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PODNIKOVÁ EKONOMIKA ECONOMICS 5 BOA

Učebné texty Ing. Helena Fra ňová

Obchodná akadémia, Akademika Hronca 8,

Rožňava

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1 MONEY

1.1 HISTORY OF MONEY The earliest form of trade was by barter . But barter has many drawbacks. Before the Puritan

family could plan its dinner, it had to find someone willing to accept cloth in payment for fish.

Or suppose they wanted to swap a cow for a few fish. How would they decide how many fish

are worth a cow?

Money can be anything that is generally accepted in payment for goods and services .

From the earliest times precious metals such as gold, silver and copper have been the most

popular forms of money. But throughout the history societies have used such things for their

money as tobacco, salt (the word salary comes from Latin salt), fish hooks, shells and

various forms of paper.

Stage 1 – the earliest form of money was goods (knives, beads, cattle etc.) among other

objects were used as money because people were willing to accept these in exchange for

their produce. Commodity money was quickly abandoned because many of the goods did

not posses the essential characteristics of a good money.

Money should have the following qualities:

a) Stability – the value of money should be more or less the same today as

tomorrow

b) Portability – modern money has to be small enough and light enough for people

to carry.

c) Durability – the metal chosen must have a reasonable life expectancy. For that

reason most countries use high-quality paper.

d) Uniformity – equal denominations of money should have the same value.

e) Divisibility – one of the principal advantages of money over barter is its ability to

be divided into parts.

f) Recognizability – money should be hard to copy and easy to recognize for what

it is. The quality of paper and intricate engravings make paper money difficult to

counterfeit.

g) Scarcity – only if money is scarce will people value i tas a commodity that can be

used in ixchange.

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Stage 2 – Precious metals such as gold and silver, have always been scarce enough to

make them a possible money. However, trading with metals involved carrying around

a weighing scale and tools to cut the metals.

Stage 3 – The problem of portability that cursed metals led to the natural development of

coinage . Precious metals in predetermined weights were often stamped with the face of king

and a stamp to show their value. Coins were often debased by clipping the precious metal

from the edges of the coins by using them and also by monarchs that called in coins for

reminting on special occasion and by mixing cheap metals with gold and silver, so the metal

content of coins was virtually worthless.

Stage 4 – The first paper money was issued by the early goldsmiths, who accepted

deposits of precious metals for keeping in their safes. In return they issued a paper receipt to

the owner.

Stage 5 – Today the government-owned bank has the sole right to issue notes and coins,

but this money can no longer be converted into gold. Today you do not even have to have

cash to pay your debt, you can use deposit money.

1.2 FUNCTIONS OF MONEY Money can be defined by what it does, which is to provide:

• A Medium of Exchange . People can sell what they have to anyone and use the money

to buy what they want. Money therefore, is the medium that enables exchanges to be

made easily.

• A Measure of value . Money enables us to state the price of something in terms that

everyone can understand.

• A Store of value . Money enables us to use the value of something that we sell today to

make a purchase some time in the future.

Economists use labels M1, M2, M3 and L (monetary aggregates) to refer to different

categories of money according to their liquidity – ability to axchange an asset for cash

without a loss of value.

M1 – implies

A) currency that consists of paper money and coins. Currency is a legal tender . This

means the law requires that it be accepted in payment of a debt.

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B) demand deposits – they are checking accounts held by the public at commercial banks.

Deposits are available on demand by writing a check. These checking accounts do not

pay any interest.

C) other checkable deposits allow the depositor to make withdrawals and payments by

check.

D) traveler´s checks – are sold in various denominations by banks and travel agencies..

Buyers pay the face amount of the check plus a small fee for the service. These are the

most liquid forms of money referred to as near money and can be disbursed by a written

draft or via automatic teller machine.

M2 – consists of M1 plus money-market accounts, saving accounts, mutual fund accounts

and other easily liquidated kinds of savings of people and companies held not just in

banks, but in all the different financial institutions.

M3 – consists of M2 plus large-denomination certificates of deposits held by private

institutions.

L – consists of M3 plus most securities (bonds, treasury bills and other government- issued

credit instruments.

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2 BANKING SYSTEM

2.1 THE DEVELOPMENT OF BANKING The development of our banking system began in the Middle Ages. The major forms of

money in those days, gold and silver coins, were inconvenient, people began depositing their

coins with local goldsmiths, who gave them a written receipt in exchange for the coins. In this

way the goldsmith provided services similar to those banks offer today. Merchants accepted

the receits in payment for goods because could redeem them for gold at a goldsmith´s shop.

As their use spread, the earliest form of paper money in Western Europe came into being.

Originally, a goldsmith´s receipts were fully backed by gold – they represented a specific

amount of gold in storage. In time, however, goldsmiths noticed that on most days the gold

that people withdrew was less than the amount deposited. This allowed them to lend some of

their depositor´s gold to other people for a fee – interest.

2.2 COMMERCIAL BANKS A commercial bank is a profit-making organization (usually a public limited company owned

by shareholders) that accepts deposits from individuals and corporations in the form of

checking and saving accounts (on which they pay interest) and uses some of these funds to

make interest bearing loans to other customers. Commercial banks make a profit from the

difference know as margin between the higher interest rate they charge borrowers and the

rates they pay to depositors. For that reason, savings and loan associations, mutual saving

banks, and credit unions are commonly called thrift institutions.

We can distinguish:

1. Specialized banks with specialized functions:

o - Reatil banks that work with individuals or small companies. They receive

deposits and make loans for them.

o - Investment banks that work with big companies. They give financial advice,

organize mergers and takeover bids and raise money by issuing shares and

bonds.

o - Clearing banks pass cheques and other payments through the banking

system.

o - Private banks manage the assets of rich people or high net worth individuals

o - Building societies provide loans to people who wish to buy property known as

mortgages. They can also arrange insurance, cash-dispensing machines,

cheque-books and estate agency services to help people find houses. Building

societies are mutual societies owned by their savers. They are non-profit-making

organizations so any suplus of revenue over costs is spent on making the

business better or offering their savers higher rates of interest.

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o - Savings and loan associations accept saving and demand deposits and

provide home mortgage loans.

o - Credit Unions are nonprofit, member-owned financial cooperatives that offer

banking services (accept deposits at relatively high rates and make short-term

loans at relatively low rates, counseling, life insurance policies and limited

number of home mortgages) to its members.

2. Universal banks doing all kinds of financial business. Today many large international

conglomerates (companies formed by mergers and takeovers) offer a complete range of

financial services so individuals and companies can use a single financial institution for

all their financial needs.

2.2.1 SERVICES OF COMMERCIAL BANKS

h) Accepting and holding deposits . (demand deposits and time deposits) People

deposit their savings in banks because they know their money will be returned

when they want it. In addition to the physical protection against fire and theft,

banks also offer deposit insurance – garantee all savings accounts up to principal

value.

i) Making loans . A main function of banks is to act as a financial middleman by

channeling money from depositors – those who wish to save money for future use

to borrowers – those who want to spend it now. Banks do this by making loans to

businesses (enable firms to meet current bills and finance expansion) and

consumers (enable individuals and families to enjoy goods and services

immediately, while paying for them with future earnings.

j) Foreign currency exchange . Banks can buy and sell foreign currencies for their

own benefit or for their clients. Importers, exporters and travellers are major users

of these services.

k) Safekeeping . Many banks rent safe-deposit boxes in their vaults to persons

seeking a safe and secure place for their valuables.

l) Credit cards and traveler´s checks . The Visa and Access cards are operated by

the commercial banks. People can use credit cards to make payment and then

pay an annual fee to use the credit card. Debit cards allow customers to make

withdrawals and do other transactions at cash dispensers. Credit cards can be

used for buying goods and services as well as for borrowing money.

m) Brokerage . Some banks entered the brokerage business. As brokers they buy

and sell stocks and bonds for their clients.

n) Letter of credit . Banks may aid commerce by writting Letters of credit. In these

documents, the bank guarantees one party (seller) payment when certain

conditions are met (delivery of merchandise).

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o) Counseling . Banks give advice to other businesses e.g. a bank may provide

assistance to a firm involved in a corporate merger or takeover, banks offer

advice about investments and private pension plan.

p) Automated teller machines offer customers the convenience of 24-hour banking

at a variety of outlets such as supemarkets, department stores in addition to the

bank´s regular branches. Depositors can get cash, trabsfer funds and make

deposits at their own discretion with the use of a computer-coded personalized

plastic access card.

q) Funds transfer system . People and companies can pay their bills and invoices

via bank transfer system, which means that banks can transfer money from one

customer´s bank account to another one at the same or another bank.

r) E-banking . People can use their mobiles or computers to transfer funds between

accounts, make payments and monitor their account, ask for a loan or cal lup

stock and bonds quotes and data on the latest interest rates being offered.

(telephone banking, internet banking, home banking) There is a monthly fee for

the service.

s) Factoring . When a firm sells many of its products on credit to consumers and

buyers are too slow in paying their bills, the company thus have a large amount of

money in accounts of recevable. A factor (bank) buys the accounts receivable

from the firm in cash (paying 50% - 70% of the value of the accounts receivable).

