This overview of the Slovak business environment, structures for mergers and acquisitions (M&A) and related tax issues covers the statutory framework for acquisitions in Slovakia.
This overview of the Slovak business environment, structures for mergers and acquisitions (M&A) and related tax issues covers the statutory framework for acquisitions in Slovakia. It does not consider specific contractual arrangements that may affect these acquisitions. This discussion reflects the state of the Slovak legislation and proposed changes as of 1 January 2018.
There is a significant difference between the tax treatment of asset deals and share deals. The key tax aspects of both types of transaction are summarized in this report.
Purchase of assets
Assets can be purchased as individual assets, as a business or as part of a business. In principle, in a pure asset deal, the buyer does not assume the liabilities of the company from which the assets are acquired.
On the sale of a business or part of a business, the seller is obliged to transfer to the buyer all assets, rights and other property related to the operation of the business, and the buyer is required to assume all obligations related to the operation of the business and to pay the purchase price. Thus, the business or a part of a business is transferred as a going concern, but public law obligations (e.g. tax payable) are not transferred with the business or part of a business.
The transfer of the business from the seller to the buyer also includes employment relationships and obligations and industrial property rights.
The Slovak Commercial Code applies the same principles to a sale of part of a business as to the sale of a whole business, but such a part of a business must be categorized as an independent operational unit before the sale. Consequently, the part of the business should maintain its own books and have records of assets and liabilities relating to that part of the business.
The purchase price of assets generally is considered as the acquisition value for tax depreciation purposes. Generally, the acquired assets may be depreciated for tax purposes (up to the acquisition price), except for certain items listed in the tax law, such as land. For the seller, a tax loss on certain assets sold is not considered as tax-deductible (e.g. loss on the sale of land).
When acquiring a business or part of a business, it is essential for the sale-purchase agreement to stipulate the acquisition price for each individual asset. This helps avoid problems in determining the acquisition price for the respective assets acquired with the business.
Goodwill, positive or negative, does not arise in the purchase of individual assets but may arise in the purchase of a business or part of a business. As of 1 January 2010, the assets acquired on the sale or purchase of a business or part of a business should be valued for tax purposes at their fair values according to accounting regulations. Depreciation
of goodwill or release of negative goodwill should be included in the tax base, as a cost or income respectively, over a maximum of 7 tax periods, starting with the period in which the goodwill arose (i.e. in the year of the purchase of business) at one-seventh of the value each year. This
treatment is subject to specific conditions, such as a business continuity test.
The tax depreciation does not have to be the same as the accounting depreciation of assets, except for the depreciation of intangible and low-value assets, which follows the accounting rules.
Assets are depreciated in six tax depreciation groups over periods of 4, 6, 8, 12, 20 or 40 years. To a limited extent, it is possible to split an asset into its component parts and depreciate them separately. Tax depreciation of tangible assets may be interrupted for any period.
There are two basic tax depreciation methods: the straight- line method and the accelerated method. The accelerated method of tax depreciation is allowed only for groups 2 and 3 of the tangible assets (i.e. useful life 6 or 8 years).
Value added tax
Valued added tax (VAT) is levied at the rate of 20 percent on most goods and services (a reduced 10 percent rate is levied on certain medical products, pharmaceuticals, some basic food products and books). A taxpayer who has acquired individual assets can usually claim back the VAT paid on their acquisition if the assets are used to produce taxable supplies (subject to exceptions specified by the law).
A legal entity or individual who has acquired a business or part of a business from a Slovak VAT-registered entity becomes a Slovak VAT-registered taxpayer automatically from the date
on which the business or its part is acquired. The successor company of a VAT-registered company that is wound up without liquidation also becomes a VAT-registered taxpayer automatically from the date on which it becomes the legal successor. A taxable person selling a building, its part or building land in an amount exceeding 49,790 euros (EUR) becomes a VAT-registered taxpayer unless the sale is exempt from VAT in line with the Slovak VAT Act. These taxpayers are required to notify the tax authorities of the event that made them VAT-registered taxpayers within 10 days.
Under Slovak tax legislation, a purchase of assets is not subject to a stamp duty. Foreign investors are only obliged to pay administrative fees related to the purchase.
