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Conditions for joint ventures with foreign participation in Poland
J BUSN RES 1992124167-72
67
Conditions for Joint Ventures With Foreign Participation in Poland Andrzej J. Miciiiski University of Lodz
Since 1976, a process of phasewise opening of Poland’s economy for foreign investors has been monitored. Until December 1988, 2 Parliament Acts existed regulating both the inflow of foreign real investment as well as the working conditions for foreign firms and joint ventures. The new and uniform Act on Joint Ventures passed at the very end of 1988 proves to be an important step ahead on the path leading to easier access for foreign capital to help the country’s underutilized resources, and to liberalization of operating conditions. Offering a favorable climate for foreign investment, Poland’s authorities set up a new Foreign Investment Agency to supervise capital inflow from the outside. All possible new joint ventures and foreign firms are to be examined with the UNIDO feasibility methodology. Introduction The possibilities of real investment in Poland opened for foreign capital as early as 1976, They widened during the next decade, and in 1986, 2 cases of economic activity evolved. One of them was called “the foreign small scale firm,” in other words, a small business established and working in Poland, funded basically by foreign capital invested by individuals or corporate bodies from abroad. The other possibility was to enter into larger-scale partnerships with large enterprises from Poland, preferably state-owned. The differentiation between these 2 types of economic activity may certainly look somewhat artificial, as differences in sizes of firms may and do change over time. Nevertheless, this division was due to separate legal regulations for each, which existed then in Poland. Namely, the first of the above 2 cases of activity was allowed into Poland’s economic landscape by the Parliament Act of July 6, 1982. In our opinion, the main objective of this new enactment was to increase the domestic output of goods and services to be offered in the internal market through development of small-scale business based on foreign capital inflow. Increased exports should be considered as a side effect rather than as a leading motive of this law. The above Act proved to be quite effective: at the end of 1988, the number of
Address correspondence to Andrrej J. Miciriski, University of Lodz, Institute of Foreign Trade, 3/5 Armii Ludowej Street. 90-950 tbdi, Poland.
Journal of Business Research 24, 67-72 (1992) 0 1992 Elsevier Science Publishing Co., Inc. 655 Avenue of the Americas, New York. NY 10010
0148-2%3/92/$3.50
68
J BUSN RES 1992:24:67-72
A. J. Micinski
small enterprises in the country exceeded 700. Still, their overall contribution to the country’s total output or exports was below 1% . The small enterprises in question, depending on the existence and the size of their exports, have been legally entitled to partially transfer their earnings abroad. Successful exporting activities are additionally rewarded through tax rate reductions. Facing strong export incentives, many of the small firms sell their products abroad, mainly to Western Europe, including EEC member countries. It is also worth noting that the Law of 1982 posed no limits to the foreign capital share in those small businesses. On April 23, 1986, the Sejm, Poland’s Parliament, passed another Law allowing for and encouraging foreign investment: The Law on Companies with Foreign Capital Participation, or in short, The Joint Ventures Act. It is worth stressing here that while with “the small scale firms,” the motive of better supplying the internal market dominated, it was not so with the 1986 Act, which strongly promoted exports. The Acts adopted different principles and procedures in giving permissions to undertake economic activity by foreign subjects as well as different conditions of operating either type of enterprises with foreign capital in Poland. The Law of 1982, besides various forms of partnerships, also allowed for establishing small firms fully owned by one person, whereas the one of 1986 opened a possibility for foreign investors to enter into big mixed-capital ventures. Thus, after 1986 there existed 2 Parliament Acts concerning the foreign capital participation in Poland. In fact, they divided such businesses into 2 sectors not uniformly treated by the existing law. This situation provoked objections and accusations from some investors of being in unjustly worse positions than others. In business circles, the Law of 1986 was seen as granting better conditions for foreign investors. As time passed, many originally small individual firms grew in size, thus removing the reason that had led to the existing division. An analogous phenomenon occurred under the other Act: some small-in-size but great-in-importance mixed-capital enterprises came into life. It became clear that the size of a firm ceased to be an important criterion. This fact helped to make clear the need for uniformity in conditions for foreign real investment in the country. Wide discussions were initiated, both in political and in business circles, concerning the necessity for new legal regulations. As a result, a new Parliament Act was issued in which the principles of establishing and operating foreign firms and joint ventures were set anew. The new Parliament Act, since it came into force on December 23, 1988, has been the sole legal framework for establishing and operating new foreign and mixed-capital enterprises in Poland. The new principles are not only uniform but also more encouraging for foreign partners than were the old ones.
