Slovakia suffered a 5% decline in GDP in 2009 as the global economic recession caused a deep drop in cyclical demand for its automotive and consumer electronics products. Slovakia is now recovering as the fastest-growing economy in the EU, with GDP growth approaching 4% in 2010, on the back of export-driven demand, principally from Germany. Unemployment remains stubbornly high at 14% overall, but reaches greater than 20% in parts of eastern and southern Slovakia. Structural unemployment within the disadvantaged Roma community is often greater than 50%. The fiscal deficit ballooned to almost 8% of GDP in 2010 because of lower tax receipts and election-year spending by the former government. As a result, public debt has jumped from 36% to 42% (as a percentage of GDP), still a relatively modest level in the European context.
Comprehensive structural reforms adopted by the Slovak government from 2000-2005, including a flat income tax at 19%, led the World Bank to name the country the world’s top reformer in improving the investment climate in its "Doing Business in 2005" report. Slovakia’s relatively low-cost yet skilled labor force, low taxes, liberal labor code and favorable geographic location within the European Union (EU) have helped it become a favorite investment destination. The Financial Times described Slovakia as the "Detroit of the East," and Forbes magazine called it the world's next Hong Kong.
The election of the center-left Smer party (2006-2010), led by then-Prime Minister Robert Fico at the head of a leftist/nationalist coalition slowed reform momentum and started a period of rolling back earlier reforms in labor, pension, and social and health insurance legislation. The Fico government’s commitment to adopting the euro in 2009 tempered proposals to overhaul the previous reforms. Slovakia joined the European Monetary Union on January 1, 2009. Nonetheless, the Business Alliance of Slovakia reported a continuous downward trend in the quality of the business environment since 2006. Negatively evaluated measures were a slow and ineffective legal system, non-transparent and unequal treatment in the legal system, increasing bureaucratic burden on companies, and an ineffective political system. In the first half of 2010, due to a perception of worsening corruption, Slovakia dropped to new lows in several international measures, including Transparency International’s Perceptions of Corruption Index and Worldwide Governance Indicators. In September 2010, the global competitiveness chart released by the World Economic Forum showed Slovakia falling 13 places to 60th position, its worst ranking ever. Of particular interest within this ranking, “Cronyism” was listed as Slovakia’s largest competitive disadvantage, and the report placed Slovakia in 127th position in that category out of 139 countries. This was especially alarming for Slovakia, an economy heavily dependent of foreign direct investments. On the Heritage Foundation’s Economic Freedom rankings, on the score related to protection of ownership rights Slovakia dropped 5 places to 50th position, due to lengthy court proceedings and firmly rooted corruption in the judiciary.
Elections in June 2010 brought a new four-party, center-right coalition government in Slovakia with a razor-thin margin in parliament. With a sovereign debt crisis swirling in the euro zone and Slovakia’s own government deficit projected at 8% of GDP for 2010, the new government, led by Prime Minister Iveta Radicova, made reducing the fiscal deficit its number one priority. The Slovak parliament passed a budget that aims to reduce the fiscal deficit to around 5% of GDP in 2011. As of January 2011, the VAT has been “temporarily” increased from 19% to 20%. An 80% tax on unused CO2 emission quotas was hastily passed, while the details on the implementation and control mechanism are still being worked out. Finance Minister Ivan Miklos has set a goal for Slovakia’s fiscal deficit to be reduced to 3% of GDP by 2013, in line with EU mandates. Beyond the budget deficit, Miklos has made clear his intent to pursue structural reforms in tax and social contributions.
PM Radicova has been cautious about publicizing her government’s intent to invite “strategic investors” to state-controlled enterprises. Her government is searching for “strategic partners” for key state enterprises including Slovak Telekom, regional heat and water companies, and railway cargo and personal transportation companies.
In addition, the coalition parties campaigned on a promise of reducing corruption and increasing transparency in all aspects of the public sector: civil service, subsidies and EU funds, free access to information, public procurement, the judiciary, territorial authorities, funding of political parties and politicians, health, police and media. The Slovak government has started to act on these issues by requiring disclosure on the Internet of all contracts, invoices and financial transactions relating to the public as a condition of their taking effect; the introduction of electronic auctions as a mandatory form of procurement; access to public inspection at the sale of state properties; open processes for hiring and procurement; the disclosure of all court decisions on the Internet; and electronic recording of all hearings. However, few cases of corruption for public officials have been prosecuted under the new government.
