Slovak Republic Slovak Republic

guidelines to taxation 2019 slovak republic slovak republic

I TAX FRAMEWORK FOR DOING BUSINESS II SPECIAL AREAS OF TAXATION OF BUSINESS-RELATED IN THE SLOVAK REPUBLIC 382 ACTIVITIES 412

A LEGAL FORMS 382 A HOLDING STRUCTURES 412 1 Participation exemption 412 B INCOME TAX ASPECTS 383 2 Dividends 413 1 Sole entrepreneurs 383 3 Interest deduction and thin capitalization 414 2 Corporations including partnerships 390 4 Non-resident shareholders 415 3 Tax relief 392 5 Tax group 415 4 Reorganizations 393 5 Specific aspects for foreign investors 394 B REAL ESTATE INVESTMENTS 416 1 Resident investors 416 C INTERNATIONAL BUSINESS-RELATED ISSUES 398 2 Non-resident investors 417 1 Tax treaties 398 3 Real estate taxes 418 2 Transfer pricing 398 4 VAT on real estate 418 3 Controlled foreign companies 399 5 Real estate investment funds 418 4 Exit taxation 399 6 Structuring of real estate investments 419

D VALUE ADDED TAX 400 III EMPLOYEES AND BOARD MEMBERS 420 1 Taxable persons 400 A EMPLOYEES 420 2 Taxable transactions 401 1 Resident employees 420 3 Place of supply 403 2 Non-resident employees 422 4 Taxable amount 405 5 Tax rates 405 B BOARD MEMBERS 422 6 Exemptions 405 1 Executives 422 7 Input VAT deduction 406 2 Non-executives 423 8 VAT liability 407 3 Non-resident board members 423 9 Tax assessment 408 C MUNICIPAL TAX 423 E OTHER BUSINESS-RELATED TAXES 410 D SPECIFIC PROVISIONS FOR CROSS-BORDER EMPLOYMENTS 424 1 Capital duty 410 1 General provisions 424 2 Stamp duties 410 3 Customs duties 410 IV TAX ASPECTS FOR PRIVATE INVESTORS 425 4 Other excise duties 410 5 Special taxes on regulated industries 410 A CAPITAL INVESTMENTS 425 6 Environmental taxes 411 1 Resident capital investors 425 7 Advertising duty 411 2 Non-resident capital investors 427 3 Investment funds 428

B INHERITANCE AND DONATION TAX PLANNING 428

C INSURANCE CONTRIBUTIONS IN RESPECT OF DIVIDENDS 428

380 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 381 I TAX FRAMEWORK FOR DOING BUSINESS IN THE B INCOME TAX ASPECTS SLOVAK REPUBLIC 1 Sole entrepreneurs A LEGAL FORMS 1.1 UNLIMITED TAX LIABILITY Business activities in Slovakia are carried on by sole entrepreneurs (indivi- If a sole entrepreneur has his domicile, place of residence or habitual place of duals) or legal entities (companies). The Slovak Commercial Code contains abode in Slovakia, he is subject to unlimited personal income tax liability (i.e. following legal forms of companies; these are commonly used for establishing resident taxation) on his worldwide income in Slovakia. Thus, income from a business in Slovakia: business activities carried on in Slovakia or elsewhere in the world is subject ¬ General partnership – verejná obchodná spoločnosť (v.o.s.) to tax at the level of the individual (subject to tax treaties). ¬ Limited partnership – komanditná spoločnosť (k.s.) An individual is deemed having a domicile when he has a registered perma- ¬ Limited liability company – spoločnosť s ručením obmedzeným (s.r.o.) nent stay in Slovakia. An individual having an available home in Slovakia, ¬ Joint stock company – akciová spoločnosť (a.s.) whereby both personal and economic relations are taken into account, is ¬ Cooperative – družstvo deemed to be resident in Slovakia. ¬ Simple joint-stock company – jednoduchá spoločnosť na akcie (j.s.a.) An individual has his habitual place of abode where he is physically present Some information about the legal and tax framework of sole entrepreneurs under circumstances indicating a permanent presence or stay. The habitual (SEnt) and companies is provided below: 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 (with the exception of individuals who stay there for their studies or for medical treatment, or who cross the border of the Slovak Republic on a daily basis or in the agreed upon intervals exclusively for the purpose of performance of dependent activity in FORMS LIABILITY MINIMUM REGISTRATION TAX TAX the territory of Slovakia). OF SHAREHOLDERS CAPITAL IN COMMERCIAL TREATMENT RATES

(EUR) MINIMUM OF FOUNDERS AND SHAREHOLDERS REGISTER Individuals who are not Slovak residents are allowed to claim certain SEnt no shares, personal 1 not obligatory tax liability 19% allowances as if they were residents if their income from Slovak sources in liability of the sole of sole or 25% the tax year is at least 90% of their total income. entrepreneur entrepreneur v.o.s. unlimited 2 obligatory tax resident; how‑ 19% / Sole entrepreneurs running an operating business in Slovakia may derive ever, tax base is 25% 1 income in the following categories: transferred to or partners 21% 2 ¬ income from business; ¬ income from independent (professional) services; k.s. unlimited for general 250 2 obligatory tax resident; how‑ 19% / partners and limited per ever, tax base 25% 1 ¬ income from rentals; and for limited partners limited attributable to or ¬ income from the use of work or art performance. partner general partners 21% 2 is transferred to and In the following, we refer only to the category »income from business« (also general partners 21% 3 referred to as »business income«) as this category is the most important one s.r.o. limited 5,000 1 (max. obligatory non-transparent, 21% in Slovak tax practice. 50) dividends 4 35% a.s. limited 25,000 1 legal obligatory non-transparent, 21% entity dividends 4 35% or 2 individuals coope- unlimited 1,250 5 indi- obligatory non-transparent, 21% rative viduals dividends 4 35% 1 Progressive personal income tax rates (19%, 25%) apply, insofar as the general partners are individuals. or 2 2 Corporate income tax rate (21%) applies, insofar as the general partners are corporations. legal 3 Tax base attributable to limited partners is taxed at the level of the partnership at 21% corporate entities income tax rate. 4 For individuals, DIVIDEND INCOME is subject to tax (7% if resident in Slovakia or a contracting j.s.a. limited 1 1 obligatory non-transparent, 21% state, and 35% if a non-contracting state is concerned). For corporations, only dividends paid from dividends 4 35% or to non-contracting states (35%) are subject to taxation. If dividend income is paid by a Slovak legal entity, the withholding tax system applies.

382 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 383 Income from business includes income from agriculture production, forestry Valuation of assets and debts and water resources management, income from trade, income from other The valuation of assets and liabilities is indirectly required for the entrepreneurial activities according to special regulations as well as the profit determination of business income. The following principles apply: shares of general partners in general and limited partnerships. Depreciable fixed assets, non-depreciable assets and current assets Please note that individuals can also derive income from non-operating acti- are reported at their acquisition or production cost less depreciation. vities, such as real estate or capital investments. For these types of activities, The value of the assets on the balance sheet at the end of the busi- see II.B and IV. ness year may not exceed their balance sheet value at the beginning of the business year. 1.2 PRINCIPLES OF DETERMINATION OF THE BUSINESS INCOME Income taxation normally requires realization. Specific rules apply TAX BASE for exchange rate differences. Currency exchange gains or losses For business income, the concept of »profit« applies when determining the from revaluation (unrealized F/X differences) are included in the tax net amount of business income. base; the taxpayer may, however, decide to follow the realization principle upon announcement within the tax return. Methods Receivables are accounted for and valued at their acquisition cost, As far as the methods for determining the tax base are concerned, which is the nominal value. Irrecoverable receivables may be written the primary method for individuals is in general the cash method or down for tax purposes from their net amount under the following what is known as the single entry accounting method. However, the conditions: Slovak Income Tax Act (hereinafter »ITA«) does not explicitly deal with these methods in more detail. ¬ up to 20% if overdue for more than 360 days; ¬ up to 50% if overdue for more than 720 days; and CASH METHOD (TAX EVIDENCE) ¬ up to 100% if overdue for more than 1,080 days. For taxpayers who are not so required and who do not voluntarily use double entry bookkeeping, the cash method applies (i.e. single entry Liabilities are valued at their nominal value. Unpaid liabilities must bookkeeping). Under this method, profit is computed as the excess of be written up for tax purposes under the same time/percentage business receipts over business expenditures. Receipts are taxed in conditions as for receivables. the calendar year in which they are received by the taxpayer; expendi- For accounting purposes, withdrawals are valued at their market tures are deducted in the calendar year in which they are paid (un- or nominal value at the time of withdrawal; contributions, at their less certain exceptions such as that for capital expenditures apply). market value at the time of the transfer. Received or paid advance payments have to be included into the tax base in the calendar year in which they are received/paid by the Depreciation taxpayer. Intangible and tangible assets are, with some exceptions (e.g. land, DOUBLE ENTRY ACCOUNTING FOR REGISTERED ENTITIES works of art), depreciable. Depreciation starts at the beginning of Under the Act on Accounting, registered corporations such as joint use in the business. In general, assets are depreciated by the owner, stock companies and limited liability companies are obliged to use with some exceptions. Intangible assets may be depreciated either double-entry bookkeeping based on the matching principle. In addi- by the owner or by the taxpayer who acquires the right to use them tion, sole entrepreneurs may also opt for double-entry bookkeeping. for a consideration. In this case, similarly to legal entities, the tax base is derived from DEPRECIATION OF INTANGIBLE ASSETS the accounting profit (difference between revenues and expenses) Intangible assets shall for tax purposes be fully depreciated in accor- increased by non-deductible items and decreased by deductible dance with the accounting regulations (depreciation according to the items as set by the ITA. expected lifetime period, costs for development shall be depreciated LUMP-SUM DEDUCTIONS within five years). For goodwill/negative goodwill resulting from Taxpayers receiving income from trade and entrepreneurial acti- business combinations, specific ITA rules apply. vities who do not prove their deductible expenses may opt for the lump-sum deduction in the amount of 60% of the relevant income. The lump-sum deduction may not exceed EUR 20,000/year (even if the taxpayer doesn’t run a business for entire year). However, these deductions are not applicable to taxable persons registered for VAT. No lump-sum deductions are possible in the case of rental income.

384 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 385 DEPRECIATION OF TANGIBLE ASSETS Tax depreciation of tangible assets leased under a financial leasing The acquisition or production costs of depreciable tangible assets agreement apply with respect to regular depreciation rules of assets. are to be deducted proportionally according to the time periods as set by the ITA. The linear method of depreciation may be used in all Provisions and accruals cases. The declining-balance method may be used only for the 2nd For anticipated claims, which are not yet certain in respect of their and 3rd depreciation group. reason or amount, provisions must be set up under general accounting principles. The tax depreciation is computed on the basis of the following useful life: For tax purposes, most of the provisions are tax non-deductible except from the provisions for unused vacation time. ¬ cars, certain tools, office machines, buses (1st depreciation group) 4 years; Expenses ¬ trucks, machines, furniture (2nd depreciation group) 6 years; Generally, all expenses or expenditures caused by a trade or busi- ¬ engines, generators, turbines, cooling systems, metallurgy ness, if incurred to generate, secure and maintain taxable income, machines (3rd depreciation group) 8 years; are deductible, unless listed as non-deductible items or items that ¬ heavy machines, assembled concrete or metal buildings are deductible only up to a limit set by the law. Generally, the tax- that are not single objects (4th depreciation group) 12 years; payer has to prove that business-related expenses are necessary or ¬ buildings not listed in 6th depreciation group (5th deprecia- appropriate with regard to their amount in connection with related tion group) 20 years; party transactions. ¬ apartment buildings, hotels, administration buildings (6th depreciation group) 40 years. In particular, no deduction is allowed for (inter alia): In the first year of depreciation the depreciated amount can be ¬ expenses and expenditures regarding the taxpayer’s written off only up to a proportion of annual depreciation, according household or lifestyle, to the number of months during which the asset is included in the ¬ personal taxes such as income tax payments; fixed asset’s register. ¬ fines and penalties;, ¬ entertainment expenses; Slovak tax law recognizes a cap on the depreciation of »luxury« ¬ representation expenses except from promotional items passenger vehicles which is at an acquisition cost of EUR 48,000, with a value under EUR 17; while the application of the limit depends on the tax base. This rule ¬ travel expenses or meal allowances over certain limits set applies also to financial and operative leasing. by law; Component depreciation is possible provided certain conditions are ¬ gifts; met. ¬ losses from the alienation of e.g. real estate property (plots of land), cars, administrative buildings, securities, shares in The taxpayer may suspend the depreciation of tangible assets for a corporations and factoring. single entire tax period or for several entire tax periods; the depreciation is resumed in the next tax periods as if it were not suspended. In any case, business deductions include (inter alia): The term of the depreciation is extended by the duration of the ¬ social security and health insurance contributions; suspension. In certain cases the suspension is mandatory. ¬ insurance premiums; FINANCIAL LEASING ¬ costs for training and further education; In the case of financial leasing, the person entitled to depreciate ¬ expenses related to business travel up to certain leased assets is the lessee. limits set by law; ¬ remunerations of statutory representatives (managing The financial lease agreement includes the following features: directors, members of the supervisory board). ¬ the leasing period exceeds 60% of the expected useful life of Certain personal expenses that are not connected to business activi- the asset or, in the case of leased land, the leasing period is ties may be deducted as special allowances unless they constitute at least 12 or 24 years (depending on the depreciation group business deductions or expenditures. Special allowances include in which the building built on the land is classified); and the basic tax allowance, the spouse allowance, contributions to ¬ after the expiration of the lease term, the ownership title to supplementary pension insurance, and spa allowance. Entrepre- the leased item passes from the lessor to the lessee without neurs can also apply a tax bonus for children and a loan interest undue delay. bonus.

386 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 387 Expenses relating to the assets used for business as well as for 1.3 CARRY-FORWARD OF LOSSES personal purposes have to be shortened for tax purposes in the ratio Generally, losses generated from business and independent professional corresponding to the actual usage. However, this ratio is to be pro- activities may only be offset against income derived from those types of ac- ved. This concerns expenses for the acquisition, operation, technical tivity in the same tax year. Losses generated before 31 December 2011 can improvement and maintenance of the assets in question. The option be used to offset income earned in other categories in the same year, subject to apply lump-sum expenses amounting to 80% remains unchanged to certain exceptions (e.g. with the exception of offsetting the losses against (no need to prove this ratio). employment income). Losses that cannot be offset may be carried forward. The period for tax loss carry-forward is four years and the amount in a year Tax incentives is capped at one quarter of the tax losses to be carried forward. The tax base may only be affected by the application of investments incentives. The most important incentives are the following: 1.4 TAX RATES AND TAX PAYMENTS INVESTMENT INCENTIVES The personal income tax is computed on the total net income of an individual. Slovakia grants investment and other incentives to investors, provi- The total net income consists of business income and other income derived ded that certain conditions set by the Investment Incentives Act and by the individual. other legal regulations pertaining to the type, value, and territory of the investment are fulfilled. The tax rates applicable: For tax relief due to investment incentives, see I.B.3.1. ¬ annual taxable income up to roughly EUR 36,260 (176.8 times the valid subsistence minimum as of 1 January 2019) is taxed at 19%; RESEARCH AND DEVELOPMENT EXPENDITURES and To support R&D, Slovak tax law applies a related incentive in the ¬ annual taxable income above roughly EUR 36,260 (i.e. remaining form of a »super-deduction« of costs up to 100% of the qualifying part) is taxed at 25%; R&D expenses booked. There is a possibility to deduct 100% of the ¬ dividend income is taxed at 7% or 35% (for non-contracting states); difference between the average of the sum of R&D costs incurred ¬ capital income irrespective of the amount is taxed at 19% (separate in the tax period and R&D costs incurred during the immediately tax base is applicable). preceding tax period and the average of the sum of R&D costs incurred in the two immediately preceding tax periods. Eligible costs Regarding taxation of dividends, a separate tax base (except dividends paid to include the software used for implementation of the R&D project, employees who do not have participation on registered capital) is applicable except for standard office software packages. Companies claiming to this kind of income. Generally, dividends (shares of profit) paid to or recei- the incentives have to prepare a written R&D project, which must be ved by individuals are taxed at 7%. However, dividends paid to individuals by submitted to the tax administrator during tax audits. companies from non-contracting states are taxed at a rate of 35%.

