Note: This article was written in 2003. Since business changes fast in Slovakia, the information contained in it might be out of date.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.

Radical Slovak tax reform aims to create pro-business environment and simplify the tax system

By Mark Gibbins

 Courtesy: KPMG

The Slovak Government, at the instigation of Finance Minister Ivan Mikloš, has proposed a major tax reform package intended to take effect from 1 January 2004. The main features of the tax reform are:
  • Both corporate and personal income tax rates to be reduced to a flat rate of 19%;
  • Abolition of dividend withholding tax;
  • A single VAT rate of 19% (i.e. abolition of the lower rate);
  • Simplification of the current legislation;
  • Abolition of property transfer tax;
  • Abolition of gift and inheritance tax; and
  • Reform of annual real estate tax to be based on market valuation.
  • Shortfall in revenues to be made up by indirect taxation including excise duties

The legislation is still draft and has yet to be passed by the Slovak Parliament and approved by the President. The final form of the legislation could therefore differ significantly from the proposals put forward.

A completely new Income Tax Act is being prepared to implement the package with one aim being to simplify the current legislation. This aim may prove to be ambitious as tax laws tend to grow more, rather than less, complex over time and will depend in part upon the quality of drafting of the new legislation. However, the new law does give the chance to eliminate some of the peculiarities and anomalies in current Slovak tax law. Preliminary drafts show some movement in this direction such as an apparent relaxation of the very restrictive tax loss carry forward rules and the adoption of definitions for "permanent establishment" (tax presence in a country) and "related party" more in accordance with standard OECD guidelines. One key point will be to test whether the current restrictive rules for determining the tax deductibility of costs will be brought more in line with international norms and commercial reality. If not, although the "headline" corporate tax rate may be reduced to 19%, the effective rate could still be much higher.

It must be stressed that while many businesses may be "winners" due to the lower tax rates, others may lose out, particularly if affected by indirect tax increases (including VAT) which they cannot fully pass on. Each business will need to review all the specific implications for them.

The tax reform proposals are currently being monitored with interest within other EU accession countries, particularly the Czech Republic. Several Czech small and medium sized companies have said that the potentially more favourable tax regime in Slovakia could motivate them to relocate parts of their operations to Slovakia. Depending on the final outcome of these proposals Slovakia may also prove to be a more attractive location for companies to headquarter their regional management due to potential personal tax savings. Slovakia will continue to "cap" social security contributions by employees to a maximum level unlike several other countries in the region.

The progress of the tax reform over the next few weeks and months will be keenly watched. If implemented in a form similar to current proposals it is likely to provide a further significant impetus to investment in Slovakia.

The author is Senior Tax and Legal Partner at KPMG Slovakia.

These articles and related information were published in Spectacular Slovakia 2003.

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