CONTRACT SI2.ICNPROCE

CONTRACT SI2.ICNPROCE009493100 IMPLEMENTED BY FOR DEMOLIN, BRULARD, BARTHELEMY COMMISSION EUROPEENNE - HOCHE - - DG ENTREPRISE AND INDUSTRY - Study on Effects of Tax Systems on the Retention of Earnings and the Increase of Own Equity Jean ALBERT Team Leader - ANNEX 20 - - SLOVAKIA - - COUNTRY REPORT - Submitted by Milika KADELOVÁ / Mickael COMPAGNON Country Expert February 15, 2008 1

SLOVAKIA Mazars Tax k.s. Milika Kadelová / Mickael Compagnon Straková 1 Bratislava 81 011 Slovakia Tel 00 421 2 59 20 47 00 Fax 00 4221 2 59 20 47 03 office@mazars.sk INTRODUCTION The aim of the report is to provide overview of those features of Slovak tax system that are affecting decision of SME business owners on the retention or profit distribution. Further is presented the summary of the impact of the current tax system on financing of the SMEs in practice. Key-summary of findings: i) The current Slovak tax system provides a more favourable tax treatment to the distribution of earnings in comparison to the retention of earnings in the Undertaking. This statement is based on several factors including the following: 2

Dividends being exempt from income taxation a, while sale of business share and shares is fully taxable (less acquisition price) at 19 % a Profits generated prior to year 2004 The distribution of profits generated prior to year 2004 is subject to corporate as well personal income taxation of 19%. If dividends prior to year 2004 are paid out to foreign stakeholders there will be a security tax of 19 % / treaty rate withholding applicable, unless the EU Parent Subsidiary Directive is applicable 3. It means that there is no taxation of dividends paid out between EU seated companies, with direct shareholding of at least 25%, for period longer than 2 years. Profits of year 2004 and later Starting with the year 2004 profits, the distribution of earnings is not subject to further income taxation. It means that dividends paid out are exempt from further taxation, while already taxed on the level of the Corporation. This is applicable to both Slovak tax residents and non residents, i.e. no withholding tax is applicable in the case of dividend paid out to the foreign shareholders. For the completeness sake, income distribution to unlimited partners in both limited liability as well as general partnership is subject to Slovak income tax, since it is not considered to be the dividend distribution that is not subject to taxation 4. For foreign partners, the pay out of such income creates permanent establishment in Slovakia 4 (i.e. this income is taxable by 19 %). The same tax treatment described above applies also to liquidation surplus, business share pay out as well as profit distribution to silent partner paid out/received. 1 Articles 3 sec. 2 c) and 12 sec. 7 c) of the Act No. 595/2003 Collection of laws of the Slovak Republic a Article 15 of the Act No. 595/2003 Collection of laws of the Slovak Republic 3

For completeness sake this tax treatment is often discussed and might be subject to changes in future by current left oriented Slovak government. However the strong resistance to such intentions is shown by both entrepreneurs and public. 3 Article 52 sec 24 of the Act No. 595/2003 Collection of laws of the Slovak Republic 4 Articles 3 sec. 2 c), 12 sec. 7 c) and 16 sec 2 and 3 of the Act No. 595/2003 Coll. of the Slovak Republic Sale of business shares /shares As already mentioned, profits from the sale of business shares and shares are taxable at general rate of 19 %. There are no exemptions available for the Corporations with respect to this taxation. In the case of the natural entities, the sale of the business shares and shares aquired prior to 31.12.2003 is exempt if these are held for five (business shares) and three years (shares) prior to their sale 5. In the case of natural entities, the profit from the sale of business shares and shares acquired after 31.12. 2003 is taxable with general allowance and exempt income allowances applicable to this income 6 (for more details please see section 25.1. ii)). In addition, no tax incentives or dividend payout discentives exist in the Slovak tax legislation motivating the business owners to retain the earnings in the Undertaking. ii) By debt or equity financing dilemma, debt financing is more favourable from tax point of view. Further, in Slovakia the creation of reserves and provisions as tax deductible costs is very restricted without significant impact on decision on financing of the Undertaking. Due to practically no tax limitations on interest tax (while considering also solvency and liquidity criteria), debt financing is commonly used by the Undertakings in Slovakia. 4

The business entity is even eligible to deduct the interest costs form the loans provided by business owner or any related entity b (under the general compliance with the transfer pricing principles). 5 Article 52 sec 20 and sec 21 of the Act No. 595/2003 Collection of laws of the Slovak Republic 6 Article 11 of the Act No. 595/2003 Collection of laws of the Slovak Republic By business owner having loan provision as passive income (income from personal activities rather then business) shall include the interest income from loans provided in gross amount in his/her personal income tax base to be taxed by 19% tax. In the case of personal income taxation no costs are allowed to reduce the tax base 7. Interests by tax non-residents With respect to tax non-residents, the taxation of interest is dependent on the stipulations of the effective Double Taxation Avoidance Treaty (over 50 effective Treaties at the moment). If there is no Treaty applicable, interests are taxed by 19 % withholding tax on source 8. In the case of the interest payments between the EU seated companies, which hold shares of over 25 % for more then 2 years, these interests would be exempt under the stipulations of the EU Interest and Royalty Directive 2003/49/ES 9. iii) Business versus passive income taxation Generally, the Undertakings have possibility to cumulate their taxable income to be lowered by the total tax deductible costs when calculating taxable base (19 % tax rate). In the case of personal income taxes, when business owners act as natural entities there are several limitations with respect to tax of related b General rules on tax deductibity of costs with restrictions applicable - Articles 19, 20 and 21 of the Act No. 595/2003 Collection of laws of the Slovak Republic 5

