reorganisation of thebanks activities. In asetback to thefurther reform of thesector, thegovernment announced in December 2006 that ithad cancelled plans to sell a69.9% stake in theState Savings Bank (CEC), astheonly bid received was lower than expected. Romania has developed arelatively well regulated financial market. Although theglobal economic crisis has highlighted vulnerabilities and hit thefinancial services industry, thebanking sector is stable. At just below US$125 billion (Eur 78.5 billion) in 2009, banking assets in Romania are greater than those in Bulgaria (US$52 billion) and Slovakia (US$76 billion), but smaller than in theCzech Republic (US$230 billion) and Hungary (US$154 billion). Thebank sector penetration ratio (total assets asapercentage of GDP) was around 78% in 2009, and therefore lags behind theEU average. Itis also much lower than in leading
east European economies such asHungary and theCzech Republic, where banking sector penetration is above 100% of GDP. Thebanking sector remains relatively concentrated. Thetop five commercial banks BCR, BRD, Volksbank, Alpha Bank and CEC Bank account for more than half of thetotal banking sector assets, while theten largest banks hold around 80% of thesectors assets. BCR has adominant 19% market share. Theremaining banks are rather small and further consolidation is expected. Foreign-owned banks account for 86.1% of theshare of assets (data asof June 2010) and have expanded their retail operations by means of intra-group loans, with credits frequently denominated in foreign currencies, making households and companies vulnerable to currency depreciation. Theaverage capitalization of Romanian banks is 14%, significantly above thestatutory minimum of 8% and the10% undertaken in theVienna agreement and bank supervision is tight. Under the2009 Vienna agreement, thenine largest foreignowned banks operating in Romania committed to maintain their exposure and strengthen thecapitalization of their subsidiaries. However, Greek-owned banks may reduce their exposure to theRomanian market to build up their domestic capital bases. Household demand for credit has risen rapidly in recent years, although itis still at abasic level, and therange of financial products held by Romanian consumers is fairly narrow. Nominal lending to theprivate sector grew by 60% in 2007, but moderated to a34% expansion in 2008, owing to theonset of theglobal financial crisis. In 2009 thecrisis curtailed credit growth, which grew by just 0.9% year on year, to less than Eur 50 billion. After registering negative y/y growth every month in January-April 2010, nominal lending to theprivate sector turned positive in May and June, growing by 2% and 6%, respectively, owing to arise in foreign-currency-denominated loans (leudenominated lending continued to decline). Theleasing sector has been afast-growing, although small, component of thenon-banking financial sector in recent years, but has been hit hard by theeconomic crisis. Thevolume of financing extended by leasing companies decreased by 30% y/y to Eur 543.7million in H1 2010, according to ALB Romania association. Besides theweaker activity this year, theleasing firms have to deal with increasing number of bad debtors under thecircumstances of intricate legal procedures. TheALB statistics cover thewhole market, even if theassociations members
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account for only 91% of thefinancing extended in thefirst six months of 2010. Thefinancing was mainly directed for transportation means - 62%, out of which 57% was for passenger cars. Other segments financed by theleasing companies were industrial equipment (20%) and real estate (18%). TheRomanian insurance market is underdeveloped in terms of thelimited range of products on offer and risks covered, including buildings, liability, motor, marine, aviation, shipping and agriculture at thecommercial level. Themarket is dominated by motor, life, health and home policies. However, itis one of thelargest untapped insurance markets in Eastern Europe, and before theeconomic crisis, ithad been experiencing extremely rapid growth rates, with gross premiums averaging growth of more than 25% per year in 2003-08. Romanian accession to theEU brought foreign insurers to themarket in larger numbers, and theintroduction of mandatory house insurance in 2008 has been aspur to themarket. Theinsurance market is expected to stagnate in 2010, when we forecast further modest negative growth in Romania, but is expected to grow robustly over themedium term. Over thepast five years theinsurance market has come to be dominated by international groups such asVienna Insurance Group (VIG; Austria), Uniqa (Austria), Allianz (Germany), ING (Netherlands) and AIG/Alico (US). Thetop ten companies account for around 80% of gross premiums in local currency terms, and thetop five hold more than 50%. Thepension market regulator CSSPP data shows net assets of mandatory pension funds (Pillar II) reached Eur 0.9 billion at theend of September 2010 and thenumber of contributors reached 5.11million, while voluntary pension funds (Pillar III) have assets of Eur 70million and 211,800 contributors. Thetotal assets held by Romanias private pension funds are expected to top Eur 1 billion by theend of this year. Abill on private pensions will be finalized and sent to Parliament for debates by theend of 2010 or early next year and abill setting up aguarantee fund for theprivate pension system is to be sent to thegovernment for approval by theend of October. Private pensions are increasingly more profitable, theRomanian Association for Privately-Managed Pensions (APAPR) announces. Theaverage annualized yield of theprivate pension funds amounted to 13.3% per cent for Pillar II and 10.2% for Pillar III, in thefirst nine months of theyear, according to arelease by APAPR.
Stock exchange TheBucharest Stock Exchange became operational in 1995, having anelectronic system allowing online trading of stock, fixed-income securities, money market instruments, rights and warrants. Itis themain market for listed securities. RASDAQ, thesystem for over-the-counter share sales, was launched shortly after in 1996. TheBSB absorbed in 2005 theRASDAQ securities exchange, thus providing greater liquidity and choice to potential investors. Prior to thecrisis in 2008, theBSE witnessed important growth in activity. Considering both theBSR and RASDAQ, themarket capitalization declined from 45.4 billion USD at theend of 2007, to 20.6 billion USD at theend of 2008. TheBET index, representing thevalue of theten most liquid shares, fell by 70.5% over theyear, to 2,901 at end-2008, and theBET-FI index (thefinancials index, which measures thegrowth of thestate investment funds) fell by 84%, to 12,549. TheBET sank to alow of 1,887 in late February 2009, then recovered to 4,691 at end-2009. However, this still left theindex far short of its peak of 10,814, set on July 24th 2007. Therally lifted themarket capitalization of theBSE and RASDAQ exchanges to 31.5 billion USD at theend of 2009. This equates to 19.5% of estimated 2009 GDP, which is still some way below theaverage of 25% for 2005-07. Thecrisis brought adecrease of theexpansion page, with fewer foreign investors on themarket. TheBSE composite index had grown more than ten times between end-2000 and end-2006, while theBET-FI grew fifty times, and theBET index grew fifteen times over this period. In thefirst four years of thetwenty-first century, Romanias BET Index was thebest-performing stock market index in theworld.
8. Industrial Parks
Industrial parks in Romania have been promoted through government ordinance no.65, approved by Law no.490 in July 2002, astheauthorities showed serious commitment to boosting business investments into theRomania. Thetitle of industrial park is granted by anorder of theMinister of Development and Prognosis pursuant to assessing thedocumentation lodged only by apartnership. Establishment of anindustrial park is based on theassociation in participation, between central and local public administration authorities, economic agents, research institutes and/or other interested partners. Thepurpose of setting up industrial parks is to stimulate economic and social development, to perform thetransfer of technology, to induce investment inflows.
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Industrial park license may be granted only to companies acting solely in theindustrail parks field, called themanaging companies (Administrator Company). None of thebusiness entity associates that use theutilities and/ or infrastructure of theindustrial park may hold control, directly or indirectly, over theAdministrator-Company. Theexploitation of industrial parks may be performed by Romanian legal entities and branches or representative offices of foreign legal entities, based on commercial agreements concluded with theAdministrator-Company. Thefollowing benefits are granted for establishing and developing anindustrial park: Exemption from thepayment of fees charged for changing thepurpose or for withdrawing theland related to theindustrial park from theagricultural circuit, for thepartnership holding thetitle of industrial park. Thelocal authorities may grant tax deductions, pursuant to decisions of thelocal or county councils, for thereal estate properties and lands transferred to theindustrial park for usage purposes, aswell asother facilities, in accordance with thelaw. According to article 257 (1) in theFiscal Code, no tax is levied on theland inside anindustrial park, and pursuant to article 250 paragraph 9 in theFiscal Code, there is no tax levied on thebuildings or facilities inside industrial parks either. Theinitiative was in line with other incentives, mostly fiscal, which Romania has sought to provide, in recent years, to small and medium sized enterprises or to certain types of economic activity in areas identified asdisadvantaged or in free trade zones. In early 2009, Romania housed over 91 industrial parks completed and other 20 in advanced stages of construction. More and more companies show interest in such parks, because of thevariety of fiscal facilities. In 2009, theexisting industrial parks spread over anarea of 1,600 hectares. In order to fully develop anindustrial park, aninitial investment is needed which may vary from EUR 10 Mil up to 30 Mil, however theprojects may easily and rapidly attract investments of up to 250 Mil Euro. TheRegional Operational Program 2007-2013 grants funding over 633 Mil Euro for thedevelopment of business structures locally and regionally. Industrial parks can be included for applications.
Romanias attractiveness for investment is boosted by: one of thelargest markets in Central and Eastern Europe; its strategic geographic location at thecrossroads of thetraditional commercial and energy routes connecting theEU, Asia and theBalkans; extensive sea and river navigation facilities; awell educated yet cheap labour force; and anextensive network of double tax treaties. Upon thecountrys accession to theEU on 1 January 2007, Romania took steps to strengthen tax administration, enhance transparency, and create legal means to resolve contract disputes expeditiously. Its membership has also helped solidify institutional reforms by subjecting government policies to EU scrutiny and thus offering reassurance to potential investors. However, judicial weakness, legislative unpredictability, corruption and bureaucratic inefficiencies, among others, continue to mar theinvestment environment. Capital inflows are free from constraint. Romania concluded capital account liberalisation in September 2006 with thedecision to permit non-residents and residents abroad to purchase derivatives, treasury bills and other monetary instruments. Abroad range of (both tax and non-tax) investment incentives is available to local and foreign investors. Tax incentives include tax exemption for reinvested profit, special incentives for expenses related to R&D, dividend tax exemption for reinvestments, reduced VAT rate of 5% for thesale of buildings and local tax exemptions for businesses located in industrial parks or scientific and technological parks. In addition, there are employment incentives for special categories, aswell asstate aid schemes for large investments. Aprivate investor in Romania may benefit from business aid from EU funds (structural and cohesion); incentives often take theform of development grants. Romania has six Free Trade Zones (FTZs), all located in ports with one exception, thenewly established Arad-Curtici FTZ. Because of its location, thelatter could become one of themost attractive for investors. General provisions include unrestricted entry and re-export of goods and anexemption from customs duties and VAT. Thelaw also permits theleasing or transfer of buildings or lands for terms of up to 50 years to corporations or natural persons, regardless of nationality. Foreign-owned firms have thesame investment opportunities asRomanian entities in FTZs. Since 1 January 2007, theEuropean Community Customs Code applies to Romanias FTZs.
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Romania

