2016/17
FOREWORD A country's tax regime is always a key factor for any business considering moving into new markets. What is the corporate tax rate? Are there any incentives for overseas businesses? Are there double tax treaties in place? How will foreign source income be taxed? Since 1994, the PKF network of independent member firms, administered by PKF International Limited, has produced the PKF Worldwide Tax Guide (WWTG) to provide international businesses with the answers to these key tax questions. As you will appreciate, the production of the WWTG is a huge team effort and we would like to thank all tax experts within PKF member firms who gave up their time to contribute the vital information on their country's taxes that forms the heart of this publication. The PKF Worldwide Tax Guide 2016/17 (WWTG) is an annual publication that provides an overview of the taxation and business regulation regimes of the world's most significant trading countries. In compiling this publication, member firms of the PKF network have based their summaries on information current on 30 April 2016, while also noting imminent changes where necessary. On a country-by-country basis, each summary such as this one, addresses the major taxes applicable to business; how taxable income is determined; sundry other related taxation and business issues; and the country's personal tax regime. The final section of each country summary sets out the Double Tax Treaty and Non-Treaty rates of tax withholding relating to the payment of dividends, interest, royalties and other related payments. While the WWTG should not to be regarded as offering a complete explanation of the taxation issues in each country, we hope readers will use the publication as their first point of reference and then use the services of their local PKF member firm to provide specific information and advice. Services provided by member firms include: Assurance & Advisory; Financial Planning / Wealth Management; Corporate Finance; Management Consultancy; IT Consultancy; Insolvency - Corporate and Personal; Taxation; Forensic Accounting; and, Hotel Consultancy. In addition to the printed version of the WWTG, individual country taxation guides such as this are available in PDF format which can be downloaded from the PKF website at www.pkf.com PKF Worldwide Tax Guide 2016/17 1
IMPORTANT DISCLAIMER This publication should not be regarded as offering a complete explanation of the taxation matters that are contained within this publication. This publication has been sold or distributed on the express terms and understanding that the publishers and the authors are not responsible for the results of any actions which are undertaken on the basis of the information which is contained within this publication, nor for any error in, or omission from, this publication. The publishers and the authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication. Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances. PKF International Limited (PKFI) administers a family of legally independent firms. Neither PKFI nor the member firms of the network generally accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms. PKF INTERNATIONAL LIMITED JUNE 2016 PKF INTERNATIONAL LIMITED All RIGHTS RESERVED USE APPROVED WITH ATTRIBUTION PKF Worldwide Tax Guide 2016/17 2
STRUCTURE OF COUNTRY DESCRIPTIONS A. TAXES PAYABLE COMPANY TAX CAPITAL GAINS TAX BRANCH PROFITS TAX VALUE ADDED TAX (VAT) FRINGE BENEFITS TAX LOCAL TAXES OTHER TAXES B. DETERMINATION OF TAXABLE INCOME DEPRECIATION STOCK / INVENTORY CAPITAL GAINS AND LOSSES DIVIDENDS INTEREST DEDUCTION LOSSES FOREIGN SOURCED INCOME INCENTIVES C. FOREIGN TAX RELIEF D. CORPORATE GROUPS E. RELATED PARTY TRANSACTIONS F. WITHHOLDING TAX G. EXCHANGE CONTROL H. PERSONAL TAX I. TREATY AND NON-TREATY WITHHOLDING TAX RATES PKF Worldwide Tax Guide 2016/17 3
MEMBER FIRM City Name Contact information Bratislava Jana Sadlonova +421 2582 82717 sadlonova@pkf.sk Prievidza Richard Clayton Budd +421 46518 3829 budd@pkf.sk BASIC FACTS Full name: Slovak Republic Capital: Bratislava Main language: Slovak Population: 5.42 million (2013 estimate) Major religion: Christianity Monetary unit: Euro (EUR) Internet domain:.sk Int. dialling code: +421 KEY TAX POINTS Resident companies are subject to corporate income tax on their worldwide income. Nonresidents are subject to corporate income tax only on income sourced in the Slovak Republic. The corporate tax rate is 22%. VAT is paid on the supply of goods and services. The standard rate is 20%, with a reduced rate of 10% for specific items. Capital gains are considered taxable income and taxed at the applicable flat tax rate. There is no concept of group relief. All transactions between related companies