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Country Study, Slovenia: Winning the Transitional Economies Race

are expected to be about 570 billion Tolars (about $5 Bill.).[41] A

significant portion of the expenditures are allocated for health, education

and infrastructure. Revenues for 1996 were expected to be 582 billion

Tolars, about

46.5% of Slovenia’s GDP.[42] The surplus is allocated to cover the

Pension and Invalidity Insurance Funds, this action preempts the expected

expenditure of 42 billions Tolars in 1997 towards the Pension Fund which is

a 20% increase from 1996.[43] One-third of the budget will be spent on

Civil Servants salaries and contributions, much higher that the 1995, due

to the desire to increase public employees salaries. Nearly 11 billion

Tolars will be spent on subsidies to exporters for social welfare

contributions, technological development, and for maintaining current

levels of employment.[44] Although, there were no current figures available

concerning defense expenditures figures from 1993 show 13.4 billion Tolars

were allocated for the military, about 4.5% of the GDP.[45] Finally about

four million Tolars are allocated for liabilities in international

agreements to members of the Paris Club and commercial banks; this is a new

item in the budget.[46] However, the current expenditures are being met

by disapproval from the Slovenian businessmen, who wanted a budget for 1996

to be equivalent to the 1995 budget. This demand was not possible for

Slovenia, as it tries to battle inflation, unemployment and provide for

its’ citizens welfare.

Tax Structure and Administration

Intergovernmental Financial Relationships

Slovenia has had relative success with the administration and

collection of taxes from its citizens and corporations at all levels of

government.. Article 147 of the Constitution states very generally: " the

state shall levy taxes, custom duties and other charges in accordance with

statute. Local government bodies shall levy taxes and other charges in

such circumstances as are determined by this Constitution and by

statute."[47] This constant flow of funds has allowed the government to

continue to provide needed services, as well as end several years, since

independence, with budget surpluses. The country has tried to diversify

the tax base, which has also added to the increased stability of the tax



The Slovene government is making extra efforts to insure successful

implementation of tax policy. Slovenian tax administrators are taking

part in the OECD’s multilateral tax network program which provides advice

on taxation practice, policy and systems, with workshops for administrators

in member countries such as Austria, Denmark, Hungary and Turkey. In

addition, this program will evaluate the countries after the year is over,

regarding their effectiveness in implementing tax policy. A key factor

that has aided in the current implementation of the tax system is that the

Slovenian Tolar is internally convertible, and therefore, foreign investors

or business dealing can take place easily in foreign or domestic currency.

In 1997, Slovenia intends to unify the tax administration offices.

Currently, there are two tax collection services, one for the companies and

one for the individuals.[48] In addition, according to OECD, in the next

two years there will be significant changes in the tax policy and

administration in Slovenia.

Currently, the tax year runs from 1 January to 31 December, with tax

returns to be filed by 31 March of the following year (15 April for a

consolidated return).[49] In general, the system depends on self-

assessment, however, if there is falsification of earnings or evasion of

taxes, the government assesses heavy penalties.

The government, although requiring penalties for late payments is

being realistic in the charges it assess for tardiness. A new act was

passed in 1995, which reduced the late payment fees from 25% of amount owed

to 18% on all public aged debt including income tax, sales tax and social

security late payments.[50]

The tax administrators have developed a system which allows for

advance payment of taxes and deadlines that apply to readjustment of taxes.

Balances due on taxes must be paid five days after the annual return has

been filed and if readjustments are made then the company has thirty days

to make the payment.[51]

Corporate Tax and Incentives

As of 1995, the corporate tax rate was at 25%.[52] The republic has

made a large effort to keep the business environment attractive to foreign

investors. However, the rates were increased to 30% by 1996 and now

legislation is trying to reduce the amount to 25% once again; the reduction

in taxable income due to re-investment exemptions could make the effective

rate 20%, if legislation goes through.[53] Slovenia continues to honor

double taxation treaties signed by the former Yugoslavian government. In

addition, a temporary tax exemption regarding capital gains derived from

securities transactions has been extended to January 1, 1997.[54] "As of

January 1, 1994, up to 20% of the amount reinvested in fixed assets(except

for cars used for personal purposes) and long-term intangible assets is

deductible from the investor’s taxable income, provided that the amount

does not exceed the tax base."[55] The tax structure also provides for 30%

deductions from taxable income for the first year if the corporation

hires an unemployed or disabled worker.

"Taxable income is defined as gross income less expenses incurred in

earning that income."[56] Some of the deductions include: 1) depreciation

on fixed assets if it does not exceed set rates, with straight line

depreciation being used only;[57] 2) interest if it does not exceed the

average interbank interest rate; 3) sums contributed for future reserves

for investment; 4) up to 70% for entertainment expenses; 5) losses may be

only carried forward for five years.[58]

Furthermore, for corporation inventories are valued using the first-in,

first-out method; last-in, first-out method; or the weighted average


Individual Tax

If one is a resident citizen of Slovenia, taxable income includes

income world-wide, however, for non-residents only income earned within

Slovenia can be taxed. The system does not provide for the taxation of

families, only individuals; therefore, joint tax returns are not filled.