Main
Provisions
of the New Act on Joint Ventures of December
23, 1988
General Background The Act in question was adopted by Poland’s Parliament simultaneously with the more general Act on Economic Activity. The Laws aim at creating a favorable
Joint Ventures With Foreign Participation
J BUSN RES 1992:24:67-72
climate for economic growth and at stimulating the whole of economic life in the country. The new Act on Joint Ventures itself should encourage foreign investors to employ their capital in Poland by creating favorable conditions, a stable environment, and guarantees of protection for foreign parties’ property.
The Most Important Regulations Concerning Foreign Firms and Joint Ventures
Establishing and Operating
The Act allows for 2 basic forms of mixed or foreign capital firms. They include: (1) limited liability companies; and (2) joint stock companies. It is explained that under these basic forms, a variety of businesses may start operations. The Law poses no limits as to the area or scope of economic activities of such firms; they can develop industrial or agricultural production, construction, trade, and services, for both the domestic market and exports. An important shift towards more liberal conditions in the new Act is the removal of size limits of joint ventures. Also, the Act does not restrict the share of foreign parties in a joint venture’s equity capital. It can be fully owned by a foreign natural, or legal, body. However, 2 requirements should be met: (1) the value of foreign contribution must not be less than the equivalent of $50,000; and (2) the foreign share cannot be lower that 20% of the equity. Investors can come from any country of the world, be it the West or the East, with no differentiation of conditions. By foreign investors the Law includes natural citizens, companies, banks, or any other body with legal status, as well as companies established by above persons with no legal status, domiciled abroad. Polish partners can be the Treasury, other legal citizens established under Polish law and having their seats in Poland, or natural citizens domiciled in Poland. Joint ventures and foreign firms enjoy numerous privileges according to the Law as compared with other sorts of firms in Poland. The most important ones are as follows: 1. Economic
quantity
freedom: the companies in question solely decide on the subject and of their production, as well as prices. They are free to seek and select
trade partners, etc. 2. Only a small proportion of export proceeds in foreign currencies is to be obligatorily sold to the Treasury (through foreign exchange bank), i.e., 15%, whereas Polish firms have to sell a much bigger part (82% on average). 3. Free distribution of the after-tax profit including free transfer abroad in its hard currency part. 4. Tax privileges: (a) during first 3 years of operation, the companies are exempted from all taxes, the period of exemption being subject to possible further extension (3 more years); (b) thereafter the companies will pay basic rate corporate income tax of 40%; this rate, however, decreases 0.4% against 1% of export share in the firm’s total sales; this tax rate cannot be less than 10%; (c) the profit of a foreign partner being transferred abroad is taxed at the rate of 5 to 15% for investors domiciled in countries that signed with Poland the double taxation avoidance conventions and 30% for others. 5. Free employment policy: the new Act poses no requirements concerning the man-
70
J BUSN RES 1992:24:67-72
A. J. Micinski
aging director (formerly he had to be a citizen of Poland and living there permanently). 6. Customs exemptions: during the first 3 years of operation, the companies do not pay customs duty on the machinery and equipment purchased from abroad; such exemption comprises also items exported after dissolution.
