Doing Business in Slovakia

Doing business in Slovakia

2019

Content

Page Content 3 Foreword 4 Country profile 6 Regulatory environment 12 Finance 15 Imports 20 Business entities 23 Labour 29 Financial reporting and audit 34 Contact details 51

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Foreword Grant Thornton Audit, s.r.o. in Slovakia Grant Thornton Consulting, k. s. in Slovakia

 Valid as of January 2019  Member of Grant Thornton International  Our services:

Grant Thornton Consulting, k. s. and Grant Thornton Audit, s.r.o. offer you:

AUDIT  Obligatory and voluntary audits of annual financial statements and group financial statements  Audits of non-profit organisations and foundations  Due diligence  Audits under capital market law as reviews of prospects and reviews of management reports  High Level Reviews  Agreed upon procedures  Special reviews (in case of change, merger, reviews under securities law, etc.)  Implementation and audit of financial analyses  Analysis of risk of misappropriation and fraud

TAX  National and international tax planning, tax optimization  Preparation of tax returns, review of adjustment notices  Support for the preparation of transfer pricing documentation  Representation in dealings with financial authorities, including tax audits and local inquiries  Help for solution of particular tax issues  Consultancy related to business reorganisations and acquisitions  Consultancy for tax proceedings before courts  Elaboration of appeals  Tax due diligence  Tax trainings  Newsletters and legal updates

ACCOUNTING  Complex processing of accounting and automatic processing of data and accounting documents  Cloud accounting including approval processing of incoming invoices  Regular reporting and analyses of financial situation of the company

 Preparation of annual financial statements, assistance by audit and the preparation of annual report  Preparation of all tax returns on behalf of the company  Representation of clients in front of the tax authority and other institutions

PAYROLL  Complex processing of payroll, including regular reporting  Annual tax reconciliation and health insurance of employees  Support and representation by audit and communication with social and health insurance company and tax authorities  Personnel consultancy

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This guide has been prepared for the assistance of those interested in doing business in Slovakia. It does not cover the subject exhaustively but is intended to answer some of the important, broad questions that may arise. When specific problems occur in practice, it will often be necessary to refer to the laws and regulations of Slovakia and to obtain appropriate accounting and legal advice. This guide contains only brief notes and includes legislation in force as of 1 January 2019.

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Country profile

Summary In 2004 the Slovak Republic became a member of the European Union and NATO. These events represent an important progress in political, economical and military reforms in Slovakia. Since 2009 the official currency is Euro, whereby the exchange rate is 30,126 SKK/1 EUR.

Geography and population The Slovak Republic is situated in the heart of Europe. The Slovak Republic shares borders with the Czech Republic, Hungary, Poland, Austria and Ukraine. The capital city is Bratislava. Due to its location Bratislava became a significant connection between Western and Eastern Europe.

Capital city: Bratislava Area: 49 035 km2 Population: 5.4 million Main cities: Bratislava, Košice, Nitra, Žilina Languages: Slovak

Political and legal system Government Form of Government Republic President Andrej Kiska Prime Minister Peter Pellegrini Electoral system Universal direct suffrage - Proportional representation (5 % thresh.) National government Multi-party government Regional governments 8 regions

Language The official language is Slovak.

Business hours/time zone Mo-Fri 8.00 – 18.00 CET

Public holidays The public holidays in 2019

1 January 2019 New Year 6 January 2009 Epiphany 19 April 2019 Great Friday 22 April 2019 Easter Monday 1 May 2019 Labor day 8 May 2019 Day of victory against the fascism 5 July 2019 Saint Cyril and Method day 29 August 2019 Slovak national uprising day 1 September 2019 Constitution of Slovak republic day 15 September 2019 Saint Maria day 1 November 2019 All Saints day 17 November 2019 Freedom´s fight day 24 December 2019 Christmas 25 December 2019 Christmas 26 December 2019 Christmas

Economy According to the latest statistics total export has increased by 6,7% in year 2017 in comparison with the year of 2016 and total import has also increased by 8%. The largest proportion of export and import is realized with the automobile and machinery industry. The volume of foreign investments continued to rise after drop which was caused by world economy crises. After the Slovak Republic joined the EU and NATO standard foreign investors in Slovakia come from EU and OECD countries.

Annual Balance of GDP Average CPI foreign Unemployment Year growth wage Inflation trade rate (%) (%) (€/month) rate (%) (mld. €) 2013 1,5 0,4 4,2 14,2 824 2014 2,8 -0,1 4,7 13,2 858 2015 3,9 -0,5 3,3 11,5 883 2016 3,3 0,2 3,6 9,7 912 2017 3,4 1,9 3,2 8,1 954 Source: https://www.focus-economics.com/countries/slovakia

Year 2013 2014 2015 2016 2016 GDP 1,5 2,8 3,9 3,3 3,4 growth (%)

GDP growth (%) 4,5% 3,9% 4,0% 3,4% 3,5% 3,3% 3,0% 2,8% 2,5% 2,0% 1,5% 1,5% 1,0% 0,5% 0,0% 2013 2014 2015 2016 2017

Year 2013 2014 2015 2016 2017 Annual CPI Inflation 0,4 -0,1 -0,5 0,2 1,9 rate (%)

Annual CPI Inflation rate (%) 2,5%

2,0% 1,9%

1,5%

1,0% 0,4% 0,5% 0,2% -0,1% -0,5% 0,0% 2013 2014 2015 2016 2017 -0,5%

-1,0%

Year 2013 2014 2015 2016 2017 Balance of foreign 4,2 4,7 3,3 3,6 3,2 trade (mld. €)

Balance of foreign trade (mld. €) 5 4,7 4,5 4,2 4 3,6 3,5 3,3 3,2 3 2,5 2 1,5 1 0,5 0 2013 2014 2015 2016 2017

Year 2013 2014 2015 2016 2017 Unemployment 14,2 13,2 11,5 9,7 8,1 rate (%)

Unemployment rate (%) 16,0% 14,2% 14,0% 13,2% 12,0% 11,5% 9,7% 10,0% 8,1% 8,0% 6,0% 4,0% 2,0% 0,0% 2013 2014 2015 2016 2017

Year 2013 2014 2015 2016 2017 Average wage 824 858 883 912 954 (€/month)

Average wage (€/month) 1000 954 950 912 900 883 858 850 824

800

750 2013 2014 2015 2016 2017

Major imports Machines, equipment and electronic equipment Automobiles Raw materials Products of chemical industry

Major exports Automobiles Parts and accessories of automobiles, tires Electronic equipment

Main trading partners (for the period January – December 2017): Exports Imports

20,6 % Germany 16,8 % Germany 11,5 % Czech republic 10,5 % Czech Republic 7,6 % Poland 7,4 % China 6,3 % France 5,7 % South Korea 6,0 % Austria 5,4 % Poland 6,0 % Italy 4,9 % Hungary 6,0 % UK 4,7 % Russia 6,0 % Hungary 3,3 % Italy 3,0 % Spain 3,2 % France 2,8 % USA 3,0 % Austria 24,2 % Others 35,1 % Others

Economic growth Economic growth continues in Slovakia in 2017. Household consumption has increased, benefiting from a record-low and still dropping unemployment rate, record- high labour force participation, dynamic growth increase, strong consumer trust and a lower inclination to savings.

Investments have a positive impact on GDP and despite the volatile foreign trade dynamics, the contribution of net exports could have helped the economic growth.

Employment levels Employment grew throughout the year, but the unemployment rate remains high. The 2017 unemployment rate of 8,1 % represents decrease by approx. 1,6 % in comparison with the previous year 2016. On the other hand, Slovakia has at its disposal an inexpensive and highly qualified manpower.

Bratislava declares the lowest unemployment and as a capital city offers a lot of work opportunities with the best remuneration. The highest unemployment is shown in Eastern of Slovakia.

The unemployed persons have a right for an unemployment aid in case they are registered at the Unemployment Office and have paid contributions to the unemployment fund for at least two years in the period of three years before registering as jobseekers.

Living standards The highest living standard is in the capital city Bratislava due to better work opportunities than in other parts of Slovakia.

Cost of living The highest costs of living are in Bratislava. The prices of goods and services are double in comparison with Eastern or Northern parts of Slovakia. On the other side, the remuneration in Bratislava is higher than in other cities in Slovakia.

For example:  A litter of milk costs about 0.8 - 1,2 EUR  125g of butter costs about 1,5 - 1,8 EUR  A loaf of bread costs about 0,9 - 1,5 EUR  A pizza in restaurant costs about 4,5 - 7 EUR  A Big Mac menu costs 5,20 EUR

Regulatory environment

Restrictions on foreign ownership Foreign corporate investments are not restricted. A foreign shareholder can hold a share up to 100% in a Slovak company. Foreign individual persons are allowed to acquire buildings but they are not allowed to acquire agricultural land or forest in the Slovak territory. There is the possibility to buy estates by means of the legal entity. Establishment of an investment to carry out banking, financial services and insurance activities must be authorised by the National Bank of Slovakia the Ministry of Finance. Sales of goods and services can be billed from abroad and paid in foreign currencies. Dividends can be repatriated in foreign currencies.