Slovakia was forced to shut off gas supplies to industrial firms for two weeks in January 2009, when a contract dispute between Russia and Ukraine halted gas flow to central Europe. Major factories such as U.S. Steel Kosice and auto manufacturers including Peugeot and Kia stood idle as workers were sent home on forced vacations.
Since then, Slovakia has implemented a reverse-flow gas interconnection with the Czech Republic and with Austria, creating both route and supplier diversity. Coupled with additional storage capacity implemented since the last gas crisis, Slovakia appears to have achieved a fair level of gas energy security in the event of a cut-off on its eastern border.
Openness to Foreign Investment
The flow of FDI per capita in Slovakia is comparable to that in neighboring Hungary and the Czech Republic. According to Ernst & Young’s "European Attractiveness Survey 2010," Slovakia ranked 8th in Europe in terms of job creation (an improvement from 12th position the previous year), with 5,262 jobs created by foreign investors in 2009, which represents a 44% increase, and 4% of the total jobs created in Europe via FDI. Most new jobs were in manufacturing, primarily in the electronics and automotive sectors.
The inward flow of FDI to Slovakia reached EUR 286 million ($389 million) in 2010, and the cumulative FDI inflow to Slovakia increased to EUR 37 billion ($50 billion) (September, 31, 2010 data, National Bank of Slovakia estimates). An informal survey by the U.S. Embassy showed U.S. investments in Slovakia at about $4.5 billion for current and future commitments making the U.S. the third largest source of FDI. Official Government of Slovakia (GOS) statistics differ because most U.S. investments are credited to third countries, depending on their corporate structure. For example, U.S. Steel Kosice is registered as a Dutch entity. According to GOS sources, the largest foreign investors in 2010 (as of 3Q2010) were: the Netherlands, Cyprus, Germany, Austria, Japan, the United Kingdom and the Czech Republic.
Foreign Direct Investment Statistics
Slovakia imports more than 90% of its oil and gas from Russia, and its export markets are primarily OECD and EU countries. More than 85% of its trade is with EU members. Germany was Slovakia's largest trading partner, purchasing 19.3% of Slovakia's exports in 2010. Other major markets include the Czech Republic (14%), Poland (7.3%), France (7%), Austria (6.7%), Hungary (6.5%) and Italy (5.8%). Slovakia imported from Germany (15.5%), Czech Republic (10.3%), Hungary (4.2%), Poland (4%), France (3.7%), Italy (3.2%) and Austria (2.5%). Slovakia's exports to the United States, made up 1.4% of its overall exports in 2009 ($649 million), while imports from the U.S. accounted for 0.9% of its total purchases abroad ($398 million), according to the Ministry of Economy (September 2010 data).
There are over 120 U.S. companies in Slovakia. In 2000, U.S. Steel Kosice (USSK) acquired East Slovakian Steelworks to become the largest U.S. investor in Slovakia, with an investment of $1.2 billion and over 13,000 employees. Johnson Controls has over 6000 employees in Eastern Slovakia; IBM has roughly 4000 employees in Bratislava, followed by HP with approximately 2000 employees. Whirlpool has 1200 employees and produces two million washing machines annually, making its local unit the largest appliance producer in Europe. Several other American companies have substantial investments in Slovakia, including Emerson Electric, Tower Automotive, Delphi, Crown Bevcan, Lear, Citibank, TRW, Visteon, AT&T, and Dell. Other major foreign corporations in Slovakia include Volkswagen, Hyundai Kia, Peugeot Citroen, Samsung, Getrag Ford, Deutsche Telecom, EON, Ruhrgas, Intesa BCI, UniCredito, Raiffeisen Group, Enel and Siemens.
The biggest investment in 2009 was Kia’s expansion in Zilina, extending its automotive production capacity with an investment of EUR 400 million ($548 million), increasing Kia Slovakia’s production capacity to 300,000 new cars per year. Volkswagen (VW) invested an additional EUR 308 million ($422 million) to its manufacturing plant in Bratislava, receiving state aid of EUR 14 million ($19 million) in the form of a tax holiday. The new manufacturing line will create 1500 new jobs and will increase the total production capacity of the VW plant in Slovakia to 400,000 cars per year. In December 2009, Taiwan-based LCD panel screen producer AU Optronics announced a EUR 191 million ($262 million) investment, creating approximately 1300 jobs and receiving state aid of EUR 38.2 million ($52 million) in cash subsidies and tax relief.