Purchase of shares
Generally, under Slovak income tax legislation, capital gains on a sale of shares in a Slovak company are considered to be liable to Slovak corporate or individual income tax.
For individuals, an income tax rate of 19 percent applies to their tax base not exceeding EUR35,268.06 (for 2018); a rate of 25 percent applies to the portion of the tax base in excess of EUR35,268.06. Certain income from sale of shares by individuals qualifies for a tax exemption. For companies, a corporate income tax rate of 21 percent applies.
Where a Slovak company sells shares, it is always liable to tax in Slovakia on the transaction. Generally, a loss from the sale of shares is not deductible.
As of 1 January 2014, income from the sale of shares in a Slovak company generated by a Slovak tax non-resident is treated as Slovakia source income under Slovak rules unless the seller is a tax resident of the European Union (EU). If
real estate forms more than 50 percent of the equity of the Slovak company, the capital gain from the sale of shares in the Slovak company is always subject to tax in Slovakia, unless an applicable tax treaty provides otherwise. In addition, where the buyer of the shares is a Slovak tax resident or Slovak permanent establishment (PE) of a non-resident, income from the sale of shares is taxable in Slovakia even in the case of EU residents. Exemption from tax on capital gains may again be available under a tax treaty.
Tax indemnities and warranties
In a share acquisition, the buyer takes over the target company together with all related liabilities, including contingent liabilities. In this case, the buyer may require more extensive indemnities and warranties than in the case of
an asset acquisition. From a tax perspective, it is advisable to seek tax warranties and indemnities covering a period of at least 6 years after the end of the year in which the share- purchase agreement (SPA) was signed and at least 8 years if the target company has a carried forward tax loss.
As of 1 January 2014, tax losses can be carried forward in equal parts over 4 years. Transitional provisions to the Income Tax Act stipulate that any tax losses reported from 2010 to 2013 and not utilized before 1 January 2014 can only be carried forward in four equal portions based on the new rules. There are no restrictions in the tax loss carry forward rules relating
to a change of shareholders of a company or a change of its business. Generally, a legal successor may carry forward tax losses declared by a company that was dissolved without liquidation, provided the purpose of the restructuring was not solely tax avoidance.
Tax license (minimum tax)
As of 2014, a concept of a ‘tax license’ was introduced for Slovak corporate taxpayers. The tax license represented a de facto minimum tax of EUR480, EUR960 or EUR2,880, depending on whether the taxpayer is VAT-registered and
whether its turnover exceeds EUR500,000. Tax licenses were abolished as of 1 January 2018. Companies will pay their last tax license for year 2017, if their taxable period is a calendar year. If they apply an off-calendar financial year as their taxable period, the last tax license would be paid for the tax period ending in 2018.
A pre-sale dividend can only be paid if conditions stipulated by the Commercial Code are met. Dividends paid out of profits derived from 1 January 2004 are not subject to any tax in Slovakia, so it may be beneficial to pay a non-taxable pre-sale dividend to reduce the capital gain on the sale of shares, which is generally taxable. Hybrids are taxable in the hands of the recipient of the underlying income.
Dividends distributed to individuals from profits generated for the periods from 1 January 2011 to 31 December 2012 are subject to Slovak health insurance contributions of 10 percent of the distributed dividends and 14 percent of dividends distributed for 2013 and later periods. This contribution
only applies if the recipient is resident in Slovakia for health insurance purposes and also if the shares are not quoted on a stock exchange.
As of 1 January 2017, dividends paid from Slovak companies to tax-resident individuals of tax treaty countries are subject to withholding tax at the rate of 7 percent, if the applicable treaty does not determine otherwise. A withholding tax rate of 35 percent applies to dividends paid by Slovak companies to all residents of non-treaty countries, including individuals and companies. Dividends received by a Slovak tax-resident individual from a treaty country are subject to 7 percent income tax. Dividends received from non-treaty countries by Slovak tax-resident individuals or companies are subject to 35 percent income tax.
Under Slovak tax law, a purchase of shares is not subject to a stamp duty, apart from minor administrative fees payable to the commercial register or Securities Register when the change of the shareholders is registered.