Romania actively seeks FDI and ithas been aleading FDI recipient in South-Eastern Europe. Thecountrys legal framework for FDI, encompassed under asubstantial body of law subject to frequent revision, provides national treatment for foreign investors, guarantees them free access to domestic markets, and allows them to participate in privatisations. Foreign investors are entitled to establish wholly foreign-owned enterprises in Romania, while there is no limit on foreign participation in commercial enterprises. Foreign firms are allowed to participate in themanagement and administration of theinvestment, aswell asto assign their contractual obligations and rights to other Romanian or foreign investors. There are no restrictions on foreign investors acquiring property or land. However, for atransition period of seven years after Romanias accession to theEU, foreign investors cannot purchase agricultural land or forests and forestry land (except for farmers acting ascommercial entities). TheRomanian Agency for Foreign Investments (ARIS) is thegovernmental body responsible for attracting FDI, providing specialised assistance to potential investors, and identifying and promoting priority investment fields and opportunities. Moreover, thegovernment has set up regulations to support investments, e.g. theauthorities issued theEmergency Government Ordinance 85/2008 on stimulation of investments aimed at supporting investments in thedevelopment of certain economic areas, taking into account Romanias development priorities, focusing particularly on those regions which attracted fewer investments in thepast to ensure abalanced territorial development. Foreign direct investments reached EUR 3.4 billion in Romania in 2009, according to data from theRomanian Central Bank (BNR), taking theentire stock of FDI to thecountry to almost EUR 50 billion. Themanufacturing industry was one of themain targets, with 31 percent of theinvestments. Oil, chemical products, plastics, metallurgy, transport industry, food and beverages industries, cement, glass and ceramics were among thetarget sectors for foreign direct investments. Thefinancial sector attracted 19 percent of theFDI, real estate and constructions, 12.9 percent, retail 12.3 percent and IT&C, 6.5 percent, according to BNR. Bucharest got more than half of theinvestments, with thecenter, south, west and south east of thecountry ranging from 5.9 to 7.4 percent of theFDI.
TheNetherlands was themain country of origin for foreign investments in Romania in 2009, with 21.8 percent of theFDI, followed by Austria, Germany, France and Greece. Companies which run based on foreign investments made a69 percent contribution on exports, while covering 60 percent of imports. TheNBR study covered 6,000 companies which run with foreign direct investments. Foreign direct investments to Romania fell 36 percent to EUR 1.9 billion in thefirst seven months of 2010, from EUR 2.9 billion during thesame period of last year, according to data from theRomanian Central Bank.
11. Expatriate Life

For travelers, Romania offers theopportunity to see genuinely wonderful places, to meet wonderful people, to experience thelast frontier-land in Europe. Romania is famous for its wellpreserved historical buildings and monasteries and thenatural beauty of theCarpathians Mountains, theDanube Delta and theBlack Sea. Bucharest, thecapital of Romania, is atrue European city, overwhelming in thebrilliance of its edifices. Romania is less expensive than other European countries and offers for expatriates awide range of international schools, fine cuisine restaurants, tasty wines and entertainment facilities. Regarding theaccommodation in Bucharest and other major cities in Romania, theexpatriates and their families may rent from centrally-located spacious apartments to villas located in residential areas.

Romania has atemperate climate with four distinct seasons. Spring and autumn are cool and pleasant, making May and June, and September and October thebest months to visit. Summers are hot from July to August and winters are harsh and very cold between December and March, with snow falling throughout most of thecountry. Spring and summer are thewettest seasons, but rain can be expected throughout theyear.
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Slovakia

