TAXATION OF EXPATRIATES WORKING IN THE SLOVAK REPUBLIC OUR OFFICES:

Transcription

1 TAXATION OF EXPATRIATES WORKING IN THE SLOVAK REPUBLIC OUR OFFICES: guide2007.p65 1

2 Leitner + Leitner No reliance should be placed on nor should decisions be taken on the basis of the contents of this book. Neither Leitner + Leitner nor any individual involved in the preparation of this book is responsible for the results of any actions taken on the basis of information herein, including errors and omissions. All rights reserved. No part of this book may be reproduced, stored in a retrieval system or disclosed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Leitner + Leitner. guide2007.p65 2

3 Welcome to the Slovak Republic! Based on years of consulting experience we have compiled information for you which will help you plan and realize your assignment or the assignment of your employees in the Slovak Republic. The information in the brochure rests upon legal framework valid at the turn of the year 2006/2007. We are pleased about your interest in one of the most dynamic European regions and wish you every success. Your contact person: RENÁTA BLÁHOVÁ Tax advisor, auditor, LLM Partner in the Bratislava office Tel /2/ guide2007.p65 3

4 guide2007.p65 4

5 TAXATION of Expatriates Working in the SLOVAK REPUBLIC CONTENT (January 2007): I. AT A GLANCE 6 II. BASIC PRINCIPLES OF THE SLOVAK TAX SYSTEM 7 III. TAX BASE AND TAX RATE 13 IV. ADMINISTRATION OF TAXES 16 V. AVOIDANCE OF DOUBLE TAXATION 19 VI. SOCIAL SECURITY AND HEALTH INSURANCE COVERAGE 20 VII. STANDARD SECONDMENT SCENARIOS 25 VIII. OTHER REQUIREMENTS 27 IX. CALCULATION EXAMPLES 31 X. OVERVIEW OF DOUBLE TAX TREATIES AND SOCIAL SECURITY AGREEMENTS 33 5 guide2007.p65 5

6 I. AT A GLANCE Flat tax rate of 19 % Tax return deadline 31 March Tax due by 31 March Monthly or quarterly tax advance payments EUR 1 = SKK (average exchange rate for the year 2006) Yearly inflation rate 1 12/ % Average salary (1 4 Quarter 2006) SKK Minimum holiday entitlement 4 Weeks Social and health insurance 35.2 % Employer 13.4 % Employee with assessment base limit of maximum SKK (approximately EUR 1 400) (Details in Part VI) 6 guide2007.p65 6

7 II. BASIC PRINCIPLES OF THE SLOVAK TAX SYSTEM 1. Legal Basis According to Slovak legislation, the following taxes can be levied: personal income tax corporate income tax value added tax excise duties (on alcohol, beer, wine, tobacco products, mineral oils) real estate tax, road tax and other local taxes (administered by municipalities). Value added tax ( VAT ), personal income tax and corporate income tax are the most important taxes within the Slovak tax system. Personal as well as corporate income taxation are governed by the Income Tax Act (hereinafter ITA ), which came into effect on 1 January 2004 and has been amended several times since. This Act was approved as a result of the well-known Slovak flat tax reform reflecting also the implementation of EU law in the field of taxation in connection with EU accession of the Slovak Republic. 2. Who is Liable to Personal Income Tax? a) Slovak Tax Residents An individual is a tax resident of the Slovak Republic if he/she has a permanent residence in the Slovak Republic or usually stays in the Slovak Republic. Any individual shall be deemed usually staying in the Slovak Republic if he/she is present in the Slovak Republic for at least 183 days in the relevant calendar year, either continuously or intermittently, in the Slovak Republic. Each day or part of a day of such a stay shall count towards its duration. According to the ITA, permanent residence is so far determined as the formally registered address. The method of calculating days follows provisions of the relevant double taxation treaty, if the individual is eligible for a treaty protection. Slovak tax residents are liable to tax their worldwide income in the Slovak Republic (unlimited tax liability). Should an individual be a tax resident of two states, the relevant double tax treaty determines the state of residency usually as follows: the state where he/she has his/her permanent home, otherwise the state with which his/her personal and economic relations are closer (i.e. centre of vital interests), otherwise the state in which he/she has a habitual abode, otherwise the state of which he/she is a national. 7 guide2007.p65 7