Corporate Social Responsibility
The Slovak government has a program allowing corporations to direct up to 2% of their corporate income tax to NGOs, making it one of the most important funding sources for NGOs. Most major foreign investors operating in Slovakia have Corporate Social Responsibility (CSR) programs, ranging from employment and education programs for underprivileged minorities to fundraising for charities and NGOs. For example, Whirlpool has a Habitat for Humanity program; U.S. Steel Kosice has a Roma employment program; and Johnson Controls has a community volunteer program. U.S. companies have been recognized by government and civil society for the excellence of their community service efforts.
State Aid to Investors
Slovakia approved state aid totaling almost EUR 40 million ($54 million) for 11 new investment projects in 2010 (including a U.S. registered company Embraco Slovakia), according to the Ministry of Economy. The new projects are expected to total EUR 1 billion by 2013, creating 1,350 new jobs in cities outside of Bratislava (Nitra, Banska Bystrica, Kosice, Presov, Trnava and Zilina). Most of the foreign investments were focused in the sectors of machinery, industrial production, electrochemical, automotive, information technology (IT), wholesale and retail trade, transportation and telecommunications. State aid was directed towards building infrastructure (48%), tax relief (13%) and cash subsidies for new jobs (6%). The largest foreign recipients of state aid in the 2010 were the U.S.-registered Embraco Slovakia ($9 million), Austrian firms Bodet and Horst mattress ticking ($7.5 million), the Hungarian SKH plastic ($7.5 million), Semecs from the Netherlands ($5.3 million) and the Swedish company Sapa Profily ($5 million).
In January 2008, the GOS enacted a new law on investment assistance to provide varying levels of aid to domestic and foreign investors from 2007-2013, depending on level of unemployment in the proposed region of investment, business sector, size of investment, and the type of employment. Assistance levels range from 10-50% of eligible costs. The rules also lay out the types of aid available, the responsibilities and decision-making processes of the state institutions, and the maximum amount of aid available to a single investment. The new rules were structured to encourage investments in less-developed regions outside of Bratislava with high unemployment into more sophisticated production, and research and development. The four priority areas are: industrial production, technology centers, centers of strategic services, and tourism.
The 2008 rules were meant to provide structure and transparency to a process that had been ad hoc and opaque, but the interpretation of new rules continues to be a source for potential non-transparency. The EC has approved a regional ‘aid map’ for each member state that identifies the regions and sectors eligible for aid and the maximum aid amounts allowed. The legislation prepared by the Ministry of Economy brings Slovak law into compliance with the new and stricter EC guidelines and its aid map for 2007-2013. Under the new legislation, the Slovak government does not have to seek EC approval for each individual investment project up to roughly $4.4 million, speeding up the application process. According to Minister of Economy Juraj Miskov, there are ongoing talks about further amending the Act on Investment Rules and making the system more transparent and effective.
State aid is available in the form of discounted prices for land, financial subsidies for acquiring tangible and intangible assets related to the investment, tax credits, and grants for the creation of new jobs. Domestic investors are eligible to apply for state aid as well. The major thrust in Slovakia is a reduction in the level of support the GOS will issue in western Slovakia and the districts of the city of Bratislava with the aim of addressing the stark regional disparity in development and employment.
In addition, regional governments can also provide support to companies in various forms, including infrastructure and training. In 2004, Slovakia changed to a flat income tax rate of 19%, for both corporations and individuals, and eliminated virtually all exemptions and deductions. In addition, the GOS eliminated withholding taxes on dividends, allowing foreign firms repatriate earnings.
The Industrial Park Law (193/2001 Z.z.) helps municipalities develop special industrial zones through funding assistance from the Slovak government. The Slovak government can fund up to 85% of the overall cost related to the purchase of land and development of infrastructure in an industrial park. In regions with an unemployment rate exceeding 10%, state co-financing could cover as much as 95% of all eligible costs (in practical terms, this exemption applies to virtually all regions of Slovakia except Bratislava). The Slovak Investment and Trade Development Agency (SARIO) has currently registered 39 industrial parks for streamlining new projects. The SARIO website (www.sario.sk) offers more detailed information.
Bilateral Investment Agreements
Slovakia has bilateral investment treaties with the following countries: Austria, Belgium, Bulgaria, Belarus, Bosnia and Herzegovina, Canada, China, Croatia, Cuba, Denmark, Egypt, Finland, France, Germany, Greece, Hungary, Indonesia, Ireland, Israel, Italy, Lithuania, Luxembourg, Malta, Montenegro, the Netherlands, North Korea, Norway, Poland, Portugal, Romania, Russia, Serbia, Singapore, Slovenia, South Korea, Spain, Sweden, Switzerland, Syrian Arabic Republic, Tajikistan, Turkey, Turkmenistan, Ukraine, the United Kingdom, the U.S., the Socialist Republic of Vietnam, and Uzbekistan. Like other new EU members, Slovakia had to negotiate an amendment to its bilateral investment treaty with the U.S., because it was considered inconsistent with EU legislation. The amended treaty entered into force on May 14, 2004. In November 2007, Slovakia signed a bilateral Science and Technology Agreement with the US.