Foreign Investment Agency Act also establishes the Foreign Investment Agency as the bureau of the President of the Agency. The President of the Agency is the central administrative authority in the area of foreign investment, and he is directly responsible to the Prime Minister. The Agency implements the policy of the State on foreign investment. It undertakes measures to encourage foreign investors towards capital engagement in Poland, and supervises the compliance of the operations of joint ventures and foreign firms with the Act in question and with an Establishment Permit. An Establishment Permit is to be issued on application by the President of the Agency. The application should contain the following basic data:
The
Partners, Subject
their names,
and seats
and scope of activities
Period
of operation
Funds
required
Shares
of the partners
being
established
(anticipated)
to commence
Seat of the company
of the company
business,
in company’s and location
equity
equity
included
and form of contribution
of its production
facilities.
act The above data should be accompanied by L+. osures: a draft establishment of a firm, documentary evidence of legal and financial status of prospective partners, and a feasibility study. According to the law, the Agency decides within 2 months from the submission date whether to grant the Permit. After the Permit has been granted, the company will be registered on general conditions, i.e., by the local court, and it may commence its operation immediately afterwards.
Development Cycle of Joint Ventures, Pre-Investment Phase
Studies within the
The development process of a joint venture consists of the following phases: (1) pre-investment phase; (2) investment phase; and (3) operation phase. Very important for the success of a joint venture or foreign firm is the preinvestment phase, which should comprise: (a) identification of the investment possibilities; (b) introductory selection of ideas; (c) shaping of a firm; and (d) appraisals and decisions. Upon the quality and reliability of the studies, which should be carried out within this phase, depend the future profitability and durability of the company. The above may be the reason why pre-feasibility studies, required by the Foreign Investment Agency as an enclosure to application for Establishment Permit, are advised to remain in accordance with methodology recommended for project ap-
Joint Ventures
With Foreign
J
BUSN RES 1992:24:61-72
Participation
71
by UNIDO. This methodology has been comprehensively verified under various socioeconomic conditions, and as a result it has been accepted by many countries as well as international organizations as an important tool of project verification into the pre-investment phase. Taking everything into consideration, the following pre-registration procedure can be suggested for all emerging foreign firms and joint ventures in Poland: praisals
1. Working out of an introductory report based on accepted business concepts concerning the establishing of a joint venture or foreign firm 2. Declaration of will by partners to enter into such a venture 3. Working out of the pre-feasibility study including important aspects and elements of the future operation of the company, projecting 5 years into the future; this study has to be carried out prior to the draft establishment act being initialed by partners 4. For large enterprises, working out of a full feasibility study, which takes into consideration the following topics: market for the commodity, sources of supply, demand, sales schedule and marketing, production program, production capacities, expenditure on materials and their availability, location, technology, construction and equipment, managing staff, workers, financial sources, legal form of the firm and its capital structure, costs, etc.
The studies 3 and 4 have to make it possible also the analysis of profitability and sensitivity of inputs or outputs.
to carry out financial analysis, and against changes of various factors
Conclusion More than 100 joint ventures and foreign firms were granted the Establishment Permit under the 1988 Law within the first 4 months of operation of the Foreign Investment Agency. The interest of business circles in establishing new enterprises seems to be growing. The expectations towards the participation in joint ventures on the side of the Polish firms are: l
Acceleration
l
Better
access to the newest
l
Better
access to raw material
l
Increase
l
Foreign
The strong l
l
of machinery
in export currency points
and equipment
modernization
technology sources
sales inflow.
of those Polish firms should
be listed as follows:
Their contribution to a joint venture may consist of already existing industrial objects, what makes the costs of the whole project considerably lower and its pre-operation phase much shorter Most Polish firms seeking joint venture opportunities lished and well experienced in their areas
have been
long estab-
72
J BUSN RES 1992:24:61-72
A. J. Micitiski
l
They employ
l
Their
l
They usually
highly qualified
personnel
labor costs are still relatively have well-established
low export
channels.
References Burzyfiski, Andrzej, Comments on Foreign Immtment Chamber of Foreign Trade, Warsaw. 1989.
