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ETLA ELINKEINOELÄMÄN TUTKIMUSLAITOS THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY Lönnrotinkatu 4 B Helsinki Finland Tel Telefax World Wide Web: Keskusteluaiheita Discussion papers No. 998 Ewa Balcerowicz* POLAND'S ENTERPRISE ENVIRONMENT A POLISH VIEW * CASE Center for Social and Economic Research, Warsaw, Poland This discussion paper has also been published in Finnish as a part of Kaitila, Lindström and Balcerowicz (2005): Poland s Business Environment: The Experience of Finnish Firms, ETLA Discussion Papers No ISSN BALCEROWICZ, Ewa. POLAND'S ENTERPRISE ENVIRONMENT A POLISH VIEW. Helsinki: ETLA, Elinkeinoelämän Tutkimuslaitos, The Research Institute of the Finnish Economy, 2006, 19 p. Keskusteluaiheita, Discussion Papers, ISSN ; No ABSTRACT: The paper briefly presents environment for business in Poland as of the end of the year A few comments, however, on its evolution in the course of the transition period are also made. The paper broaches administrative, legal and financial requirements to start and run business activities by both natural and legal persons. In addition, it presents government support schemes for investors. A brief description of the scope of the grey economy and corruption completes the picture of the business environment. The topic has been approached from the foreign investor s perspective. Although foreign investors are subject to the same laws as domestic (Polish) ones, in a limited number of cases they are treated differently than the latter. These cases, and specifically land purchase and employment of foreign citizens, are reviewed. KEY WORDS: Business climate, industrial policy, state aid, grey economy, Poland. BALCEROWICZ, Ewa. POLAND'S ENTERPRISE ENVIRONMENT A POLISH VIEW. Helsinki: ETLA, Elinkeinoelämän Tutkimuslaitos, The Research Institute of the Finnish Economy, 2006, 19 s. Keskusteluaiheita, Discussion Papers, ISSN ; nro 998. TIIVISTELMÄ: Tässä tutkimuksessa tarkastellaan lyhyesti Puolan yritysympäristöä vuoden 2005 lopun tilanteen mukaan ja esitetään joitakin kommentteja tämän ympäristön kehityksestä siirtymätalousaikana. Tutkimuksessa esitellään hallinnolliset, juridiset ja rahoitukselliset edellytykset yritystoiminnan aloittamiseksi ja harjoittamiseksi sekä luonnollisten että juridisten henkilöiden tapauksessa. Lisäksi esitellään julkisen sektorin tukijärjestelmät investoinneille. Lyhyt kuvaus harmaan talouden ja korruption laajuudesta täydentävät kuvan yrityskentästä. Aihetta lähestytään ulkomaisen investoijan näkökulmasta. Vaikka ulkomaisia investoijia koskevat samat lait kuin kotimaisia eli puolalaisia, eräissä tapauksissa edellisiä kohdellaan eri tavalla kuin puolalaisia. Tutkimuksessa tarkastellaan näitä tapauksia sekä erityisesti maan ostamista ja ulkomaisen työvoiman palkkaamista. AVAINSANAT: Yritysilmapiiri, elinkeinopolitiikka, valtionavustukset, harmaa talous, Puola Note about the author Ewa Balcerowicz is a co-founder and the President of the Board of the CASE - Center for Social and Economic Research, where she also conducts her research. She graduated in 1977 from the Warsaw School of Economics (SGH), then called the Main School of Planning and Statistics (SGPiS). There she also received her PhD (1988). The major field of her research and publications include: SME sector, environment for development of the private sector, banking sector and insolvency systems, barriers of entry and exit in transforming economies of CEEC. The paper has been proof-read by James Cabot. TABLE OF CONTENTS 1 TYPES OF BUSINESS ENTITIES 1 2 REGISTRATION Registration of a business activity by a physical person Registration of companies and partnerships 2 3 LICENSING Concessions Permits Regulated activities Regulation of professions 5 4 TAXATION Tax regimes for natural persons running a business CIT PIT VAT 9 5 LABOUR AND LABOUR COST Employment of a foreigner Social security payments Minimum wage 12 6 REAL ESTATE OWNERSHIP 12 7 INVESTMENT SUPPORT Special Economic Zones Investment grants Governmental institutions extending support to investors 15 8 GREY ECONOMY 16 9 CORRUPTION 17 CLOSING REMARKS 18 REFERENCES 19 Foreign investors are subject to the same laws as domestic (Polish) ones. The Law of 2 July 2004 on Economic Freedom guarantees foreign natural and legal persons from the European Union and the European Free Trade Agreement zones belonging to the European Economic Area (EEA) the same rights as domestic investors to start, run and close business activities in Poland. In the case of entrepreneurs coming from other countries, the principle of reciprocity is employed, i.e. equal right are adopted vis-à-vis entrepreneurs from countries with which Poland has ratified international agreements. There is one exception, however: foreign investors are treated differently than domestic ones in the case of land purchase (see Section 6 below). Employment of foreign citizens is also restricted; however this is relevant equally for domestic and foreign-owned companies registered in Poland (see Section 5). 