During the past decade Slovakia used to be called a tiger in the middle of Europe. We have earned this nickname because we implemented transparent tax system with lower rates which in combination with relatively cheap labor attracted many large investors.

But big corporations were not the only companies who came here to set up the regional centers or manufacturing facilities. Smaller companies from the neighboring countries were interested as well. Lower taxes were inviting them to move their official residence to Slovakia. Despite political tensions between Hungary and Slovakia, Hungarian companies were seeking brokerage firms that assisted them with the tax and other legal issues to change their residence to Slovakia. No wonder they were interested as back in 2007 this could reduce their tax liabilities by 30%. Car owners were thinking likewise as from 7,000 to 10,000 Hungarian cars were registered in Slovakia because of lower fees every year. It seems that when it comes to saving the people’s own money, national conflicts become irrelevant.

This might be true even today. This time, however, the opposite situation is the case. If Slovak companies want to reduce their tax burden they do not have to run away to Cyprus necessarily – it is just enough to register their residence in Hungary. More than 680 Slovak companies have done it this year so far. For companies with a tax base up to 500 million forints (1,81 mil. EUR) 10% income tax rate is applicable. Even though in Slovakia corporate income tax is about to be raised from 19% to 23% (highest rate in the region), Slovak Ministry of Finance does not see this as a problem. Unusual withdrawal of companies is not expected.

However, Ministry might be surprised. If companies were changing their official residence to the neighboring countries because of lower taxes in the past decade, there is a good reason to believe they might be optimizing their tax burden again. While a few years ago Slovakia used to report higher collection of income taxes than expected (after the introduction of 19% flat tax the real revenues on individuals exceeded expectations by 40% and on corporate businesses by 35%) we may soon see the opposite trend. Relying on the ethos of the tiger in the middle of Europe can be deadly for the economy. Investors did not use to seek Slovakia because of our marketing, it was the good marketing that was a consequence of favorable business conditions which the investors were interested in. With the tiger in the middle of Europe on sedatives – in the form of new taxes, higher income tax rates and higher labor costs – attracting the foreign investors will be much harder.

Update 23.8.2012: Along the corporate income tax, there is also a local business tax effective in Hungary. The rate is determined by the municipality (max 2%) and it is based on the net sales revenues, not on the profit.