The factor then collects the money due the firm. How much this cost the firm

depends on the rate the factor charges for this service. The discount rate

implies: - interest rate to the maturity, - risk fee that depends on the nature of the

business and conditions of the economy, and also expense fee.

t) Lease . Lease is a legal agreement between the owner of the equipment or asset

(lessor) and the individual using the equipment (lesee), Under a financial lease

(long-term lease) the lessor (usually a bank or financial institution) makes the

purchase for the company that needs the equipment (lesee) and provides the use

of that equipment in exchange for monthly payments over an agreed number of

years. At the end of the lease period the equipment usually belongs to the lesee.

Under an operating lease (shot-term lease) the lessor provides not just financing,

but also training and maintenance and gives the customer a way to easily dispose

of their old models.

2.2.2 PASSIVE OPERATIONS OF BANKS

a) Demand deposit means that money is available on demand from the depositor.

Banks charge individual consumers a service charge per month or demand

a minimum deposit.

A current account / checking accounts allow customers to take out or withdraw

money with no restriction and they are usually used to make payments from it.

A customer can deposit and withdraw money from this account without giving any

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notice. To help make payments customers holding a current account are given

cheque books. No interest is offered to these accounts as they help customers to

make and receive payments on daily basis and they make a very risky source of

money for banks to invest or use it for loans. By filling in a standing order (fixed

regular sums of money) a customer can instruct a bank to make regular payments

from his or her account to pay gas, electricity, telephone and all other manner of

bills or direct debit (amount of payment and payment date varies) Banks charge

customers for these services. A NOW

(negotiable order of withdrawal) account typically pays an annual interest rate, but

requires a certain minimum balance that must be maintained in the account at all

times and restricts the number of checks that can be written each month.

A super NOW account pays higher interest in order to attract larger deposits.

b) Banks offer a variety of saving accounts. They are used for savings and do not

offer a cheque-book. Interest is offered to encourage people to save, but a notice

of withdrawal has to be given to the bank.

The most common form of saving account is called a passbook savings

account. Depositors do not have checking privilages but get a passbook where

all turnovers and the total balance are recorded as well as the notice of

withdrawal. Other types of saving accounts are offered by

mutual and building societies or insurance companies where saving is combined

with a mortgage or insurance service.

c) Time deposits/deposit accounts are represented mainly by cetificate of

deposit that earns an interest rate to be delivered at the end of the certificate´s

maturity date. The depositor agrees not to withdraw any of the funds in the

account until the end of the speciefied period. CDs are currently available for

periods from a month to 5 years and the interest rates offered vary, depending on

the period of the certificate.

Banks usually send their clients monthly or after each turnover staments listing resent sums

of money going out (debits) and sums coming in (credits).

2.2.3 ACTIVE OPERATIONS OF BANKS

Active operations of banks involve banks´own investment activities as well as offering

different types of loan. Loans are given based on the creditworthiness of the recipient. Banks

want to manage their funds effectively and thus carefully screen loan applicants to ensure

that the loan plus interest will be paid back on time.

People and firms who supply money charge interest for tree main reasons:

• People may lend their money because they do not want to spend it now and they will

only lend if they are compensated with interest for not being able to spend their money

when they want.

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• Lending money is a risky business. There is always a chance that the borrower may not

pay the money back to the lender.

• Because money loses its value over time, people who lend money to others will want

some payment to compensate them for this loss of value. In general, the longer the loan

and the more risky the loan, the higher the interest rate will be.

Banks have more complicated risk assessment methods for corporate customers (business

clients). Banks have to find a balance between liquidity – having cash available when

depositors want it, and different maturities (dates when loans will be repaid). They also have

to balance yield (how much a loan pays) and the risk.

Loans can be divided according to the period of time to:

Short-term loans to consumers and businesses that have to be repaid within 1 year. We

distinguish:

• Overdrafts which allow customers to overdraw an account – they can have a debt up to

an agreed limit on which interest is calculated daily. This is cheaper than an ordinary

personal loan in cash for a short-period for buying consumer goods. The purpose of

a line of credit is to speed the borrowing process so that the firm does not have to go

through the hassle of appying for a new loan every time it needs funds.

• Personal loans/ consumer credits to people to buy consumer goods. The purpose of

taking loan can be stated (cheaper version) or unstated which means that people get

a loan in cash. They are usually unsecured by collateral, banks rely on the earning power

of the borrowers or may require the third party liability as a guarantee.

• Short-term secured loans to customers, usually businesses. Banks require loan

applicants to provide adequate collateral – assets such as inventory (raw material or

merchandise), short-term securities, accounts receivable, that the bank could assume

control over in the case of non repayment. In businesses it is very common to borrow

money by pledging any collateral as a security for a loan.

Long-term loans are given to individuals, corporations and domestic or foreign

governments. They have to be repaid in longer time that exceeds one year, typically within 2-

5 years but could be extended for longer periods of time up to 20 or 30 years. Such loans

require a long and exhausting bargaining before the terms of loan (interest, repayment

period, type and amount of collateral required and default options) are mutually agreed upon.

• Mortgages are loans to people, local government or companies who want to buy, build

or refurbish a real estate. On these loans a property acts as collateral for the bank. If the

borrower does not repay the mortgage, the bank can repossess the house, flat, land or

building and sell it. They are cheaper than other loans but often have floating or variable

interest rates that change according to the supply and demand for money.

• Long-term secured loan where movables (machinery, cars, agricultural equipment,

long-term accounts receivable and long.term securities) are pledged for a loan. A bank

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accepts the firm´s signed statement that the inventories or movables are pledged to the

lender in the event of nonpayment.

2.3 CENTRAL BANK The nation´s central bank (in our country called National Bank of Slovakia , NBS) stands at

the centre of the banking system and has many responsibilities:

• It is the government´s bank . It is responsible for looking after the money received by the

Government (manily taxes) and making its payments (spending on hospitals, schools,

social security benefits) so manages the National Budget Account, issues and

redeems government bonds and other securities. It manages the national debt .

• It stores the nation´s gold and foreign currency reser ves . These reserves are used to

influence the value of the currency. It tries to have an influence on the exchange rate.

• It has the sole right of note issue . NBS is responsible for the printing and issuing of

banknotes and coins and putting them into circulation.

• It is the banker´s bank . NBS acts as a supervisor to the banking system , deciding

who can be a bank and how banks should behave, establishes the rules of behaviour for

the banking system to ensure the safety and soundness of the institutions that handle our

funds. NBS acts as a bank for the commercial banks. These banks keep deposits of their

money at the central bank so that they can settle debts between themselves following the

exchange of cheques and other payments, NBS transfers funds from one commercial

bank to the other. NBS will lend money to banks to try to prevent them from going

bankrupt if they run out of money.

• It develops and carries monetary policy. NBS tries to control the rate of inflation to

maintain financial stability. The aim is to protect the value of currency.

• It supervises the whole financial sector including the financial market.

• It collects financial data and publishes statistics and provides financial information for

customers.

• It is a member of the European System of Central Banks . ESCB bring together the

national central banks of all the member countries of the European Union with the

European Central Bank.

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3 TAXATION

The government budget is a financial plan that summarizes anticipated income and

expenses. When anticipated income equals anticipated expenses, the budget is said to be

balanced . When income is greater than expenses, the difference is said to be a surplus .

When budget expenses are greater than income, the difference is described as a deficit .

Income Expenses • Taxes (income, excise, estate, VAT) • Custom duties, administrative and legal

fees • Social insurance taxes and

contributions (health, social, retirement, unemployment contributions)

• Incomes from the government issued securities (Treassury Bills, Bonds)

• Interest payments on loans made by the public sector and rent from public-owned land and buildings

• Transfer payments to population (benefits paid to pensioners, unemployed, diabled)

• Transfers to local governments (towns, villages to support, regional development, transportation, education)

• Subsidies to production sphere (agriculture, electricity suply, ecology projects)

• Current and capital expenditures on public sector (health care, education, defence, government departments, social security, legal departments)

Why do governments collect taxes?

• Theprincipal purpose of taxes is to pay the cost of government as it fulfills its roles

providing for national defense, building roads and highways and providing for those in

need. Sometimes taxes are levied to protect selected industried (agriculture, export)

• Taxes also discourage activities the government believes to be harmful (excise taxes

on cigarettes and alcohol)

• Taxes have been used to encourage certain activities (modernize plant and increase

productivity, protect environment) by lowering taxes to some firms.

• To regulate the level of economic activity . By increasing or decreasing taxes,

government can directly affect the amount of money available to be spent.

• Taxation can help to reduce differences in incomes between people and gives the

government Money to spend on providing goods and services for less wll off.

All the taxes in the country are together called the tax system.

Compulsory monetary contribution to the state's revenue, assessed and imposed by a

government on the activities, enjoyment, expenditure, income, occupation, privilege,

property, etc., of individuals and organizations.

