Doing business in Slovakia 2013 and guidelines to taxation

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© BMB Leitner No reliance should be placed on nor should decisions be taken on the basis of the contents of this book. Neither BMB Leitner nor any individual involved in the preparation of this book is responsible for the results of any actions taken on the basis of information herein, including errors and omissions. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or disclosed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BMB Leitner. INTRODUCTION

Dear readers, partners and investors,

Slovakia is one of the most attractive markets for foreign investments in Central Europe, mainly due to its flexible and efficient workforce, favourable geopolitical location and membership both in the Eurozone and in the Schengen area. In terms of economic performance, Slovakia belongs to the most successful EU Member States. Foreign investors traditionally praise the business environment in Slovakia.

The country’s simple tax and law system these guidelines focus on has always been of great importance.

In terms of taxation, Slovakia enjoys a high degree of popularity among the EU Member States. Even though, additionally to the personal income tax rate of 19% applicable in the past, with effect since 1 January 2013 a new tax rate of 25% was introduced for individuals with annual income over EUR 34 thousand and the corporate income tax rate increased to 23%, the tax system is still simple and transparent when compared to the neighbouring countries: The income is taxed only once, i.e. the dividends are not subject to taxation. Both the inheritance tax and the gift tax have been abolished. In addition, no tax is imposed on the transfer of real estate. To sum up simply, the whole taxation system is transparent.

We believe that these guidelines will help you take your investment-related decisions.

I wish you every success!

Renáta Bláhová, FCCA, LL.M Founding Partner of BMB Leitner

BMB Leitner – 2013 International Tax Firm of the Year in Slovakia

www.leitnerleitner.com CONTENT 3. Customs duties 35 4. Other excise duties 36 I. INVESTMENT ENVIRONMENT IN SLOVAKIA 10 5. Special duty in regulated sectors 36 A. GENERAL INFORMATION 10 6. Environmental taxes 37 1. Opportunities for foreign investors 10 7. Advertising duty 37 2. Area and population 10 III. SPECIAL AREAS OF TAXATION OF BUSINESS-RELATED 3. Government and law 11 ACTIVITIES 38 4 Key economic indicators 12 A. HOLDING STRUCTURES 38 B. PRACTICAL INFORMATION 14 1. Participation exemption 38 1. Transport 14 2. Dividends 38 2. Language 14 3. Interest deduction and thin capitalization 38 3. Time relative to Greenwich Mean Time (GMT) 15 4. Non-resident shareholders 39 4. Business hours 15 5. Tax Group 39 5. Public holidays 15 B. REAL ESTATE INVESTMENTS 40 II. TAX FRAMEWORK FOR DOING BUSINESS IN SLOVAKIA 16 1. Resident investors 40 A. LEGAL FORMS 16 2. Non-resident investors 41 B. INCOME TAX ASPECTS 17 3. Real estate taxes 42 1. Sole entrepreneurs 17 4. VAT on real estate 42 2. Corporations including partnerships 23 5. Real estate investment funds 43 3. Reorganizations 24 6. Structuring of real estate investments 43 4. Specific aspects for foreign investors 25 IV. EMPLOYEES AND BOARD MEMBERS 45 C. INTERNATIONAL BUSINESS-RELATED ISSUES 26 A. EMPLOYEES 45 1. Tax treaties 26 1. Resident employees 45 2. Transfer pricing 26 2. Non-resident employees 46 3. Controlled foreign companies 26 B. BOARD MEMBERS 47 D. VALUE ADDED TAX (VAT) 27 1. Executives 47 1. Taxable persons 27 2. Non-executives 47 2. Taxable transactions 28 3. Non-resident board members 47 3. Place of supply 29 C. MUNICIPAL TAX 48 4. Taxable amount 30 D. SPECIFIC PROVISIONS FOR CROSS-BORDER EMPLOYMENT 48 5. Tax rates 31 1. General provisions 48 6. Exemptions 31 V. TAX ASPECTS FOR PRIVATE INVESTORS 50 7. Input VAT deduction 32 A. CAPITAL INVESTMENTS 50 8. VAT liability 33 1. Resident capital investors 50 9. Tax assessment 34 2. Non-resident capital investors 51 E. OTHER BUSINESS-RELATED TAXES 35 3. Investment Funds 52 1. Capital duty 35 B. INHERITANCE AND DONATION TAX PLANNING 52 2. Stamp duties 35 C. HEALTH INSURANCE CONTRIBUTIONS ON DIVIDENDS 52

8 9 I. INVESTMENT ENVIRONMENT IN SLOVAKIA the EU Shengen Agreement in 2008. In addition, Slovakia joined the Eurozone on 1 January 2009. A. GENERAL INFORMATION Thanks to its location, the Slovak Republic offers a good access to markets of 1. OPPORTUNITIES FOR FOREIGN INVESTORS the European Union Member States as well as eastern European countries. The territory of the Slovak Republic is covered by important European transport According to some international surveys, the Slovak market remains a very routes, oil and gas pipelines. Many foreign investors have chosen the Slovak attractive target market for foreign investments in the EU, mainly due to the Republic due to its unique location. following positive features: ¬ EU membership; The Slovak Republic has an estimated population of 5.4 million (as at 31 ¬ Transparent and simple tax system; December 2012). The population density is 110 inhabitants per square kilometre. ¬ Flexible and reliable workforce. The total area of Slovakia is 49,035 square kilometres and is divided into eight administrative regions. In our experience, apart from these key strengths, other attractive advantages and characteristics include: The capital Bratislava, with a population of approximately 431,000, can be easily ¬ Since 2009 the official currency has been the Euro; reached by motorway from Vienna in less than an hour. Further important Slovak ¬ Favourable geopolitical location and member of Shengen Agreement; cities include Košice (population 235,000), Prešov (population 93,000), Žilina ¬ Improving infrastructure; (population 84,000), Nitra (population 84,000), Banská Bystrica (population ¬ Economic stability; and 83,000) and Trnava (population 70,000). As there are significant regional ¬ Transparent Investment Aid Act. disparities in the Slovak Republic, potential investors may find very interesting locations for their business. From a tax point of view, the Slovak Republic has still a simple and transparent tax system with a low income tax burden and not many tax categories. The workforce is highly educated and labour productivity per person employed in the Slovak Republic is the third highest (after Cyprus and Malta) among the new The inheritance and the gift tax were abolished on 1 January 2004, as was the members of the European Union.2 On the other hand, the Slovak Republic is one real estate transfer tax on 1 January 2005. of the eight EU countries in which the estimated hourly labour costs for 2012 are below EUR 10.3 The official language is Slovak, although many people also speak The tax rate of 19% is still applicable to personal income tax. However, since 1 German or English. January 2013 a second personal income tax rate of 25% has been applicable to annual income exceeding EUR 34,000. As for the corporate income tax rate, it has 3. GOVERNMENT AND LAW been increased from 19% to 23% with effect since 1 January 2013. Foreign investors regularly praise the Slovak business environment, recognising Slovakia is a parliamentary democratic republic with a multi-party system. The the long-term investment opportunities that lie within the region. Slovak head of state is the President, elected by direct popular vote for a five-year term. Most executive power rests with the head of government, the Prime Minister, 2. AREA AND POPULATION1 who is usually the leader of the winning party, but who has to form a majority coalition in the parliament. The Prime Minister is appointed by the President. The The Slovak Republic is located in Central Europe, bordered by Austria, Hungary, rest of the cabinet is appointed by the President, with recommendations from the Poland, the Czech Republic and Ukraine. Slovakia has been part of the European Prime Minister. Union since its accession on 1 May 2004. It has only a very short border with Ukraine, the only non-EU country with which Slovakia has a border. The remaining neighbouring countries have been freely accessible since Slovakia’s accession to

2 Source: Eurostat. http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pco- de=tec00116&plugin=0 3 Source: Eurostat. http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-10042013-AP/EN/3-10042013- 1 10 Source: Statistical Office of the Slovak Republic. AP-EN.PDF 11 The highest law-making body of the Slovak Republic is the National Council 4. 2. Inflation (parliament), comprising only one chamber. Delegates for the National Council are elected for a four-year term, based on proportional representation. Since 2009 the inflation rate has been calculated according to the Eurostat methodology (HICP index). In 2009 - 2012 the inflation rate reached 0.9%7, 0.7%8, Slovakia’s highest judicial body is the Constitutional Court of Slovakia (Ústavný 3.9%9 and 3.6%10, respectively. For 2013 an inflation rate of 2.3% is estimated.11 súd), which rules on constitutional issues. The 13 members of this court are appointed by the President. 4. 3. Unemployment

In terms of administrative division, Slovakia is subdivided into eight regions (kraje), After a few favourable years, the unemployment rate increased as a result of the each named after its principal city. Regions have enjoyed a certain degree of economic crisis. In 2010 the unemployment rate reached over 14.4%. In 2011 it autonomy since 2002 and are run by self-governing bodies. fell to 13.5%12, however, in 2012 it has risen again to 14%.13 This is still one of the highest unemployment rates within the European Union. Foreign investors attach great importance to the fact that the Slovak Republic is a member of a number of international organisations including: 4. 4. Foreign trade and foreign direct investments14 ¬ UNO; ¬ The World Bank; As at December 2011 the accumulated foreign direct investment in the Slovak ¬ OECD; Republic amounted to EUR 33.73 billion.15 The most important country was the ¬ GATT/WTO; Netherlands, with about 24% (including tax holding structures), followed by ¬ CEFTA (Central European Free Trade Association); Austria with almost 15%, Germany with 12%, Italy with 8%, and Hungary and the ¬ NATO; Czech Republic both with 5%. ¬ UNESCO; ¬ OSCE (Organization for Security and Co-operation in Europe); By sectors, the biggest share of direct investments was in manufacturing ¬ CERN; production, financial and insurance services, water supply, and information and ¬ WHO (World Health Organization); communication technology. ¬ INTERPOL; and ¬ Visegrád Group. As at the date of this publication, no official statistics for 2012 were available. But after a decline in the inflow of foreign direct investments due to the financial and 4 KEY ECONOMIC INDICATORS4 economic crisis in 2009, a slow growth is expected in the following years.