PATENT BOX Dividends paid to regular employees without participation on registered Effective as of 1 January 2018, a special tax treatment of commer- capital are included in their income from employment and taxed at a rate of cial use of intangible assets has been introduced in Slovakia with 19% or 25%; however, special rules apply if board members or executives the aim of supporting science, research, and intellectual property: receive shares of profit. ¬ exemption of royalties from the provision of registered (Dividends paid to foreign individuals by Slovak companies are also taxed at a patents, utility models, and designs and from the provision rate of 7% or 35%, whereby the withholding tax system applies.) of computer programs (software); and The taxpayer must declare his income in an annual tax return and must file ¬ exemption of income from the herewith related sale of it with the competent tax office. Depending on whether the tax liability of products. the preceding year exceeds EUR 16,600 or EUR 2,500, the taxpayer must The exemption is applicable only if the intangible assets are de- make monthly resp. quarterly prepayments based on his tax liability of the veloped internally by the taxpayer in Slovakia (not purchased). preceding year. The prepayment is credited against the final personal income tax liability. The only exception is the partial tax base »other income«, from The exemption amounts to 50%. Where the acquisition costs include which the advances will not be paid. expenses charged by a related party, a coefficient is to be used to calculate the exempt amount. The exemption can be claimed during the All sole entrepreneurs are obliged to communicate exclusively electronically tax depreciation period of the relevant intangible assets capitalized. with the tax authorities (in all tax matters). Taxpayers who claimed the »super-deduction« in the previous periods may apply the patent box exemption in the future. Claiming one relief type does not exclude claiming the other.

388 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 389 Withholding tax 2.2 PRINCIPLES OF DETERMINATION OF THE TAX BASE Certain types of income are not aggregated, but are subject to a Resident companies are taxable on their worldwide income. Unless specific final withholding tax 19%. The withholding tax applies inter alia to: rules apply, income derived from any type of activity or from the disposal of ¬ income from participation units, certain debentures, property is subject to corporate income tax. treasury bonds and investment coupons; Taxable income is determined on the basis of the accounting profit. Thus, the ¬ interest on bank deposits and current accounts in general; profit reported in the financial statements (i.e. accounting profit) is adjusted ¬ payments from private life or pension insurance, reduced by the tax law rules (increased by non-deductible items and decreased by by the amount of paid contributions; deductible items as set by the ITA). The taxable income of companies that are ¬ payments from the supplementary pension insurance; generally obliged to use double-entry bookkeeping is assessed on an accrual ¬ dividend income (7% or 35%, for more details see above). basis (with few minor exceptions). In the case of income from participation units upon their redemption Taxable income is assessed for each tax year, which is usually the calendar (return), the taxpayer may opt to include such income in the aggre- year. If the business year deviates from the calendar year, the company may gate taxable income and treat the withholding tax as a prepayment. report its income on the basis of its business year by means of a written The 35% rate also applies to all payments where the taxpayer is not announcement delivered upfront to the tax authority. able to identify the beneficial owner Moreover, notification details The principles of determination of the tax base described in I.B.1.2 are must be disclosed to the tax authority. accordingly also applicable to corporate entities. With respect to certain types of income, a special withholding tax system 2 Corporations including partnerships applies (see I.B.2.4). 2.1 TAXPAYERS AND RESIDENCE 2.3 CARRY-FORWARD OF LOSSES A corporation having its statutory seat or place of effective management in Slovakia is subject to unlimited corporate income tax liability, which provi- Losses incurred in a business year that cannot be offset against taxable des for a taxation of income on a worldwide basis (subject to applicable tax income derived in the same business year may be carried forward in four treaties). consecutive tax periods. The amount in each year is capped at one quarter of the tax losses to be carried forward. Corporate entities, for instance a.s. and s.r.o. (in the following referred to as »corporations«), are regarded as non-transparent under Slovak tax law. No other restrictions, apart from a general anti-avoidance rule, apply to Therefore, the income derived by the corporation is taxable at the level of losses. the corporation. 2.4 TAX RATES AND TAX PAYMENTS However, in the case of partnerships Slovak tax law provides neither the transparency principle nor a definition for flow-through entities. The unli- In general, any profit derived by a corporation is subject to corporate income mited/general partnership (v.o.s.) and the limited partnership (k.s.) are ge- tax at a flat rate of 21%, regardless of whether the profit is distributed to nerally subject to Slovak corporate income tax and are considered by the shareholders or retained. However, dividends received from a non-contrac- Slovak ITA to be tax residents. However, that portion of a corporate income ting state are subject to a tax rate of 35%. tax base calculated for the partnership as a whole which is attributable to Resident companies are no longer subject to a minimum corporate tax. partners with unlimited liability in both categories of Slovak partnerships is taxed only at the level of such partners, which in principle corresponds to the A corporation must file annual tax returns with the competent tax office, transparent approach. On the other hand, the portion of a corporate income based on which the tax office determines the final tax liability for the res- tax base calculated for the partnership as a whole which is attributable to pective tax period. Depending on whether the tax liability of the preceding the limited partner in the limited partnership (k.s.) is treated as if he was a year exceeds EUR 16,600 or EUR 2,500, the corporation must make monthly shareholder in a limited liability company, i.e. the transparent approach is resp. quarterly prepayments based on its tax liability of the preceding year. not applied. The prepayment is credited against the final corporate income tax liability. All corporations are obliged to communicate exclusively electronically with the tax authorities (in all tax matters).

390 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 391 Withholding tax The investment plan should be implemented at one place, where one Certain types of income are excluded from the corporate income tax place is to be understood as a complex of real estate objects forming base, since they are subject to a final withholding tax of 19%. The one corporate area. withholding tax is levied on: The first utilization of the tax relief is possible over the course of ¬ income from participation certificates and investment three years as of granting of the relief, and the relief can be claimed coupons; over no more than 10 tax periods. ¬ interest on bank deposits and current accounts in The sum of the tax relief claimed over the course of this period may general; not exceed the overall amount stated in the approval of investment ¬ paid off differences from revaluation within the mergers, aid. splits, or dissolutions of companies without liquidation under special conditions For information concerning an automatic R&D incentive under the Slovak Income Tax Act, see I.B.1.2. In the case of income from participation certificates, the taxpayer may opt to include such income in the corporate income tax base Incentives under the Act on Research and Development are also and treat the withholding tax as a prepayment. For more details, see available; however, they are subject to an approval process. I.B.5.1. The special tax relief for registered social corporations which fulfill the public interest became effective on 1 January 2019. 3 Tax relief

3.1 TAX RELIEF FOR INVESTMENT AID BENEFICIARIES 4 Reorganizations Eligible projects There is no special reorganization tax act; instead, the tax consequences of One of the forms of investment incentive is income tax relief, which reorganizations are governed by the Slovak ITA. The application of the Slovak can be provided as a state aid to recipients (sole entrepreneurs and ITA rules is heavily driven by the reporting based on the Slovak GAAP. legal entities with their registered office in Slovakia that are registe- According to general income tax principles, changes in the legal position red in the Register of Public Sector Partners if obliged) who fulfil the of companies (corporations as well as partnerships) are treated as taxable conditions set forth in the Investment Incentive Act. The Investment events for income tax purposes. However, certain kinds of reorganizations, Incentive Act defines four categories of projects that are eligible for which are covered by the EU Merger Directive (90/434/EEC) as implemented support from the investment incentives: into the Slovak ITA, are excluded from taxation. ¬ industrial production, From 2018 reorganizations in Slovakia are no longer tax neutral as tax- ¬ technological centers, payers are no longer given a choice as to whether to perform selected ¬ shared service centers, types of reorganization, for tax purposes, at historical cost or at fair value. ¬ tourism. Analogous to the sale of companies, contributions in kind and dissolutions The relief is provided by the Ministry of Finance. There is no legal of companies without liquidation (through merger or split) performed after entitlement to investment aid; however, the government prefers the 1 January 2018 are also possible (for tax purposes) at step-up values only. tax relief form over other forms (up to 35% resp. 25% of the amount Accordingly, hidden reserves are always subject to taxation upon reorgani- of the investment, depending on the state aid rules). zations. In the case of cross-border reorganizations, these hidden reserves will have to be taxed by a single tax payment. Each category of projects has specifically defined conditions that must be met in order to qualify for the investment incentives. Special Historical values will be allowed only in specific cases, under the condition rules apply to less developed regions, where the legal certainty for that a permanent establishment remains in Slovakia and the receiving coun- a tax relief is significantly higher. There are minimum investment try is a EU Member State which applies exclusively historical values for tax amounts (i.e. eligible costs) that vary depending on the region and purposes. Transactions with the aim of gaining a tax advantage by applying type of investment, and the creation of new jobs and the unemploy- historical values are not possible at all. ment rate in the specific region play an important role, except from If a permanent establishment originates in Slovakia as a result of a reorga- large investment projects with eligible costs exceeding EUR 200 nization, but the assets and activities of the permanent establishment are million, which are not subject to approval by the Slovak government subsequently transferred outside Slovakia, exit taxation applies to such a and do not have to meet the condition of creation of new jobs. transfer (see I.C.4).

392 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 393 5 Specific aspects for foreign investors ¬ income from the transfer of interests or shares in a company or from the transfer of membership rights in a cooperative with a 5.1 NON-RESIDENT SOLE ENTREPRENEURS AND CORPORATIONS registered office in Slovakia, irrespective of the tax residence of Individuals without a domicile, a place of residence, or a habitual place both the transferor and the transferee; of abode in Slovakia and corporations with no seat or place of effective ¬ income from the transfer of interests or shares in a company and management in Slovakia (»non-residents«) are subject to limited tax liability the transfer of membership rights in a cooperative irrespective of only and taxed in general on their income derived from Slovak sources. When their registered office, if the company or the cooperative owns real exercising taxing rights, potential restrictions under international double tax estate located in the Slovak whose book value exceeds 50% of the treaties that are binding for Slovakia must also be taken into consideration. equity of this company or cooperative; ¬ income from the difference between a higher value of the According to the ITA, Slovak-source income includes: contribution in kind into the registered capital of a company or a ¬ income from activities of permanent establishments; cooperative with a registered office in Slovakia counted towards a ¬ income from employment activities performed in Slovakia contribution paid up by a partner/shareholder and the book value (for further details, see point III); of the assets contributed; ¬ income from services, including commercial, technical, or other ¬ income from monetary as well as non-monetary benefits provided advisory services, from management and agency activity, from to a health care provider by a holder, if these benefits are provided construction and assembly activities and projects, and from similar in relation to the activities performed in Slovakia. activities provided in Slovakia, even though not carried out by way For ITA purposes, a permanent establishment is defined as a permanent of a permanent establishment; place or facility for the activities of non-residents in the territory of Slovakia ¬ income from activities performed by artists or athletes in the in particular, places of management, branches, offices, workshops, places of territory of Slovakia; sale, technical equipment or research facilities for the extraction of natural ¬ income derived from payments from Slovak residents or from the resources. A place or facility is deemed permanent if used permanently or permanent establishments of non-residents in Slovakia, which are: repeatedly. The definition of activity performance also covers the repeated bro- ¬ payments for the use of, or the right to use, software, kering of transport and accommodation services, even if performed exclusively designs, models, plans or information concerning industrial through a digital platform, i.e. without physical presence in Slovakia. In respect or scientific experience; of activities performed only once, the relevant place or facility is deemed ¬ payments for the use of, or right to use, licenses and copyrights; permanent if the duration of the activities exceeds six months in a 12-month ¬ interest and other yields on granted credits and loans, period (whether consecutive or not). A construction site and a site for the deposits, securities (except for bonds and treasury bills) and provision of construction services (such as preparation of architectural plans) derivatives; are deemed permanent establishments only if their duration exceeds the pe- ¬ rental income from movable property located in Slovakia; riod of six months (regardless of the term of the tax period). The time test of ¬ income from the transfer of movable assets situated in the 6 months can be met taking into account not only the activities of the foreign territory of Slovakia, from the transfer of property rights company as such, but also its related parties, if these activities are interlinked registered in Slovakia, and from the transfer of securities and build upon one another. This should prevent an artificial »fragmentation« issued by a taxpayer with registered office in the territory of of activities among related parties striving to avoid permanent establishment Slovakia other than income from the transfer of government creation in Slovakia. A person operating in Slovakia on behalf of a non-resident bonds and government treasury bills; may constitute an »agency« permanent establishment when a representative/ ¬ remuneration of members of statutory and other bodies of agent has a decisive influence on contract conclusion but the contract is con- legal entities paid as a consideration for discharging their cluded by a foreign taxpayer without crucial changes and for its account and offices; risk. The performance of services within the territory of the Slovakia, if these ¬ winnings in lotteries and other similar games, winnings in activities exceed 183 days (within 12 consecutive months; existence of a fixed advertisement contests and drawings of lots, prizes won in place is not required), also leads to the creation of a permanent establishment. public and sporting competitions; ¬ alimony, pension, annuities and similar payments; The income generated by a permanent establishment also includes the ¬ shares of profits (dividends); income of non-resident unlimited partners in Slovak partnerships whose ¬ payments for the services, including commercial, technical, income is derived from their interest in such partnerships and from loans and or other advisory services, data processing, marketing credits granted to such partnerships. services, management services, or agency activity; Non-residents deriving Slovak-source income must file income tax returns in ¬ profit shares of unlimited partners in Slovak partnerships Slovakia, unless their income is taxed by withholding tax, which is considered which have shares in non-transparent corporations (a.s. or s.r.o.); to be final. ¬ income from transactions concerning domestic real estate;

394 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 395 Withholding tax Security tax Non-residents are subject to the general 19%/35% withholding tax (un- Resident individuals and legal persons, as well as non-resident with- less limited under a tax treaty), inter alia on the following Slovak-source holding agents are obliged to withhold a 19% security tax from gross income, which is not attributable to a Slovak permanent establishment: payments to non-residents (including Slovak permanent establishments), unless income is tax exempt. The obligation does not arise in ¬ income from services rendered in Slovakia; respect of payments subject to the withholding tax. The security tax ¬ income from activities performed by artists or athletes in is not a final tax but is creditable against the non-resident’s Slovak tax the territory of Slovakia; liability declared in the tax return under self-assessment. The securi- ¬ income derived from payments from Slovak residents ty tax rules do not apply (i) if a non-resident recipient of income or from the permanent establishments of non-residents proves to the payer that the tax is already secured through advance in Slovakia which are royalties, income from renting out payments, or (ii) if payments are made to residents of other EU movable property, payments for the services including Member States (including their Slovak permanent establishments) commercial, technical, or other advisory services, data or residents of EEA. processing, marketing services, management services or agency activity, or dividends paid to non-contracting states; The tax rate is 19%; an increased tax rate of 35% is applied by the ¬ interest on credits, loans and derivatives; payer of the income to the taxpayer of a non-contracting state, which ¬ interest income from investment coupons, bank deposits is subject to a security tax in Slovakia. Where the payer is not able and current accounts, irrespective of whether attributable to identify the beneficial owner of the income, it must withhold a tax to a Slovak permanent establishment or not; of 35% (see above). ¬ income from participation units; If the payer of such income fails to fulfill the required obligations ¬ payments from private life or pension insurance; (including the filing of notification with tax authority), all the costs of ¬ payments from the supplementary pension insurance, etc. this transaction are considered non-deductible. The tax base for withholding tax purposes corresponds to the gross income, unless otherwise provided by the law. The tax withheld is considered to be final tax, unless otherwise provided by the law. In general, the tax withheld on royalties, rental income of movable property, interest income on credits, loans and derivatives, income from activities of artists and athletes, and income from participation units upon their redemption (return) may be considered an advance payment upon decision of the recipient, if the recipient is a resident of an EEA country. According to ITA, the withholding tax rate is 19%; an increased tax rate of 35% is applied by the payer of the income to the taxpayer of a non-contracting state (state not listed on a »white list«, to be published by the Slovak Ministry of Finance), which is subject to a withholding tax in Slovakia. For the purposes of withholding tax, the definition of the »final beneficiary« is applicable in Slovakia and it represents a person taking risk and control over the income, having the right to use it, and not obliged to transfer it to another person. Where the payer is not able to sufficiently identify the final beneficiary, it must withhold a tax of 35% (attention is to be paid to foreign general and limited partnerships). If the payer fails to fulfill the required obligations (including the filing of notification with tax authority), all the costs of this transaction are considered non-deductible. As regards dividend taxation, see II.A.2.

