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 Since business changes fast in Slovakia, the information contained in it might be out of date.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.



The Slovak tax environment

Current status

The Slovak tax system is based on the original tax system of the Czech and Slovak Federal Republic. After separation the Slovak tax system was subject to changes following the changes in the economic and political climate. Further significant changes are expected within the next 2 years because of Slovakia’s accession talks concerning the European Union. Currently, the Slovak tax system in-cludes taxes as outlined in Table 1

Some features of the aforementioned taxes are described below in more detail.

Corporate Income Tax

The corporate income tax is levied on legal and other entities (e.g. civil associations, non-profit organisations, contributory organisations etc). Residents (entities with a seat in the Slovak Republic) are liable to pay tax on their world-wide income (derived from Slovak and non-Slovak sources). Non-residents are liable to pay Slovak corporate income tax only on the in-come from Slovak sources.

Rate
Recently the Slovak In-come Tax Act has been amended. The corporate income tax rate is now 25%. It was reduced from 29% with effect from 1 January 2002. The new rate applies to all taxable income occurring after 1 January 2002. There were several proposals introduced in the Slovak parliament to decrease the corporate tax rate to 20% or below in the taxation period after 2002.

Calculation of the Tax Base
Tax is paid on taxable profit derived from the profit reported in the financial statements according to Slovak accounting standards and adjusted for deductible and non-deductible items. The tax base of taxpayers using the double-entry bookkeeping system is based on the accrual basis.

Generally, expenses recorded by the taxpayer are tax deductible if they can be proven to have been made in order to attain, ensure and maintain taxable income, unless they are:

  • deductible only after being paid,
  • partially deductible up to a certain limit determined either by the ITA or by a special law,
  • specifically stated as non-deductible in the Slovak Income Tax Act.

Losses carry forward
The Income Tax Act only allows those losses arising in the three years prior to the tax period in which the taxpayer recorded the positive tax base to be carried forward. Income subject to withholding tax is excluded from the loss carried forward. The accumulated tax loss (further referred to only as “Loss”) can be deducted in equal instalments in the five tax periods immediately following the tax period in which it was incurred (with a maximum of 20% of the total Loss). The amount of Loss utilised in a respective tax period must be invested into tangible fixed assets within three years from the end of the year in which the tax loss was utilised. This obligation does not apply for tax losses that the taxpayer started to utilise before 1 January 2000.

Depreciation
Fixed assets can be tax depreciated by the owner of the tangible or intangible fixed asset, or under specific circumstances specified by the Slovak Income Tax Act by the lessee or by the administrator of state and municipal property.

Intangibles can be tax depreciated for a maximum period of up to five years in accordance with Slovak accounting standards.

Tangible fixed assets are depreciated based on their useful life. Fixed assets are divided into five categories for depreciation purposes, and for each category, a period of depreciation is prescribed, as set out in Table 2.

Transfer pricing
The transfer pricing rules apply to transactions be-tween economically or personally related parties. The transfer pricing rules allow the authorities to adjust the taxpayer’s tax base. Slovak tax legislation regarding transfer pricing applies a slightly different approach to transactions between:

  • Slovak and foreign related parties, and
  • Slovak related parties.

However, in general the transfer pricing rules are largely based on OECD principles. If the difference between the price agreed between the Slovak entity and a foreign related party and the arm’s length price is not sufficiently justified (and supported by appropriate documents), the difference is considered as a dividend distribution and is conse-quently subject to a withholding tax.

Thin Capitalisation
A thin capitalisation rule governs the tax deductibility of interest on loans paid to either economically and/or personally related parties. When the total of loans (ex-cluding loans or part of loans, the interest from which is capitalised ) provided by related parties throughout the taxation period exceeds four times the equity of the recipient at the beginning of the period (4:1 ratio), the interest on the excess is not tax deductible. If the interest is paid abroad, the excess is considered as a dividend distribution and is thus subject to a withholding tax. If the recipient of the loan is a bank or insurance company, a 6:1 debt/equity ratio applies.

Withholding Taxes
Withholding taxes are paid on dividends, interest, royal-ties and other payments such as lease rentals. Treaties with Slovakia are available to minimise withholding taxes. The withholding tax according to Slovak tax legislation varies between 1% and 25% (e.g. 15% on dividends and interest on deposits, 25% on interests from loans and royalties paid to non-residents). If there is a Double Taxation Treaty between Slovakia and the recipient’s tax residential country, the withholding tax rates specified in the corresponding Treaty apply (unless the withholding tax rate specified in the Slovak Income Tax Act is lower).