Income tax returns generally must be filed within 3 months of the end of the taxable period. As of 1 January 2010, an automatic extension of this deadline is available to corporate taxpayers, provided they notify the tax authorities that they intend to extend their deadline for the submission of the income tax return by up to 3 months or, if they have taxable foreign-source income, by up to 6 months. The automatic extension is not available to companies in liquidation or
bankruptcy whose filing deadlines may only be extended with the approval of the tax authorities.
In the Slovak Republic, several potential acquisition vehicles are available to foreign investors. Each vehicle has a different tax impact on the foreign investor.
Local holding company
As of 1 January 2018, Slovakia has participation exemption rules for capital gains on sales of shares and ownership interests in Slovak and foreign companies. These rules do not apply to taxpayers whose core business activity is trading with securities.
The conditions for applying the participation exemption are as follows:
Foreign parent company
A foreign parent company can be set up in a jurisdiction, preferably within the EU and/or a country with a beneficial tax treaty with Slovakia that provides for the participation exemption for dividends and capital gains.
Non-resident intermediate holding company
It is also possible to use a non-resident intermediate holding company that holds the shares in the Slovak company.
However, where relief will be sought under the EU Interest and Royalties Directive or a tax treaty, the principle of beneficial owner of interests and royalties and the applicable anti-tax avoidance rules must be taken into account when deciding what transactions should flow through the intermediate holding company.
A foreign company may register a branch (organizacna zlozka) in the Slovak Republic, which may carry out business activities on behalf of the foreign company in the Slovak Republic
from the day of the branch’s registration with the Slovak commercial register. The manager of the branch office is entitled to act on behalf of the branch office in all legal matters related to the branch’s business activity. A branch generally qualifies as a PE in Slovakia, with certain exceptions.
Joint ventures are common in Slovakia. They are registered normally as limited liability companies. In certain cases, a European Economic Interest Grouping (EEIG) can be considered.
A foreign investor must decide how the company established in Slovakia should be capitalized. The company could be funded by:
Hybrids are not frequently used in Slovakia, and their tax treatment is not beneficial to the recipient of the income from hybrid financing.
Thin capitalization rules were re-introduced by an amendment to the Income Tax Act approved in October 2014. As a result, under so-called ‘earnings-stripping’ rules for tax periods starting on or after 1 January 2015, interest costs are not tax- deductible in certain cases where they exceed 25 percent of the value of an indicator roughly corresponding to earnings before interest costs, taxes, depreciation and amortization (EBITDA). These rules apply to related legal entities, namely, Slovak tax residents and PEs of tax non-residents. Entities engaged in the financial sector are exempt. The restriction of tax-deductibility of the interest costs does not apply to loans from which the interest is capitalized in accordance with the accounting legislation. Transfer pricing rules continue to apply to debt financing.
Deductibility of interest
Interest on loans used to acquire assets is generally tax- deductible unless it is capitalized, in which case it increases the depreciation value of the assets. In principle, interest on loans used to acquire shares is not deductible where it is deemed not to have been incurred to generate, assure or maintain taxable income on the acquisition of and holding the shares. Such interest is deductible when the shares are
sold (if the participation exemption rules do not apply), except for taxpayers whose core business activity is trading with securities. However, debt pushdown schemes may result in tax-deductible interest costs, if properly structured. Where the interest is not set at arm’s length terms, the tax authorities may challenge its deductibility.
Withholding tax on debt and methods to reduce or eliminate it
Interest income is subject to 19 percent tax in Slovakia. Interest paid by a Slovak company or Slovak PE to a foreign recipient is subject to 19 percent withholding tax (WHT), unless the EU Interest and Royalties Directive applies or a tax treaty reduces the WHT rate. Slovakia has a wide network of tax treaties, including treaties with most European countries, under which WHT on interest is reduced to 0 percent (see the table of treaty WHT rates at the end of this report).
As of 1 March 2014, a 35 percent WHT applies to ‘non-treaty country taxpayers’. Treaty countries include countries with which Slovakia has either concluded a tax treaty and countries that are signatories to other agreements covering exchange of information to which Slovakia is also a party.