8 b) Slovak Tax Non-Residents A tax non-resident is an individual who does not fulfil the residency requirements and thus is taxed only on Slovak-sourced income (has a limited tax liability). A tax non-resident is also an individual who usually stays in the Slovak Republic just for studying or health care purposes; or is a cross-border commuter employed in the Slovak Republic. Income is considered to be Slovak-sourced income if it is related to: activities carried out through a permanent establishment; employment activities performed in the Slovak Republic or aboard of ships or aircrafts operated by a Slovak tax resident; services such as commercial, technical or other consultancy services, management or intermediary services, and similar services provided in the Slovak Republic (even if such services are not provided through a permanent establishment); activities of artists, sportsmen, performers and their co-performers and similar activities carried out in person or commercialized in the Slovak Republic (regardless of whether the relevant parties earn their income directly or through an agent); payments obtained from Slovak tax residents and from permanent establishments of Slovak tax non-residents, consisting of: payments for granting the right to use or for using industrial proprietary rights, computer software, designs or models, projects, production-technical and other knowledge which is economically exploitable (know-how); payments for granting the right to use or for using copyrights or rights similar to copyrights; interest and other income from credits and loans and from savings book deposits, deposits in current and savings accounts, participation certificates yields, bond yields, deposit certificates yields, treasury bill yields and yields related to other securities of equal ranking, and income from other investments pursuant to special legislation; rent or income from other use of real estate or movable assets located in the Slovak Republic; income from sale of real estate located in the Slovak Republic; income from sale of movable assets located in the Slovak Republic, from sale of securities issued by taxable parties with registered office in the Slovak Republic, from sale of proprietary rights registered in the Slovak Republic and from transfer of ownership interest or shares in a partnership, company or cooperative with a registered office in the Slovak Republic; remuneration of members of statutory and other bodies of legal entities for executing their function; winnings in lotteries and other similar games, winnings in advertisement contests and drawings of lots, prizes won in public and sporting competitions; alimony payments, pensions, annuities, and similar payments. 8 guide2007.p65 8

9 3. What is Subject to Personal Income Tax? Individuals are liable to personal income tax on the following sources: income from employment and related benefits and remuneration of members of statutory bodies; income from business activities and independent (professional) activities (including income from the lease of real estate); income from capital investments; other income. The taxable income is the aggregate income from the sources named above. (i) Income from Employment (Dependent Activities) a) Taxable Income This category of income includes: income received from current, former or future employments, public service or public office (or a similar relationship in which the taxable party performing his/her work for the income payer must follow the orders or instructions of such a payer, regardless of whether this activity was, is, or will be actually performed by the taxable person for the benefit of the income payer); remunerations of co-operative members, partners and statutory representatives of limited liability companies, limited partners of limited partnerships, remunerations of liquidators, authorized agents and bankruptcy trustees; wages and salaries received by constitutional officers of the Slovak Republic (the Government of the Slovak Republic, the Parliament of the Slovak Republic, the courts), public ombudsman, members of the European Parliament elected in the Slovak Republic, public prosecutors of the Slovak Republic; remuneration for executing functions in public authorities and local selfgoverning bodies (municipalities); income from the social fund paid pursuant to special legislation; tips; income from employees stock options, refunded insurance contributions claimed in previous years; prizes and winnings over SKK received by an employee; each prize or winning shall be treated separately for the purposes of the exemption. Non-monetary remunerations (benefits in kind) are to be valued at their market price. Company cars used for both business and private purposes are taxed at 1% of their acquisition price including VAT per month. Further, the taxable income includes the reimbursement of travel expenses and insurance premiums exceeding the statutory limits paid by the employer into the pension and life insurance systems. The value of the fuel consumption for private purposes is subject to personal income tax, too. 9 guide2007.p65 9

10 b) Tax Exempt Income When computing the income from employment activities, especially the following income received by a taxable person is tax-exempt (or not subject to tax): mandatory contributions made by the employer to social and public health insurance schemes and pension savings contributions; specified non-monetary benefits provided by an employer to its employees: amounts paid for training of employees (provided the training in question relates to the activity or business of employer); free food and non-alcoholic beverages for consumption at the workplace; recreation and education in the employer s facilities; income from employment activities performed in the Slovak Republic received by Slovak tax non-residents from an employer with its seat abroad when the performance of the activity does not last more than 183 days in the calendar year; the exemption does not apply to the activities of artists, professional athletes, work performed under economic employment concept and activities within a permanent establishment; reimbursement of proven expenses, provided they do not exceed statutory limits; compensations in case of temporary disability to work paid by the employer to its employees pursuant to special legislation; profit shares paid to an employee. Finally, please note that no deductions for expenditures incurred in connection with employment are available. c) Agreement on Net Pay Agreements on net pay are not provided for in the Slovak law, but in practice various types of agreements on net pay are used for seconded employees. Therefore, tax equalization (gross-up or roll-over) is done in practice, although there is no Slovak legislation on tax equalization methods. As an agreement on net pay may have sensitive tax consequences, the structuring and calculation of the employment agreement must be done carefully. (ii) Income from Business Activities, Independent Professional Services and Income from Rental and Leasing Income from business activities includes: income from agriculture, forestry and water supply industry; income from business activities according to the Trade Licence Act; income from other business activities carried out pursuant to special legislation; and income earned by partners of a general partnership and by general partners in a limited partnership. 10 guide2007.p65 10