TheSlovak economy has undergone very dynamic development for last 5 years. Slovakia has been praised for theimplementation of significant economic reforms. Stability in thefinancial sector, integration into NATO and EU, continuous improvement of business environment with many progressive reforms, such as: theintroduction of aflat 19 % (20 % from 2011) corporate and personal income tax, theimplementation of flexible labour code, launching pension reform, thecompletion of privatization process, continuous state support towards foreign investment, etc. have helped theSlovak economy speed up its economic growth. Steady inflow of FDI, proves that thecountry has become afavorite destination for foreign investors. This is especially true in theindustrial sector, which saw ahuge inflow of FDI during thelast couple of years. Everything changed in 2008, when crisis had come. Real GDP is growing at around 2,7 per cent for 2010, exports are expanding steadily and domestic demand was hit by crisis. Thecurrent account deficit has returned to amore sustainable level ascompared to years before. Euro was set in 2009. Wages are rising in line with productivity, keeping inflationary pressures under control. Rapid acceleration in thegrowth of exports and imports will occur asmajor car plants and other foreign investment are constructed and then come online. Given this performance and Slovakias future outlook, some have dubbed Slovakia theTatra Tiger, whose EU funding, reforms, low cost labour and low taxes could help lead to strong growth for years to come. Political system Slovakia is aparliamentary democracy with aunicameral Parliament, theNational Council. Slovakias highest legislative body is the150-seat unicameral National Council of theSlovak Republic (Nrodn rada Slovenskej republiky). Delegates are elected for afour-year term on thebasis of proportional representation. TheCouncil has budgetary aswell aslegislative powers. TheSlovak head of state is thepresident, elected by direct popular vote for afive-year term. Although mostly aceremonial figure, thePresident cn use his veto to stop legislation proposed by theNational Council. Most executive power lies with thehead of government, thePrime Minister, who is usually theleader of thewinning party. ThePrime Minister is appointed by thePresident. Theremainder of thecabinet is appointed by thePresident on therecommendation of thePrime Minister.
A13-member Constitutional Court has power to challenge legislation on grounds of unconstitutionality.
2. Tax Structure
Tax administration Registration Requirements Theentity or individual that obtains license to perform or starts performing business activities in Slovakia is obliged to register at relevant tax authorities within 30 days. Statutory time limit to assess additional tax TheSlovak tax law allows theTax Authorities to review tax periods, five years from theend of thecalendar year (atax period) in which thetax return should be filed. If, prior to theexpiration of such time limit theTax Authorities initiates anaction having asits aim theassessment of tax, another period of 5 years commences from theend of theyear in which thetaxpayer was notified of such anaction. In this case, thetax may be additionally assessed no later than 10 years after theend of thetax period in which theduty to file atax return arose. In cases when double tax conventions were applied, thestatute of limitation expires after 10 years from theend of theyear in which thetax return was due. Tax returns Generally, thetax year coincides with thecalendar year. Thetaxpayer can elect aneconomic year astheir tax year for corporate taxes. For certain types of taxes (for example VAT, excise duties) thetax period is acalendar month or acalendar quarter. Corporate income taxes are assessed on thebasis of annual returns, which must be filed within three months following theend of thetaxation period. Thetaxpayer must also calculate and pay thecalculated tax by thefiling date. Thetaxpayer must file anadditional tax return, if hefinds out that thetax liability is higher than that declared in thetax return. Corporate Income Tax Corporate Income Tax Rate Thecorporate income tax rate is 19 %. Calculation of theTax Base Tax is paid on taxable profit derived from theprofit reported in thefinancial statements according to Slovak Accounting Standards and adjusted for deductible and non-deductible items. Thetax base of taxpayers using thedouble-entry bookkeeping system is assessed on theaccruals basis. For taxpayers applying theIFRS instead of Slovak Accounting Standards, further adjustments are required.
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Generally, expenses recorded by thetaxpayer are tax deductible if they can be proved to have been spent on attaining, ensuring and maintaining taxable income, unless they are: partially deductible up to acertain limit determined either by theITA or by aspecial law (for example theAct on Travel Expenses) ; or specifically stated asnon-deductible in theSlovak Income Tax Act. Few expenses are deductible only after being paid. Advance Payments For corporate income tax purposes, advance payments are required on amonthly or quarterly basis, depending on theamount of thecompanys tax liability in theprevious tax period. They are paid on amonthly basis if thetaxpayers tax liability for theprevious tax period exceeded EUR 16,596.96 or aquarterly basis if itranged between EUR 1,659.70 and EUR 16,596.96. Thetax administrator can rule on adifferent payment of advance payments. Tax Credit In general, tax credit is available in theSlovak Republic in theform of areduction of thecorporate tax liability. They provide thetaxpayer with atax relief of 100% for 10 years, but up to theamount approved up front. In summary, only entities resident in theterritory of theSlovak Republic that meet thecriteria specified in thelaw are eligible for thetax credits. Ithave to be reconciled by theSlovak authorities, itis apart of investment incentives. Thecriteria include: Certain amount and type of investment; Investing in specific underdeveloped regions; etc. Transfer pricing Thetransfer pricing rules apply to cross-border transactions between economically, personally or other business related foreign entities. Aneconomic relationship is defined ashaving more than a25% direct or indirect ownership or voting rights aswell asabusiness relationship between related individuals, aslegally defined. Apersonal relationship is defined asaparticipation in management or control of theother party, also through persons or shareholders of thecompany and their related individuals. If thedifference between theprices agreed between theSlovak entity and aforeign related party and thearms length price is not sufficiently justified (and supported by appropriate documents), such adifference will be subject to additional taxation and penalties, provided thetransfer pricing adjustment increased thetax base in Slovakia.
Theadjustment will be determined with reference to theconditions, which would arise among independent persons in asimilar business or financial relationship (theprinciple of independent relationship). Thefollowing methods are used to determine theadjustment: acomparison of theprices (themethod of comparable uncontrolled prices, resale price method, cost plus method); acomparison of profits; acombination of theaforementioned methods or any other reasonable method, which is in accordance with theprinciple of independent relationship. Thetransfer pricing documentation is required on the: managers services purchase of stocks and material, loans and within thegroup. Thepurpose of thetransfer documentation is to record thepricing methodology of thetaxpayers non-arms length transactions, including its relationship with therelated parties, theprices for services, loans and credit granted. Thedocumentation should demonstrate that thepricing of theControlled Transactions are in compliance with thearms length principle. Thedocumentation content depends on thecircumstances and conditions applicable to individual Controlled Transactions1 of thetaxpayer and thetransfer pricing method employed. Thedocumentation should be prepared separately for each Controlled Transaction or jointly for agroup of Controlled Transactions, i.e. several Controlled Transactions that are closely related, are of thesame kind, have been made under identical conditions or are comparable from afunction and risk perspective. There are two types of reporting requirements, depending on thetaxpayers financial reporting. TheFull Documentation requirement is applicable only to IFRS reporters and theSimplified Documentation requirement is applicable to non-IFRS reporters. If documentation is not submitted when required, apenalty of up to EUR 33,000 per request may be assessed. Penalties are not tax deductible. If thedocumentation is not provided, thetax authorities will also perform their own economic analysis and may adjust theprice to themost unfavorable point of thearms length range. Adjustments may result in additional tax with applicable penalties and late payment interest. During atax audit should thetax authority request thetransfer pricing documentation, thetaxpayer is obliged to submit such documentation within 60 days from thedate of therequest. Thetransfer pricing documentation should be submitted in theSlovak language. However, upon thetaxpayers request,
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thetax authority may allow that thetransfer pricing documentation be submitted in alanguage other than theSlovak language. Thin Capitalization There are no thin capitalization rules in Slovakia. Tax Treatment of Losses Tax losses are deductible from thetax base. Thetaxpayer may utilize incurred tax losses within maximum five consequent taxation periods after thetaxation period, in which thetax loss was declared. Losses may not be carried back. Losses after 2009 could be utilized for maximum 7 years. Depreciation Generally, fixed assets are depreciated for tax purposes by theowner or lessee of thetangible or intangible fixed asset. Intangible Fixed Assets Intangible assets are capitalised and depreciated if thevalue of theintangible is more than EUR 2,400 and if their expected useful life exceeds one year, and if they were purchased or created by anactivity of thetaxpayer for thepurposes of its trade. Theintangibles specified above can be depreciated in accordance with theSlovak accounting rules. Tangible Fixed Assets Tangible assets are capitalised and depreciated if their value is more than EUR 1,700 and if their expected useful life exceeds one year. Tangible fixed assets are divided into four categories for depreciation purposes, and for each category, aperiod of depreciation is prescribed, asset out in below: Depreciation Categories Category Period of depreciation (Years) 4 6 Type of assets
ACompany may choose to depreciate assets either by using thestraight-line or theaccelerated method. Once themethod for each asset has been selected, itmust not be changed for theentire period of depreciation. Theaccelerated method allows for higher depreciation claims in theearly years of anassets life. Itis possible to interrupt thetax depreciation of tangible assets in some taxable periods and then continue asif thetaxpayer had not interrupted depreciation. In this way, thetime period when thefixed assets are fully depreciated for tax purposes is prolonged. Withholding Taxes Withholding taxes are paid on interest, royalties and other payments such ason lease rentals. Double Tax Treaties concluded by Slovakia with anumber of countries normally reduce withholding tax rates. Treaty rates can be applied directly. If theinterest and royalties are paid to residents of other EU member states and certain conditions are met such payments are not subject to withholding tax. Dividends Dividends paid asdistribution of profit after tax are not subject to any Slovak taxation. Collateral tax If theSlovak tax resident (company or individual) makes payment abraod (except for payments made to thetaxpayers of theEU Member States) and these payments relate to Slovak source income, theSlovak tax residents are then obliged to withhold 19% of payments, unless thepayment is subject to withholding tax, or unless thenon-resident taxpayer submits aconfirmation issued by theSlovak tax administrator that heis paying advance tax payments in Slovakia. Thetaxpayer is obliged to remit withholding taxes within 15 days of thefollowing month for theprevious calendar month to therelevant tax authority. If thetaxes are not paid on time or in anincorrect amount, thetax authorities may claim thedue tax (including penalties) from theSlovak taxpayer that did not comply with thelaw. Considerations for Groups Tax law does not provide for consolidated tax returns. At present, each company must file its own tax return and pay its own taxes. Losses can be deducted only from thetax base of theentity that incurred theloss.
1 2
computers, cars and certain tools etc. machinery and equipment, furniture, vehicles for special purposes, etc. production equipment, e.g. steam boilers and auxiliary equipment etc. pipelines, buildings of timber construction, other buildings, etc.
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20
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Slovakia