Checklist for debt funding
Under the Commercial Code, registered capital represents the financial expression of the total sum of financial contributions and of contributions in kind of all members/ shareholders of the company. The Commercial Code also defines the contribution of a member/shareholder as the sum of their financial means and other financially expressible contributions to the company that entitle the member or shareholder to share the results of the partnership’s or
company’s business. The member or shareholder is obliged to contribute its respective pledged contribution to the company and is entitled to participate in the economic results of the company.
Limited liability companies and joint stock companies have an obligation to create registered capital. This should amount to at least EUR5,000 for a limited liability company and at least EUR25,000 for a joint stock company (EUR1 for a simple joint- stock company). Partnerships may have registered capital, but they are not required to.
The registered capital can be increased by monetary contributions (cash contributions), non-monetary contributions (contributions in kind) or both, by shareholders or other persons (who subsequently become shareholders).
Contributions to and increases in registered capital must be approved by a general meeting of the company and registered with the commercial register. The signature of the chairman of the general meeting on the decision of the general meeting of the company must be verified by a notary public. Cash contributions to a limited liability company must be paid-up within 5 years and to a joint stock company within 1 year.
Non-monetary contributions must be paid-up before the registration of the increase in the registered capital with the commercial register. A contribution in kind normally requires an expert valuation.
In joint stock companies, the increase of the registered capital by subscription of new shares is effective as of the day of its registration with the commercial register. In limited liability companies, the increase of the registered capital is effective as of the day of the resolution on the increase at the general meeting, unless the resolution provides otherwise.
Income from a decrease of registered capital may be subject to tax if the registered capital was previously increased by after-tax profit, as well as the payment of funds from the capital fund created from the contributions made by reallocation of own resources of company´s after-tax profit.
As of 1 January 2016, the Slovak Commercial Code introduced the concept of ‘company in crisis” in order to protect the creditors. A company is considered ‘in crisis’ if it is:
If a company is in crisis, stricter requirements for action by the governing body of the company are applied. Where the governing body that concludes (or could have concluded in light of all circumstances) that the company is in crisis, it is obliged – as required by necessary and professional reasonable diligence principles – to take all measures that would otherwise be taken by another reasonably diligent person in a similar position in order to overcome the crisis.
Corporate income tax
An increase in the registered capital via a cash contribution generally is not considered income, so it is not subject to corporate income tax.
The recipient of an in-kind contribution of business has the option to apply one of two regimes for the valuation of the acquired assets for tax purposes only in the case of a cross- border transaction:
In the case of a cross-border contribution in kind of individual assets, the recipient should be able to value the acquired assets for tax purposes at their contribution value while
any potential step-up in the tax value is taxed (regime 1). Alternatively, the recipient should be able to take over the original tax values of assets to the contributor without paying tax on the potential step-up (regime 2).
A number of tax base adjustments are needed for the contributor and the recipient of the in-kind contribution of a business or a part of a business, depending on the selected tax regime. These adjustments apply, for example, to the treatment of reserves and provisions and the computation of tax depreciation charges. Under certain conditions, the taxation of the potential step-up in the tax value of the assets may be spread over a period of up to 7 years.
The use of historical prices (regime 2) for tax purposes is not possible for in-kind contributions to the share capital within Slovakia as of 1 January 2018.
The fair values tax regime must also be used for mergers, fusions and demergers of trading companies and cooperatives within Slovakia that are entered into on after 1 January 2018.
The historical prices regime may only be applied where:
Contribution in kind
A contribution in kind under the current legislation is treated in the same way as a sale of assets or a sale of business, as appropriate.
Contributions can be made to other capital funds. It is not necessary to register the increase of other capital funds with the commercial register, but a general meeting of the company must approve the increase.
Hybrids are not frequently used in Slovakia, and their tax treatment is not beneficial for the recipient of hybrid income.
Discounted securities are not used in Slovakia.
In certain circumstances, especially where agreed between related parties, deferred settlement may be reclassified as a loan on which interest is due.
Concerns of the seller
If grants were received by the seller of assets for the original acquisition of those assets, the grants may have to be refunded to the relevant institution and the sale of assets may not be possible.
It may not be possible, under the Commercial Code, for the seller in a share deal to pay a pre-deal dividend. In this case, the seller may require a higher price for the shares.