11 Income from independent professional services includes: income from the use of industrial proprietary rights or industrial know-how, copyright and similar rights, including activities as a writer; income from independent professional services that are neither business nor entrepreneurial services (e.g. income of professional sportsmen, income from scientific, artistic and literary activities as well as the income of architects, attorneys-at-law and physicians); and income from independent activities such as those performed by experts and interpreters; income from activities of intermediaries pursuant to special legislation. Foreign nationals carrying out business activities in the Slovak Republic should obtain the appropriate Slovak trade licenses under the same conditions as Slovak nationals. If an individual or partnership keeps books, the tax base for income from business activities and independent professional services is determined on the basis of the financial result (i.e. profit or loss). Otherwise, the tax base is determined on the basis of simplified tax records as the difference between income and expenditures. Income from rental and leasing includes: income from the renting or leasing of real estate. Income from business activities, independent professional activities, rental and leasing is calculated as the excess of taxable income over deductible expenditures. As an alternative, instead, a lump-sum deduction of 40 % of the gross income can be applied, provided that the taxable person is not VAT registered or that he/she has been VAT registered only for a part of the period. (iii) Income from Capital Investments This category of income includes: interest and other yields from securities; income from share certificates derived from their payout (return); interest, winnings and savings on deposit accounts that are not related to business activities; interest and other income from credits and loans; yields from supplementary pension insurance; yields from life insurance paid out after passing a contractual age; income from bills of exchange, other than proceeds from the sale thereof. These types of income (except income stated in the third and sixth indent) are subject to withholding tax, unless they are received from abroad, in which case they are treated as a part of the tax base. The withholding tax may be reduced under double taxation treaties for individuals who are not Slovak tax residents. 11 guide2007.p65 11

12 Dividend Income Dividend income from profits (after tax) arising in 2004 or later is not subject to Slovak tax. There is no separate capital gains tax in the Slovak Republic. Income from capital paid to Slovak residents as well as non-residents is partly subject to withholding tax (see III.4.). (iv) Other Income Mainly the following income is considered as other taxable income, unless it falls into the categories of income from employment activities, business income, income from capital investments, or income from rental and leasing: income from occasional activities (including income from occasional agriculture, forestry and water supply industry and occasional rental of movable property); income from transfer of ownership title to real estate; income from sale of movable assets; income from transfer of options; income from transfer of securities; income from sale of participations in a business; income derived from inherited industrial and other intellectual proprietal rights, including copyright and rights similar to copyright; pensions and similar recurring benefits; gains from lotteries and other similar games, and prizes won in advertising competitions; prizes won in public competitions and sport prizes; income from derivative transactions. If the total sum of income from leasing of real estate; income from option, stock and company share transfers after deduction of related expenditures; as well as income from occasional activities doesn t exceed SKK in the year 2006 (SKK in the year 2007), the stated income value is free from tax in the Slovak Republic. Other income is determined as the excess of receipts over deductible expenditures. Losses incurred by the taxable person in the other income category are not deductible. 12 guide2007.p65 12

13 III. TAX BASE AND TAX RATE 1. Determination of Income The total income from different sources, such as income from employment, income from business activities and independent (professional) services, income from rental, income from capital investments and other income, forms the overall tax base of a taxable person. In general, expenditures incurred in order to generate, secure and maintain a taxable person s income shall be deducted in calculating the taxable income of the four categories of income, as long as such deduction is not restricted by law. Losses arising from business activities, independent professional services or rental of property can be offset against other types of income, with the exception of employment income and other income. If an overall loss is suffered, it can be carried forward and offset against taxable income arising from most types of non-employment income in five consecutive years. Other income is partly subject to withholding tax (see III. 4.). The income is computed in the following way: + 1. Income from dependent activities +/ 2. Income from business activities, independent professional services and rental income +/ 3. Income from capital investments + 4. Other income Total amount of income Special allowances Taxable income (annual tax base) Application of the flat tax rate amounting to 19% Income tax liability Tax credits Annual tax liability Wage tax paid in advance Tax prepayments and withholding taxes Tax due or overpayment 2. Tax Allowances Tax base-reducing allowances, depending on the taxable person s family or social status, include the following: A yearly amount corresponding to 19.2 times the living minimum in force as of 1 January of the relevant tax period. In 2006 it amounted to SKK and was claimable almost by all taxable persons except for persons who derived old-age pensions at the beginning of the tax period. As of 1 January 13 guide2007.p65 13