4. 1. Gross domestic product (GDP) In 2010 foreign trade almost reached pre-crisis levels with exports amounting to EUR 48.3 billion and imports to EUR 47.5 billion. In 2011 further growth was Slovakia is an open economy that greatly depends upon foreign trade. The recorded, when the exports reached EUR 56.8 billion and imports EUR 55.7 billion. economic crisis which has affected the neighbours and business partners In 2012 the growth continued, when the exports reached EUR 62.8 billion and of Slovakia (mainly Germany) has had an impact on Slovakia, too. In 2012 an imports EUR 59.2 billion. The balance of foreign trade remained a positive figure economic growth of 2.0% was recorded in Slovakia.5 However, in 2013 the for the fourth year in a row.16 Eurozone expects a slower economic growth, according to a forecast of the IMF at the rate of 1.4%.6 The Slovak Republic exports mainly motor vehicles, engineering facilities and technical products. According to the current figures the automotive industry is

7 Source: Statistical Office of the Slovak Republic. 8 Source: Statistical Office of the Slovak Republic. 9 Source: Statistical Office of the Slovak Republic. 4 Source: Statistical Office of the Slovak Republic. 10 Source: National bank of Slovakia. 5 Source: National bank of Slovakia (available in Slovak language). http://www. 11 Source: Statistical Office of the Slovak Republic. nbs.sk/sk/informacie-pre-media/tlacove-spravy/spravy-vseobecne/detail-tlaco- 12 Source: Statistical Office of the Slovak Republic. vej-spravy/_komentar-nbs-k-rychlemu-odhadu-hdp-a-nbsp-zamestnanosti-v- 13 Source: Statistical Office of the Slovak Republic. -4-stvrtroku-2012 14 Source: Statistical Office of the Slovak Republic, The National Bank of Slovakia. 12 6 Source: National bank of Slovakia (available in Slovak language). http://www.nbs. 15 Source: The National Bank of Slovakia. 13 sk//_img/Documents/_komentare/2013/23_Flash_IMF_04_2013.pdf. 16 Source: Statistical Office of the Slovak Republic. one of the key industries for the Slovak Republic. After the crisis year 2009 with 3. TIME RELATIVE TO GREENWICH MEAN TIME (GMT) a total production of less than 470 thousand vehicles, more than half a million vehicles were once again produced in 2010. Further growth was recorded in 2011, Slovakia is in the Central European Time Zone, which means it is one hour ahead when the number of vehicles manufactured in Slovakia was around 640,000 of GMT. Like most countries in Europe, Slovakia observes Summer (Daylight- as a result of the new ‘small class’ vehicle production. Given these figures, Saving) Time – the time is shifted forward by one hour – two hours ahead of GMT. the country became the world’s leading producer of vehicles per person. The forecasts for 2012 were met, when the production reached 926,000 vehicles. The 4. BUSINESS HOURS experts anticipate that in 2013 around 930,000 vehicles will be manufactured in Slovakia.17 Currently, the biggest company in the country is Volkswagen Slovakia Business in Slovakia is normally conducted during an eight-hour day, with offices (2012 turnover EUR 6.59 billion). 419,888 vehicles were manufactured in the plant typically open between 9.00 am and 5.00 pm. Most business offices are closed on in 2012.18 Saturday and Sunday.

4. 5. Currency19 5. PUBLIC HOLIDAYS

Since 1 January 2009 the official currency in Slovakia has been the euro, with The holidays observed by most businesses and government offices are: the irrevocable exchange coefficient EUR/SKK (conversion rate) EUR 1 = SKK ¬ Day of the Establishment of the Slovak Republic - 1 January; 30.1260. The introduction of a common European currency has helped to protect ¬ Epiphany – 6 January; the country from foreign exchange exposure. ¬ Good Friday and Easter Monday – depends on the church calendar; ¬ May Day - 1 May; B. PRACTICAL INFORMATION ¬ Day of Victory – 8 May; ¬ St Cyril and Methodius Day – 5 July; 1. TRANSPORT ¬ Slovak National Uprising anniversary – 29 August; ¬ Day of the Constitution of the Slovak Republic – 1 September; There are eight international airports in the Slovak Republic.20 The biggest is the ¬ Day of Blessed Virgin Mary, patron saint of Slovakia – 15 September; Bratislava airport in the Slovak capital. There are also airports in the neighbouring ¬ All Saints‘ Day - 1 November; countries which are very nearby, for example Vienna airport (Austria), Krakow ¬ Struggle for Freedom and Democracy Day – 17 November; airport (Poland) and Budapest airport (Hungary). ¬ Christmas Eve – 24 December; Besides air transport, the Slovak Republic has a well-developed rail network and ¬ Christmas Day – 25 December; and an improving motorway system. The most important waterway is the Danube ¬ St Stephen’s Day – 26 December. River.

2. LANGUAGE

The official language is Slovak, part of the Slavic language family. Hungarian is widely spoken in the southern regions and Ruthene is used in some parts of the northeast. Minority languages hold co-official status in some municipalities. Many people speak at least one foreign language. The most common of these are English and German.

17 Source: (available in Slovak language) http://ekonomika.sme.sk/c/6770852/ automobilky-u-nas-vyrobili-vlani-rekordny-pocet-aut.html 18 Source: Volkswagen Slovakia, press release. (available in Slovak language) http://sk.volkswagen.sk/content/medialib/vwd4/sk/pdf/hospodarske-vysled- ky-12/_jcr_content/renditions/rendition.file/tlacova-sprava.pdf 19 Source: The National Bank of Slovakia. 20 14 Source: Ministry of Transport, Construction and Regional Development. 15 II. TAX FRAMEWORK FOR DOING BUSINESS IN SLOVAKIA B. INCOME TAX ASPECTS

A. LEGAL FORMS 1. SOLE ENTREPRENEURS

Business activities in Slovakia are carried on by sole entrepreneurs (individuals) 1. 1. Unlimited tax liability or legal entities (companies). The Slovak Commercial Code contains following legal forms of companies; these are commonly used for establishing a business in Individuals who are resident in Slovakia (residents) are subject to unlimited income Slovakia: tax liability on their worldwide income (i.e. income from domestic and foreign 1. General partnership – verejná obchodná spoločnosť (v.o.s.) sources). An individual is resident in Slovakia if he has his domicile or habitual 2. Limited partnership – komanditná spoločnosť (k.s.) place of abode in Slovakia. 3. Limited liability company – spoločnosť s ručením obmedzeným (s.r.o.) 4. Joint stock company – akciová spoločnosť (a.s.) An individual is deemed to have his domicile in Slovakia if he has a registered 5. Cooperative – družstvo. permanent stay there. An individual has his habitual place of abode where he is physically present under circumstances indicating a permanent presence or Some information about the legal and tax framework of a sole entrepreneur (sEnt) stay. The habitual place of abode is deemed to be established in Slovakia if the and companies is provided below: individual stays in Slovakia for more than 183 days in a calendar year.