Taxes in general can be:

Progressive – they take a larger percentage of a higher income and smaller percentage

of a lower income (income tax)

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Proportional – they take the same percentage of all income, regardless of size (capital

income tax)

Regressive – thay take a higher percentage from people with low-incomes than from

people with high incomes (excise taxes)

The Slovak tax system divides taxable persons into two basic categories:

A) legal entities

B) individuals (natural persons).

The tax system, which encompasses various types of direct and indirect taxes, is governed

by various acts and decrees of the Ministry of Finance of the SR.

Tax incidence refers to the individual or business that will actually pay a tax. With

income taxes or tolls, determining the incidence is fairly easy. These are direct taxes.

The burden of some taxes can be avoided if the one responsible can pass the cost on to

someone else. This process is known as tax-shifting and is related to indirect taxes.

When taxes are passed on to customers, they are shifted forward (excise taxes, they are

calculated in prices of goods).

3.1 DIRECT TAXES Direct taxes are collected by the government directly from incomes and wealth of individuals

and businesses.

a) Individuals pay income tax on their vages or salaries and most other money they

receive. It is collected from employee´s incomes by their employers.

b) Capital gain tax is on profits made from the sale of assetes such as shares or from

earned interests on deposit accounts.

c) An inheritance tax is usually imposed on inherited money or property. (Abolished in

January 2004)

d) Companies pay corporation tax on their profits.

The tax period is one fiscal year which is in principle identical to the calendar year. The

obligation for tax registration depends on type of particular tax.

3.1.1 INCOME/CORPORATE TAX

The Income Tax Act stipulates that both legal entities as well as individuals, having their seat

or place of management in the SR – tax residents, are taxable on their worldwide income,

regardless where they earn it. On the other hand, Slovak non tax residents shall pay taxes

only on the income generated from sources in the SR. For the purpose of the determination

of seat or place of management, the decisive factor in relation to individuals varies from the

one by legal entities. In respect of individuals, by the state authorities recognized permanent

residence or physical presence for more than 183 days is required in order to fall within the

scope of tax resident. As regards legal entities, legal seat or location of management is

decisive.

The company tax rate is 23% which is the flat rate for all corporations and legal entities

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without exception. The fiscal year is the calendar year or the taxpayer’s fiscal year.

Tax is due and payable:

• In a single payment if the previous tax liability was less than € 1 659, 70.

• In quarterly instalments if the previous liability was between €1 659, 70 and €16 596,96.

• In monthly instalments if the previous tax liability was over €16 596,96.

Tax returns for the applicable period should be filed by 31 March of the following year.

A three-month extension of the deadline may be requested, but only if income was

earned outside Slovakia.

Taxpayers can donate 1.5 -2% of their paid taxes to non-profit organisations. Based on

a written request, the tax authorities will provide the donated amount to the designated

non-profit organisation.

There is an opportunity to inform the tax authorities in writing about any change of the

tax period from the calendar year to a fiscal yea

The income tax rate for individuals is 19%, regardless of nature or amount of income

gained by a taxable person. The tax base is the difference by which the revenues exceed the

expenses of a taxable person. The Income Tax Act specifies expenses which are deductible

from the income of a legal entity or an entrepreneur on an annual basis. In principle,

expenditures are tax deductible as long as they are related to taxable income. They incur in

order to generate or maintain the taxable income.

Fringe benefits (goods or services) to employees are taxed as part of their total taxable

amount at a flat rate of 19%. Any tax levied on an employee is deducted by the employer.

Starting 1st January 2013, an increased rate of 25% is levied on income above € 34 401,74

earned by individuals during the year.

In general, expatriates can apply for the following tax allowances (amounts are valid for the

tax period 2012):

• Personal allowance: €3,735.94 per year can be applicable for annual tax base under

€19,458.00. For the tax base over €19,458.00 to €34,401.74 is applicable progressive

personal allowance and over €34,401.74. EUR is personal allowance equal to EUR 0

• Tax allowance depending on high of income of wife/husband sharing a household with

taxpayer (expatriate): the annual amount of the tax allowances is determined by special

law requirements which must be met. This kind of tax allowance can be claimed by

expatriates only in case they receive at least 90% of their

worldwide income from Slovak sources

• Tax bonus for dependent children: approximately €21.41 monthly (the high of the tax

bonus is changed as 1 July of the each calendar year). Special criteria which must be

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met are a minimum taxable income = €2,026, children must live in the household of the

expatriate and the worldwide income of expatriate must be at

least 90% from Slovak sources.

Income tax rates

Since 1 January 2013 there are two tax rates for individuals (progressive taxation) in

Slovakia. Slovak individuals including expatriates with gross income up to €2,866.81 per

month should be taxed by a 19% tax rate and taxpayers over €2,866.81 by a 25% tax rate.

Tax losses may be carried forward over a period of 7 years. As a general rule, in case of

mergers and acquisitions, a legal successor may carry forward tax losses declared by a

company that was dissolved without liquidation only if the purpose of the restructuring was

not solely tax avoidance.

In respect of individuals, a general non-taxable personal allowance may be deducted, which

is up to EUR 3 645, however only up to the yearly tax base of EUR 18 984. For the time

being, the dividends are not subject to taxation in the SR.

3.1.2 REAL ESTATE TAX

Provisions of the Act on Local Taxes govern tax on real estate which comprise

• tax on plots of land,

• tax on buildings

• tax on apartments and non-residential premises in apartment houses, with some

exceptions.

The real estate tax can be exempt by a generally binding regulation issued in view of the

local circumstances.

Subject to the tax on plots of land are following taxpayers:

• owners of plots of land registered with the respective Cadastral Office,

• administrators of plots of land owned by the State,

• administrators of plots of land owned by a local municipality,

• administrators of plots of land owned by a Higher Territorial Unit.

In principle, the tax liability is calculated by multiplying the value of a plot of land and 0,0025.

However the amount can be different according to geographical location. The tax is paid

annually.

Subject to the tax on buildings are following taxable persons:

• owners of a building,

• administrators of a building owned by the State,

• administrators of a building owned by a local municipality

• administrators of a building owned by a Higher Territorial Unit.

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Generally, the tax liability is determined by the total area of the built-up land set in square

metres multiplied by EUR 0,033 per every square metre. However, the amount can be

different according to geographical location.

Subject to the tax on apartments are following taxable persons:

• owners of apartments,

• owners of non-residential premises in the apartment house,

• administrators of apartments and non-residential premises owned by the State

• administrators of apartments and non-residential premises owned by a local municipality

• administrators of apartments and non-residential premises owned by a Higher Territorial

Unit.

Subject to the tax on apartments are the apartments and non-residential premises within an

apartment building where at least one apartment or non-residential premises is owned by

individuals or legal persons.

The tax liability is determined by the total area of the ground floor set in square meters

multiplied by EUR 0,033 per every square metre. However, the amount can be different

according to geographical location.

3.1.3 MOTOR VEHICLE TAX

Motor vehicle tax is governed by provisions of the Act on Local Taxes and is levied by slef-

governing regional authorities.

Subject to motor vehicle tax are both legal entities and individuals, in particular, but not

exclusively, registered as possessors of a motor vehicle provided the motor vehicle is

registered under the evidence registration number with the local Vehicle Transportation

Office of the Police Department and used for or in connection with business activities of its

possessor. The motor vehicle tax is paid on an annual basis.

The taxable amount is the engine cylinder capacity in cm³ for passenger cars and the total

weight and the number of axels for utility vehicles and buses. The range of the tax rates

varies from Higher Territorial Unit to Higher Territorial Unit. The Act on Local Taxes stipulates

further the exemptions from motor vehicle tax obligations.

Some other direct taxes: fees on community waste disposal, tax on keeping a dog, tax on

operation of vending machines, tax on machiones that do not offer cash prizes, tax for the

entrance to the historic centre, tax for use of public space.

3.2 INDIRECT TAXES Indirect taxes are levied on the production or sale of goods and services. They are included

in the price paid by the final purchaser. These are taxes on spending and are only paid when

people buy goods and services.

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a) Value-added tax (VAT) is levied on the value added to materials and suppliers at every

stage of production based on the value added to the product at that stage.

b) Excise taxes are levied on commodities like tobacco, alcohol, petrol and fuels

3.2.1 VALUE ADDED TAX

The Act on Vat stipulates that VAT applies to :

• supply of goods for consideration within the territory of the country effected by a taxable

person, who acts in the capacity of a taxable person,

• provision of a service for consideration within the territory of the country effected by a

taxable person, who acts in the capacity of a taxable person,

• acquisition of goods for consideration within the territory of the country from another

Member State of the EU,

• importation of goods into the territory of the country.

Subject to the VAT registration are taxable persons who have reached the turnover of the

aggregate of EUR 49 790 for the past 12 consecutive calendar months. Such taxable person

is obliged to apply for the VAT registration with a respective tax office by the 20th day of the

month following the month in which the aforesaid turnover was reached. Moreover, there are

further taxable persons obliged to be registered in the respective tax office, regardless of,

whether their turnover exceeds the aggregate of EUR 49 790 for the past 12 consecutive

calendar years. The decisive factors, in this respect, are cross-border economic activities,

such as providing services into a Member State.

