These countries have made a dynamic growth in their economies and the creation of new institutions over the past quarter of a century. Continuous influx of foreign investors has not only a positive impact on the economic situation of these countries but it also promotes the development of domestic companies which cooperate with foreign investors and, in some economic areas, compete with them successfully.
What makes the CEE region interesting to foreign investors?
There are many factors which cause that extensive interest of the investors, from the geographical location supporting the establishment of contacts with the Middle East and Asia, with access to the Adriatic, Baltic, Black Seas and the Mediterranean Sea, the availability of qualified and well-educated employees whose labor costs are relatively low compared to Western Europe, to incentives offered by the governments of the CEE countries which encourage investing in their countries. Investors suggest that the availability of investment incentives, low cost of labor and tax rates are most important factors in favor of investing in a given country. Stable political situation of the CEE countries as well as membership in the European Union or official candidacy cannot be ignored, either. Countries which are not yet EU member states are official candidates, e.g. Serbia, Albania, Montenegro, Macedonia.
Thanks to all of the above, CEE countries are currently regarded as the most attractive location, just after Western Europe, with a chance to become an economic driving force for Europe. Investors do notice favorable tax systems, availability of educated, inexpensive workers and a gigantic market potential.
Over many years a large number of international companies have made a decision to invest or relocate to the CEE. As a consequences CEE countries were given the possibility to win investors and began to compete among themselves intensely to attract investors “to their own backyard”. However, all of the CEE countries established different incentives to invite the investors. Investors should note that the adopted encouragement solutions have a different dimension and a different character in each country.
Employment costs in CEE countries
One of the most important factors taken under consideration are labor costs. CEE countries present much better results than Western European countries in this respect. The differences in employment costs are significant enough for investors – particularly in the manufacturing industries – that they cannot be ignored. Labor costs include not only a salary paid to employees but also non-wage costs, mainly social security contributions paid by the employer.
According to Eurostat data for 2013 average hourly labor costs in the 28 European Union countries is estimated at EUR 23.70 and EUR 28.20 in the euro zone. However, differences between countries are enormous. For example, in Sweden, the average hourly labor cost amounted to EUR 40.10 and in Bulgaria to EUR 3.70, which is almost 11 times less.
- Find out more about Labour Costs in the CEE region
CEE countries with the highest labor costs
Among the CEE countries the highest labor costs are recorded in Slovenia and amounted to EUR 15.3, which was approximately 35% less than the EU average. In other countries of the region the costs were significantly lower, e.g. in Czech Republic – EUR 9.8, Poland – EUR 8.1 and in Romania – EUR 4.4. As compared to the European average (23.7%), non-wage labor costs in CEE countries are significantly lower, too, e.g. in Slovenia – 14.7%, Bulgaria – 15.8%, Croatia – 15.4%, Poland – 16,7%.
Undoubtedly, non-wage labor costs and their significant variation among different countries can be an element of inter-country “rivalry” between to acquire investors. Especially in the case of similar costs of employees’ gross remuneration, the non-wage labor costs can contribute towards the decision that investing in a given location is more profitable. To illustrate this, with a similar level of gross remuneration in Poland, Slovakia and Estonia, it is Estonia that has the highest non-wage labor costs and Poland to have the lowest.
Even though the increase of remuneration in CEE countries is visible, and projected for the following years, this “gap” is big enough for the labor costs to be an important factor taken into consideration by investors in many years to come.
It is also important that CEE countries are seen not only as a source of cheap labor, but are also appreciated due to highly educated workers, professionalism and skills in technology and engineering. Shared service centers, providing IT and accounting services, located in CEE countries are the best example of this.