The Act on Collective Agreement was amended on December 14, 2010, by the Radicova government. The prior version of the Act, implemented by the Fico government, guaranteed that collective agreement negotiated between a company and the government was automatically extended to all other companies in the same sector. Based on the recent amendment to paragraph 7 of the same Act, the Ministry of Labor has to approach each company in the negotiations about extending collective agreements.
Slovakia’s workforce of more than two million has a strong tradition in engineering and mechanical production. Foreign companies frequently praise the motivation and abilities of younger workers, who also often have good foreign language and computer skills. Slovaks have a reputation for being technically skilled, particularly in heavy industry. Nominally, education levels match or exceed neighboring countries; with nearly 86% of Slovaks aged 25-64 having at least a high school education. According to the World Bank’s Student Learning Assessment Database, Slovaks outscored all other central and eastern European students in math and placed third (behind Hungary and the Czech Republic) in sciences. Slovaks continue to have good prospects of finding a skilled job, with 85% or more of tertiary educated 25-34 year-olds employed in skilled occupations, indicating that those with higher education are in strong demand (OECD Education at a Glance 2009 report).
Total nominal hourly labor costs in Slovakia decreased slightly in 2010, reflecting the effects of the economic crisis and associated high unemployment. The unemployment rate hovered around 20% as recently as six years ago, declined to a range between 7-8% in 2008 due to strong economic growth, entry to the EU, and stricter policies on qualifying for unemployment benefits, and subsequently reached 14.5% in 2010 (Ministry of Labor est.). There are extensive regional variations in unemployment rates across the country, with a pre-recession rate of less than 6% in Bratislava but up to 33% in some parts of eastern and southern Slovakia (Rimavska Sobota).
The GOS is considering reforms and liberalization of the Labor Code in 2011. After the latest amendments to the Labor Code in April 2007, the workweek was standardized at 40 hours, and the overtime allowance was decreased to 100 hours per year, pending an agreement between employers and employees. Despite these recent legislative changes, Slovakia remains one of the most liberal economies in Europe. As of January 2010, the minimum wage is EUR 319.5 ($438) per month, up from EUR 295.5 ($405) per month. Wages have been rising since 2004 following the country’s accession to the EU and because of increasing demand for labor brought on by growing levels of FDI. A new law on minimum wage, which took effect at the beginning of 2009, introduced a more regular review of minimum wage, indexed to overall wage growth. Slovak social insurance is compulsory and includes a health allowance, unemployment insurance, and pension insurance. The ceiling on social insurance payments affecting both employers and employees was increased under legislation passed in 2007.
Union membership has been on the decline in recent years. According to the Confederation of Labor Unions, 365,541 workers (or approximately 17% of the total Slovak workforce) belonged to trade unions in 2010. The Ministry of Labor, Social Affairs and Family estimates that 24% of all workers are covered by collective bargaining agreements; however, business associations estimate the union membership base at 10%. In 2007 the Fico government re-instituted the so-called "tripartite arrangement," a discussion platform consisting of state representatives, labor unions and the employers' association. The unions generally have been tolerant of the costs imposed on labor by economic transformation, but union leadership has remained politically engaged and is active among its membership. Slovakia is a member of the International Labor Organization and adheres to its Convention Protecting Worker Rights.
Slovakia and the Euro
There is broad agreement amongst local economists that the euro has significantly helped Slovakia attract foreign investors and weather the economic crisis. However, the Radicova government has had rocky a relation with the euro zone. Several of the center-right parties currently in government had campaigned on a platform opposing euro zone bail-outs. Under EC pressure, the government of Slovakia decided to support Slovakia’s $5.7 billion participation in the European Financial Stability Facility (EFSF), while it decided not to support the Greek bailout package. While Slovakia has expressed principled opposition to specific ad hoc bailouts, they have supported the general idea of supporting the euro through a formally structured mechanism. Thus, Slovakia agreed to support the November 2010 Irish bailout from the EFSF while expressing reservations about this and further bailouts. The Radicova government has indicated that, if the euro zone needs to bolster the EFSF with additional funds, Slovakia will side with Germany, the Netherlands and Finland in demanding automatic sanctions on countries that violate fiscal discipline.
