Since 1 January 1993, the tax system in Slovakia (SR) has evolved rapidly. The following outlines some of the issues that are now being encountered.
For foreign entities trading or investing directly into SR, many sources of income arising in SR are subject to Slovak taxation at the withholding tax rate at 25% or 15%. Sources include payments by Slovak persons or royalties, technical know-how fees, interest and dividends. A wide network of treaties exists with SR, which reduce the underlying rate of withholding from 25% on such sources. A special withholding regime for cross border leasing also exists for financial leases where withholding is 1% of leasing payments.
The Slovak tax net is widened by the inclusion of legislation deeming that income from provision of services of a technical and consulting nature by a foreign entity in SR is a source of Slovak income. Furthermore, if carried out for a period of more than six months, the activity is deemed to cause a taxable presence (a "permanent establishment") of the foreign entity to arise. The profit attributable to such a presence is taxable therefore at the corporate tax rate of 40%. This provision is very wide and common structures, such as secondment of foreign management personnel to SR, can be caught. This has caused numerous practical problems, as secondment has always been the preferred route taken by foreign investors when starting up operations, owing to the substantial individual tax and social security benefits available from such structuring.
The classical "group" structure of Slovak holding company with Slovak subsidiaries can be very disadvantageous. There are currently no forms of tax consolidation of profits and losses of group companies, and only limited relief for intra-group dividends. This has inevitably led to groups finding ways to reduce the tax burden of their structure, including merging group companies under domestic legislation for example.
Financial markets and financial instruments are still relatively undeveloped in SR compared to the Czech Republic, although we expect to see further developments in this area as demand grows. The tax law includes exemption from taxation for profits generated on certain transactions with bonds and similar instruments, as well as tax exemption for individuals on long term capital gains on securities generally. Also, there is no general distinction between capital and revenue transactions, which can lead to significant tax planning opportunities.
Careful structuring of operation financing is also essential. Thin capitalisation rules may limit the amount of interest an entity may deduct for tax purposes dependent upon the amount and nature of debt taken on by the entity when compared to its equity. Tax losses of an entity may be carried forward five years.
Tax depreciation asset lives ranging from four to 50 years based on classification defined in the tax legislation. Entities may also choose between straight line or accelerated forms of tax depreciation on an asset by asset basis. Hence, scope exists for maximisation of tax depreciation by appropriate classification.
The development of the VAT system is also causing difficulties and opportunities. Rates of 6% and 25% increase costs to entities such as financial institutions and individuals, and the combination of numerous VAT procedural rules and high penalties for non-compliance provides many chances for planning and monitoring.
The Slovak taxation system will continue to evolve at the same rapid rate and ensuring full understanding of developments is crucial to maximising returns from Slovak operations.
The content of this article is intended to provide general information on the subject matter. It is therefore not a substitute for specialist advice.
For further information contact Richard Fletcher, Arthur Andersen Prague, tel: +42 2 2440 1300, or enter text search "Arthur Andersen' and 'Business Monitor'.