costs per each individual income. Further, there are limited possibilities for the natural entities to apply tax loss carry forward. 7 Article 7 sec 4 of the Act No. 595/2003 Collection of laws of the Slovak Republic 8 Articles 16 sec 1 e) 3 and 43 sec 2 of the Act No. 595/2003 Collection of laws of the Slovak Republic 9 Article 13 sec 2 g) of the Act No. 595/2003 Collection of laws of the Slovak Republic (corporate entities only) On the other hand, there are several exemptions available at the moment of the sale of investments (of real estates, business shares/shares acquired prior to year 2004) as well as set of allowances per person 10 (general annual allowance, spouse allowance, child bonus, minimum exempt income etc. please see section 25.1. ii)). When using the above criterion, it is fair to claim that both passive and business incomes are treated similarly with majority of income being subject to taxation at 19 %. The differences arising between the Undertakings and natural entity taxation relate to the extend of the costs that are applicable during the period of business activity versus exemptions available at the point of sale (natural entities only) as well as with respect to general allowance system in place. In practice, however there is an perception that the current tax system is the most favourable in many years with respect to profit distribution and in sight or the possible changes business owners tend to consider private investments from dividends paid out as more favourable once. Conclusion based on our findings: Taking into account only the above described tax considerations, scenarios preferred by business owners are following: Higher debt financing of the business entity, decreasing the taxable corporate incomes of the Undertaking Distribution of profits (taxed by corporate tax) with no further taxation to business owners. 6

Due to publicly known fact of no dividend taxation and simplicity of application, the issues relating to no ratio of profit retention/loan financing is currently not the primary area of tax consultancy in Slovakia. 10 Articles 9 sec 1 a), b) and c) as well as Art. 52 sec 20) and 21) of the Act No. 595/2003 Collection of laws of the Slovak Republic Solutions to promote retained earnings: The more favourable tax treatment of the distribution of earning is evidently having the negative impact on the capital base of enterprises undertaking in Slovakia. The implementation of the tax incentives favouring the retention of earnings might be the appropriate solution in order to strengthen the capital of companies. The tax incentives means might be following: Exemptions, significant allowances or decrease of tax rate for the capital gains from sale of business Decrease or partial refund of corporate income tax in case of profit retention. Promotion of the tax incentives shows to be more effective approach compared to the implementation of the tax disincentives (obstacles) in order to motivate the business owners to retain the earnings in their Undertakings. Glossary/Explanation of Key Terms/Antonyms: The general Key Terms enclosed in the Glossary to the EU Commission project within the meaning explained were used in this Project. Further the meaning of several general Key Terms was extended or used with certain specific features complying with the Country Specifics. The other specific Key terms and Antonyms were supplied as follows: 7

Corporate income taxation/tax ( CIT ) shall refer to the tax levied by the government and delegated authorities on the Undertaking s net profit, which is the result of the Undertaking s total revenue minus its total expenses. CIT is applicable only on Corporations, not applicable on Partnerships (Income of Unlimited Partner) or Sole Trader business income. Natural Entity/Natural person shall mean the individual other than Corporation, Partnership or Sole Trader. Personal income taxation/tax ( PIT ) shall refer to tax levied on the income of individual, private investment income, Sole Trader business income and Partnership profits attributed to Unlimited Partners. Private/non Business income shall mean the returns from investment into other assets than the Undertaking. Sale of the Business shall refer to the sale of the assets of the business in the specific way as the sale of total assets and take over of all liabilities (based on specific contract on sale of business. Sale of the Shares shall refer to the sale of the shares in the business having two forms, sale of share in Limited liability Company and sale of shares in Joint Stock Company. Sale of Securities shall refer to sale of securities, Slovak or foreign, tradable or non tradable includng ordinary shares on joint stock companies and companies with similar treatment, debentures or bonds, participation certificates and units, etc. that are considered securities according to the non tax country legislation, used for the purposes of tax exemptions and allowances of capital gains from sale. SITA shall mean Slovak income tax Act No. 585/2003 Z.z. that regulates local corporate income taxation and personal income taxation Sole Trader shall be considered the equivalent of a general partnership with only one partner. Sole Trader as an individual might receive the combination of Business income and Private investment income each treated differently. Unlimited Partners shall refer to an investor in partnerships whose personal liability is not limited only to the extent of his or her investments into the partnership. Withholding tax ( WHT ) shall mean the taxation of income by way of wihhodling made by the entity paying the income to the beneficiary on his behalf. The beneficiary receives the net income decreased by tax. Paying 8

entity pays the tax on behalf of beneficiary to fiscal authority and is responsible for the timely and correct payment. In the comments bellow the detailed reponses to the questions given are presented including the explanations and information in the tables and case studies. For the simplicity sake there are no further comments on the tax treatment in international scope included in Parts 1 to 4 (e.g. comments relate only to the transactions between the Slovak tax residents). The relevant comments of tax treatment related to non residents are attached in Annex. 9