Government approvals and registration The Anti-monopoly Office of the Slovak Republic with its seat in Bratislava acts as a main body for support and protection of the economic competition. Its main role is to protect and support the economic competition, create appropriate conditions for its further development as well as to prevent the existence of monopoly and dominant position of business entities on the Slovak market. The activities of the Anti-monopoly Office are regulated by the Act on protection of the economic competition. The Anti-monopoly Authorities examines the following aspects:  market development,  market structure and market power of existing competitors,  substitution possibilities,  possibility to enter the market for new entities. The Act on non-measured conditions in business regulations regulates the protection of economic competition and regulates the establishment of business chains with the aim to eliminate the monopolistic, trafficking, unusual business machinations performed by the business chains. The Act on business chains also prohibits the abuse of economical power.

Competition rules/consumer protection The Act on consumer protection regulates:  conditions for performing business activities with the aim to protect the consumers and  duties of the state authorities in the area of customer’s protection. According to the Act on consumer protection the producers are obliged to inform the consumer sufficiently about the quality of the products and it is forbidden to provide the customer with false information about the products. Generally, the Slovak Business Inspection controls the adherence of the Act with the aim to protect the customers.

Import and export controls

Price controls The Act on prices ensures the correct price creation, especially in the area of prices regulated by the government of the Slovak Republic, e.g. electricity, water, gas etc.

Use of land Until 1950 there was a land register essentially similar to the one in Austria and Germany. Between 1950 and 1992 different regulations were in force. It is important to know that real right in land could take effect without registration into the land register during this time. Since 1993 a real estate act is in force, which binds the legal operative effect of material rights to the registration by the registering authority. For the above reasons, the registering authorities cannot trace back a complete chain of information until the beginning of the last century.

To acquire ownership A plot of land and the buildings on it can be treated differently in Slovak law. Therefore one has to make sure that all land and all buildings mentioned on the map (the so- called “Geometrical map”) are indeed listed in the contract. The registration of the property right takes legal effect dated back to the date of the application to the registering authority. The possibility of a reservation does not exist, but a relevant note is made at the date of the application. Only after this relevant note is made, the purchaser is protected against dispositions by the vendor. Purchase of Slovak real estate by non-resident individuals is allowed. Domestic companies with foreign owners may buy real estate nearly without any restrictions; also branches of foreign companies may buy real estate.

Exchange control The exchange control is regulated by the Foreign Exchange Act. All foreign exchange restrictions were cancelled in 2004. It means that for foreign exchange operations and having a bank account abroad is not necessary to obtain a foreign exchange licence. The foreign exchange licence is only required in case of performing a business activities with foreign currency and providing the foreign exchange monetary services (banks, exchange offices etc.). The foreign credits and opening of the bank account for Slovak subject abroad has to be reported to National Bank of Slovakia.

Government incentives Investment incentives (or state aid) are one of the tools which are used to motivate investors to place their projects also in the less developed regions, (the regions with higher unemployment). Second goal is to attract the investments with the high added- value to Slovakia.

The connection with a certain region is one of the fundamental characteristics of the incentives. The conditions that need to be met in order to be eligible for incentives are the same for Slovak and foreign investors.

Four categories of projects can be supported by the investment incentives:  industrial production,  technology centres,

 combined projects of industrial production and technology centres,  business service centres.

Each category has specifically defined conditions which shall be met in order to apply for the investment incentives.

The incentives are provided in the form of:  a cash grant (a subsidy for the acquisition of the long term tangible and intangible assets),  an income tax relief,  a contribution for newly created jobs,  transfer or rent of real estate at a price lower than a general asset value.

The investment aid (in the terms of Slovak republic) is regulated by the Act 57/2018 on Regional Investment Aid, which is fully harmonized with the EU legislation.

Finance

Summary In 2002 the legislation regarding the activities performed on the capital market has changed radically. After applying these changes the evaluation of the Slovak capital market has improved significantly and Slovakia became more attractive for foreign investors.

Banking system The banking system in Slovakia consists of two levels: 1. National Bank of Slovakia (“NBS”) or European Central Bank, respectively 2. Business and commercial banks. The activities of the National Bank of Slovakia are regulated by the Act on National Bank of Slovakia. Its main task is to ensure the price stability. The National Bank of Slovakia is a central bank and its main responsibilities are to:  regulate the monetary policy and to ensure the currency stability in order to sustain the measured level of the inflation,  regulate the monetary circulation in the country,  coordinate the activities of commercial banks,  run the income and expense accounts of the state budget,  represent the country and prepare the drafts of the acts.

The commercial banks are governed by the Act on banks. A bank is a legal entity with its seat in the Slovak Republic, established as a joint-stock company or state monetary body. It receives bank deposits from individuals and legal entities and provides credits or other services. To establish a bank in Slovakia it is necessary to obtain an approval from the National Bank of Slovakia Foreign banks need the license to perform their activities in Slovakia. Banks with a licence issued by other EU – member states do not need any Slovak licence to perform activities in the Slovak Republic; they only have a notification duty.

Capital markets The Slovak capital market is divided into:  stock market and  bond market

The entities performing the activities on the capital market are:  trader with securities,  branch of the foreign trader with securities,  agent for the investment services,  stock exchange,  central depositary of securities,  management company,  unit trust.

The Bratislava Stock Exchange is the only stock exchange on the Slovak capital market.

The Slovak capital market is regulated by the following Acts:  Act on securities and investment services,  Act on stock exchange,  Act on collective investment,  Act on bonds.

The Financial Market Authority supervises the activities on the financial market as follows:  monitors the adherence of the respective legislation,  issues the permissions and licenses and controls their adherence,  keeps lists of entities to whom the licenses were provided.

Other sources of finance International Project Financing The term project financing refers to a direct financing arrangement for a legally independent business entity created to carry out a specific project (Special Purpose Company – SPC). The capital requirement for the project is met by sponsors (initiators, providers of equity), providers of outside capital (commercial banks, multinational organisations such as the IFC, EBRD, etc.) and guarantors. Further project financing participants are project contractors and project operators.

In deciding whether a project will be realized, the key criterion is the project’s financial viability (cash-flow orientation). Apart from this, spreading the project risks among the project participants is of particular importance in project financing. Another important aspect is to achieve an optimised structuring depending on the financial performance of the individual project participants. As far as risk sharing is concerned, every participant should bear the risks which lie within its scope of responsibility (e.g. the project contractor should be responsible for risks related to the timely completion of the project).

A project finance deal is characterised by a variety of risks – commercial risks, political risks and technical risks. Consequently, a detailed project analysis and evaluation (feasibility study) must be carried out before the execution and financing of a project.

This feasibility study should cover the following: project description, financing need, the structure of the financing arrangement, market study, competitor analysis, cost calculation, investment calculation, projected balance sheets, break-even analysis, general contractor and subcontractors, project participants and credit position reports, collateral and a final risk and project assessment.

Overview of Assistance Programmes and Financing Products

World Bank Group The World Bank Group consists of the IBRD (International Bank for Reconstruction and Development), the IDA (International Development Association), the IFC (International Finance Corporation), the MIGA (Multilateral Investment Guarantee Agency) and the ICSID (International Centre for Settlement of Investment Disputes). Whereas the IBRD extend loans at the usual market rates to creditworthy states and refinances them by issuing bonds on the capital market, the IDA makes available loans to countries with low credit ratings. Such loans (interest-free, small processing fee, extremely long-term, 10-year redemption-free period) cannot be refinanced on the capital market but are funded by contributions from 30 member states. Unlike the IBRD and the IDA, the IFC does not lend to countries but directly to private companies (lender to the private sector). It can refinance these loans on the capital market at favourable rates thanks to its AAA rating. Apart from lending, the IFC can also take equity interests and provide know-how if required. Since the IFC lends only a specific percentage of the project costs, international commercial banks – in addition to providers of equity capital – are integrated in the project financing as well (providers of B-loans). The MIGA issues guarantees against political risks to protect investors (providers of equity capital, shareholder loans or outside capital). Projects insured by MIGA guarantees must be economically viable, correspond to the development plans of the host country and comply with environmental standards.

European Bank for Reconstruction and Development (EBRD) The EBRD was established in 1991. Its purpose is to promote the transition to an open market economy and to encourage private and entrepreneurial activities in those countries of Central and Eastern Europe and the Commonwealth of Independent States which are committed to and guided by the principles of multi-party democracy, pluralism and market economy. The main types of EBRD financing for private sector enterprises are loans, investments (shares) and guarantees.

European Investment Bank (EIB) The EIB is the financing institution of the European Union. It finances projects which are consistent with European objectives (promotion of small and medium-sized enterprises, environmental protection, improvement of transportation and telecom infrastructure, etc.) and involve a volume of over EUR 25 million at usual market rates in the form of individual loan arrangements. EIB financing covers a maximum of 50 % of the project costs; the difference must be raised through equity capital market thanks to its AAA rating. Smaller projects can be financed through “global loans” granted to banks. Under this arrangement, the EIB extend loans to banks subject to the condition that these banks grant smaller loans to project applicants.

Financing from EU funds Upon the EU accession the Slovak Republic has access to funds from the EU budgets. The European Union has implemented special programs and instruments to support regional development in the new member countries. The structural funds are one of them. The support is focused on environment protection, infrastructure improvement, lowering of unemployment, industry restructuring and development of human resources.

