Central Europe’s manufacturing sector is being reshaped by EU Sustainability regulations, impacting countries like SlovakiaRomania, and Hungary. The aftermath of the Ukraine war and Germany’s reevaluation of its reliance on China have disrupted supply chains, driving up power costs and prompting a shift towards cleaner energy sources.

We inteviewed Július Činčala and Zuzana Sidorová of Kreston Slovakia, about how EU regulations affect doing business in the region.

EU sustainability regulations impact on Central European manufacturing

Central Europe has traditionally played a smaller role in global manufacturing figures than other European neighbours. However, since the outbreak of the Ukraine war and Germany’s pre-Covid reliance on China, broken supply chains have driven up power costs.

Higher prices and new carbon reduction regulations favourably reposition countries like Slovakia, Romania and Hungary who have some of the highest shares of electricity from clean sources well above the West European average.

As the European Union grapples with balancing new environmental standards and maintaining its competitive edge on the global market, ambitious countries like Slovakia are becoming test beds for the new sustainability-focused landscape. With the advent of carbon emissions reporting within the EU, will listed and large companies relocate in droves to save money and carbon?

Driving carbon emissions down and costs up

The EU’s commitment to environmental sustainability is not without its challenges. Činčala believes that it will be easier to relocate manufacturing outside of Europe, rather than deal with the complexity of carbon emission reporting, while the process is being established,

“Slovakia has always been an industrial country. However, the higher power costs have seen companies seek to relocate manufacturing operations to China. We see this with our clients now. They are freezing operations as transforming their business to meet carbon emissions far outweighs any cost saving or carbon saving they receive from being in Slovakia.

Tax on imports

Although alarming, Činčala has been advising the Slovak government on dealing with these challenges for over 25 years, so has a clear view on the options available to the EU.

“If we want higher investments in green energy and business transformation we have to invest more in education, people, and transformation models. Currently, products that are manufactured outside of the European Union are cheaper because they’re not subject to the same level of regulation and transformation costs we face in the EU. This is why we need to find a way to fortify ourselves and our market. For example, by introducing new tax regulations on products made in third countries and imported into the EU.”

Transfer pricing compliance

With some unrest in the region, Činčala’s colleague, tax expert Zuzana Sidorová, has advice for any businesses moving operations around Europe, specifically into Slovakia,

“In recent months, a number of companies have approached us to transfer their business from Ukraine territory to Slovakia or to another European country.”

In Slovakia, any company that does transactions within its group, either locally or across borders, must follow transfer pricing rules, in line with the OECD (Organization for Economic Co-operation and Development) guidelines.

Common Transfer Pricing challenges in Slovakia

In Slovakia, many international companies are considered “limited risk,” like manufacturers, distributors, or service providers. These companies often report losses despite having little decision-making power. Sidorová has clear advice for companies with limited risk businesses in satellite European countries;

“From a transfer pricing perspective, they shouldn’t be reporting losses. Tax authorities often investigate these loss-reporting, internationally-owned companies, leading to lengthy and difficult tax audits. These audits can result in extra corporate taxes and can be extended to cover multiple tax periods.”

Transfer Pricing benchmarks

Sidorová advises her clients making cross-border or local (Slovak) intra-group transactions needs to review and update its transfer pricing file on a yearly basis. The benchmarking analysis must be prepared every three years, with annual financial updates of comparables (compliance with OECD transfer pricing guidelines).

Staying competitive

As the EU intensifies its sustainability focus, companies in Slovakia must adapt quickly. Success hinges on embracing green technology and understanding local tax and transfer pricing rules. It’s essential for businesses to align their operations with EU environmental goals, not just to comply with regulations, but to stay competitive and sustainable in the long run. Keeping up to date with any rapid tax updates in response to competitive markets is vital to maintain the viability of companies based in Slovakia. This strategic alignment by Slovakian companies is not only crucial for their own sustainability but also serves as a model for the wider European Union, demonstrating how economic resilience and environmental responsibility can coexist and drive progress across the continent.

Authors: Julius Cincala, Partner at Kreston Slovakia, and Zuzana Siderova, Tax Manager, Tax Advisor and Transfer pricing specialist, Kreston Slovakia

Reposted from: https://www.kreston.com/article/eu-sustainability-regulations/