Business
Law in Slovakia
The legal climate for foreign investment has continued to
improve in Slovakia. EU Accession on 1st May, 2004 opens up many
opportunities for foreign investors and Slovak companies alike. At the same time, the new, and for some unfamiliar, legal environment
represented by EU law will present some challenges. While the ongoing programme of privatisation of the large
state monopolies has now more or less come to an end, inward investment of
various sizes and the development of overseas business ties continues to grow.
The legal framework for business in Slovakia is being rapidly developed to
encourage economic activity and further Slovakia’s integration with the EU. At
the beginning of 2002 a new Securities Act, Banking Act and a substantial
amendment to the Commercial Code were introduced in a further shake-up of the
existing legal regime. In addition, a long-awaited and much needed reform of the
law relating to security was enacted in 2003, bringing into force a highly
sophisticated legislative framework designed to enable a much greater degree of
flexibility in the way in which secured transactions can be structured. There have also been major changes to the Labour Code, the tax codes, an
Arbitration Act has been introduced, and an overhaul of the bankruptcy
legislation is underway. Such changes are designed to lead in the medium term to
increased flexibility and commercial certainty, but they also mean that up to
the minute legal advice is required to do business in Slovakia.
Doing
Business in Slovakia
Setting yourself up to do business in Slovakia is a
complex (but perfectly achievable) undertaking requiring plenty of planning and
forward thinking. Obtaining the necessary permits and papers and setting up
appropriate entities in Slovakia takes time, and people considering doing
business in Slovakia should allow adequate time to be ready by their desired
deadlines. Always check the legal, tax and accountancy regime well in advance,
but get regular updates as the law can change frequently.
The nature of the advice you will
need depends on whether you are merely exporting to or trading with persons in
Slovakia or whether you are intending to establish a permanent presence or
purchase a business or company
there. You will need to find out what permits or licences are required, which
may include work/residency permits, trade licences and industry-specific permits
relating to financial services regulations or environmental regulations, for
example.
Choosing the appropriate legal
advisor to help you with this at an early stage is very important. Larger
international firms have the depth of experience to manage transactions to their
successful conclusion according to the standards that international investors
require, but also have the local knowledge to help you avoid the legal (and
cultural) pitfalls. In some cases, however, advice on smaller issues may be more
efficiently dealt with by local boutique firms who specialise in your industry.
Seeking the help of your Chamber of Commerce is the first step in identifying
appropriate advisors.
Investing
in Slovakia
There
are many ways in which to invest directly in Slovakia, but each of them requires
careful due diligence to assess the status and value of the enterprise involved.
Previous business practices are not always of a standard that international
investors expect, due to the relatively recent transformation of the Slovak
economy into a free market. The regulation of business activity is rapidly being
brought into line with EU norms, but care is required with respect to many
issues in the past, and professional advice should be sought at an early stage.
Consideration needs to be given not just to identifying problems, but also to
identifying and implementing solutions with the help of your advisors.
The most common ways to invest are:
Asset Purchase
This method allows a buyer simply to
acquire those assets needed to run a business from an existing business: it
significantly reduces the exposure of inheriting hidden liabilities or having to
carry out an extensive due diligence of the seller. It is therefore relatively
less risky, but care is needed on VAT issues and on the need to avoid the
purchase being deemed to be the sale of a business (see below) by the
authorities. The buyer has to act through a Slovak-established entity and this
will need to acquire a trade licence and other permits, as appropriate.
Business
Purchase
This method involves
the acquisition of all the assets and liabilities of a company or a distinct
part of it (including its employees) as a going concern. The transfer of all the
staff, intellectual property and equipment is automatic (subject to certain
formalities) and thus involves less time, but there is a limited ability to
cherry pick assets. All liabilities of the business transferred (contractual,
environmental etc.) pass with it, requiring detailed due diligence on the target
business. The buyer has to act through a Slovak-established entity and this will
need to acquire a trade licence and other permits, as appropriate.
Share Purchase
This method allows the purchase of a
company without the need to set up a separate Slovak entity for the acquisition.
It also allows the transfer of the target company with significantly less
registration requirements than a business or asset sale. The target company will
be acquired together with all its liabilities, and although these liabilities
would not generally pass directly to the purchaser (because of the concept of
the limited liability of the target company in by far the majority of cases), a
detailed due diligence is still however advisable to minimise the risk of hidden
liabilities emerging in the acquired target company.
It should be noted that certain forms of companies in Slovakia do not divide the
capital of the company by shares, but by participation interests representing
percentage proportions of ownership. If such a company is to be purchased the
transaction requires a slightly different approach to the process and its
documentation.
Certain investments of the types
above may qualify for special tax or other incentives if they constitute
“greenfield” or “brownfield” investments, where investors develop
manufacturing or other facilities from scratch or acquire existing facilities
but radically redevelop them. These types of investments can be very beneficial,
but require numerous consents, licences and permits to be able to proceed with
such a development. In all the cases above the investment will need to be
structured, documented and negotiated with great care. Failure to plan carefully
can lead to long delays in anticipated completion dates and failure to obtain
the hoped-for incentives.
Real
Estate
Real estate is an area of investment that currently
generates a great deal of interest in Slovakia. This level of interest may well increase on Slovakia's accession to the
European Union on 1st May, 2004. From this date, non-Slovak residents will be allowed to acquire real
estate in the Slovak Republic. This means that the practice
of setting up a special purpose Slovak company to own real estate will generally
no longer be necessary (although the structuring of real estate investment funds
etc. may still mean that using a Slovak company to hold each project is a better
structure for tax purposes or for exit strategy). Nevertheless, the
liberalisation of real estate ownership will not include land that is owned
solely by the Slovak Republic, land to which the Slovak Republic has a statutory
right of pre-emption or agricultural and forested land. The prohibition to
acquire agricultural land will not apply to EU citizens who have run a farm in
Slovakia for at least three years from 1st May, 2004 and who have registered for
temporary residence in Slovakia; such individuals qualify as farmers.
Summary
Through
the changes to the laws regulating business, various tax incentives offered for
the development of both greenfield and brownfield sites and a programme of
integration with EU standards, Slovakia is becoming an increasingly popular
country for investment. Companies of all sizes can benefit from doing business
in Slovakia and can enter the market with the security of advice from leading
international lawyers and other advisors.
The
information on this website is based on the position as at 01/10/03 and may be
subject to changes in law or the interpretation of the law.
Allen
& Overy are listed in numerous legal directories as one of the leading law
firms in Slovakia. They can be
contacted via their website at www.allenovery.com
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