Best European location for development and investing in business
For example, in the “2015 Top 100 Outsourcing Destinations” report, Krakow in Poland has been recognized as the ninth best location in the world for the development of modern service industry for business. Cracow is the only European city in the top ten, overtaken only by cities located in India and the Philippines. There are not many European cities in the Top 100 ranking, however the most widely represented is the CEE, e.g.Prague (15), Budapest (25), Brno (29), Warsaw (30), Bucharest (39), Bratislava (49), Sofia (51), Ljubljana (53), Wroclaw (62). Western Europe has, though, only five representatives, all from the British Isles: Dublin (10), Belfast (43), Glasgow (64), Cork (65), Leeds (87).
Tax systems of CEE countries
Labor costs are a result of historical situation, but tax systems of CEE countries are often especially “designed” to be investment-friendly, especially foreign investment-friendly and can also be a part of a competition between given CEE countries for investors.
As compared to indirect tax, regulated heavily by EU directives, EU member states have more leeway to set the rates, calculation rules and exemptions for direct tax. As a result, fiscal policies of the EC countries differ among themselves and may take differ forms in various countries.
- All current tax rates of 11 CEE/SEE countries: Investing in Central Eastern Europe 2015
Lower CIT rate in CEE than EU countries
The first indicator of companies taxation level in a given country is a nominal income tax rate (CIT). The average among OECD countries amounts to approx. 24% and for EU countries – more than 21%. When it comes to CEE countries, only Slovakia has a rate higher than the European average – 22%. The remaining CEE countries have a CIT rate lower than the average in Europe. A 20% rate is in place in Croatia, Poland, Czech Republic and Hungary have their rate at the level of 19%, Slovenia – 17%, Romania – 16%, Serbia – 15% and Bulgaria – 10%. The 10% rate in Bulgaria is the lowest CIT rate in the whole of EU. Candidate states have their rates lower than the EU average, too: Albania and Serbia – 15%, Macedonia – 10%, Montenegro – 9%. In some countries smaller businesses can enjoy lower rates. In Hungary companies with revenue not exceeding approx. EUR 1.6 million pay 10% tax and in Albania smallest companies only 7.5%. One could expect that businesses starting to operate, or being in the early stages of development, would pay such lowered taxes.
Nominal rates in Western Europe fare worse in comparison to the above. The highest rates are in Malta – 35%, Belgium – 33.99%, France – 33.33% and Spain – 30%. Nominal rates in The Netherlands and Luxembourg, taken as “friendly” tax jurisdictions are, accordingly, 25% and approx. 29%. Cyprus, on the hand, criticized by the EU for its too liberal fiscal policy has the rate at the level of 12.5%.
One needs to point out, though, that Western Countries have noticed that high rates do not aid foreign investments and can cause the migration of capital to countries with lower rates. It is one of the reasons why Sweden and Finland lowered their rates, respectively, from 26% to 22% in 2013 and from 24.5% to 20% in 2014. Portugal was lowering its rate from 25% in 2013 to 23% as of last year, with planned decrease to 17–19%.
Naturally, it would be naive to compare nominal rates only. Each country can apply separate rules of taxing different income types or grant various tax reliefs. Rules of calculating tax income are important, too. In example, Poland has a broad catalogue of tax non-deductible costs which accounts for the effective taxation rate being higher. Moreover, the nominal rate is applied for all income types, whereas in some other countries some income types can be taxed in a more favorable way, e.g. interest, IP rights, which makes the effective taxation rates in countries such as Ireland, Belgium, Malta, Luxembourg, Switzerland or The Netherlands much lower than nominal rates. OECD data show that in 2012 thanks to their fiscal policy The Netherlands and Luxembourg drew USD 5.8 trillion of foreign investments, with only 10% of these means going to actual sectors of economy and the rest to companies set up to limit tax liabilities.
Tax incentives for investors
OECD data show that in 2012 thanks to their fiscal policy The Netherlands and Luxembourg drew USD 5.8 trillion of foreign investments, with only 10% of these means going to actual sectors of economy and the rest to companies set up to limit tax liabilities.