396 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 397 C INTERNATIONAL BUSINESS-RELATED ISSUES Tax authorities have the right to require the submission of the transfer pricing documentation at any time (not only during a tax audit), and the time limit for 1 Tax treaties submission of the documentation was reduced to 15 days from the delivery of the request. The tax administration may inflict, even repeatedly, a special In the case of cross-border transactions Slovakia follows the tax treaties in penalty of up to EUR 3,000 upon a taxpayer who is in default of an obligation the area of personal and corporate income tax that have been concluded with (other than payment obligation), as well as the regular penalty of up to 10% about 68 states (all EU Member states are covered). These treaties relate per annum of the tax amount levied by the tax auditor. The penalty is twice to all categories of income including interest, royalties or dividends. Most as high (20% per annum) in the case of non-compliance with anti-abuse rules. of the Slovak double tax treaties comply with the OECD Model Convention. Any international treaties that have been approved, ratified and promulgated It is possible to make an advance pricing agreement (APA) with the tax autho- prevail over the Slovak ITA. rities. The APA may cover up to five taxable periods (renewable). A specific fee (EUR 10,000 for a unilateral APA or EUR 30,000 for a multilateral APA) Concerning the methods for elimination of double taxation, Slovak treaties is charged for an application for the approval of a specific transfer pricing are in general based on the ordinary credit principle. The amount of foreign method. If such a bi- or multilateral agreement results in an increase in the tax for which Slovakia allows a credit is capped at the corresponding propor- tax amount in Slovakia, the penalty system above does not apply. Moreover, tion of Slovak tax. a two-year roll-back applies. As a member of OECD, Slovakia has acceded to the Multilateral Convention in the case of 64 out of the total 68 double tax treaties concluded. The Con- 3 Controlled foreign companies vention entered into force on 1 January 2019, which means the immediate change of the covered tax treaties according to the reservations and notifica- On 1 January 2019, the controlled foreign company (CFC) legislation came tions to the Convention. It can be briefly summarized that Slovakia has opted into effect in Slovakia. The income of a low-taxed CFC is attributed to the for most of the provisions without reservations, while most of them must be controlling Slovak company, depending on actual functions performed and accepted by both contracting states. Regarding the application of methods for risks assumed by the controlled company. CFC rules are applicable in cases the elimination of double taxation, Slovakia has chosen to apply the general when the Slovak company has controlling influence, and, at the same time, tax credit method with respect to all income types where the tax treaties the tax to be paid abroad is lower than 50% of the tax which would apply in enable the other jurisdiction to tax the income. The only provision which has Slovakia. There is no similar rule for individuals as yet. not been accepted is the arbitration provision. 4 Exit taxation 2 Transfer pricing All economic values created in Slovakia are subject to taxation. Exit taxa- The Slovak ITA rules on transfer pricing are in line with OECD Transfer Pri- tion will apply at the point when Slovakia loses its taxing rights, e.g. as a cing Guidelines, and the three-tiered standardized approach to transfer pri- consequence of relocation, transfer of activities abroad, transfer of assets cing documentation, including master file, local file, and country-by-country to a foreign permanent establishment, or transfer of assets from a Slovak reporting, is obligatory in Slovakia. MNE groups must prepare a CbC report permanent establishment back to the head office. if the consolidated group turnover amounted to EUR 750 million or more in The calculation of the special tax base upon exit will be based on a »fiction of the previous fiscal year. sale« of the transferred assets. The applicable tax rate will amount to 21%, A duty to keep transfer pricing documentation also applies to domestic as the taxation will affect legal entities only. An exception from exit taxation entities. The regulation stipulating the content of the transfer pricing docu- will apply in the event of a temporary transfer of assets with an expected mentation distinguishes between three types of documentation, depending return within 12 months. on the scope: shortened, basic and full scope. A number of criteria are to be Given the fact that the taxation will apply to unrealized profits, taxpayers may considered by subjects for a particular documentation. One of the goals of the file an application for payment in installments, but only in the case of an exit regulation is to define the documentation scope depending on the risk rate of to another EU Member State, within the EEA, or if Slovakia has a tax claims subjects. Low-risk subjects should not be subjected to an unnecessary admi- recovery convention with the receiving country. nistrative burden and are only obliged to keep the shortened documentation

398 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 399 D VALUE ADDED TAX 1.2 VAT GROUP Based on the group registration certain taxable persons with a seat, a place 1 Taxable persons of business or a fixed establishment in Slovakia which are closely related 1.1 GENERAL by financial, economic and organizational links may create a group for VAT purposes (and are regarded as a single taxable person). In general, entrepreneurs carrying out taxable transactions in Slovakia are subject to value added tax (VAT). An entrepreneur is defined as a person con- Financial links are defined as links between taxable persons, where one or ducting a business (economic activity) or profession in an independent way, more taxable persons are controlled by one controlling entity as defined regardless of whether it derives profits. There are no special VAT provisions by the Slovak commercial law. A controlled entity is a company in which a regarding holdings in Slovakia. Even non-resident entrepreneurs may be certain entity owns the majority of the voting rights through an interest in the subject to VAT if they carry out taxable transactions in Slovakia (see I.D.9.2). company or holding shares of the company to which the majority of the voting rights is attached, or has entered into agreements with other authorized par- The list of taxable persons also includes Slovak non-profit organizations and ties and may thus exercise most of the voting rights, regardless of whether other Slovak persons conducting economic activities as well as public bodies such agreements are valid or not. Economic links are defined as links between and persons registered for VAT in other EU Member States. taxable persons whose main activities are dependent on each other or have Other individuals may be subject to VAT in the case of importation of goods a common economic aim, or where one of them wholly or partially performs from countries outside the EU into Slovakia (import VAT) or in the case of an activities in favor of one or more VAT group members. Organizational links intra-Community acquisition of new vehicles. are defined as links between taxable persons who are managed or supervised by one same person at least. Taxable persons with their seat, place of business or fixed establishment in Slovakia do not have to register for VAT purposes on the condition that their A representative of a group, who acts on behalf of the group, must be appoin- turnover does not exceed the amount of EUR 49,790 during a period of the ted in the application form. All group members are jointly and severally liable. preceding 12 months. The group members are not obliged to pay VAT from the supplies of goods and services performed within the group, as these are not subject to VAT. Taxable persons that do not meet their registration duty or that do not register for VAT on time are obliged to file VAT returns and to pay the VAT for the period from the day they should have registered until the day of their actual 2 Taxable transactions registration. At the same time, they are entitled to an input VAT deduction 2.1 SUPPLY OF GOODS AND SERVICES upon meeting the legal requirements. A supply of goods is deemed to occur whenever the (economic) ownership A compulsory VAT registration is applicable to taxable persons selling a with regard to the supplied goods is transferred to another person. In such a building (flat, non-residential space)/building land or a part of it, or if they case, the supplier entitles the recipient to dispose of the supplied goods as accept the payment prior to the supply of the building/building land. their owner. The transfer of the right to dispose of goods as their owner does As of 2019, no interest-free collateral is required upon registration in any not, however, require the transfer of the legal ownership (e.g. conditional case (in the past it amounted to the sum from EUR 1,000 up to EUR 500,000). sale). Collaterals paid to the tax authority before the end of 2018 will be returned Supplies of services for VAT purposes are all supplies that are not treated as to the taxpayers. supply of goods or real estate. Services may consist in a positive action (e.g. VAT-registered persons are obliged to communicate with the Slovak tax the rendering of services) or in permitting actions by others (e.g. leasing of authorities exclusively electronically in all tax matters. tangible property, use of rights and patents). Supplies of goods and services are also considered to be: ¬ transfers of rights (supply of services); ¬ supply of goods or services through a commission agent, since this is characterized as two separate supplies, i.e. one carried out by the principal and another by the commission agent; and ¬ the use of tangible assets for free or for non-business purposes, including private consumption by entrepreneur or its employees, if the input VAT was fully or partly deducted.

400 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 401 The following are not considered to be supplies of goods or services: 2.4 INTRA-COMMUNITY ACQUISITIONS ¬ contributions or sale of a business or a part of it (forming an An intra-Community acquisition is the acquisition of goods transported from organizational business unit) consisting of tangible or intangible an EU Member State to another Member State, provided both the supplier assets, unless the recipient provides mainly exempt supplies (if and the recipient are entrepreneurs for VAT purposes. On the one hand, the the recipient provides mainly exempt supplies, such contribution supplier carries out a tax-exempt intra-Community supply; on the other hand, or a sale is considered to be a supply of goods or services; certain the recipient has to pay VAT and may deduct it if it is entitled to the input exceptions may apply); VAT deduction. ¬ cession of the entrepreneur’s own receivables; Relocation of business property (transfer of goods) to another EU Member ¬ giving advertising presents (without consideration) with a value of State in order to perform business activities in that State is subject to VAT less than EUR 17 per present; and is deemed intra-Community supply. Relocation of business property by ¬ issue of securities; an entrepreneur registered for VAT in another EU Member State into Slovakia ¬ receipt of interest income on a bank account if the taxable person is treated as an intra-Community acquisition of goods. is not a bank. As of September 2019, Council Directive (EU) 2016/1065 as regards the tre- 3 Place of supply atment of vouchers has been implemented in the Slovak VAT Act. The new regulation concerns the single- and multi-purpose vouchers issued after 30 The supply of goods and services is taxed only if the place of the taxable September 2019. transaction is considered to be in Slovakia. Each supply of a single-purpose voucher by a taxable person is considered The supply of goods is effected at the place where the goods are situated at a supply of goods/service. The supply of goods/service itself for which the the time the economic ownership is transferred to the recipient. The place of voucher has been issued is not considered an independent transaction. supply of goods dispatched or transported by the supplier or by the recipient is deemed to be the place where the goods are at the time when dispatch or The supply of a multi-purpose voucher is not subject to VAT. On the other transport starts. When goods are dispatched or transported from a country hand, an actual supply of goods/service purchased for a multi-purpose vou- outside the EU to a Member State, the supply of goods is taxable in Slovakia cher is subject to VAT. If the multi-purpose voucher is supplied by the taxable only if the importer pays import VAT. person other than the supplier of the goods/service in the previous sentence, each service related to the supply of the voucher (e.g. distribution or adverti- Intra-Community supplies have their place of supply where the dispatch or sing service) is subject to 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 2.2 WITHDRAWALS (SELF-SUPPLY) 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 Self-supply is not separately mentioned in the Slovak VAT Act (VATA), but Slovakia to a »threshold acquirer« and the total value of supplies to Slovakia is listed in the general definition of supply of goods and services. In general, exceeds EUR 35,000 in the current calendar year or excisable goods are self-supply is taxable only if the acquisition of the goods in question gave rise supplied. to an input VAT deduction. Threshold acquirers are: 2.3 IMPORT ¬ entrepreneurs effecting exempt supplies without a right to deduct The transfer of goods from a country outside the EU to Slovakia is subject input VAT; and to Slovak import VAT only if the goods are directly imported into Slovakia. ¬ non-entrepreneurial legal entities or legal entities that acquire An entrepreneur is entitled to deduct the VAT paid on imported goods if the goods for non-business purposes. goods are used for business purposes. For private persons, the import VAT Intra-Community acquisitions are taxable at the place where the dispatch is final. or transport ends. Intra-Community acquisitions by private persons or by The same treatment applies if goods are returned from a duty-free zone or a threshold acquirers who do not exceed the threshold of EUR 14,000 are only bonded warehouse into the territory of Slovakia. taxed in the source state, except for new means of transport. The supply of services from a country outside the EU is not taxable under the In general, the supply of services to a taxable person (B2B) is taxable at the VATA, unless the place of supply is deemed to be in Slovakia. place where the recipient has established his business or has a fixed estab lishment out of which the service is supplied. The supply of services to a non- The foreign taxable persons are not obliged to register for VAT upon import taxable person (B2C) is taxable at the place where the supplier is established. of goods to Slovakia, if they do not plan to supply the imported goods with However, special rules for the determination of the place of supply of services the place of supply in Slovakia. provided to taxable or non-taxable persons apply in specific cases.

402 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 403 As of 2019, with respect to electronic services, telecommunication services 4 Taxable amount and/or radio and TV broadcast services to customers who are private indivi- The taxable amount is the consideration payable in order to receive goods duals in more EU Member States, the place of supply (place of taxation) of or services plus additional expenses, but excluding the VAT itself. For with the above services provided to private individuals will be: drawals of goods and services, the taxable amount is determined by costs, ¬ a) the residence state of the customer (»MS of the customer«).; which can be lowered by accumulated depreciation. ¬ b) where the supplier has established his business or has a fixed As a rule, VAT is imposed on the basis of the consideration agreed between establishment out of which the service is supplied parties. If the entrepreneur does not finally receive the agreed consideration, (»MS of the supplier«) if: the VAT is adjusted, unless there are losses caused by insolvency of the ¬ the supplier has established his business or a fixed customer. establishment only in one EU Member State, and ¬ the customer resides in a state other than the MS The taxable amount for the goods and services delivered by a taxable person of the supplier, and to persons having a special relation to a supplier (e.g. employees, supervisory ¬ the total amount of supplied services (without VAT) and statutory board members, particular participations in a company, etc), does not exceed the threshold of EUR 10,000 in one must be the open market value. calendar year and at the same time did not exceed the same threshold in the previous calendar year. 5 Tax rates If the threshold of EUR 10,000 is exceeded during the calendar year, the The general VAT rate is 20%. The reduced tax rate of 10% is applicable only place of supply in the MS of the supplier changes to place of supply in the to limited categories of goods such as basic food products, books, pharma- MS of the customer. ceuticals, accommodation services, and goods/services supplied by so-called The supplier having his business (or FE) established in Slovakia who meets »social companies« (with the aim of achieving measurable positive social the conditions for application of place of supply in the MS of the supplier may influence) to a non-taxable personal entity with social economy activities or choose to have the place of supply in the MS of the customer. In that case, he to a subject of the public sector. is obliged to apply the place of supply in the MS of the customer for at least two calendar years. 6 Exemptions However, the law makes it possible for taxable persons to use a simplified The numerous exemptions from VAT can be grouped in two categories depen- regime to meet their VAT-related obligations. ding on whether they preclude the deduction of input VAT or not. The most In order to prevent the providers of such services to private individuals from important exemptions are listed below: having to register in each EU Member State in which their customers reside, the law has introduced a special regime – the »mini one-stop-shop« (MOSS) 6.1 ZERO-RATED SUPPLIES – thus allowing the providers of such services to register in only one EU The following supplies do not affect the right to deduct input VAT: Member State (»place of establishment«). ¬ export of goods (goods are transported outside the EU); This simplified regime makes it possible for taxable persons to fulfill their ¬ intra-Community supplies; tax-related duties from »one place« without having administrative duties in ¬ cross-border transportation of export goods; all the states in which their customers reside. The providers meet their duty ¬ cross-border transportation of persons by vessels and aircraft; to declare and pay the tax by filing a single special tax return in their place ¬ working and processing of goods destined for export of establishment. outside the Community; and ¬ exempt supplies with the place of supply outside the EU.

404 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 405 6.2 EXEMPT SUPPLIES A taxable person is able to deduct the input VAT with respect to buildings, plots, flats and non-residential space (investment assets) to be used for bu- VAT exemptions, which preclude the deduction of input tax, include: siness as well as other than business purposes only in such ratio in which he ¬ postal services; plans to use these investment assets for business purposes. ¬ radio and TV broadcasts; No input VAT deduction is allowed with regard to supplies used for repre- ¬ banking and financial transactions as well as insurance sentation purposes and supplies of transitory items – items purchased in the transactions; name and on behalf of the customer required by the supplier. ¬ transfers of immovable property (including buildings) after five years following their acquisition or surveying (the entrepreneur Finally, the amount of the VAT liability consists of the VAT due on supply may opt for regular VAT treatment except for the building for of goods and services carried out by the entrepreneur less input VAT of the accommodation, a flat or apartment in a property intended for same period. The entrepreneur must pay the balance due to or may claim a dwelling; refund from the tax office. ¬ letting of immovable property for business purposes – Under the cash accounting scheme (Art. 167a of the VAT Directive), a taxable the entrepreneur may opt for regular VAT treatment except for person accounts for the output VAT for its supply after it has received pay- letting of a flat, private house and apartment in a property intended ment from its customer and, on the other hand, input VAT can be deducted by for dwelling or part thereof) depending on whether the lessee is a this person only after it pays for its supplies. The recipient of a supply from a taxable person or not; person applying »cash accounting« will be able to deduct the input VAT from ¬ health services and goods; this invoice after the payment is carried out. VAT registered persons with an ¬ social care services; and annual turnover of up to EUR 100,000 are eligible for this scheme. ¬ training and education services.