1 TYPES OF BUSINESS ENTITIES There is a variety of legal forms of business available in Poland and foreign investors (as Polish ones, if they come from EU or EFTA zones) are free to choose the one that fits them best, within the limits of the law 1. Besides limited liability and joint stock companies, there are the following options: general partnership (registered partnership), limited partnership, professional partnership, limited joint-stock partnership. Foreign investors can also establish branch offices (foreign subsidiary) or set up a representative office. Individuals have the additional option of setting up a natural person business (sole proprietorship), which has been the most popular form of business activity for Polish citizens since the departure from the command economy in the autumn of Nowadays there are 2,763,000 sole proprietorships registered 2 and they constitute 77.3% of all business entities. There are a number of reasons for the popularity of this legal form of business activity: a favourable tax regime (see Section 4), lower than usual contributions to the pension system (see Section 5.2), simplified accounting, quick and cheap registration (see Section 2). However a sole proprietorship is a convenient legal form for small scale business activity only, due to its unlimited personal exposure of an entrepreneur to business risks. Investors from countries for which the principle of reciprocity does not apply have a limited choice and may establish in Poland only a limited liability company, a joint stock company, a limited partnership or a limited joint-stock partnership; they may also join such companies already registered in Poland (through purchase of shares or interests). 1 In some sectors - banking and insurance being good examples - there is only one legal form of enterprise. 2 As of 31 December 2004, CSO (2005a). The number of active sole proprietorships is by far smaller then the number of registered ones stated below. 2 2 REGISTRATION 2.1 Registration of a business activity by a physical person Registering of a sole proprietorship is an easy and low-cost procedure (25 euro), unless the activity is licensed. An individual has to fill in a short form and deliver it to the Business Activity Register run by the municipality (gmina) bureau 3. The gmina administration has no power to refuse (unless some information is missing in the form) and must place the new business entity in the register within 14 days, though in practice this usually requires less time. As of 1 January 2004 an entrepreneur may ask the gmina administration to accept and forward his/her applications to the Central Statistical Office to receive a Statistical Identification Number (called REGON) and to the tax office to receive a Taxpayer Identification Number (so called NIP). The other three steps required for establishing a sole proprietorship include: opening of an account at a Polish bank 4 and notification of the Social Insurance Institution (ZUS). The third and last one is the application for required permission or license (see Section 3). Further improvement will take place from 1 January 2007, when the time limit for processing the application by the gmina office will be shortened to 3 days and the process of building a one-stop shop within the Business Activity Register will have been completed. Under this new system all applications (which must currently pass through the four different government institutions listed below) will be processed at the local administration bureau 5. Outside of the one-stop shop only the application for a permit/license will remain. Starting from January 2007 on-line registration will be available as well. 2.2 Registration of companies and partnerships The registration of business entities - other than the sole proprietorship - has changed for the better in the course of the 15 years of transition 6, yet remains a time consuming and costly procedure. Establishing a limited liability company, for example, requires nine steps. Since 1 January 2004, as in the case of sole proprietorships, three formalities may be fixed in one place: an entrant may place in the National Court Register (NCR) also applications for REGON and NIP 7. The registration takes at least 31 days (plus additional time for obtaining a licence or permit, if necessary), while in the most liberal economies this period is much shorter 8. The most difficult part of the registration process for all kinds of companies is dealing with the National Court Register, which is like all other courts in Poland -very formalistic and hesitant to communicate with an applicant, with the result that the check-up of an application and accompanying documents is prolonged. The extreme recommendation 3 Gmina is the smallest administrative unit in Poland. Gminas are grouped in districts (poviats) and poviats in provinces (called voivodships), which are the largest administrative units. There are 2,478 gminas, 379 poviats and 16 voivodships. 