The income tax is paid directly through the employer and is based on

progressive rates for the income earned in the previous month.[59] (See

Appendix XI) In addition, capital gains of real estate are taxable. After

January 1, 1997, gains from sales of securities will also be taxable.[60]

The government has some deductions and relief built into the system.

All individuals may deduct an amount equal to 11% of the annual wage in

Slovenia; in fact if you earn less than this amount you do not have to file

a return. Furthermore, up to 3% of the tax base can be deducted for each

of the following: 1) expenses in purchasing state securities, 2) membership

fees in various parties or organizations, 3) payments for health care, 4)

payments for education.[61]

Withholding Tax

Slovenia levies a withholding tax of 25% for residents and 15% for

non-residents. There is also a withholding tax on royalties of 25% on all


Inheritance and Gift Tax

Beneficiaries of the inheritance or gift must pay taxes unless they

are the spouse or child of the donor. If the beneficiary is a

relative(i.e., brother, sister , nephew or niece) they have to pay only 5

Tolars on receipts with a market value of 1,164,822 Tolars. However, if

the beneficiary is not a relative they may have to pay up to 30% of the

value in taxes.[63]

Property Tax

Once the value of the building is determined by the government, a

progressive rate of no more than 1.5% is applied. Some buildings may be

exempt. Their is also a tax of 2% of the purchase price on immovable


Customs and Excise Duties

Rates for imports vary form 0% to 25% of the value of the goods.

There are also some excise taxes which apply to fuel, tobacco, and


Value-Added Tax

The VAT, which was introduced to Slovenia at the beginning of 1996,

will provide important revenue to the Slovenian government. Before the VAT

was introduced, sales tax was assessed on the sale of retail goods and

services and on imports. However, several rates applied depending on the

type of good. The tax was ultimately paid by the consumer. The VAT has

already been introduced in 5 other transitional economies and it seems to

be effective. In addition according to OECD, the VAT continues to be a key

in the tax reform process in the transition countries.

As the previous discussion shows, Slovenia has developed a highly

specific, and involved tax structure. The country is making an attempt to

have a sophisticated tax administration and structure that is effective,

efficient, equitable and has a yield that will allow for enough revenue for

the government to function. In addition, the country has a highly

diversified tax base, which also strengthens the income from tax revenue.

Social Insurance

Slovenia’s current social safety nets and income transfers are

obstructing free market labor productivity, postponing structural

adjustment and are harboring high levels of unemployment. Before entry

into the EU, Slovenia must alter its social programs. There is a strong

belief among EU members that the assistance for employment fostering

policies leading to the future improvement in the quality of labor in

Slovenia is more efficient and desirable than the future income transfers

covering unemployment benefits and social safety that would otherwise have

to be provided.[66]


Housing Policy is yet another area of concern for the government. In

October of 1991, the government of Slovenia passed the Housing Act.

Creating a state housing policy was necessary for the private ownership of

land and building. In addition, the government created the National

Housing Fund which was anticipated to be a "social cushion’ and was

supposed to create national housing policy.[67] This did not happen!

The Housing Act ended up back firing. The Act was created to allow

for equal ownership for all citizens. Unfortunately, some people were able

to purchase greater amounts of property and effectively bought out the

property rights of their neighbors.[68] This situation has caused many

tenant-owner conflicts. Another problem created by the Housing Act was the

inequity in the amount of housing sold in each region. There was a great

amount of disparity which may cause problems for future housing reforms.


Slovenia experienced high levels of unemployment in its first stage

of transition as the number of individuals seeking early retirement

increased substantially. In addition, many enterprises that had entire

branches, equipment, factories in the other Yugoslavian republics went

bankrupt or lost a large sector of their business.[69] Therefore,

unemployment was a huge social problem for the new Republic of Slovenia. In

1992, 140,000 people were unemployed.[70] The transition of the economy

brought about increased need for social insurance. The residents

considered retirement income systems(RIC) the most important part of the

social safety net since the RIC alleviated the economic hardships faced

by the retired elderly. The government of Slovenia knew how these problems

used to be solved and they knew how the EU wanted them to deal with it.

The dilemma was deciding what was in the country’s best interest.

There was a complex relationship between spending priorities on

social safety and on human capital development. The trade-off in the short-

run balanced the government and the private sector expenditures on welfare

and investment in human capital against high unemployment, increasing

poverty, and a high share of retired persons in the total population

absorbing funds that could otherwise be allocated on labor training

programs. However, investment in human capital had the possibility of

increasing productivity and labor force competitiveness in the long-run.

