Eastern European region is characterized by an attractive economic dynamism. Foreign direct investment (FDI) has been flown to this region for several years, as it seems to be so promising for the development of their activities. The COVID crisis has shaken the international economic chessboard. Hence, the post-pandemic economic recovery promises high growth rates boosted by the return of foreign investment and the revival of foreign demand. Indeed, local economies are very open in a number of sectors. This greatly encourages many developed countries to invest in the nearshoring locations in Central and Eastern Europe.
FDI plays a vital role in the economic growth of the Eastern European countries. Let’s have a quick look at the measures to attract FDI active in different countries of this region, where FDIs come from, which sectors are the most developing. These are the questions the article is trying to address.
POLAND
Since joining the European Union, Poland becomes an undisputed economic partner. Its geographical location allows it to be a hub for trade flows on the Eurasian scale.
Polish economy is quite developed and open. FDI represented 40% of Polish GDP in 2019. Most of these investments came from Germany (19%), the United States and France (11%). For several years now, the government has been pursuing proactive policies to attract FDI. In addition to very advantageous tax incentives, Poland is famous for high-quality and relatively not expensive local labor.
French players are now the third largest foreign direct investors in Poland. These are large firms, such as PSA, the Guillin group, Carrefour, Poujoulat group, Binder International and others.
Today more and more new FDI are destined to service industries, such as IT, financial, accounting business services, business process outsourcing. Of course, these investments are less intensive than investments in, for example, industry. But high-skilled employees and comparatively low labour cost encourage to this type of investment in Poland, therefore the number of foreign shared service centres is growing very rapidly.
FDI incentives in Poland
There are many opportunities for foreign companies to obtain support for projects both from the European Union Funds and domestic sources. Let’s make a quick overview of available incentives and mechanisms for FDI support within Poland:
- Regional aid for new investments: based on the “The Polish Investment Zone Act on support for new investments” adopted and amended by Polish government. It gives an opportunity for the companies making “initial” or “new” investments to benefit of income tax exemption. The amount of this exemption and its duration is determined on the basis of the regional aid map (project location), size of company and type of investment project.
- Program for supporting investments of major importance: operates on the basis of the “Programme for supporting investments of major importance to the Polish economy for the years 2011-2030”. The support is provided in the form of grant based on the agreement concluded between the Ministry of Economy and investor.
- Cash grants from EU funds: for the companies registered in Poland cash grants can be obtained from EU funds for R&D activity such as innovative new investments using a new technology; energy efficiency projects; production of energy from renewable sources.
- Special Economic Zones: companies investing in Poland can benefit from income tax exemption for business activities conducted within SEZ. There are currently 14 SEZs in Poland and the support shall remain in force until 31 December 2026.
- State aid for R&D, R&D Tax Relief: Poland offers plenty of support instruments for investors conducting R&D activity: R&D tax relief, Innovation Box, governmental R&D grants as well as several programs co-financed with EU funds. Since 1st of January 2022 multiple additional incentives for the entities carrying out R&D activities entered into force in Poland
- Real estate tax exemption: municipal council may, by way of resolution, establish exemption from real estate tax for businesses. This exemption generally applies to land and buildings and structures erected in relation to a new investment within the area of the City or Commune.
ROMANIA
Romania is one of the most attractive countries in Eastern Europe. The country’s urban growth is significant. It reflects the efforts made by both public and foreign investors in the development of the territory. Transport infrastructures are increasingly developed, making logistics and distribution activities more efficient. A large part of local production is destined for export insofar as it is strongly fed by foreign investments. It is supported by a recognized automotive and electronic assembly industry. The largest international groups have turned to it, such as Ford in Craiova or Renault. The energy industry is also an important part of the Romanian economy. However, renewable energies are not missing out. It is a sector in full expansion, driven by the commitments made by the public authorities for an energy and environmental transition. Indeed, the potential for development in this area is huge (wind, photovoltaic, solar, hydraulic, hydrogen, biogas and biomass) and many foreign investors are targeting this market.
With a competent and well-trained workforce that often speaks several languages, more and more economic decision-makers and business leaders are opting for Romania. The country offers opportunities in different fields, which are future-oriented and particularly innovative. The development of production sectors that are more respectful for the environment and committed to the energy and economic transition combines high-tech solutions available in Romania. There is no lack of investment in this field. Such companies, as Beltrame, Porsche Engineering, ABB, Holcim, Nestlé, Orange, Veolia have invested millions of euros.
Romania is an attractive location for FDI due to several factors: a large and growing market, low cost but skilled labour force, the integration into the European Internal market, the great geographical positioning of the country.
FDI Incentives in Romania
Romania proposes several incentives to boost the foreign capital influx into the country. These measures can be divided into 2 major groups:
- State Aid scheme: it applies either to investments exceeding EUR 1 million or to investments creating minimum 100 new jobs / per location. The idea is that Romanian government can provide grants to cover some of the eligible investment costs.
- Fiscal Incentives: Romania overall has an interesting general fiscal policy offering 16% Corporate Tax, 5% Dividend Tax and 0% profit tax for reinvested profits in new technological equipment used for business purposes. R&D and IC&T sectors benefits from income tax exemption for employees and profit tax relief. R&D companies can take advantage of accelerated depreciation for R&D equipment and additional corporate tax deduction.
- Industrial Parks: investments located in the industrial parks may be granted an exemption from tax on real estate (buildings and land).