The following four structural funds represent the main fiscal instruments of the European Union:  European Regional Development Fund (ERDF)  European Social Fund (ESF)  European Agricultural Guidance and Guarantee Fund (EAGGF)  Financial Instrument for Fisheries Guidance (FIFG)

Slovak National Support of Small and Medium – size Business The support of small and medium size businesses in the Slovak Republic is governed by the Act No. 290/2016 on the state support. There was also the National Agency for Development of Small and Medium Enterprises established, which was renamed on Slovak business agency in March 2014. Slovak Business Agency is crucial, and is the oldest specialized non-profit organization for the support of small and medium-sized enterprises (SMEs). Slovak Business Agency was founded in 1993 by a common initiative of the EU and the Government of the Slovak Republic. It is the unique platform of public and private sectors. Slovak Business Agency wants to be the first choice for Slovak enterprises for starting and development of their business. SMEs are the backbone of the Slovak economy: Represent more than 99,9 % of Slovak business entities. They are net job creators and employ almost 75% of the active labour power. They share in more than 50% of GDP and create added value.

The founding members include:  Ministry of Economy of the Slovak Republic,  Entrepreneurs Association of Slovakia,  Slovak Association of Crafts.

Mission  Support for SMEs at the national, regional and local level.  Complex support of SMEs in compliance with the Small Business Act’s (SBA) principles.  To improve the competitiveness of SMEs within the single EU market as well as in the non- EU markets.

Objectives  To increase the survival rate of enterprises  To increase the employment rate in private sector  To increase the innovation performance of Slovak enterprises  To stimulate entrepreneurship spirit  To avoid marginalization of enterprises  To increase the competitiveness of Slovak business environment and Slovak enterprises.

More information can be obtained from the Slovak Business Agency:

Slovak Business Agency (SBA) Karadžičova 2 811 09 BRATISLAVA 2 Slovak republic Tel.: + 421 2 203 63 100 e-mail: [email protected]

Imports

Summary To the Slovak Republic were imported goods in the amount of 71.706,0 million EUR in 2017 on-year rise of 8,0 %.

From the most significant trade partners, import from Germany increased by 6,7 %, the Czech republic by 4,9 %, South Korea by 3,0 %, Poland by 8,8 %, Hungary by 9,8 %, Russia by 24,7 %, Italy by 7,6 %, France by 11,0 % and Austria 8,9 %. Imports from China decreased by 5,5 %.

Import restrictions The Slovak Republic has been granted full membership in WTO (since 01.01.1995). Accordingly, there are no quota limits for imports from other WTO member countries (164 WTO members). Import licenses are required for certain commodities, such as oil, natural gas, sporting guns, ammunition, and pyrotechnical products.

Customs duties The Slovak Republic has adopted the Brussels Tariff nomenclature. General and conventional rates of duty are issued in the Customs List, published in the Collection of Laws. The Customs List valid in 2001 was issued in Government Decree No. 598/2001 Coll. The classification of goods in the Slovak Republic is in accordance with the Combined Nomenclature of the European Union. Moreover, the Slovak Republic uses the same system of goods classification in tax laws and licence regulations. After the accession of the Slovak Republic to the European Union, a new Customs Act was adopted, which is fully harmonised with the EU Customs Code. The Slovak Republic is a party to a number of agreements on free trade zones. Bilateral preferences are being granted under the Agreement between the EFTA states (Liechtenstein, Iceland, Norway and Switzerland) and the Slovak Republic 1. Central European Free Trade Agreement (CEFTA) concluded between the Slovak Republic, Czech Republic, Hungary, Poland, Slovenia, Romania and Bulgaria, 2. Free Trade Agreements between the Slovak Republic and Latvia, Lithuania, Estonia, Israel, and Turkey.

Unilateral autonomous customs preferences are granted to imports from the developing countries under the Generalised System of Preferences (GSP).

For imports of goods from non - EU countries, the customs office must receive transport documents, an accessory certificate on origin of goods EUR1 or another certificate pursuant to which the importer may apply for award of customs preferences, invoice containing designation of seller, buyer, name of goods, number and type of freight pieces and their designation, delivery condition (under INCOTERMS 2000), unit price, total invoiced amount, and number and date of invoice issuance. It is appropriate to mention intellectual property rights.

Value-added tax

1. EU member states Integration of the Slovak Republic into the EU caused the deregulation of borders and the former concept of export and import of goods and services was replaced by delivery of goods and supply of services within the EU; the terms export and import are still used in connection with third party states (non-EU).

Delivery of goods Provided both the supplier of goods and the customer are registered for VAT in their home countries, the VAT liability is on the customer’s side - the supplier of goods issues invoices without VAT and the customer enforces VAT in his home country with the right to deduct the enforced VAT (“reverse charge”).

Reporting in relation with deliveries of goods Former border controls were replaced by a system of reporting the movements of goods among EU countries. This system consists of three reports: - “EC Sales List”, which purpose is to match the reported amount of delivered goods between EU members according to the tax identification numbers of suppliers and customers, -“Intrastat report”, which monitors the physical movement of goods according to the customs tariff group and places (countries) of delivery. -“VAT Transaction Statement” represents detailed records on output transactions for which the enterprise is obliged to pay VAT, as well as transactions in respect of which the enterprise is entitled to deduction of VAT.

Supply of services According to the basic rule, the reverse-charge system is applicable, i.e. the VAT has to be paid by the recipient of services.

There is an exception for some special services (e.g. services related to real estate, rental of vehicles,...) non-established businesses in Slovakia and services provided to other than the taxable person, where VAT has to be paid by the supplier of services.

Possibility of VAT refund in SR EU residents may ask for VAT refund in the Slovak republic under the condition, that they have no seat or establishment in the SR and do not perform business activities in Slovakia or do perform activities which, however, do not entitle them to deduct VAT via submission of VAT returns.

2. Non-EU member states The importers from non – EU countries are liable to pay the VAT on imported goods including goods cleared for free circulation, re-imported goods that were cleared for free circulation abroad and re-exported goods that were cleared for temporary circulation in the Slovak Republic. Import VAT is charged on a value that includes customs duty and any import surcharge. For goods imported for temporary use in the Slovak Republic has to be paid the full amount of VAT. Imported goods are exempt from VAT, provided that the supply of such goods on the territory of Slovakia would be exempt from VAT.

Imported goods are also exempt from VAT provided that the delivery of such goods in inland is subject of exemption from customs duty. For example:  goods for scientific research, educational, investigation, and therapeutic services,  defence equipment,  advertisement objects,  where exemption from customs duty is provided in a system of preferential tariffs or from an international agreement on a customs union or free-trade area,  importation of goods from a third country and the dispatch of transport of which ends in another member state. The condition is the VAT registration of the importer in the Slovak republic. In case of the foreign person doing the importation of goods to the Slovak republic, this person can be represented by “tax representative”.

Excise tax Excise tax is charged on the import of the following goods into Slovakia from outside:  beer,  wine,  mineral oil,  spirits,  tobacco products,  electricity, coal and natural gas.

The rate of excise tax depends on the specific type of product.

Business entities

Summary Commercial environment is regulated by the Slovak Commercial Code.

In actual practice, the most common form of business organisation in the Slovak Republic is the limited liability company. Less frequent forms are the general partnership, the limited partnership, the joint stock company and the co-operative.

Structure of business organisations The Slovak Commercial Code recognises five basic forms of legal entities, all of which must be registered in the Commercial Register:

 Joint-stock companies  Limited liability companies  General commercial partnerships  Limited partnerships  Co-operatives

In addition, foreign companies may establish a branch, European company (societas europaea) or European cooperatives (societas cooperativa europaea) in the Slovak Republic. Sole proprietors are not governed by the Commercial Code, unless they voluntarily register in the Commercial Register.

Sole proprietorships Establishing a sole proprietorship Sole proprietorships is type of business owned by an individual person. Generally it is small type of business (for example hairdresser, carpenter etc.)

For comparison the registration process of Sole proprietorship takes less time as registration of Limited Liability Company. As one of advantages is the Sole proprietorship may use single entry rather than double-entry book-keeping. Further Sole proprietorship may apply tax allowance on taxpayer in comparison with Limited Liability Company.

Foreign company branches Establishing a foreign company branch

Branch of a foreign business (organizačná zložka zahraničnej osoby) Foreign persons may engage in a business in the Slovak republic under the same conditions and to the same extent as Slovak persons, unless the law stipulates otherwise. Under Slovak law, the legal capacity of the legal entity is determined by the law under which such person was established. Branches, i.e. “organisational component”, of foreign businesses can conduct business activities in the Slovak Republic provided that they are registered in the

Commercial Register. The provision of registration in the Commercial Register shall not apply to individuals who have a permanent address in Slovakia. The branch must register details of the foreign business, its location in the Slovak Republic, the scope of its business activities and the local residence of its head (general manager). The branch must obtain a trade authorisation from the regional Trade Office. The branch is subject to corporate income tax on its Slovakia source income.

Partnerships General partnerships

General commercial partnership or unlimited partnership (verejná obchodná spoločnosť) An unlimited partnership is an entity formed by two or more persons under a common commercial name and bear joint and several liabilities for the obligations with all their property. A partner can only be a natural person who meets the general requirements for undertaking a trade. If a partner is a legal entity, the rights and duties connected with the participation shall be exercised by such entity’s statutory organ. The commercial name must include the designation “verejná obchodná spoločnosť”, “ver. obch. spol“. or :“v.o.s.“, unless it includes the surname of at least one of its partners, in which case a :“a spol.“ is sufficient. The partners are entitled to act on behalf of the partnership and are jointly and severally liable for the partnership obligations. Income is not subject to corporate income tax; it is taxed in the hands of the partners.

