# **The Role Of Factoring In the New EU Member States**

factoring companies), with at least 1 in each country. All but 2 of the respondents were bank subsidiaries. Most received their funding in the form of bank loans (presumably from their bank affiliates or parents, although no information was collected on this issue).

**Table 3. Summary of Survey Findings on Factoring in the EU 8**

|**TAXES**|**Regulation**|**Legal Code**|**Factoring Practices**|**Barriers to**<br>**Growth**|
|---|---|---|---|---|
|**Value added**<br>**taxes (VATs)**<br>• Applied to pre-<br>financing<br>– Lithuania (18%)<br>• Applied to<br>service fees<br>– Estonia, Latvia,<br>Lithuania,<br>Slovenia<br>(~18%)<br>**Stamp taxes**<br>None<br>**Factoring losses**<br>**not treated**<br>**as tax cost**<br>Poland<br>Source: World Bank.|**Supervisory authority**<br>• Central bank: Estonia,<br>Latvia, Lithuania<br>• Bank supervisor:<br>Hungary<br>**Cross-border**<br>**factoring regulations**<br>• Latvia and Lithuania<br>**Factoring licenses**<br>• Hungary: ~$4,000<br>(minimum capital<br>requirement) (five<br>months)<br>• Czech Republic and<br>Slovak Republic:<br>~$30 (one month)<br>**Laws on initial capital**<br>**requirements**<br>• Yes: Hungary, Latvia,<br>Lithuania, Slovenia<br>• No: Czech Republic,<br>Estonia, Poland,<br>Slovak Republic|**Factoring**<br>**provisions**<br>**included in**<br>**civil or**<br>**commercial**<br>**code**<br>• Estonia,<br>Latvia,<br>Lithua nia,<br>Slovenia<br>**Security laws**<br>**permitting**<br>**lenders to**<br>**collateralize**<br>**working capital**<br>**assets (account**<br>**receivables,**<br>**inventory, and**<br>**the like)**<br>**A recording**<br>**system to**<br>**register liens**<br>**on accounts**<br>**receivable**|**Sources of financing**<br>• Bank loans (88%)<br>• Equity (44%)<br>•Retail deposits (17%)<br>• Corporate bonds (0%)<br>**With notification**<br>• All countries<br>**With and without**<br>**recourse**<br>**Sources of**<br>**information on**<br>**customers**<br>• Self-reported<br>• Parent bank or<br>insurance company<br>• Credit bureaus<br>– Public:<br>Czech Republic,<br>Lithuania,<br>Slovak Republic,<br>Slovenia<br>– Private: Poland<br>**Sources of**<br>**information on**<br>**underlying account**<br>**obligors**<br>• Dun & Bradstreet<br>• Credit bureaus|**Lack of**<br>**understanding**<br>**of factoring;**<br>**considered a**<br>**lender of last**<br>**resort**<br>**Difficulty of**<br>**accessing credit**<br>**information**<br>**and predicting**<br>**credit risk**<br>**Slow legal**<br>**recovery**<br>**Lack of**<br>**refinancing**<br>**Non-**<br>**assignment**<br>**clauses**<br>**(Poland)**<br>**Unfavorable**<br>**tax laws**|

As noted, a country’s tax structure is among the most important determinants of whether factoring can serve as a viable source of credit. The survey asked several questions related to taxation of factoring in the EU 8. In only one country (Lithuania) is VAT applied to interest payments on pre-financing (Table 3). In four countries no VATs are applied to service fees for receivables administration and collection services, while in four they are applied (with the tax rate in all four around 18 percent). Perhaps more important, factors in all of the EU 8 countries indicated an absence of stamp duties and other duties on document transfers applied to factoring. In some countries stamp taxes have been a major constraint to the development of factoring. Only one country (Poland) indicated that losses incurred on bad receivables are not recognized for tax purposes. Ex ante provisioning by factors (as opposed to ex-post recognition of actual losses incurred) for problematic receivables is typically not allowed in the EU 8. As most of the factors that responded to the survey are owned by banks, however, the differential tax treatment in this respect (with banks allowed to deduct provisions) was

**26**

**THE WORLD BANK**