Slovakia's Tax Reforms Now Being Put To The Test

by Ulrika Lomas, Tax-News.com, Brussels

08 January 2004

With Slovakia’s new across-the-board 19% flat rate of income tax now in effect, the government is hoping to see a surge of interest from foreign investors and manufacturers, potentially earning the country a reputation as Eastern Europe’s ‘tax haven’.

Not only does the flat tax apply to personal income tax, it also applies to corporate tax and VAT, both of which will also be levied at 19%. In the latter case, however, this entailed a tax increase.

Although the Slovak President, Rudolf Schuster initially vetoed the legislation late last year, fearing that the tax would create greater social inequality, parliament overruled him, preferring to take Finance Minster Ivan Miklos’ view that the changes will create a "fair, simple, and investment-oriented tax environment.”

Some observers have suggested that the Slovak government may have gone out on a limb somewhat with the flat tax, although it could be argued that the move is already starting to pay dividends, with many global firms (most notably in the automotive sector) showing a keen interest in establishing operations in the country.

Currently, the Slovakian Economics Minister, Pavol Rusko, is negotiating with Asian car-maker Hyundai, whilst French firm Peugeot could bring up to 3,500 jobs when a new plant is completed. This will be in addition to an increased presence from Volkswagen, Slovakia’s largest employer, which has a Bratislava-based plant employing over 9,000, and produces some of the firm’s best-selling marques.

German firms are also making their presence felt in other sectors, including telecommunications through a local subsidiary of Deutsche Telecom, and insurance, with Allianz also investing via a Slovak subsidiary.

In addition, the real estate sector could also become a popular investment area for foreign dealers now that a flat 3% tax on property sales, regardless of value, has replaced the old progressive system.

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