4 The law intentionally requires that every business entity have a bank account. 5 This is envisaged by the the Law of 2 July 2004 on Economic Freedom; which gives the government thirty months to create the technical facilities necessary for one-stop shop business registration. 6 During the 1990s, the commercial court had 3 months to process the application of a new company, while now the formal limit for the centralized National Court Register (which took over the duties from commercial courts in 2001) is 14 days. 7 Further improvements have been announced for January 2007 (as described above). 8 In Australia - 2 days, in Canada -3, Denmark 4, USA 5 (World Bank, 2005). 3 (Balcerowicz, 2004) is to replace the court-run procedure with an administrative one 9 ; however this option seems to be difficult to implement after the huge investment made a couple of years ago in the establishment of the National Court Register. A more modest option, if the court registration is to stay, would be to release an entrant from the costly obligation to use a notary before submitting deed of association or statute of a company to the NCR and to make this voluntary. The relative cost of the whole registration procedure (the cost of a receipt of licence/permit excluded) for a limited liability accounts for 20.6% of GDP per capita, which is very high as compared with the cost in the countries with regulatory environment most favourable to business 10. Poland ranks 23 in the EU-25; only in Greece and Hungary are registration cost higher (35.2% and 22.9% respectively) (World Bank, 2005). Besides the relatively high cost of registering companies, Polish law imposes high requirements for initial capital: for a limited liability company and a limited joint-stock partnership it is 50,000 zloty (12,500 euro). This amount accounted for 237.9% of GDP per capita in 2004, and made Poland the most restrictive country in the EU-25 in this respect (World Bank, 2005). Greece, ranked second, had a rate close to two times lower than Poland (125.7%). For a joint stock company the minimum initial capital required to be collected before registration is 500,000 zloty (125,000 euro) and this is a very restrictive level if the EU directive settled the obligatory minimum capital at 25,000 euro, which is five times less than in Poland. 3 LICENSING Administrative control over access on the part of entrepreneurs to business activities has evolved very much in the course of the transition period (Balcerowicz, 2004). Yet the scope of government intervention in the freedom to start and conduct business is still large. A second important observation to make is that information about licenses and permits is very much dispersed so it is not easily accessible: except for the general law that settles the general rules of licensing (and this is done by the Law of 2 July 2004 on Economic Freedom), there are numerous parliamentary laws and ministerial regulations stemming from the laws that settle rules for specific activities. The total number of those legal acts may be 1,000 11, which gives a rough picture of the complexity and non-transparency of this area of regulation. Furthermore, terminology used for administrative control exercised in individual types of activities does cause problems, and unification is very much desired, though we may hardly expect it to be undertaken as it would require a huge revision of the law. 9 Such a recommendation was made last year by CASE team that worked out the complex reform program that should be introduced in order to improve macroeconomic fundamentals and the competitiveness of the Polish economy in the context of the enlarged EU. 10 In New Zealand, USA and Canada the relative cost of establishing a limited liability company does not surpass 1% of GDP per capita). 11 This number is actually unclear. Paczocha (2004) provides the estimate of 1,000. 4 Administrative control over access to some business activities currently takes different forms: issuance of a concession or a permit, registration of a business entity in the register of so called regulated activities, issuance of a license, and regulation of professions. 3.1 Concessions Concession is the strongest instrument in the hands of the government, as it gives some discretionary power to the deciding body of the government. Therefore it is good that the number of activities subject to concessions is very limited and that the new Law on Economic Freedom cuts this number from eight to six areas. These areas are: Search, exploration and excavation of minerals and mineral material; non-tank storage of substances in mounds and storage of waste in underground mines; Manufacturing and trading in explosives, weapons and ammunition, as well as in goods and technology for military or police use; Production, processing, storage, transmission, distribution and trade in fuels and energy; Protection of people and property; Air transportation; Broadcasting