14 2007 the amount of the personal tax-free allowance varies depending on the taxable person s tax base. The allowance decreases if the tax base exceeds SKK 498,000. The taxable person whose tax base reaches the amount of SKK is not entitled to any tax-free allowance. A taxable person whose tax base is e.g. SKK ( EUR ) may claim the tax-free allowance only in the amount of SKK ( EUR 1 560) instead of SKK Similar limitations apply also to the spouse allowance. supplementary pension savings contributions paid pursuant to special legislation; special purpose savings; life insurance contributions. The supplementary pension savings contributions of the taxable person, the payments made by the taxable person into the special purpose savings account and the life insurance contributions may be deducted from the tax base in the amount documented as paid during the tax period up to SKK Principally, personal allowance is granted to all taxable individuals. On the other hand, the other above mentioned allowances are granted only to individuals with permanent residence in the Slovak Republic. Tax Bonus A tax bonus of SKK for each dependent child living in a common household with a taxable person with a permanent residence in Slovakia is available to the taxable persons with taxable income of at least six times the minimum wage. The tax bonus decreases the tax liability, not the tax base. In other words, it is equal to an allowance of approximately SKK assuming the 19% tax rate. 3. Tax Rate The personal income tax rate is a flat rate of 19%. The same rate is also applicable to corporate income tax and VAT. However, in the field of VAT a reduced tax rate for selected goods was introduced from 1 January Special Treatment of Non-Resident Individuals Individuals with no residence or habitual place of abode in the Slovak Republic are only taxed on income from specific sources, as mentioned in II.2b. Non-residents must file tax returns, unless their income is taxed by way of withholding tax. Pursuant to the ITA, the withholding tax is levied on the following: income from services such as commercial, technical or other consultancy services, management or intermediary services, and similar services provided in the Slovak Republic; income from independent services, e.g. of an artist, sportsman or of similar professions if such services are carried out in the Slovak Republic; 14 guide2007.p65 14

15 payments for granting the right to use or for using industrial proprietary rights, computer software, designs or models, projects, production-technical and other knowledge which is economically exploitable (know-how); payments for granting the right to use or for using copyrights or rights similar to copyrights; interest and other income on debt claims and loans granted, and income on deposits, income from participation certificates, certificates of deposit and income from other investment instruments; prizes in cash won in lotteries and other similar games, and prizes in cash won in advertisement contests and drawings, prizes in cash won in public and similar competitions and in sporting competitions; income earned under a supplementary pension savings scheme pursuant to special legislation; indemnities paid under an insurance policy after the attainment of a contractual age; income from renting of non-residential premises, joint premises of a house, or joint facilities of a house earned by owners of apartments and nonresidential premises, which is treated as an allocation to the fund for the operation, maintenance, and repairs; income of authors for their articles for newspapers, magazines, radio, or television, unless they are treated as artistic performances; interest accruing from debentures and treasury bills. The withholding tax is 19%, unless a tax treaty provides otherwise. Where no withholding tax is levied, payers of income to a non-resident are obliged to post a tax guarantee to the tax authorities withheld from the payment to the tax non-resident at a rate specified by a tax treaty, otherwise 19%. 15 guide2007.p65 15

16 IV. ADMINISTRATION OF TAXES 1. Fiscal Period In general, individuals generating taxable income must file their tax return and pay the income tax by 31 March of the year following the tax year, which is represented by the calendar year. Prepayments are generally paid based on the tax liability of the preceding year, except for prepayments related to employment income. The tax period is the calendar year. According to the Accounting Act, only legal entities may use a business year which differs from the calendar year. 2. Wage Tax Employers are obliged to withhold wage tax and social security and health insurance contributions from salaries paid to their employees. The obligation to withhold wage tax may also apply to non-resident employers with a permanent establishment in the Slovak Republic. The employer has to pay this tax to the tax office at which the entity is registered within five days from the date the salary was paid to the employee. The employer is obliged to keep payroll records and is responsible for tax registration and the correct payment of tax. Wage tax constitutes a prepayment on the employee s annual income tax liability and is credited against the personal income tax liability. If an individual only generates income from employment activities, in general it is not required that he/she files a tax return, but the employee has to submit an application for a yearly tax settlement to be made by the employer, namely by 15 February of the following year. An employer has the obligation to withhold income tax from employment income when the salary payments are made (wage tax), usually on a monthly basis, in the case of: all employees of a Slovak company, except for employees who were seconded abroad and will be taxed abroad; all employees of a Slovak branch of a foreign company that is registered with the Slovak Commercial Register or permanent establishment of a foreign company including expatriates employed by the foreign company who are seconded to work in the Slovak branch. In general, the employer is obliged to withhold a wage tax from the taxable wage paid to the employee on a monthly basis. 3. Tax Return In the case of an individual, the competent tax authority for filing the tax return is determined by the individual s residential (permanent) address in the Slovak 16 guide2007.p65 16