MINIMUM REGISTRA- Sole entrepreneurs running an operating business in Slovakia may derive income LIABILITY OF MINI- FOUNDERS TION from the following categories: FORMS SHAREHOLD- MUM AND IN COM- TAX TAX ERS CAPITAL SHARE- MERCIAL TREATMENT RATE 1. income from business HOLDERS REGISTER 2. income from independent (professional) services no shares, per- 3. income from rentals. 19% sonal liability of not obliga- tax liability of sole sEnt - 1 OR the sole entre- tory entrepreneur 25% In the following, we refer only to the category „income from business“ (also preneur referred to as „business income“) as this category is the most important one in tax resident; however, Slovak tax practice. Please note that individuals can also derive income from other v.o.s. unlimited - 2 obligatory the tax base is trans- 23% ferred to partners activities, such as real estate or capital investments. For these types of activities, see III.B. and V. unlimited for tax resident; how- general part- 250 ever, the tax base is k.s. ners and lim- limited 2 obligatory 23% transferred to general 1. 2. Principles of determination of the business income tax base ited for limited partner partners partners The distinction between business income and other income categories is tax resident, non- transparent, important with regard to the method used. For business income, the concept of s.r.o. limited 5 000 1 (max. 50) obligatory 23% dividends not subject “profit” applies when determining the net amount of business income. to tax tax resident, non- Methods transparent, a.s. limited 25 000 1 obligatory 23% dividends not subject to tax As far as the methods for determining the tax base are concerned, the primary method for individuals is in general the cash method or what is known as the tax resident, non- 5 individuals coopera- transparent, single entry accounting method. However, the Slovak Income Tax Act (ITA) does unlimited 1 250 or 2 legal obligatory 23% tive dividends not subject entities not explicitly deal with this method in more detail. to tax

16 17 Cash method (tax evidence) exception to this rule to the competent tax authorities within the stipulated deadline. For taxpayers who are not so required and who do not voluntarily use double entry bookkeeping, the cash method applies (i.e. single entry bookkeeping). Under Receivables are accounted for and valued at their acquisition cost, which is the this method, profit is computed as the excess of business receipts over business nominal value. Irrecoverable receivables may be written down for tax purposes expenditures. Receipts are taxed in the calendar year in which they are received from their net amount, since 1 January 2010, under the following conditions: by the taxpayer; expenditures are deducted in the calendar year in which they are ¬ up to 20% if overdue for more than 360 days; paid (unless certain exceptions such as that for capital expenditures apply). ¬ up to 50% if overdue for more than 720 days; and ¬ up to 100% if overdue for more than 1,080 days. Double entry accounting for registered entities Liabilities are valued at their nominal value. Under the Act on Accounting, registered corporations such as joint stock companies and limited liability companies are obliged to use double entry Depreciation bookkeeping based on the matching principle. In addition, sole entrepreneurs may also opt for double entry bookkeeping. In this case, similarly to legal entities, the The acquisition or production costs of depreciable fixed assets are deducted tax base is derived from the accounting profit (difference between revenues and proportionally according to the fixed regulations of the ITA. The linear and expenses) increased by non-deductible items and decreased by deductible items declining-balance methods of depreciation may be used. Amortization starts at as set by the ITA. the beginning of use in the business.

Lump-sum deductions The tax depreciation is computed on the basis of the following useful life: ¬ cars, tools, buses (1st depreciation group) 4 years; Taxpayers receiving income from trade and entrepreneurial activities who do ¬ trucks, machines (2nd depreciation group) 6 years; not prove their deductible expenses may opt for the lump-sum deductions in ¬ heavy machines, plants (3rd depreciation group) 12 years; the amount of 40%, but only up to EUR 5,040 per year, i.e. EUR 420 per month. ¬ buildings (4th depreciation group) 20 years. However, these deductions are not applicable to taxable persons registered for value added tax (VAT). Since 2013 it is no more possible to apply lump-sum The Amendment to the ITA introduces proportional tax depreciation, i.e. deductions to income from rentals. that depreciated amount can be written off only up to a proportion of annual depreciation in the first year, according to the number of months during which the Valuation of assets and debts asset is included in the fixed assets’ register in the first year. This should apply to tangible assets put into use after 31 December 2011. The valuation of assets and liabilities is indirectly required for the determination of business income. The following principles apply: In the case of financial leasing contracts, depreciation may be deducted by the Depreciable fixed assets, non-depreciable assets and current assets are reported economic owner of the leased asset only. If the conditions of financial leasing at their acquisition or production cost less depreciation. The value of the assets are met, the aforementioned depreciation period may be reduced to 60%, e.g. on the balance sheet at the end of the business year may not exceed their balance buildings may be fully depreciated already in 12 years. sheet value at the beginning of the business year. The going concern principle is not applicable for tax purposes. Income taxation If the acquisition or production costs of a single asset do not exceed EUR 1,700, normally requires realization. the total cost may be deducted in the year of acquisition or production. Currency exchange gains or losses from revaluation (unrealized F/X differences) For income tax purposes, depreciation may be interrupted at any time and are included in the tax base. Income taxation does not follow the realization continued later. principle unless the taxpayer submits the documentation necessary for an

18 19 Provisions and accruals ¬ interest; ¬ payments from private life or pension insurance reduced by the amount of paid For expected claims, which do not have to be legal or certain in amount, provisions contributions; and must be set up under general accounting principles. For tax purposes, the tax- ¬ payments under the supplementary pension insurance. deductible provisions are limited to the following since 1 January 2008: ¬ provisions for vacation allowances (including social security contributions); In the case of Slovak-source income, the taxpayer may opt to include such income ¬ provisions for the supply of goods and services not yet charged; in the aggregate taxable income and treat the withholding tax as a prepayment. ¬ provisions for the costs of audit, year-end financial statements and tax returns. However, since 1 January 2011 the possibility of the option is significantly reduced in the case of resident taxpayers. Accruals for non-invoiced supplies and services are deductible, too. Tax incentives Expenses An income tax relief can be provided as a state aid for recipients that fulfil the Deductible business expenses are expenses or expenditures caused by a trade conditions set by the Investment Incentive Act. In 2013 an amendment to the or business. Generally, the taxpayer has to prove that business-related expenses Act on Investment Aid was adopted and has been applicable since 1 May 2013. are necessary or appropriate with regard to their amount in connection with The maximum amount of the income tax relief depends on the decision of the related party transactions. In particular, no deduction is allowed for expenses and government, based on an application submitted by the applicant. expenditures regarding the taxpayer’s household or lifestyle, personal taxes such as income tax payments and penalties or bribes. Representation expenses are not Overview of the Most Significant Changes deductible. Advertising expenses are deductible with a few exceptions only (e.g. ¬ A precondition for granting investment aid is the creation of new jobs (the promotional items with a value over EUR 16.60, which are not tax deductible). number of new employees may not be lower than 40). Losses from the alienation of e.g. real estate property (plots of land), securities, ¬ The minimum investment amounts have been decreased and advantages for shares in corporations and factoring are not tax deductible. small and medium-sized enterprises (SMEs) have been introduced. ¬ At least 50% of the investment has to be covered by equity. In any case, business deductions include: ¬ The investment project is to be implemented at one location, where one ¬ social security and health insurance contributions; location is to be understood as the complex of real estates creating one ¬ insurance premiums; enterprise estate. ¬ costs for training and further education; ¬ The expansion of production in an existing plant is conditioned by a minimum ¬ expenses related to business travel up to certain limits set by law; production increase of 15%, in terms of value or volume, compared to the ¬ remunerations of statutory representatives (managing directors, members of average for the last three fiscal years prior to the submission of the investment the supervisory board). project to the Ministry of Economy. ¬ A change of parameters of the investment and Investment Aid after the Certain personal expenses that are not connected to business activities may be approval of the investment aid was allowed (subject to the approval of the deducted as special allowances unless they constitute business deductions or competent Ministry) only once during the implementation of the investment expenditures. Special allowances include the basic tax allowance and the single- project, drawing the aid and the period of the following five years (it has been earner allowance. also specified which changes are not allowed). ¬ Non-current intangible assets are eligible up to the amount of the acquired Withholding tax fixed assets (until now up to 50%). ¬ Subsidies for acquired assets may not be granted in the area of strategic Items excluded from the consolidated income, and subject to a final withholding services centres any more and maximum subsidy amounts in the area of tax of 19% include: technology centres (EUR 5 million) and of industrial production (EUR 10 ¬ income from certain debentures and investment coupons; million) have been introduced.