A sale of a substantial portion of assets may trigger taxation of any revaluation differences arising on a previous merger, demerger, sale or contribution of a business.
Company law and accounting
The Commercial Code is the main legislation governing business activities in the Slovak Republic. The Commercial Code recognizes the following basic legal forms for carrying out business activities:
Legal entities established under EU law have a similar legal status to companies and partnerships in the Slovak Republic.
The most common types of company in the Slovak Republic are the joint stock company and the limited liability company.
Joint stock company
Simple joint-stock company
Limited liability company
Branch office of a foreign company
Foreign individuals are entitled to carry out their business activities in the Slovak Republic on registration with the Slovak commercial register. However, individuals residing in EU or Organisation for Economic Co-operation and Development (OECD) countries are entitled to carry out their business activities in the Slovak Republic even without such registration.
European Economic Interest Grouping
Under the Council Regulation (EEC) Nr. 2137/1985 of 25 July 1985, an EEIG can be created in certain circumstances.
Under the Council Regulation (EC) Nr. 2157/2001 of 8 October 2001, a European public limited liability company (SE) can be created in certain circumstances.
European cooperative society
Under Council Regulation (EC) Nr. 1435/2003 of 22 July 2003, a European cooperative society (ECS) can be created in certain circumstances.
Corporate income tax-grouping is not available in Slovakia, but VAT-grouping became available from 1 January 2010.
Slovakia’s transfer pricing rules broadly comply with OECD transfer pricing guidelines for multinational enterprises and tax administrations.
Under Slovak tax law, where the agreed price in a transaction differs from the fair market price and will reduce the taxable base, and the difference cannot be satisfactorily explained, a fair market price may be substituted for tax purposes. This is always the case where the same legal persons or individuals directly or indirectly participate in the management, control or capital of the parties involved in the transaction.
‘Related parties’ are defined as economically or personally connected natural persons or legal entities. ‘Economic connection’ is defined as a direct or indirect participation of more than 25 percent in the share capital or voting rights. ‘Personal connection’ is defined as a participation in the management or control of the other person.
Moreover, where two or more entities enter into a business relationship for the purpose of reducing a taxable base or increasing a tax loss, these entities are deemed to be related parties.
Under the local tax legislation, the tax authorities are allowed to make transfer pricing adjustments where prices charged between related parties differ from arm’s length prices
in comparable business transactions, such that the price reduces the Slovak entity’s tax base (or increases its tax loss).
Based on a recent amendment of the Income Tax Act, the transfer pricing rules also apply to transactions performed between Slovak related entities. This amendment applies to tax periods starting on or after 1 January 2015 and also to
contracts concluded before this date. Formal transfer pricing documentation requirements were introduced as of 1 January 2009. The Slovak Ministry of Finance issues guidance on the contents of the transfer pricing documentation.
Taxpayers are obliged to submit local transfer pricing documentation to the tax authority on its request (i.e. not only in the course of the tax audit) within 15 days of receiving the request.
Dual tax residency is not possible under Slovak tax legislation. Taxpayers are regarded as either Slovak or foreign tax residents.
Foreign investments of a local target company
Any dividends received as distributions of profits derived from 1 January 2004 are not subject to tax in Slovakia, unless their source is hybrid financing. Dividends distributed out of profits generated in 2017 and later that are paid to or received from a resident of non-treaty country are subject to 35 percent tax. Dividends received by Slovak tax-resident companies that were distributed out of profits generated in 2004 and later by tax residents in treaty countries are not subject to tax. Interest income and royalty income are included in the taxable base of the Slovak company and taxed at the rate of 21 percent as of 1 January 2017.
Advantages of asset purchases
Disadvantages of asset purchases
Advantages of share purchases
Disadvantages of share purchases
KPMG Slovensko Advisory, k.s. Dvorˇákovo nábrežie 10 Bratislava 81102
T: +421 2 599 84 303
KPMG Slovensko Advisory, k.s. Dvorˇákovo nábrežie 10 Bratislava 81102
T: +421 2 599 84 331
KPMG Slovensko Advisory, k.s. Dvorˇákovo nábrežie 10 Bratislava 81102
T: +421 2 599 84 306