REVIEW #10: Small Is Not Always Beautiful, Especially When Aided by (Polish) Government

The official rhetoric of Law and Justice (PiS) government is “to make it possible to develop micro enterprises into small, small into medium, and medium into large or even into international champions”¹. However, the actual measures undertaken by the government were, in fact, to petrify the size of the companies.

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06_MARCIN ZIELIŃSKI_SMALL IS NOT ALWAYS BEAUTIFUL, ESPECIALLY WHEN AIDED BY (POLISH)

Since 2015, at least three pieces of regulation have been introduced that formally served to promote micro and small enterprises, regardless of their efficiency: a freeze on trade in agricultural land, (very heavy) restrictions imposed on new pharmacies, and a ban on Sunday retail trading. What they do is to render it unprofitable to develop into bigger companies. In addition to this, a new tax relief has been put forward, rendering company growth unprofitable.

The conditions have not improved with the introduction of the so-called “Business Constitution”, i.e. a new law on business activity that was intended to improve the conditions of running a business in Poland.

However, because of its general character, its effects are negligible in the light of the myriad of existing specific regulations.

Regulations Promoting Small and Inefficient Companies

As mentioned, the official rhetoric of Law and Justice government is to facilitate growth of Polish companies. With regard to building (rather national than international) mostly state-owned champions, the government has at its disposal several instruments that serve to recapitalize them or provide them with preferential loans.

However, the environment for smaller entities – especially those privately-owned – was not so favorable, because of two reasons.

First, smaller companies are often less efficient than bigger ones, especially those foreign-owned. This is not to say that obstacles shall be put on small companies, but rather that the growth of potentially innovative small companies into bigger ones with economies of scale (let them disrupt the market) shall be enabled. Second, the regulatory and tax framework has been very complex, which makes it harder to operate for smaller companies. The actions undertaken by the government were not to facilitate the regulatory framework by some deregulatory measures (the so-called “Business Constitution” was not such a measure), but to use new regulations to compensate for lower efficiency of smaller companies.

In light of these developments, three pieces of regulation that were introduced in the last three years shall be discussed. All of them were implemented to favor small enterprises, or at least was claimed by their sponsors or supporters².

But by hampering the growth of companies, they also jeopardize the competition between bigger enterprises by making the market less contestable. Therefore, anti-growth tax relief (the so-called “small CIT”), and “Business Constitution” shall be also closely examined.

Freeze on Trade in Agricultural Land

May 1, 2016 was the last day of a transitional period negotiated with the European Union (EU), during which acquisition of agricultural land by foreigners had been prohibited without permission from the Ministry of Interior. Because it was impossible to discriminate against the foreigners, still in 2015, the previous parliament almost unanimously voted for the law which seriously hampered the trade in agricultural land: It banned resale of agricultural land purchased from the Treasury for ten years.

Yet, in 2016, the PiS government introduced a new law, which increased the ban to fifteen years. Furthermore, it suspended the sale of agricultural property by the Treasury for a period of five years and required that the agricultural land of the Agricultural Property Agency would only be leased to the farmers.

Moreover, it requires the purchasers of agricultural land to be, as a rule, individual farmers, with agricultural qualifications, holding agricultural property with an area of up to 300 hectares and residing in the commune (gmina) for at least five years.