Limited partnership (komaditná spoločnosť) A company similar to a general commercial partnership in which one or more partners are liable for the partnership’s obligations up to the amount of the unpaid parts of their contributions , i.e. limited partners” (komanditisti) and one or more partners are liable with their entire property, i.e. “general partners” (komplementári). A general partner can be a person who complies with the general requirements for carrying a trade. A general partner can be also a legal entity. Only unlimited partners are entitled to manage the partnership. The name must include the designation “komanditná spoločnosť”, “kom.spol.“ or “k.s.“ in its name. If the business name includes the name of a limited partner, he shall have unlimited liability for the partnership’s obligations. A list of partners, identification of limited and unlimited partners, and the amount of investment contribution of each limited partner must be registered in the Commercial Register. Income attributable to the limited partners is subject to corporate income tax; income attributable to the general partners is taxed in the hands of those partners.

Limited liability companies (spoločnosť s ručením obmedzeným) Combines aspects of a joint-stock company and a partnership; is less regulated than a joint-stock company. Registered capital is made up of its member’s investment contributions. The company is liable for breaches of its obligations with its entire property. Its members are jointly and severally liable (as sureties) for their company’s obligations up to the unpaid portions of their investment contributions.

Company may be formed by one person. A company may have a maximum of 50 members. The name must include “spoločnosť s ručením obmedzeným”, “spol. s r.o.” or “s.r.o.” List of members, amount of each member’s investment contribution, and the names of the supervisory board members must be registered in the Commercial Register. The company must have a registered capital of at least EUR 5.000. Each member must contribute at least EUR 750. Starting from 1 January 2016 there is no need to physically deposit the funds into a bank account. Just a written statement of one of the partners is sufficient. The registered capital is not divided into shares, but the amount to be invested by each member is set out in the Articles of Association. A business share (“holding” or “ownership interest”) represents the member’s participation in the company and its size is determined by the ratio of a particular member’s investment contribution to the company’s registered capital. A member may transfer his business share to another party if allowed by the Articles of Association. A business share may be pledged. A contract of lien must have written form. The company is obliged to create the reserve fund. If the company doesn’t create the reserve fund at the time of formation, it is obliged to create the reserve fund from the net profit in the amount of minimum 5 % of the net profit, but not more than 10% of the registered capital. The reserve fund is annually to allocate from the profit in amount up to 10% of the registered capital.

The General meeting appoints executives to form the statutory body of the company. A Supervisory Board is only necessary if required by the Articles of Association. A statutory representative of the company may be only an individual person who has attained the age of 18, is fully legally competent, is of unimpeachable character and if there is no impediment to his carrying on a trade. There is prohibition of competitive conduct. There is no need to appoint an auditor if there are not unless two from following condition fulfil: turnover exceeds EUR 2.000.000 total assets exceed EUR 1.000.000 and average number of employees exceeds 30. Income is object to corporate income tax.

A company cannot give loans or any similar instruments to purchase its own participating shares. Non-monetary assets contributed to a limited liability company must be valued and such a valuation will be binding for the company. Only officially appointed appraisers can serve as expert appraisers for this purpose. Company members have a priority right to participate in the increase of registered capital.

The company can be wound up with the transfer of business assets to a legal successor by: 1) merger: a) merger by acquisition of another company (i.e. a takeover) b) merger by the formation of a new company 2) winding up a limited liability company with transfer of its business assets to a sole member

3) division of a limited liability company a) division by the formation of new legal entities b) division by acquisition 4) conversion of legal form

Partnerships limited by shares

Joint-stock company (akciová spoločnosť) A joint stock company is company whose registered capital is divided into a certain number of shares with a specific nominal value. The company is liable for a breach of its obligations with its entire property. A shareholder is not liable for the company’s obligations. The commercial name must include the designation “akciová spoločnosť” or the abbreviation “akc. spol.” or “a.s.” A share may be made out as a registered share or as a bearer share and shares may be issued either as “certified shares” (i.e. shares in a physical form) or “uncertified shares” (i.e. book-entry shares). The statutes may restrict but not exclude the transferability of registered shares. The transferability of a bearer share is unrestricted. A share may be owned by more than one person. According to the statutes the employees may acquire shares of the company on better conditions. Preference shares may be issued, but their nominal value cannot exceed 50% of the nominal value of the capital stock. The number and class of shares, their nominal value and the list of names of the supervisory board members must be registered in the Commercial Register.

A joint stock company may be founded by a single person if such person is a legal entity, otherwise by two or more persons. The registered capital of company must be at least EUR 25,000. The value of the registered capital must be subscribed and at least 30% of the monetary contribution paid upon incorporation. A joint stock company may issue debentures, which carry the extent of rights of exchange for the stocks or pre-emptive rights provided that there is a conditional increase in capital stock. A company is allowed to purchase its own shares only under special conditions and is permitted to hold them for only a limited period of time.

The Company creates at the time of formation the reserve fund in amount of minimum 10 % of the registered capital. This fund must be allocated every year in amount stated in statutes, but at minimum of 10 % of the net profit stated in annual financial statements, until it reaches the amount stated in statutes, but at least 20 % of the capital stock. Annual financial statements must be published and audited by a registered auditor under certain conditions. A company must establish a Supervisory Board and a Board of directors. Each must have at least three members, appointed for terms not exceeding five years. A member of the Supervisory Board may not concurrently be a member of the Board of directors, a procurator of the company, or a person acting in the name of the company.

If the company has more than 50 full-time employees, the employees have the right to elect one-third of the members of the Supervisory Board; two-thirds are elected by the General Meeting. Directors are appointed by the General Meeting or, if permitted by the Articles, the Supervisory Board. A member of the Board of directors or a member of the Supervisory board may be only an individual who has attained the age of 18, has full legal competence, is of unimpeachable character and if there is no impediment to his carrying on a trade. Non-cash contributions for share capital must be valued by an independent expert and such valuation will be binding for the company. Only officially appointed appraisers can serve as expert appraisers for this purpose.

The right to receive a dividend, the pre-emptive right to a share subscription, convertible bonds and bonds with warrants attached and the right to be paid a liquidation share may be transferred separately from the share to which the rights are attached. Separately transferable right is assigned by a contract on transfer of receivable. Without creating a special fund from retained earnings, a company cannot pay out dividends prior to the full amortisation of capitalised start-up costs. A share’s issue price may not be lower than its nominal value.

Increasing of registered capital is possible by subscription for new shares, conditional increase of registered capital, increasing registered capital from equity, integrated increase or by integrated increase by decision of the board of directors.

Methods of company conversion: 1) by merger a) merger by acquisition of another company (i.e. a takeover) b) merger by the formation of a new company 2) winding up a joint stock company and transfer of its business assets to a sole shareholder 3) division of a joint stock company a) division by the formation of new legal entities b) division by acquisition 4) conversion of legal form

Other entities

Co-operatives (družstvo) Formed by at least five members (unless two of the members are legal entities) to undertake business activities or for the economic or social benefit of its members. A co-operative must have no fewer than five members. Must include the designation “družstvo“ in its commercial name. The amount of recorded registered capital and the total amount of the members’ basic investments must be included in the Commercial Register. The recorded registered capital must amount to no less than EUR 1.250. A co-operative is a legal entity and is liable for any breach of its obligations with entire property. Members are not liable for the debts and obligations of the co-operative.

Indivisible fund of at least 10% of the registered capital must be created at the time of incorporation. At least 10% profit after tax must be transferred to the indivisible fund annually, until it reaches at least 50% of the registered capital. A co-operative has the following bodies:

a) the members’ meeting (i.e. the general meeting), b) a managing board, c) an auditing commission, d) other bodies established under the statutes.

All statutory representatives of the company must be Slovak, EU or OECD citizens or have a visa. Income is subject to corporate income tax.

Labour

Summary Slovak legal entities and branches can employ Slovak nationals without restriction. Foreign entities can employ Slovak nationals on an employment contract concluded under the law of any country if they follow the conditions of the Slovak labour law. Foreign employees, non EU citizens require work permits (issued by a local labour office) and in some cases visas (issued by the Foreign Police Department or by a Slovak Embassy abroad). After the Slovak Republic joined the EU the foreign employees EU citizens do not need work permit neither the visas to stay or work in Slovakia.

Wages Average nominal wage in 2017 was EUR 954. In comparison with the year 2016 it has increased by 42 EUR.

The minimum hourly wage from 1 January 2019 for an employee is in amount of EUR 2,989 for each working hour and the minimum monthly wage is in amount of EUR 520.

Social security There are two major social security schemes to which both the employee and the employer contribute: social insurance and health insurance. Participation in the insurance plans is mandatory for all employees of Slovak legal entities, or registered branches of foreign entities, if the employment contracts are concluded under the Slovak law. With effect from 1 January 2004 a new Act on Social Insurance entered into force that radically changes social security system, including the pension system. There is a new definition of social security system including besides system of the sick leave insurance, retirement insurance, disability insurance and injury insurance also system of unemployment insurance (i.e. the insurance in the case of unemployment) and guaranty insurance ( i.e. the insurance in case of employer insolvency).