realised both inside Slovakia and across borders must be conducted at an arm's length basis. Any difference arising between the price of the actual transaction and that regarded as the arm's length price will be adjusted for tax purposes. Dividends are neither subject to personal nor corporate income tax, but are subject to health insurance levies in the case of individuals who pay mandatory health insurance contributions in the Slovak Republic. A 19% tax rate applies to withholding taxes at source. Personal income tax is payable by permanent residents within the Slovak Republic individually on their worldwide income. Non-residents are only subject to tax on Slovak-sourced income. An annual property tax is levied on the owner or beneficial owner of a building, flat or land situated within the Slovak Republic. There is no inheritance tax, gift tax or real estate transfer tax. In addition to income tax, employees also pay mandatory social and health insurance premiums and prepay tax, all of which are withheld from their gross pay. Employers are likewise subject to payroll contributions and taxes on their employees Individuals can request the tax authorities to donate 2% of their Slovak personal income tax liability to an eligible Slovak non-profit organisation. A. TAXES PAYABLE COMPANY TAX Slovak resident companies are subject to corporate income tax on income derived from worldwide sources, while non-residents are subject to corporate income tax only on income sourced in the Slovak Republic. Since 1 January 2004, income tax has been governed by Act No. 595/2003 Coll.). The Act was amended more than two years ago with a new tax rate for legal entities and, in some cases, sole proprietors. PKF Worldwide Tax Guide 2016/17 4
Resident companies are those which have their legal seat or place of effective management in the Slovak Republic. The corporate tax rate is currently 22%. This is a flat rate applicable to all corporations and legal entities without exception. The fiscal year is the calendar year or the taxpayer's fiscal year (subject to notification to the tax authorities). Tax is due and payable: In a single payment if the previous tax liability was less than EUR 2,500; In quarterly instalments if the previous tax liability was between EUR 2,500 and EUR 16,600; In monthly instalments if the previous tax liability was over EUR 16,600. Tax returns for the applicable period should be filed by 31 March of the following year. A three-month extension of the deadline may be requested with a simple notice to the tax authorities. The concept of a tax licence was introduced starting in 2014, where a registered legal entity is required to pay a minimum tax even if the company reports a loss. There are three brackets determining the minimum tax to be paid which is based on annual turnover and whether the company is registered for value added tax: EUR 480 (non-vat payers whose annual turnover is under EUR 500,000), EUR 960 (VAT payers whose annual turnover is under EUR 500,000) and EUR 2,880 (net turnover over EUR 500,000). Withholding tax is 35% for payments made in favour of a taxpayer residing in a country that has no double taxation treaty with the Slovak Republic. A list of such countries is published by the Ministry of Finance of the Slovak Republic on its website: www.finance.gov.sk. Taxpayers can donate 1.5% to 2% of their paid taxes to non-profit organisations. Based on a written request, the tax authorities will provide the donated amount to the designated non-profit organisation. There is an opportunity to inform the tax authorities in writing about any change of the tax period from the calendar year to a fiscal year. CAPITAL GAINS TAX There is no separate capital gains tax. Starting in 2016, the taxable amount for calculating tax includes income generated from capital assets, regardless of whether the income was earned inside or outside the Slovak Republic. Gains from sales of assets are incorporated into taxable income when determining the company's tax liability. BRANCH PROFITS TAX There is no separate branch profits tax in the Slovak Republic. The income of Slovak branches of foreign companies is subject to taxation in the Slovak Republic at the flat rate of 22%. VALUE ADDED TAX (VAT) The current VAT Act (No. 224/2004 Coll.) entered into effect with the accession of the Slovak Republic into the European Union on 1 May 2004 and is harmonised with similar laws in other EU Member States (based on Council Directive 2006/112/EC). VAT is paid on the supply of goods and services within the country, the intra-community acquisition of goods, and on the importation of goods from countries outside the EU. The standard rate is 20%. There is a reduced rate of 10% for medicines, books