(Please note: Zugimpex does not provide services to US citizens and to US residents.)
Remember: the benefits of Slovakia (low dividend tax, liberal business laws) are an excellent complement to those of other countries: Zugimpex helps customers to combine these advantages. We know which steps are necessary; with our local offices, we offer various services from one source.
Please note that VAT registration according to § 4 is handled restrictive by the tax office and requires a domestic turnover of 50,000 Euros. Registration according to § 7a is easily possible, and with this the company can issue invoices abroad immediately, but the input tax is not deductible. This means if a company purchases services from abroad subject to the reverse charge system, a tax-liability for VAT arises, but without §4 VAT registration there is no deduction of the same amount allowed, so the result is a tax of 20% of the service costs that is lost. Because of the behaviour of the administration, we recommend buying an existing company with a §4 VAT number.
The standard rate of VAT in Slovakia is 20%, and for imports into the EU the VAT has to be paid at the customs. While the administration of VAT is similar to other countries, VAT credit is refunded to companies with delay of a month and often there are inspections.
In Slovak Republic, there is a tax of 21% for companies and a tax rate from 19% to 25% for individuals, and every self-employed person has an option to deduct up to 20.000 Euro as flat fee for costs without further proof.
Corporations are taxed only on corporate profits: since 2017 there is a 7% taxation on dividends at shareholders level in Slovakia, relevant for dividends on profits from 2017. Corporate shareholders are not subject to this dividend tax. Dividends usually are taxed in the country of residence, so a foreign partnership can be a good solution.
If a company has annual sales of less than 50.000 Euro, the income tax rate is reduced to 15%.
Interesting possibilities for accounting policy: for example, the tax legislation allows a 150% deduction of costs for research and development, or benefits in the evaluation of inventory or of receivables. This possibility to influence the tax base can be combined with e.g. Austrian group taxation which allows compensating profits with losses of associated companies.
Audits are mandatory, if two of the following criteria happen in two consecutive years: assets > 2 Mio, net revenue > 4 Mio, average > 30 employees. Therefore, by splitting activities over non-related companies (e.g. asset company and operational company), audits can be avoided.
Challenges are the limitations of loss carry forward (5 years, up to 50% of profit), the limit to deduct cash expenses (5000 Euro) and the rule that service expenses can only be deducted in the year they are paid from taxable income.
Some of the Slovak double taxation agreements (DTAs) eliminate double taxation according to the exemption method, i.e. income taxed abroad is exempt from the national tax. In these cases, a partnership is useful: the profits in the other country are taxed at a tax rate based on total income, and this can work in both directions: if there is a loss in one Slovakia, the income in the other country can be taxed on the basis of total income, so there the base becomes lower or zero.
“Expect tomorrow, deliver today”: customers can use this option and change the structure in the following years so that the Slovak loss can compensate for later Slovak profits (there are some restrictions), without affecting then the income in the other country.
The advantages of a “s.r.o. & k.s.” (Ltd. & Limited Partnership):
21% tax, often without social contribution for the limited partner (explanation: the limited partnership k.s. has an s.r.o. as general partner).
Consequently, small fronting companies can be installed between the shareholder and the main operative company, to benefit from the lower 15% tax rate. They need no §4 VAT registration as they only issue local invoices. If these fronting companies are in the form of a k.s., foreign owners only pay the 7% dividend tax.
While in countries like Austria total taxation of the owner of a corporation is 45,625% (25% corporate income tax + 27,5% dividend tax on the remaining 75%), Slovakian total tax burden will only be 20.95% (100 x 15% + 85 x 7%), this huge savings are possible.
In Slovak Republic, the tax act (a translation into English is available in the Internet) allows companies to have a business year that is different from the calendar year (January to December). Such a structure may be useful within a group of companies, but also to delay the tax declaration of profit distribution to shareholders in another country.
Steps and Conditions for Company Formation in Slovakia – Click here !
Companies who transfer activities to Slovakia additionally benefit there as an employer from lower wages and prices. Additional costs might be caused by tax progression e.g. in Austria on the level of natural persons (Austria takes Slovak profits into account when calculating the tax bracket for Austrian profits), structure costs and additional costs for effective restructuring. In addition, several actions must be taken to perform a real business and to avoid classification as misuse. The k.s. should not have mainly passive income in order not to be qualified as a pure financial vehicle. In addition, it is recommended to consider social charges according to the EU-Directive 883/2004.
Holding function: tax-free reception and distribution of dividends: a limited liability company (s.r.o.), which has a real substance (permanent establishment, real function), can (subject to the parent-subsidiary directive of the EU) receive dividends from a subsidiary in another EU country and distribute it to an active k.s. (limited partnership). There is still a possibility to avoid further taxation, if the owners of the KS have their residence in another country that has a double taxation agreement with Slovakia.
If an s.r.o. receives dividends, they remain tax free, and there is currently little restriction on dividends from countries with low taxation.
Attention: if you have residence in another country: only for business income of a Slovakian company, the right of taxation is exclusively assigned to Slovakia according to Article 7 DTT. But dividends, interest and salaries to individuals usually are taxed in the country of residence according to the local tariff in this country.