ESTONIA
The European continent shows how effective FDIs can be in the process of transforming into the success. To prove, it is enough to remember 30 years from now to see how, for example, Warsaw or Bucharest looked like then and return back to 2019 and be astonished by the changes. The same is very much applicable to the whole Estonia which has managed to modernise its appearance, while entering the league of the largest net beneficiaries from FDI in the EU.
Estonia is among the leading countries in CEE region regarding FDI per capita. It is highly developed in attracting investments in such fields as IT, biotechnologies, green industries. A balanced budget, free trade agreements, a fully convertible currency, a competitive banking sector, and an investment-favorable environment have all led to the success of Estonia.
The main sectors of FDI in Estonia are related to digital start-ups and IC&T sector. Estonia is a world leader in number of unicorns per capita.
FDI incentives in Estonia
Estonia keeps the first position in the OECD Tax Competitiveness Index 2021 meaning that this country is among the most tax-friendly in the world. The main advantage is the lack of corporate income tax on retained and reinvested profits which is an incentive for new businesses to reinvest. The income tax on distributed profits is 14-20%.
There are also start-up and development grants available for the companies through Enterprise Estonia with the amounts ranging from 5000 to 32000 EUR.
BULGARIA
Foreign direct investment (FDI) has been regarded as an important driver of economic development in Bulgaria since the very beginning of market transition.
Bulgaria has one of the lowest corporate tax rates country in the EE area (10%) and has low labor costs. Thus, it is relatively well-placed for foreign investments, which are not subject to screening from the government. There are no legal limits on foreign ownership or control of firms, and foreign entities are formally granted the same treatment as national companies.
The largest net flows of direct investment in the country come from the Netherlands, the UK, Ireland and Germany.
Traditionally, the largest investors in Bulgaria are Germany, which creates 5375 jobs, the US with 618 jobs and the UK, which has 195 jobs. They are mainly in the sphere of business services, information technology, transport, and logistics.
FDI incentives in Bulgaria
The legal framework for promotion and certification of foreign investments is provided through the Investments Promotion Act (IPA) enacted in 1997 and the Regulation for the Implementation of the IPA adopted in 2007 (the IPA Regulation). Depending on the size of the investment, the economic sector and the region of the country in which the investment is made, the investor may obtain a certificate for class of investment (Class A or Class B) or for priority investment projects. Based on this, the investor may benefit from a wide range of government incentives such as:
- purchase of, or acquisition against consideration of, limited rights in rem in immovable private state or municipal property located near the investment site without participating in a public tender procedure;
- state financing for the construction of elements of the technical infrastructure such as roads, drainage networks and facilities;
- state financing for the professional training of employees hired in relation to the investment;
- state financing in the form of partial reimbursement of the statutory social security contributions and health insurance contributions paid by the investor for newly hired employees;
- reimbursement of up to 100 per cent of the paid corporate income tax on taxable profits from manufacturing activities in municipalities with an unemployment rate higher than Bulgaria’s average;
- value added tax (VAT) advantages for large investment projects;
- provision of fast-track and individual administrative services.
HUNGARY
The FDI has been a significant element of the modernization of the Hungarian economy, and the established firms have become its backbone.
After the transformation of the Hungarian economy in the 90s, the country became a hub of foreign direct investment in the region, in particular, Germany, the US and Austria invested heavily in the Hungarian economy and today these three countries are the main foreign investors in this country.
In order to boost the attraction of the economy, Hungary introduced the most competitive corporate income tax in the EU with 9 percent flat rate, it reduced taxes on employment, and made working law more flexible, and it also reduced the requirements necessary to start a business in Hungary.
FDI incentives in Hungary
One of Hungary’s competitive advantages for FDIs is a strong government commitment to increasing the competitiveness of SMEs and large companies in Hungary.
The main incentives provided in this country are:
- Regional Aid from Hungarian Funds: the maximum available amounts of regional incentives are based on a regional aid intensity map and can reach up to 50%;
- EU Funds subsidies: provided by the EU for investments in specifically determined sectors;
- Tax Allowances: there is a wide range of tax allowances for new investments and R&D. For example, Hungary provides tax exemption on holding structures, capital gains on shares and intellectual property under certain conditions are tax free, and a 50% tax allowance is applicable on royalty incomes. There is no withholding tax on dividends, interest and royalty paid by a Hungarian company to a foreign company;
- Tax Incentives: there is a possibility to obtain 80% exemption of the corporate tax payable for 13 years. The application for this incentive must be submitted to the Ministry of Finance and the investment must respect several criteria;
- Subsidy Based on Individual Government Decision: the Hungarian Government considers asset investments, R&D projects and the creation or expansion of business service centers as priorities in the field of investment promotion. The scheme of the non-refundable “VIP investment cash subsidy” provided on the basis of individual government decision aims at facilitating projects with high added value in Hungary.
Conclusion
The region of Eastern and Central Europe is a very promising environment for foreign direct investments. Local governments understand the importance of the FDI and implement different incentives to encourage the foreign investors. These incentives are also supported by corporate tax-friendly policy.
Poland and Hungary seem to have the most developed schemes and mechanisms in the region for the FDI support. At the same time Bulgaria also proposes interesting incentives for large investments.
Romania and Estonia are interesting countries for investment in IC&T sector and digital start-ups.