and other printed matter, and specific foods such as meat, fish, milk and bread. Goods and some services exported from the Slovak Republic are exempt from tax. There is also a special excise tax imposed on selected commodities such as petroleum, wine, spirits, tobacco, beer, electricity, coal and natural gas. FRINGE BENEFITS TAX Fringe benefits (goods or services) to employees are taxed as part of their total taxable amount at a flat rate of 19%. Any tax levied on an employee is deducted by the employer. There is an increased rate of 25% levied on personal incomes earned during the year above a stipulated threshold. In 2015, this annual income threshold is EUR 35,022.31 and has been left unchanged for 2016. PKF Worldwide Tax Guide 2016/17 5
LOCAL TAXES The main local taxes that a municipality can levy are property tax (on land, buildings and flats), hotel tax, tax on the operation of vending machines and machines that do not offer cash prizes, as well as local fees on community waste disposal and low-value construction waste. Motor vehicle tax is also charged for categories of vehicles used by businesses or self-employed persons. Local taxes paid are a recognised deduction from income tax. OTHER TAXES An annual tax is levied on the owner or beneficial owner of a building, flat or land situated within the Slovak Republic. The rate of tax depends on the size, quality, type and location of the property. This tax is deductible on a cash basis for income tax purposes. There is no inheritance tax, gift tax or real estate transfer tax levied in the Slovak Republic. Employers pay contributions to social security and health insurance amounting to 35.2% of gross income paid to employees as shown on payroll records up to a maximum assessment set by law. These contributions are deductible when determining taxable income. The rates are as follows: Health insurance 10.00% Hospitalisation 1.40% Retirement insurance 14.00% Disability 3.00% Unemployment insurance 1.00% Accident insurance 0.80% Guaranty insurance 0.25% Reserve fund 4.75% B. DETERMINATION OF TAXABLE INCOME A company's taxable income is determined by ascertaining assessable income according to official accounting and then subtracting all deductions. Generally, to be deductible, expenditure must be wholly and exclusively incurred for the purposes of the business. Certain income that has already been subject to withholding tax is not included in taxable income, with some exceptions such as royalties. Special additional conditions apply to deductions of some expenses. For example, special expenses defined by tax law are tax-deductible only for the period in which they are fully paid. Examples include legal and consulting services and sports sponsorships. On the other hand, special income such as marketing studies and marketing research, as well as contractual penalties and late fees is taxable only for the period in which it is received. DEPRECIATION The tax law prescribes the rules under which a business depreciates its assets. Property, plant and equipment are divided into six groups according to their expected useful life (periods ranging from four to 40 years). The straight-line depreciation method is used, although accelerated (decliningbalance) depreciation may be applied in the case of machinery and technological equipment in depreciation groups 2 and 3 (in general, NACE Classifications 25-32, although the amended Income Tax Act specifically outlines the applicable statistical classification numbers). The choice of method is carried out on an asset-by-asset basis and, once the method is selected, it PKF Worldwide Tax Guide 2016/17 6
cannot be changed. Intangible assets (capitalised development costs) can be amortised over five years from when they were expensed. Amortisation may be postponed without the taxpayer losing the right to amortise in future periods. (Note: Starting from 1 January 2012, assets are depreciated in the first year pro rata according to the number of months.) STOCK / INVENTORY All trading stock on hand is valued at purchase price including any additional procurement costs incurred. Internally generated inventory must be valued on the basis of production costs. In the event that a temporary impairment in inventories is found during stocktaking, an allowance is made. Accepted valuation methods include FIFO, average acquisition costs or pre-defined (planned) prices but not LIFO. CAPITAL GAINS AND LOSSES Capital gains are considered taxable income and taxed at the applicable tax rate: 22% for legal entities, 19% for individuals up to annual income of EUR 35,022.31, and 25% of earnings from individuals above that figure. Losses from the sale of stock or a share of a limited liability company are recognised as