20 21 ¬ It is not possible to grant investment aid in form of a tax relief to strategic 1. 3. Carry-forward of losses services centres any more if they are located in a district with unemployment rate below the Slovak average. Generally, losses generated from business and independent services may be set ¬ It is no longer possible to claim investment aid in form of an income tax relief off against income earned in the same category in the same year. Losses may using a fixed coefficient of 0.8 (up to the amount of 80% of the tax liability). be set off against income earned in other categories, except for set-offs against employment income. Remaining losses may be carried forward provided that the Industrial Production losses were computed according to generally accepted accounting principles and adjusted for purposes of the ITA. The minimum investment amount has been decreased as follows: ¬ EUR 10 million in districts with unemployment rate below the Slovak average A loss carry-forward is limited up to seven years. (until now EUR 14 million); ¬ EUR 5 million in districts with unemployment rate above the Slovak average 1. 4. Tax rate (until now EUR 7 million); ¬ EUR 3 million in districts with unemployment rate at least 50% above the Since 1 January 2013 personal income is taxed at the rate of 19% and 25%. The Slovak average (until now EUR 3.5 million). higher tax rate is applicable when the tax base exceeds 176.8 multiple of the applicable subsistence minimum (ca. EUR 34,000 per year). The income not The minimum investment amount for investments to be realized by SMEs has exceeding the above limit will be taxed at the rate of 19%. been decreased to 50%. 2. CORPORATIONS INCLUDING PARTNERSHIPS In districts with a higher unemployment rate the minimum ratio of new production and technology equipment to be acquired in connection with the investment 2. 1. Taxpayers and residence remains unchanged. With respect to legal persons (corporations), the Slovak ITA defines a taxable Technology Centres person with unlimited tax liability (the Slovak tax resident) as a legal entity which has its registered office or its place of effective management in the territory of The minimum investment amount remains unchanged at EUR 500,000. the Slovak Republic. The place of effective management is the place in which Employees with a university degree have to account for at least 70% (until now management and business decisions are taken by statutory and supervisory 60%) out of the total staff. bodies of the legal entity, even if the address of the place of effective management is not registered in the Companies Register. Strategic Services Centres In this regard it is necessary to address the absence of the transparency principle The minimum investment amount remains unchanged at EUR 400,000. and of a definition for flow-through entities. This includes Slovak partnerships. The Employees with a university degree have to account for at least 60% (until now unlimited partnership (verejná obchodná spoločnosť) and, partially, the limited 30%) out of the total staff. partnership (komanditná spoločnosť) in general are subject to Slovak corporate income tax and are considered by the Slovak ITA to be tax residents. However, the Tourism income tax base of partners with unlimited liability in both categories of Slovak partnerships is divided automatically among such partners, which in principle, The minimum investment amounts have not been changed and remain as follows: corresponds to the transparent approach. On the other hand, the income tax ¬ EUR 10 million in districts with unemployment rate below the Slovak average; base of the limited partner in the limited partnership (k.s.) is treated as if he were ¬ EUR 5 million in districts with unemployment rate above the Slovak average; a shareholder in a limited liability company, i.e. the transparent approach is not ¬ EUR 3 million in districts with unemployment rate at least 50% above the applied. Slovak average.

22 23 This overview is restricted to public and private limited companies including by the EU Merger Directive (90/434/EEC) as implemented into the Slovak ITA, are limited partners (in the following referred to as “corporations” since they excluded from taxation. represent the most important corporate entities for purposes of daily business in Slovakia). The following changes in the legal position are tax neutral, based on the Slovak ITA: 2. 2. Principles of determination of the tax base ¬ contributions of businesses or part of businesses; ¬ exchanges of shares; and Taxable income is determined on the basis of the accounting profits. Thus, the ¬ mergers and de-mergers. profit reported in the financial statements (i.e. accounting profit) is adjusted by the tax law rules (increased by non-deductible items and decreased by deductible There is no special Reorganization Tax Act; instead, the tax consequences are items as set by the ITA). determined by the Slovak ITA. Under the Slovak ITA, taxpayers are given a choice whether to perform selected types of reorganization, for tax purposes, at historic Taxable income is assessed for each tax year, which is usually the calendar year. cost or at step-up values. If the business year deviates from the calendar year, the company may report its income on the basis of its business year. In such a case, written communication 4. SPECIFIC ASPECTS FOR FOREIGN INVESTORS with the tax authorities is required. Non-resident sole entrepreneurs and corporations 2. 3. Carry-forward of losses Individuals without a residence or habitual place of abode in Slovakia and Losses incurred in a business year that cannot be set off against taxable income corporations with no seat or place of effective management in Slovakia are taxed derived in the same business year may be carried forward for seven years. in general on income from the following sources (Sec. 16 ITA): However, for the losses incurred up to 31 December 2009 only a five-year period is ¬ income from any activities carried out through a permanent establishment; applied. No other restrictions apply to losses except for a general anti-avoidance ¬ income from employment activities performed in Slovakia; rule. ¬ income from independent professional services performed or utilized in Slovakia; 2. 4. Tax rates and tax payments ¬ income from rental and leasing of immovable assets situated in Slovakia; and ¬ income from transactions concerning domestic real estate. In general, any profit derived by a corporation is subject to corporate income tax regardless of whether the profit is distributed to shareholders or retained. Non-residents deriving Slovak-source income must file tax returns unless their income is taxed by way of withholding within the meaning of Sec. 43 ITA. Since 1 January 2013 the corporate income tax rate has increased from 19% to 23%. Each corporation which reports a tax liability over EUR 1,659.70 for a tax Under Sec. 43 ITA, the withholding tax amounts to 19% of the gross amount of period must pay corporate income tax prepayments in the following tax period. income and is levied on various categories of income including: The prepayments are credited against the annual corporate income tax liability. ¬ income from independent services as writer, lecturer, artist, architect, However, no minimum income tax is levied in the case of losses. sportsman, artiste, or as contributor to an entertainment program performed or utilized in Slovakia, regardless of to whom the payment for such services is 3. REORGANIZATIONS made; ¬ royalties and income from renting of immovable property; According to general income tax principles, changes in the legal position of ¬ income from commercial and technical consultancy services carried out in companies (corporations as well as partnerships) are treated as taxable events for Slovakia; income tax purposes. However, certain kinds of reorganizations, which are covered ¬ income from participation in a commercial business as silent partner; ¬ interest including similar income from securities.

24 25 The withholding tax is final unless reduced by a tax treaty. In the case of income D. VALUE ADDED TAX (VAT) that is not subject to withholding tax, the recipient of the service is obliged to secure a tax of 19% unless the non-resident supplier has its seat in the EU. 1. TAXABLE PERSONS

Taxation of savings (interest) within the EU has been effective since 1 January General 2005 and treated in accordance with the Directive 2003/48/EC and taxation of royalties has been effective since 1 May 2006. In general, entrepreneurs carrying out taxable transactions in Slovakia are subject to value added tax (VAT). An entrepreneur is defined as a person conducting C. INTERNATIONAL BUSINESS-RELATED ISSUES a business (economic activity) or profession in an independent way regardless whether it derives profits. Even non-resident entrepreneurs may be subject to VAT 1. TAX TREATIES if they carry out taxable transactions in Slovakia (see 9. 2. ).

In the case of cross-border transactions Slovakia follows the tax treaties in The list of taxable persons has been extended to include Slovak non-profit the area of personal and corporate income tax that have been concluded with organizations and other Slovak persons conducting economic activities as well as about 64 states (September 2012) and social security including health insurance public bodies and persons registered for VAT in other EU Member States. contributions (all EU Member States and a few non-EU countries). These treaties relate to all categories of income including interest, royalties or dividends. Most Other individuals may be subject to VAT in the case of importation of goods from of the Slovak double tax treaties comply with the OECD Model Convention. Any countries outside the EU into Slovakia (import VAT) or in the case of an intra- international treaties that have been approved, ratified and promulgated prevail Community acquisition of new vehicles. over the Slovak ITA. In practice, there is no treaty override issue in Slovakia. Taxable persons with their seat, place of business or fixed establishment in 2. TRANSFER PRICING Slovakia do not have to register for VAT purposes on the condition that their turnover does not exceed the amount of EUR 49,790 during a period of the The Slovak ITA rules on transfer pricing are in line with OECD Transfer Pricing preceding 12 months. Since 1 October 2012 a compulsory VAT registration has Guidelines. The transfer pricing documentation in line with the OECD’s Code of been introduced for taxable entities that sell a construction (flat, non-residential Conduct is obligatory for taxpayers which are obliged to keep books under IFRS. space) or its part, if the supply reaches the aforementioned turnover, even if the For other taxpayers only simplified documentation is required. If requested by payment is received prior to the supply of the construction. This does not apply to the tax authorities during a tax audit, the transfer pricing documentation must be a VAT exempt sale of a construction or its part. submitted within 60 days. Taxable persons that do not meet their registration duty or that do not register for As a result of the changes in the structure of the tax administration, tax inspectors VAT on time are obliged to file VAT returns and to pay the VAT for the period from will put more focus on the issue of transfer prices in the future. It is also planned the day they should have registered until the day of their actual registration. At to specify legislative requirements for the submission of documentation. the same time, they are entitled to an input VAT deduction upon meeting the legal requirements. This provision applies to taxable persons with the obligation to file 3. CONTROLLED FOREIGN COMPANIES a registration application after 1 April 2009.

Slovak tax law does not provide for controlled foreign company legislation (CFC Since 1 October 2012 a compulsory interest-free collateral upon registration legislation). Nevertheless, transactions may be challenged on the basis of general (from EUR 1,000 to EUR 500,000) has been introduced to be deposited in the tax principles and, in particular, the substance-over-form rule, the beneficial account of the tax administrator or to be submitted as a bank guarantee under ownership approach and the arm’s length principle. certain conditions.