Value Added Tax Registration All individuals or legal entities, which perform economic activities in Slovakia, are regarded astaxable persons. Thetaxable person with theseat, place of business or permanent establishment in Slovakia is obliged to register for VAT after exceeding turnover of EUR 49,790 within 12 preceeding consecutive calendar months. In general, theturnover consists of all performed taxable supplies in Slovakia. Taxable person can apply for thevoluntary VAT registration. Aforeign entity without registered office, place of business or permanent establishment in Slovakia performing taxable transactions with aplace of supply in Slovakia is obliged to register for theSlovak VAT before themoment of starting abusiness activity subject to VAT in theSlovak Republic with some exceptions e.g. (when theVAT obligation is shifted to thecustomer.) VAT Rate Thestandard VAT rate in Slovakia is 20%. TheSlovak parliament has recently approved theincrease of thestandard VAT rate from 19% to 20%. This new VAT rate should be effective asof 1 January 2011 and should be used until our fiscal deficit is less than 3% of GDP (3 years probably). Asof January 2007 theSlovak VAT Act introduced areduced VAT rate of 10%. This reduced rate applies only to books, antibiotics, certain pharmaceutical and sanitary products asmentioned in theAttachment 7 of theVAT Act. VAT Returns Thestandard assessment period is thecalendar month or thecalendar quarter (depending on sturnover.) VAT returns must be submitted by the25th day of themonth following thetax period concerned. Where returns are submitted monthly or quarterly, payment in full must accompany thereturn, i.e. VAT for arelevant tax period is payable by the25th day of thefollowing month. Claiming Input VAT In general, thetaxpayer is entitled to deduct VAT applied on goods and services used in course of his business performed asaVAT registered payer. However, input VAT cannnot be deducted from supplies linked with certain supplies, which are VAT exempt without right to deduction and from certain specific purchased supplies, e.g. (purchase and lease of apassenger car, passenger car accessories including their installation, refreshments and entertainment, etc.).
In order to qualify for input VAT deduction, thefollowing conditions have to be met: Ataxable liability arose for thetaxpayer performing business activity; In case of domestic supply thetaxpayer has aninvoice issued by asupplier; In case of reverse charged services and goods supplied with installation or assembly theentry of theVAT in thecompanys records for VAT purposes is sufficient for thededuction; For theacquisition of goods from other Member States thetaxpayer has aninvoice issued by asupplier or thetransfer document in case of atransfer of own goods from another Member State; In case of importation thetaxpayer has theunderling customs declaration and theimport VAT has been already paid to thecustoms authorities. Input VAT that relates to VAT exempt taxable supplies cannot be deducted and becomes anexpense of thetaxpayer. These are for example: Financial services (e.g. including provision of consumer loans); Insurance services; or Supply and lease of real estate under certain conditions. Thesupplies exempt from VAT with theright to deduction. These are for example: Delivery of goods to other Member States to aperson registered for VAT in another Member State; Transfer of own goods by ataxable person to another Member States for his business purposes; Theinternational transport of passengers; Export of goods or services, VAT deduction Therefund of VAT happens under normal circumstances automatically in Slovakia. Theprocedure is that if taxpayer is in aVAT refund position for acertain month (month A), thetax authority will wait for theVAT position of thefollowing month (month A+1) and off set theVAT due (month A+1) against thedeductible VAT (month A). Theremainder will be reimbursed within 30 days of filing aVAT return for month A+1. If theVAT return is subject to aVAT audit by thetax authority, theexcessive VAT deduction VAT will be returned within 10 days of thecompletion of theaudit.
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VAT refund for foreign entrepreneurs Foreign entrepreneurs without aplace of business, abranch or apermanent establishment registered in Slovakia, which are not VAT registered in theSlovak Republic and incurred Slovak VAT can ask for arefund. If such persons have incurred VAT in Slovakia on thepurchase of goods or services or on theimport of goods, they will be entitled to arefund, provided they meet theconditions laid out in theVAT Act: They are VAT registered in thecountry of their establishment; Their country of establishment gives VAT refunds to Slovak entities (reciprocity principle); Thegoods or services purchased or goods imported must be used for theforeign entrepreneurs business activities abroad. During theperiod for which theVAT refund is claimed theforeign person must not have made any sales of goods or supply of services within Slovakia (with certain exceptions, e.g. transport services and complementary services relating to exported goods and goods under acustoms regime, asupply of goods with installation or assembly). Therefund can be claimed not later than six months after theend of thecalendar year, in which VAT was incurred. Generally, VAT shall be refunded within six months of thesubmission of theapplication. Customs legislation AstheSlovak Republic is amember state of theEuropean Customs Union, thecustoms legislation of theEU is directly applicable in theSlovak Republic aswell asin theother EU Member States. Thecustoms duties for goods are also unified in all EU Member States. Customs code allows theuse thefollowing customs regimes when trading with third countries: release into free circulation; transit regime; customs warehousing; inward processing of goods; processing under customs control; temporary admission; outward processing of goods; export of goods.
Taxation of individuals Slovak tax residents are liable for personal income tax on their worldwide income. Slovak tax non-residents are liable for personal income tax only on Slovak source income. Any individual with apermanent home registered in Slovakia or who spends in Slovakia more than 183 days in acalendar year is considered aSlovak tax resident. Aperson commuting to theSlovak Republic on aregular basis (even daily) only for thepurpose of performing dependent activities is not considered aSlovak tax resident solely because hespends more than 183 days here, i.e. 183-day rule does not apply to commuters. Theconcept of economic employment was introduced from 1 January 1999 and also applies to employees seconded by aforeign company to aSlovak company. Itis no longer important in relation to income tax prepayments whether itis aforeign or adomestic employer that pays aforeign employee for his or her work. If aSlovak company issues orders regarding how thework should be done, itis considered to be theemployer of theexpatriate even if theexpatriate receives salary from abroad. Theeconomic employer has aduty to make income tax prepayments to theTax Authorities toward theforeign individuals Slovak personal income tax. Personal income tax of 19% applies on thetax base. Thetax base is calculated asthegross salary decreased by themandatory employee social security contributions and also thetax deductible allowances. Social Security Contributions Thesocial security system in Slovak consists of social security contributions and health insurance contributions. If theindividuals are on theSlovak payroll, themonthly social security withholding is done by theemployer on themonthly basis.
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Slovakia
Thesocial security contributions in Slovakia are relatively inexpensive and are capped asfollows: Insurance System in Slovakia Old-age Insurance* Sickness Insurance Disability Insurance* Accident Insurance Health Insurance Unemployment Insurance Reserve Fund Guarantee Fund TOTALS
* old-age and disability = pension Source: Deloitte Slovakia, 2010
Assessment Base Min (EUR) 307.7 307.7 307.7 307.7 307.7 307.7 307.7 307.7 35.2 Max (EUR) 2978 1116.75 2978 gross income 2978 2978 2978 1116.75 13.40 Employer (%) 14.00 1.40 3.00 0.80 10.00 1.00 4.75 0.25 47.15
Contributions% Employee (%) 4.00 1.40 3.00 Self-employed (%) 18 4.4 6
4.00 1.00 4.75
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Local Taxes Local Taxes include various payments (real estate tax, dog tax, accommodation tax, etc.) administered by municipalities. Themost important tax is real estate tax, which is assessed on land, buildings and flats (hereinafter real estate). In general, theowner of real estate is thetaxpayer of thereal estate tax. Anannual tax return must be filed by 31 January of thecurrent tax period. No other tax return must be filed unless theconditions decisive for thelevy of thetax are changed (e.g. change of type of land, sale of property) or if thetaxpayer applies for anexemption from tax. Thetax administrator (municipality) assesses tax by 15 March each year. Usually, thetax is due on 31 March. However, itis possible to agree with municipality on payment of tax in several installments. Thetax base is determined based on thearea of land in square meters (in thecase of land tax) and/or thearea thebuildings cover (in thecase of tax for buildings) and thebasic tax rate. Thetax base for land and buildings is determined based on thestatus of property owned asof January 1 of therelevant tax period. Theindividual tax rates and coefficients are declared annually by individual municipalities and can vary greatly.
3. Legal Entities
Asaresult of thedecisions made aspart of aforeign investors structuring of aninvestment, some legal form of doing business in Slovakia must be established. Themost common legal form of conducting business in theSlovak Republic is via thelimited liability company (hereafter LLC, spolonos sruenm obmedzenm, s.r.o.) and thejoint stock company (hereinafter JSC, akciov spolonos, a.s.). Both types of these legal entities provide theinvestor with limited liability in theSlovak Republic, however there are differences, which theinvestor should be familiar with. There is also theoption to create ageneral partnership (verejn obchodn spolonos, v.o.s.) and alimited-partnership company ( komanditn spolonos, k.s.). Limited Liability Company Theminimum registered capital of aLLC is EUR 5,000. ALLC can be established by asfew asone shareholder or asmany as50 shareholders. Acompany with one shareholder may not be thesole founder or thesole owner of another company. While this provision may complicate aSlovak holding structure itcan be dealt with rather easily. ALLC is anadministratively easy entity to operate. One executive who is appointed initially in thefoundation deed or memorandum of association can then represent theLLC alone.
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Thus, aformal board of directors is not needed. In addition, there is more flexibility regarding theallocation of profits and distribution of cash among owners. Joint Stock Company Theminimum registered capital of aJSC is EUR 25,000 divided over anumber of shares with certain value. Slovak law recognizes private and public JSCs. JSC can be created by one shareholder, provided that such shareholder is alegal entity. Thetotal number of shareholders is in general unlimited. Theadministrative obligations of aJSC are more complex than those of aLLC. For example, thestatutory body of aJSC, theBoard of Directors (BOD), has to be created. In addition, aJSC must create aSupervisory Board, which has acertain level of control over theBOD. Last but not least, aJSC does not have much flexibility regarding thedistribution of cash, asitmust be done with respect to theshareholders. General partnership According to theSlovak Commercial Code, General partenership is apartnership, in which two or more parties conduct business under acommon business name and bear joint and several liability for theobligations of thepartnership with all their properties. PLC asapartnership is established for amutual business purpose and ithas to be established by at least two parties natural persons and/or legal entities foreign or local. There is no registered capital requirement (although itis possible to make acontribution) and all partners can represent thecompany. Limited-Partnership Company This is anentity where one or more members are liable up to theamount of their unpaid contribution into theregistered capital registered in theCommercial Register (limited partner) and one or more members are liable with all their property (general partner). In this sense itis amixture between anLimited liability company and aGeneral partnership. Thelimited partner is obliged to make acapital contribution of anamount estbalished by thememorandum of association, minimum EUR 250.
proximity to Vienna and also that itis thecapital city of Slovakia and finally ithas been receiving ahigh inflow of foreign investment heading to theBratislava region. Thelowest salary level belongs to theregions in eastern part of thecountry. Theregion is disadvantaged by its location, poor infrastructure and low volume of foreign investment. Labour Legislation Aspart of any investment in Slovakia, itis natural that theinvestor will eventualy hire some Slovak employees. TheSlovak Labour Code has recently undergone aseries of amendments to make itmore employer friendly but itstill has many provisions designed to protect theemployee. Therefore, before embarking on aprogram to hire any employees in Slovakia, theinvestor must understand thelabour legislation and prepare employment contracts and human resource policies accordingly. Hereby, we discuss some of themost relevant aspects of theLabour Code, although at avery high level. Therefore itis recommended that theinvestor obtains alegal counsel to review this area in more detail. TheSlovak Labour Code governs thearea of employment and industrial relations in Slovakia. Under this code, employment relationship is founded through awritten labour contract between theemployer and theemployee, which represents themutual agreement of thecontractual parties. Thelabour relation is created from theday, which was agreed upon in thelabour contract asthefirst day of work. Theemployment relationship can be concluded for adefinite period of time or for anindefinite period of time. Within thelabour contract, itis possible to agree upon atrial period, theduration of which is maximum three months and cannot be extended; thetrial period must be agreed in writing, otherwise itis not valid. During this trial period, either party can terminate thelabour relationship without ramifications. Generally, theworking time of anemployee in Slovakia is limited to 40 hours aweek. Itis possible to require or to agree with anemployee on some overtime work. Anemployer may (subject to some specific exceptions) require from anemployee additional 8 hours of overtime work per week during aperiod of maximum four consecutive months (if they agree, 12 months). Thetotal overtime work requested by anemployer may not exceed 150 overtime hours per calendar year. Provided there are serious reasons, theemployer can agree with theemployee on anadditional overtime work up to amaximum of 250 hours per calendar year.
4. Labour and Wages