Conversion and Transfer Policies
Foreign exchange operations are governed by the Foreign Exchange Act (312/2004 Z.z.) allowing for easy conversion or transfer of funds associated with an investment. As a member of the OECD, Slovakia meets all of the international standards for conversion and transfer policy. In 2003, an amendment to the Foreign Exchange Act liberalized operations with financial derivatives and abolished the limit on the export and import of banknotes and coins (domestic and foreign currency). Since January 2004, an amendment to the Foreign Exchange Act authorized Slovak residents to open accounts abroad and eliminated the obligation to transfer financial assets acquired abroad into Slovakia. Non-residents may hold foreign exchange accounts. No permission is needed to issue foreign securities in Slovakia, and Slovaks are free to trade, buy and sell foreign securities. There are very few controls on capital transactions, except for rules governing commercial banking and credit institutions, which must abide by existing banking and anti-money laundering laws.
Efficient Capital Markets and Portfolio Investment
After Slovakia joined the OECD, the export of capital and outward direct investment were liberalized to conform to international standards. As of September 2010, the Slovak banking sector was composed of 15 banks (established and with permanent residency in Slovakia) and 13 licensed branches of foreign banks. Citibank is the only U.S. bank in Slovakia. The sector is overwhelmingly foreign-owned. Through November 2009, the assets of all Slovak banks totaled about $78 billion.
Slovakia’s stock market remains weak and small in an international context. In 2001, the Bratislava Stock Exchange (BSSE) opened a floor for trading foreign securities in order to boost market sentiment, but to date there has been little activity. The BSSE’s trading system enables it to organize securities trading in any currency and to structure stock exchanges with few restrictions. When raising capital, Slovak companies usually float shares on the Vienna or Warsaw stock exchanges.
The total number of issues in 2010 on the BSSE was 240, of which 132 were bond issues. The total volume traded in 2010 was $9 billion (down 42% over the prior year), with 3.77 billion units of securities changing hands in 7,769 transactions. Total market capitalization was $37.5 billion, up 9% from the same period in 2009. Over 97% of this trading volume was in bond transactions. The stock index, SAX, was down 14% in 2010.
OPIC and Other Investment Insurance Programs
The Overseas Private Investment Corporation (OPIC) offers U.S. investors in Slovakia insurance against political risk, expropriation of assets, damages due to political violence, and currency inconvertibility. OPIC can provide specialized insurance coverage for certain contracting, exporting, licensing, and leasing transactions undertaken by U.S. investors in Slovakia. Slovakia is a Member of the Multilateral Investment Guarantee Agency (MIGA).
The U.S. Embassy purchases local currency at a rate generated by the Department of State and the current rate (January 19, 2011) is EUR 0.747 / $1.00. The Embassy expects to convert roughly $9 million during fiscal year 2011.
Expropriation and Compensation
The constitution of Slovakia and the commercial and civil codes permit expropriation only in exceptional cases of public interest, with a requirement to provide compensation. The law also provides for an appeal process. In December 2007, the GOS approved a new expropriation or eminent domain law that allows the state to construct highways on private property without prior consent of the landowner if the construction parcel is considered "strategic" for Slovak interests. Owners would be compensated by the state after the fact. The legislation was aimed at speeding up highway construction projects to finish the connection between Bratislava and Kosice. It was challenged by several civil society groups and MPs in the Constitutional Court in 2008. On January 26, 2011 the Constitutional Court ruled that the provisions of the Law on Extraordinary One-Off Measures in Preparation of Road and Highway Construction are in contradiction with the Constitution of the Slovak Republic and international agreements.
Slovakia is a contracting state of the ICSID, the World Bank's Commercial Arbitration Tribunal (established under the 1966 Washington Convention), and is a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitrage Awards.
In 2008 the Fico government passed a law that banned private health insurance companies from paying dividends to their shareholders and severely limited allowable overhead costs. In response, one of the shareholders in the health insurance company Dovera, Health Insurance Companies of Eastern Europe, and Eureko BV, a shareholder of Union Zdravotna Poistovna filed for international arbitration seeking compensation of EUR 500 million ($685 million). A group of 49 MPs also filed an extensive complaint in the Constitutional Court in October 2008, objecting to the law's stipulations and claiming that it violates the Slovak Constitution and international agreements to which Slovakia is a signatory. On January 26, 2011 Slovakia's Constitutional Court overturned the law that bans private health-insurance companies from paying dividends and requires them to plough their profits from public health insurance back into the healthcare system, saying it is not in line with the Slovak Constitution.