26 27 VAT Group 2. 2. Withdrawals (self-supply)

Since 1 January 2010 certain taxable persons with a seat, a place of business or Self-supply is not separately mentioned in the Slovak VAT Act (VATA), but is listed a fixed establishment in Slovakia which are closely related by financial, economic in the general definition of supply of goods and services. In general, self-supply is and organizational links may create a group for VAT purposes (and are regarded taxable only if the acquisition of the goods in question gave rise to an input VAT as a single taxable person). A representative of a group, which acts on behalf deduction. of the group, must be appointed in the application form. All group members are jointly and severally liable. The group members are not obliged to pay VAT from 2. 3. Import the supplies of goods and services performed within the group as these are not subject to VAT. The transfer of goods from a country outside the EU to Slovakia is subject to Slovak import VAT only if the goods are directly imported into Slovakia. An 2. TAXABLE TRANSACTIONS entrepreneur is entitled to deduct the VAT paid on imported goods if the goods are used for business purposes. For private persons, the import VAT is final. 2. 1. Supply of goods and services The same treatment applies if goods are returned from a duty-free zone or A supply of goods is deemed to occur whenever the (economic) ownership with a bonded warehouse into the territory of Slovakia. regard to the supplied goods is transferred to another person. In such a case, the supplier entitles the recipient to dispose of the supplied goods as their owner. The The supply of services from a country outside the EU is not taxable under the transfer of the right to dispose of goods as their owner does not, however, require VATA, unless the place of supply is deemed to be in Slovakia. the transfer of the legal ownership (e.g. conditional sale). 2. 4. Intra-Community acquisitions Supplies of services for VAT purposes are all supplies that are not treated as supply of goods or real estate. Services may consist in a positive action (e.g. the An intra-Community acquisition is the acquisition of goods transported from rendering of services) or in permitting actions by others (e.g. leasing of tangible an EU Member State to another Member State, provided both the supplier and property, use of rights and patents). the recipient are entrepreneurs for VAT purposes. On the one hand, the supplier carries out a tax-exempt intra-Community supply; on the other hand, the recipient Supplies of goods and services are also considered to be: has to pay VAT and may deduct it if it is entitled to the input VAT deduction. ¬ transfers of rights (supply of services); ¬ supply of goods or services through a commission agent, since this is Relocation of business property (transfer of goods) to another EU Member characterized as two separate supplies, i.e. one carried out by the principal and State in order to perform business activities in that state is subject to VAT and is another by the commission agent; and considered to be an intra-Community supply. Relocation of business property by ¬ the use of tangible assets for non-business purposes, including private an entrepreneur registered for VAT in another EU Member State into Slovakia is consumption by entrepreneur or its employees. characterized as an intra-Community acquisition of goods.

The following are not considered to be supplies of goods or services: 3. PLACE OF SUPPLY ¬ contributions or sale of a business or a part of it (forming an organizational business unit) consisting of tangible or intangible assets, unless the recipient The supply of goods and services is taxed only if the place of the taxable provides mainly exempt supplies; transaction is considered to be in Slovakia. ¬ cession of the entrepreneur’s own receivables; ¬ giving advertising presents with a value of less than EUR 16.60; The supply of goods is effected at the place where the goods are situated at the ¬ issue of securities; time the economic ownership is transferred to the recipient. The place of supply ¬ receipt of interest income on a bank account if the taxable person is not a bank. of goods dispatched or transported by the supplier or by the recipient is deemed

28 29 to be the place where the goods are at the time when dispatch or transport The taxable amount for the goods and services delivered by a taxable person to starts. When goods are dispatched or transported from a country outside the EU persons having a special relation to a supplier (e.g. employees, supervisory and to a Member State, the supply of goods is taxable in Slovakia only if the importer statutory board members, particular participations in a company, etc.), must be pays import VAT. the open market value. This applies only if the recipient is either a person not registered for VAT or a VAT registered person not entitled to deduct the full input Intra-Community supplies have their place of supply where the dispatch or VAT. transport starts, unless the rules on distance selling apply or a new means of transport is delivered. In the case of distance selling, the place of supply is 5. TAX RATES not the place of departure of the goods, but the place of delivery. The rules on distance selling apply if goods are transported from a Member State to Slovakia Since 2011 the general VAT rate has been increased from 19% to 20%. The to a “threshold acquirer” and the total value of supplies to Slovakia exceeds EUR reduced tax rate of 10% is applicable only to limited categories of goods such as 35,000 in the current calendar year or excisable goods are supplied. books and pharmaceuticals.

Threshold acquirers are: 6. EXEMPTIONS ¬ entrepreneurs effecting exempt supplies without a right to deduct input VAT; and The numerous exemptions from VAT can be grouped in two categories depending ¬ non-entrepreneurial legal entities or legal entities that acquire goods for non- on whether they preclude the deduction of input VAT or not. The most important business purposes. exemptions are listed below:

Intra-Community acquisitions are taxable at the place where the dispatch or Zero-rated supplies transport ends. Intra-Community acquisitions by private persons or by threshold acquirers who do not exceed the threshold of EUR 13,941.45 are only taxed in the The following supplies do not affect the right to deduct input VAT: source state, except for new means of transport. ¬ export of goods (goods are transported outside the EU); ¬ intra-Community supplies; In general, the supply of services to a taxable person (B2B) is taxable at the place ¬ cross-border transportation of export goods; where the recipient has established his business or has a fixed establishment to ¬ cross-border transportation of persons by vessels and aircraft; which the service is supplied. The supply of services to a non-taxable person (B2C) ¬ working and processing of goods destined for export outside the Community; is taxable at the place where the supplier is established. However, special rules for and the determination of the place of supply of services provided to taxable or non- ¬ exempt supplies with the place of supply outside the EU. taxable persons apply in specific cases. Exempt supplies 4. TAXABLE AMOUNT VAT exemptions which preclude the deduction of input tax include: The taxable amount is the consideration payable in order to receive goods or ¬ postal services; services plus additional expenses, but excluding the VAT itself. For withdrawals ¬ radio and TV broadcasts; of goods and services, the taxable amount is determined by costs, which can be ¬ banking and financial transactions as well as insurance transactions; lowered by accumulated depreciation. ¬ transfers of immovable property (including buildings) after the lapse of five years following their acquisition or surveying (the entrepreneur may opt for As a rule, VAT is imposed on the basis of the consideration agreed between regular VAT treatment); parties. If the entrepreneur does not finally receive the agreed consideration, the ¬ letting of immovable property for business purposes (the entrepreneur may VAT is adjusted, unless there are losses caused by insolvency of the customer. opt for regular VAT treatment depending on whether the lessee is a taxable person or not);

30 31 ¬ health services and goods; No input VAT deduction is allowed with regard to supplies used for representation ¬ social care services; and purposes. ¬ training and education services. Finally, the amount of the VAT liability consists of the VAT due on supply of goods 7. INPUT VAT DEDUCTION and services carried out by the entrepreneur less input VAT of the same period. The entrepreneur must pay the balance due to or may claim a refund from the tax An entrepreneur is entitled to deduct VAT invoiced by other entrepreneurs office. and thus paid on goods and services, as well as imports and intra-Community acquisitions, provided that the following conditions are met: 8. VAT LIABILITY ¬ the supply of goods or services must be effected by another entrepreneur in Slovakia for the business of the recipient; In general, an entrepreneur carrying out taxable transactions is liable to VAT. ¬ an invoice has to be issued or the tax must be recorded in VAT documentation; He is obliged to pay the invoiced VAT to the tax office. In respect of supplies and and services subject to the reverse-charge system as well as intra-Community ¬ no VAT exemption, which precludes the deduction of input tax, is applicable. acquisitions, the recipient of goods and services is subject to VAT.

Since 1 October 2012 foreign taxable entities registered for VAT in Slovakia The reverse-charge system applies in the case of the supply of services under the supplying only goods and services subject to the reverse charge (the tax is to be basic rule for the place of supply of B2B services under Section 15(1) VATA. The paid by the buyer) do not have the possibility to deduct the input VAT in a VAT reverse-charge system also applies to other specific services and contract work refund but only through the VAT refund procedure. within the meaning of the VATA (voluntary reverse-charge i.e. the supply of goods to be installed or assembled, the services connected with immovable property, Input VAT deduction is apportioned between taxable supplies and supplies exempt short-term hiring of means of transport, cultural, artistic and similar activities, the from VAT and without the right to the input VAT deduction. The respective pro rata passenger transport and restaurant and catering services). Since 1 April 2009 the is determined as the quotient of all taxable supplies with a claim for an input VAT domestic reverse charge for specific goods has been applicable (investment gold deduction and the total of all taxable supplies with and without the claim for an and metal waste and scrap). input VAT deduction. Since 1 January 2011 the domestic reverse charge has been extended for the If the purpose of the use of the movable long-term property is changed within emission allowances. The reverse-charge system may be agreed also in the case five years or in the case of real estate within 20 years following the acquisition of of “call-of-stock” warehouses under certain conditions. such property, the input VAT deduction must be corrected in accordance with the number of years of future use of the asset. Since 1 October 2012 the scope of application of the inland reverse charge has been extended to cover the supplies of real estate or its part in inland when the Since 1 January 2011 a taxable person is able to deduct the input VAT with supplier opts for taxation, and the exercise of a lien and of a security assignment respect to buildings, plots, flats and non-residential space (investment assets) to of a right, if ownership of goods is transferred. be used for business as well as other than business purposes only in such ratio in which he plans to use these investment assets for business purposes. If an entrepreneur or a private person charges VAT on an invoice, it becomes liable to the VAT on the basis of the invoice. A new system of adjustment of the tax already deducted is being introduced to cover cases when the extent of the use of investment assets for business and From 1 January 2014, subject to certain conditions, it will be possible to apply the other purposes changes subsequently. Taxable persons are liable to monitor reverse charge system to imported goods as well. changes in the extent of use for the period of 20 years.