Law of 23rd December
1988. Polish
67
Conditions for Joint Ventures With Foreign Participation in Poland Andrzej J. Miciiiski University of Lodz
Since 1976, a process of phasewise opening of Poland’s economy for foreign investors has been monitored. Until December 1988, 2 Parliament Acts existed regulating both the inflow of foreign real investment as well as the working conditions for foreign firms and joint ventures. The new and uniform Act on Joint Ventures passed at the very end of 1988 proves to be an important step ahead on the path leading to easier access for foreign capital to help the country’s underutilized resources, and to liberalization of operating conditions. Offering a favorable climate for foreign investment, Poland’s authorities set up a new Foreign Investment Agency to supervise capital inflow from the outside. All possible new joint ventures and foreign firms are to be examined with the UNIDO feasibility methodology. Introduction The possibilities of real investment in Poland opened for foreign capital as early as 1976, They widened during the next decade, and in 1986, 2 cases of economic activity evolved. One of them was called “the foreign small scale firm,” in other words, a small business established and working in Poland, funded basically by foreign capital invested by individuals or corporate bodies from abroad. The other possibility was to enter into larger-scale partnerships with large enterprises from Poland, preferably state-owned. The differentiation between these 2 types of economic activity may certainly look somewhat artificial, as differences in sizes of firms may and do change over time. Nevertheless, this division was due to separate legal regulations for each, which existed then in Poland. Namely, the first of the above 2 cases of activity was allowed into Poland’s economic landscape by the Parliament Act of July 6, 1982. In our opinion, the main objective of this new enactment was to increase the domestic output of goods and services to be offered in the internal market through development of small-scale business based on foreign capital inflow. Increased exports should be considered as a side effect rather than as a leading motive of this law. The above Act proved to be quite effective: at the end of 1988, the number of
Address correspondence to Andrrej J. Miciriski, University of Lodz, Institute of Foreign Trade, 3/5 Armii Ludowej Street. 90-950 tbdi, Poland.
Journal of Business Research 24, 67-72 (1992) 0 1992 Elsevier Science Publishing Co., Inc. 655 Avenue of the Americas, New York. NY 10010
0148-2%3/92/$3.50
68
J BUSN RES 1992:24:67-72
A. J. Micinski
small enterprises in the country exceeded 700. Still, their overall contribution to the country’s total output or exports was below 1% . The small enterprises in question, depending on the existence and the size of their exports, have been legally entitled to partially transfer their earnings abroad. Successful exporting activities are additionally rewarded through tax rate reductions. Facing strong export incentives, many of the small firms sell their products abroad, mainly to Western Europe, including EEC member countries. It is also worth noting that the Law of 1982 posed no limits to the foreign capital share in those small businesses. On April 23, 1986, the Sejm, Poland’s Parliament, passed another Law allowing for and encouraging foreign investment: The Law on Companies with Foreign Capital Participation, or in short, The Joint Ventures Act. It is worth stressing here that while with “the small scale firms,” the motive of better supplying the internal market dominated, it was not so with the 1986 Act, which strongly promoted exports. The Acts adopted different principles and procedures in giving permissions to undertake economic activity by foreign subjects as well as different conditions of operating either type of enterprises with foreign capital in Poland. The Law of 1982, besides various forms of partnerships, also allowed for establishing small firms fully owned by one person, whereas the one of 1986 opened a possibility for foreign investors to enter into big mixed-capital ventures. Thus, after 1986 there existed 2 Parliament Acts concerning the foreign capital participation in Poland. In fact, they divided such businesses into 2 sectors not uniformly treated by the existing law. This situation provoked objections and accusations from some investors of being in unjustly worse positions than others. In business circles, the Law of 1986 was seen as granting better conditions for foreign investors. As time passed, many originally small individual firms grew in size, thus removing the reason that had led to the existing division. An analogous phenomenon occurred under the other Act: some small-in-size but great-in-importance mixed-capital enterprises came into life. It became clear that the size of a firm ceased to be an important criterion. This fact helped to make clear the need for uniformity in conditions for foreign real investment in the country. Wide discussions were initiated, both in political and in business circles, concerning the necessity for new legal regulations. As a result, a new Parliament Act was issued in which the principles of establishing and operating foreign firms and joint ventures were set anew. The new Parliament Act, since it came into force on December 23, 1988, has been the sole legal framework for establishing and operating new foreign and mixed-capital enterprises in Poland. The new principles are not only uniform but also more encouraging for foreign partners than were the old ones.