The Slovak judicial system is comprised of general courts and the Constitutional Court. General courts decide in civil and criminal matters and also review the lawfulness of decisions by administrative bodies. District courts (54) are the first instance courts, and regional courts (8) hear cases as appeals courts. The Supreme Court of the Slovak Republic is the final review court. A special court for corruption, organized crime and crimes of highest public officials was created in 2005, though it was abolished by a judgment of the Constitutional Court in 2009 and replaced with another, similar court that has a somewhat more limited scope. Judges of general courts are nominated by the Judicial Council of the Slovak Republic and are appointed for life by the President. They may only be removed for cause. The Constitutional Court of the Slovak Republic is an independent judicial body that decides on the conformity of legal norms, adjudicates conflicts of authority between government agencies, hears complaints, including complaints of individuals regarding their human rights, and interprets the Constitution or constitutional statutes. Judges of the Constitutional Court are appointed for 12-year terms by the President from a list of candidates selected by the parliament.
The legal system generally enforces property and contractual rights, but decisions may take years, thus limiting the utility of the courts for dispute resolution. Slovak courts recognize and enforce foreign judgments, subject to the same delays. Although generally the commercial code appears to be applied consistently, the business community considers corruption and political influence to be significant problems in the legal system. U.S. and other companies have reported to Embassy officers instances of multi-million dollar losses that were settled out of court because of doubts about the court system’s ability to offer a credible legal remedy.
Slovakia accepts binding international arbitration, and the Slovak Chamber of Commerce and Industry has a court of arbitration for alternative dispute resolution; nearly all cases involve disputes between Slovak and foreign parties. Slovak domestic companies generally do not make use of arbitration clauses in contracts.
The current law on bankruptcy and restructuring entered into effect on January 1, 2006. Its main aim was to shorten the duration of cases and to increase the volume of revenues recovered. The law allows companies to undergo court-protected restructuring and individuals to discharge their debts through bankruptcy. According to the International Monetary Fund, the act overhauls ineffective bankruptcy procedures by speeding up their processing, improving creditor rights, reducing discretion by bankruptcy judges, and randomizing the allocation of cases to judges to reduce the potential for corruption. A new law on trustees entered into effect on July 1, 2005. Its main goal was to increase requirements for professional skills of trustees. Trustees must now graduate from accredited institutions or private companies, receive a license from the Ministry of Justice, and will be subject to continued monitoring by the ministry and bankruptcy courts. Still, investors have complained of unpredictable and corrupt bankruptcy and restructuring decisions, despite the new laws.
Slovakia recognizes secured interests in immovable property, normally secured by physical possession of, or a conveyed title to, the property in question until the loan is repaid. There is a recognized procedure for foreclosures, which specifies how evictions are handled, debts are repaid and any remaining funds are returned to the titleholder. Since 2003, Slovakia has one of the most advanced frameworks in Europe for registering security interests in moveable property.
Performance Requirements and Incentives
Slovakia has no formal performance requirements for establishing, maintaining, or expanding foreign investments. However, such requirements may be included as conditions of specific negotiations for property involved in large-scale privatization by direct sale or public auction. (See the "Openness to Foreign Investment" section for details on incentives). There are no obstacles for foreign entities to participate in GOS financed and/or subsidized research and development programs and to receive equal treatment as domestic entities. There are no domestic ownership requirements for telecommunications and broadcast licenses.
The current law regarding defense offsets has been in effect since January 1, 2008. The law outlines the basic principles and responsibilities of the supplier and the relevant state institutions (Ministry of Defense, Ministry of Economy, interdepartmental offset committee) for offset programs in Slovakia, based on similar legislation in other EU and NATO countries. The law requires offsets of 20% direct or 30% for a combination indirect and direct offsets of the value for defense contracts worth over EUR 6 million ($8.2 million). The offsets can be reduced by a set formula if applied in specific areas such as technology transfer, R&D, education, IT and direct investments.
Right to Private Ownership and Establishment
Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity in Slovakia. In theory, competitive equality is the standard by which private enterprises compete with public entities. In addition, businesses are able to contract directly with foreign entities. Private enterprises are free to establish, acquire and dispose of business interests, but all Slovak obligations of liquidated companies must be paid before any remaining funds are transferred out of Slovakia. Non-residents from EU and OECD member countries can acquire real estate for business premises. For a transitional period of seven years starting May 1, 2004, foreign legal entities can buy agricultural and forestry land, as well as land in residential areas only if they establish a legally registered Slovak company. Since January 2004, there are no restrictions for Slovak residents on the purchase, exchange, and sale of real estate abroad.