PART 1 GENERAL QUESTIONS 1. What are the main characteristics of the tax systems applicable on enterprises and business owners in your Country (corporate income tax, income tax, capital gains tax, other profit based taxes, capital based taxes, other taxes)? The Slovak tax system recognizes two types of income taxation as follows: Personal income taxation ( PIT ) Corporate income taxation ( CIT ) The flat rate tax of 19% is applicable on both corporate income as well as personal income. There si no other profit based tax existing in Slovakia. The capital gains are part of the overall profits taxed in system of PIT or CIT. Personal income taxation applies on income received by individual (from employment, investment, sale of property or other activities), income received by sole trader or income received by general partner of General Partnership or unlimited partner of Limited Partnership 11. 11 Articles related to PIT - 3 to 11, 32 to 38 of the Act No. 595/2003 Collection of laws of the Slovak Republic Corporate income taxation 12 applies on income (profits) generated by business companies such as Limited Liability Company, Joint Stock Company and partly Limited Partnership. For these purposes no comments are made with respect to non-profit companies (such as foundations, etc.) that are treated also within the system of CIT with some differences to the business companies. 1.1. Corporate 10

1.1.1 What are the general principles for the computation of taxable profits? Taxable profits are calculated from the accounting profits accounted on the basis of double entry bookkeeping based on the standards specified by the Slovak accounting legislation 13. The taxable profit is calculated by adjusting it for the entries that are specified in the SITA 14. From the calculated tax base tax loss from the previous years (five years carry forward is applicable) might be deducted according the conditions specified in SITA 15. 1.1.2 What are the main differences between the tax balance sheet and commercial balance sheet? The financial statements (consisting from Balance sheet and Profit and Loss statement) are considered to be the commercial balance sheet in Slovakia and are to be enclosed to the tax return. The financial statements report on the information accounted based on double entry bookkeeping standards specified by the Slovak accounting legislation 13. 12 Articles 12 to 31 of the Act No. 595/2003 Collection of laws of the Slovak Republic 13 Accounting Act (No. 431/2002 Coll.), Slovak Accounting Standards for double entry bookkeeping - Decree of the Ministry of Finance No. 23054/2002-92dated 16 December 2002 as amended 14 Articles 17 to 21 of the Act No. 595/2003 Collection of laws of the Slovak Republic 15 Article 30 of the Act No. 595/2003 Collection of laws of the Slovak Republic 11

There is no standard tax balance sheet to be used for tax purposes; rather the separate calculation of the tax base by adjusting entries increasing or decreasing the accounting result is used 16. Some of the adjustments are also to be specified in the tax return form. The adjustment of accounting profits is made by: Non-taxable income (e.g. dividends) Taxable income or deductible costs under some conditions (e.g. delay charges and contractual fines treated taxable upon payment) Non-deductible costs-general specification Non-deductible costs-specific costs (e.g. costs of representation) Deductible costs uder specified conditions or limits (e.g. depreciation of assets) 1.1.3. What are the most important adjustments for the computation of taxable profits/taxable gains on the base of accounting profits? The examples of most important adjustments are as follows: 16 Non-taxable income; dividends, donations, compensation of new shares at business reorganizations or increase of basic capital from undistributed profits etc. 16 Taxable income or deductible costs under some conditions; e.g. delay charges and contractual fines treated taxable upon receipt as well as the costs of this character deductible upon payment 16 Non-deductible costs-general specification; the costs with no direct link to taxable incomes of undertaking, not booked in the tax period, or for which it is not possible to prove the rendering 17 Non-deductible costs-specific costs; costs of representation, damages and shortages, fines and penalties, etc. 16 Article 17 of the Act No. 595/2003 Collection of laws of the Slovak Republic 17 Articles 19 to 22 of the Act No. 595/2003 Collection of laws of the Slovak Republic 12

17 Deductible costs uder specified conditions or limits; e.g. depreciation of assets regulated by SITA, reserves and provisions deductible only in specific cases, capital losses deductible for specified property only or under some conditions, travel costs or fuel consumption with some limits, etc. 1.2. Income 1.2.1. What are the general principles of income taxation of business owners on business income, wages, distributed earnings, interest on loans and capital gain (sale of shares)? The business owner is treated as an invidividual that is subject to personal income tax. The personal income tax rate is 19% of tax base. The tax base is calculated as the aggregate of separate categories of personal income (partial tax base) 18, such as: business income (sole trader activity) income from employment, investment income (interest income) capital gains from sale of property (real-estate, securities and derivatives) and other casual income. The taxable base is calculated differently for each category of income. The deductions of costs are normally available only for business income, when it is possible also to reach the deductible tax loss (the tax loss should not be reported for the other categories of income). The business income comprises also the capital gains in case the property had been included in business property of the individual. Otherewise it is treated as the separate category of income (capital gains partial tax base). 18 Articles 3 to 11 of the Act No. 595/2003 Collection of laws of the Slovak Republic 13