32 33 9. TAX ASSESSMENT VAT refund scheme

9. 1. Resident taxable persons Since 1 January 2010 foreign taxable persons not established in the Member State of refund (Slovakia) but established in another Member State who do not Any taxable person having his seat, place of business or fixed establishment in carry out taxable transactions in Slovakia may claim a refund of input VAT by filing Slovakia who starts business activities in Slovakia must register with the tax an application electronically with the tax office in the state of their seat, place of office if the turnover threshold (EUR 49,790) is exceeded. For VAT purposes, business or fixed establishment and using the official form. The application must an entrepreneur carrying out taxable supplies has to file periodical VAT returns be filed by 30 September of the calendar year following the refund period. (monthly or quarterly, by the 25th day of the following month) and make payments during the tax year. No annual VAT return to settle any differences during the Foreign taxable persons from third countries who do not carry out taxable year is filed. Thus, differences during the year must be corrected by means of transactions in Slovakia may claim a refund of input VAT by filing an application supplementary VAT returns. with the tax office Bratislava and using the official form. The application must be filed by 30 June of the calendar year following the refund period. In addition, an entrepreneur carrying out intra-Community supplies or supplying services according to the basic rule for B2B services Section 15(1) VATA must Regardless of whether a taxable person is established within the EU or not, the file an EC Sales List that shows the VAT identification numbers of his business following conditions must be fulfilled: partners and the total value of all the supplies of goods and services performed ¬ the taxable person is registered for VAT (or another similar tax) in a state by the entrepreneur. The EC Sales List must be filed electronically on a monthly or where he has a seat, residence or fixed establishment; quarterly basis depending on the amount of the goods supplied. ¬ the taxable person has no permanent residence, seat or fixed establishment in Slovakia; 9. 2. Foreign taxable persons ¬ the taxable person has not effected supplies of goods or services in Slovakia (in the period for which the application is submitted) with the exception of the General deliveries where there is no need to register for VAT (see above).

Foreign taxable persons (having no seat, place of business or fixed establishment E. OTHER BUSINESS-RELATED TAXES in Slovakia) who start performing activities subject to VAT in Slovakia have to register for VAT purposes at the Tax Office Bratislava and submit monthly or 1. CAPITAL DUTY quarterly VAT returns unless certain exceptions or the reverse-charge mechanism applies. In Slovakia there is no specific legislation that regulates capital duty. As far as company law is concerned, related registration fees are not of significant value. It is not necessary to register if the foreign taxable person delivers only: ¬ transport services and the related auxiliary services exempt from VAT; 2. STAMP DUTIES ¬ services and goods with installation and assembly and the recipient is obliged to pay the VAT; Stamp duties are levied on certain services of the authorities responsible for ¬ gas and electricity and the recipient is obliged to pay the VAT; domestic affairs (e.g. visas) or court appeals (in the form of notary fees), usually of ¬ the goods from Slovakia to another Member State which were imported from a small value. There is no special tax act that regulates stamp duties. the third state and the foreign person had a fiscal representative; ¬ goods within a triangular transaction if the foreign person is the first customer. 3. CUSTOMS DUTIES

The registration form must be submitted before starting business (i.e. performing In general, all goods crossing the Slovak border are subject to customs duties. activities that are subject to VAT). As an EU Member State Slovakia does not levy customs duties on the import of goods from other Member States. The customs tariffs towards third countries

34 35 (i.e. countries outside the EU) are determined by the EU. Custom duties represent 6. ENVIRONMENTAL TAXES EU revenue. In addition, various international agreements providing for customs exemptions or preferential customs duties apply. In Slovakia, environmental taxes (taxes on electricity, natural gas and coal) apply to entities (both individuals and corporations) that supply electricity, natural gas 4. OTHER EXCISE DUTIES and coal to the final customer or consumer Environmental taxes follow rules set by Directive 2003/96/EC. Excise duties are levied on tobacco products, alcoholic drinks, spirit and mineral oils. These excise duties are non-recurring taxes and are payable by the seller, 7. ADVERTISING DUTY who passes on these costs to the customer. In the course of EU accession, Slovakia has been granted some insignificant exemptions. No special tax is applied to advertising activities performed in Slovakia.

5. SPECIAL DUTY IN REGULATED SECTORS

Since 1 September 2012 a special duty on business activities in regulated sectors has been introduced. Taxable entities are companies operating in sectors of energy, insurance and re-insurance, public health insurance, electronic communications, pharmaceutics, postal services, rail traffic, public water and sewer systems, air transport and provision of health care under special regulation.

The base for the duty should be the profit reported for the accounting period in which the regulated entity has a licence to perform such activities. The duty is payable, if the expected annual accounting profit of the entity amounts to at least EUR 3 million. The monthly duty rate is 0.363%, i.e. the annual rate is 4.356%.

This duty should be paid only until December 2013.

Since 1 January 2012 Slovak banks and affiliates of foreign banks operating in the Slovak Republic established under specific rules for banks, are subject to the ‘‘bank tax’’.

This special duty in the banking sector in the amount of 0.1% is payable within 25 days of the corresponding calendar quarter (i.e. the annual rate is 0.4%). The base for the duty is the amount of the liabilities reported at the end of the previous calendar quarter (adjusted by strictly specified items defined by law).

The extraordinary banking duty had to be paid in last calendar quarter of year 2012 in the amount of 0.1% of the base for duty calculated from the above mentioned data.

36 37 III. SPECIAL AREAS OF TAXATION OF BUSINESS-RELATED Thin capitalization ACTIVITIES No thin cap rules are applied. A. HOLDING STRUCTURES 4. NON-RESIDENT SHAREHOLDERS 1. PARTICIPATION EXEMPTION 4. 1. Interest and royalty payments to non-residents As dividends and other profit distributions after 1 January 2004 are not subject to tax, a domestic and international participation exemption in line with the Parent- Interest and royalty payments made to associated companies or their permanent Subsidiary Directive is not necessary. establishments located in another EU Member State are exempt from any withholding tax under the EU Interest and Royalty Directive. This directive is 2. DIVIDENDS incorporated in the Slovak ITA.

Since 1 January 2004 dividends are no longer subject to tax, if they are paid out The exemption is subject to the condition that the recipient qualifies as beneficial of the profits generated by companies after 1 January 2004 or later. This applies owner of such payments. A company is deemed to be associated under the Slovak both to inbound and outbound dividends, i.e. for dividends paid by domestic ITA for these purposes if, in principle, the share in capital represents at least 25% corporations and for dividends received from domestic or foreign corporations. for an uninterrupted period of 24 months.

Since 1 January 2011 dividends are subject to health insurance contributions if Exceptions granted to Slovakia under the Accession Treaty have already expired. they are paid out to individuals obligatorily insured for health insurance purposes in Slovakia. Moreover, the dividends paid to the persons with no participation in the 4. 2. Capital gains company (e.g. employees) are subject to social security contributions as well. Capital gains are generally included in the aggregate income depending on the 3. INTEREST DEDUCTION AND THIN CAPITALIZATION assets alienated and provided such income is not tax-exempt under special provisions. Gains from the sale of assets that have been used to generate income Interest deduction from business or professional activities are treated as business income. Gains from occasional sales of non-business-related assets are taxed as other income, Interest and royalty payments made to associated companies or their permanent unless exempt. establishments located in another EU Member State are exempt from any withholding tax under the EU Interest and Royalty Directive. This directive is 5. TAX GROUP incorporated in the Slovak ITA. In general, each corporate entity is regarded as a separate entity for income The exemption is subject to the condition that the recipient qualifies as beneficial tax purposes. Thus, parent corporations and subsidiaries are taxed separately. owner of such payments. A company is deemed to be associated under the Slovak Resident parent corporations and resident subsidiaries may not elect for taxation ITA for these purposes if, in principle, the share in capital represents at least 25% as a fiscal unity. Any agreements in this regard are not valid for tax purposes. for an uninterrupted period of 24 months.

