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 Since business changes fast in Slovakia, the information contained in it might be out of date.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

Slovakia's accession to EU heralds significant tax changes

By Van Mumby

 Courtesy: KPMG

Slovakia's accession to the EU in May 2004 will significantly change many of the laws and conditions under which a Slovak company does business. We set out in this article a summary of some of the main changes.

Indirect taxes

Joining the EU single market will require full VAT and excise duty harmonisation, the removal of tariff barriers and the implementation of the common EU customs code. Although Slovak VAT law has in recent years already adopted many EU standards, a number of details and points of interpretation remain which are divergent from EU law. In particular, there will be extensive and complex rules as regards intra-EU supplies of goods and services and there will be a requirement to implement new systems to administer these rules. These new systems should be able to accommodate the anticipated compliance requirements, including completing government statistics returns (Intrastat) and EC sales lists. Slovak VAT payers will have to get used to the concept of "self assessment" of VAT on services received from abroad and on intra community acquisitions. It should be stressed that EU VAT law is not completely uniform. While many aspects of the EU 6th Directive are binding, in other areas there are alternative approaches that EU member states may adopt. As a result it will not be possible to give comprehensive guidance until the Slovak Government puts forward specific proposals for legislative changes later in 2003.

The EU Customs Code, Customs Warehousing and Binding Tariff Information systems are generally already in use in Slovakia. The adoption of the EU customs regulations will involve the removal of EU customs borders and further liberalisation of trade.

Direct taxes

Harmonisation of direct taxes in the EU has progressed much more slowly than indirect taxes. To date the most significant instruments for harmonisation of direct taxes have been the Parent-Subsidiary Directive and the Merger Directive. The Parent-Subsidiary Directive eliminates withholding taxes on dividend distributions made by a subsidiary in one EU member state to its parent company in another EU member state, provided certain qualifying conditions are met. The Merger Directive aims to ensure tax neutrality on cross border re-structuring of businesses in the EU by, for example, deferring any taxable gains that may result. It is assumed that these Directives will be introduced into Slovak law as at the date of accession, or possibly even earlier from 1 January 2004.

Other Direct Tax initiatives which will be introduced into Slovak law are the exchange of information directive which provides for assistance and provision of information between tax authorities in EU states and the Arbitration Convention which sets a framework for agreeing transfer pricing adjustments.

Planned future Directives will include a Directive on a common system of tax on savings income within the EU setting a minimum level of tax and enabling exchange of information and a Directive on interest and royalties which will eliminate inter EU withholding tax on payments.

State Aid rules

A key area for Slovakia is the direct application of EU State Aid rules. This has already led to a major revision in Slovakia's system of tax incentives ("tax holidays") as discussed in the following article.

Primacy of EU law

EU law represents an independent legal system with supremacy over national law. The impact of EU membership will be to add a large area of law and precedent into Slovak law. EU law consists of primary law, secondary law and case law. Primary community law was created by treaties concluded between the EU member states. The treaty establishing the European Economic Community in 1957, as amended by subsequent treaties, is now known as the EC Treaty.

Secondary community law is created by the legislative acts of the various EU institutions and the legally binding instruments of secondary law are Regulations, Directives and Decisions. Recommendations and Opinions are not legally enforceable within EU member states. Case law is based on the judgments of the Court of Justice of the European Communities ("ECJ") and the Court of First Instance.

Conflicts between national and EU law are heard before the ECJ, which is empowered to rule on the application of EU law. Decisions of the ECJ arising from such conflicts must be implemented into the respective member state's national law.

The author is a Senior Tax Manager at KPMG Slovakia specializing in EU Accession issues.

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

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