17 Republic, otherwise by the place where he/she usually resides (i.e. where he/ she spends most of the days within the calendar year). Generally, every individual with an annual taxable income over 50% of the amount corresponding to 19.2 times the living minimum in force as of 1 January of the relevant tax period (i.e. SKK in the year 2006, SKK in the year 2007) is obliged to file a tax return, with the exception of an individual who only has: income from dependent activities, provided that he/she requests a yearly tax settlement with the employer; income which is taxed through a final withholding tax; income which is exempt from tax. The annual filing deadline for an individual s tax return is 31 March (of the calendar year following the year in which the income was received). The taxable person must calculate the tax liability in the tax return him-/herself (self-assessment principle). Generally, husbands and wives must file separate tax returns. A filing deadline can be extended by the tax authority by up to three months upon request of the taxable person or on the basis of the discretion of the tax authority. 4. Tax Payment The tax shall be paid to the tax authority in Slovak currency. If taxable persons are taxed through a Slovak payroll, the employer has to pay tax advances to the tax office at which the entity is registered within five days from the date the salary was actually paid to the employee. Generally, taxable persons who are not taxed through a Slovak payroll, (in the event they perform dependent activities for an employer that is neither Slovak nor foreign taxpayer), pay tax advances in the amount based on the income which was paid out, transferred or credited to the taxable person s account in the given calendar month. These advance payments are due until the end of the calendar month following the month in which such income was paid out, transferred or credited to the account. The taxable person is obliged to inform the competent tax authority that he/she began to derive this income until the end of the calendar month in which such income was paid out, transferred or credited to his/her account for the first time. In the event the contract based on which the taxable person derives income does not contain information whether the duration of the stay of the taxable person in the Slovak Republic exceeds 183 days, the taxable person is obliged to pay advances only after the lapse of the 183-day-period. The difference between the final tax liability and the tax advances paid must be paid on the day of the tax return deadline at latest. 17 guide2007.p65 17

18 5. Penalties In case of non-performance of statutory obligations the tax authority can impose the following penalties, which are calculated in the same way as for companies: failure to indicate the tax in the tax return in the correct (higher) amount the tax authority shall impose a fine equal to three-times the base interest rate of the National Bank of Slovakia, multiplied by the positive difference (between the tax calculated by the tax authority and by the taxable person). At present (January 2007) the base rate amounts to 4.75 %. If a taxable person files a supplementary tax return (with a higher tax liability), the tax authority will impose a fine reduced by 50 % (1.5-times the base interest rate of the National Bank of Slovakia); failure to file the tax return within the statutory deadline regardless of the payment date, the tax authority shall impose a fine equal to 0.2% of the tax indicated in the tax return for each day of delay, but not more than 10% of the tax indicated in the tax return; the aggregate fine shall not be less than SKK and not more than SKK 1 million; failure to fulfil the registration or reporting duty the fine from SKK to SKK shall be imposed; failure to fulfil any of the non-monetary duties under specific legislation the tax authority may impose a fine up to SKK 1 million; failure to pay taxes on time is punished with an administrative fine (late payment interest) amounting to four times of the base interest rate of the National Bank of Slovakia. 18 guide2007.p65 18

19 V. AVOIDANCE OF DOUBLE TAXATION 1. Double Tax Treaties The Slovak Republic has concluded double tax treaties (hereinafter referred to as Treaty ) with almost 60 countries (see X.). Principally, the content of the Treaties reflects the OECD Model Tax Convention. According to the ITA, the Treaties which the Slovak Republic has concluded with other countries take precedence over the provisions of the ITA. In almost all Treaties, Article 15 stipulates income from employment as being taxable in the state in which the employment activity is carried out. However, Paragraph 2 of Article 15 contains an exception to this rule, which can be applied under three conditions: a) an employee must not be present in the state of activity for a period exceeding (in the aggregate) 183 days in the calendar year concerned; b) the remuneration must be paid by, or on behalf of, an employer who is not a resident of the state of activity; and c) the remuneration must not be borne by a permanent establishment which the employer has in the state of activity. The Treaty also stipulates a special regulation for taxation of other sources of income such as income from immovable property, dividends, interest, royalties, capital gains, director's fees and other income. 2. Methods for Elimination of Double Taxation In Treaties, two key methods are in place for the elimination of double taxation by the state in which the taxable person is resident, i.e. the exemption method and the credit method. Most Treaties concluded by Slovakia apply the exemption method in case of employment income (including Treaties with Austria and Germany). However, there are some important Treaties applying the credit method in case of employment income (including the Treaty with the Czech Republic). 19 guide2007.p65 19