Protection of Property Rights
Secured interests in property and contractual rights are recognized and enforced. The mortgage market in Slovakia is growing, and a reliable system of recording such interests exists. However, titles to real property are often unclear and can take significant amounts of time to determine. Legal decisions may take years, thus limiting the utility of the system for dispute resolution.
Slovak courts recognize and enforce foreign judgments, subject to the aforementioned delays, and the commercial code is applied consistently. A bankruptcy law adopted in 2006 has improved creditors’ rights in bankruptcy cases. The business community considers corruption to be a significant factor in the court system and sometimes goes to extraordinary lengths to avoid litigation in Slovak courts. In spite of the improved property rights legal regime, Slovak courts have issued a number of questionable decisions in this area. One heavily criticized ruling involved the property rights of citizens whose land was expropriated in order to build a highway.
Protection of intellectual property rights (IPR) falls under the jurisdiction of two agencies. The Industrial Property Office is responsible for most areas, including patents, and the Ministry of Culture is responsible for copyrights (including software). Slovakia is a member of the World Trade Organization (WTO), the European Patent Organization and the World Intellectual Property Organization (WIPO). The WTO TRIPS agreement is legally in force in Slovakia, but there have been no cases brought to test actual enforcement. Slovakia also adheres to other major intellectual property agreements including the Bern Convention for Protection of Literary and Artistic Works, the Paris Convention for Protection of Industrial Property, and numerous other international agreements on design classification, registration of goods, appellations of origin, patents, etc. In general, patents, copyrights, trademarks and service marks, trade secrets, and semiconductor chip design appear adequately protected under Slovak law and practice.
In 2006, Slovakia was taken off the Watch List of the U.S. Trade Representative’s annual interagency "Special 301" review in recognition of the significant progress that the GOS had made in addressing concerns related to the protection of pharmaceutical patents in Slovakia. Slovak authorities had adopted legal and administrative measures to ensure that patent-infringing drugs are not given market authorization; some of those measures have since been weakened to accord with current EU norms. The government also built a new secure facility to house confidential pharmaceutical test data.
Transparency of Regulatory System
In general, transparency and predictability have been problematic for many investors. The process of obtaining residency permits for expatriate managers has been criticized for years as difficult and time-consuming. Legislation which came into effect in December 2005 addressed some but not all of the problematic areas. An amendment to the law governing the stay of foreigners, effective from January 2007, introduced EU Directive 562/2006 on Schengen borders. Investors have long complained that purchasing land and obtaining building permits are time-consuming and unpredictable processes, but improvements, including the web portal www.katasterportal.sk, which enables interested parties to verify information about land ownership online, have started to ease the process. Formerly, inconsistencies within the tax system had been a problem, but a major tax reform in 2004 improved this situation. Today, many observers consider Slovakia’s flat rate tax system to be one of the simplest in Europe.
The Commercial Code and the 1991 Economic Competition Act govern competition policy in Slovakia. The Anti-Monopoly Office is responsible for preventing noncompetitive situations. The current Law on Public Procurement, valid from 2006, harmonized Slovak law with all relevant EU directives on public procurement. An electronic tendering system, operating by the Public Procurement Office and the Ministry of Finance, was adopted in 2007 to support the tendering cycle. Nevertheless, concern about the transparency and integrity of public tenders is a subject of concern which has led to the dismissal of government ministers and to inquiries on the part of the European Commission. Lack of transparency in public tenders ranks among the areas of most concern to foreign investors in Slovakia.
Foreign investors and foreign companies doing business in Slovakia have complained about the transparency of regulatory processes in several industries, and a number of regulatory bodies are considered by the business community to be less than fully independent. Political pressure on regulators in several offices has resulted in changes of leadership in order to influence the outcome in specific regulatory adjudications.
In recent years, the previous government had used emergency legislative procedures with increasing frequency in cases affecting businesses. This practice reduced the public comment period for some proposed laws and regulations to practically nothing, a fact that various business groups vigorously protested. One law resulting from this is the controversial “strategic companies” law introduced in 2009, which effected a major change in bankruptcy and restructuring procedures, allowing the state the right of first refusal in acquiring distressed companies in certain sectors. The law was drafted, introduced, and passed in roughly a week, with no formal period for public comment. Another example, from 2008, changed corporate governance rules for companies in regulated network industries to allow the state to determine utility prices. Again, this highly controversial legislation was brought to a vote in Parliament and signed into law with virtually no public comment period. The validity of the “strategic companies” act expired at the end of the year in 2010 and was not renewed by the new government.