The tax rate for VAT is 20%. (temporarily raised to 20% on 1 January 2010.) There is a

reduced rate of 10% for medicines, books and other printed matter.

In principle, a VAT taxpayer is entitled to a full or proportional tax deduction in the cases

stipulated by respective provisions of Act on VAT. Further, it may deduct the tax under

certain conditions stipulated by the Act on VAT. As being uniform to the EU legislation, the

Act on VAT also stipulates certain services to be exempt from VAT. VAT returns are due

monthly or quarterly, if the previous year’s turnover was less than app. EUR 332 000.

3.2.2 EXCISE TAXES

Excise taxes refer collectively to:

a) excise tax on wine;

b) excise tax on beer;

c) excise tax on tobacco;

d) excise tax on spirits;

e) excise tax on mineral oils; and

f) excise tax on electricity, coal, and natural gas

a) The subject of tax is wine produced in the SR, supplied from another Member State or

imported from a third country into the SR. The tax liability is determined by amount of

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wine set in hectolitres multiplied by EUR 1 080, amount set for the particular type of wine

and coefficient also different for each type of wine. For instance, the tax liability of a

sparkling wine with fewer alcohol is determined by amount of wine set in hectolitres

multiplied by EUR 1 080 , 59% and coefficient of 0,085. Therefore, if we have 1 hectolitre

of such wine, the tax liability is app. EUR 54.

b) The subject of tax is beer produced in the SR, supplied from another Member State or

imported from a third country into the SR. The tax liability is determined by amount of

beer in hectolitres multiplied by percentage of real content of alcohol and respective tax

rate related to the particular type of beer.

c) The subject of tax is tobacco and tobacco products set in kilograms or pieces, produced,

supplied from another Member State of the EU or imported from a third country in the

SR. The tax liability is determined by amount of tobacco multiplied by amount set for the

particular type of tobacco product, apart from cigarettes, at EUR 70,90 per kilogram, or

EUR 77,14 per 1 000 pieces. With regard to cigarettes, the tax liability is determined by

amount of cigarettes and their fixed price multiplied by 59 EUR per 1 000 pieces and

23% of the fixed price. The minimum tax liability shall exceed EUR 90 per 1 000 pieces.

d) The subject of tax is spirits produced in the SR, supplied from another Member State or

imported from a third country into the SR, specified according to amount of spirit per

aggregate volume thereof set in percentage. The tax liability is determined by amount of

absolute alcohol (100% ethyl alcohol per temperature of 20 degrees) multiplied by

specified amount (from EUR 540 per hectolitre to EUR 1 080 per hectolitre).

e) The subject of tax is mineral oils produced in the SR, supplied from another Member

State or imported from a third country into the SR, specified according to particular

codes set by the Act. The tax liability is determined by amount of mineral oil in litres

multiplied by amount set by the Act. This amount varies, depending on the mineral oils.

f) In case of electricity, the Act stipulates the tax liability by multiplying an amount of

electricity and the tax rate which is EUR 1,32 per megawatt hour. With regard to coal,

the tax liability is determined by amount of tones multiplied by amount of EUR 10,62. In

relation to the natural gas, the tax liability in general, is determined by amount of

megawatt hours of natural gas multiplied by amount set for the particular type of natural

gas.

Tax administration in the territory of the SR is governed by provisions of Act No. 563/2009

Coll, as amended. The Act deals with, the registration of taxable persons, collecting of taxes,

deadlines for submission of tax returns, tax controls or distress proceedings in tax

administration. Subsequently Act No. 479/2009 Coll on tax offices, as amended, stipulates

organization and competence of local tax offices in collecting, increasing, and adjusting taxes

and related fees.

Apart form the aforesaid scope of legal regulation of the tax administration, decrees of the

Ministry of Finance govern certain particular issues applicable thereto especially in relation to

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competence of local revenue authorities in granting easements from increasing of taxes,

fines, default interests, etc.

Multinational companies often register their head offices in tax heaven – small countries

where income taxes for foreign companies are low (Lichtensten, Monaco, the Cayman

Islands, the Bahamas)

Using legal methods to minimize your tax burden is called tax avoidance. It often involves

usingloopholes (ways of getting around the law, because of an error or a technicality in the

law itself) Using illegal methods such asnot declaring your income or reporting it incorrectly

is called tax evasion and can lead to big penalties.

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4 FINANCIAL MARKET

Financial market is a complex market where supply of temporarily free funds meet demand

from deficit sector – those who need funds. Trading may me direct or indirect via

intermediaries (financial institutions).

Components of financial market: money market, capital market, insurance market, foreign

exchange market, bullion markets.

4.1 MONEY MARKET Network of banks, institutional investors, and money dealers who borrow and lend among

themselves for the short-term (typically 90 days to one year). Money markets trade in highly

liquid financial instruments such as bankers' acceptance, certificates of deposit, and

commercial paper), and government securities with maturities less than three years such as

treasury bills, Unlike organized markets (such as stock exchanges) money markets are

largely unregulated and informal where most transactions are conducted over phone, fax, or

online.

Commercial paper

Promissory note issued by financial institutions or large firms with very-short to short maturity

period (usually, 2 to 30 days, and not more than 270 days), and secured only by the

reputation of the issuer. Commercial paper is a popular means of raising cash, and is offered

generally at a discount instead of on interest bearing basis.

Treasury bill

Short-term (typically three months) maturity promissory note issued by a national

government as a primary instrument for regulating money supply and raising funds via open

market operations. Issued through the country's central bank, T-bills commonly pay no

explicit interest but are sold at a discount, their yield being the difference between the

purchase price and the par-value (also called redemption value). Although their yield is lower

than on other securities with similar maturities, T-bills are very popular with institutional

investors because, being backed by the government's full faith and credit, they come closest

to a risk free investment.

Bill of exchange

A written, unconditional order by one party (the drawer) to another (the drawee) to pay a

certain sum, either immediately (a sight bill) or on a fixed date (a term bill), for payment of

goods and/or services received. The drawee accepts the bill by signing it. A bill of exchange

is also called a draft but, while all drafts are negotiable instruments, only "to order" bills of

exchange can be negotiated. According to the Geneva Convention a bill of exchange

contains:

(1) The term bill of exchange

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(2) An unconditional order to pay a determinate sum of money.

(3) The name of the person who is to pay (drawee).

(4) A statement of the time of payment.

(5) A statement of the place where payment is to be made.

(6) The name of the person to whom or to whose order payment is to be made.

(7) A statement of the date and of the place where the bill is issued.

(8) The signature of the person who issues the bill (drawer).

A bill of exchange is the most often used form of payment in local and international trade,

and has a long history.

Banker´s acceptance

Countersigning (endorsement) of a bill of exchange by the buyer's (or importer's) bank.

Bankers acceptance establishes that payment of the bill on its maturity date is now

guaranteed by the endorsing bank. Banks agree to countersign a bill of exchange when they

are comfortable with the buyer's financial strength and stability, and on payment of the

acceptance fee.

4.2 CAPITAL MARKET A financial market that works as a conduit for demand and supply of debt and equity capital.

It channels the money provided by savers and depository institutions (banks, credit unions,

insurance companies, etc.) to borrowers and investees through a variety of financial

instruments (bonds, notes, shares) called securities. Businesses benefit from capital markets

by obtaining the capital they need to begin operations, expand and buy goods and services.

Capital market also offer businesses a way to earn additional funds with their income.

Investors also benefit from capital market because it gives them a convenient place to buy

and sell shares, bonds and mutual funds. :

Instruments of capital market:

A share is evidence of ownership. It usually is a piece of paper that lists the name of

company, the number of shares it represent and typa of stock it is. Many stock certificates

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indicate some face value (par value) which is an amount for which the stock is selling for the

first time on the new issue market and then they have market price made up by supply and

demand relation on secondary market when the shares are traded. Companies employ

experts to help them choose the best price and way of selling shares. Share prices depend

on a number of factors:

• the financial situation of the company

• the situation of the industry in which the company operates

• the state of the economy in general

• the beliefs of investors whether the share price will rise or fall. When price-sensitive

information (news that affects a company´s value) arrives, a share price will change.

There are some ways of selling shares:

• A prospectus is printed material which represent an invitation to the general public to

buy new shares in a company. It contains full details of the company´s history, future

plans, recent results and other financial information that enable prospective investors to

evaluate shares. The requirements for the prospectus are set by the Securities and

Exchange Commission and include extensive financial and legal information.

• by offer for sale . The issuing house (bank) agrees to buy up all of the shares giving the

company an ogreement sum of money. The bank will then try to sell all the shares to the

public itself fat a higher price

• by placing . When an issue of shares is small the issuing house may arrange for the

shares to be sold to its own clients and the number of other financial institutions, like

pension funds and insuring companies.

• by tender. This involves inviting the public to make a bid for a number of new shares and

then selling the shares to the highest bidders.

A dividend is a part of the firm´s profits that is distributed to shareholders. The dividend may

be in form of cash or stock.