Main
Provisions
of the New Act on Joint Ventures of December
23, 1988
General Background The Act in question was adopted by Poland’s Parliament simultaneously with the more general Act on Economic Activity. The Laws aim at creating a favorable
Joint Ventures With Foreign Participation
J BUSN RES 1992:24:67-72
climate for economic growth and at stimulating the whole of economic life in the country. The new Act on Joint Ventures itself should encourage foreign investors to employ their capital in Poland by creating favorable conditions, a stable environment, and guarantees of protection for foreign parties’ property.
The Most Important Regulations Concerning Foreign Firms and Joint Ventures
Establishing and Operating
The Act allows for 2 basic forms of mixed or foreign capital firms. They include: (1) limited liability companies; and (2) joint stock companies. It is explained that under these basic forms, a variety of businesses may start operations. The Law poses no limits as to the area or scope of economic activities of such firms; they can develop industrial or agricultural production, construction, trade, and services, for both the domestic market and exports. An important shift towards more liberal conditions in the new Act is the removal of size limits of joint ventures. Also, the Act does not restrict the share of foreign parties in a joint venture’s equity capital. It can be fully owned by a foreign natural, or legal, body. However, 2 requirements should be met: (1) the value of foreign contribution must not be less than the equivalent of $50,000; and (2) the foreign share cannot be lower that 20% of the equity. Investors can come from any country of the world, be it the West or the East, with no differentiation of conditions. By foreign investors the Law includes natural citizens, companies, banks, or any other body with legal status, as well as companies established by above persons with no legal status, domiciled abroad. Polish partners can be the Treasury, other legal citizens established under Polish law and having their seats in Poland, or natural citizens domiciled in Poland. Joint ventures and foreign firms enjoy numerous privileges according to the Law as compared with other sorts of firms in Poland. The most important ones are as follows: 1. Economic
quantity
freedom: the companies in question solely decide on the subject and of their production, as well as prices. They are free to seek and select
trade partners, etc. 2. Only a small proportion of export proceeds in foreign currencies is to be obligatorily sold to the Treasury (through foreign exchange bank), i.e., 15%, whereas Polish firms have to sell a much bigger part (82% on average). 3. Free distribution of the after-tax profit including free transfer abroad in its hard currency part. 4. Tax privileges: (a) during first 3 years of operation, the companies are exempted from all taxes, the period of exemption being subject to possible further extension (3 more years); (b) thereafter the companies will pay basic rate corporate income tax of 40%; this rate, however, decreases 0.4% against 1% of export share in the firm’s total sales; this tax rate cannot be less than 10%; (c) the profit of a foreign partner being transferred abroad is taxed at the rate of 5 to 15% for investors domiciled in countries that signed with Poland the double taxation avoidance conventions and 30% for others. 5. Free employment policy: the new Act poses no requirements concerning the man-
70
J BUSN RES 1992:24:67-72
A. J. Micinski
aging director (formerly he had to be a citizen of Poland and living there permanently). 6. Customs exemptions: during the first 3 years of operation, the companies do not pay customs duty on the machinery and equipment purchased from abroad; such exemption comprises also items exported after dissolution.