8 VAT liability 7 Input VAT deduction In general, an entrepreneur carrying out taxable transactions is liable to VAT. An entrepreneur registered for VAT in Slovakia is entitled to deduct VAT He is obliged to pay the invoiced VAT to the tax office. In respect of supplies invoiced by other entrepreneurs and thus paid on goods and services, as well and services subject to the reverse-charge system as well as intra-Commu- as imports and intra-Community acquisitions, provided that the following nity acquisitions, the recipient of goods and services is subject to VAT. conditions are met: The reverse-charge system applies in the case of the supply of services ¬ the supply of goods or services must be effected by another under the basic rule for the place of supply of B2B services under Art. 15(1) entrepreneur in Slovakia for the business of the recipient; VATA. The reverse-charge system also applies to other specific services ¬ an invoice has to be issued or the tax must be recorded in VAT and contract work within the meaning of the VATA (the supply of goods to documentation; and be installed or assembled, the services connected with immovable property, ¬ no VAT exemption, which precludes the deduction of input tax, short-term hiring of means of transport, cultural, artistic and similar activi- is applicable. ties, the passenger transport and restaurant and catering services). Foreign taxable persons registered for VAT in Slovakia supplying only goods Domestic reverse-charge is applied to the following goods: and services subject to the reverse-charge do not have the possibility to deduct the input VAT through a VAT return but only through the VAT refund ¬ »call-of-stock« warehouses under certain conditions; procedure. ¬ investment gold and metal waste and scrap; ¬ emission allowances; Input VAT deduction is apportioned between taxable supplies and supplies ¬ real estate, whole or in part, in Slovakia, when the supplier opts for exempt from VAT and without the right to the input VAT deduction. The res- taxation and for exercise of a lien and of a security assignment of a pective pro rata is determined as the quotient of all taxable supplies with a right, if ownership of goods is transferred; claim for an input VAT deduction and the total of all taxable supplies with ¬ mobile phones and integrated circuits, supplies of specific agricul- and without the claim for an input VAT deduction. tural crops and metals, unless a simplified invoice is issued; If the purpose of the use of the movable long-term property is changed ¬ the supply of construction works as well as the handing over of within five years, or in the case of real estate within 20 years following the construction works regarded as a supply of goods. acquisition of such property, the input VAT deduction must be corrected in If an entrepreneur or a private person charges VAT on an invoice, it becomes accordance with the number of years of future use of the asset. liable to the VAT on the basis of the invoice.

406 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 407 9 Tax assessment ¬ the goods via electronic communication interface from Slovakia to another Member State/third state that were 9.1 RESIDENT TAXABLE PERSONS acquired from another Member State, and the foreign Any taxable person having his seat, place of business or fixed establishment person has a fiscal representative; in Slovakia who starts business activities in Slovakia must register with the ¬ goods within a triangular transaction, if the foreign person tax office if the turnover threshold (EUR 49,790) is exceeded. For VAT pur- is the first customer not established in Slovakia; poses, an entrepreneur carrying out taxable supplies has to file periodical ¬ electronic services, telecommunication services and/or VAT returns (monthly or quarterly, by the 25th day of the following month) radio and TV broadcast services, and the foreign person and make payments during the tax year. No annual VAT return to settle any is identified for the application of special arrangements to differences during the year is filed. Thus, differences during the year must be these services in another Member State or applies special corrected by means of supplementary VAT returns. arrangements pursuant to VATA. In addition, an entrepreneur carrying out intra-Community supplies or sup- The registration form must be submitted before starting business plying services according to the basic rule for B2B services under Art. 15(1) (i.e. performing activities that are subject to VAT). VATA must file an EC Sales List that shows the VAT identification numbers Foreign-based suppliers applying only the reverse- charge only can of his business partners and the total value of all the supplies of goods and deduct the input VAT from inland invoices exclusively through the services performed by the entrepreneur. The EC Sales List must be filed on a VAT refund scheme. monthly or quarterly basis (by the 25th day of the following month) depending on the amount of the goods supplied. Moreover, VAT registered persons are VAT refund scheme also obliged to file an inland recapitulative statement with the tax authority. Foreign taxable persons not established in the Member State of The statement must be filed in electronic form together with the VAT return. refund (Slovakia) but established in another Member State who The statement must contain details of transactions subject to VAT in Slovakia do not carry out taxable transactions in Slovakia may claim a re- as well as of transactions where input VAT deduction is claimed. fund of input VAT by filing an application electronically with the As mentioned under I.D.1.1, VAT registered persons are obliged to commu- tax office in the state of their seat, place of business or fixed nicate with the Slovak tax authorities exclusively electronically in all tax establishment and using the official form. The application must be matters (not only VAT matters). filed by 30 September of the calendar year following the refund period. This application can also be in English language. 9.2 FOREIGN TAXABLE PERSONS Foreign taxable persons from third countries who do not carry out General taxable transactions in Slovakia may claim a refund of input VAT Foreign taxable persons (having no seat, place of business or fixed by filing an application with the Tax Office Bratislava and using the establishment in Slovakia) who start performing activities subject to official form. The application must be filed by 30 June of the VAT in Slovakia have to register for VAT purposes at the tax office calendar year following the refund period. Tax Office Bratislava and submit monthly or quarterly VAT returns Regardless of whether a taxable person is established within the EU unless certain exceptions or the reverse-charge mechanism applies. or not, the following conditions must be fulfilled: There is no limit under which foreign taxable persons performing activities subject to VAT in Slovakia are not obliged to register for VAT. ¬ the taxable person is registered for VAT (or another similar tax) in a state where he has a seat, residence or Foreign taxable persons need not register if they deliver only: fixed establishment; ¬ transport services and the related auxiliary services ¬ the taxable person has no permanent residence, seat or exempt from VAT; fixed establishment in Slovakia; ¬ goods, services and goods with installation and assembly ¬ the taxable person has not effected supplies of goods or and the recipient is obliged to pay the VAT; services in Slovakia (in the period for which the application ¬ gas and electricity and the recipient is obliged to pay the is submitted) with the exception of the deliveries where VAT; there is no need to register for VAT (see above). ¬ the goods from Slovakia to another Member State that were imported from the third state and the foreign person had a fiscal representative;

408 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 409 E OTHER BUSINESS-RELATED TAXES Slovak banks and branches of foreign banks operating in Slovakia and established according to special legislation on banks are subject to a special 1 Capital duty bank levy as of 1 January 2012 based on a special legislation. The amount of the levy for 2017 until 2020 is 0.05%, and is due on the 25th day of every In Slovakia there is no specific legislation that regulates capital duty. As far calendar quarter (i.e. an annual rate of 0.2%). The levy is calculated over the as company law is concerned, related registration fees are not of significant bank's liabilities at the end of the previous calendar quarter (adjusted by value. certain items defined by law). As of October 2018, the insurance companies, insurance companies from 2 Stamp duties other EU Member States, and branches of foreign insurance companies must Stamp duties are levied on certain services of the authorities responsible pay an 8% tax on non-life insurance payments. for domestic affairs (e.g. visas) or court appeals (in the form of notary fees), As of 2019, stores with premises in at least 15% of all regions and whose usually of a small value. There is no special tax act that regulates stamp turnover from sale of food to the end customer is at least 25% are obliged duties. to pay a special 2.5% levy on the three-month turnover each quarter of the store’s accounting period. 3 Customs duties In general, all goods crossing the Slovak border are subject to customs du- 6 Environmental taxes ties. As an EU Member State, Slovakia does not levy customs duties on the In Slovakia, environmental taxes (taxes on electricity, natural gas and coal) import of goods from other Member States. The customs tariffs towards third apply to entities (both individuals and corporations) that deliver electricity, countries (i.e. countries outside the EU) are determined by the EU. Custom natural gas and coal to the final customer or the one who used it. Environ- duties represent EU revenue. In addition, various international agreements mental taxes follow rules set by Directive 2003/96/EC. providing for customs exemptions or preferential customs duties apply.

7 Advertising duty 4 Other excise duties No special tax is applied to advertising activities performed in Slovakia. Excise duties are levied on tobacco products, alcoholic beverages and mineral oils. These excise duties are non-recurring taxes and are payable by the seller, who passes on these costs to the customer. In the course of EU accession, Slovakia has been granted some insignificant exemptions.

5 Special taxes on regulated industries A special contribution on business activities in regulated industries applies. Taxable persons are businesses operating in the following industries: energy, insurance and re-insurance, public health insurance, electronic communica- tions, pharmaceuticals, postal services, rail traffic, public water and sewer systems, air transport and health care services under special legislation. The tax base for the contribution is the profit reported for the accounting period in which the regulated entity has a license to perform such activities. The obligation to pay the contribution arises if the expected annual accounting profit is at least EUR 3 million. As of 1 January 2019, the monthly rate of the contribution is 0.545% and will be reduced to 0.363% as of 1 January 2021.

410 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 411 II SPECIAL AREAS OF TAXATION OF BUSINESS-RELATED 2 Dividends ACTIVITIES Generally, dividends are subject to taxation in Slovakia from 2017. Non-taxation of dividends distributed from profit before this period depends on the year A HOLDING STRUCTURES for which the profit was reported. 1 Participation exemption If dividends derived from profits reported since 1 January 2017 are paid to regular employees without participation on registered capital of the corpo- Any income from profit distribution (dividends) derived by a resident corporation (hereinafter only »the employees«), these are considered employment ration (s.r.o. or a.s.) or a cooperative from a participation in another Slovak income (subject to employment income tax and social and health contribu- corporation or cooperative is exempt from corporate income tax, regardless tions). However, special rules apply if board members or executives receive of the capital ownership percentage and the holding period. This exemption shares of profit. can be applied only if the company is the beneficial owner of the income from dividends, and it does not apply to capital gains (see below). 2.1 OUTBOUND DIVIDENDS

1.1 CAPITAL GAINS EXEMPTION 2.1.1 Dividends paid to resident corporations or shareholders Income from sales of the shares in corporations derived by a resident or In general, dividends and other profit distributions made by Slovak non-resident corporation with PE in Slovakia is tax exempt if the following corporations to individuals (other than employees) are subject to conditions are met: a withholding tax of 7%. This taxation is final, i.e. the withholding tax can neither be credited nor refunded. If the recipient is a Slovak ¬ minimum shareholding 10% (in registered capital); corporation, dividend income is tax exempt. ¬ minimum holding period 24 months; ¬ sufficient substance and an adequate profile of functions and risks 2.1.2 Dividends paid to non-resident corporations or in Slovakia of the selling entity. shareholders However, this exemption does not apply to income from sales of shares There are the following possibilities of outbound non-resident divi- where a subsidiary goes into bankruptcy proceedings/liquidation/restructu- dend taxation in Slovakia: ring or the taxpayer/seller is in liquidation. Also, securities traders are not exempted. The exemption can first be applied in 2020. (i) Paid to contracting states: If paid to individuals (other than employees), 7% withholding tax applies, but a reduction of 1.2 ANTI-ABUSE RULES withholding tax may be applied under the tax treaties. If paid to corporations in contracting states, outbound Artificial structures and other sham transactions may be challenged by the dividends are tax exempt. application of the »substance-over-form« and »abuse-of-law« principles. (ii) Paid to non-contracting states: These outbound dividends There is also an anti-abuse rule relating to the dividends, which regulates are subject to 35% withholding tax. situations in which the taxpayer conducts transactions upon the receipt of (iii) 35% withholding tax if the beneficial ownership of the dividends which do not entirely correspond to economic reality and obtaining received dividend payment cannot be identified benefit was one of the principal purposes. In such a case the dividends received will be subject to tax anyway. 2.2 INBOUND DIVIDENDS Hybrid shareholdings There are the following possibilities of inbound dividend taxation in Slovakia: Dividend income received from shareholdings in foreign subsidiaries (i) Received from contracting states: These are taxed on a separate and from international holding participations is not exempt from cor- tax base, which is excluded from the general tax base. They are porate income tax if the dividend is deductible as a business expense subject to 7% tax, or a reduction of the tax rate based on tax treaty at the level of the foreign subsidiary. is applicable if paid to individuals. If paid to Slovak corporations, inbound dividends are tax exempt. (ii) Received from non-contracting states: These inbound dividends are also taxed on a separate tax base excluded from the general tax base. They are subject to 35% tax.

412 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 413 2.3 TAXATION OF DIVIDENDS IN PARTNERSHIPS 4 Non-resident shareholders

According to the ITA, profit shares of unlimited partners in Slovak partner- 4.1 INTEREST AND ROYALTY PAYMENTS TO NON-RESIDENTS ships (k.s. or v.o.s.) which have shares in Slovak non-transparent corporations Interest and royalties are subject to withholding tax at a rate of 19% (note: (a.s. or s.r.o.) are subject to withholding tax, and the partnership is respon- in specific cases where the final beneficiary is not identified, an increased sible for the payment of the tax. The tax rate depends on the residence of tax rate of 35% will apply). The rate may be reduced under a tax treaty (see the unlimited partners (7% or 35%). If the partnerships with shares in Slovak I.B.5.1). non-transparent corporations (a.s. or s.r.o.) are located abroad, the Slovak non-transparent corporation is responsible for the payment of the withhol- Interest and royalty payments made to associated companies or their per- ding tax while the residence of the beneficial owner of the shares (unlimited manent establishments located in another EU Member State are exempt partners) is decisive for the application of the tax rate, i.e. where the payer from any withholding tax under the EU Interest and Royalty Directive. This is not able to sufficiently identify the final beneficiary, he has to withhold a Directive is incorporated in the Slovak ITA. The exemption is subject to the tax of 35%. condition that the recipient qualifies as beneficial owner of such payments. A company is deemed to be associated under the Slovak ITA for these purposes The limited partner in the limited partnership (k.s.) is treated like a sharehol- if, in principle, the share in capital represents at least 25% for an uninterrup- der in a limited liability company, i.e. the new taxation on dividends (see ted period of 24 months. above) applies.

With respect to foreign partnerships, Slovak tax administration generally 4.2 CAPITAL GAINS follows the tax law of the country of source. Capital gains of non-resident corporations (or individuals) are subject to tax in Slovakia if they fall within the definition of Slovak-source income (see I.B.5.1). 3 Interest deduction and thin capitalization Losses from the sale of certain assets (e.g. shares) are not tax deductible. For the capital gains exemption, see II.A. 3.1 INTEREST DEDUCTION The income from the sale of securities traded on the regulated market in the Interest on loans and other debts is generally deductible for tax purpo- hands of individuals is exempt from taxation if it falls under the definition of ses, provided that the general test for tax-deductible expenses (expenses long-term investment savings. incurred with a view to obtaining taxable income) is met and the interest is in line with the transfer pricing rulespricing rules and a thin capitalization rule The taxing right of Slovakia may be limited by tax treaties. Most tax treaties (see 3.2 below). concluded by Slovakia prohibit Slovakia as a source state from taxing capital gains resulting from the alienation of shares. 3.2 THIN CAPITALIZATION

In contrast to the debt-equity concept used in most EU countries, in accor- 5 Tax group dance with the thin capitalization rule in Slovakia, there is a cap applied on In general, each corporate entity is regarded as a separate entity for income interest expense at 25% of EBITDA (earnings before interest, tax, deprecia- tax purposes. Thus, parent corporations and subsidiaries are taxed separa- tion, and amortization) as reported in the financial statements under Slovak tely. Resident parent corporations and resident subsidiaries may not elect accounting rules. It is applied only to loans between related parties and not for taxation as a fiscal unity. Any agreements in this regard are not valid for to financial institutions including leasing companies. tax purposes.