20 VI. SOCIAL SECURITY AND HEALTH INSURANCE 1. EU Regulations In the course of the EU accession the Slovak Republic adopted new rules and implemented changes in its domestic legislation. Contrary to the directives with respect to taxes, the EEC regulations concerning social security need not be implemented into the local legislation they became applicable automatically with the EU accession. EEC Regulation No. 1408/71 of 14 June 1971 (hereinafter the Regulation ) is valid for employed persons or independent entrepreneurs (as well as their family members) who are or were subject to legal regulations of one or more member states; nationality is not of relevance in this regard. This Regulation is applied to all general and special systems of social security; its application is regulated by the rules set forth in Regulation No. 574/72. According to Regulation No. 1408/71, a person who is employed in one member state is subject to the regulations of such state even if he/she lives in another member state, or if the registered headquarters or place of business of the institution, company or individual employing such person are in another member state. There are some exceptions to this rule; the most important exception is given when an employer seconds an employee from one member state to another member state. The Regulation No. 1408/71 also stipulates detailed rules for situations when a person works in two or more EU countries. As mentioned above, the main principle is to apply the legislation of the country of residence, if work is also performed there. If no work is performed in the country of residence, the employee must be insured in accordance with the legislation of the employer s domicile. If a person works for several companies with domiciles in different countries, the legislation of the employee s country of residence is applied. Such employees are provided with a form E 101 (see VI.3.). It is expected that at the end of 2007 changes in the field of social insurance law occur. These changes shall result from the Regulation No. 883/2004, which should enter in force after adoption of implementing regulations. This Regulation should prolong the period of secondment to 24 months and the duty to request the E 102 form after the lapse of 12 months shall be removed. In the event the employee works for one employer in several member states and in the state of residence as well, he shall be obliged to pay the social insurance contributions only in the state of residence, if a considerable part of his work is performed there, otherwise he shall pay these contributions in the state of employer s seat. The aim of the new Regulation is also to simplify the procedure if the employee performs dependent and independent activities in two different member states 20 guide2007.p65 20

21 at the same time. With no exception, social insurance contributions will be paid in the member state in which dependent activities are performed. 2. Slovak Regulations Bilateral international treaties, which are binding for the Slovak Republic, are an integral part of the Slovak legal system. If an international treaty diverges from the domestic legislation, the international treaty prevails. Enclosed is a list of the countries that have concluded a bilateral Treaty on Social Insurance with the Slovak Republic (see X.). a) Health Insurance Health insurance is governed by the Act No. 580/2004 Coll. on Health Insurance. The following individuals are covered by health insurance and are obliged to pay contributions: individuals who have permanent residence in the Slovak Republic, with exception of: individuals who are health insured in another country where they perform their work; individuals who perform an independent professional activity abroad or receive a pension from another EU member state and are insured in the other EU member state. individuals who do not have a permanent residence in the Slovak Republic and are not insured in another EU member state and who have an employment contract with a Slovak employer; self-employed persons in Slovakia. The assessment base for calculating contributions is the taxable income received (certain benefits provided by the employer are excluded). The minimum base is the official minimum salary valid as at 1 January of the calendar year for which insurance contributions are paid (SKK as at 1 January 2007, SKK as at 1 January 2006). The maximum monthly base is three times the official average salary in the Slovak economy as determined by the Slovak Statistical Office for the calendar year 2 years prior to the relevant calendar year (SKK as at 1 January 2007). b) Social Security Social insurance is governed by the Act No. 461/2003 Coll. on Social Insurance. The social insurance under this Act comprises of: sickness insurance, which provides for the income during the period of temporary disability to work, pregnancy, and maternity leave, pension insurance, namely: old-age pension insurance, disability insurance, accident insurance, 21 guide2007.p65 21

22 guarantee insurance, which covers the risk of insolvency of employers, unemployment insurance, which covers the risk of loss of employees income due to their unemployment. Generally, the following individuals are covered by the sickness insurance, old-age and disability insurance, and unemployment insurance and are obliged to pay the contributions: employees who perform employment activities in the Slovak Republic and employees, who perform work outside the Slovak Republic during a certain period determined by the employer; self-employed persons in the Slovak Republic, if their income is above a specified limit. An individual over 16 years of age, who has a permanent residence, a right to a permanent residence, or a temporary residence in the Slovak Republic, can be insured on a voluntary basis. The assessment base for calculating contributions for all categories of social insurance is the taxable income received (certain benefits provided by the employer are excluded). The minimum monthly base is the official minimum monthly salary (currently SKK as at 1 October 2006). The maximum monthly base is three times the official average salary in the Slovak economy for the categories: old-age and disability insurance, unemployment insurance and reserve fund contributions; and 1.5 times the official average monthly salary for the categories of sickness insurance and guarantee insurance. The average monthly salary that applies to the period from 1 July 2006 is SKK , which is the 2005 average monthly salary. The current rates for health and social insurance coverage and other obligatory contributions (as a percentage of the employee's assessment base) are shown below: Type of insurance Employee Employer Assessment base (valid as at 1/1/2007) Min Max* Health insurance 4% 10% Sickness insurance 1.4% 1.4% Old-age insurance 4% 14% Disability insurance 3% 3% Accident insurance 0.8% unlimited unlimited Unemployment insurance 1% 1% Guarantee insurance 0.25% Reserve fund 4.75% Total 13.4% 35.2% * This maximum assessment base is applied from 1 July 2006 except for health insurance; for health insurance it is applied from 1 January guide2007.p65 22