a tax deduction only up to the amount of income. There are three exceptions when the loss is fully recognised for tax purposes: A loss from the sale of specially quoted stock on an exchange; A loss from the sale of bonds to the extent of income received from the bond included in its price; A loss from the sale of stock certified by a broker. DIVIDENDS In the Slovak Republic, dividends are subject to neither personal nor corporate income tax. This applies to dividends paid out in 2004 onwards. For profits earned and not paid out as dividends prior to 2004, the undistributed profits are taxed at a rate of 19% when they are paid out or at the tax rate according to the applicable double taxation treaty. Dividends paid out by companies in a group to corporate shareholders resident in an EU Member State who have a direct holding of at least 25% of the capital is not taxed. (Note: most taxable income and dividends paid out since 2011 are included when assessing health insurance contributions.) INTEREST DEDUCTION Interest paid by a company is treated as an ordinary business expense. Starting in 2015, the Slovak Republic is again applying thin-capitalisation related restrictions on the deduction of interest from loans. Note: Most taxable income earned and also any dividends paid out after 2011 will be used to determine the basis for assessing health insurance premiums. This assessment is applied unless dividends are paid out to a citizen or resident of the European Union and the recipient s health insurance is provided outside the Slovak Republic. In the case of third country citizens, the assessment is handled on a case by case basis. LOSSES Losses in a year may be carried forward and set off against profits in the subsequent four years uniformly with no obligation to reinvest the deducted losses. FOREIGN SOURCED INCOME The Slovak authorities levy taxes on all foreign income received by Slovak residents and companies whose registered office is in the Slovak Republic. PKF Worldwide Tax Guide 2016/17 7
INCENTIVES Incentives for investors are governed by legislation on government assistance (No. 231/1999 Coll., as amended) and investment assistance (Act 561/2007 Coll.), under which tax benefits and relief may also be an incentive to invest. Specific tax benefits have to be negotiated with the Economics Ministry. C. FOREIGN TAX RELIEF Tax paid in a foreign country is set off against tax liabilities in the home country in accordance with double taxation treaties with the applicable country (either by a deduction or exemption). Income earned by individuals (i.e. from wages and salaries) is exempt from taxation where proof is given that the income will be taxed abroad and where the Slovak Republic has no double taxation treaty with the other country which has taxed the income. If a double taxation treaty exists, exemptions stipulated in the treaty take precedence. D. CORPORATE GROUPS There is no concept of corporate groups in the Slovak Republic. For tax purposes, profits and losses of holding and subsidiary companies may not be consolidated. E. RELATED PARTY TRANSACTIONS All transactions between related parties must be conducted at an arm's length basis with the meaning of arm's length price depending upon each individual transaction. Any difference arising between the price of the actual transaction and that regarded as the arm's length price will be adjusted for tax purposes. F. WITHHOLDING TAX The Slovak Republic imposes a 19% withholding tax at the source, which applies also to interest and royalties. This tax rate may be reduced to the tax rate set in the relevant double taxation treaty. There is no withholding tax on dividends. Withholding tax is 35% for countries that have no tax treaty with the Slovak Republic. G. EXCHANGE CONTROL Slovakia has been using the euro as its currency since 1 January 2009. The Foreign Exchange Act allows the euro to be used freely to pay for business and other costs, for direct investment and reinvestment and for purchase of real estate property abroad. Also, it is legal to accept financial credit (i.e. receive loans) from companies with no registered office within the Slovak Republic but, in certain circumstances, there is a requirement to report such credit. The Foreign Exchange Act partially restricts the ability for companies without a registered office in the Slovak Republic to acquire real property in the Slovak Republic. Capital transfers are regulated and there is a duty to report and obtain a special permit or licence from the central bank. Since 2013 cash payments are restricted under a separate law to a ceiling of EUR 5,000, except for individuals not operating an undertaking, where the ceiling for payments in cash is EUR 15,000. H. PERSONAL TAX Personal income tax is payable by permanent residents within the Slovak Republic individually on their worldwide income. Non-residents are only subject to tax on Slovak sourced income. If an individual spends 183 days or more of the relevant calendar year in the Slovak Republic, that person is deemed to be resident in the Slovak Republic. Under Slovak law, employees hired under an PKF Worldwide Tax Guide 2016/17 8