414 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 415 B REAL ESTATE INVESTMENTS Corporate investors The income of corporations is to be regarded as »business income« 1 Resident investors in any event, regardless of the nature of the income (e.g. income from real estate investment). The general principles of business An individual person is resident for tax purposes in Slovakia if he has a do- taxation are applicable (see I.B.2.2 and business income of individual micile, place of residence, or habitual place of abode in Slovakia (see I.B.1.1). investors above II.B.1.1). Rental and leasing payments as well as Such a person is subject to Slovak personal income tax on his worldwide capital gains are taxable. The 21% flat tax rate applies. income, including income from real estate. A corporate investor is resident for tax purposes in Slovakia if the place of its 2 Non-resident investors effective management or legal seat is situated in Slovakia (see I.B.2.1). Such a corporate investor is subject to Slovak corporate income tax on its worldwide Individual non-resident investors income, including income from real estate. An individual real estate investor is non-resident in Slovakia if he does not have a domicile, place of residence, or habitual place of 1.1 REAL ESTATE INVESTMENT INCOME abode in Slovakia. Individual investors Non-resident individuals are taxed on real estate only with respect to Income from real estate may fall into one of the following two income from the following sources (see I.B.5.1 and II.B.1.1): categories: ¬ business income if the real estate business activity ¬ business income including income from rentals; or is carried out in Slovakia or the Slovak real estate belongs ¬ capital gains from the alienation of real estate. to a non-Slovak business; ¬ income from rentals and leasing if the immovable property BUSINESS INCOME AND INCOME FROM RENTALS is located in Slovakia, irrespective whether the payments If real estate activity qualifies as business income (see I.B.1.1), the for the use of immovable property are made by Slovak or general principles of business taxation apply (see I.B.1.2). Rentals non-Slovak residents; and leasing payments and capital gains from selling the real estate ¬ income from the sale of real estate located in Slovakia would be fully taxable. Expenses (e.g. on-going expenses and main- (other than business income) within the five-year holding tenance) are, in general, tax deductible. period. Acquisition costs must be capitalized and for buildings such acquisi- Non-resident individuals with Slovak-source real estate income have tion costs can be depreciated over the period set by the ITA. The same to file tax returns. The 19% or 25% tax rate applies. is applicable for manufacturing costs (costs incurred by the land owner for the construction of a building or major extensions of exis- Corporate non-resident investors ting buildings) of real estate. A corporate real estate investor is non-resident in Slovakia if the place According to tax law, in general the maximum depreciation rate for of its effective management or legal seat is not situated in Slovakia. real estate is either 5% or 2.5% (depending on the type of the real Income of non-resident corporations (comparable to Slovak corpora- estate) of the acquisition costs per year (20 respectively 40 years). In tions) from immovable property (including capital gains) situated in the case of financial leasing depreciation is applied by a lessee. In the Slovakia is taxable as business income (see I.B.5.1 and II.B.1.1). The case of the premature ter- mination of the financial leasing, a lessee 21% flat tax rate applies. is obliged to adjust the tax base. Land plots are not depreciable. The 19% or, as the case may be, the 25% tax rate applies.

CAPITAL GAINS FROM THE ALIENATION OF REAL ESTATE 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 after expiration of the five-year holding period is not taxable. The tax base is the difference between sales price and acquisition costs. The 19% or 25% tax rate applies.

416 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 417 3 Real estate taxes 6 Structuring of real estate investments

3.1 REAL ESTATE TRANSFER TAX The real estate investor can acquire Slovak real estate by way of an asset Real estate transfer tax is not levied in Slovakia. deal (e.g. direct acquisition of real estate) or a share deal (e.g. acquisition of a corporation owning real estate). 3.2 REAL ESTATE TAX 6.1 DIRECT INVESTMENT (ASSET DEAL) Real estate tax is levied on Slovak property, which comprises land, buildings and apartments. In all cases, the tax liability arises on 1 January of the year According to the Foreign Exchange Act (Devízový zákon) valid in Slovakia, a following the year in which the property is acquired and ends on 31 December foreign person (a legal entity with its registered seat outside Slovakia or indi- of the year in which the ownership ends. vidual with a permanent home abroad) may directly acquire Slovak real estate (with some exceptions in the case of agricultural land and forest land). The general rate of the land tax is 0.25% of the value. The general rate of the The acquisition of the ownership right to real estate is generally subject to building tax and the apartment tax is EUR 0.033 per m². The municipalities registration in the Slovak real estate register. Interest expenses for a debt- may increase or decrease these rates in accordance with local conditions. financed acquisition may be deducted from the income from real estate if real estate is rented out or used for its own business. 4 VAT on real estate No real estate transfer tax is applied. The delivery (sale) of real estate or part of real estate is VAT exempt if the delivery is carried out after a lapse of five years from the first use. The VAT Real Estate Investment Funds with limited tax liability registered person may opt to charge the VAT (only if the subject of supply is If the investment fund is considered to be a transparent company in not a building for accommodation, a flat or apartment in a property intended the state of its residence (outside Slovakia), it is considered to be a for dwelling). The seller is only entitled to a full input VAT deduction for transparent company by Slovak law, too. The income of individual services received related to the acquisition of real estate and the acquisition shareholders is subject to the personal income tax rate of 19% or, costs when the sale is subject to VAT. The same has to be considered for VAT as the case may be, 25%. on some major repairs. If input VAT was deducted, a VAT-exempt sale within If the investment fund is considered to be a non-transparent com- 20 years leads to a pro rata reversal of input VAT deduction. pany in the state of its residence (outside Slovakia), the tax base If a legal successor identified for VAT acquires capital goods, he continues is created by the company income and is subject to the corporate adjusting the deducted input VAT using the same pro rata as his predecessor. income tax rate of 21%. Upon the sale of an enterprise or its organizational part, or upon the contribution of a business into a company, the contributor is obliged to inform the 6.2 INDIRECT INVESTMENT (SHARE DEAL) acquirer of the amount of the input VAT deducted and of any adjustments. Investment through a resident corporation If he fails to do so, it is deemed that the tax has been deducted in the full The tax base is created by the company income (corporate income amount upon the acquisition. tax rate is 21%). The leasing out of real estate is VAT exempt. The lessor may lease real estate (except for lease of a flat, private house and of an apartment in a property Investment through a resident partnership intended for dwelling or part thereof) and charge the VAT only if the lessee In the case of Slovak partnerships, the tax base is created by the part- is a taxable person. nership income. A tax base attributable to limited partners in the limited partnership (k.s.) is taxed at the level of the partnership (at 21% tax rate). A tax base attributable to partners with unlimited liability 5 Real estate investment funds is taxed only at the level of the partners through their tax returns. If Asset management companies (undertakings for collective investment in unlimited partners are individuals, the tax rate of 19% or, as the case transferable securities according to the UCITS Directive) may create unit may be, 25% applies. trusts investing in real estate. Unit trusts are not legal entities but assets Please be aware of certain specifics of the taxation of Slovak partner- of unit holders (the units are issued by the asset management company). ships in Slovakia. However, such unit trusts are currently uncommon in Slovakia.

418 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 419 III EMPLOYEES AND BOARD MEMBERS 1.2 PRINCIPLES OF DETERMINATION OF THE TAX BASE The income tax base is determined as the difference between the total A EMPLOYEES employment income and the social and health insurance contributions paid (withheld). Employees are subject to wage tax on their employment income 1 Resident employees levied at the time of payment. An employee is considered a resident in Slovakia under the same conditions The tax base and income tax liability are computed as follows: as the sole entrepreneur (see part I.B.1.1). + income from employment activities 1.1 EMPLOYMENT INCOME – special allowances (social security contributions, personal allowances) 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 = taxable base of income of the employer’s vehicle per month, various prices). application of progressive tax rate Income from employment includes: – tax bonus (for each child) ¬ salaries, gratuities and other benefits in cash or kind – tax bonus for loan interest (paid during the relevant calendar year) from current, former or future employment; = tax liability ¬ dividends paid to regular employees without participation on registered capital (special rules apply to board members, part B.l); ¬ benefits for work of a member of a cooperative; 1.3 TAX RATE, ASSESSMENT AND SOCIAL SECURITY ¬ benefits for work of a statutory representative and income CONTRIBUTIONS from work of a board member; A progressive personal income tax rate of 19% or 25% applies (for I.B.1.4). ¬ remunerations for the members of the government and the parliament of Slovakia, the heads of state administration; Moreover, an additional tax of 5% is to be paid by the representatives of ¬ related remunerations for work in public and private self- constitutional bodies (e.g. the President, Members of Parliament) on their governing bodies; employment income. ¬ income from employee stock options – such income becomes In general, all taxable income (monetary and non-monetary) received from taxable on the date of exercising a stock option (the amount the employer must be included in the assessment base for the social security subject to income tax is the difference between the higher market and health contributions. value of the share on the exercise date and the price of this share guaranteed by the employee option, less the amount paid by the In Slovakia, employers pay payroll taxes from employees’ gross income. employee for the purchase of the option). For more details on social security and health contributions, see the summary A gross-up of the benefits in kind provided by employers to employees must in the table below: be calculated, and afterwards the final amount calculated in this way falls INSURANCE EMPLOYEE EMPLOYER ASSESSMENT BASE IN EUR under employment income. Moreover, the monetary and non-monetary in- (AS FROM 1.1.2019) PER MONTH come provided in line with the Labor Code is treated equally on the part of 1 the employer with regards to the deductible tax expenses rates min max health 4.00% 10.00%x 477 unlimited sickness 1.40% 1.40%x 477 6,678 old age 4.00% 14.00%x 477 6,678 disability 3.00% 3.00%x 477 6,678 accident 0.80%x 477 unlimited unemployment 1.00% 1.00%x 477 6,678 guaranty 0.25%x 477 6,678 1 The minimum assessment basis for the employee is not regulated for the purposes of social insurance and health insurance. However, the employer is legally liable to remunerate the reserve fund 4.75%x 477 6,678 employee in compliance with legal provisions on the minimum wage. The minimum assessment basis for the social and health insurance is determined only for the compulsorily insured self- total 13.40% 35.20%x employed person and the voluntarily insured person.

420 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 421 2 Non-resident employees 2 Non-executives Individuals who do not meet the conditions to be deemed tax residents In general, income of non-executive resident directors (e.g. supervisory board) in Slovakia (non-residents) are taxable on income derived from domestic is taxable in the same way as income of executive directors (employment sources only. The taxable income of non-residents is limited to that listed in income) under the Slovak ITA. Sec. 16 ITA (for further details see I.B.5.1). Social security and health insurance is treated similarly as under III.B.1 above. The rules regarding the determination of the tax base, tax rate, assessment and social security contributions are very similar to the treatment of resident 3 Non-resident board members employees (see III.A.1). Non-resident executive and non-executive directors are taxed on income Non-resident individuals with income from Slovak sources constituting at from employment activities performed within the territory of Slovakia if they least 90% of their total income in the tax year are allowed to claim certain have an employment contract. If a mandate contract or an agreement on allowances as if they were residents (e.g. dependent spouse allowance, tax performance of the function is concluded, directors are taxed on employment bonus for a child and for loan interest). income received from the Slovak resident employer, regardless whether the Under certain conditions, the recipient of taxable services may be obliged to activity is performed within the territory of Slovakia or not. collect tax in the name of the service provider in order to secure further tax Under a few of Slovakia’s double tax treaties, including the one concluded payment (see under III.A.1). with Austria, the advantageous 19% or, as the case may be, 25% tax may be a final taxation for income of board members if certain conditions are met. B BOARD MEMBERS The rules regarding the determination of the tax base, tax rate and assessment are very similar to the treatment of resident employees (see III.A.1). 1 Executives Non-resident individuals with income from Slovak sources constituting at least Executive directors (e.g. board members) can perform their activities in re- 90% of their total income in the tax year are allowed to claim certain allow- lation to the company on the basis of an agreement on performance of the ances as if they were residents (e.g. dependent-spouse allowance, tax bonus function or a mandate contract. For operating activities an employment for a child and for a loan interest paid). contract is usually concluded. The income is a subject to the social security and health insurance contri- According to the Slovak ITA, the income of executive directors is considered butions, unless the non-resident is obliged to pay these contributions in the income from dependent activity (employment income) even though they are country he resides in, according to the EC Regulation 883/2004 and EC Regu- not bound to follow another person's instructions when performing their work lation 1408/71. The non-resident board members from third countries are not for the company. There is no specific treatment for this kind of employment obliged to pay social security contributions if protected by a bilateral treaty. in Slovak tax law. In general, for the purpose of the ITA an employment relationship is consti- C MUNICIPAL TAX tuted if the employee owes his entire manpower to the employer and if he works under the supervision of the employer. Municipal tax law covers taxes such as real estate tax, dog tax, lodging tax, Special rules apply if board members or executives receive shares of profit. nuclear device tax and road tax. Municipalities are also allowed to impose a so-called municipal levy on development for building an immovable property. The gross income of resident executives is subject to both social security and health insurance. There is no specific municipal income tax in Slovakia.

422 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 423 D SPECIFIC PROVISIONS FOR CROSS-BORDER EMPLOYMENTS IV TAX ASPECTS FOR PRIVATE INVESTORS

1 General provisions A CAPITAL INVESTMENTS

1.1 TAX TREATY LAW 1 Resident capital investors

Foreign nationals carrying out their employment in Slovakia are basically An individual capital investor is resident in Slovakia under the same condi- subject to taxation in Slovakia, unless a double tax treaty assigns the taxation tions as the sole entrepreneur (see I.B.1.1). A corporate investor is resident rights to the other contracting state. in Slovakia if its place of effective management or legal seat is situated in In most cross-border employments Art. 15 OECD Model Convention (OECD Slovakia (see I.B.2.1). MC) applies. Under Art. 15 OECD MC, the country in which the employment is performed (country of exercise) is assigned the taxation rights on the 1.1 INVESTMENT INCOME remuneration for this activity. However, the employment is taxable in the In general, according to the Slovak ITA, an individual capital investor may residence state only if the following cumulative criteria are met: (i) the receive »income from investment of capital« or »other income« if the income employee does not stay longer than 183 days during a calendar/tax year or does not belong to »business income«, »income from independent (professi- twelve-month period in the country of exercise and (ii) the employer is not onal) services«, »income from rentals«, »income from the use of work or art resident in the country of exercise and (iii) the employer does not maintain a performance« (see point I), or »income from dependent activities« (see point III). permanent establishment in the country of exercise. In regard to cross-border employment of board members according to the Income from the investment of capital most of double tax treaties concluded by Slovakia, Art. 15 or Art. 16 OECD Unless the following income is characterized as income from MC (Director’s fees) is applicable. employment activities or profit shares of partners in a general partnership or of general partners in a limited partnership, it constitutes Under a few of Slovakia’s double tax treaties, including the one concluded income from the investment of capital: with Austria, the advantageous 19% or, as the case may be, 25% tax may be a final taxation for income of board members if certain conditions are met. This ¬ interest and other income from securities, loans, debentu- results in a very interesting tax planning opportunity. res, treasury bonds, deposits, credit balances with banks; ¬ income from participation units received upon their 1.2 SOCIAL SECURITY LAW redemption (return); ¬ income from a supplementary retirement insurance; Foreign nationals coming to Slovakia to perform their dependent activities ¬ income from a private life insurance; and in Slovakia are basically subject to the same social security scheme appli- ¬ the difference between payment at maturity and the cable to Slovak employees. However, a different treatment may be claimed issue price of a security. under EU Regulation 883/2004 or under a particular bilateral social security agreement that aims at avoiding that a person is subject to double social The income from profit shares (dividends), interest, and other ear- security schemes. nings from shares and equity participations, and profit shares as a silent partner is subject to income tax if paid out of profits derived Persons resident in the EU are subject to the provisions of EU Regulation before 1 January 2004 and after 1 January 2017. Generally, the 883/2004, which provide for the applicable social security regulation in the taxation of dividends concerns individuals, and in case of corporate case of cross-border activities. Depending on a person's personal and pro- entities, the taxation concerns only those from non-contracting sta- fessional situation either the social security scheme of the home country or tes. However, an exception to the non-taxation of dividends in special of the seconding country is applicable in many cases. The A1 (E101) form cases is applied as an anti-avoidance rule (see II.A.2). on the applicable social security provisions has to be applied for in the competent country. Based on this form, no other country is entitled to levy local With respect to individuals, income from investment of capital is, social security contributions. in general, subject to a withholding tax at a flat rate of 19% if paid domestically (see I.B.1.4). However, some exceptions apply, e.g. with If non-EU residents work in Slovakia or Slovak nationals work in a third respect to notes receivables, interest income from loans, debentures country a bilateral social security agreement may provide for the applicable and treasury bonds. There are also some exemptions applicable to social security legislation. Slovakia has currently concluded social security capital gains generated by individuals, e.g. income from the sale of agreements with 27 countries (EU and non-EU countries). securities traded on the regulated market under certain conditions and income from the transfer of securities, options and income from derivative transactions, if it falls under the definition of long-term investment savings.