23 Supplementary Pension Insurance In addition to the compulsory pension schemes, taxable persons and employees can invest in a supplementary pension insurance scheme. To apply the tax allowance (currently limited to SKK ) for tax purposes, the benefits have to be paid to participants after at least 10 years of saving and after they reach the age of at least 55, for both men and women. The yields are subject to Slovak withholding tax of 19%. Contributions can be made by the individual and/or by his Slovak employer. Contributions made by the Slovak employer on behalf of the employee are tax-deductible for corporate income tax purposes up to a limited amount. 3. Secondment from EU Member State The Regulation stipulates that a person who is employed in one member state by a company for which he/she usually works and is seconded by this company to another member state in order to work there shall continue to be subject to the regulations of the first member state. According to the currently valid Regulation No. 1408/71, the period of secondment cannot exceed 12 months. If, owing to unforeseeable circumstances, the duration of secondment exceeds 12 months, the employer can apply for an extension of secondment for up to further 12 months. Employees who are seconded from an EU member state to the Slovak Republic for a period exceeding 12 months are, in accordance with the Regulation and the Slovak domestic legislation, subject to the Slovak legislation in the area of social insurance. This means that the employer must pay Slovak social and health insurance contributions from the employee s salary and withhold the employee s proportion of the contributions. If an employee is sent to replace another employee whose period of secondment has ended, this does not qualify as secondment. Throughout the period of secondment a direct relationship must be maintained between the employer and the seconded employee. If the period of secondment exceeds 12 months and this is known in advance, an application to the relevant Social Security Authority requesting an exception to the Regulation is necessary. EU citizens who are seconded to work in the Slovak Republic should be provided with the form E 101, which certifies that both the seconded employee and his/her employer are exempted from paying social insurance contributions in the Slovak Republic. The employee must complete an appropriate application form in order to be covered by the Slovak social security system during his/her employment abroad. The form E 101 is valid for 12 months. 23 guide2007.p65 23

24 4. Secondment from Contracting State Employees seconded to the Slovak Republic from non-eu member states that have concluded a bilateral treaty on social insurance with the Slovak Republic (see X.) are subject to participation in the social security system in the state that is defined in the treaty. However, generally, employees are liable to contributions to the social security system in the state in which they physically carry out their employment activities. 5. Secondment from Non-EU Member States without Treaty on Social Security If an employee is seconded to the Slovak Republic by an employer with its legal seat outside the EU and such a state has not concluded a bilateral treaty on social insurance with the Slovak Republic, regardless of the length of the secondment, such an employee is excluded from the Slovak health insurance coverage. Therefore, such an employee is not liable, with respect to his secondment, to make contributions to the Slovak social and health insurance systems. 24 guide2007.p65 24

25 VII. STANDARD SECONDMENT SCENARIOS The term secondment includes a temporary transfer of an employee to another position or the hiring out of an employee to another organization. Generally, there are three possible organizational alternatives for the secondment of a foreign employee to the Slovak Republic on inter-company level: (1) secondment of employees under a consultancy agreement, (2) contracting out/hiring out of employees, (3) direct employment. 1. Secondment of Employees under Consultancy Agreement This form of secondment assumes that the seconded employee of a foreign company provides services for a Slovak company; accordingly, a consultancy agreement must be concluded between the foreign and the Slovak company. It should be noted that on the basis of the consultancy agreement, a Slovak permanent establishment of the foreign company can be created in Slovakia. The disadvantages of a possible permanent establishment can be summarized in terms of the following additional administrative burdens: tax registration for corporate income tax purposes and for the payment of wage tax advances at the tax office; tax guarantee of 19% from payments according to the consultancy agreement to which the Slovak company would be obliged unless tax advances are paid by the permanent establishment; (refers only to suppliers from non-eu member states) immediate presentation of the consultancy agreement to the tax authority; filing of the corporate income tax return. The taxation of a seconded employee from personal income tax point of view is governed by the appropriate double tax treaty (hereinafter Treaty ; see V.1.). Even if the seconded employee does not spend more than 183 days in a calendar year in the Slovak Republic, the creation of a permanent establishment has an impact on the personal income tax liability of the seconded employee and thus a proportional amount of his income attributable to the permanent establishment must be taxed in the Slovak Republic. In determining the employee s income tax liability in the Slovak Republic, it is possible to deduct any mandatory social security contributions and health insurance paid abroad, as well as the basic tax allowance per taxable person (see Part III.2) from the tax base. For more information on tax advances see Part IV guide2007.p65 25