Social security Employee contributions Max. monthly assessment base for calculating the contribution in EUR Old-age insurance of 4 % 6,678 Sickeness insurance of 1,4 % 6,678 Disability insurance of 3 % 6,678 Health insurance of 4 % 6,678 Unemployment insurance of 1 % 6,678

Social Security Employer contributions Max. monthly assessment base for calculating the contributions in EUR old-age insurance of 14 % 6,678 sickeness insurance of 1,4 % 6,678 disability insurance of 3 % 6,678 health insurance of 10 % 6,678 unemployment insurance of 1 % 6,678 accidental insurance of 0,8 % Uncapped gross income reserve fund of 4,75 % 6,678 guarantee fund of 0,25 % 6,678

Pensions The social security system consists of three independent principles, in particular:  the pay-as-you-go principle (mandatory) is operated by the state Social Insurance Company responsible for providing individuals, who fulfil the conditions set out by the Act, with pensions that guarantee the minimum standard of social security;  the capitalisation principle (mandatory and fully-funded) is operated by new asset management companies entitled to accumulate additional capital from individuals during their working years, to collect and deposit the funds in so called “ individual retirement accounts” and to pay additional pensions to individuals who fulfil the condition set out by the Act regarding pension retirement savings, disability savings and savings from inheritances; and  the voluntary private principle is operated by the existing supplementary insurance companies, banks and asset management companies. It provides individuals with non-limited benefits, depending however, on the volume of savings accumulated by an individual during the working years and the return of the investment.

From 1 January 2019, the method of determining the retirement age has been changed. The retirement age is set in years and calendar months and is known for five years ahead.

Fringe benefits

Holiday pay An employee is entitled to accrue vacation if the employment contract lasts for at least 60 continuous days during the calendar year. Where the contract lasts for less than one year, 1/12 of the annual vacation is accrued for each calendar month of continuous employment with the same employer. The minimum vacation period is four weeks per year, after achieving of an age of thirty-three years it is five weeks. Many employers increase the vacation by additional two/ three days. Wages paid during vacation leave are calculated at the employee’s average monthly remuneration.

Sick pay Employers are obliged to pay sick leave benefits to employees for the first 3 days of the employee’s sickness in amount of 25 percent of the employee’s gross salary and for the other seven days 55 percent of the gross salary. The Social Insurance Company will pay sick leave benefits as of the 11th day of sickness up to the end of the 52nd week of the employee’s sickness under cap limits.

Others The employee is guaranteed time-off in the following circumstances:

 during health treatments,  childbirth,  death of a family member,  marriage - self, children, parents,  home relocations,  job-search prior to completion of employment contract.

Employment protection legislation Employment protection is regulated by the Slovak Labour Law. The employers can enter into the following kinds of employment contracts depending of their requirements:

 regular employment contract,  agreement on performance of work concluded for less than 350 hours per year,  agreement on brigade work of students concluded for maximum up to 20 hours a week on average,  agreement on work activity concluded for less than 10 hours per week.

Unions With the aim to provide good working conditions, the employer is obliged to enable the employees to participate on decision of employers directly or through the relevant unions, employee’s board or employee’s fiduciary. These free associations stand for interests of all employees and their activities are regulated by the Slovak Labour Law.

Personnel limitations - foreigners/nationals All employers are required to conclude an employment contract with their employees. The employment contract must be documented in writing. The contract includes the following obligatory provisions:  type of work to be carried out,  place of employment,  commencement date,  payroll conditions.

Furthermore, it is employer’s responsibility to acquaint the employee with his rights and obligations under the agreement as well as the terms of remuneration, working hours, holiday and the notice period. Slovak labour legislation includes the following provisions:  Employees can have a trial period of three months,  The maximum working week is 40,0 hours,  Generally, employees are not allowed to work more than 40,0 hours per week. Certain strategic industries such as agriculture, transport, communications and power are exempt from this restriction,  Minimum annual paid holiday is four weeks,  Termination of employment - two or three months' notice is required from employers and two months' notice from employees. An employment can be terminated without notice if both the employer and employee agree,  Employer can cancel an employment contract immediately if: - an employee was sentenced for an intentional criminal act, - an employee continually disrupts the normal working discipline.

The employer can cancel an employment contract only from the reasons stated in the Slovak Labour Law. A special responsibility agreement must be documented in writing if the employee is responsible for cash, securities, goods, or inventories, or a deficit in any of these items.

Work permit Slovak employment law stipulates that foreign employees from non - EU countries may only be employed if they have been granted residence permit and hold a work permit (issued by the local labour office). The work permit is generally issued for a limited period, at the longest, however, for one year. Extensions are possible. Certain employees (e.g. family members of diplomatic representatives, refugees, etc.) require no permit. With effect from 1 May 2004 EU residents can be employed or act as company representatives in the Slovak Republic without any restrictions. The duration of the work permit depends on the duration of the residence permit.

Residence permit EU citizens After the Slovak Republic joined the EU, the EU citizens do not need work permit neither visas to stay or work in Slovakia. EU citizens who intend to reside permanently in Slovakia must register for permanent residence.

Non-EU citizens There are three types of residence permits under the law governing stays by aliens for purposes of employment in Slovakia:  Short-term temporary residence permit seasonal works for a maximum of 180 days,  Long-term temporary (e.g. intercompany transfer of employees for a maximum of three years and others for a maximum of five years) ,Permanent residence permit (for a maximum of five years or unlimited period) r.

The Slovak embassies abroad or the Slovak Foreign Police are responsible for granting residence permits. The temporary residence permit can be issued as a stamp in a passport with the validity for a maximum of five years. Short-term permits are decided within 30 days; long-term and permanent permits, within 60 days. The law provides a number of reasons for rejection (e.g. previous convictions). Short-term and long-term residence permits can be repeatedly extended by 180 days or one year. A violation of residence permit regulations results in a fine. If a long-term or permanent residence permit expires and a request is made to leave the country, an exit visa form is required. If the holder of a long-term or permanent residence permit is out of the country for more than 180 days without notifying of this absence in advance, the permit becomes null and void.

Financial reporting and audit

Summary Following the dramatic political changes in late 1989, one of the primary goals of the new legislation was to replace the socialist legislation with modern commercial law, including a new Accounting Act. In its approach to accounting, the legislature also incorporated the provisions of the EC Fourth Directive (on annual accounts), the EC Seventh Directive (on consolidated accounts) and the EC Eighth Directive into national law.

Domestic corporations

Filing/publication requirements The legal framework for accounting consists of a three-level hierarchy of legal norms. The highest level legal norm is the Commercial Code. It contains only fundamental principles and refers to the Accounting Act with regard to formal aspects and scope. The Accounting Act sets down provisions based on the general rules and regulations of the Commercial Code, and contain provisions on accounting systems, on preparing annual financial statements along with valuation provisions, penal provisions, etc. The third hierarchical level consists of the ordinances issued by the Slovak Ministry of Finance on the basis of the Accounting Act. These ordinances vary according to the type of legal person involved. For example, separate ordinances have been issued for local governments, non-profit organisations, political parties, etc.

Accounting standards With effect from 1 January 2003 a new accounting law entered into force (except the regulations regarding the change of accounting period that became effective as of 1 January 2004). The aim of the new law is to achieve the total comparability of the content of this legal form with the provisions of the EC Directives. The law also enables the use of the IFRS. The basis for the new accounting law was the analysis of the differences of the national legal regulations and the EC Directives and the International Accounting Standards (IAS/IFRS).

Audit requirements The following companies must verify their financial statements by an independent auditor:

1. companies with obligatory share capital and cooperatives, that meet at least two of the following three conditions: - total value of assets exceeded EUR 1.000.000 - net turnover exceeded EUR 2.000.000

- the average calculated number of employees exceeded 30 in a single accounting period 2. trading companies and a cooperatives whose securities are admitted to trading on a regulated market 3. companies that have a duty to do so under specific regulations.

The books must be verified by an auditor until the end of the following financial year. The consolidated financial statements must always be audited. According to the accounting law, a parent accounting entity has no obligation to prepare consolidated financial statements unless any two of the following conditions have not been met: a) based on individual financial statements:  total net amount of assets of the consolidated entity exceeded EUR 24,000,000  net turnover of the consolidated entity exceeded EUR 48,000,000  average calculated number of employees of the consolidated entity exceeded 250 during the accounting period b) for the consolidated group:  total net amount of assets of the consolidated entity exceeded EUR 20,000,000  net turnover of the consolidated entity exceeded EUR 40,000,000  average calculated number of employees of the consolidated entity exceeded 250 during the accounting period The amount of penalties changes in the findings mentioned in the final provisions of the law. The amount of penalty for some findings depends on the total amount of assets and varies between 1- 2%.

Bookkeeping With effect from 1 January 2004 the accounting units have the possibility to change the accounting period. Introduction of the new term – „financial year“, that is not equal with the calendar year. The financial year includes 12 calendar months. The accounting unit must announce the change of the accounting period to the tax authorities in advance, before starting the change. New accounting law offers wider duties of the accounting units. For example, if the accounting unit creates adjustments and provisions to the property and payables, which are in a foreign currency, the unit has the duty to account these adjustments and provisions in Slovak and also in foreign currency. The accounting unit cannot change the accounting methods and principles during the accounting period - for example evaluation or depreciation. Accounting unit can change used methods and principles only in the following accounting period and only then, if the used methods and principles enabled not to show the real values or because of the change of the subject of business.