Without sufficient qualifications, Slovenia’s workers experienced high

unemployment and created a demand for compensatory benefits that would have

to be financed either by limited domestic sources or by external


Pensions and Disability

In 1995, the managers of the Pension and Disability Insurance Fund

(ZPIZ) finished the business year with a deficit of 12 billion Tolars.[72]

However, the ZPIZ has made it a priority to insure that all pensioners

received their pensions. Additional support for the ZPIZ and their policy

came from the Slovenian Parliament, which passed an increase of 42 billion

Tolars for the funding of the ZPIZ.[73] Furthermore, Slovenia is one of

the few countries in transition that has tried to keep monthly old-age

pensions as a relatively constant percentage rate of the average monthly

gross wages. (See Appendix XII ) This has helped elderly citizens provide

for their own needs through their pensions.


Slovenia also has a National Unemployment Office (RZZ). This office

reported in February 1996, 123,689 people remained unemployed which is 1.9%

more than February 1995.[74] This further supports that the economy of

Slovenia may be experiencing a slow down. As of July of 1996, the RZZ

reported that unemployment was 13.7% but according to the ILO definition of

unemployment, the figure was much lower at 7.3%.[75] However, with the

change in government, hopes are that these issues will be discussed and

policies implemented to reduce the level of unemployment. Currently, the

country is providing unemployment insurance for the people without jobs who

register with the RZZ.


Slovenia remains a powerhouse in comparison to some of the other

former Eastern Bloc countries. It has proceed with some caution, realizing

the changes that are necessary for a stable free market economy. Now, with

new leaders, the country has to decide whether it will continue the course

set forth by the originators of the country or whether it will go back,

taking more conservative steps. From Slovenia’s current actions, it would

seem that the next step is either Associate Membership or Full Membership

in the European Union.

Janez Drnovsek when presenting the 1996 budget to parliament informed

the legislative body that "Slovenia met three of the five Maastricht

criteria for introducing a single European currency: ‘Our public debt is

well below the European average and the budget is balanced, which is

significantly better than the European Union average. We also meet the

third criterion on the convertibility of the national currency. Two

criteria remain: both our average interest rate and our inflation is too

high, but we are planning to cut inflation down to about 6.5%.’"[76]

Currently, Slovenia seems to be ahead of some of the current members of the

EU in satisfying the Maastricht Treaty’s requirements. In addition, the

question remains, whether Slovenia will join NATO. The new parliament may

have a well defined opposition to this prospect.

Additionally, Slovenia is flourishing as an economic center of

commerce in the East. Slovenia needs to strengthen its ties with other

eastern countries, such as Russia, in order to develop its trade partners.

The transitioning countries can serve as a new market for the West as well

as Slovenia. Furthermore, additional trade partners exist in the far east,

which are currently not being considered.

Many challenges face the transition countries as the century comes to

a close. It will be important to watch these economies as they begin to

rise above the already established economies of the West. It will be

important that Slovenia manage it’s inflation rate, keep interest rates at

a stable level and insure that the Tolar remain at a controlled level. All

these factors will play a large role in determining successful public

financial and monetary policy in the Republic of Slovenia.



[2] Golnik, Richard. “Calm & Safe Slovenia.” Emerging Nations -Slovenia,

June 1995.

[3] Slovenia was at one point a part of the Austro-Hungarian Empire and

thus always had felt a strong historical and economic ties to the Western

European countries.

[4]Ibid, p.4.

[5]Danforth, Kenneth. “Slovenia: Open markets in an open society.” Europe.

May 1996, no.356, p.22(3).

[6]Golnik, 1995, p.1.

[7]Mencinger, Joze. (1989) The Yugoslav economy: Systemic changes, 1945-

1986. Pittsburgh, PA.: University of Pittsburgh Center for Russian and

East European Studies. The Serbian/Bosnian/Croatian conflict was getting

worse and the country was starting to fall apart.

[8] Http://soho.ios.com/`finsol/emregions/e-europe/slovenia.htm, p.4.

[9]Schneider, Jens. “Slovenia searches for Europe.” World Press Review,

Jan. 1993 Vol.40, No.1, p.42(1).

[10]Danforth, 1996, p.2. and “Unimaginable only a few years ago, one of

the six republics that once composed Yugoslavia is being praised in most

Western capitals as the model for any ex-communist state aspiring to

membership in NATO and the European Union.”

[11]EIU Country Report- 2nd Quarter. Slovenia. The Economist Intelligence

Unit Limited, 1996.

[12]Http://www.gzs.si/eng/slovenia/busPages/TRENDS/TREND_1.HTM and 5.HTM,

Chamber of Economy of Slovenia 1996.

[13]Golnik, 1995, p.1.

[14]Chamber of Economy of Slovenia. “Slovenia’s Economic Trends.” 1996.