Types of share:

a) Common share represents ownership privilages in a firm. These privilages

include the right to vote and the right to receive some of the firm´s profits

(dividends) when distributed by management.

b) Preferred share gives its owners preference in the payment of dividends and an

earlier claim on assets if the company is sold, but does not include voting rights.

Often the divided rate paid to preferred shareholders is higher than that paid to

common shareholders and it is fixed whereas the common divided varies.

Preferred shareholders get their dividend payments before common shareholders

are paid and are assured that payment will be made as long as the company

makes sufficient profits.

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Categories of shares:

• Blue chips are shares in large companies with a reputation of quality, reliability and

profitability. More than twothirds of all blue chips in industiralized countries are owned by

institutional investors such as insurance companies and pension funds.

• Growth shares are expected to regularly rise in value. Most technology companies are

growth shares and do not pay dividends so shareholders´equity increases. This causes

the share price rise.

• Income shares have a history of paying consistently high dividends.

• Defensive shares provide a regular dividend, but their value is not expected to rise or

fall very much.

• Value shares that investors believe are currently trading for less than they are worth.

A bond is a contract of indebtedness issued by a corporation or government that promises

payment of a principal amount at a specified future time plus interest. Interest is a payment

the issuer of the bond makes to bondholders for use of the borrowed money. The interest

rate varies based on factors such as the state of the economy and the rates being paid for

government bonds. Principal refers to the face amount of bond, usually stated in multiples of

1000€. Bond sell below face value are called discount bonds. Those sell above face value

are called premium bonds. Term to maturity refers to the period from the purchase date of

the bond to the final principal-payment date. A call or refunding provision gives the issuer the

right to pay off a bond prior to maturity.

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Advantages of selling bonds:

• bondholders unlike shareholders have no vote on corporate affairs, thus management

retains control over the firm. Bondholders are creditors, not owners.

• Bonds are more flexible tan stocks. Whereas shareholders have ownership forever,

bondholders represent more temporary sources of funds that can be tapped when

needed.

Disadvantages of selling bonds:

• bonds are an increase in debt (liabilities) and may make it more difficult to obtain other

financing.

• Interests on bonds is a legal obligation. A corporation cannot delay or halt such

payments as they may do with dividens.

• The face amount of bonds must be paid when due, ublike stock, which carries no such

obligation.

• Interest payments on bonds affect a firm´s cash flow negatively.

Kinds of bonds:

There are two classes of bonds. The first is called unsecured bonds (debentures ) that

have only the credit rating of the firm as protection for the investor. Only companies with

excellent credit ratings can sell debentures. The second class of bonds is called secured

bonds . These bonds are backed by some tangible assets that is pledged to the investor if

the principal is not paid back. There are several kind of secured bonds:

• Motgage bonds are secured by the company´s real assets such as land and buildings.

• Collateral trust bonds are backed by stock that the company owns.

• Equipment trust bonds are backed by the equipment the company owns (tucks,

aircraft) A trustee holds title to the equipment until the bondholders are paid.

• Convertible bonds can be exchanged for another security, usually common stock.

• Municipal bonds are issued by the state or local government (town, village) to finance

publicservices such as housing, schools, roads, hospitals or power plants and are

backed by assets of the local government.

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• Zero-coupon bonds pay no interest prior maturity. The return comes from the difference

between purchase price and the face value.

SHARES BONDS 1.Represent ownership of the business 1.Represent debt of the business

2.Pay dividends to sharekholders 2.Pay interest to bondholders

3.Dividends are paid from after-tax profit 3.Interest is tax deductible for fitm

4.There is no legal obligation to pay dividend

4. Interest is a legal obligation

5.Shareholders can vote for the board of directors

5.Bondholders have no vote

6.Shareholders are permanent owners 6.Bondholders can be thought for funds when needed

7.Common stock never matures 7.Face value of bonds must be paid when due.

4.2.1 STOCK EXCHANGE

Organized and regulated financial market where securities (bonds, shares) are bought and

sold at prices governed by the forces of demand and supply. Stock exchanges basically

serve as

(1) primary markets Market in which buyers and sellers negotiate and transact business

directly, without any intermediary such as resellers. Financial market in which newly

issued securities are offered to the public. (2) secondary markets All commodity and stock exchanges, and over-the-counter

markets, serve as secondary markets which (by providing an avenue for resale) help in

reducing the risk of investment and in maintaining liquidity in the financial system.

Stock exchanges impose stringent rules, listing requirements that are binding on all listed

and trading parties. Stock markets have the following functions:

• it determines the structure of the markets for different securities

• it makes rules and regulations for the way in which the markets work in order to protect

the interests of people and firms who buy securities.

• It supervises the conduct of member firms buying an selling shares on the stock market

• It provides up-to-the-minute information on security prices and trading.

A listed (quoted) company is one that has been allowed by the council to sell its shares on

the stock exchange.

The Stock Exchange is not open to the general public. This means that if someone wishes to

buy or sell some shares he must contact a share dealing firm (or broker ) which is a

member of the Stock Exchange. Because the need for large sum of money, many

professional share dealers on the Stock Exchange work for firms owned by banks and other

large financial institutions. The stockbroker is an expert who has studied extensively in the

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area of investment practices and has passed a series of examinations on the buying and

selling of securities. The most important stockbrokers are registered with many exchanges.

Trades in the older exchanges are conducted on the floor (called the 'trading floor') of the

exchange itself, by shouting orders and instructions (called open outcry system ).

On modern exchanges, trades are conducted over telephone or online. Almost all exchanges

are 'auction exchanges' where buyers enter competitive bids and sellers enter competitive

orders on the computer „order book “ stating which shares and at what price they wish to buy

or sell. If the computer system finds a match between buying and selling prices, it will carry

out the transaction automatically. This has greatly increased the speed and efficiency of the

share market.

Four types of order:

• A limit : customers log the number of shares and price at which they wish to buy or sell

shares and matxhes are shown automatically. If there is no immediate match, it renains

on the order book until the suitable match comes along within a given time period, after

which it is deleted if no match is made.

• At best : a customer enter their orders and agree to the computerized systém carriying

these out immediately at the best price available on the systém.

• Fill or kill : these orders are carried out immediately or rejected by the systém if a price

match cannot be found.

• Execute and eliminate : these are like at best orders, except that limits are palced on the

price range that will be accepted by the traders.

Some European exchanges, however, use 'periodic auction' method in which round-robin

calls are made once a trading day.

Financial futures are standardized contracts traded on exchanges to buy and sell financial

assets such as currency, interest rates or shares for fixed value for a specified future date.

Derivatives are financial products whose value depends on another financial product such

as a share or interest rate payments. The main kind of derivatives are options and swaps.

Options give the right not obligation to buy or sell an asset in the future. If you buy a call

option it gives you the right to buy an asset for a specific price at any time before the option

ends on a specific future date. If the market value of the share is more favourable than your

agreed price in option contract, you will not exercise the option. If you buy a put option , it

gives you the right to sell an asset at a specific price within a specified period or on a

specified future date. Investors can buy put options to hedge against falls in the price of

shares. The option buyer pays a fee - premium to the option seller.

Bulls are investors who believe that stock prices are going to rise. They buy shares in

anticipation of the increase. When stock prices are rising, it is called a bull market .

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Bears are investors who except share prices to decline. They would tend to sell their shares

before the prices fell. An investor can borrow shares from a shareholder and sell it, hoping to

buy the shares later at a lower price and return shares the broker. This is known as selling

short. It is a way to make money when share prices are going down. When the share prices

decline steadily, it is known as a bear market.

Stags are investors who buy net shares with hope there will be more demand than available

shares, so the succesfull buyers can immediatelysell their shars at a profit.

Speculators are people who buy and sell shares rapidly, hoping to make a profit. These

include day traders who buy shares and sell them again before the settlement day (on which

they have to pay for shares they purchased, usually 3 business days after the trade was

made). If day traders sell at a profit before settlement day, they never have to pay for their

shares. They usually work with online brokers on the internet, who charge low commissions.

The first stock exchange was opened in Amsterdam in 1602; the three largest exchanges in

the world are (in the descending order) New York Stock Exchange (NYSE), London Stock

Exchange (LSE), and the Tokyo Stock Exchange (TSE). The Stock Exchange in Bratislava

was open in 1992, started to operate a year later and is call Bratislava Stock Exchange .

4.2.2 THE OVER-THE-COUNTER MARKET (OTC)

The over-the-counte market provides a means to trade shares not listed on the national

securities exchange. The OTC market is made up of a network of several thousand brokers

that maintain contact with each other and buy and sell securities to the public. A nationwide

electronic system communicates trades to the brokers. Originally the over-the-counte maket

dealt mostly with small firms that could not qualify for listing to the national exchange or did

not want to bother with the procedures. Today, however, well kown firms prefer to have their

shares traded on the OTC market.

4.2.3 MUTUAL FUNDS

Investing means committing capital with the expectation of making a profit. Active investing

means that the investor makes the decisions on how his or her money is invested, as in

starting a business of buying real estate. Passive investing ,eans that the investor commits

funds, but someone else decides on the specific use of them. Investing in mutual fund is a

form of passive investing.