The annual financial statements The annual financial statements consist of the following documents pursuant to Section 18 of the Accounting Act:  the balance sheet (form)  the profit and loss statement (form)  the notes to the financial statements (form)  annual report

An accounting entity which is required to have audited financial statements, shall be required to issue an annual report. The compliance of financial statements and annual report prepared for the same accounting period must be audited.

As of 2014 the obligation of the companies (accounting entities) to submit the individual financial statements to the collection of deeds of the Commercial Register was ceased. Accounting entities are required to present individual financial statements to the respective tax authority within the deadline for filing corporate income tax return.

The financial authorities will be obliged to publish the data from the financial statements in the central register of the financial statements (www.registeruz.sk).

Branches of foreign companies Filing/publication requirements The Slovakian branch of foreign company has the same obligation like a local company. Branch of foreign company must present every year following documents:

 the balance sheet ,  the profit and loss statement ,  the notes to the financial statements, Accounting standards The accounting standards are the same as for local companies.

Audit requirements The Slovakian branch of foreign company, partnership and limited partnership is not subject to audit according to the Slovak Accounting Standards (since they have no obligatory share capital).

Tax Summary Taxation of companies and individuals is covered by Income Tax Act. The Income Tax Act effective in January 2004 has been amended several times and brought many changes in income tax. Recent significant changes were adopting transfer pricing documentation which is obligeatory for taxpayers, and applying of thin capitalization rules on interests to loans provided between related parties.

Companies Corporate income tax is levied on the world-wide income of Slovak legal entities and on the Slovak-source income of foreign entities operating in the Slovak Republic via a registered branch or permanent establishment (PE).

Tax rates Standard tax rate for the companies is 21%.

Depreciation Tax depreciation is generally available for expenditure incurred on tangible and intangible fixed assets. Tangible assets are classified into six tax depreciation groups. In the first year of depreciation assets shall be classified into one of six depreciation groups as follows:

Depreciation Yearly Examples of assets category depreciation

1 Office machines, computers, cars 4

2 Machinery, furniture, sport equipment 6

3 Motors, generators, turbines, furnaces 8 Wooden, metal and plastic buildings, all small 4 12 buildings, boats Buildings - production halls and manufacturing 5 20 facilities Buildings – houses, hotels, administration 6 40 buildings, buildings for culture, education, health

The law defines two methods of depreciation, straight-line depreciation and accelerated depreciation. The accelerated method can be used only in case of assets classified in the depreciation group 2 and 3. Once the method has been chosen for a given asset it may not be changed.

The new Income Tax Act changes the depreciation rates in respect of the straight-line depreciation and accelerated depreciation of assets. In case of accelerated depreciation must be applied the coefficient for individual depreciation group. In the first year of depreciation tangible assets by straight-line depreciation and by accelerated depreciation there is applied only a proportional part of annual depreciation. Finally, the tax depreciation is the same as accounting depreciation.

Intangible assets are amortised according to the accounting legislation also for tax purposes. According to the Slovak accounting legislation the amortisation of intangible assets should show a realistic rate of depreciation.

Land, works of art or intangible assets contributed by a shareholder for no consideration are not depreciable.

Tax base (differences between book and taxable profits) Determination of taxable profit Corporate income tax is generally based on profit and loss statement as reported in the financial statements and adjusted for certain non-deductible items including the following:

 Representation costs;  Gifts and donation;  Expenses related to non-taxable income;  Expenses related to the personal needs of the taxpayer;  Travel allowances in excess of statutory limits;  Reserves, unless specifically deductible under Slovak tax rules;  Bad debts;  Tax paid on behalf of other taxpayers;  Contractual/Non-contractual penalties and fines;  Losses on receivables sold at less than book value (after bad debt provisions).

Expenses tested on payment The condition requiring the actual payment of many types of costs in order to enable their tax deductibility was extended from 1 January 2015 (for example rental fees of tangible and intangible assets; accounting, tax and legal advisory and etc.).

Promotional items Costs incurred on promotional items above a threshold of EUR 17 per item can be tax deductible with exception of:

 Gift orders,  Tobacco products, except for the taxpayer with the production of tobacco products representing the core business thereof,  Alcoholic drinks, except for the alcoholic drinks under special legislation in an aggregate amount of no more than 5% of the tax base; this does not apply to a taxpayer with the production of alcoholic drinks representing the core business thereof.

Groups

Thin capitalization rules New thin capitalization rules became effective from 1 January 2015. The taxpayers are not permitted to deduct from tax interest expenses paid to related parties, exceeding 25% of an indicator calculated as a profit before taxation plus interest expenses and depreciation (EBITDA), i. e. they will have to increase the tax base by this amount. The thin capitalization rules apply to taxation periods starting on or after 1 January 2015, including interest arising on or after that date on existing loans.

Transfer pricing rules Transfer pricing rules generally follow OECD guidelines. Since 1 January 2009, companies have been obliged to keep the documentation regarding the transactions between foreign related parties according to Income Tax Act. From 1 January 2015, they are extended to apply to transactions between domestic related parties as well as those between a Slovak resident and non-resident related party. Taxpayers must prepare contemporaneous transfer pricing documentation to substantiate the methodology used in determining transfer prices in related party transactions.

Filing of tax returns Deadline for filing of Corporate Income Tax return is till 31 March of the tax period after the period in which the income is earned. Based on announcement submitted to the relevant tax authority a Corporate Income Tax return as well as tax payment deadline can be extended by three months or six months if individual receives income sourced from abroad.

Use of losses The use of tax losses is limited to 25% per year in 4 subsequent tax periods.

Dividends As of 1 January 2017, there was a significant change in the taxation of dividends based on which the companies has to check whether the dividends are distributed or received the dividends from the profit derived before 1 January 2004 (subject to taxation) and after 1 January 2017. The taxation of dividends depends on the profit from which the dividends were distributed, a status of receiver and payer.

Please find below a summary sheet of dividend treatment from the profit derived:

till 31.12.2003 After 1.1.2017 Dividends received by a Slovak tax resident from Slovak entity (legal entity) Legal entity CIT – 21 % - taxation through n/a tax return** Dividends received by a Slovak tax resident from abroad

Legal entity CIT – 21 % - taxation through Separate tax base – 35 tax return** % - taxation through tax return Dividends received by tax non - resident from a Slovak entity Legal entity WHT** – 19 % or DTT* WHT – 35 % *Provisions of double tax treaty (“DTT”) **In case that dividends are paid by Slovak legal person to legal person with registered seat in EU who has direct interest on RC less than 25% or paid by legal person with registered seat in EU to Slovak legal person who has direct interest on RC less than 25%.

WHT 35% is applied in case that dividends are paid/distributed from taxpayer of a non-contracting state. Dividends are not subject to taxation if paid out of profits derived by the distributing company as from 1 January 2004 to 31 December 2016.

Dividends are exempt at the level of the recipient only if those dividends are not considered a tax deductible expense at the level of the distributing company. Based on the Slovak tax legislation, dividends and other profit distribution are not tax deductible expenses.

Income exempted from tax or excluded from the taxable base includes, amongst others, the following types of income: • income from the sale of property included in bankruptcy proceedings; and • income from the acquisition of own securities for a price less than their nominal value followed by a reduction in the registered capital.

The provisions of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEBS should be applicable as of 1.1.2019.

Incentives Investment incentives may be available to start new production or the provision of services, to expand or modernize production or the provision of services, or for R&D. These incentives are subject to special rule in the State Aid Act and the Investment Stimulus Act. Since 1 January 2015 a “super deduction” for R&D costs has been introduced. The super deduction allows deduction for 200% of the actual R&D expenses incurred in the respective tax period. A “super deduction” for R&D of 100% of the actual R&D expenses can by increased 100% of the difference between the average amount of incurred R&D expenses i) in the current tax period and the previous tax period and ii) in two subsequently preceding tax periods: [(R&D expenses incurred in actual tax period + previous tax period)/2] - [(sum of R&D expenses incurred in preceding tax periods)/2]

Foreign income Withholding taxes A withholding tax at the rate of 19% applies on certain payments made abroad (interest, royalties). This tax can be reduced by double tax treaties signed by Slovakia or Czechoslovakia in the past. In case of absence of the double tax treaty or treaty about exchange of information with a respective country, a rate of 35% must be applied. On the side of tax residents with an unlimited tax liability (e.g. legal entities with their registered office in Slovakia, individual entrepreneurs, individual who is not an entrepreneur) the withholding tax may represent the final tax and the income from which tax is withheld is not included into the tax base. A withholding tax at the rate of 7% applies on dividends paid/received by the individual provided that the provisions of Double tax treaty can be applied. For tax residents with a limited tax liability is advantageous to deem the withholding tax as a tax prepayment and include the income from which tax is withheld into the tax base and file an income tax return in Slovakia.

Individuals Tax rates From 1 January 2013 came into the force changes in taxation of individuals. There was cancelled flat tax rate 19% and in force is progressive tax rate. Tax rate 19% is applicable for assessment tax base EUR 3.021.36 per month (to the amount of EUR 36.256,37 per year) and the tax rate 25% for assessment tax base over EUR 3.021.36 per month (EUR 36.256,37 per year).