Foreign Investment Agency Act also establishes the Foreign Investment Agency as the bureau of the President of the Agency. The President of the Agency is the central administrative authority in the area of foreign investment, and he is directly responsible to the Prime Minister. The Agency implements the policy of the State on foreign investment. It undertakes measures to encourage foreign investors towards capital engagement in Poland, and supervises the compliance of the operations of joint ventures and foreign firms with the Act in question and with an Establishment Permit. An Establishment Permit is to be issued on application by the President of the Agency. The application should contain the following basic data:
The
Partners, Subject
their names,
and seats
and scope of activities
Period
of operation
Funds
required
Shares
of the partners
being
established
(anticipated)
to commence
Seat of the company
of the company
business,
in company’s and location
equity
equity
included
and form of contribution
of its production
facilities.
act The above data should be accompanied by L+. osures: a draft establishment of a firm, documentary evidence of legal and financial status of prospective partners, and a feasibility study. According to the law, the Agency decides within 2 months from the submission date whether to grant the Permit. After the Permit has been granted, the company will be registered on general conditions, i.e., by the local court, and it may commence its operation immediately afterwards.
Development Cycle of Joint Ventures, Pre-Investment Phase
Studies within the
The development process of a joint venture consists of the following phases: (1) pre-investment phase; (2) investment phase; and (3) operation phase. Very important for the success of a joint venture or foreign firm is the preinvestment phase, which should comprise: (a) identification of the investment possibilities; (b) introductory selection of ideas; (c) shaping of a firm; and (d) appraisals and decisions. Upon the quality and reliability of the studies, which should be carried out within this phase, depend the future profitability and durability of the company. The above may be the reason why pre-feasibility studies, required by the Foreign Investment Agency as an enclosure to application for Establishment Permit, are advised to remain in accordance with methodology recommended for project ap-
Joint Ventures
With Foreign
J
BUSN RES 1992:24:61-72
Participation
71
by UNIDO. This methodology has been comprehensively verified under various socioeconomic conditions, and as a result it has been accepted by many countries as well as international organizations as an important tool of project verification into the pre-investment phase. Taking everything into consideration, the following pre-registration procedure can be suggested for all emerging foreign firms and joint ventures in Poland: praisals
1. Working out of an introductory report based on accepted business concepts concerning the establishing of a joint venture or foreign firm 2. Declaration of will by partners to enter into such a venture 3. Working out of the pre-feasibility study including important aspects and elements of the future operation of the company, projecting 5 years into the future; this study has to be carried out prior to the draft establishment act being initialed by partners 4. For large enterprises, working out of a full feasibility study, which takes into consideration the following topics: market for the commodity, sources of supply, demand, sales schedule and marketing, production program, production capacities, expenditure on materials and their availability, location, technology, construction and equipment, managing staff, workers, financial sources, legal form of the firm and its capital structure, costs, etc.
The studies 3 and 4 have to make it possible also the analysis of profitability and sensitivity of inputs or outputs.
to carry out financial analysis, and against changes of various factors
Conclusion More than 100 joint ventures and foreign firms were granted the Establishment Permit under the 1988 Law within the first 4 months of operation of the Foreign Investment Agency. The interest of business circles in establishing new enterprises seems to be growing. The expectations towards the participation in joint ventures on the side of the Polish firms are: l
Acceleration
l
Better
access to the newest
l
Better
access to raw material
l
Increase
l
Foreign
The strong l
l
of machinery
in export currency points
and equipment
modernization
technology sources
sales inflow.
of those Polish firms should
be listed as follows:
Their contribution to a joint venture may consist of already existing industrial objects, what makes the costs of the whole project considerably lower and its pre-operation phase much shorter Most Polish firms seeking joint venture opportunities lished and well experienced in their areas
have been
long estab-
72
J BUSN RES 1992:24:61-72
A. J. Micitiski
l
They employ
l
Their
l
They usually
highly qualified
personnel
labor costs are still relatively have well-established
low export
channels.
References Burzyfiski, Andrzej, Comments on Foreign Immtment Chamber of Foreign Trade, Warsaw. 1989.
Law of 23rd December
1988. Polish