Slovakia still maintains its place asthecountry within Central Europe asthecountry with one of thelowest salary levels. Regarding specific sectors, thetelecommunication and financial intermediaries had thehighest average monthly salary in Slovakia in 2006. Conversely, salaries in thehospitality industry were one of thelowest. Within Slovakia, there is awide gap among salaries levels with respect to individual regions. TheBratislava region has thehighest salary level. Some of thereasons are theBratislavas
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TheLabour Code also specifies theminimum salary conditions for Slovak workers. Theminimum wage is EUR 1.768 per hour {EUR 307.7 per month} and additional increases are mandated for thefollowing conditions: Working hours in Slovakia salary + minimum increase of overtime work work during state holiday night work hazardous heath working conditions
* of employees average salary ** minimum hourly increase for night work and hazardous heath working conditions is calculated from minimum hourly wage of EUR 1.768. Source: Deloitte Slovakia, 2010
25%* 50%* 20%** 20%**
However, Slovakia is still behind theEuropean average with respect to thenumber of university graduates to total number of students. Only about 11% of thepopulation has auniversity diploma, amuch lower percentage than in other developed countries. Compared with 1990, thenumber of university graduates has increased by more than 65%. Many Slovak students are expanding their education skills by studying abroad asEU membership provides ample opportunity for students to study and travel abroad. This way many Slovaks improve their language skills and obtaining valuable international working experience. Young Slovaks are very keen to take advantage of such opportunity and theoverall education levels and language skills of these young students are quite high. Universities Currently, higher education in Slovakia comprises 33 universities, among them 20 public, 3 state including military and police academy and 10 private. Approximately more than 225000 students were enrolled at these universities during in 2004. Asignificant number of university students were enrolled economics and technical faculties. In 2004 there were more than 60000 students at economic and technical faculties in Slovakia.
Thelaw strictly limits reasons for termination of alabour contract from anemployers side by means of awritten notice. Thenotice period is thesame for theemployer aswell asfor theemployee and takes at least two months. If thenotice is given to anemployee who has worked for at least five years for thesame employer, thenotice period is at least three months. Theminimum annual holiday to be provided to employees is four weeks. Any employee who has worked for 15 years or more is entitled to five weeks of annual holiday. TheLabour Code also specifies thelength of maternity leave, which is 28 weeks (37 weeks if themother is asingle parent or gives birth to more than one child). Both men and women are entitled to retirement pension at theage of 62.
6. Infrastructure
Road network Slovakias first and thesecond category roads are in fair condition. While only 415.425 km of highways are currently operational today, thehighway network is currently under construction and is planned to reach about 705.924 km in length by 2017. Current gaps in thehighway connection between Bratislava Kosice are acause for thevast difference in theeconomic development of theeast compared to theBratislava region. These two cities are expected to connect by highway by theyear 2013 through thenorthern corridor and by 2017 through thesouthern corridor. Improvement of thehighway connection between Bratislava and Vienna had been completed 6. Infrastructure in 2007.
5. Education
Before 1989 when Slovakia entered thefree market economy, theeducation system was characterized by astrong focus on technical fields such asmathematics, physics, electrotechnics and chemistry. At that time, theSlovak education system provided anadequate technical knowledge and abundance of graduates in areas such asmechanical and electrical engineering, civil engineering and chemical production, military and energy production for theexisting Slovak economy. Currently, in Slovakia there are about 340 primary schools, within secondary level of education there are 371 high school, middle and associated middle schools, and 37 universities asschools of higher education. In 2005 more than 91% of theSlovak population reached secondary or university education.
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Road network Slovakias first and the second category roads are in fair condition. While only 300 km of highways are currently operational today, the highway network is currently under construction and is planned to reach about 689 km in length by 2010. Current gaps in the highway connection between Bratislava Kosice are a cause for the vast
Road network Slovakias first and thesecond category roads are in fair condition. While only 415.425 km of highways are currently operational today, thehighway network is currently under construction and is planned to reach about 705.924 km in length by 2017. Current gaps in thehighway connection between Bratislava Kosice are acause for thevast difference in theeconomic development of theeast compared to theBratislava region. These two cities are expected to connect by highway by theyear 2013 through thenorthern corridor and by 2017 through thesouthern corridor. Improvement of thehighway connection between Bratislava and Vienna had been completed in 2007. Railway network Therailway network in Slovakia is aresult of 150-years of development in various state and economic conditions and numerous political agendas. From thepoint of view of railway transport Slovakia is atransit country. Main international railways routes have adirect link to rail lines in Slovakia. Many local companies and foreign investors heavily utilize therailway asameans of transport. One of themajor advantages of theSlovak railway network in theEastern part of Slovakia is theexistence of large gauge rail, which is compatible with theRussian network. Air transport There are 15 public airports in Slovakia, however, only theairports in Bratislava, Kosice, Poprad, Sliac, Piestany, and Zilina have international importance. TheBratislava and Kosice airports are by far themost actively used in Slovakia with theZilina and Poprad airports likely to be thenext to develop because of theHyundai-KIA investment in Zilina and theincrease of tourism in themountainous Poprad region. Current trends show asignificant interest for major development of Bratislava international airport. Itis ideally located in atriangle 65 km from Vienna and 193 km from Budapest but for many years, ithas been underutilized. Its recent, rapid growth has been fueled by thelow-cost airline RYANAIR. RYANAIR is based out of Bratislava and ithas direct flights to many major Western European cities such asLondon, Paris, Brussels and Rome. Bratislavas airport was reconstructed in 2010. Water transport Approximately 200 km of Danube River forms thewestern border of Slovakia and thecapital city of Bratislava sits on its banks. TheDanube is thetrans-European artery, flowing 3500 km between theNorthern European states and theRomanian coast of theBlack Sea. In theSlovak section there are two ports Bratislava and Komarno.