of radio and television programmes. Altogether in these six areas there are 31 activities for which a concession is a must in order to be able to conduct a business. It is important that a concession is granted for no less than 5 years (unless otherwise requested) and up to 50 years. The Law says that all entrepreneurs may apply and all must be treated equally. In order to be considered, entrepreneurs must prove that they fulfil conditions specified in the relevant law. The new rule (introduced in 2004 by the Law on Economic Freedom) is that if the number of concessions to be granted is limited and lower than the number of applications, then a public tender must be announced. The winner should be the company that offers the highest concession fee. The cost of application differs and the process is time consuming: the authority granting the concession alone may use up to 2-3 months to take a decision. 3.2 Permits A permit is an instrument of administrative intervention that is friendlier to the entrepreneur, as it does not at least formally - leave room for discretionary decisions. To obtain a permit a business person or a company must prove that it complies with specific conditions that are written down in the provisions. Currently, access to 73 areas of business activity is under direct administrative control and within these areas there are 191 permits in total for specific activities that need to be obtained in order to be able to conduct the business (Paczocha, 2004). Most permits are granted by governmental bodies, and some are in local government domain (like road transportation, tourism services, and sales in alcoholic beverages). Obtaining a permit is costly: besides the fee for submitting application and receiving the permit, there are costs related to collecting all documents required by the law. The authority that issues permits has from 1 to 3 months to process the application and grant the right to conduct the controlled business activity. 5 3.3 Regulated activities This is a new category and one that is not clearly defined. It has been introduced by The Law on Economic Freedom of 2004 for a group of 34 activities listed under this Law. All of them under the previous legal regime were subject to permits. The difference between the permit and the status of the regulated activity is that while to get a permit a business person or a company has to deliver all necessary documents to prove that he/she/it complies with conditions required, in case of a regulated activity the solemn statement (in writing) suffices. The governmental body running the register of a regulated activity is obliged to enrol the business entity in the register in 7 days time after receiving the request. If it fails to do so within 14 days, the entrant may start the activity without being registered; though the subject authority must be informed of this fact. The approach adopted is a revolutionary one: less bureaucracy, a cheaper and quicker procedure. However there is also the stick: if an applicant does not in fact meet the conditions, i.e. his statement is found dishonest during the audit, there is a severe penalty in place. This includes removal from the register and a 3-year ban on conducting the activity. 3.4 Regulation of professions Market entry and conduct of 131 professions is regulated in Poland. This is much more (by 40%) than it was in pre-transition times when 93 professions were regulated (Paczocha, 2004). New on the list of regulated professions are those occupations that did not exist under the command economy, like stockbroker, real estate appraiser, or actuary. Usually these are government bodies that supervise the entry and removal from the registers, as well as the conduct of professionals. However, in a number of cases, these rights have been passed to professional societies. The membership of these societies is mandatory and their objective is to ensure that their members adhere to the legal, merit and ethical rules regulating the professions. However, in the case of the legal professions (legal counsellor, attorney, notary) bad practices have been observed in recent years. The relevant societies, by internal regulations, have limited entry, controlled prices, banned advertising of services and decided on the territorial allocation of legal services. These have increased costs for customers and made legal services unaffordable for the poor, while limiting the freedom of legal service providers to choose the occupation and to offer legal services. On top of this, nepotism in the selection of candidates for the legal professions has been proven, which has received much publicity. This has helped to build public support for the liberalization and reform of the legal societies. In August 2005 the Parliament passed the Law on the Legal Professions that relaxed the entry and introduced state examinations (replacing examinations administered by the professional soci
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