If Slovakia is the country of competence according to the EU-Directive 883/2004, personal income should be low, because not all social contributions have an upper limit and thus, 14% charges on health insurance can become expensive. Therefore persons with high income often are employed in another country and work as self – employed in Slovakia.
Profits of a K.S. are not exempt in the country of residence, if the business is run from this country, if the company has no substance or if the k.s. receives dividends from abroad that are not relevant for its functional business activities (therefore, in such cases we recommend a subsidiary corporation as a dividend feeder company for the k.s.). (see statement of Austrian ministry of finance in EAS 3010).
National laws in the country of residence define when the profit of a k.s. is attributed to the limited partner: Slovakia and other countries attribute it when the payment is received, for other countries in the year when it is generated. Therefore, we recommend different options of structures.
In the menu “Advisory” we offer clients to benefit from our know-how in International Tax Planning and Substance.
Holding Structures shall follow the business activities, so please look at our guidelines for Company Structures.
Legal Documents and some Double Tax Treaties: Downloads & Links
Reimbursement of Expenses and Vehicles in Slovakia
1. Travel expenses for managing directors and employees (Law 283/2002 as last amended)
- Accommodation costs: against receipt.
- Public transport (train, plane, etc.): on receipt.
- Use of the private vehicle for operational purposes: remuneration according to Decree of The Ministry No. 632/2008 EUR 183 per km, proof by logbook or a written order from the employer for a series of business trips with km indication.
- Replacement of fuel: Against receipt, price per km can be calculated on the basis of the invoice or on the basis of the publications according to the Statistical Office for the period of the mission (§ 7 para. 5 according to 283/2002)
- Food allowance during business trips within Slovakia: According to measure taken by Ministry No.148/2018:
- EUR 4.80 for a mission lasting 5 to 12 hours,
- EUR 7.1 0 for mission lasting 12 to 18 hours
- EUR 10.90 for a mission of more than 18 hours
- Food allowance during business trips outside Slovakia: different regulations depending on the country of destination, are included in measure No. 401/2012 regulated.
- Stays in other EU countries (these allowances do not incur taxes and social security contributions):
- up to 6 hours of mission 25% of the daily rate,
- from 6 to 12 hours 50% of the daily rate,
- over 12 hours the daily rate. (e.g. in Austria: 45 €)
- According to measure of Ministry No. 482/2010 food allowance for foreign business trips
2. Representation expenses:
- Representation expenses (restaurant invitations, cultural and sporting events, business events) are generally not tax deductible, but can be charged to the company and be booked there as a non-deductible expense. Since profit distributions in Slovakia trigger low tax liability, there is no risk of a hidden profit distribution in Slovakia. However, such benefits may be attributed to a person who is domiciled abroad by the local tax office as a reference in kind.
- Catering costs can be deducted as an expense.
- Memberships in business associations max. 0.05% of the taxable income for the year, but max. 66,387.84 EUR per year
- Gifts to business friends (e.g ballpoint pen, etc.): max. in value 17,00 EUR per pcs
3. Company cars:
- Private share:
- an employee who can also use his company car privately is added 1% of the price of the vehicle per month as additional income (such as an additional wage payment) (§ 5 para. 3 lit. a). This triggers taxes and social security contributions.
- As an alternative, it is possible to agree on a contract of use for the car, which is limited in time and after km, whereby the employee only pays a market price for this use.
- Fuel (§ 19 para. 2 letter l)
- If a logbook is kept, the company can deduct the fuel costs and also claim input tax as a VAT payer (§ 4) (in the amount of the business km)
- Without a logbook you can deduct 80% of the fuel costs and as a VAT payer (§ 4) you can also claim input tax (maximum in the amount of 80% of the business-driven km)
- VAT on motor vehicles can be claimed as input tax, whereby a proportionate reduction must be made for private use. If the company provides VAT-free services, a proportionate reduction shall also be made, to the extent of the VAT-free services to the total services of the company.
4. Reimbursement of expenses for employees and for managing directors (even if there is no employment relationship). In the case of limited partners (an agreement on expenses must be drawn up):
- Expenses: All employees of a company who are employed in an employment relationship may be reimbursed for business-related expenses if they have accrued in the interest of the employer:
- Meals: ( 153 Labour Code) during normal presence in the company:
- Company canteen: 55% of the cost of a main meal consumed
- Canteen abroad: at least 55% of the value of a main meal, but a maximum of 55% of the meal allowance for business trips lasting from 5 to 12 hours (Labour Code) (2.64 €)
- Generalization of expenses is basically possible by law, for this purpose a calculation based on the average conditions must be prepared, taking into account the legal requirements of the employee. Only the part of the lump sum that is listed as pocket money can have an impact on social security.
5. Commuters: If the place of work is not in the same city as the place of residence, there is no tax relief for commuters. However, if the place of residence is defined in the employment contract as the place of work and the employee commutes to the headquarters of the company, these trips can be regarded as a business trip.
(updated July 2021)