For Slovak personal income tax purposes, income is divided into following categories:

 Employment income (salaries, imputed income, etc.),  Entrepreneurial and rental income,  Income from capital (interest, pensions),  Others income (sale of immovable, sale of shares, lottery winnings, occasional income).

Employee Taxable remuneration includes all remuneration, whether monetary or non-monetary, and benefits in-kind given to or provided for an employee except where noted below. Reimbursement of travel expenses in excess of statutory limits is taxable remuneration for the employee, irrespective of whether the individual is an employee of a Slovak entity or is seconded by a foreign entity. Non-monetary benefits received in the form of training courses, onsite catering, temporary on-site accommodation, employer social insurance contributions, recreation and nursery facilities paid by the employer are exempt. Benefits-in-kind are valued in principle at market value, the main exception being cars used for private purposes of employees, for which the taxable benefit is 12% per annum of the purchase price of the vehicle including VAT in the first year and in next years 12% of the purchase price of the vehicle including VAT decreased by 12,5 % for each next year. The cost of private fuel is a taxable benefit to the employee if is reimbursed from the employer.

State pensions, annuities, family benefits, sickness benefits, and maternity benefits are exempt from tax. Pension from non-state sources are included in taxable income. Home-country pensions, social and health insurance contributions are deductible if payment is a statutory obligation.

Small business Self-employed individuals (entrepreneurs), general partners in unlimited and limited partnerships are liable to personal income tax on their share of business profit. Entrepreneurs registered in the Trade and/or Commercial Register are liable to file personal income tax on their business profits. Taxable profits are calculated in the same way as for corporate income tax. Similar rules apply to entrepreneurs not registered in the Commercial Register and using cash base of accounting.

Residence criteria Slovak Tax residents Individuals who are physically present in the Slovak Republic for more than 183 days in a calendar year are treated as tax residents. Equally those, who have the legal status of a permanent establishment or are deemed to have a place of abode in the Slovak Republic, i.e. if their stay is likely to be long-term and indefinite, are treated as tax residents. In most cases, tax residents are liable to personal income tax on their world-wide income. The timing of the dates of arrival and departure from the Slovak Republic should be considered as a tax planning opportunity. As of 1.1.2018, an addition of the tax resident definition to the criteria of main residence and habitual residence according to the criterion of "residence in the territory of the SR". Pursuant to the amendment, as residence will be considered an accommodation, which is permanently available to a natural person and is not an occasional accommodation for business trips, tourism, recreational holidays, etc. The introduction of this criterion can cause e.g. a change in the tax residence of athletes, who have permanent residence in Monaco. Since many athletes have permanent apartments in Slovakia, they will be required to pay taxes in Slovakia.

Taxation of non-residents Slovak tax non-residents Non-residents are only subject to taxation on their Slovak-source income. Income is considered to arise in the Slovak Republic in explicitly stated cases in the law for example:

 Work carried on the territory of the Slovak Republic,  Activities carried on through a permanent establishment located in the country,  Business technical or other consultancy services and similar activities provided on the territory of the Slovak Republic if constituting a permanent establishment.

Payment dates Tax on employment income is withheld by the employer and remitted to the tax authorities. In general, income other than employment income is self-assessed. Individuals must file a tax return. Personal income tax is payable by 31 March of the calendar year after the year in which the income is earned.

Tax returns If the individual earns more than specific amount (for 2019 is the amount 1.968,78 EUR) during the calendar year than he/she has an obligation to file individual income tax return till 31 March of the calendar year after the year in which the income is earned. Based on announcement submitted to the relevant tax authority an individual income tax return as well as tax payment deadline can be extended by three months or six months if individual receives income sourced from abroad.

Other Income Interests earned on Slovak savings deposits, derived from loans or securities are subject to a final withholding tax of 19% or 35% in case that the income is paid from the countries not on the white list.

Please find below a summary sheet of dividend treatment from the profit derived:

till 31.12.2003 After 1.1.2017 Dividends received by a Slovak tax resident from Slovak entity (legal entity) Individual WHT – 7 % WHT – 7 % Dividends received by a Slovak tax resident from abroad Individual Separate tax base – 7 % - Separate tax base – 7 %, taxation through tax return 35% - taxation through tax return Dividends received by tax non - resident from a Slovak entity Individual WHT – 7 % or DTT* WHT – 7 %, 35% or DTT* *Provisions of double tax treaty (“DTT”)

Tax calculation Income from each source, net of allowable deductions, is aggregated for the tax year. Losses arising on one source of income are offset against income from any source of income (although certain types of income cannot be negative, e.g. employment income and income derived from capital).

Deductions and exemptions For the tax period 2019 all taxpayers are entitled to a personal allowance in the amount of EUR 3.937,35 if their tax base does not exceed the amount of EUR 20.507. In case the taxpayer accomplishes the tax base between EUR 20.507 and EUR 36.256,37, his applicable personal allowance is progressively reduced. The tax payer with the tax base over the limit of EUR 36.256,37 is not entitled to the personal allowance (the personal allowance is EUR 0,00). Further, the taxpayer is entitled to the tax bonus for each dependent child in amount of EUR 22,17 monthly.

Value Added Tax

Registration All individuals or legal entities that carry out economic activities in Slovakia are treated as taxable persons. The registration threshold for VAT purposes is a taxable turnover of EUR 49,790 within the preceding 12 consecutive calendar months. The taxable persons below the threshold can apply for the voluntary VAT registration. In case of voluntary VAT registration, taxable person is obliged to prove performing of business activities. A registered branch or permanent establishment of a foreign company can be treated as a domestic taxable entity for VAT purposes after fulfilment of legal conditions (such as having of material equipment and personnel who is able to run business activities independently from the foreign co-founder).

Registration of non-established taxable persons For foreign taxable persons a single transaction which is subject to VAT in Slovakia triggers the obligation to apply for VAT registration in Slovakia and to pay VAT under the Slovak VAT Act Therefore, the registration may be necessary for the taxable persons without a registered seat or fixed establishment in Slovakia as a result of transferring business assets to Slovakia, supplying goods or performing an acquisition of goods or an import of goods here. The voluntary VAT registration is also available upon request in respect of non – established taxable persons not obliged to register. For the VAT registration it is necessary to submit with the application the extract from the Commercial register of the company from abroad (original or the notarised copy). The Tax Authorities Bratislava is responsible for the registration of non-established taxable persons.

VAT registration of the group From 1 April 2009, members of the group may apply for the tax registration of the group in Slovakia. The Slovak tax office shall register the group as of 1 January of the calendar year following the day on which the application for the registration of the group was submitted. Where the application for the registration of the group is submitted after 31 October of a calendar year, the tax office shall register the group as of 1 January of the second calendar year following the submission of the application.

Rates As of the beginning of year 2011 the standard VAT rate is 20%. The reduced VAT rate applying to certain pharmaceutical, medical products and books is 10 %.

Certain supplies (e.g. financial and insurance services) are exempt.

Returns The standard assessment period is a calendar month. The tax payer may decide to apply for a calendar quarter assessment period if its turnover is less than EUR 100,000 in the preceding 12 consecutive months and the person has been registered for VAT for at least one calendar year. The VAT return must be submitted by the 25th day of the month following the relevant tax period (month/quarter). VAT is payable within the same deadline. Where the input tax exceeds output tax for a period, the excess is deductible against the tax liability in the following period. If the excess could not be deducted in the following tax period (next month or quarter), the tax authorities will pay it back within the following 30 days.

Reporting VAT Transaction Statement The VAT transaction statement represents detailed records on output transactions for which the enterprise is obliged to pay tax, as well as transactions in respect of which the enterprise is entitled to deduction of VAT. The VAT transaction statement comprises the following data: a) Data from issued invoice on supplies of goods and services b) Data from received invoice on supplies of goods and services c) Data from “corrective invoice” (credit/debit note) d) Data on supplies of goods and services other than those specified in Part A, for which the taxpayer is obliged to pay tax.

The VAT transaction statement is submitted for the tax period together with the VAT return, i.e. by the 25th day of the month following the relevant tax period (month/quarter).

EC Sales Lists For services with a place of supply outside Slovakia and in respect of intra- community supplies of goods EC Sales Lists must be submitted. The EC Sales List for the tax period must be filed by the 25th of the month following the relevant tax period (month/quarter).

Business transactions The VAT Act defines a place of supply of goods and services for deliveries performed within territory of Slovakia, from Slovakia to EU and non-EU countries. In connection with the transport of goods within the EU the place of the taxable supply of goods is in the country, where the transport of goods has started. In connection with rendering of services it is the country where the seat of the taxable person who renders the services is located. For specific services, mainly sports, scientific and educational services or work on movable assets, it is the country where the services are realized.

Goods The VAT Act regulates the application of VAT on the sale of goods between two EU member states and the transfer of business assets to another EU member state.

In general the intercommunity supply of goods by a Slovak VAT payer to a VAT payer located in another EU state will be exempted from tax. A recipient of goods in Slovakia (identified for the VAT in Slovakia) is obliged to declare and pay VAT upon the acquisition of the goods from the supplier (identified for the VAT) from another EU member state. Consecutively he has a right for deduction of VAT. The purchase of goods from abroad whose installation/assembly is performed in Slovakia is also subject to taxation in Slovakia, the VAT liability is shifted to the recipient of the goods under a condition that the recipient is a taxable person with a business seat in Slovakia.