In principle, CEE countries do not take on any practices that would make them suitable for the purposes of tax optimization only, however each country uses tax incentives whose aim is to draw investors, e.g. with tax exemptions for a given time or a favorable method of taxing a given income type.
Economic zones in Poland
Poland has 14 special economic zones (SEZ) where the production or distribution can be undertaken with the use of preferential conditions. Their aim is to support regional growth, especially by creating new workplaces as well as supporting the development of new technical and technological solutions. SSE investors can use state aid, given in the form of income tax exemptions, new investment costs exemption and / or exemption for costs connected with creating new workplaces. The Ministry of Economy states that investments in SEZs grow by PLN 215 in each second only, and that the total SEZ investment value as of end of June 2014 amounted to USD 96.5 billion.
Immovable Property Tax Exemptions
Another form of encouraging investors to invest in a given municipality are immovable property tax exemptions that can be decided about by the municipality authorities. Yet another form of fiscal support is the possibility to create research & development centers (RDC) which can deduct the sum allocated to the innovation fund from the tax base. What is more, all entrepreneurs acquiring “new technologies” can additionally (beside depreciation) deduct 50% of the “new technologies” value from their tax base which makes such investing 9.5% cheaper.
Investors in Poland can also count on government grants within the “2011–2020 Program of supporting investments with significant importance for Polish economy”. Support height from this program depends on the type of investment, its worth, localization and the number of workplaces created.
Similar investment support forms are in place in other CEE countries, too, especially those which compete with Poland for a foreign investor the most often, i.e. in Bulgaria, Czech Republic, Romania, Slovakia and in Hungary.
Attractive CEE countries for investors
Czech Republic supports investments in the manufacturing industry, research & development centers as well as strategic services centers (e.g. shared services centers, call centers, data processing centers). For such investments it is possible to obtain a CIT exemption for 10 years as well as grants for new workplace creation and for the training and re-qualification of employees. Similar actions are aided in Slovakia, which supports, additionally, the tourism and transport industry.
Profits re-invested in a new factory or tangible assets are CIT-exempt in Romania. Moreover, there exists a possibility for additional deductions in the height of 50% connected with research & development expenses. Tangible assets used for research & development can be depreciated faster.
Hungary offers the widest choice of “industrial parks” among CEE countries. Investors can choose between more than 200 active parks depending on the type of business they run. Setting up in an industrial park is done under very favorable conditions. Hungary also taxes license fees for IP rights at the level of 5%.
In Bulgaria, on the other hand, 60% of profits from investment in agriculture is tax exempt. Investors can also count on grants connected with creating new workplaces. Do you want to start a business in Bulgaria? Contact our local tax advisors in Bulgaria first!
EU funds for investors in CEE countries
Another important element used by CEE countries to “tempt” investors in such countries’ access to EU funds which can be used by investors making new investments and creating new workplaces, too. In 2014–2020 EU countries will receive nearly EUR 351 billion from the EU budget, with more than a half (EUR 167 billion) going to Poland, Croatia, Czech Republic, Hungary, Romania and Slovakia. Poland will receive as much as EUR 77.6 billion, i.e. approx. 22% of funds, the most of all EU countries. The biggest part of funds will be used for infrastructure and environment, with the rest going to investments in research & development, furthering the level of Polish education and digitalization.
All of the above factors make the CEE countries an attractive investment location for foreign investors, as compared to other locations. What is more, tax- -related elements and preferences of various kinds allow the CEE countries to actively “fight” between each other for investors.
- The article was published in the 6th edition of the shopping center almanac that can be ordered free of charge online: Almanac of Shopping Centres
Krzysztof Kaczmarek, Tax Advisor, Managing Partner. He specializes in tax advisory for commercial real estate sector – among others he provides tax due diligence, transaction advisory projects as well as restructuring and reorganisation processes.
Remigiusz Fijak, Manager. Remigiusz Fijak specialties comprise among others in VAT and CIT advisory, including issues of international tax planning and transfer prices.