Very important step in investment process is to select general investment vehicle (form of

investing money) that best fit the specific needs of the investor. When selecting investment

vehicle, we have to také in consideration:

• investment risk: the chance that an investment and all its accumulated yields will be

worth less at some future time than when it is made. Generally speaking, the greater the

risk an investor assumes, the greater the potential return may be on the investment.

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• total yield: is the increase in the value of an investmentover time. Real yield is after taxes

and inflation are subtracted.

• duration: investment decisions differ dippending on whether one wants to make a large

return in a few years or invest over the long term for retirement.

• liquidity: is how quickly one can get back invested funds when desired. It takes time to

sell assets such as a farm or business. On the other hand shares, bonds and most

commodities can be sold almost immediately and are thus considered more liquid.

Diversification consists of buying several different general investment vehicles (porfolio) to

spred the risk. For example, an investor may put 30% of his money into growth shares with

high risk, another 30% may be invested in conservative government bonds, 15% in silver and

other commodities and the rest placed in the bank for emergencies and other investment

opportunities. Most people put a significant percentage of their investment into real estate

(namely, their own home).

Mutual fund is an organization managed by finance professionals that raises capital by

selling shares in a chosen and balanced set of securities to the public. A mutual fund's

capital is invested in a group (portfolio) of corporate securities, commodities, options, that

match the fund's objectives detailed in its prospectus. Mutual funds are of two main types:

(1) open end fund , where the capitalization of the fund is not fixed and more units may be

sold at any time to increase its capital base,

(2) closed end fund , where capitalization is fixed and limited to the number of units

authorized at the fund's inception

Mutual funds usually charge a management fee (typically between 1 and 2 percent of the

fund's annual earnings) They may be referred to as unit investment trust.

4.2.4 COMMODITY EXCHANGES

Commodity exchange specializes in buying and selling of goods such as wheat, sugar, silver,

crude oil. They operate much like stock exchanges in that members of the exchange meet on

the floor to exchange goods. All transactions for a specific commodity také place in specific

trading areas or rings. Trades result from the meeting of a bid and offer in an open

competition among exchange members.

Spot trading refers to the purchase and sale of commodities for immediate delivery. Futures

trading is a more common practise, and involves the purchase and sale of goods for delivery

sometime in the future.

Forward and futures contracts are agreements to sell an asset at a fixed price on a fixed date

in the future. Futures are traded on a wide range of agricultural products (tea, cocoa, maize

pork, beef), industrial metal (copper, lead, zinc, nickel), precious metals (silver, gold,

platinum and palladium). Futures were invented to enable regular buyers and sellers of

commodities to protect themselves against loses or to hedge against future changes in the

price. Futures are standardized contracts for fixed quantities and fixed time periods (3, 6, 9

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months) that are traded on a special exchange. Forwards are individual non-standardized

contracts between two parties, traded over-the-counter, directly between two companies,

rather than through exchange.Hedging means purchasing the commodity ahead of time and

gives thus business a form of price insurance. (A farmer who has wheat growing in the field

is not sure of a price of wheat at harvesttime so he would sell the wheat on the futures

market. The price would be fixed for the future time regardless the conditions in the future.)

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5 INSURANCE

Insurance is a promise of compensation for specific potential future losses in exchange for a

periodic payment. Insurance is designed to protect the financial well-being of an individual,

company or other entity in the case of unexpected loss. Some forms of insurance are

required by law , while others are optional . Agreeing to the terms of an insurance policy

creates a contract between the insured and the insurer . In exchange for payments from the

insured (called premiums ), the insurer agrees to pay the policy holder a sum of money upon

the occurrence of a specific event. In most cases, the policy holder pays part of the loss

(called the deductible ), and the insurer pays the rest. Examples include car insurance,

health insurance, disability insurance, life insurance, and business insurance.

Insurance is the equitable transfer of the risk of a loss, from one entity to another in

exchange for payment. It is a form of risk management primarily used to hedge against the

risk of a contingent, uncertain loss.

The term risk refers to the chance of loss. Categories of risk:

1. Pure risks is defined as the loss with no chance for profit and the risk must be real

and not related to gambling. (threat of fire, accident) If such events occur, a company

loses money, but if the accident do not occur, the company gains nothing.

2. Speculative risk is a type of risk that involves a chance of either profit or loss. It

includes the chance a firm takes to make extra money b expanding its options, buying

new machinery, acquiring more inventory.

An insurer , or insurance carrier, is a company selling the insurance;

the insured, or policyholder, is the person or entity buying the insurance policy.

The amount of money to be charged for a certain amount of insurance coverage is called the

premium . Insurance premiums from many insureds are used to fund accounts reserved for

later payment of claims – in theory for a relatively few claimants – and for overhead costs. So

long as an insurer maintains adequate funds set aside for anticipated losses (called

reserves), the remaining margin is an insurer's profit.

The insured receives a contract, called the insurance policy , which details the conditions

and circumstances under which the insured will be financially compensated. Generally, an

insurance contract includes, at a minimum, the following elements:

• identification of participating parties (the insurer, the insured, the beneficiaries),

• the premium,

• the period of coverage,

• the particular loss event covered,

• the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the

event of a loss), and exclusions (events not covered). An insured is thus said to be

"indemnified" against the loss covered in the policy.

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When insured parties experience a loss for a specified peril, the coverage entitles the

policyholder to make a claim against the insurer for the covered amount of loss as specified

by the policy.

Risk management, the practice of appraising and controlling risk, has evolved as a discrete

field of study and practice.

Insurance involves pooling funds from many insured entities (known as exposures) to pay

for the losses that some may incur. The insured entities are therefore protected from risk for

a fee, with the fee being dependent upon the frequency and severity of the event occurring.

In order to be an insurable risk, the risk insured against must meet certain characteristics.

Insurance as a financial intermediary is a commercial enterprise and a major part of the

financial services industry, but individual entities can also self-insure through saving money

for possible future losses.

5.1 LEGAL REQUIREMENTS • When a company insures an individual entity, there are basic legal requirements. Several

commonly cited legal principles of insurance include:

1. Indemnity – the insurance company indemnifies, or compensates, the insured in the

case of certain losses only up to the insured's interest.

2. Benefit insurance - the isurance company doesn't have the right of recovery from

the party who caused the injury and is to compensate the Insured regardless of the

fact that Insured had already sued the negligent party for the damages (for example,

personal accident insurance)

3. Insurable interest – the insured typically must directly suffer from the loss. Insurable

interest must exist whether property insurance or insurance on a person is involved.

The concept requires that the insured have a "stake" in the loss or damage to the life

or property insured. What that "stake" is will be determined by the kind of insurance

involved and the nature of the property ownership or relationship between the

persons. The requirement of an insurable interest is what distinguishes insurance

from gambling.

4. Utmost good faith – the insured and the insurer are bound by a good faith bond of

honesty and fairness. Material facts must be disclosed.

5. Contribution – insurers which have similar obligations to the insured contribute in the

indemnification, according to some method.

6. Subrogation – the insurance company acquires legal rights to pursue recoveries on

behalf of the insured; for example, the insurer may sue those liable for the insured's

loss. The Insurers can waive their subrogation rights by using the special clauses.

7. Causa proxima , or proximate cause – the cause of loss (the peril) must be covered

under the insuring agreement of the policy, and the dominant cause must not be

excluded

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8. Mitigation – In case of any loss or casualty, the asset owner must attempt to keep

loss to a minimum, as if the asset was not insured.

Methods of insurance

There are the following types of insurance:

1. Co-insurance which relates to risks shared between insurers or between insurer and

Insured

2. Dual insurance which relates to risks having two or more policies with same

coverage

3. Reinsurance which relates to the situations when Insurer passes some part of or all

risks to another Insurer called Reinsurer

5.2 TYPES OF INSURANCE Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give

rise to claims are known as perils. An insurance policy will set out in detail which perils are

covered by the policy and which are not.

Vehicle insurance would typically cover both the property risk (theft or damage to the

vehicle in case of traffic collision) and the liability risk (legal claims arising from an

accident).

A home insurance policy typically includes coverage for damage to the home and the

owner's belongings, certain legal claims against the owner, and even a small amount of

coverage for medical expenses of guests who are injured on the owner's property.

Business insurance can take a number of different forms, such as the various kinds of

professional liability insurance , also called professional indemnity (PI), and the business

owner's policy (BOP), which packages into one policy many of the kinds of coverage that a

business owner needs.

5.2.1 LIFE

Life insurance provides a monetary benefit to a decedent's family or other designated

beneficiary, and may specifically provide for income to an insured person's family, burial,

funeral and other final expenses. Life insurance policies often allow the option of having the

proceeds paid to the beneficiary either in a lump sum cash payment or an annuity.

In many countries, the tax law provides that the interest on this cash value is not taxable

under certain circumstances. This leads to widespread use of life insurance as a tax-efficient

method of saving as well as protection in the event of early death.