424 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 425 Income from investment of capital that is not subject to final 2 Non-resident capital investors withholding tax shall be included in the aggregate income and taxed An individual capital investor is non-resident in Slovakia if he does not meet at the special 19% tax rate. the residency conditions in Slovakia (see I.B.1.1). A corporate investor is non-resident in Slovakia if its place of effective management or legal seat is Other income not situated in Slovakia. Unless the following income is characterized as income from employment activities or business income or income from other gainful 2.1 LIMITED TAX LIABILITY activities or income from the investment of capital, it constitutes other income. Other income includes mainly: An individual non-resident capital investor is taxed in Slovakia only on income from Slovak sources, which according to the ITA includes (for further details ¬ income from occasional activities or the occasional rental see I.B.5.1): of movable property; ¬ income from the alienation of own real estate or the ¬ income derived from payments from Slovak residents or from the transfer of own movable property and securities; permanent establishments of non-residents in Slovakia, which are ¬ income from the transfer of stock options; interest and other yields on granted credits and loans, deposits, ¬ income (capital gains) from the alienation of shares in securities (except for bonds and treasury bills) and derivatives; limited liability companies, participations as limited partner ¬ income from the transfer of interests or shares in a Slovak of a limited partnership or shares in a cooperative; company or from the transfer of membership rights in a Slovak ¬ income from the use of inherited industrial property rights cooperative; or industrial know-how and copyright or similar rights ¬ income from the transfer of interests or shares in a company and including translation; the transfer of membership rights in a cooperative, irrespective of ¬ income from permanent alimonies, pensions and similar their registered office, if the company or the cooperative owns real repeated payments; estate located in the Slovak Republic whose book value exceeds ¬ gains from lotteries, bets and similar games; prizes recei- 50% of the equity of this company or cooperative; ved in public competitions and sports contests; and ¬ income from the valuation difference in the case of contribution in ¬ income from derivatives; kind into the registered capital of a company or a cooperative with ¬ income in cash or in kind of health care providers; a registered office in Slovakia. ¬ income from compensations regarding supplies of electricity, gas, water, etc; 2.2 WITHHOLDING TAX OBLIGATIONS ¬ income from compensations for non-material damage; Non-resident individuals with Slovak-source income from investments ¬ income from sale of waste; of capital have to file tax returns, unless their income is taxed by way of the ¬ income received by athletes pursuant to sport sponsorship Slovak withholding tax at a flat tax rate of 19% (unless reduced by the tax agreements; treaty) or 35% on income from investment of capital. The beneficial owner ¬ income from compensations for sport volunteers’ time loss concept is used in Slovakia. ¬ income from the redistribution of capital reserves. For further details, see I.B.5.1. The above items of income must be substantiated in order for an exemption to be applicable. 2.3 TAX TREATY PROTECTION FROM SLOVAK WITHHOLDING TAX Income from all other sources (i.e. other income) is computed as Double tax treaties usually provide for reduced source tax rates for income the excess of taxable receipts over deductible expenditures. Thus, from capital investments of individuals. Thus, if the Slovak withholding tax the gross income from each source of other income is reduced by rate of 19% is higher than the source tax rate provided by a double tax treaty, expenditures incurred in earning, protecting and preserving the in- the latter is normally applicable. The direct application of the reduced treaty come in question as well as by special allowances. Losses from the tax rate at source is allowed if the non-resident recipient of the income pre- other income category may not be offset against other categories of sents a certificate of residence to the paying company. income and are not deductible. Income of individuals falling within »other income« category is in principle included in the aggregate income and taxed at 19% tax rate or, as the case may be, at 25%. Some exceptions, however, apply (e.g. with respect to some monetary prizes received in competitions and monetary gains from lotteries and similar games when 19% withholding tax applies).

426 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 427 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 © LeitnerLeitner risk diversification rule. The unit trusts can be created by asset management Reliance should not be placed on nor should decisions be taken on the basis of the con- companies (undertakings for collective investment in transferable securities tents of this country report. The country report contains so-called „external links” (links according to the UCITs Directive). Asset management companies are legal to websites of third parties), over which we have no control and assumes no liability. entities that are required to be established as joint stock companies. Unit Neither LeitnerLeitner as a company nor any counsel of LeitnerLeitner involved in the trusts are not legal entities but assets of unit holders (the units are issued by preparation of this country report is responsible for the results of any actions taken on the asset management company). the basis of information herein, including errors and omissions. Asset management companies that create unit trusts are subject to corporate income tax (current rate 21%), however, only with respect to the income All rights reserved. No part of this country report may be reproduced, stored in a retrieval earned by the asset management company. system or disclosed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of LeitnerLeitner. 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. Generally, income derived by an individual capital investor from participation units received upon their redemption (return) is treated, for ITA purposes, as income from the investment of capital (for further details, see IV.A.1.1 and I.B.1.4). If an individual capital investor is a non-resident, income from participation units received upon their redemption (return) is considered income from Slovak sources and, as such, as taxable in Slovakia (for further details, see IV.A.2.1 and I.B.5.1). Loss from participation units (if the aggregate of deposits made by the holder of units exceeds the aggregate of income from units received upon their redemption – return) is not deductible.

B INHERITANCE AND DONATION TAX PLANNING Inheritance and donation tax was abolished in Slovakia with effect from 1 January 2004.

C INSURANCE CONTRIBUTIONS IN RESPECT OF DIVIDENDS Health insurance contributions may apply to dividends from profits reported before 2017.

428 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 annex ANNEX I Holding Structures

BOSNIA-HERZEGOVINA

AUSTRIA FED OF BIH REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC CORPORATE 25% 10% 10% 10% 18% 19% INCOME TAX RATE (12% if revenues < HRK 3 m) CAPITAL DUTY None None None None None None

INTERNATIONAL PARTICIPATION EXEMPTION INBOUND Full exemption (participation of Full exemption Full exemption Full exemption of legal entities Full exemption Full exemption within EU, CZ and DIVIDENDS at least 10% in the equity of a within EU; withholding tax of 5% Liechtenstein, Norway, Iceland, foreign company, minimum for the rest persons within EU and Switzerland (participation holding period of 1 year) and any other persons from third of at least 10% of capital, mini- countries mum holding period of 1 year); additional requirements for third countries

CAPITAL GAINS Full exemption (participation of at Taxable Taxable Taxable Taxable Full exemption if capital gain least 10%, 1 year); option to treat (exempt if realized by realized by a Czech parent capital gains as taxable (capital non-resident companies) company (for requirements losses are tax deductible accordingly) see »Inbound Dividends«)

DEDUCTION OF No Yes Yes Yes Yes No CAPITAL LOSSES (unless the option was exercised (exception for shares held and in certain cases of liquidation/ for securities trading under insolvency) certain conditions)

DEDUCTION OF No Yes Yes Yes, according to special Yes No WRITE-OFFS (unless the option was exercised) conditions (upon realization)

CROSS-BORDER Yes No No No No No LOSS DEDUCTION

DEDUCTION OF Yes Yes Yes Yes, Yes No EXPENSES restrictions for intra-group acquisi- however restrictions for (e.g. interest) tions and intra-group payments to intra-group acquisitions low tax

THIN CAP RULES No Yes No Limitation by Limitation by debt-equity Limitation by debt-equity ratio debt-equity ratio ratio of 4:1 for related parties of 4:1 for related parties and of 3:1 6:1 for banks and insurance companies; interest on profit- linked loans fully non-deductible

WITHHOLDING 25% (reduction by 5% (reduction by 5% (reduction by 5% (reduction by tax treaties) 12% (reduction by tax treaties) 15% (reduction by tax treaties) TAX ON OUTBOUND tax treaties) tax treaties) tax treaties) 35% for residents of non-EU/-EEA DIVIDENDS 0% if EC Parent-Subsidiary and non-treaty states 0% if EC Parent-Subsidiary Directive is applicable Directive is applicable (at least 10%, 2 years) 0% if EC Parent-Subsidiary Directive (at least 10%, 1 year) is applicable (at least 10%, 1 year)

CFC LEGISLATION Yes (For fiscal years starting No No Yes Yes No (but planned introduction in after 31 December 2018, 2019) CFC rules apply)

ANTI-ABUSE As of 1 January 2019, participation Substance-over- Substance-over- Substance-over- Substance-over- Substance-over- PROVISIONS exemption is denied under form principle form principle form principle form principle form principle; revised conditions (passive income, abuse-of-law principle effective foreign tax rate of 12.5% or lower); switch-over to credit method.

488 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 489 ANNEX I Holding Structures

HUNGARY SERBIA SLOVAKIA SLOVENIA CORPORATE 9% 15% 21% 19% INCOME TAX RATE

CAPITAL DUTY None None None None

INTERNATIONAL PARTICIPATION EXEMPTION INBOUND Full exemption Fully included, Full exemption within EU for dividends paid out of Full exemption within EU; DIVIDENDS (except dividends received from a CFC) foreign paid tax credited against profits generated after 1.1.2017 (corporations) additional requirements for third countries Serbian tax

CAPITAL GAINS Full exemption for Taxable at 15% Full exemption (at least 10%, 2 years and substance 50% exemption if at least 8%, »reported participations« (minimum 1 year requirements). The 2-year holding period will first be 6 months and 1 employee for holding period, must be reported to the tax fulfilled in 2020. 6 months (for third countries authority within 75 days from acquisition) the same additional requirement as for inbound dividends)

DEDUCTION OF Yes Yes, No Yes (50%) CAPITAL LOSSES (except for participations in CFC or under against capital gains (certain exceptions and compensation by capital the reported participation scheme) gains possible)

DEDUCTION OF Yes Yes, No Yes, WRITE-OFFS (under certain conditions) under certain conditions subject to special conditions

CROSS-BORDER No No No No LOSS DEDUCTION DEDUCTION OF Yes Yes Yes Yes, EXPENSES (provided that the business purpose and the amount of 5% of exempt dividends and capital (e.g. interest) CFC test are met) gains is not recognized as expenditure

THIN CAP RULES Limited at 30% of EBITDA or HUF Limitation by debt-equity ratio of 4:1 for Yes – limitation on interest expense up to Limitation by debt-equity ratio of 4:1 for related 939,810,000 (approx. EUR 3 million) – related parties and 10:1 for banks and 25% EBITDA for related parties parties whichever is higher – but might be carried financial lease companies forward. Special exemption rules apply for groups drawing up a consolidated financial statement.

WITHHOLDING No withholding tax for corporate recipients 20% WHT rate unless reduced by the Dividends from profits generated as of 1.1.2017 15% (reduction by tax treaties) TAX ON OUTBOUND applicable DTT subject to DIVIDENDS ¬ 35% if distributed to non-contracting states 0% if EC Parent-Subsidiary ¬ 7% (reduction by tax treaties) if distributed to Directive is applicable (at least 10%, 2 years) or 0% if individuals who are residents in contracting states dividends fully exempt at the level of EU ¬ 0% if distributed to corporations within EU parent company which is treated as a taxable person and has no right to claim a tax repayment

CFC LEGISLATION Yes No Yes Yes

ANTI-ABUSE Substance-over- form principle Substance-over-form principle Substance-over-form abuse of law principle, Participation exemption for dividends and capital PROVISIONS Principal purpose test anti-abuse rule for dividends, and beneficial owner gains can be denied under certain conditions concept (for third countries see above; hybrid loans, substance-over-form principle) An arrangement or a series of arrangements which are not genuine shall be ignored for the purposes of calculating the corporate tax liability (this GAAR complements the substance-over-form principle).

490 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 491 ANNEX II Companies covered by the Parent-Subsidiary Directive

COUNTRY COMPANY FORMS COVERED AUSTRIA Aktiengesellschaft; Gesellschaft mit beschränkter Haftung; Versicherungsvereine auf Gegenseitigkeit; Erwerbs- und Wirtschaftsgenossenschaften; Betriebe gewerblicher Art von Körperschaften des öffentlichen Rechts; Sparkassen; companies constituted under Austrian law subject to Austrian corporate tax

BOSNIA-HERZEGOVINA –

BULGARIA Sabiratelno drujestvo; Komanditno drujestvo; Komanditno drujestvo s akzii; Drujestvo s ogranichena otgovornost; Akzionerno drujestvo; Nepersonificirano drujestvo; Kooperazia; Kooperativen sajuz; Darjavno predpriatie

CROATIA Dioničko društvo; Društvo s ograničenom odgovornošću; other companies constituted under Croatian law subject to corporate tax

CZECH REPUBLIC akciová společnost; společnost s ručením omezeným

HUNGARY közkereseti társaság; betéti társaság; korlátolt felelősségű társaság; részvénytársaság; egyesülés; szövetkezet; közös vállalat (this company form is no longer possible after 15 March 2014)

SERBIA n/a

SLOVAK REPUBLIC akciová spoločnost’; spoločnosť s ručením obmedzeným; komanditná spoločnosť

SLOVENIA delniška družba; komanditna družba; družba z omejeno odgovornostjo

guidelines to taxation 2019 leitner leitner 492 ANNEX III Companies covered by the Merger Directive

COUNTRY COMPANY FORMS COVERED AUSTRIA Aktiengesellschaft; Gesellschaft mit beschränkter Haftung; Erwerbs- und Wirtschaftsgenossenschaften

BOSNIA-HERZEGOVINA –

BULGARIA –

CROATIA Dioničko društvo; Društvo s ograničenom odgovornošću; other companies constituted under Croatian law subject to corporate tax

CZECH REPUBLIC akciova společnost; společnost s ručenim omezenym

HUNGARY közkereseti társaság; betéti társaság; korlátolt felelősségű társaság; részvénytársaság; egyesülés; közhasznú társaság (this company form ceased to exist after 30 June 2009, replaced by non-profit companies, the directive was not amended); szövetkezet; közös vállalat (is no longer possible after 15 March 2014)

SERBIA n/a

SLOVAK REPUBLIC akciová spoločnost’; spoločnosť s ručením obmedzeným; komanditná spoločnosť SLOVENIA delniška družba; komanditna družba; družba z omejeno odgovornostjo

guidelines to taxation 2019 leitner leitner 493 ANNEX IV Companies covered by the Interest and Royalty Directive

COUNTRY COMPANY FORMS COVERED AUSTRIA Aktiengesellschaft; Gesellschaft mit beschränkter Haftung

BOSNIA-HERZEGOVINA –

BULGARIA Komanditno drujestvo s akzii; Drujestvo s ogranichena otgovornost; Akzionerno drujestvo

CROATIA Dioničko društvo; Društvo s ograničenom odgovornošću; other companies constituted under Croatian law subject to corporate tax CZECH REPUBLIC akciová společnost; společnost s ručením omezeným veřejná obchodní společnost komanditní společnost družstvo

SERBIA n/a

SLOVAK REPUBLIC akciová spoločnosť; spoločnosť s ručením obmedzeným; komanditná spoločnosť; verejná obchodná spoločnosť; družstvo

SLOVENIA delniška družba; komanditna delniška družba; komanditna družba; družba z omejeno odgovornostjo; družba z neomejeno odgovornostjo

guidelines to taxation 2019 leitner leitner 494 ANNEX V Transfer Pricing BOSNIA-HERZEGOVINA

AUSTRIA FED OF BIH REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC

APPLICABLE Transfer Pricing Documentation Corporate Income Tax Corporate Income Tax Regulated by law is the principle Corporate Income Tax Act Income Tax Act 586/1992 LEGISLATION Law; Income Tax Act (Sec. 6/6, Act and corresponding Act and corresponding on the market character of the and corresponding decrees; Sb. (Sec. 23/7, 38nc); AND RULINGS Sec. 6/14); Corporate Income Tax decrees; decrees; relations between related parties Double Tax Treaties; Directives of the Ministry of Act (Sec. 8/1 and 2); Double Tax Double Tax Treaties Double Tax Treaties as well as the methods on deter- Guidance stipulating MAP Finance D-332, D-32 and Treaties; Transfer Pricing Guide- mination of market values. The Procedure D-334; Directive of the General lines of the MoF as interpretation tax offices apply in their practice Finance Directorate D-10, Double instrument (not legally binding) transfer pricing manual. Tax Treaties APPLICABLE Both traditional and (alternatively) Both traditional and other Both traditional and other Both traditional and other Both traditional and other Both traditional and other TP METHODS other TP methods according to TP methods according to TP methods according to TP methods according to TP methods according to TP methods according to OECD Transfer Pricing Guidelines OECD Transfer Pricing OECD Transfer Pricing OECD Transfer Pricing OECD Transfer Pricing OECD Transfer Pricing Guidelines Guidelines Guidelines Guidelines Guidelines

CONTROLLED Art. 9/1 OECD MC Cross-border and Cross-border and According to the provisions of the Cross-border and domestic Sec. 23/7 of the PARTIES domestic related parties domestic related parties Bulgarian Tax and Social Security related parties (under certain Czech Income Tax Act Code of Procedure conditions)

AVAILABILITY No, No No No Yes Yes OF APA respectively on discretionary basis; however, binding rulings in transfer pricing issues available as of 2011 according to Sec. 118 Federal Tax Act

VALIDITY OF APA N/A N/A N/A N/A Up to 5 years Up to 3 years (depending on specific cases); rulings according to Sec. 118 Federal Tax Act have binding force

APPLICATION Ministry of Finance/ N/A N/A N/A Ministry of Finance – Local tax authority FOR APA Local tax authority Tax Authorities (also for binding rulings)

FEE FOR APA None; N/A N/A N/A Unilateral: HRK 15,000-50,000; CZK 10,000 costs for binding rulings according Bilateral: fee for unilateral agree- to Sec. 118 Federal Tax Act amount ment increases for HRK 50,000; between EUR 1,500 and Multilateral: fee for unilateral EUR 20,000 depending on turnover agreement increases for HRK of requesting taxpayer 100,000, extension of the agreement amounts to 50% of the base fee DOCUMENTATION Duty to keep documentation in TP documentation is TP documentation is The evidence materials to be Chosen TP method has to be TP documentation is REQUIREMENTS line with the relevant provisions practically necessary practically necessary provided, incl. in the appeal trial, supported by extensive TP practically necessary as provided by the Transfer Pricing but not strictly prescribed but not strictly are at one’s own discretion (no documentation prescribed by but not obligatory. Documentation Law, the Austrian by the PTA prescribed by the PTA specific requirements). There is Corporate Income Tax Act and Directive D-334 gives General Fiscal Code, taking into no specific requirement by law corresponding decrees recommendations for account the OECD Transfer Pricing for a prior preparation of transfer the documentation. Guidelines and the Transfer Pricing pricing guidelines Guidelines of the Austrian MoF

SUBJECTS All taxpayers engaged in All entities engaged in All entities engaged in All taxpayers (legal persons) All entities engaged in cross- All entities engaged in OBLIGED TO KEEP cross-border transactions transactions with related transactions with engaged in transactions with border transactions with related cross-border and DOCUMENTATION with related parties parties related parties related parties. Draft amendments parties/all resident related domestic transactions of the Bulgarian Tax and Social parties (if one of the parties has a with related parties Security Code of Procedure, will preferential tax status be discussed and promulgated in 2019 and will regulate the compulsory preparation of local file in certain cases.

