Note: This article was written in 2002. Since business changes fast in Slovakia, the information contained in it might be out of date. Please review newer articles or contact a professional consultant before making business decisions.

These articles were published in the Spectacular Slovakia travel guide, published annually by The Slovak Spectator since 1996. The latest editions can be obtained from our online shop.

Income tax incentives

The Slovak Republic provides income tax incentives to foreign and local investors in the form of a tax credit against the investor’s corporate income tax liability.

Currently, these tax credits can be separated into two different categories:

  • Tax credits available after fulfilling the condi-tions stipulated in the Income Tax Act. These credits amount up to 100% of the tax liability of the first five years after the year in which tax profit was achieved for the first time, and 50% of the tax liability shown in the subsequent five years.
  • Tax credits available only after receipt of an up-front approval from the Ministry of Economy. These credits amount up to 100% of the tax liability shown in years 1-10 of the investment, but it should be noted that the Ministry of Economy can limit the absolute amount of the credit.

Each tax credit program requires the investor to fulfil different criteria.

Tax credits claimed directly - Articles 35 and 35a of the Slovak Income Tax Act

There are two forms of directly claimed tax credits available in Slovakia. They are similar in the benefits they provide as well as qualifying criteria. Both provide for a 100% tax credit in the first five years commencing with the year in which a tax profit was achieved for the first time, and a 50% tax credit in the following five years. In addition, both credits require a minimum foreign investment (up to EUR 5 million under Article 35 and up to EUR 4.5 million under Article 35a), a minimum amount of foreign ownership in the Slovak entity (75% under Article 35 and 60% under Article 35a), as well as a minimum amount of paid-in capital.

However, there are cer-tain material differences between the two which must be considered by a potential foreign investor. Of greatest importance is the fact that the credit provided under Article 35 is available only to entities created prior to 31 December 2001, whereas the Article 35a credit is avail-able to entities created prior to 31 December 2003.

Article 35 contains several restrictions. For example, it requires that the taxpayer re-invest an amount equal to the tax sheltered by the credit into their business. Article 35a has no such requirement and, therefore, may be better suited to an investor who does not have aggressive growth plans.

Also, Article 35 requires that the taxpayer be a producer of products which were not previously pro-duced in the Slovak Republic, or which are exported. Article 35a does not have similar provisions and may be the better choice for investors who cannot meet the more restrictive requirements of Article 35.

On the other hand, Article 35 contains a valuable planning tool as it allows depreciation on tangible and intangible assets to be interrupted and re-started with no loss of tax basis at the discretion of the taxpayer. Article 35a explicitly prohibits interrupting the depreciation.

Lastly, it is important to note that the Slovak Republic’s accession negotiations with the European Union are having an impact on the tax credits, including Articles 35 and 35a. Most importantly, companies established after December 31, 2001 and drawing a tax credit in accordance with Article 35a must reduce the amount of credit in proportion to the ratio of GDP in the region compared to the average GDP in the EU.

Tax credits subject to approval - Articles 35b and 35c of the Slovak Income Tax Act

These two Articles pro-vide for tax credits up to 100% of the investor’s tax liability for 10 years and have less restrictive qualifying criteria. However, these credits are only available after receiving the approval of the Ministry of Economy. The provisions in the Income Tax Act provide for a credit up to 100% for ten years; how-ever, the total amount of tax credit may not exceed the amount as granted in the approval of the Ministry of Economy.

Both tax credits require a minimum investment (up to SKK 400 million) into tangible and intangible assets and are, in general, granted for modernisation of production or extension of the scope of services.

The limitations of the tax credit and specific approval process are the result of the accession negotiations between Slovakia and the EU.

The article was written by Ľubica Adame
- Tax Senior Manager from Deloitte & Touche in the Slovak Republic.

These articles and related information were published in Spectacular Slovakia 2002.

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