5.2.2 PROPERTY

Property insurance provides protection against risks to property, such as fire, theft or weather

damage. This may include specialized forms of insurance such as fire insurance, flood

insurance, earthquake insurance, home insurance, inland marine insurance or boiler

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insurance. The term property insurance may, be used as a broad category of various

subtypes of insurance, some of which are listed below:

• Boiler insurance (also known as boiler and machinery insurance, or equipment

breakdown insurance) insures against accidental physical damage to boilers, equipment

or machinery.

• Builder's risk insurance insures against the risk of physical loss or damage to property

during construction. Crop insurance may be purchased by farmers to reduce or manage

various risks associated with growing crops. Such risks include crop loss or damage

caused by weather, hail, drought, frost damage, insects, or disease. Earthquake

insurance is a form of property insurance that pays the policyholder in the event of an

earthquake that causes damage to the property. Most ordinary home insurance policies

do not cover earthquake damage.

• Fidelity bond is a form of casualty insurance that covers policyholders for losses

incurred as a result of fraudulent acts by specified individuals. It usually insures a

business for losses caused by the dishonest acts of its employees.

• Flood insurance protects against property loss due to flooding.

• Home insurance , also commonly called hazard insurance or homeowners insurance

(often abbreviated in the real estate industry as HOI), provides coverage for damage or

destruction of the policyholder's home. The policy may include inventory, or this can be

bought as a separate policy, especially for people who rent housing.

• Marine insurance and marine cargo insurance cover the loss or damage of vessels at

sea or on inland waterways, and of cargo in transit, regardless of the method of transit.

When the owner of the cargo and the carrier are separate corporations, marine cargo

insurance typically compensates the owner of cargo for losses sustained from fire,

shipwreck, etc., but excludes losses that can be recovered from the carrier or the

carrier's insurance.

• Supplemental natural disaster insurance covers specified expenses after a natural

disaster renders the policyholder's home uninhabitable. Periodic payments are made

directly to the insured until the home is rebuilt or a specified time period has elapsed.

• Terrorism insurance provides protection against any loss or damage caused by terrorist

activities.

• Volcano insurance is a specialized insurance protecting against damage arising

specifically from volcanic eruptions.

• Windstorm insurance is an insurance covering the damage that can be caused by wind

events such as hurricanes.

5.2.3 LIABILITY

Liability insurance is a very broad superset that covers legal claims against the insured.

Many types of insurance include an aspect of liability coverage. For example, a homeowner's

insurance policy will normally include liability coverage which protects the insured in the

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event of a claim brought by someone who slips and falls on the property; automobile

insurance also includes an aspect of liability insurance that indemnifies against the harm that

a crashing car can cause to others' lives, health, or property. The protection offered by a

liability insurance policy is twofold: a legal defense in the event of a lawsuit commenced

against the policyholder and indemnification (payment on behalf of the insured) with respect

to a settlement or court verdict. Liability policies typically cover only the negligence of the

insured, and will not apply to results of wilful or intentional acts by the insured.

• Public liability insurance covers a business or organization against claims should its

operations injure a member of the public or damage their property in some way.

• Directors and officers liability insurance (D&O) protects an organization (usually a

corporation) from costs resulting from errors made by directors and officers for which

they are liable.

• Environmental liability insurance protects the insured from bodily injury, property

damage and cleanup costs as a result of the dispersal, release or escape of pollutants.

• Errors and omissions insurance (E&O) is business liability insurance for professionals

such as insurance agents, real estate agents and brokers, architects, third-party

administrators (TPAs) and other business professionals.

• Professional liability insurance, also called professional indemnity insurance (PI),

protects insured professionals such as architectural corporations and medical

practitioners against potential negligence claims made by their patients/clients.

Professional liability insurance may take on different names depending on the profession.

For example, professional liability insurance in reference to the medical profession may

be called medical malpractice insurance.

5.3 MANDATORY HEALTH INSURANCE Holders of mandatory public health insurance are entitled to health care provision and all

related services in compliance with the Act on Health Insurance. Public health insurance

covers benefits in full or to a partial extent, depending on specific conditions.

According to the Act on Health Insurance No. 580/2004 Coll., compulsory public health

insurance applies to every person having permanent residence in the territory of the Slovak

Republic. A proof of health insurance is required also as a part of residence permit

granting procedure.

Mandatory public health insurance does not apply to an individual with permanent residence

in Slovakia, if he/she:

• Is employed abroad and is covered by health insurance in the country of employment;

• Performs a self-employment activity abroad and is covered by health insurance

abroad;

• Is staying abroad long-term (more than 6 months) and is covered by health insurance

in this country.

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Mandatory public health insurance also applies to a person who does not have permanent

residence in the territory of the Slovak Republic, unless medically insured in another EU

Member State or in a State Party to the European Economic Area Agreement and in the

Swiss Confederation, and

• he/she is employed by an employer established or with a fixed establishment within the

territory of the Slovak Republic;

o this does not apply if he/she is employed in the Slovak Republic by an employer

who enjoys privileges and immunities under international law, or employed on the

basis of an agreement on work performed outside employment, or

• he/she is self-employed person in Slovakia,

• he/she is a student from another Member State or a foreign student studying at school in

the Slovak Republic on the basis of an international treaty by which the Slovak Republic

is bound.

The compulsory public health insurance begins on the date of the facts set out above, or the

date of obtaining permanent residence in the Slovak Republic. Within eight days of this

date, the insured person is required to submit an application for public health insurance in a

health insurance company.

Obligation to have public health insurance in Slovakia according to the Act on Health

Insurance does not always mean the insured person must also be the insurance payer.

According to the Act on Health Insurance, the insurance payers are:

• Employee (partially participates on payments with the employer);

• Self-employed person (mostly pays the insurance alone, unless otherwise stipulated by

law);

• Employer (partially participates on payments for the employee);

• The state (for students/PhD students under 30 years; for students from another Member

State, or foreign students to secure the obligations of international treaties binding for the

SR).

5.4 INDIVIDUAL (COMMERCIAL) HEALTH INSURANCE Individual health insurance holders are entitled to health care services stipulated in the

agreement with the Health Insurance Authority. Commercial health insurance is provided

in compliance with special legislation (Civil Code). The scope of the health services is

stipulated individually either as basic health care available to foreigners who cannot have the

public health insurance; or supplementary insurance (above standard health care) or

combination of both previously mentioned.

Commercial health insurance is compulsory for everyone, who does not fall into the scope of the mandatory public health insurance. This concerns:

• researchers who are not employed and they perform activities on a basis of a grant, and

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• students who are not EU/EEA/Swiss nationals, do not have permanent residency in the

Slovak Republic, and do not study on the basis of international agreement binding for the

Slovak Republic.

Commercial health insurance can be obtained from any provider, not necessarily a Slovak

one. In case it is obtained from a foreign insurance provider, the contract must stipulate its

coverage on the territory of the Slovak Republic and it must be translated into Slovak

language by an official sworn translator.

Information about commercial insurance companies in Slovakia is available on the following

websites (on these websites you can find a list of insurance companies with their contact

data):

5.5 THE SOCIAL INSURANCE SYSTÉM The Social Insurance System in Slovakia has been newly defined by Act No 461/2003 Coll.

on Social Insurance effective as of January 2004. The Act specifies the social insurance,

amends the range of social insurance, legal relations within social insurance performance,

the organisation of social insurance, the financing of social insurance, the state supervision

over social insurance performance and acting in matters of the social insurance.

The Social Insurance System in Slovakia comprises apart from the sickness insurance ,

pension insurance and accident insurance , also of the unemployment insurance with

the current inclusion of the legal form of providing benefits out of this system, and of the

insurance in case of employer’s insolvency named the guarantee insurance .

The competency in the area of unemployment benefits provision and guarantee insurance

benefits has been taken over from the National Labour Office by the Social Insurance

Agency (SIA). The SIA provides for disbursement of unemployment benefits, the job seeking

registry is administered by the Centre of Labour, Social Affairs and Family.

The Social Insurance Agency is a statutory institution with a nationwide competency in the

area of the sickness insurance, the pension insurance, the accident insurance, the

unemployment insurance and the guarantee insurance.

The scope of operation of the SIA within the applic ation of EC Law .

SIA has been designated to be the competent and the liaison institution for the following

branches of social security:

• Sickness benefit

• Maternity and equivalent paternity benefits

• Invalidity benefits

• Old - age benefits

• Survivors´ benefits

• Benefits in respect of accidents at work and occupa tional diseases

• Unemployment benefits

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Employers pay contributions to social security and health insurance amounting to 35.2% of

gross income paid to employees as shown on payroll records up to a maximum assessment

set by law. These contributions are deductible when determining taxable income.