Personal Income Tax

Tax residents are liable for personal income tax on their world-wide income. Tax non-residents are liable for personal income tax only on income from sources in Slovakia.

An individual whose permanent residence is in Slovakia, or who lives here for an aggregate of at least 183 days in a calendar year, is consi-dered a Slovak tax resident. The residence rule does not apply to individuals who earn income from dependent activities from sources located in Slovakia and who, in consequence, cross the borders daily or for an agreed-upon time only for the purpose of performing those activities.

Tax base and income tax
The tax base is determined as the sum of the partial tax bases for all types of income (e.g. employment, entrepreneurial activity, rental income, etc.). This income includes both monetary and non-monetary forms of remuneration and benefits. The partial tax base for income from en-trepreneurial activity, rental income and income specifically stated in the law can be decreased by expenses incurred to obtain such income. All individuals are allowed to deduct general tax allowances from their income (for individuals, their children etc.) and expenses on compulsory social security contributions and supplementary pension insurance contributions up to the limits stated by law.

Personal income tax rates apply to the tax base after any relevant tax allowances, deductible items, and tax-exempt income. The current rates are shown in Table 3.

Economic Employment Concept
The concept of economic employment was introduced on 1 January 1999 and applies to employees seconded by a foreign company to a Slovak company. It is no longer important in relation to income tax prepayments whether it is a foreign or a domestic employer who pays a foreign employee for his or her work. If a Slovak company issues orders regarding how the work should be done, it is considered to be the employer of the expatriate, even if the expatriate receives the salary from abroad. The economic employer is obliged to make income tax prepayments to the tax authorities toward the foreign individual’s Slovak personal income tax.

VAT

The Slovak VAT system generally follows the principles of the 6th Directive of the EU. Therefore, the basic VAT mechanism resembles other European VAT systems. How-ever, the Slovak VAT system is still different from the 6th EU Directive in some aspects.

Taxable persons registered for VAT are obliged to impose VAT on supplies to their customers and remit it to the Tax Authorities. In the computa-tion of the VAT liability to be remitted to the authorities, taxable persons can credit input VAT incurred on supplies received and paid to their suppliers. The aggregate VAT a taxable person charges in a taxable period is referred to as “output VAT”, while the aggregate VAT he pays on his supplies is referred to as “input VAT”. The VAT liability is thus calculated as output VAT less input VAT.

Taxable persons are individuals and companies which carry on “taxable supplies”. Taxable persons whose sales exceed the registration threshold of SKK 750,000 in the most recent 3 consecutive months must register for VAT and comply with tax remit-tance and reporting requirements. Taxable persons can also register voluntarily, if the tax authorities accept such a voluntary registration. Foreign companies without a Slovak branch cannot register for VAT purposes.

The standard rate of VAT is 23%. A reduced rate of 10% applies to specified supplies, such as basic foodstuffs, electricity and gas, pharmaceutical products, newspapers and magazines, medical aids for the disabled, etc. The reduced rate also applies to services like distribution of electricity and gas, repair and maintenance services to individuals, accommodation services and catering, road transportation except freight transport, etc.

Certain supplies are exempt from VAT. Conse-quently, they are not entitled to a deduction of input VAT associated with the provision of such exempt supplies. Goods and services exempt from VAT include postal services, broadcasting services, financial services, insurance services, certain educational and scientific services, health care services, social security services, operation of lotte-ries and similar games, the transfer and lease of land, buildings and apartments after 2 years of construction, and sale of an enterprise or part of an enterprise.

“Zero-rated” supplies are not subject to VAT, but the suppliers are entitled to fully credit input VAT related to such supplies against their VAT liability. These supplies are exports of goods and certain services (including transfer of rights abroad) and international transportation.

The import of goods triggers VAT. Generally, the taxable base for the assessment of import VAT includes the customs value of the goods, and customs and excise duties. The VAT rate for imported goods is 23% or 10%, depending on the type of goods imported. Generally, if imported goods are exempt from customs duties, they are exempt from VAT as well. Importers are entitled to claim back the import VAT as long as they use the imported supplies for carrying out their own taxable supplies. The input VAT can be claimed on a VAT return submitted for the same taxable period in which the VAT was paid to the customs authority.

The assessment period is generally a calendar month. If a VAT payer’s turnover for the previous calendar year was lower than SKK 10,000,000, the tax period is a calendar quarter unless the VAT payer elects for a monthly return. VAT returns must be submitted by the 25th day of the month following the tax period concerned.