Exceptions granted to Slovakia under the Accession Treaty have already expired.

38 39 B. REAL ESTATE INVESTMENTS Capital gains

1. RESIDENT INVESTORS If the activity does not qualify as a business activity, the acquisition and sale of real estate and comparable rights within a period of five years is taxable. A sale An individual person is resident for tax purposes in Slovakia if he has a domicile or after expiration of the five-year holding period is not taxable. If an individual – the habitual place of abode in Slovakia. Such a person is subject to Slovak personal legal owner of the real estate – acquired the real estate before 1 January 2011 the income tax on his worldwide income, including income from real estate. capital gains are exempt from tax if the permanent address of the acquirer is more than two years thereof. A corporate investor is resident for tax purposes in Slovakia if the place of its effective management or legal seat is situated in Slovakia. Such a corporate The tax base is the difference between sales price and acquisition costs. The 19% investor is subject to Slovak corporate income tax on its worldwide income, or 25% tax rate applies. including income from real estate. Corporate investors 1. 1. Real estate investment income The income of corporations is to be regarded as „business income“ in any event, Individual investors regardless of the nature of the income (e.g. income from real estate investment). The rules for business income are applicable. Rental and leasing payments as well Income from real estate may fall into one of the following two categories: as capital gains are taxable. ¬ business income including income from rentals; or ¬ capital gains. The 23% tax rate applies.

Business income and income from rentals 2. NON-RESIDENT INVESTORS

If real estate activity qualifies as business income (see II.B.1. 1. ), the general Individual non-resident investors principles of business taxation apply (see II.B.1. 2. ). Rentals and leasing payments and capital gains from selling the real estate would be fully taxable. Expenses An individual real estate investor is non-resident in Slovakia if he has neither (e.g. on-going expenses and maintenance) are, in general, tax deductible. a domicile nor his habitual place of abode in Slovakia.

Acquisition costs must be capitalized and for buildings such acquisition costs Non-resident individuals are taxed on real estate only with respect to income from can be depreciated over the period set by the ITA. The same is applicable for the following sources (see II.B.1.1): manufacturing costs (costs incurred by the land owner for the construction of ¬ business income if the real estate business activity is carried out in Slovakia or a building or major extensions of existing buildings) of real estate. the Slovak real estate belongs to a non-Slovak business; ¬ income from rentals and leasing if the immovable property is located in According to tax law, in general the maximum depreciation rate for real estate Slovakia, irrespective whether the immovable property belongs to a Slovak or is 5% of the acquisition costs per year (20 years). In the case of financial leasing non-Slovak business; depreciation is applied by a lessee. In the case of the premature termination of the ¬ income from the sale of real estate located in Slovakia within the five-year financial leasing, a lessee is obliged to adjust the tax base. holding period, irrespective of whether the immovable property belongs to Land plots are not depreciable. a Slovak or non-Slovak business.

The 19% or 25% rate applies. Non-resident individuals with Slovak-source real estate income have to file tax returns. The 19% or 25% tax rate applies.

40 41 Corporate non-resident investors 5. REAL ESTATE INVESTMENT FUNDS

A corporate real estate investor is non-resident in Slovakia if the place of its Asset management companies (undertakings for collective investment in effective management or legal seat is not situated in Slovakia. transferable securities according to the UCITS Directive) may create unit trusts investing in real estate. Unit trusts are not legal entities but assets of unit holders Income of non-resident corporations (comparable to Slovak corporations) from (the units are issued by the asset management company). However, such unit immovable property (including capital gains) situated in Slovakia is taxable as trusts are currently uncommon in Slovakia. business income (see II.B.1.1). 6. STRUCTURING OF REAL ESTATE INVESTMENTS The 23% tax rate applies. The real estate investor can acquire Slovak real estate by way of an asset 3. REAL ESTATE TAXES deal (e.g. direct acquisition of real estate) or a share deal (e.g. acquisition of a corporation owning real estate). 3. 1. Real estate transfer tax 6. 1. Direct investment (asset deal) Since 1 January 2005 no real estate transfer tax has been levied in Slovakia. A Slovak foreign entity may directly acquire Slovak real estate. Interest expenses 3. 2. Real estate tax for a debt-financed acquisition may be deducted from the income from real estate if real estate is rented out or used for its own business. Real estate tax is levied on Slovak real property, which comprises land, buildings and flats. The taxable base is the assessed value of 1 square metre of land No real estate transfer tax is applied. multiplied by the area in square metres. The annual tax rates are not limited by the law and since 1 January 2005 the Slovak municipalities may apply their local Real Estate Investment Funds with limited tax liability tax rates. If the investment fund is considered to be a transparent company in the state of 4. VAT ON REAL ESTATE its residence (outside Slovakia), it is considered to be a transparent company by Slovak law, too. The income of shareholders is subject to the personal income tax The delivery (sale) of real estate or part of real estate is VAT exempt if the delivery rate of 19% or 25%. is carried out after the lapse of five years after the first use. The VAT registered person may opt to charge the VAT. The seller is only entitled to a full input VAT If the investment fund is considered to be a non-transparent company in the state deduction for services received related to the acquisition of real estate and the of its residence (outside Slovakia), the tax base is created by the company income acquisition costs when the sale is subject to VAT. The same has to be considered and is subject to the corporate income tax rate of 23%. for VAT on some major repairs undertaken within 20 years of the sale. If input VAT was deducted, a VAT-exempt sale within 20 years leads to a pro-rata reversal of 6. 2. Indirect investment (share deal) input VAT deduction. Investment through a resident corporation The leasing out of real estate is VAT exempt. The lessor may lease real estate and charge the VAT only if the lessee is a taxable person. The tax base is created by the company income. The income of shareholders (dividends) is not subject to taxation in Slovakia.

42 43 Investment through a resident partnership IV. EMPLOYEES AND BOARD MEMBERS

The income of a general partnership (v.o.s.) is split between the shareholders and A. EMPLOYEES is subject to the personal income tax rate of 19% or 25%. The income of limited partnerships (k.s.) is split between the unlimited and limited partners and is 1. RESIDENT EMPLOYEES subject to the income tax, too. An employee is resident in Slovakia if he has his domicile or habitual place of Please be aware of certain specifics of the taxation of Slovak partnerships that we abode in Slovakia. An individual is deemed to have his domicile there if he has will be pleased to furnish to you upon request. formally registered his permanent stay in Slovakia. The habitual place of abode is deemed to be established in Slovakia if the individual stays in Slovakia for more than 183 days in a calendar year.

1. 1. Employment income

In general, employment income is income received from the employer or a third party in cash or other form such as benefits in kind (e.g. 1% of the value of the employer’s vehicle per month, various prices).

Income from employment includes: ¬ salaries, gratuities and other benefits in cash or kind from current or former employment; ¬ benefits of a member of a cooperative; ¬ benefits of a statutory representative and income as a board member; ¬ remunerations for the members of the government and the parliament of Slovakia, the heads of state administration; and ¬ related remunerations for work in public and private self-governing bodies.

1. 2. Principles of determination of the tax base

The income tax base is determined as the difference between the total employment income and the social and health insurance contributions paid (withheld). Employees are subject to wage tax on their employment income levied at the time of payment.

The tax base and income tax liability are computed on a monthly basis as follows:

44 45 + income from employment activities The rules regarding the determination of the tax base, tax rate, assessment - special allowances (social security contributions, personal allowance) and social security contributions are very similar to the treatment of resident = taxable base of income employees (see IV.A.1.). application of progressive tax rate income tax liability B. BOARD MEMBERS - tax bonus (for each child) = tax liability 1. EXECUTIVES