Automotive Industry Slovakia, with its 5.4 million people, is expected to produce more than 500,000 cars ayear by 2011 themost of any Central European nation and themost per capita of any country in theworld. Slovakias location in Central Europe, its EU membership, competitive production costs, low taxes and other factors has influenced theremarkable growth in theautomotive sector. According to theAutomotive Industry Association of theSlovak Industry (AAI) asof Feb. 16. 2010, there were approximately 140 Tier 1 and Tier 2 suppliers to theautomotive industry in Slovakia. Currently, there are more than 76,000 people employed in theautomotive industry and itis expected that in next 4 years this number will be more than 80,000. Key players in themarket VW was thefirst automotive manufacturer to enter Slovakia, doing so in 1991 through theacquisition of theSlovak manufacturer of car components BAZ. Up to now thecompany has grown into one of themost sophisticated production plants within theentire VW group. Currently, VW employs more than 8,000 employees and itplans to reach aproduction target of 150,000 cars per annum by 2010/2011. In January 2003, Slovakia emerged asthewinner in aCentral European site selection competition for another major producer. Ajoint venture between PSA Peugeot and Citroen selected thecity of Trnava (cca. 50 km from Bratislava) asthesite to build anew production plant. Thefacility should be operational by theend of 2006. Again in March 2004, Slovakia was chosen over Poland asthesite for athird major car manufacturer. TheKorean company KIA Motors announced that Zilina would be thesite for its first production facility in Europe. The1,1 bn EUR investment is expected to produce 450,000 cars per annum, with atotal employment of 2,500 people by 2007. Investment opportunities Having such acritical mass of car producers makes Slovakia avery attractive place for supply chain companies, many of which are already in Slovakia. Together with other neighboring countries, theproduction capacity of theCentral European region should reach between 3-4 million cars by theyear 2010. Engineering During socialism, Slovakia was amajor manufacturing center for themember states of theWarsaw Pact. Slovakia produced massive amounts of heavy armory, weapons and machinery. Assuch, mechanical and electrical engineering have along tradition in Slovakia and present foreign investors many opportunities such asapool of qualified and available workers anexisting infrastructure and potential acquisition targets.
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This industry is closely related to and feeds other industries such asautomotive, construction, agriculture, mining, machines tools, white goods appliances and special production (weapons and ammunition). Key players in themarket Slovakias history of manufacturing bearings attracted thesecond largest European bearing manufacturer INA, theGerman concern Danfoss, which has been producing compressors in Slovakia since 2001 has extended its production to Povazska Bystrica by reloating its Danfoss Bauer and Danfoss Gearmotor divisions from Germany. American company Whirlpool has alarge washing machine manufacturing facility in theNortheastern city of Poprad. Within thesame city is also rail wagon production of theSlovak companies Tatravagnka in Poprad. Other Slovak companies are: Kinex in Bytca, and Tatramat in Poprad. For thepast several years, companies such asMobis in Gbelany, Emerson Electric in thecity of N. M. n Vahom and Brazilian company Embraco in Spisska Nova Ves and Johnson Control International, which now employs more than 10,000 people, have recorded successful growth. Other major foreign companies are: Sachs in Trnava, Siemens Automotive in Michalovce; Volkswagen Electrical systems in Nitra; BSH Drives and Pumps in Michalovce. Electronics Industry Theelectronics industry represents atraditional industry in Slovakia. Asasub-sector of electrical engineering itis, together with theautomotive sector, one of themost active sectors of theSlovak economy. Asstatistics show, thesector employs 10% of theSlovak work-force and awell-established tradition and specialised education system guarantees that Slovakia will continue to produce qualified workers for this sector. Key players in themarket TheGerman company Yazaki Wiring Technologies Slovakia and BSH Drives and Pumps all located in Michalovce, are amajor producer of office electrical machines and devices. Other major electronics producers are: Japanese Sony Corporation, which produces television sets in Trnava; Matsushita Electronics, with production facilities in Krompachy, Trstena and Stara Lubovna; Molex, which produces electrical devices and connectors in Kosice; Punch, thebiggest Belgian investor in Slovakia in theelectronics sector is located Trnava and Namestovo; On Semiconductors in Piestany, which produces semiconductors for variety of industries; Osram, producing lighting components in Nove Zamky; Alcatel with their plant in Liptovsky Hradok, which produces telephone devices; OVP Orava located in Trstena; Sky Media Manufacturing, with its production of CDs and DVDs in N. M. n. Vahom will become thecompanys largest production facility in Europe;Koreas Samsung Electronics had also built aproduction facility and regional logistic center which will be its largest in Europe.
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Information & Communication Technologies (ICT) TheInformation and Communication Technologies (ICT) sector has long been very active in Slovakia. Even in thepast, when there was imposed embargo on ITproducts, so called eastern clones of mainframes were being produced. Thehistorical evolution of ICT in Slovakia took asimilar path asin Western Europe. Evolving from centralized mainframe computing, through thePC and LAN revolution in the1980s and 1990s, then towards themore recent Internet and extranet technology. Today, theICT sector in Slovakia is up to speed with themost recent technological advances and most major ICT players are present in Slovakia. Currently, Slovak ITfirms are competing successfully on international markets with Internet and intranet applications, and software solutions for thebusiness, banking, and financial sectors, aswell asfor thegovernment, telecom, manufacturing, and small and medium-sized enterprises. Major growth areas in theSlovak market include hardware, software, ITand telecommunications services. Mobile, Wireless & Internet By theend of 2009, themobile penetration in Slovakia was already reached with 100% of Slovaks owning amobile telephone. Competition is already strong in this sector together similarly asin theInternet services. Themobile services are provided by foreign companies O2, Orange and T-Mobile. Thenetwork infrastructure is maintained mainly by thefixed-line operator, German operator T-Mobile, which possesses anextensive infrastructure for fixed-line telecom throughout Slovakia. Key players in telecommunications Orange is amobile operator which is owned mainly by its French parent company Orange aswell asminority interest controlled by private financial investors and theEuropean Bank for Reconstruction and Development (EBRD). Thesecond mobile operator is company T-Mobile. Key players in software development Many world-class companies are engaged in software development and shared services, including Siemens Software House (Switzerland), Eset (Slovaki), Accenture (Netherlands), Alcatel (France), IBM (US), Hewlett Packard (US), Infineon and Telenor (Norway). In January 2004, German company Infineon announced theestablishment of its software house in Bratislava. There is also anextremely buoyant domestic software development sector, comprising around 64 companies that employ over 3,000 people. In addition, more than 1,000 people are employed in up to 200 small companies that are involved in arange of other software support services.
Investment opportunities Despite arelatively short history of outsourcing ITprocesses, which means more than a10-year delay compared to theWest, insiders predict ITsuccess in Slovakia just asin international markets. ITservices have been outsourced in Slovakia for about five years, but itonly started to bring actual results three years ago. From theglobal point of view, Slovakia is still only at thebeginning of theoutsourcing track, outsourcing of ITservices in Slovakia provides significant opportunities for foreign companies supported by ahigh quality workforce with international experience. International Business Services In addition to moving manufacturing facilities to Slovakia, western companies are also relocating administrative support services to Slovakia. This recent trend is being fueled by anavailable and inexpensive workforce that is highly trained in IT, finance and language skills. Also, thefavourable individual and social insurance tax rates and theeasy access to theVienna and Bratislava airports makes Bratislava anattractive place for such administrative centers. Through these consolidated administrative centers, multi-national companies can provide aconsistent level of support for their entire European operations at afraction of thecost of keeping these functions embedded in thevarious operating units. In Slovakia, this sector includes abroad range of services, including: Professional consulting services; Back Office Support Services; Data processing; Financial services; On-line services; Software development; Technical support services; Customer service call-in centers. While many multi-nationals have elected to establish their own shared service centers in Slovakia, itis also possible that such services be out-sourced to existing Slovak companies. Major Shared Services & Call Centers in Slovakia Themost suitable location for shared services in Slovakia proves to be Bratislava asthis city hosts several shared and call centers such as: Dell Computers, IBM, Hewlett Packard, Johnson Controls, Kone, Henkel, Checkpoint, Kraft Foods, etc.
Investment opportunities International business services is becoming avery active sector in theSlovak economy. Global competition from low cost countries forces many international companies to reduce their overhead by transferring part of their business activities into less expensive teritorries. Slovakia with its language efficient, ITliterate, skilled and low waged labour is becoming thefavorite location for such services. Traditional Industries Chemical Industry Theproduction of chemicals and chemical products is growing into one of thestrategic sectors of theSlovak economy. Itincludes theproduction of chemicals, agrochemicals and pesticides, cleaning agents, chemical fibers, coating composition, pharmaceuticals and other chemical products. This sector, more so than others, is dependent upon theimportation of raw materials. Foreign capital started penetrating theSlovak market in early 1990s through theestablishment of new companies and joint venture operations. Major areas of chemical production in Slovakia are asfollowed: heavy chemistry, theproduction of chemical fibers, petrochemicals, cosmetics & cleaning agents, coating chemicals, agrochemicals, pesticides and explosives and synthetic fibers. Key players in themarket Theleading companies in heavy chemistry are Chemko in Strazske, Duslo in Sala, Novacke Chemicke Zavody (NCHZ) in Novaky; in theproduction of chemical fibers Nexis Fibers located in Eastern Slovakia in thecity of Humenne; in thepetrochemical production Slovnaft/Mol (MOL) in Bratislava and Petrochema in Dubova; in synthetic fibers Chemosvit in Svit and Slovensky Hodvab in Senica. Metallurgical Industry Slovakia has along tradition in metallurgy. Massive military output had substantially contributed to thedevelopment of Slovak metallurgy during socialist era. After 1989 arapid decline of military production had driven metallurgy production into decline. Slovakias steel production is not expected to change significantly by 2013 since itwill be restricted by production quotas of theEuropean Union. Thekey players in themarket TheSlovak producer of seamless tubes, pipe bends, welded tubes of large diameters is Zeleziarne Podbrezova; Thelargest company employing about 13,500 employees is theAmerican company U.S. Steel Kosice. Bigger companies are Slovalco located in Ziar nad Hronom and Kovohuty in Krompachy.
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Glass Industry Theproduction of glass in Slovakia includes theproduction of glass and mineral fibers, handmade glass products, package and lighting glass. Thestrongest export destinations are Germany, USA and UK. Key players in themarket Therepresentatives of theSlovak producers are asfollowed: Slovglass in Poltar and Rona in Lednicke Rovne glassware producers; Izomat Nova Baa, aproducer of mineral fiber thermal insulation materials that is amember of Austrian Radex Heraklit; theAmerican company Johns Manville Company aproducer of fiber optic; producer of glass packages Vetropack in Nemsova. Rubber Industry In 2004, thetotal number of employed people in themanufacturing products from rubber and plastic were about 15,000. Themost significant situation is afact that Slovakia has received amassive investment from automotive sector. Key Players in themarket TheMatador Group in Pchov associates several companies. Its core business is in themanufacturing of tyres and industrial rubber products; German Continental Matador that acquired abranch of Matador is also tyre producer. New investment into plant for injection molding will be made by German company Mannesmann Plastics Machinery in Martin. Investment opportunities in traditional industries Aforementioned industries represent asignificant opportunity for foreign investment. Theknowledgeable work force is still one of thelowest paid in theEU. High exports are typical for these types of industries and Slovakia, with its central location is avery attractive spot for investment in this industry.
Themost highly developed industrial parks are typically home to themajor automotive companies and their suppliers. These investments are significant enough to allow themajor manufacturers to dictate some terms to theSlovak government and to attract major finance and development companies to develop theparks properly. In these parks, thepricing structure and level of infrastructure and service is at auniform and commercial level.
Availability of Investment Incentives Theavailability of investment incentives represents anattractive part of investing in Slovakia. All investment incentives granted in Slovakia are aspecific form of state aid. Thecurrent rules are based on theapplicable legal regulations of Slovakia and thevalid legislation of theEuropean Union (EU). Investors completing anapplication for investment incentives should adhere to theAct No. 565/2001 Coll. on Investment Incentives asamended. TheSlovak Republic is currently preparing anew set of rules for thegranting of investment incentives. According to available information, thenew legislation should be available in thesecond half of 2007. Thenew rules should encourage investors to invest in less developed regions with high unemployment, and to attract investment into sectors with higher added value. In general theforms and intensity of state aid depend on thetype of investor project (activity), thevolume of investment, and thegeographical location of theinvestment. According to thevalid legislation asof March 2007, Slovakia provides thefollowing forms of investment incentives: Tax relief from corporate tax (tax credit) (up to 10 years); Subsidies for theretraining (re-qualification) of employees; Subsidies for job creation (employment incentives);
8. Industrial Parks
Slovakia has been experiencing asignificant inflow of FDI since 2001. Astheprivatization process is essentially complete, themajority of new foreign investments are in theform of green-field projects. This process has created ahigh demand for suitable land with good logistics and proper infrastructure. One of thepriorities of theSlovak government together with local municipalities is to support thedevelopment of new industrial parks that can accommodate this demand. Theland within industrial parks meant to be properly zoned for construction with all necessary permits and utility connections that are required by aforeign investor. Foreign investors can then either buy or lease theland. Despite this uniform vision, thestructure of industrial parks varies in Slovakia, with some being owned directly by municipalities and others by private owners. Asaresult, thepricing structure and degree of development can vary drastically among theparks.
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According to Act No. 565/2001 Coll. on Investment Incentives, some of themajor conditions that aninvestor must fulfil in order to be eligible for tax credit are: Thecreation of anew place of business (factory, workshop, service operation, etc.), theextension, upgrading or modernization of anexisting place of business in order to manufacture new products or provide new services. Investment of at least EUR 10 million in aregion with anunemployment rate of less than 10% or EUR 5 million in aregion with more than 10% unemployment, where at least 50% of this amount derives from theinvestors own funds; i.e. from equity and not loans.
In general, theintensity of state aid is calculated asacertain percentage of eligible investment made by theinvestor within 3 years. Themaximum limits for state aid in aspecific region that aninvestor can apply for is set astheaverage GDP per capita compared to theEU GDP per capita average. Thefollowing table shows theaid ceiling for individual regions of Slovakia. For investmen projects with eligible expenditure not exceeding EUR 50 million, themaximum celing may be further increased. Aid ceilings for 2007 2013 (maximum) Bratislava region Western Slovakia Central Slovakia Eastern Slovakia 0 % (after 2009) 40 % 50 % 50 %
Distribution of EU funds 2007-2013 (asof October 2010) Operational Program Regional Environment Transportation Information society Research and development Education Employment and social inclusion Technical assistance Health Care Competitiveness and economic growth Bratislava region Total Allocation (in EUR millions) 1.445 1.800 3.207 993.1 1,209 617.8 881.8 97.6 250 772 87 11.360
Itis important to understand that there is no legal right to obtain incentives in Slovakia, thus incentives can still be denied even in thecase that aninvestment fulfills all therequired Slovak and EU rules and regulations. Theinvestor must go through anapplication and approval process. When preparing theapplication, theinvestor must review theEU state aid legislation and demonstrate that their investment qualifies for legal state aid. This application is then submitted to theSlovak government which ultimately decides whether theparticular investment will be granted any incentives. EU Funds On December 13, 2006 thefinal draft version of theNational Strategic Reference Framework for theEUs 2007-2013 budget period was approved by theSlovak government. Itoutlines what thecountry intends to do with theEU funds. in atotal amount of approximately 11,24 billion over thenext six years. By utilizing EU funds, Slovakia is expected to increase thecompetitiveness and economic performance of its regions, aswell asincreasing employment. Thefocus will be on infrastructure, human resources, and building aknowledge-based economy. According to currently available information, thefunds should be distributed among 11 operational programs: theRegions, Environment, Transport, theInformatization of Society, Science and Research, Development and Innovations, Employment and Social Inclusiveness, Education, Technical Assistance, Competitiveness and Economic Growth, Healthcare, and theBratislava region programs. Most of theEU funds should be allocated to transport projects, specifically to theimprovement of thehighway network.
Source: Ministry of Construction and Regional Development