Excise duties
Any person who manufactures in Slovakia or imports taxable products is liable to excise tax. Excise taxes apply on mineral oils (fuels and lubricants), spirits, beer, wine, tobacco and tobacco products. Generally, excise duty is levied as a fixed amount per unit of measure specified for each type of product.

Real estate tax

Real estate tax is a direct tax levied by municipalities and is assessed on land, buildings and flats (hereafter “real estate”). In general, the owner of the real estate pays the tax. The base is deter-mined based on the area of land in square meters or its value (in the case of land tax) and/or the area the buildings cover (in the case of tax for buildings) and the basic tax rate.

The basic (annual) tax rate is SKK 1/m2 for land to be used for building construction and SKK 0.10 for land on which a building already exists. In the case of a building the basic annual tax rate ranges from SKK 1 to SKK 10 per square metre depending on its classifica-tion (e.g. production hall, garage, residence etc.). The basic tax rate is increased in the case of multi-floor buildings by SKK 0.75 for each floor above the ground floor.

The annual tax rate is multiplied by a coefficient which ranges from 1 to 4.5 depending on the number of inhabitants of the relevant municipality. In addition, the municipality may increase the tax rate by up to 100% (150% in the case of buildings for business purposes) and decrease the tax rate for buildings by a maximum 50%. Therefore, the tax to be paid differs from place to place.

Real estate transfer tax

The sale or transfer of property rights to real estate located in Slovakia is subject to real estate transfer tax. The tax base is the purchase price of the real estate, unless the price determined by an expert is higher. Based on the relationship between the persons involved in the transaction, the rate varies between 1% and 20%. The tax is paid by the seller.

Inheritance and gift tax

An inherited or donated property is subject to the inheritance and gift tax. The base is the “current value” of the property. In the case of real estate, a valuation prepared by an expert is required. The tax is paid by the beneficiary. The tax rates depend on the relationship of the parties involved and vary from 1% to 40%. Tax exemptions of up to SKK 2 million are available under certain circumstances .

Road Tax

Most vehicles (including automobiles, trucks and buses) used for business purposes in Slovakia are subject to road tax. The amount of the tax depends on the type of vehicle. The base for passenger cars is the cylinder volume, and varies from SKK 1,600 to SKK 5,600.

Expected changes

VAT

It is likely that the VAT Act will be amended effective from 1 January 2003, in the further process of harmonisation with the 6th EU Directive. The most crucial changes are expected to be:

  • A change in the input VAT deduction (cancellation of the payment condition) - currently, input VAT is only deductible once actually paid.
  • A change to the refund - currently the recovery of input VAT in the case of a VAT payer also making exempt output VAT supplies is based on the ratio of the taxable output VAT supplies to all supplies executed. The amendment proposes a more precise way of matching inputs with outputs: inputs subject to VAT are to be matched with directly related outputs with an entitlement to VAT deduction, or they are to be matched with directly related exempt outputs with no entitlement to deduction.
  • No cash refund of excess input VAT - instead of receiving a cash refund for excess VAT suffered in any tax period, it is to be recoverable by being offset against VAT due in future periods for up to 5 years (except specified cases).

Real estate transfer tax

The draft amendment to the law introduces a unified rate of 4% for real estate transfer tax provided the parties involved are legal entities or individuals outside of a family relationship.

The article was written by Ľubomír Alezár - Senior Tax Manager, and Marian Šinský - Tax Manager, from Deloitte & Touche in the Slovak Republic.

Table 1.

Slovak tax system overview

Table 1.

Direct Taxes

  • Corporate income tax
  • Personal income tax
  • Road tax
  • Real estate tax
  • Real estate transfer tax
  • Gift and inheritance tax

Indirect Taxes

  • Value Added Tax (VAT)
  • Excise duty
  • Customs and import duties

Depreciation categories

Category Period of
depreciation [Years]
Period of
depreciation
effective
from 1 Jan. 2003
[Years]
Type of assets
1 4 4 computers, cars and certain tools etc.
2 8 6 machinery and equipment, furniture, vehicles for special purposes, etc.
3 15 12 production equipment, e.g. steam boilers and auxiliary equipment etc.
4 30 20 pipelines, buildings of timber construction etc.
5 40 30 other buildings

Table 3.

Personal income tax rates

Band of Taxable
Income (Sk)
Rate Applicable
to Band (%)
Tax Liability
for Previous
Tax Brackets (Sk)
0 - 90,000 10
90,000 - 180,000 20 9,000 +
180,000 - 396,000 28 27,000 +
386,000 - 564,000 35 87,480 +
564,000+ 38 146,280 +


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

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