The standard individual allowance (non taxable income) available is annually in total of 96 TSK to 0 (based on the level of earned incomes). There are some allowances for wife/husband and allowances also for children available 19. The individual is required to file a tax return by 31 March following the calendar year when the income was earned, unless the income is considered tax exempt or if the income is subject to final reconsiliation of tax prepayments made by the employeer. There are some further conditions relevant that exclude or set obligation for the individual to file the tax return 20. Income taxation of business owners on business income The business owner receiving the business income is treated as sole trader that is subject to personal income taxation. The tax base of business owner is calculated on basis of accounting profit using the single-entry bookkeeping system, as the difference between his income and expenses 21. Further, the income can be decreased either by the actually incurred expenses, or by the lump expenses determined as the percentage of income can be deducted. The lump expenses are in amount to 40% or 60 %. 21 The Sole Trader is elligible to use single-entry bookkeeping or voluntary use of double-entry bookkeeping system. business owner receiving wages The wages received by business owner (individual) are taxable by 19%. 19 Article 11 of the Act No. 595/2003 Collection of laws of the Slovak Republic 20 Article 32 of the Act No. 595/2003 Collection of laws of the Slovak Republic (on tax return filling), Articles 35 to 38 of the Act No. 595/2003 Collection of laws of the Slovak Republic (on obligations of employer) 21 Articles 6 (sec 10 on lump sums) and 17 of the Act No. 595/2003 Collection of laws of the Slovak Republic, Accounting Act (No. 431/2002 Coll.), Slovak Accounting Standards for single entry bookkeeping - Decree of the Ministry of Finance No. 23586/2002-92 dated 17 December 2002 as amended 14

The tax should be withheld by employer who is responsible for proper and timely pre-payment of tax calculated from gross wage of employee. The remuneration of members of statutory bodies (except for distribution of profits) is treated also as the employment income 22. The employer is obliged to provide employee with final reconsiliation of the tax prepayments for the final tax liability, unless the employee received the other categories of income based on other conditions stipulated in SITA 20. business owner receiving distributed earnings The distributed earnings (dividends) paid from taxed profits are generally not taxable. This treatement is available for the profits generated in year 2004 and further 23. It is equally applicable for all recipients whether Slovak residents or non-residents. The distributed profits from year previous to year 2004 are taxable by 19% (with obligation to file the tax return for Slovak residents). business owner receiving interest on loans The interest income is taxable by 19%. There is no possibility to deduct any costs (if applicable) from this income, except for the interest income received for provision of loan within the business (received as business income). Interest income -business income might be deducted by the costs (e.g. interest costs) under the standard conditions specified by SITA 24. The recipient (Slovak tax resident) is having the obligation to file tax return in case of receipt of the interest income. business owner receiving capital gain (sale of shares) Capital gain (if not exempt) is taxable by 19%. 22 Article 5 sec 1 a) and sec 2 of the Act No. 595/2003 Collection of laws of the Slovak Republic 23 Article 3 sec 1 c) of the Act No. 595/2003 Collection of laws of the Slovak Republic 24 Article 6 of the Act No. 595/2003 Collection of laws of the Slovak Republic, Articles 17 to 29 of the Act No. 595/2003 Collection of laws of the Slovak Republic 15

The taxable capital gain is calculated as the difference between the selling price and deductible costs. Deductible costs include the purchase price and acquisition and selling expenses borne by the seller 24. The annual allowance (exemption) up to amount of 24 900 (applicable in year 2007) might be applied. The exemption applies on total profits from sale of some types of securities that is calculated as the difference between total income from sale of all applicable securities and total deductible expenses connected to sale of securities. In case the total result from sale of securities exceeds the threshold only the sum exceeding the limit is taxable. For completeness the yearly total exemption of 24 900 SK is to be applied for more categories of income (e.g. rental of real estates and casual income) but is to be applied only once. The loss from the sale of securities must not be deducted from other categories of income of the employee (e.g. the income from employment, business income, etc.) 25. 1.2.2. Is there a different tax treatment for income from different income sources? Yes, different tax treatment is to be applied for income from different income sources, recognized as follows: business income (sole trader activity) - The tax base is calculated as the difference between the income and expenses, the deductible tax loss might be reported (Article 6 of the SITA) income from employment- The tax (19%) from gross wage is to be withheld by employer (Article 5 of the SITA) investment income (interest income) - The interest income is taxable (19%) without the possibility of costs deduction (except for the interest income received for provision of loan within the business) (Article 7 of the SITA) 24 Article 8 sec 5 to 11 of the Act No. 595/2003 Collection of laws of the Slovak Republic 25 Article 4 sec 1 and sec 2 and Article 8 sec 1 e), sec 5 e) and sec 8 of the Act No. 595/2003 Collection of laws of the Slovak Republic 16

capital gains from sale of property (Article 8 of the SITA) (real-estate, securities and derivatives) and other casual income - The taxable capital gain (19% tax) is calculated as the difference between the selling price and deductible costs; deductible costs include the purchase price and acquisition and selling expenses borne by the seller; some exemptions are available for the capital gains from sale of securities or real estates (not applicable for sale of property included into business assets of seller) 10. The deductible tax loss might be reported only for business income. Within the category of capital gains (income), the capital loss might be deducted from capital gains 25. 1.3. Capital 1.3.1. Is there a different tax treatment between distributions of earnings and capital gains realised by the sale of the business or the shares in the undertaking? Yes, the tax treatment is different, please see bellow: The distribution of earnings (after taxation by CIT) to the beneficiary is not further taxable (applicable for profits generated in years 2004 and later). Capital gains realized by the sale of business are considered to be the taxable income (income from business acitivities). The taxable base is calculated as the difference between the selling price of business and its tax value (residual tax value of assets decreased by liabilities). Capital gains realized by sale of shares - Capital gain (if not exempt) is taxable by 19%. The taxable capital gain is calculated as the difference between the selling price and deductible costs (purchase price and acquisition and selling expenses borne by the seller). 17