According to National bank of Slovakia (NBS), asof September 30, 2005 aggragate volume of FDI in Slovakia totaled USD 14bn. TheNetherlands accounted for thebiggest share with 22% of all FDI dollars. coming from German investors. German companies especially represented by Volkswagen, Siemens, and Deutsche Telekom with significant investments in Slovakia accounted for thesecond place. French companies have also been very active in Slovakia, especially by aninvestment in automotive industry made by PSA Peugeot Citroen and its suppliers. Some of thebiggest Dutch companies are Heineken and theKappa Packaging Group. Following close behind is Slovakias neighbor to theWest, Austria. Thebulk of Austrian investment has come from banking sector and small and medium sized entities. Massive investments into infrastructure projects should be coming from Austria after thefinal ruling of thewinners of airport and rail cargo privatization projects. Theleading capital in 2005 came from Korean automotive sector asmajor OEMs especially aconsortium Hyundai-KIA has started realizing its robust investment in northern Slovakia. Companies such asUS Steel, Molex, and On Semiconductors represent major US investments.
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11. Expatriate Life

Therecent inflow of FDI into Slovakia has also brought many expatriates and their families who have chosen to live and work in Slovakia. While theexpatriates are scattered throughout thelarger cities, themajor expatriate communities are in Bratislava, Zilina and Kosice. Theexpatriates community is growing with large representation of expatriates from Germany, USA, France and Korea. Theliving conditions are approaching standards found in thelarger cities in Western European countries and at thesame time, thecost of living is remarkably lower. The19% flat personal income tax rate also makes Slovakia avery attractive place to live and work. Concerning accommodation, Slovakia provides awide selection of high standard luxury apartments and houses for rent.