employment contract pay contributions for social security, retirement and health insurance amounting to 13.4%. This is withheld by the employer. The rate of contributions is as follows: Health insurance 4.00% Hospitalisation 1.40% Retirement 4.00% Disability 3.00% Unemployment insurance 1.00% Different rates apply to contributions made by self-employed persons. The personal income tax rate in the Slovak Republic is19% for annual earnings up to EUR 35,022.31 and 25% above that figure. When determining the rate for monthly prepaid tax on income earned from employment, the threshold is EUR 2,918.53. In addition and in all cases, the personal allowance is reduced on a sliding scale to zero when taxable income is more than 176.8 times subsistence income (in 2016, this figure remains EUR 35,022.31). Tax returns for the applicable period should be filed by 31 March of the following year, although a three-month extension can be requested with a simple notice to the tax authorities. Income tax on earnings from employment is withheld monthly. Provisional payments on income from business operations, rental income, etc. are paid quarterly or monthly depending on the last known tax liability (between EUR 2,500 and EUR 16,000 or over EUR 16,600 respectively) and as a single payment if the last tax liability did not exceed EUR 2,500). Individuals can request the tax authorities to donate 2% of their Slovak personal income tax liability to an eligible Slovak non-profit organisation. The Act sets out who can receive such charitable contributions, for example, civic associations, foundations and religious organisations. These recipients must meet several conditions. Real property tax is paid on land, flats and buildings, with the tax rate depending on the quality of land and location of the buildings or flats (number of citizens). I. TREATY AND NON-TREATY WITHHOLDING TAX RATES Note: All treaties follow the OECD model with the exception of the double taxation treaty between the Slovak Republic and Mongolia, which follows another basis. Mongolia is not included in the table below. Dividends 1 Interest 2,3,5 Royalties 2,4 Non-treaty countries 0 19 19 Treaty countries: Australia 0 10 10 Austria 0 0 5/0 Belarus 0 10/0 10/5 Belgium 0 10/0 5/0 Bosnia and Herzegovina 0 0 10 Brazil 0 15/10 15/25 Bulgaria 0 10 10 Canada 0 10/0 10/0 China 0 10/0 10 Croatia 0 10 10 PKF Worldwide Tax Guide 2016/17 9
Dividends 1 Interest 2,3,5 Royalties 2,4 Cyprus 0 10/0 5/0 Czech Republic 0 0 10/0 Denmark 0 0 5/0 Estonia 0 10/0 10 Finland 0 0 10/5/1 France 0 0 5/0 Georgia 0 5 5 Germany 0 0 5 Greece 0 10 10/0 Hungary 0 0 10 Iceland 0 0 10 India 0 15/0 30 Indonesia 0 10/0 15/10 Ireland 0 0 10/0 Israel 0 10/5/2 5 5 Italy 0 0 5/0 Japan 0 10/0 10/0 Kazakhstan 0 10/0 10 Korea 0 0/10 10/0 Kuwait 0 10/0 10 Latvia 0 10/0 10 Lithuania 0 10 10 Libya 0 10 5 Luxembourg 0 0 10/0 Macedonia 0 10 10 Malta 0 0 5 Mexico 0 10/0 10 Moldova 0 10 10 Montenegro 0 10 10 Netherlands 0 0 5 Nigeria 0 15 15 Norway 0 0 5/0 Poland 0 10/0 5 Portugal 0 10 10 Romania 0 10/0 10/15 Russia 0 0 10 Serbia 0 10 10 Singapore 0 0 10 Slovenia 0 10 10 South Africa 0 0 10 Spain 0 0 5/0 Sri Lanka 0 10/0 10/0 Sweden 0 0 5/0 Switzerland 0 10 10/0 Syria 0 10 12 Taiwan 0 0/10 5/10 PKF Worldwide Tax Guide 2016/17 10
Dividends 1 Interest 2,3,5 Royalties 2,4 Tunisia 0 12 15/5 Turkey 0 10/0 10 Turkmenistan 0 10/0 10 Ukraine 0 10 10 United Kingdom 0 0 10/0 United States 0 0 10/0 Uzbekistan 0 10 10 Vietnam 0 10 5/10/15 NOTES: 1. Dividends paid out within the Slovak Republic are generally not subject to tax where paid out of profits generated from 1 January 2004 onwards. 2. Interest and royalties are tax exempt for associated companies in EU Member States in accordance with EU Directives (see Section F above). 3. The lower tax rate generally applies to interest on loans provided by the government or the central bank. It is advisable to check the applicable double taxation treaty for specific details. 4. Separate tax rates for royalties are generally applied so that the higher rate is for industrial royalties and the lower rate is for cultural royalties. It is advisable to check the applicable double taxation treaty for specific details. 5. The withholding rate is reduced to 5% if a bank or financial institution receives the interest. PKF Worldwide Tax Guide 2016/17 11