The annual allowance (exemption) up to amount of 24 900 (applicable in year 2007) 26 might be applied on capital gains from sale of some types of securities (e.g. shares on limited liability or joint stock company). The exemption applies on total capital gains profits from sale of the securities that is calculated as the difference between total income from sale of all applicable securities and total deductible expenses connected to sale of securities. In case the total result from sale of securities exceeds the threshold only the sum exceeding the limit is taxable. Some exemptions relating to sales of shares aquired prior to year 2004 are available 27 ; the exemption applies on sale of securities held for longer than 3 years and sale of shares in Limited Liabilitiy Company held longer than 5 years. 1.3.2. Are there different tax treatments for long-term capital gains and short-term capital gains? No, there is no different tax treatment applicable on capital gains with respect to the durance of its retention. 1.3.3. Are there different tax treatments for capital gain from SME business stock and capital gain from larger companies business stock? No, there is no different tax treatment applicable on capital gains with respect to the size of the company. The overview of relevant tax provisions and tax treatement thoughtout the years 2002 to 2006 is presented in tables bellow with specifics of Corporations and Partnerships applicable for SMEs. 26 Article 9 sec 1 j) and Article 11 of the Act No. 595/2003 Collection of laws of the Slovak Republic 27 Article 52 sec 20 and 21 of the Act No. 595/2003 Collection of laws of the Slovak Republic 18

19 Countries RELEVANT TAX PROVISIONS AND SUBSEQUENT CHANGES For CORPORATIONS (distinguish specific tax rates for SMEs) 2002 X 2003 X 2004 XX 2005 XX 2006 XX Corporate tax 1. Tax rate Standard 25 25 19 19 19 Reduced Reduced tax of Reduced tax of 15% N/A N/A N/A 15% for Agriculture production (minimum 50% of agr. incomes); Reduced tax of 18% for employing disabled persons (50% and more of disabled employees, minimum total employees 20) for Agriculture production (minimum 50% of agr. incomes); Reduced tax of 18% for employing disabled persons (50% and more of disabled employees, minimum total employees 20) Minimum Tax 24 TSK N/A N/A N/A N/A Special Rates % Non profit tax (local tax on corporations, energy tax ) 2. Tax accounting rules 3. Depreciation Basis 5,10,15 (dividends and interest, etc.), 20 N/A (for nonprofit organization same tax rate applicable, available exemption of incomes 300 TSKK) Right for depreciation limited to owners of assets, basis purchase price (at purchase) or official evaluation (contributions, gifts) 5,10,15 (dividends interest, etc.), 20 N/A (for non-profit organization same tax rate applicable, available exemption of incomes 300 TSKK) Right for depreciation limited to owners of assets, basis purchase price (at purchase) or official evaluation (contributions, gifts) N/A N/A N/A N/A (for nonprofit organization same tax rate applicable, available exemption of incomes 300 TSKK) Right for depreciation not limited to owners of assets, basis purchase price (at purchase) or official evaluation (contributions, gifts) X Income Tax Act No. 366/1999 Coll. effective until 31.12.2003, some provisions still in force XX Income Tax Act No. 595/2003 Coll. effective from 1.1.2004 N/A (for nonprofit organization same tax rate applicable, available exemption of incomes 300 TSKK) Right for depreciation not limited to owners of assets, basis purchase price (at purchase) or official evaluation (contributions, gifts) N/A (for non-profit organization same tax rate applicable, available exemption of incomes 300 TSKK), cancelled from 1.1.2007) Right for depreciation not limited to owners of assets, basis purchase price (at purchase) or official evaluation (contributio ns, gifts) 19

Methods Rates (%) Accounting Straight line, accelerated depreciation (based on decision) Strait line annual rates: 14,2 (cars, computers; 6,2 (machinery); 3,4 (machinery); 1,4 (special buildings and machinery); 1,5 (regular buildings) Based on economic life Intangibles From 2 to 5 years Non depreciable assets 4. Provisions Risks and futures expenses Land, works of art No tax available for reserves on risks, available for some explicitly specified future expenses (wages and mandatory contributions, services relevant to fiscal year etc.) Straight line, accelerated depreciation (based on decision) Strait line annual rates: 14,2 (cars, computers; 8,5 (machinery); 4,3 (machinery); 3,1 (special buildings nad machinery); 1,4 (regular buildings) Based on economic life Straight line, accelerated depreciation (based on decision) Strait line annual rates: 25 (cars, computers; 16,6 (machinery); 8,3(machinery and special buildings; 5 (regular buildings) Based on economic life From 2 to 5 years From 2 to 5 years Land, works of art No tax available for reserves on risks, available for some explicitly specified future expenses (wages and mandatory contributions, statutory audits services relevant to fiscal year etc.) Land, works of art No tax available for reserves on risks, available for some explicitly specified future expenses (wages, mandatory contributions, statutory audits, services relevant to fiscal year etc.) Straight line, accelerated depreciation (based on decision) Strait line annual rates: 25 (cars, computers; 16,6 (machinery); 8,3(machinery and special buildings; 5 (regular buildings) Based on economic life Based on economic life Land, works of art No tax available for reserves on risks, available for some explicitly specified future expenses (wages and mandatory contributions, statutory audits, services relevant to fiscal year etc.) Straight line, accelerated depreciation (based on decision) Strait line annual rates: 25 (cars, computers; 16,6 (machinery); 8,3(machine ry and special buildings; 5 (regular buildings) Based on economic life Based on economic life Land, works of art No tax available for reserves on risks, available for some explicitly specified future expenses (wages and mandatory contribution s, statutory audits, services relevant to fiscal year etc.) 20