Privatization of State Enterprises
The Fico government (2006-2010) had halted most privatization plans. It cancelled a privatization tender for the rail cargo company, reversed the privatization process for the Bratislava airport, stopped privatizations of regional heating companies, imposed a ban on further privatization of designated "strategic" companies, and repurchased interest in the company that owns the oil pipeline passing through Slovakia.
PM Radicova has been cautious about publicizing her government’s intent to invite “strategic investors” to state-controlled enterprises. Her government is searching for “strategic partners” for key state enterprises including Slovak Telekom, regional heat and water companies, and railway cargo and personal transportation companies. The current law on strategic privatization permits complete privatization of most businesses and allows for 49% foreign ownership (with management control) of “strategic companies.” The state must still retain ownership of railroad right of ways, postal services, water supplies (but not suppliers) and forestry companies.
Competition from State-Owned Enterprises
The Fico government had imposed strict return guarantee requirements and fee limits on private pension funds. Many industry analysts have attributed these moves to a desire to eliminate competition to the state-run pay-as-you-go pension system, and to encourage investors to move their savings back into the state system, which is running huge deficits. In October 2008 the EU started an infringement proceeding against the Slovak government for guaranteeing a monopoly position for Slovak Post in hybrid postal services. There is also a pending EC infringement proceeding against the Slovak government for limiting repatriation of profits in the health insurance industry. This move was widely seen as an effort to limit competition with the state-owned insurance company, which has a 70% market share.
In 2000, the GOS passed a national anti-corruption program. Subsequently, it appointed a corruption steering committee, amended the Criminal Code in attempts to strengthen law enforcement, approved a law modernizing public procurement, and enacted a strong Freedom of Information Act. A special court and a special prosecutor for corruption and organized crime were established in 2003. The Special Court was abolished in 2009 as a result of an action by the Constitutional Court, and in its stead a new Specialized Court, with more limited powers, was established.
The current law on conflict of interest, which is generally viewed as weak and even more weakly enforced, came into force in October 2004. A special committee of Parliament supervises the implementation of the law, but it has not sanctioned any official covered by the law for violation of conflict of interest rules since its inception.
Slovakia is also party to international treaties, among them the OECD Convention on Combating Bribery of Foreign Public Officials, UN Anti-Organized Crime Convention, UN Anti-Corruption Convention, and Criminal Law Convention on Corruption and Civil Law Convention on Corruption. Slovakia is a member of the Group of States against Corruption (GRECO).
The press has taken an active role in reporting on corruption, and public awareness of the issue has steadily increased over the past several years. The Slovak chapter of Transparency International (TI) is active and, along with other civil society groups, monitors public tenders. Slovakia is a signatory to the OECD Convention on Battling Bribery, and to give or accept bribes is a criminal act. It should be noted, however, that Slovakia is ranked very low in the quality of its implementation of the Convention, according to a TI report. Slovakia ranked 59th on TI’s 2010 Corruption Perception Index (CPI), down (i.e. more corrupt) from 57th in 2009 and 52nd in 2008.
Non-governmental organizations and the news media reported a growing number of corruption allegations during the period between 2006-2010, including several allegedly involving senior members of the Slovak government. In the years 2009-2010, several government ministers were relieved of their posts because of concerns about non-transparent or inflated tenders or because of ethical violations. The most grievous reports of corruption came out of the Ministry of Environment and the Ministry of Construction and Regional Development, both headed by the ultra-nationalist Slovak National Party (SNS) a partner of the former coalition government. The PM at the time, Robert Fico closed the Ministry of Environment because he found the situation irreparable, and had the Ministry of Agriculture take over its functions. The Ministry of Environment was recreated in November 2010.
The European Commission has sought explanations or investigated corruption complaints in connection with several tenders and regulatory decisions. The most notable cases investigated involved the Ministry of Environment, the Ministry of Construction and Regional Development, the Ministry of Labor, Social Affairs and Family, and the Ministry of Transportation.
Foreign-Trade Zones/Free Trade Zones
Foreign trade zones and free ports were eliminated in Slovakia in 2006.
There have been no reports of politically motivated damage to property, and civil disturbances are extremely rare. There has been no violence directed toward foreign-owned companies.
National Bank of Slovakia www.nbs.sk
Center for Economic and Social Analyses www.mesa10.sk
Ministry of Economy of Slovak Republic www.economy.gov.sk
Ing. Slovakia www.ingfn.sk
The Slovak Republic Government Office www.government.gov.sk
Ministry of Finance of Slovak Republic www.finance.gov.sk
International Monetary Fund www.imf.org