Type of contribution Employee Employer Total contribution

Pension insurance 4.00 % 14.00 % 18.00 %

Health insurance 4.00 % 10.00 % 14.00 %

Disability insurance 3.00 % 3.00 % 6.00 %

Sickness insurance 1.40 % 1.40 % 2.80 %

Reserve fund 0.00 % 4.75 % 4.75 %

Unemployment insurance 1.00 % 1.00 % 2.00 %

Accident insurance 0.00 % 0.80 % 0.80 %

Guarantee fund 0.00 % 0.25 % 0.25 %

Total 13.40 % 35.20 % 48.60 %

5.5.1 SICKNESS INSURANCE

Benefits provided by the SIA in this area are the cash benefits, the benefits in kind are

provided by the Health Insurance Companies. The cash benefit types include: sickness

benefit, nursing benefit, equalization benefit, maternity benefit. The sickness benefits are

provided from the social insurance system from the 11th day of employee’s working

incapacity, in the case of a self – employed person and a voluntarily insured person from the

1st day of a temporary working incapacity until the end of the working incapacity, or until the

recognition of invalidity, no longer than 52 weeks from the commencement of the temporary

working incapacity. The calculation method of a daily amount of the sickness benefit has

been simplified and unified for employees, self – employed persons and voluntarily insured

persons. During the temporary working incapacity, the employee´ s income replacement is

during the first ten days provided by an employer, the sickness benefit is then provided by

the SIA from the 11th day.

Sickness benefit is provided per days, in the first 3 days the benefit equals to 25% of the

daily assessment basis, from 4th day of the temporary incapacity for work the cash sickness

benefit is 55% of the daily assessment basis.

The benefit is payable up to one year of the temporary incapacity, after this period the health

condition must be re-examined.

Nursing benefit is provided per days in the amount of 55% of the daily assessment basis

from the first day of attendance on a sick child, a husband, a wife, a parent or on a sick

parent of his/her spouse whose health condition requires the treatment provided by another

natural person.

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Equalization benefit - the female employee is entitled to this kind of benefit, if redeployed for

another job, as the work performed before is prohibited to pregnant women or, according to

the medical report threatens her pregnancy, and the work she was transferred to provides for

a lower income without her fault, compared to the income she had earned before her

redeployment. The amount of the equalization benefit is 55% of the difference between the

monthly assessment basis and the assessment basis from which the female employee pays

premium for the sickness insurance in separate calendar months after being transferred to

another job. The equalization benefit is provided for a calendar month.

Maternity benefit is provided per days in the amount of 55% of the daily assessment basis.

The entitlement of the pregnant insured woman or of the insured woman taking care of a new

born child is awarded provided that the person concerned has been insured at least 270

days within the period of two years prior to the confinement.

The benefit is payable for 28 weeks (37 weeks for the single mother and for multiple births)

including at least six weeks before the expected date of childbirth.

5.5.2 ACCIDENT INSURANCE

Insurance of employer’s responsibility against working injury and occupational disease has

been changed into the new insurance system - the accident insurance. This insurance is

mandatory for the employer, except the employer as a judge and prosecutor. There is no

minimum qualifying period required. The employer´ s accident insurance originates from the

day he/she employed at least one employee and terminates by the day when no employee is

engaged. Within the accident insurance the whole range of benefits is provided depending

on the character of events, either repeatedly or as lump-sum payments. The categorization

of accident benefits is as follows: additional accidental benefit , accidental rent , lump-sum

settlement , survivor’s rent , lump–sum compensation , professional rehabilitation

benefit , retraining benefit , pain compensation and compensation for difficulties with

social reintegration , compensation for medical expenses , funeral expenses

reimbursement .

5.5.3 PENSION INSURANCE

The pension system reform required a re-definition and creation of a new institutional

framework of the new systems. The pension reform has been designed to build up a modern

system of social security in the Slovak Republic, based on three pillars representing an

important mandatory public pillar (1stpay-as-you-go pillar), old-age pension saving

systém (2nd pillar). The new system of social security is enhanced through tax deductible

voluntary saving/insurance schemes , supported by the state (3rd pillar).

As it comes to the role of the SIA in the pension insurance as a whole, the SIA administers

the 1st pillar, and is responsible for collecting of contributions for the 2nd pillar as well as for

registering of contracts with Pension Asset Management Companies.

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The retirement age introduced by the Act on Social Insurance is extended gradually (until the

end of year 2023), and has currently been unified for men and women up to 62 years . The

qualifying condition for entitlement to the old- age pension is 15 years of insurance and

reaching the pensionable age . According to Act on Social Insurance, the following types of

pension benefits are provided from the pension insurance system by the SIA: the old-age

pension, the early old-age pension, the invalidity pension, and survivors´ pensions i.e.

widow´ s pension, widower’s pension, orphan´ s pension.

Old- age pension - the amount of old-age pension is determined as a product of the average

personal wage point, the period of pension insurance acquired as of the day of occurrence of

the claim to the old-age pension and the current pension value; in compliance with the

Slovak legislation the amount of minimum or maximum pensions is not determined.

A new kind of benefit introduced by the Act on Social insurance is the early old -age pension.

The qualifying condition is achievement of at least 15 years of pension insurance, lacking two

years to reach the retirement age at most, and satisfying the condition of reaching the

pension amount equal to 1.2 multiple of the subsistence minimum level for a natural person

by the day of claiming the benefit.

Invalidity pension – the qualifying condition is a reduction of capacity to perform the gainful

activity due to a long term unfavourable health condition (longer than 1 year) by more than

40%, and achieving the required insurance period as of the day of invalidity occurrence and

non qualifying to the old- age pension, or non awarding the early old - age pension. The

pension insurance period is not required on condition the invalidity occurred due to the

working injury or the occupational disease.

Survivors´ pension insurance includes widow ´s pension, widower’s pension and orphan’s

pension.

Widow's pension represents 60% of the insured deceased person´ s pension. Entitled to this

kind of benefit is the widow whose husband was receiving the old- age pension, the early

old- age pension or the invalidity pension as of the day of his death, or satisfied conditions of

the old - age pension entitlement as of the day of his death, or achieved the number of years

of the pension insurance necessary to qualify to the invalidity pension as of the day of his

death, or died due to the working injury or the occupational disease. The entitlement ceases:

• by contracting of marriage

• by the day validity of the court ruling according to which the widow caused the death of

her husband by a wilful criminal act.

Widower's pension represents 60% of the insured deceased person’s pension. Entitled to

this kind of benefit is the widower whose wife was receiving the old- age pension, the early

old- age pension or the invalidity pension as of the day of her death, or satisfied conditions of

the old- age pension entitlement as of the day of her death, or achieved the number of years

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of the pension insurance necessary to qualify to the invalidity pension as of the day of her

death, or died due to the working injury or the occupational disease The entitlement ceases:

• by contracting of marriage

• by the day of the court ruling validity according to which the widow caused the death of

his wife by a wilful criminal act.

Orphan's pension

Entitled of this type of benefit is the dependent child after a deceased parent or an adopter

who as of the day of his/her death was receiving the old - age pension, early old- age

pension or invalidity pension, or as of the day of his/her death completed the number of

pension insurance years to qualify to the invalidity pension, or qualified to old- age pension or

died due to a working injury or an occupational disease.

The amount of orphan ´s pension represents: 40% of the insured deceased parent/adopter´ s

old- age or invalidity pension to which the deceased parent/adopter was entitled or would be

entitled; or 40% of the insured deceased parent/adopter ´s early old- age pension to which

the deceased person was entitled by the day of his/her death.

The entitlement to orphan pension ceases: by reaching the age of 26 years of the dependent

child; as of the day of the validity of the court ruling according to which the dependent child

caused the death of his/her parent or adopter.

5.5.4 UNEMPLOYMENT INSURANCE

The system of social insurance also includes the system of unemployment insurance. The

insuree is entitled to the unemployment benefit on condition he/she had unemployment

insurance for at least two years (i.e. 730 days ) within the past three years before being

included into the registry of unemployed job seekers. Entitled to the unemployment benefit is

also the insuree who within the past four years before being included into the registry of

unemployment job seekers achieved at least two years of insurance related to the labour

relation concluded for a definite period, or two years of the voluntary insurance, and at the

same time was not insured for the purposes of unemployment due to other activity as an

employee. The entitlement ceases to by elapsing six month period (in certain cases by

elapsing four months) from the commencement of the benefit entitlement, or as of the day of

granting the old-age pension, the early old- age pension and the invalidity pension due to

incapacity to perform gainful activity by more than 70%. The unemployment insurance does

not relate to the natural person who had been granted the old- age pension, the early old-

age pension or the invalidity pension due to a decrease in performing gainful activities by

more than 70%. The unemployment benefit is provided per days. The amount of

unemployment benefit equals to 50% of the daily assessment basis times number of days in

the month. The daily assessment basis to determine the unemployment benefit is the

quotient of assessment basis footings for payment of unemployment insurance contributions

completed by the person in past two years.

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5.5.5 GUARANTEE INSURANCE

It is the insurance in case of the employer´ s insolvency. Entitled to this type of benefit is the

employee whose employer has become insolvent and as a result cannot provide for

satisfying of employees´ entitlements. The benefit is provided for a three month period on

condition of the labour relation duration for the past 18 months preceding the employer´ s

insolvency. The benefit is paid as a lump sum.

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