Bad debts Limited tax of provisions to bad debts or write off (the special conditions to be fulfilled, e.g. bankruptcy of debtor) Limited tax provisions to bad debts or write off (the special conditions to be fulfilled, e.g. bankruptcy of debtor) Tax of provisions to bad debts or write off possible, conditions less limitative (some conditions to be fulfilled, e.g. maturity period) Tax of provisions to bad debts or write off possible, conditions less limitative (some conditions to be fulfilled, e.g. maturity period) Tax of provisions to bad debts or write off possible, conditions less limitative (some conditions to be fulfilled, e.g. maturity period) Pensions N/A N/A N/A N/A N/A Repairs Reserves on repairs accrued 2 and more years based on plan, to maximum of 80% of asset value (plus further conditions to be fulfilled) Reserves on repairs abolished, available if used in previous years under the plan (accrued 2 and more years to maximum of 80% of asset value and further conditions to be fulfilled N/A N/A N/A 5. Losses Carry forward Cumulative of 3 year consequitive losses, 5 years carry forward from the first profits after loss (some limitations 1/5 part of loss annual deduction, investment into assets in sum of loss is necessary) Cumulative of 3 year consequitive losses, 5 years carry forward from the first profits after loss (some limitations 1/5 part of loss annual deduction, investment into assets in sum of loss is necessary) 5 years loss carry forward (deduction from profits), no limitations; the previous years carry forward combination possible 5 years loss carry forward (deduction from profits), no limitations; the previous years carry forward combination possible Carry back N/A N/A N/A N/A N/A Transfer of losses Not possible Not possible Possible only for business combinations (mergers, divisions etc.); applicable only to new system of loss carry forward Possible only for business combinations (mergers, divisions etc.); applicable only to new system of loss carry forward 5 years loss carry forward (deduction from profits), no limitations; the previous years carry forward combination possible Possible only for business combination s (mergers, divisions etc.); applicable only to new system of loss carry forward 21

5. Inventories Valuation rules Allocation methods Purchase price including costs of purchase; FIFO method or based on weighted average Inventories in process; direct costs allocated, partly indirect costs for long processing inventory Purchase price including costs of purchase; FIFO method or based on weighted average Inventories in process; direct costs allocated, partly indirect costs for long processing inventory Purchase price including costs of purchase; FIFO method or based on weighted average Inventories in process; direct costs allocated, partly indirect costs for long processing inventory Purchase price including costs of purchase; FIFO method or based on weighted average Inventories in process; direct costs allocated, partly indirect costs for long processing inventory Purchase price including costs of purchase; FIFO method or based on weighted average Inventories in process; direct costs allocated, partly indirect costs for long processing inventory Personal Income tax Interest Income (recipient Slovak resident) Dividends (recipient Slovak resident) Employment income Taxable (15% special witholding tax for interest), no exemptions; of costs not applicable for private (non business) income Profit after Tax (CIT) subject to special rate 15% (withholding tax) Received income Taxable (progressive rates 10-38%) by withholding, deductible for Undertaking Taxable (15% special witholding tax for interest); no exemptions; of costs not applicable for private (non business) income Profit after Tax (CIT) subject to special rate 15% (withholding tax) Received income Taxable (progressive rates 10-38%) by withholding, deductible for Undertaking Taxable (19%), no exemptions; of costs not applicable for private (non business) income Profit after Tax (CIT) Not taxable, applicable for profits generated in year 2004 and further; both paid/received Received income Taxable (19%) by withholding, deductible for Undertaking Taxable (19%), no exemptions; of costs not applicable for private (non business) income Profit after Tax (CIT) Not taxable, applicable for profits generated in year 2004 and further; both paid/received Received income Taxable (19%) by withholding, deductible for Undertaking Taxable (19%), no exemptions; of costs not applicable for private (non business) income Profit after Tax (CIT) Not taxable, applicable for profits generated in year 2004 and further; both paid/receive d Received income Taxable (19%) by withholding, deductible for Undertaking 22