26 Should the seconded employee transfer his domicile or habitual place of abode into the Slovak Republic, he/she may become liable to taxation of his worldwide income in the Slovak Republic (unlimited tax liability). 2. Contracting out / Hiring out of Employees This kind of secondment involves a wide-spread familiar practice of contracting out an employee, whereby the foreign company is considered to be a legal employer and the Slovak company acts as an economic employer. It is not relevant which employer (legal or economic) pays the employee's salary. The economic employer (or deemed employer ) is a Slovak employer with foreign individuals in its employment, though not on the basis of a Slovak employment contract. Such individuals are typically employed by the foreign company. In such cases, the economic employer is obliged to act as a payroll agent and must transfer the appropriate income tax advances to the appropriate tax authority on a monthly basis. As mentioned above, the Slovak company is obliged to withhold the monthly income tax advances for the hired-out employees. Starting from 2006, the employees should not pay the income tax advances themselves but should be registered in the payroll list of the Slovak company (same as direct employment). The amount of mandatory health and social security contributions paid by the foreign employee abroad is deductible for the purposes of calculating the Slovak tax liability. This alternative of secondment does not lead to the creation of a permanent establishment. 3. Direct Employment With this alternative, a seconded employee enters a direct labour relationship with a Slovak employer. In general, the employee s salary is paid by the Slovak employer in Slovak currency. However, if the place of work according to the employment agreement is abroad, the employee s salary can be paid in a foreign currency. The Slovak employer is obliged to withhold monthly tax advances as advance payments on behalf of the foreign employee. Should the seconded employee have other taxable income in addition to his/her salary, an income tax return shall be filed by the employee in place of a yearly tax settlement. Basically but not necessarily, the seconded employee is subject to the Slovak social security system. 26 guide2007.p65 26

27 VIII. Other Requirements 4. Labour Permit and Residence Permit From 1 May 2004, EU citizens and their family members have the same legal position in legal relations occurring pursuant to Act on Employment Services (No. 5/2004 Coll.) as the citizens of the Slovak Republic, if not otherwise stipulated by this Act. They do NOT need to apply for a labour permit. On the basis of the Treaty of Accession of the Slovak Republic to the EU the Slovak Republic enables access to its labour market to citizens of all EU member states without any restrictions. The Foreigners Police provides EU citizens with special identity residence permits (ID card with a photograph). Such an ID card remains valid for up to five years when issued for the purpose of employment or acting as a statutory representative. Family members of EU citizens will be treated according to the same conditions. An EU citizen who wishes to stay in the Slovak Republic permanently is obliged to register for a permanent residence at a police department that is competent according to the place of his/her permanent residency. When registering for the permanent residence, the EU citizen is obliged to submit a passport and a document confirming his accommodation. Basically, all other foreigners who intend to work in the Slovak Republic have to apply for a residence permit and a labour permit. The Slovak Republic may be entered only with a travel document (passport) and a visa or with a passport and a residence permit. A visa is not required if it is stipulated by an international treaty, or by the government's decision. a) Labour Permit Non-EU citizens ( Foreigners ) may be employed in the Slovak Republic provided that they were granted a labour permit and a temporary residence permit for the purpose of employment. A labour permit is also required for a Foreigner who intends to work in the Slovak Republic within a labour relationship with a foreign employer who is sending him/her to perform work on the basis of a commercial or another agreement concluded with a Slovak legal entity or individual. The Foreigner intending to work in the Slovak Republic shall submit a written Labour Permit Application and the Employer s Promise to Employ a Foreigner to the office in the territorial competence of which the Foreigner is to perform the employment prior to his/her arrival in the Slovak Republic. This has to be done in person or by means of the future employer. 27 guide2007.p65 27

28 The labour permit shall be valid only for the type and place of work corresponding to the submitted employer s promise. The competent office issues the labour permit with validity up to one year. The office may repeatedly extend the labour permit by up to one year upon the application of the Foreigner. b) Residence Permit The residence of Foreigners in the Slovak Republic is divided into two categories temporary and permanent residence. Temporary Residence Permit The Foreigner has to submit a Temporary Residence Permit Application in person, abroad, at the consulate or embassy of the Slovak Republic in the country which issued his/her passport, at the consulate or embassy of the Slovak Republic in the country where he/she has his/her residence. The following documents are required for a temporary residence permit: passport; photograph; documents not older than 90 days, confirming mainly: the purpose of stay, financial coverage of the stay (in the amount of five times the minimal wage per each month of the stay for the purpose of performing a business activity and in the amount of the minimal wage per each month of the stay for other purposes), no criminal history (extract from the Criminal Register) health insurance covering the territory of the Slovak Republic, confirmation of accommodation during the temporary stay long-term stay of the foreigner. The temporary residence permit can be granted for a time necessary for achieving its purpose, however, for no longer than two years. With regard to the period for granting a labour permit by the relevant authorities (within 30 days) and with regard to the period for granting the temporary residence permit at the Foreigners Police, the foreign citizens police department (within 90 days), it is recommended that the applications are filed enough in advance. Permanent Residence Permit Based on the application, the Foreigners Police may grant a permanent residence permit for the first time for five years ( first permit ). After the end of five years the Foreigners Police may, based upon the application, grant a permanent residence permit for an indefinite period of time ( subsequent permit ). 28 guide2007.p65 28