495 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 496 ANNEX V Transfer Pricing BOSNIA-HERZEGOVINA

AUSTRIA FED OF BIH REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC PENALTIES No specific TP penalties No specific TP penalties EUR 10,000-30,000 No specific fine, option for adjust- No specific TP penalties No specific TP penalties (adjustment of tax base + (adjustment of tax base + (adjustment of tax ment of the financial result and (adjustment of tax base + (adjustment of tax base + late payment interest) late payment interest if base + late payment accruing of additional tax and late payment interest if late payment interest applicable) interest if applicable) default interest. The draft amend- applicable) and penalty 20% or 1% ments are envisaging fines for in the case of a loss) non-submission of local file.

497 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 498 ANNEX V Transfer Pricing HUNGARY SERBIA SLOVAKIA SLOVENIA APPLICABLE Hungarian Act on Corporate Income Tax Corporate Income Tax Act and corres- Corporate Income Tax Act and corresponding rule- Corporate Income Tax Act; (Official Gazette LEGISLATION AND (Sec. 18); ponding rulebooks; Double Tax Treaties books; Double Tax Treaties No. 117/06, Art. 16-19); Rules on Transfer Pricing; RULINGS Decree No. 32/2017 of the Ministry of Income Tax Act 595/2003 (Sec. 17/5, 17/6, 17/7, 18); Double Tax Treaties National Economy; Double Tax Treaties Regulation of Ministry of Finance on contents of TP documentation; Double Tax Treaties APPLICABLE Both traditional transaction methods and OECD TP methods + any other method, Traditional and other TP methods according to OECD Both traditional and other TP methods according to TP METHODS transactional profit methods according in case OECD methods cannot be Transfer Pricing Guidelines OECD Transfer Pricing Guidelines to OECD Transfer Pricing Guidelines applied

CONTROLLED PARTIES Act on Corporate Income Tax Cross border and domestic related Sec. 2 (n) and (r) of the Slovak Income Tax Act; Art. 16 and 17 of the Slovenian Corporate Income (Sec. 4 point 23). Cross-border as well as parties cross-border and inland transactions covered Tax Act domestic related parties – OECD MC

AVAILABILITY OF APA Yes No Yes Yes (unilateral, bilateral, multilateral)

VALIDITY OF APA For 3 to 5 years, possible to N/A Up to 5 years, possible to extend for another 5 years The agreement may be concluded for a maximum extend for another 3 years period of 5 years with the possibility of an extension.

APPLICATION FOR APA Hungarian Tax Authority N/A Local tax authority The General Tax Office in Ljubljana

FEE FOR APA HUF 2 million (approx. EUR 6,250) if N/A EUR 10,000 for unilateral APA / EUR 15,000 to conclude the APA, and EUR 7,500 Comparable Uncontrolled Price Method, EUR 30,000 for multilateral APA for the renewal of the APA Cost Plus Method or Resale Price Method can be applied in unilateral procedure, othewise HUF 2 million multiplied by the number of parties involved; in personal consultation: HUF 0.5 million (approx. EUR 1,562.5)

DOCUMENTATION Detailed transfer pricing documentation Chosen TP method has to be supported Duty to keep documentation in line with requirements According to Slovenian tax law, the TP documenta- REQUIREMENTS rules are valid since 2003 (transitional by TP documentation prescribed by under the Regulation of Ministry of Finance taking into tion consists of a »master file« and a »country- period until 2005) the Rulebook issued by the Ministry of account the Code of Conduct on TP Documentation specific documentation« and is in line with the Code Finance and OECD provisions. of Conduct on TP Documentation. Taxpayers are obliged to submit the TP documenta- Multinational enterprise groups (MNE groups) with tion to the tax authority within 15 days upon request. an annual consolidated group revenue of EUR 750 million or more must include a country-by-country report in their documentation.

SUBJECTS Currently all (local and cross- border) All taxpayers engaged in transactions Obliged subject depends on number of criteria and All taxpayers (legal persons) engaged in transac- OBLIGED TO KEEP related party transactions (except small with related parties other special circumstances, e.g. low-risk or high-risk tions with related parties. DOCUMENTATION enterprises and small transactions) entities. New multilevel rule classifies 3 types of should be documented over the yearly documentation: shortened, basic and full scope. threshold of HUF 50 million (approx. EUR 156,250); for low added value services simplified documentation requirement applies subject to meeting certain criteria

PENALTIES Special default penalty of HUF 2 million Penalties of up to approx. EUR 16,600 No specific TP penalties (adjustment of tax base plus Specific penalties between EUR 1,200 and (approx. EUR 6,250) per transaction for for failure to include arm’s length late payment interest and/or a penalty of up to EUR 30,000 are imposed in respect of TP docu- non-compliance with the documentation prices in the tax balance, for failure to EUR 3,000 for breach of a non-monetary obligation); mentation. Additional penalty (EUR 600-4,000) is obligations (repeated penalty may reach submit TP documentation. Additional The penalty is twice as high on the additional tax as- imposed on the responsible person. Penalty for an HUF 4 million (approx. EUR 12,500), or fines if due to failure to comply with TP sessed in the case of non-compliance with anti- offence that is considered particularly severe can four times higher than the first penalty); rules results in false income tax repor- avoidance rules for the tax audits started after amount to between EUR 4,500 and EUR 150,000 plus TP adjustment of tax base resulting ting (30% on difference between repor- 31.12.2016. and for the responsible person from EUR 1,200 to tax penalties and late payment interest ted and actual tax + default interest). EUR 20,000. if applicable

499 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 500 ANNEX VI Treaty withholding tax rates on Dividends, Interest, Royalties

BOSNIA CZECH SLOVAK AUSTRIA HERZEGOVINA BULGARIA CROATIA REPUBLIC HUNGARY SERBIA REPUBLIC SLOVENIA AUSTRIA DIVIDENDS 10/5 5/0 1 15/0 3 10/0 3 10 15/5 10 15/5 INTEREST 5 0/5 2 5 0 0 10 0 0/5 7 ROYALTIES 5 5 0 0/5 4 0 5/10 4 0/5 4 5 BOSNIA-HERZEGOVINA DIVIDENDS 10/5 Acc. to IBFD, 10/5 5 10 10/5 15/5 10/5 INTEREST 5 no DTT with 10 0 0 10 0 0/7 7 ROYALTIES 5 Bosnia 10 10 10 10 10 5 BULGARIA DIVIDENDS 5/0 1 Acc. to IBFD, 5 10 10 15/5 10 10/5 INTEREST 0/5 2 no DTT with 5 10 10 10 10 5 ROYALTIES 5 Bulgaria 0 10 10 10 10 5/10 7 CROATIA DIVIDENDS 15/0 2 10/5 5 5 10/5 10/5 10/5 5 INTEREST 5 10 5 0 0 10 10 5 ROYALTIES 0 10 0 10 0 10 10 5 CZECH REPUBLIC DIVIDENDS 10/0 3 5 10 5 15/5 10 15/5 3 15/5 INTEREST 0 0 10 0 0 10 0 5 ROYALTIES 0/5 4 10 10 10 10 5/10 7 0/10 4 10 HUNGARY DIVIDENDS 10 10 10 10/5 15/5 15/5 15/5 15/5 INTEREST 0 0 10 0 0 10 0 5 ROYALTIES 0 10 10 0 10 10 10 5 SERBIA DIVIDENDS 15/5 10/5 15/5 10/5 10 15/5 15/5 10/5 INTEREST 10 10 10 10 10 10 10 10 ROYALTIES 5/10 4 10 10 10 5/10 7 10 10 5/10 4 SLOVAKIA DIVIDENDS 10 15/5 10 10/5 15/5 3 15/5 15/5 15/5 INTEREST 0 0 10 10 0 0 10 10 ROYALTIES 0/5 4 10 10 10 0/10 4 10 10 10 SLOVENIA DIVIDENDS 15/5 10/5 10/5 5 15/5 15/5 10/5 15/5 INTEREST 0/5 6 7/0 6 5 5 5 5 10 10 ROYALTIES 5 5 5/10 7 5 10 5 5/10 4 10

1 The zero rate applies if the beneficial owner is a company (other than a partnership); no degree of ownership is required. 2 The lower rate applies to interest on bank loans. 3 A holding of at least 10% is required. 4 The lower rate applies to copyright royalties, including films. 5 The zero rate applies among others to interest on bank loans and interest on loans granted for a period of more than two years. The lower rate applies if and as long as the treaty partner under its domestic law does not levy withholding tax on interest paid to a resident of Romania. 6 The lower rate applies to interest paid by public bodies. 7 The lower rate applies to copyright royalties, excluding computer software and cinematograph films, but including films and to equipment rentals.

501 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 502 ANNEX VII Real Estate Taxation BOSNIA-HERZEGOVINA

AUSTRIA FED OF BIH REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC CORPORATE INCOME 25% 10% 10% 10% 18% 19% TAX RATE

ARE FOREIGNERS EEA Investors: yes Yes Yes EU residents: without restrictions; EU investors: yes Yes ALLOWED TO Other Investors: other countries: buildings and Other investors: ACQUIRE approval required building right – no restrictions; yes but subject to additional REAL ESTATE? land – only on the basis of inter- conditions that have national agreement to be fulfilled

IS A LOCAL No No No No No, but usual to avoid need for No ACQUISITION Minister of Justice approval COMPANY REQUIRED?

REAL ESTATE 0.5% to 3.5% Taxed at a level set by No 2% of sales price or tax value 3% of retail price 4% of either (i) sales price or TRANSFER TAX RATE each canton individually. (market value); (ii) 0.75 legal value under In most cantons in FBiH exemption for building Valuation Act or guided value the tax rate is 5% and building land if in case real estate value is set by subject to VAT tax office (tax base = the higher value from (i) and (ii))

REAL ESTATE Yes. RETT is levied if at least Not applicable Not applicable Not applicable Not applicable Not applicable TRANSFER TAX 95% of all shares of a corpora- ON THE tion owning Austrian immovable TRANSFER OF property are transferred to one shareholder or several shareholder SHARES who are members of a tax group. RETT is also triggered if 95% of the shares of a partnership have been transferred to new partners within the last five years

REAL ESTATE 1% of special tax assessed value; No Tax rate in the range Depending on the local No Land tax depends on the type of TAX in addition 1% land value tax of 0.1% to 0.2% of municipality (however other parafiscal property. Rates from 0.25% per m² of the special tax assessed value current real estate fees are levied) for agri land) up to CZK 2 per m² for undeveloped land market price multiplied by coefficient (1-5) for building land; building tax from CZK 2 up to 10 (plus CZK 0.75 per floor above the ground floor of real estate), multiplied by the coefficient

DEPRECIATION 2.5% Over 20 years Over 20 years No 5%, Over 30 years in general; RATES FOR REAL may be doubled Over 50 years for office parks, ESTATE HELD shopping malls and hotels AS BUSINESS ASSET

TAXABLE GAIN FOR Yes No Yes Yes Yes Yes DIRECT SALE OF (exceptions if held (exceptions if held REAL ESTATE outside a business) outside a business under certain conditions))

503 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 504 ANNEX VII Real Estate Taxation BOSNIA-HERZEGOVINA AUSTRIA FED OF BIH REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC SALE OF REAL VAT exempt but option into Yes Yes Agricultural land – VAT exempt. Agricultural land – VAT exempt; In general 21% VAT, 15% for resi- ESTATE SUBJECT 20% VAT possible Old buildings (5 years after the used buildings (2 years after the dential buildings with limited size. TO VAT construction) – optional taxation first occupancy) – VAT exempt/ Non-building plots which do not subject to 20%; any other real optional taxation subject to 25% comprise a functional unit are VAT estate – subject to 20% tax of VAT; any other real estate – exempt. Exemption applies also subject to 25% VAT after the expiry from the issue of first consent concerning the final building (“after expiry from the issue” sounds strange. Could this work: “… after expiry of the first issue of approval for use of the building”?). Option for taxation in this cases (either “this case” [sin- gular] or “these cases” [plural]) is applicable.

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HUNGARY SERBIA SLOVAKIA SLOVENIA CORPORATE INCOME 9% 15% 21% 19% TAX RATE ARE FOREIGNERS EEA investors: yes Yes, subject to reciprocity. Restriction Yes EU investors: yes ALLOWED TO Other investors: some conditions have to applies only to agricultural land Limitations for agricultural land and forest land Other investors: reciprocity required (exceptions ACQUIRE be fulfilled, as of 1 May 2014 citizens of apply) REAL ESTATE? the EU member states are entitled – under strict conditions – to acquire arable lands

IS A LOCAL No, but usual No (apart from agricultural land), but No No, but usual ACQUISITION recommendable COMPANY REQUIRED? REAL ESTATE 4% up to the value of HUF 1 billion 2.5% No tax 2% of sales price TRANSFER TAX RATE (approx. EUR 3,125) and 2% above (exempt if subject this threshold. The tax will be capped, to VAT) however, at HUF 200 million (approx. EUR 625,000).

REAL ESTATE RETT is levied upon the transfer of shares Not applicable Not applicable Not applicable TRANSFER TAX in a »real estate company« over the ON THE 75% participation level. However, certain TRANSFER OF structures are exempt from RETT. SHARE

REAL ESTATE Building and undeveloped land tax Up to 0.4% for taxpayers keeping Land tax is 0.25% of the value; building tax and the No general real estate tax. TAX (max. HUF 1,898/m² or 3.6% of the business books, up to 2% (progressive) apartment tax is EUR 0.033/m². Municipalities may impose a local real estate tax market value in case of buildings and for taxpayers who do not keep accoun- The above rates may be increased or decreased by called »charge« for the use of land for construction max. HUF 345/m² or 3% of the respective ting records. A (or should this be “The”) municipality purposes, and a building tax. adjusted market value in case of taxable base is the market value of undeveloped land) the real estate on 31 December of the previous year.