Capital gains tax (PIT, CIT) Sale of fixed assets Business assets: Profits taxable (dif. selling price and tax residual value), tax of loss limited for some fixed assets (land, works of art, personal cars, furniture, etc.) Private income (dif. selling price and purchase price including costs of purchase), some exemptions availabe Business assets : Profits taxable (dif. selling price and tax residual value), tax of loss limited for some fixed assets (land, works of art, personal cars, furniture, etc.) Private income (dif. selling price and purchase price including costs of purchase), some exemptions availabe Business assets : Profits taxable (dif. selling price and tax residual value), tax of loss limited only for lands and works of art Private income (dif. selling price and purchase price including costs of purchase), some exemptions availabe Business assets (sole trader): Profits taxable (dif. selling price and tax residual value), tax of loss limited only for lands and works of art Private income (dif. selling price and purchase price including costs of purchase), some exemptions availabe Business assets (sole trader): Profits taxable (dif. selling price and tax residual value), tax of loss limited only for lands and works of art Private income dif. selling price and purchase price including costs of purchase), some exemptions available Timing rules Business assets Taxable at sale (e.g. date of sale agreement), sale of real estates is taxable at transfer of rights effective in Cadastre of RV Private income taxable upon receipt of income (if not exempt) Business assets Taxable at sale (e.g. date of sale agreement), sale of real estates is taxable at transfer of rights effective in Cadastre of RV Private income taxable upon receipt of income (if not exempt) Business assets Taxable at sale (e.g. date of sale agreement), applicable also for sale of real estates upon right of use, not transfer in Cadastre RV Private income taxable upon receipt of income (if not exempt) Business assets Taxable at sale (e.g. date of sale agreement), applicable also for sale of real estates upon right of use, not upon transfer in Cadastre RV Private income taxable upon receipt of income (if not exempt) Business assets Taxable at sale (e.g. date of sale agreement), applicable also for sale of real estates upon right of use, not upon transfer in Cadastre RV Private income taxable upon receipt of income (if not exempt) 23

Accounting rules N/A for Private income; Accounting profit (diff. between selling price and accounting residual value) realized at sale (e.g. date of sale agreement), sale of real estates is effective at transfer of rights in Cadastre of RV N/A for Private income; Accounting profit (diff. between selling price and accounting residual value) realized at effective sale, except for sale of real -estates (effective at transfer of rights in Cadastre of RV) N/A for Private income; Accounting profit (diff. between selling price and accounting residual value) realized at sale (e.g. date of sale agreement), applicable also for sale of real estates upon right of use, not transfer in Cadastre RV N/A for Private income; Accounting profit (diff. between selling price and accounting residual value) realized at sale, applicable also for sale of real estates upon right of use, not transfer in Cadastre RV N/A for Private income; Accounting profit (diff. between selling price and accounting residual value) realized at sale, applicable also for sale of real estates upon right of use, not transfer in Cadastre RV Inflation (%) 3,35 8,5 7,5 2,7 4,5 Rates (%) 25 (CIT), progressive rate 10-38 (PIT) 25 (CIT), progressive rate 10-38 (PIT) 19 flat 19 flat 19 flat Exemptions Applicable only on sale of property not included in business (individual investment, private purposes); based on minimum 2,3, or 5 years ownership (depending on type of building, or shares) Applicable only on sale of property not included in business (individual investment, private purposes);based on minimum 2,3 or 5 years ownership (depending on type of building, or shares) Applicable only on sale of property not included in business (individual investment, private purposes); restricted exemptions, some still available (buildings or shares aquired prior 2004) Applicable only on sale of property not included in business (individual investment, private purposes); restricted exemptions, some still available (buildings or shares aquired prior 2004) Applicable only on sale of property not included in business (individual investment, private purposes); restricted exemptions, some still available (buildings or shares aquired prior 2004) Sale of shares Profits from sale (diff. selling price and purchase price including costs of purchase) taxable (PIT 10-38%); exemptions available for individual investment, private purposes) Profits from sale (diff. selling price and purchase price including costs of purchase) taxable (PIT 10-38%); exemptions available for individual investment, private purposes) Profits from sale (diff. selling price and purchase price including costs of purchase) taxable (19%); exemptions available for individual investment, private purposes) shares aquired prior to year 2004 Profits from sale (diff. selling price and purchase price including costs of purchase) taxable (19%); exemptions available for individual investment, private purposes) shares aquired prior to year 2004 Profits from sale (diff. selling price and purchase price including costs of purchase) taxable (19%); exemptions available for individual investment, private purposes) shares aquired prior to year 2004 24