Slovakia has what is considered amild continental climate, with generally cold, dry winters and warm (sometimes hot), moist summers. Temperatures will vary according to elevation in themany mountainous areas. Thewarmest and driest regions are thesouthern plains and theeastern lowlands. In those areas theaverage temperature is 10 C, and theaverage annual rainfall is near 500 mm. Heavy snow with significant accumulation is common at higher elevations in theTatras mountains during thewinter months. Bratislava, thecapital, experiences temperatures ranging from achilly minus 2 C in January to 25 C in July, with approximately 26 inches of precipitation per year, most of which occurs during thesummer.
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About Deloitte Central Europe
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Introduction
Over thepast 20 years, Central Europe has experienced one of themost remarkable economic transformations ever, and Deloitte has played amajor part in this changing landscape since we first established anoffice in theregion in 1990. Thedynamic changes of this region have created awealth of opportunities for doing business. Deloitte has been involved with assisting our clients, including governments, large national enterprises, multinational companies, and small and medium-sized high growth companies in this new competitive environment. At present, Deloitte Central Europe spans 17 countries divided into 4 clusters, with more than 30 offices and over 3,400 professional staff but we still operate asone cohesive organization. This Central European structure was formed in 1997. At this time we integrated our national practices to form Deloitte Central Europe because we realised that to best serve our clients we needed to be able to share our knowledge, expertise and manpower throughout thewhole of our geography. Our integration has allowed us to manage regionally and deliver locally, adding value to our services and allowing them to be performed in themost effcient manner. At Deloitte Central Europe we are dedicated to finding solutions for our clients: solutions which create value for them. Our mission has been, and continues to be, very simple: to help our clients and our people excel. Our vision is to be thestandard of excellence. All theCentral Europe offices of Deloitte refer to one or more of Deloitte Touche Tohmatsu Limited, aUK private company limited by guarantee and its network of member firms, each of which is alegally separate and independent entity.
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Our Expertise
At Deloitte Central Europe we believe in having strong industry practices to support our service line expertise. Many of our industry experts have worked in key industry sectors. They developed theknow-how and experience to understand industry-specific issues and are ready to share their resources and knowledge of best practices. By utilizing our industry practices, we are able to provide value-added, industry-specific services to our clients. FDI Site Selection Services To assist foreign investors in their initial, and most critical, stages of their investment process, we have developed aspecialised service line focused on thespecific needs of FDI. We are offering auniform co-ordinated approach and afull range of FDI specific services across thewhole CE region. Our FDI specific services include but are not limited to: Country analysis and sector overview Site selection (in co-operation with our site selection team in Brussels, Belgium) Investment incentives advisory and management Negotiation support with local/national government, municipalities, etc. Business assistance to other service lines (Tax & Legal, Financial Advisory Services, Audit & Advisory incl. Enterprise Risk Services and Consulting Services) Tax & Legal Services Keeping up with changing tax requirements, opportunities, and risks can pose achallenge to any organization, from alocal business to amultinational. Your tax planning must keep pace with even help shape your companys operations. This means that your tax experts must manage all of theintricate details in local jurisdictions while understanding and strategically planning theglobal fow of transactions. We offer our clients abroad range of fully integrated tax services. Our approach combines insight and innovation from multiple disciplines with business and industry knowledge to help your company excel globally. International Corporate Tax Services Local Corporate Tax Services Indirect Tax Services VAT and Customs Duty Transfer Pricing Services
Merger and Acquisition Services Personal Tax Services Global Employer Services Employee Benefit Services Bookkeeping Legal Services Business Process Outsourcing Payroll Services Financial Advisory Services For thepast years, governments throughout Central Europe have dramatically reformed their economies by moving commercial enterprises from state control to private ownership. Amyriad of opportunities and pitfalls have arisen for local entrepreneurs and foreign multinationals, and traversing this new landscape can be diffcult. Thepotential for growth in Central Europe is enormous, but this region also presents unique challenges not found in more developed markets. Whether you are interested in privatization strategies, cross-border acquisitions, corporate finance transactions, development and venture capital, business and asset valuations, value enhancement strategies, corporate recovery or fraud investigations, our Financial Advisory Services professionals can help you. Areas of specialization focus on: Mergers & Acquisitions Transaction services Post-Merger integration Strategic Acquisition or Investor Search and Analysis Privatizations Project Finance and Debt Raising Commercial/Financial Due Diligence Business, Real Estate and Equipment Valuations Business Modelling Non-Performing Loans Public Private Partnerships
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Audit & Advisory Services In aworld where business is confronted with new challenges at anunprecedented speed, theneed for solid financial reporting and forecasting has never been more critical. Annual audits are start, but they are not enough. When itcomes to coping with market analysts and wary shareholders with 24-hour trading at their fngertips, you need to know where you stand today. Our network of Audit and Enterprise Risk Services professionals provide arange of audit and advisory services to assist clients in achieving their business objectives, managing their risk and improving their business performance anywhere in theworld. We offer credibility, assurance and independence. Our Audit & Advisory services include: Statutory & International Audits Financial Statement Transformations Financial Reporting Review of Accounting Systems and Internal Controls Sarbanes-Oxley Compliance & Advisory Accounting Consultation Training Financial Due Diligence Audit Committee Services Control Assurance Internal Audit Services Capital Markets Forensics Services Security & Privacy Environmental Risk Services
Consulting Services Our professionals can help you to plan, grow and structure your business to address key issues such asstrategy, technology and change management. We provide integrated consulting services focused on large national entities, multi-national corporations, growth organizations, and public sector entities. With our unique, collaborative approach, we offer not only industry and functional business performance knowledge, but also theinsight of others through our consulting alliances. We work closely with clients to improve business performance, drive shareholder value and create acompetitive, sustainable advantage, regardless of where in theworld your business takes you. We provide thefollowing services: Strategic Planning and Management Including Balanced Scorecard Performance Improvement and Cost Reduction Process Optimisation Customer Relationship Management Supply Chain Management Production Management Cost and Corporate Performance Management Treasury Management Selection and Implementation of Information Systems Human Capital Advisory Services Advisory Services Related to theAcquisition of EU Funding Actuary Services
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Contact us
Gbor Gion Chinese Services Group Leader in Central Europe Hungary Country Leader Partner, Audit Tel: + 36 (1) 4286827 Email: ggion@deloittece.com Tomasz Konik Partner, Tax Poland Tel: +48 (0) 326030335 Email: tkonik@deloittece.com dr.Csaba Mrkus, LL.M. Director, R+D and government incentives Hungary Tel: +36 (1) 4286793 Email: csmarkus@deloittece.com Marcin Sieczyk Director, Financial advisory Poland Tel: +48 (22) 5110024 Email: msieczyk@deloittece.com Viktor Emmer Manager, Audit & advisory Hungary Tel: +36 (1) 4286411 Email: vemmer@deloittece.com
This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, any of its member firms or any of theforegoings affliates (collectively theDeloitte Network) are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not asubstitute for such professional advice or services, nor should itbe used asabasis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult aqualifed professional adviser. No entity in theDeloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication. Investing in Central Europe 123
Deloitte is thebrand under which tens of thousands of dedicated professionals in independent firms throughout theworld collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu Limited (DTTL), aUK private company limited by guarantee. Each member firm provides services in aparticular geographic area and is subject to thelaws and professional regulations of theparticular country or countries in which itoperates. DTTL does not itself provide services to clients. DTTL and DTTL member firm are separate and distinct legal entities, which cannot obligate theother entities. DTTL and each DTTL member firm are only liable for their own acts or omissions, and not those of each other. Each of themember firms operates under thenames Deloitte, Deloitte & Touche, Deloitte Touche Tohmatsu, or other related names. Each DTTL member firm is structured differently in accordance with national laws, regulations, customary practice, and other factors, and may secure theprovision of professional services in their territories through subsidiaries, affiliates, and/or other entities. Deloitte Central Europe is aregional organization of entities organized under theumbrella of Deloitte Central Europe Holdings Limited, themember firm in Central Europe of Deloitte Touche Tohmatsu Limited. Services are provided by thesubsidiaries and affiliates of Deloitte Central Europe Holdings Limited, which are separate and independent legal entities. Thesubsidiaries and affiliates of Deloitte Central Europe Holdings Limited are among theregions leading professional services firms, providing services through more than 3,400 people in more than 30 offices in 17 countries. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With aglobally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloittes approximately 170,000 professionals are committed to becoming thestandard of excellence. 2011 Deloitte Central Europe

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Investing in Central Europe Opportunity knocks

Investing in Central Europe

Investing in Central Europe

Czech Republic Slovakia Moldova

Hungary Romania Slovenia Croatia Bosnia - Herzegovina

1. Planning expansion/ relocation

2. Consider thecompetitive advantages of CE region

Bulgaria Czech Republic Hungary Poland Romania Slovakia Serbia

3. Select themost suitable country in CE region

4. Choose thebest location based on important factors

5. Set up alegal entity for your investment

6. Continue with your operational phase

7. Plan further expansion of your production services

Investing in Central Europe

Why Central Europe?

European Union (EU) Membership

Lower Labour Costs

Availability of Investment Incentives

Favourable Tax Environment

Investing in Central Europe

Source: TheEconomist Intelligence Unit, 2010

Existing Ties, Potential Opportunities

Investing in Central Europe

Source: Hungarian Central Statistics Office

Major Chinese companies in Hungary

50 50 40 2010 Sales (EUR mn) 144.2 Year of found 2003 Note

28.3 16.7 9.4 4.6 2.2 1.2 0.7 0.1

2005 2005 2005 2009 1992 2008 2009 2004 2 2

Investing in Central Europe

Major Chinese investments in Hungary

Yantai WanHua Polyurethane Co.Ltd.

HUA WEI Technologies

China BBCA Group Corporation

CANYI New Lighting

Source: Czech Statistics Office 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0

Investing in Central Europe

Major Chinese companies in theCzech Republic

Huawei Technologies (Czech) s.r.o. Changhong Europe Electric s.r.o.

ZTE CZECH s.r.o. Kinloon s.r.o. (Kinloon Technology)

WANSIDA Int. s.r.o.

Major Chinese investments in theCzech Republic

YingKe Changhong Europe Electric

Shanghai maling (Czech) a.s.

Huawei Technologies (Czech) s.r.o.

CANYI New Lighting

Investing in Central Europe

Chinese FDI in Poland (2004-09; in EUR mn) 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 38.7 32.6

0.4 2006 2007 2008 2009

Source: National Bank of Poland

Major Chinese investments in Poland

TCL Operations Polska - yrardw

China Shan Xi Yun Cheng Group Plant Making Ltd.

YUNCHENG (POLAND) Sp. zo.o. - d

initial investment 3,00"

Potential Chinese investments in Poland

Liugong Machinery Ltd

rumoured PLN 250m (~EUR 60m)

Civil part of HSW

Investing in Central Europe

Major Chinese companies in Serbia

HUAWEI Technologies d.o.o.

2005 2008 {1}

Major Chinese investments in Serbia