[15]EIU Country Report, 1996.

[16]Gow, James. (1994). "Slovenia: Stabilization or stagnation?" RFE-RL

Research Report, Jan. 7th, vol. 3, No. 1.

[17]Golnik, 1995, p.2.

[18]Http://www.new-europe.gr/profiles/slovenia.htm, p.3.

[19]Ibid., p.3.

[20]Bank of Slovenia. (1996). "General information on Slovenia." Monthly

Bulletin: April.

[21]Golnik, 1995.

[22]Price Waterhouse. (1996). "Privatization in Slovenia." Price

Waterhouse. January 22.

[23]Ibid., 1996.

[24]EIU Country Report, 1996.

[25]EIU Country Report, 1996.

[26]EIU Country Report, 1996.

[27]Golnik, 1995, p.3.

[28]Markotich, Stan.(1996) "Slovenian Election Final." Open Media Research


[29]Markotich, Stan.(1996) "Slovenia’s former Communists say ‘No’ to NATO."

Open Media Research Institute.

[30] The Economist. “Much to do: Slovenia.” Nov. 2, 1996 vol.341 no.7990


[31]Shortall, Fergal. Slovenia: Birth of an Adriatic Tiger.

http://www.economics. tcd.ie/ser/1996/slovenia.htm.

[32]Chamber of the Economy of Slovenia, 1996.

[33]Shortall, 1996.

[34]Ibid., 1996.

[35]Ibid., 1996.

[36] Chamber of Economy of Slovenia. (1996) Exchange Rate and Monetary

Policy. Http://www.gzs.si/eng/slovenia/busPages/Trends/Trend_4.HTM.

[37]Exchange Rates for Companies. Banka Slovenia. 1996.

[38]The Economist. (1996) "Creditable: Eastern European Finance." July 13,

Vol.340, No. 7974, p.72.

[39]General Information on Slovenia. Banka Slovenia. May 1996

[40]Institutional Investor, March 1996.

[41]Markotich, Stan.(1996) "Slovenian Parliament Approves Draft Budget."

Open Media Research Institute.

[42]Petrov, Sabina. (1995). "Parliamentary election accelerates the

enactment of the Slovenian Budget." Banka@ZSE.COM.HR.

[43]Ibid., p.1.

[44]Ibid., p.1.

[45]Http://www.odci.gov/cia/publications/95facts/si.html, p.7.

[46]Ibid., p.1.

[47] Slovenian National Constitution. Section- Public Finance. Adopted


[48] Adair, Robin. (1996). "Slovenia introduces Value-Added Tax as part of

system reform." Transition Brief. No. 2 Winter.

[49]Deloitte & Touche LLP. (1996). "Slovenia." Taxation in Eastern Europe.


[50]Price Waterhouse. (1995). " Taxation- Introduction and Developments."

Business Monitor. 4 September, p.2.


[52]Ibid., p.1.

[53]Deloitte & Touche, LLP, p.3.

[54]Ibid., p.2.

[55]Deloitte & Touche, LLP, 1996.

[56]Ibid. p.4.

[57]Ibid. p.4- Rates include 5% to 10% for building and other structures,

33.3% for most machinery and equipment( including vehicles), 50% for

computer equipment, and 20% for goodwill.

[58]Ibid., 1996.

[59]Ibid., 1996. Income tax is paid on personal income, income form

agriculture, income from various activities, investment income, and income

form property and property rights. Personal income consists of salary

income, pension income, or any other gross receipts of an employee,

including fringe-benefits, value of gifts, accommodations or used cars for

personal purposes. Income from property and property rights includes rental

income, income from profit participation, interest income, and royalty


[60]Ibid., 1996.

[61]Ibid., 1996.

[62]Ibid., 1996.

[63]Ibid., 1996.

[64]Ibid., 1996.

[65]Ibid., 1996.

[66]Shortall, 1996.

[67]Tanovnik, Tine. (1994). "The sale of the social housing stock in

Slovenia: what happened and why." Urban Studies. Nov. Vol. 31, No. 9,


[68]Sendi, Richard. (1995). "Housing reform and housing conflict: the

privatization and denationalization of public housing in the Republic of

Slovenia in practice." International Journal of Urban and Regional

Research. Sept. Vol.19, No. 3 p. 435 (12).

[69]Golnik, 1995, p.1.

[70]Golnik, 1995, p.1.

[71]Orlowski, Lucjan T. (1995) "Social Safety Nets in Central Europe".

Comparative Economic Studies. Vol. 37, No. 2 Pg. 29-48; Summer, p.40.

[72]Business Report on Slovenia. (1996).

[73]Petrov, 1995. P.1.

[74]Business Report on Slovenia. (1996).

[75]Chamber of Economy of Slovenia. (1996). Demand and Employment.


[76]Petrov, 1995. p.1.

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