Services The purchase of some services from abroad is subject to taxation in Slovakia. Services taxed in Slovakia are, for example, consulting services, advertising services, transport services. The recipient (taxable person) is obliged to pay an output VAT. In case the recipient is the VAT payer in Slovakia, he has right to deduct VAT.

Real estate transactions Not only supply of new building is taxable, but also supply of older building, by which purpose of its use has been changed or it has been reconstructed. The condition is, that the costs on construction works value is amounting at least 40% of the building value before starting of building job.

Exemption from VAT • Supply of building after 5 years since the day of building acceptation, by which first use of building was permitted or after 5 years since the day of first use of building (from what occurs first) • Supply of building after 5 years since the day of building acceptation, by which purpose of its use has been changed, if the costs on construction works are amounting at least 40% of the building value before starting of building job. • Supply of building after 5 years since the day of building acceptation, by which was permitted use of building after execution of building job (repair or reconstruction) if costs on construction works are amounting at least 40% of the building value before starting of building job.

New rules will apply if construction works has started after 31 December 2018 If the supply of building is exempted from VAT, the tax payer can decide (opt for), that supply of building will be not exempted from VAT. However, the tax payer can not make such decision if he supplies the building aimed for accommodation, an individual accommodation or individual apartment in apartment building.

Other taxes

Motor vehicle tax The subject of motor vehicle tax is a motor vehicle registered in the Slovak Republic and used for business purposes. Obligation to pay a motor vehicle tax may arise also an employer who pays travel allowances to employee for usage of his car for business purposes.

For passenger cars, the tax is based on the cylinder capacity of the engine. For lorries and buses, the tax is based on their weight and number of automotive axles . The tax rate is set by the Act on motor vehicle tax. The tax period is a calendar year and the tax liability is payable for the previous year by 31 January. Special vehicles indicated by specific inscriptions, including side vehicles and vehicles with special license plates are not subject to this tax.

Excise tax Excise tax is levied on Slovak-made and imported hydrocarbon-containing fuels and lubricants, spirits and liquors, beer, wine and tobacco products, electricity, coal and natural gas. Tax liability is incurred upon removal of the good from storage or with the incurring of a customs debt. These goods are taxed just once under the Excise Tax Act. The assessment period for this tax is one calendar month (i.e. preceding period). From 1st July 2008 new excise taxes on electricity, gas and coal were introduced.

Real estate tax Real estate tax is considered as local tax and consists of land tax, property tax on buildings and flats. This tax is calculated on the basis of the assessed amount and the assessment rate. The minimum assessment rate for tax purposes is:

 0.25 % of the assessment (tax) value for lands,  EUR 0.033 per square meter for buildings and  EUR 0.033 per square meter for the flats.

The municipality may set higher or lower tax rate. The tax return must be submitted and the tax must be paid by the owner of the real estate at the beginning of the calendar year; by the end of 31 January.

Inheritance tax Inheritance tax was abolished from 1 January 2004 in Slovakia

Capital gains tax- individuals Capital gains are taxable as income. Exemptions are available for gains arising on the disposal of assets that have not been used for commercial purposes and have been held for certain minimum periods, for example:  win from the lottery operated under the special law condition,  sale of moveable assets,  real estate held for more than five years, if not used for business purposes,  income up to 500 EUR form sale of securities.

Electronic communication with the tax authorities From 1 January 2014 any delivery of documents to the tax or customs authorities requires electronic form. The tax entity is allowed to submit documents by electronic means through secured electronic signature or on the basis of written agreement concluded according to the valid Tax Administration Act.

The obligation of electronic delivery of documents applies to the following entities:

 Tax entities (physical or legal persons) who are VAT payers  Legal persons registered in the Commercial register of Slovakia  Individual persons registered for income tax purposes  Tax advisors acting on behalf of tax entities in tax administration  Lawyers acting on behalf of tax entities in tax administration  Other representatives acting on behalf of tax entities who are VAT payers.

If the company is not a VAT payer and is not represented by tax advisor/lawyer/other representative, such company can further use the written form in its communication with the tax administrator.

Tax treaties The Slovak Republic has entered into bilateral treaties with 70 countries. Bilateral treaties are all based on the OECD model treaty. Treaty policy is to conclude treaties with all major trading partner/investor countries as a means of encouraging inward investment and training relationships. Therefore, the Slovak Republic’s usual treaty objective is to reduce withholding taxes.

Tax treaties take precedence over domestic legislation. Slovakia has accede into the Multilateral Convention to implement tax treaty related measures to prevent BEPS (“MLI”) which came into the force as of 1.1.2019. The main task of the MLI is to transpose selected results from the action points of the OECD/G20 BEPS Project into treaties on double taxation. MLI brings automatic amendments to all covered double taxation agreements without the necessity of bilateral negotiations of changes and ratification of the individual agreements).

Convention includes recommendations for following areas: • Abuse of double taxation treaties (Action 6 of the Action Plan BEPS), • Dispute resolution mechanism in the field of taxation (Action 14 of the Action Plan BEPS), • Neutralisation of the effects of hybrid arrangements (Action 2 of the Action Plan BEPS), • Avoidance of permanent establishment status (Action 7 of the Action Plan BEPS).

In general, Slovakia has applied almost all provisions of the MLI with the exception of Section VI – Arbitration and all double taxation treaties concluded by Slovakia shall be covered.

Due to the adoption of the MLI in Slovakia, the assessment of cross-border transactions will no longer require only the assessment by Slovak legislation and the relevant treaties on double taxation.

In case of areas covered by the MLI it is always necessary to take into account also the wording of the relevant provisions of the MLI and at the same time examine to what extent the relevant contracting party has applied the MLI in comparison to the extent accepted by the Slovak Republic (Contracting parties must agree on the extent to trigger application of the MLI). It is necessary to follow the applied reservations and the choice of the optional provisions by both parties.

Permanent establishment The term “permanent establishment” is usually defined in treaties in the way recommended by the OECD model treaty. In practice, a branch office registered in the Slovak Republic, construction sites existing for more than 6 to 12 months (depending on the treaty), the provision of services in the territory of the Slovak Republic for more than 6 months are deemed to be permanent establishments and are taxable on their attributable profits.

Elimination of double taxation Tax treaties generally eliminate the double taxation by crediting the foreign tax paid on passive income (dividends, interest and royalties) against the Slovak tax due and by exempting active income (business profits, income from personal services and capital gains) from Slovak taxation. This treatment corresponds with domestic Slovak law.

The list of Conventions for the Avoidance of Double Taxation

Contractual party Number in Collection Armenia 6/2017 Coll. Australia 157/2000 Coll. Austria 48/1979 Coll. Belarus 112/2001 Coll. Belgium 354/2002 Coll. Bosnia-Herzegovina 99/1983 Coll. Brazil 200/1991 Coll. Bulgaria 287/2001 Coll. Canada 369/2002 Coll. China 41/1998 Coll. Croatia 220/1997 Coll. Cyprus 30/1981 Coll. Czech republic 238/2003 Coll. Denmark 53/1983 Coll. Estonia 383/2006 Coll. Etiopia 123/2018 Coll. Finland 207/2001 Coll. France 73/1975 Coll. Germany 18/1984 Coll. Georgia 201/2012 Coll.

Greece 98/1989 Coll. Hungary 80/1996 Coll. India 77/1987 Coll. Indonesia 12/2002 Coll. Iran 122/2018 Coll. Ireland 365/2000 Coll. Island 225/2003 Coll. Israel 327/2000 Coll. Italy 17/1985 Coll. Japan 46/1979 Coll. Kazachstan 257/2008 Coll. Korea 244/2003 Coll. Latvia 317/2000 Coll. Lithuania 756/2002 Coll. Lybia 258/2010 Coll. Luxembourg 227/1993 Coll. Macedonia 153/2010 Coll. Malaysia 211/2016 Coll. Malta 318/2000 Coll. Mexico 429/2007 Coll. Moldavia 514/2006 Coll. Mongolia 19/1979 Coll. Netherlands 138/1974, 199/1997 Coll. Nigeria 339/1991 Coll. Norway 35/1980 Coll. Poland 95/1996 Coll. Portugal 11/2005 Coll. Republic of Uzbekistan 444/2003 Coll. Romania 105/1996 Coll. Russia 31/1998 Coll. Serbia and Montenegro 269/2002 Coll. Singapore 381/2006 Coll. Slovenia 99/1983 Coll. South Africa 39/2001 Coll. Spain 23/1982 Coll. Sri Lanka 132/1979 Coll. Syria 35/2010 Coll. Sweden 9/1981 Coll. Switzerland 127/1998 Coll. Taiwan 309/2011 Coll. Tunisia 419/1992 Coll. Turkey 90/2000 Coll. Turkmenistan 100/1999 Coll. Ukraine 173/1997 Coll. United Kingdom 89/1992 Coll. USA 74/1994 Coll. Vietnam 296/2009 Coll.

Contact details

Grant Thornton Consulting, k.s. Grant Thornton Audit, s.r.o.

Hodžovo námestie 1/A SK-811 06 Bratislava T +421 (2) 59 300 400

www.grantthornton.sk

Silvia Hallová Tax partner

T +421 2 59 300 474 M +421 918 884 073 E [email protected]

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