Central Eastern Europe is considered one of the best performing markets for business expansion in the world, but there are three common mistakes companies make when expanding in this region.
Central Eastern Europe (CEE) is considered one of the best performing markets for business expansion, thanks to its political stability and continuous growth. Romania and Poland are expecting to grow approximately 3% in 2018 while the growth of other countries in the European Union will be around 1.6%. Consumer and business confidence has improved significantly in Poland, Hungary and Romania, as have employment levels, according to CEEMEA Business Group.
However, when expanding to this dynamic region, companies may come across challenges they hadn’t expected before they began the expansion process.
Where are companies going wrong?
During the last two years, TMF Group has conducted multiple surveys such as the latest research in partnership with GFK: ‘Insight into Multi-Country Outsourced Services Trends’, which reveals two common challenges among multinationals when they are investing in this region. The first is the compliance framework, including the short notice given for regulatory changes, the number of reports and the frequency with which it is necessary to present and file reports and returns. The second most common challenge is finding the right and qualified labour.
Considering the compliance framework, we have identified three common mistakes when building and planning expansion to the Central Eastern European countries.
Failing to establish the right timescale
There is a lack of understanding and a gap in expectations among multinationals on when their new business or entity can be ready to operate and start producing. What companies lack in their expansion plan is consideration for the small requirements that can delay the operation for months. For example, while most countries in Western Europe tend to have the same process for company incorporation and tax registration, in CEE countries such as Romania, Bulgaria and the Czech Republic, this process will be run separately. Tax registration will be a stand-alone process after the company’s incorporation. In Romania, VAT registration can take up to 30 days.
It is important to plan for such timescales because delays could impact on operation start-up. For example, if you don’t have your VAT registration then you will be unable to conduct VAT-able transactions, such as EU sales and acquisitions. This will impact cash flow and could delay the entire operation. It is essential to understand all the registration processes in the region, to avoid delays on a new operation’s ‘go-live’ date.
Multinationals don’t integrate local standards with global operating work
Around 50% of companies are working or trying to migrate to a shared service centre model because they believe it will reduce cost and improve efficiency in processes such as managing accounting and tax. However, in Central Eastern Europe this might not be suitable because local governments are restricted by local regulations. It is mandatory among the nine countries of Central Eastern Europe that the corporate accounting books are maintained in the local language (either Polish, Romanian, Hungarian, Czech, etc.), and in the local currency (either Polish Zloty, Romanian Leu, Hungarian forint, etc.), plus that the accounting documents are physically stored in the relevant country. This hampers a central services process.
Additionally, requirements such as accounting reporting or software can differ from country to country and have different criteria.
A certain degree of customisation is required in order to adapt the business correctly to the new regulations and local compliance. It is necessary to have local knowledge in local market regulations, local understanding of the rules and sometimes even local software for a company to meet local government reporting standards.
Budgets can be wrong
When developing a business plan, one of the key areas is budgeting the cost of the expansion project. Companies can often forget to include the costs of the tax registrations, or costs in localising their enterprise resource planning (ERP), hiring the correct talent, etc. For example, one of the main concerns of Human Resources departments is finding the right talent, according to the Insight into Multi-Country Outsourced Services Trends report, so it will be important to understand local market salaries, experience, the education system, etc. to be sure that the right budget is prepared to cover the necessary investment in the talent needed to develop the operation.
This cost can be accurately anticipated if you understand the whole framework of local regulations.
In our recent webinar What’s driving foreign investment in Central and Eastern Europe?, you can learn more not only about the opportunities in the region but also the challenges that companies are facing and how to overcome them to succeed in the market.
How can TMF Group help with this particular subject?
The CEE region offers business opportunities for companies of all sizes, across all industry sectors. It boasts domestic market stability, lower-than-EU-average tax rates and favourable tax environments. TMF Group is here to help you realise your business opportunities in CEE, whether you are entering the market for the first time, or looking to simplify your operations.
With local experts in the nine countries: Bulgaria (Sofia), Croatia (Zagreb), Czech Republic (Prague), Hungary (Budapest), Poland (Warsaw and Katowice), Romania (Bucharest), Serbia (Belgrade), Slovakia (Bratislava) and Slovenia (Ljubljana), we are able to set up your business structure; assure compliance on your accounting and tax processes; align your employee payments with your corporate policies and local legislation, and be compliant with often complex regulatory changes in the region.