Capital loss (PIT) Fixed assets Shares (PIT) Capital Loss tax deductible; limited for some fixed assets (land, works of art, personal cars, furniture, etc.) Loss not deductible, might be offset only with profits from sale of other securities); different treatment for CIT Capital Loss tax deductible; limited for some fixed assets (land, works of art, personal cars, furniture, etc.) Loss not deductible, might be offset only with profits from sale of other securities); different treatment for CIT Capital Loss tax deductible; limited only for lands and works of art Loss not deductible, might be offset only with profits from sale of other securities); different treatment for CIT Capital Loss tax deductible; limited only for lands and works of art Loss not deductible, might be offset only with profits from sale of other securities); different treatment for CIT Capital Loss tax deductible; limited only for lands and works of art Loss not deductible, might be offset only with profits from sale of other securities); different treatment for CIT Wages (CIT) Average cost to the Undertaking Wages subject to mandatory insurance contribution (costs of employer) from the gross wages (38 % of employee wage, minimum of 1,9 TSK maximum of 14,1 TSK per employee); Slovak minimum monthly wage gross 4,9 TSK, average wage 13,5 TSK Wages subject to mandatory insurance contribution (costs of employer) from the gross wages (38 % of employee wage, minimum of 2,1 TSK maximum of 15,4 TSK per employee); Slovak minimum monthly wage gross 5,6 TSK, average 14,4 TSK Wages subject to mandatory contribution insurance (costs of employer) from the gross wages (35,2 % of employee wage, minimum of 2,2 TSK maximum of 15,2 TSK per employee); Slovak minimum monthly wage gross 6,1 TSK, average 15,8 TSK Wages subject to mandatory insurance contribution (costs of employer) from the gross wages (35,2 % of employee wage minimum of 2,3 TSK maximum of 16,7 TSK per employee); Slovak minimum monthly wage gross 6,5 TSK, average 17,3 TSK Wages subject to mandatory insurance contribution (costs of employer) from the gross wages (35,2 % of employee wage, minimum of 2,5 TSK maximum of 18,2 TSK per employee); Slovak minimum monthly wage gross 6,9 TSK, average 18,7 TSK Average cost to the employee Employee wage is subject to: - mandatory insurance contributions (12,8 % of employee wage, minimum 1 TSK maximum 4,7 TSK); WHT Tax (progressive tax 10-38%) of gross wage Employee wage is subject to: - mandatory insurance contributions (12,8 % of employee wage, minimum 1 TSK maximum 5,2 TSK); WHT Tax (progressive tax 10-38%) of gross wage Employee wage is subject to: - mandatory insurance contributions (13,4 % of employee wage, minimum 1 TSK maximum 5,7 TSK); WHT Tax (progressive tax 10-38%) Employee wage is subject to: - mandatory insurance contributions (13,4 % of employee wage, minimum 1 TSK maximum 6,4 TSK); WHT Tax (19%) of gross wage Employee wage is subject to: - mandatory insurance contributions (13,4 % of employee wage, minimum 1 TSK maximum 6,9 TSK); WHT Tax (19%) of gross wage 25

Overall tax on distributed earnings or Dividends (PIT, CIT) Timing Tax credit structure Excluding non profit tax Including non profit tax Deduction of expenses (CIT) General rule Dividends are payable after the end year closing (no dividend prepayments possible), from taxed profits CIT WHT dividend tax 15% - recipient Slovak resident, WHT dividend tax applicable within 15 days after the end of month of payment; Dividends are payable after the end year closing (no dividend prepayments possible), from taxed profits CIT WHT dividend tax 15% - recipient Slovak resident, WHT dividend tax applicable within 15 days after the end of month of payment; Dividends are payable after the end year closing (no dividend prepayments possible), from taxed profits No WHT dividend tax applicable for dividends from profits 2004 and later Dividends are payable after the end year closing (no dividend prepayments possible), from taxed profits No WHT dividend tax applicable for dividends from profits 2004 and later Dividends are payable after the end year closing (no dividend prepayments possible), from taxed profits No WHT dividend tax applicable for dividends from profits 2004 and later N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Essentials: Link to taxable incomes of undertaking, booking in the tax period, prove the rendering of costs, If not specifically limited by tax legislation Essentials: Link to taxable incomes of undertaking, booking in the tax period, prove the rendering of costs, If not specifically limited by tax legislation Essentials: Link to taxable incomes of undertaking, booking in the tax period, prove the rendering of costs, If not specifically limited by tax legislation Essentials: Link to taxable incomes of undertaking, booking in the tax period, prove the rendering of costs, If not specifically limited by tax legislation Essentials: Link to taxable incomes of undertaking, booking in the tax period, prove the rendering of costs, If not specifically limited by tax legislation 26

Non of expenses Thin capitalization Overall corporate tax on Retained earnings Excluding non profit tax Including non profit tax Debt financing Interest Examples of non deductibles: Remuneration of statutory representatives (tantiems), distributed profits, damages, provisions and reserves unless special conditions fulfilled (difficult to reach), penalties, costs of representation, etc. Applicable: Debt equity ratio 4:1 (banks 6:1) Examples of non deductibles: Remuneration of statutory representative s (tantiems), distributed profits, damages, provisions and reserves unless special conditions fulfilled, penalties, costs of representation, etc. Applicable: Debt equity ratio 4:1 (banks 6:1) Examples of non deductibles: distributed profits, damages, provisions and reserves unless some conditions fulfilled (easier to reach), penalties, costs of representation, etc. N/A, no limits to interest (if transfer prices basis between related parties) Examples of non deductibles: distributed profits, damages, provisions and reserves unless some conditions fulfilled (easier to reach), penalties, costs of representation, etc. N/A, no limits to interest (if transfer prices basis between related parties) Examples of non deductibles: Remuneration of statutory representatives, damages, provisions and reserves unless some conditions fulfilled (easier to reach), penalties, costs of representation, etc. N/A, no limits to interest (if transfer prices basis between foreign related parties) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Special rules (bellow) for loans provided between related parties (25% shareholding or personal interconnection ), otherwise tax deductible for corporation or sole traders (not possible for private persons) Special rules (bellow) for loans provided between related parties (25% shareholding or personal interconnectio n), otherwise tax deductible for corporation or sole traders (not possible for private persons) Tax deductible for undertaking (corporations or sole traders, not possible for private persons) Tax deductible for undertaking (corporations or sole traders, not possible for private persons) Tax deductible for undertaking (corporations or sole traders, not possible for private persons) 27