DEPRECIATION 2% for long-life, 2.5% 20 or 40 years Up to 3% for buildings, RATES FOR REAL 3% for medium-life, for part of buildings up to 6% ESTATE HELD 6% for short-life structures AS BUSINESS ASSET and 1-25% for other special buildings

TAXABLE GAIN FOR Yes Yes Yes Yes DIRECT SALE OF (exceptions if held outside a business) (exceptions if held (exceptions if held REAL ESTATE The capital gain is taxed in the case of an outside a business) outside a business) asset deal

SALE OF REAL ESTATE Generally 27% VAT with exemptions Transfer of all types of land is VAT VAT exempt (except for new buildings and developed Generally VAT exempt (except new buildings and SUBJECT TO VAT (but taxpayer may opt into taxation) exempted. First transfer of building land), option for 20% VAT possible (except sale of building land) with the option for taxation between built after 1 January 2005 is subject building for accommodation, a flat/apartment in a taxable persons if certain conditions are fulfilled. to 20% VAT (commercial real estate), property intended for dwelling); When taxed, generally 9.5% for residential buildings i.e. 10% (residential real estate). Every the inland reverse charge is applicable to the supply and 22% for business premises. next transfer of buildings can be sub- of real estate or its part in inland, when the supplier ject to VAT if contracting parties so opts for taxation and the buyer is a VAT registered agree. person

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BOSNIA-HERZEGOVINA AUSTRIA FED OF BIH AND REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC R&D TAX RELIEFS R&D expenses are deductible; specific R&D expenses are deductible R&D expenses are deductible Deduction is possible. Tax reliefs Double deduction (200% = 100% (AS CIT BASE R&D tax relief is available (for own and for R&D are approved in the form tax deductible expenses + 100% DECREASING contract R&D) in the form of cash tax credit of additional decrease of the tax as CIT base decreasing item) is ITEMS) (12% of R&D expenses before 1 January liability in respect of eligible costs available on direct R&D costs 2018 and 14% as of 1 January 2018; of scientific and development expended in same tax period. max. EUR 100,000 for contract R&D) research. Additional CIT base deduction of 10% of increased sum of R&D Maximum amount of incentives expenses from previous tax period. for which additional reduction of taxable base is possible may not If the tax base is lower than the exceed the following amounts: R&D CIT base decreasing item ¬ for basic research, up to 150% (also in case of the tax loss), this of the project’s eligible costs, CIT base deduction can be used in ¬ for applied research, up to three years immediately following 125% of the project’s eligible the taxable period. costs (with the increase of 10% and 20% for medium and small This tax deduction cannot be enterprises), used for R&D projects which are ¬ for development research, up at least partly financed by public to 100% of the project’s eligible sources. costs (with the increase of 10% and 20% for medium-sized and small enterprises).

The tax incentive can be used upon prior approval from the Ministry of Science.

DONATIONS Donations to certain charitable organi‑ Accounting expenses on donations Tax deductible if provided to Donations to charities can reduce zations such as universities, the Austrian to a total amount of up to 10% specific domestic entities up to the CIT base up to 10% of the CIT Research Promotion Agency, museums, of the accounting profit (in some the amount of 2% of the revenue base. The minimum value of one etc, up to an amount of 10% of total cases to an aggregate amount of generated in the previous year. donation has to be CZK 2,000. income of the current year. Furthermore, up to 50%) is recognized for tax donations to certain entities covered by a purposes where the expenses on list issued by Austrian tax authorities are donations are incurred in favor of deductible as well. certain entities.

ACCELERATED N/A The accelerated depreciation General annual depreciation rates By tangible assets the taxpayer DEPRECIATION is applicable for the following (buildings and ships of over 1,000 may opt for linear or accelerated assets: GRT – 5%; basic herd and personal depreciation (non-tangible assets ¬ machinery, process equipment, cars – 20%; intangible assets, have to be depreciated linearly). apparatus. The annual rate of equipment, vehicles (except per- The depreciation period for both tax depreciation may not sonal cars) and machinery – 25%; methods is the same. exceed 50%, where the following computers, computer hardware conditions are simultaneously and software, mobile telephones fulfilled: 1) the assets form part and computer of an initial investment; 2) the network accessories – 50%; other assets are new as fabricated and non-mentioned assets – 10%) can have not been exploited prior to be doubled. Depreciation for tax the acquisition thereof; purposes should be aligned with ¬ computers, computer peripheral accounting depreciation. equipment, software, and right to use software, mobile telephones. Annual rate of tax depreciation – 50%.

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BOSNIA-HERZEGOVINA AUSTRIA FED OF BIH AND REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC OTHER SPECIAL CIT Possibility to deduct foreign losses of EU N/A N/A N/A Under specific requirements BASE DECREASING subsidiaries/subsidiaries resident in DTT Relief for reinvested profits is deduction for vocational training ITEMS states with comprehensive administrative abolished from FY 2017 onwards (e.g. deduction for the trainee or assistance (by tax grouping); deduction of the acquisition price deduction of losses of foreign partnerships/ of the asset for vocational training) PEs

INVESTMENT Transfer of hidden reserves: N/A In case of recruiting certain Investment incentives can reduce The Czech Republic grants invest‑ INCENTIVES sole entrepreneurs and partnerships categories of unemployed – the corporate tax rate, depending ment incentives to investors who (whose partners are individuals) may reducing the tax financial result on the amount invested and the meet special conditions set by transfer hidden reserves that are realized by the amount of the wages and number of employees connected the Investment Incentives Act and from the sale of an asset to a newly social security contributions paid to the investment. Grants are other legal regulations. Invest- acquired asset under the condition that by the employer for a period of provided to taxpayers who, in ment incentives are granted in the the asset sold has belonged to the enter- 12 months; connection with a new invest- form of tax abatement or compen- prise for at least 7 years (15 years for ¬ agricultural producers – 60% of ment, create new employment or sation for certain operating costs. certain buildings and land) corporate tax due is subject to professionally train or re-qualify remission; employees. Additionally, a percen- Tax abatements may be granted ¬ in case of manufacturing tage of the general and specialized in the amount of the tax liability activities in municipalities with training costs not associated with calculated for the specific taxable a high unemployment rate – up a new investment may be used to period or as the amount of the to 100% of the corporate income reduce the income tax base. difference between the tax liability tax may be subject to remission calculated for the taxable period preceding the granting of the investment incentives and the tax liability calculated for the specific taxable period (after the investment was made).

The period for which the investment incentives may be drawn is 10 years.

R&D RELATED TAX As of 2016, the previously applicable N/A N/A N/A N/A INCENTIVES education allowances (20%/6%) have been abolished entirely.

OTHER TAX Sole entrepreneurs and partnerships Full CIT exemption for companies whose Income from trade in securities Accelerated depreciation; Tax allowance on disabled ALLOWANCES may claim a general allowance for profits exports exceed 30% of total turnover and and financial instruments on stock Reduced/abolished CIT rate for a employees (»Gewinnfreibetrag«) if they acquire or for companies investing no less than exchange/regulated market is not period of 10 years for qualifying produce a depreciable tangible asset or EUR 10 million over 5 consecutive years taxable investments (depending on a securities. The deductible profit allowance in production under condition that the number of new employments and decreases gradually, depending on the investment during the first year is at least the total amount of investment) amount of the assessment basis, and is EUR 2 million; for investment in plants and 13% for the first EUR 175,000 of profits, immovable property used for production; 7% for the next EUR 175,000 and 4.5% for employment incentives the next EUR 230,000. In total, the profit allowance is capped at EUR 45,350 for the assessment.

OTHER INCENTIVES Employment and family incentives, Free trade zones; custom duty incentives; Shortened terms for administra- Employment incentives; Financial support for new job incentives for certain expats moving to employment incentives tive service, assumption of expen- incentives for education/training openings and for staff training or Austria ses for building infrastructure, of employees in relation to the retraining acquisition of state and municipal investments; incentives for R&D properties without opening an activities auction

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HUNGARY SERBIA SLOVAKIA SLOVENIA R&D TAX RELIEFS Double deduction (200%) is available to R&D expenses are deductible R&D expenses are deductible (in line with IFRS R&D expenses are tax deductible (depreciated (AS CIT BASE direct costs of R&D activity performed by accounting rules) + additional »super-deduction« over the useful life of assets) + additional tax DECREASING own assets and personnel; the tax base of costs up to 100% of the qualifying R&D expenses relief (100%) of the amount invested in R&D; the ITEMS) decreasing item available to the Hungarian + deduction up to 25% personnel costs (under certain unused part of the tax relief may be used up in the taxpayer may be transferred, wholly or conditions) + possibility to deduct 100 % of R&D subsequent 5 years. Tax relief is provided for R&D partly, to a Hungarian domestic related costs growth, whilst the calculation of the growth expenses for new or substantially enhanced party company, subject to certain criteria. will consider two tax periods materials, products, systems, services, etc. Expenses for R&D include costs of employees, 400% deduction possible (max. HUF 50 services, equipment for R&D, trainings, protection million, approx. EUR 156,250) with regard of IP rights. to R&D performed jointly by the taxpayer and an institution of higher education or MTA (Hungarian Academy of Sciences) or any other entity including corporations performing R&D activities that are held directly or indirectly by the state.

As of 26 July 2018, the tax base decreasing item regarding direct R&D costs performed by own assets and personnel may also be shared between the service provider and the customer under certain conditions.

DONATIONS Donations (with certain restrictions) to Donations are tax exempt Donations are not deductible costs (except for Donations to charitable and some non-profitable charitable entities entitle the donee to a humanitarian aid donations under certain conditions); organizations entitle the donee to tax relief in the 20 or 50% tax base reduction (40% in case income is out of scope amount of 0.3 % of taxable income, and 0.2 % of of a long-term donation agreement) taxable income in certain cases. Costs for donations are not deductible

ACCELERATED (General) development reserve = N/A Yes (only assets of 2nd and 3rd depreciation groups). No (except in cases of small value tangible assets DEPRECIATION accelerated depreciation (capped at – up to EUR 500, which may be depreciated in one HUF 10 billion – approx. EUR 31 million – year) and at 50% of the positive pre-tax profit), on the condition that the reserve is utilized in 4 tax years for investment

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HUNGARY SERBIA SLOVAKIA SLOVENIA OTHER SPECIAL CIT Royalty exemption – old scheme available A taxpayer which is not a newly estab- Tax depreciation generally faster than accounting BASE DECREASING with restrictions on certain already acqui- lished company performing innovative depreciation ITEMS red IPs until 30 June 2021: 50% of royalty business activities and which invests in income tax exempt; capped at 50% of the the share capital of the (as in the other positive pre-tax accounting profit file, I think this should be “a”) newly established company performing in- Special development reserve for intangible novative business activities has a right assets (mount of revenue realized on sales to a tax credit in the amount of 30% of or in connection with in-kind contribution of such investment. intangible assets entitling to receive royalty income, which has been booked from the re- A tax incentive for taxpayers who tained earnings to the tied-up reserves derive income based on the compensa- and has been shown among the tied-up tion for the use of intellectual property, reserves on the last day of the tax year. with condition that it must be regis- This amount may be utilized exclusively for tered. Qualified income, realized by the acquisition of intangible assets entitling the owner of the intellectual property, to receive royalty income, in five years based on the compensation for the use following the year of creating; otherwise tax of registered IP, except compensation plus late payment penalty should be paid by for the transfer of all rights on the IP the general rules. This regulation cannot be (as suggested in the other file: with applied to the intangibles that are reported the exception of compensation for the under the »reported intangibles scheme« transfer of all IP rights), may be exclu- as introduced above) ded from the tax base in the amount of 80% of such realized income, if the New royalty schemes were introduced as of taxpayer opts for it; July 2016, replacing the above old scheme: 50% of royalty profit may be tax exempt, capped at half of the positive pre-tax A new tax incentive provides that accounting profit, with the application of the expenses directly related to R&D so-called Nexus ratio. The Nexus ratio shall activities performed in the Republic of also apply to the above introduced special Serbia are tax deductible in the double development reserve for intangible assets amount (My suggestion was: … in the as of July 2016. amount of double the invested sum. Also, I was wondering whether this Further decreasing items on employment paragraph should be in the “R&D TAX of students, students graduated recently, RELIEFS” section two pages up). unemployed persons, persons released from prison.

INVESTMENT Development allowance is available in Corporate income tax holiday – Slovakia grants investment incentives to investors Tax relief on investment (40% of the invested INCENTIVES connection with certain environmental companies are exempt from corporate who meet special conditions set by the Investment amount) protection investments or other kinds of profit tax for a period of 10 years Incen- tives Act. Investment incentives are granted high-volume investments. 80% of the CIT starting from the first year in which mainly in the form of tax relief. The amount of payable may be credited, arriving at an they report taxable profit if they invest income tax relief (investment aid – IA) depends on the effective tax rate of 1.8%. The tax credit is an amount exceeding approximately unemployment rate. The maximum possible intensity available in 13 tax years in total, within EUR 8.3 million in fixed assets, and amounts to 35% of total eligible costs. A precondition 16 years from the request year. employ at least 100 additional emplo- for granting IA is the creation of new jobs (the number yees throughout the investment period. of new jobs must be at least 40). A tax incentive for investment projects Investment aid can be used to finance investments to aimed at energy efficiency is available Carry-forward of losses – the tax loss specific fields: depending on the intensity ratio of the stated in the tax return can be carried ¬ industrial production region, capped at the HUF equivalent of forward and offset against future pro- ¬ technology centers EUR 15 million in present value. This allo- fits over a period of up to 5 years. ¬ strategic services centers wance is available for 6 tax years in total. (e.g. software development, customer support, headquarters of international corporations The taxpayer is entitled to only one of the ¬ tourism above tax allowances regarding the same investment project.

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HUNGARY SERBIA SLOVAKIA SLOVENIA R&D RELATED TAX Special development tax allowance of N/A A special tax treatment of the patent box regime Tax relief for R&D amounts to 100% of the amount INCENTIVES 80% of the tax for investments designed of commercial use of intangible assets is applied in invested in R&D to promote R&D worth at least HUF Slovakia with the aim of supporting science, research 100 million (approx. EUR 312,500) at and intellectual property: present value; it may be utilized during ¬ exemption of royalties from the provision of 13 tax years in total, but in the 16th tax registered patents year at the latest. ¬ exemption of income from the herewith related sale of products.

The exemption amounts to 50 %. Where the acquisition costs include expenses charged by a related party, a coefficient is to be used to calculate the exempt amount. The exemption can be claimed during the tax depreciation period of the relevant intangible assets capitalized. ¬ utility models and designs and from the provision of computer programs (software); and ¬ exemption of income from the herewith related sale of products. The exemption is applicable only if the intangible assets are developed internally by the taxpayer in Slovakia (not purchased).

OTHER TAX Tax allowance on sponsorship of popular Value added tax (VAT) exemptions in Taxpayers can claim corporate income tax relief also Tax relief for employment/for employing disabled ALLOWANCES team sports (football, basketball, handball, free zones under the Act on Research and Development, which is persons; tax relief for practical work in professional ice hockey, water polo, volleyball) and the subject to an approval process. education; tax relief for voluntary supplementary film industry. Income generated through commercial pension insurance. Special allowances for employ- activities in the free zones in Serbia Income tax relief is granted for a proportional part of ment of certain groups of employees (70% of cost Two types of tax allowances may be is exempted from VAT. There are 13 the tax base, the amount of tax relief is limited by the of employees) and investments (70% of invested obtained for the above forms of support in free zones currently operating in the absolute amount of aid recognized for the given type. amount) in certain equipment and intangible assets the form of: country: Subotica, Novi Sad, Zrenjanin, The grantor is relevant tax office. in underdeveloped parts of Slovenia (e.g. Premurje). ¬ 70% deduction from the CIT payable; or Sabac, Kragujevac, and Pirot, Uzice, ¬ by way of a cash credit to be received in Smederevo, Nis, Krusevac, Svilajnac, On 1 January 2019 the special tax relief for registered the tax account in proportion with the Apatin, Vranje. Foreign companies can social corporations which fulfill the public interest support amount. establish a privately owned free zone was introduced. based on the project approved by the government.

Tax relief for employment of disabled persons – tax duty is reduced based on proportion of disabled persons in total number of employees (Art. 46 of the Corporate Income Tax Act).

OTHER INCENTIVES Special government decision for tax Availability of funds (subsidies) for Except for income tax relief, under the Investment Subsidies for the acquisition of non-current tangible allowances regarding investment projects creation of new jobs, tax incentives for Incentive Act, investors can also apply for: and intangible assets, real estate owned by state or in the value of at least the HUF equivalent employing senior and junior work force ¬ investment grants; municipalities; contribution for the creation of new of EUR 10 million. In addition to tax allow- ¬ new job grants; or jobs; EU funds still available ances, cash incentives may also be granted; ¬ the option to acquire property at a price lower than strategic partnerships between the market value. Hungarian government and certain significant Hungarian taxpayers – the aim is to grant incentives for employment, R&D, and certain investment activities

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