1. 3. Tax rate, assessment and social security contributions Executive directors (e.g. board members) can perform their activities in relation to the company on the basis of an agreement on performance of the function or A progressive personal income tax rate of 19% or 25% applies. a mandate contract. For operating activities an employment contract is usually In general, all taxable income (monetary and non-monetary) received from the concluded. employer must be included in an assessment base for the social security and health contributions. According to the Slovak ITA, the income of executive directors is considered income from dependent activity (employment income) even though they are not In Slovakia, employers pay payroll taxes from employees’ gross income. For more bound to follow another person’s instructions when performing their work for the details, see the summary of payroll taxes in the table below: company. There is no specific treatment for this kind of employment in Slovak tax law. ASSESSMENT BASE IN EUR EMPLOYEE EMPLOYER INSURANCE (SINCE 1 JANUARY 2013) In general, for the purpose of the ITA an employment relationship is constituted if RATES MIN. MAX. the employee owes his entire manpower to the employer and if he works under the health 4% 10% 337.70 3,930.00 supervision of the employer. sickness 1.4% 1.4% N/A 3,930.00 old age 4% 14% N/A 3,930.00 Until 31 December 2010 the gross income of resident executives has been disability 3% 3% N/A 3,930.00 included in an assessment base for the health insurance contributions only. accident – 0.8% N/A unlimited However, since 1 January 2011 this income, if regular, is considered to be the assessment base for the social security contributions as well. unemployment 1% 1% N/A 3,930.00 guaranty – 0.25% N/A 3,930.00 2. NON-EXECUTIVES reserve fund – 4.75% N/A 3,930.00 TOTAL 13.4% 35.2% – – In general, income of non-executive resident directors (e.g. supervisory board) is taxable in the same way as income of executive directors (employment income) Since 1 January 2013 persons insured in Slovakia are obliged to pay health under the Slovak ITA. insurance contributions on selected capital gains including dividends. Their amount is limited by a separate maximum assessment base for dividends (see Social security is treated similarly as under B.1. above. under V.C.). 3. NON-RESIDENT BOARD MEMBERS 2. NON-RESIDENT EMPLOYEES Non-resident executive and non-executive directors are taxed on income from Individuals with neither a domicile nor habitual place of abode in Slovakia (non- employment activities performed within the territory of Slovakia if they have an residents) are taxable on income derived from domestic sources only. The taxable employment contract. If a mandate contact or an agreement on performance of income of non-residents is limited to that listed in Sec. 16 ITA. the function is concluded, directors are taxed on employment income paid by the

46 47 Slovak resident employer, regardless whether the activity is performed within the of exercise and (iii) the employer does not maintain a permanent establishment in territory of Slovakia or not. the country of exercise. In regard to cross-border employment of board members according to the most Under a few of Slovakia’s double tax treaties, including the one concluded with of double tax treaties concluded by Slovakia, Article 15 or Article 16 OECD MC Austria, the 19% or 25% tax may be a final taxation for income of board members (Director’s fees) is applicable. if certain conditions are met. Under a few of Slovakia’s double tax treaties, including the one concluded with The rules regarding the determination of the tax base, tax rate and assessment Austria, the 19% or 25% tax may be a final taxation for income of board members are very similar to the treatment of resident employees (see IV.A.1.). if certain conditions are met. This results in a very interesting tax planning opportunity. The income is a subject to the social security and health insurance contributions unless the non-resident is obliged to pay these contributions in the country he/she 1. 2. Social security law resides according to the EC Regulation 883/2004 and EC Regulation 1408/71. The non-resident board members from third countries are not obliged to pay social Foreign nationals coming to Slovakia to perform their dependent activities in security contributions if protected by a bilateral treaty. Slovakia are basically subject to the same social security scheme applicable to Slovak employees. However, a different treatment may be claimed under EU C. MUNICIPAL TAX Regulation 883/2004 or under a particular bilateral social security agreement that aims at avoiding that a person is subject to double social security schemes. Municipal tax law covers taxes such as the real estate tax, dog tax, lodging tax, nuclear device tax and road tax. Income from the road tax flows into municipal/ Persons resident in the EU are subject to the provisions of EU Regulation local budgets and income from the other municipal tax types flows into municipal 883/2004, which provide for the applicable social security regulation in the case budgets. of cross-border activities. Depending on a person’s personal and professional situation either the social security scheme of the home country or of the There is no specific municipal income tax in Slovakia. seconding country is applicable in many cases. The A1 (E101) form on the applicable social security provisions has to be applied for in the competent D. SPECIFIC PROVISIONS FOR CROSS-BORDER EMPLOYMENT country. Based on this form, no other country is entitled to levy local social security contributions. 1. GENERAL PROVISIONS If non-EU residents work in Slovakia or Slovak nationals work in a third country 1. 1. Tax treaty law a bilateral social security agreement may provide for the applicable social security legislation. Slovakia has currently concluded social security agreements with 21 Foreign nationals carrying out their employment in Slovakia are basically subject third countries. to taxation in Slovakia, unless a double tax treaty assigns the taxation rights to the other contracting state. In most cross-border employments Article 15 OECD Model Convention (OECD MC) applies. Under Article 15 OECD MC, the country in which the employment is performed (country of exercise) is assigned the taxation rights on the remuneration for this activity. However, the employment is taxable in the residence state only if the following cumulative criteria are met: (i) the employee does not stay longer that 183 days during a calendar/tax year or twelve-month period in the country of exercise and (ii) the employer is not resident in the country

48 49 V. TAX ASPECTS FOR PRIVATE INVESTORS ¬ income from the alienation of own real estate or the transfer of own movable property and securities; A. CAPITAL INVESTMENTS ¬ income from the transfer of stock options; ¬ income (capital gains) from the alienation of shares in limited liability 1. RESIDENT CAPITAL INVESTORS companies, participations as limited partner of a limited partnership or shares in a cooperative; An individual capital investor is resident in Slovakia if he has his domicile or ¬ income from the use of inherited industrial property rights or industrial know- habitual place of abode in Slovakia. A corporate investor is resident in Slovakia if how and copyright or similar rights including translation; its place of effective management or legal seat is situated in Slovakia. ¬ income from permanent alimonies, pensions and similar repeated payments; ¬ capital gains upon liquidation or termination of the company or the cooperative, 1. 1. Investment Income gains from lotteries, bets and similar games; and ¬ prizes received in public competitions and sports contests. In general, according to the Slovak ITA, an individual capital investor may receive „income from investment of capital“ or „other income“ if the income does not The above items of income must be substantiated in order for an exemption to be belong to „business income“ (see II.) or „income from employment“ (see IV.) applicable.

Income from the investment of capital Income from all other sources (i.e. other income) is computed as the excess of taxable receipts over deductible expenditures.Thus, the gross income from each Unless the following income is characterized as income from employment source of other income is reduced by expenditures incurred in earning, protecting activities or profit shares of partners in a general partnership or of general and preserving the income in question as well as by special allowances. Losses partners in a limited partnership, it constitutes income from the investment of from the other income category may not be set off against other categories of capital: income. ¬ interest and other income from loans, bonds, deposits, credit balances with banks; 2. NON-RESIDENT CAPITAL INVESTORS ¬ income from a supplementary retirement insurance; ¬ income from a private life insurance; and An individual capital investor is non-resident in Slovakia if he does not have ¬ the difference between payment at maturity and the issue price of a security. a domicile or habitual place of abode in Slovakia. A corporate investor is non- resident in Slovakia if its place of effective management or legal seat is not Income from profit shares (dividends), interest and other earnings from shares situated in Slovakia. and equity participations, profit shares as silent partner (exceptions apply) is not subject to income tax if paid out of profits derived after 1 January 2004. 2. 1. Limited tax liability

With respect to individuals, income from investment of capital is, in general, An individual non-resident capital investor is taxed in Slovakia only on: subject to a withholding tax at a flat rate of 19% if paid domestically (see IV.A.1.). ¬ interest from loans including similar income from securities; ¬ income from participation in a commercial business as silent partner; and Other income ¬ income from the alienation of participations in a resident corporation.

Unless the following income is characterized as income from employment activities or business income or income from the investment of capital, it constitutes other income: ¬ income from occasional activities or the occasional rental of movable property;

50 51 2. 2. Withholding tax obligations

Non-resident individuals with Slovak-source income from investments of capital have to file tax returns, unless their income is taxed by way of the Slovak withholding tax at a flat tax rate of 19% on income from investment capital.

2. 3. Tax treaty protection from Slovak withholding tax

Double tax treaties usually provide for reduced source tax rates for income from capital investments of individuals. Thus, if the Slovak withholding tax rate of 19% is higher than the source tax rate provided by a double tax treaty, the latter is normally applicable. The direct application of the reduced treaty tax rate at source is allowed if the non-resident recipient of the income presents a certificate of residence to the paying company.

3. INVESTMENT FUNDS

The Slovak Collective Investment Act (CIA) defines an investment fund (“unit trust”) as a pool of securities that is divided into equal shares. These shares are securities and called „units“. Each unit represents a co-ownership of the assets of the unit trust. The portfolio of securities is structured under the risk diversification rule. The unit trusts can be created by asset management companies (undertakings for collective investment in transferable securities according to the UCITS Directive). Unit trusts are not legal entities but assets of unit holders (the units are issued by the asset management company).

Taxation of unit trusts is rather complex and unstable under the current Slovak ITA. It partially applies a transparent approach combined with taxation at source. We would be pleased to provide you with more details upon specific request.

B. INHERITANCE AND DONATION TAX PLANNING

Inheritance and donation tax was abolished on 1 January 2004. Accordingly, private foundations are not a significant tax planning tool in Slovakia.

C. HEALTH INSURANCE CONTRIBUTIONS ON DIVIDENDS

Since 1 January 2013 the rate applicable to dividends has increased from 10% to 14%. A separate maximum assessment base for dividends in the amount of 120 multiple the average monthly salary (i.e. in 2013 ca. EUR 94 thousand) has been introduced. This duty has to be paid only by the capital investors who are individuals and are insured in Slovakia.

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