On 15. Directive No. 2024/927[1] (“AIFMD II“). EU Member States must transpose AIFMD II into their national laws by 16 June at the latest. April 2026 , while the transposition deadline for some provisions has been postponed until 16. April 2027. AIFMD II fundamentally changes not only in particular the provisions of Directive No. 2011/61/EU[2] (“AIFMD“), but also partially amends Directive No. 2009/65/EC[3]. The changes introduced by AIFMD II apply to all management companies licensed under the AIFMD, but do not apply to the so-called “AIFMD II”. They do not apply to under-limited AIFMs.

We took a closer look at the topic of investment funds, including the differences between management companies and registered managers, at our conference on regulated structures in real estate:

Lending by alternative investment funds

One of the key objectives of AIFMD II is to harmonise the rules for alternative investment funds (AIFs) providing credit. The aim is to create an efficient and functioning internal market for AIF lending within the EU. The harmonisation of AIF lending is further intended to ensure a consistent level of investor protection across Member States and also to facilitate access to (alternative) finance for businesses.

What is an AIF lending?

A lending AIF[4] is such an AIF under AIFMD II:

(a) whose investment strategy consists primarily of lending; or

(b) the loans granted have a nominal value of at least 50 % of its net asset value.

At the same time, the term “extension of credit”[5] within the meaning of AIFMD II means the granting of credit:

(a) directly from the AIF as the original lender; or

(b) indirectly through a third party or special purpose vehicle(SPV) that originates the loan for or on behalf of the AIF, or an AIF management company (‘AIFM‘) for or on behalf of the AIF in relation to the AIF, where the AIFM or AIF is involved in structuring the loan or in defining or pre-approving its characteristics before acquiring exposure to the loan.

At this point it should be noted that the Slovak translation of AIFMD II uses a single term “loan origination”, while the English version of AIFMD II differentiates between “loan origination” and “originating a loan”. It is important to see this distinction in the context that a loan-originating AIF is an AIF that meets the above criteria, but at the same time some of the provisions of AIFMD II will also apply to those AIFs that do not qualify as loan-originating AIFs but are involved in the origination of loans (” AIFs that originate loans”).

The term “loan “ itself is not defined in the AIFMD II, which may cause some interpretative confusion in the future, specifically as to what all transactions will qualify as a “loan” for the purposes of the AIFMD II. In this respect, ESMA can be expected to provide its opinion on the issue[6].

What will it mean for asset management companies if they want to manage AIFs providing loans or. AIFs involved in lending?

Under AIFMD II, an AIFM will also be able to apply for authorisation to provide an additional service[7], namely credit management activities. In such a case, the AIFM will be obliged to, for example[8]:

(a) establish effective policies, procedures and processes for the assessment of credit risk and the management and monitoring of its loan portfolio, ensure that those policies, procedures and processes are kept up to date and effective and review them at least annually;

(b) ensure that the nominal value of loans granted by the AIF it manages to any one borrower does not exceed in aggregate 20% of the capital of that AIF where the borrower is a finance company[9], another AIF or a UCITS fund;

(c) comply with lending restrictions under which the AIF will not be able to lend to, for example, its AIFM, or. its employees, its depositary or entities in the same group as the AIFM;

(d) disclose all costs and expenses associated with loan servicing; and

(e) ensure that the AIF it manages retains 5% of the nominal value of each loan made by the AIF and subsequently transferred to third parties.

However, authorisation for the activity of loan management shall not be required for the granting of shareholder loans, provided that the nominal value of such loans does not exceed in total 150 % of the AIF’s capital.

Can a lending AIF be an open-ended investment fund?

AIFMD II provides[10]that the AIFM is obliged to ensure that the AIF lending which it manages is closed. At the same time, however, this Directive allows for such an AIF to be kept open if the AIFM is able to demonstrate to its supervisory authority that the liquidity risk management system of such an AIF will be compatible with its investment strategy and redemption policy.

Liquidity management tools available to AIFMs managing open-ended AIFs include[11] under AIFMD II will include, for example, suspension of subscriptions, redemptions and redemptions, restrictions on redemptions, extension of notice periods for redemptions, redemption fees or swing pricing mechanisms. These instruments may only be used if they are provided for in the AIF’s statutes or constituent documents.

New requirements for the performance of AIFM activities and the outsourcing of activities to third parties

AIFMD II introduces a new requirement to appoint at least two natural persons who are either full-time employees of the AIFM or full-time executive or management board members of the AIFM and who reside in the EU to carry out the activities of the AIFM.[12]

AIFMs that delegate portfolio management or risk management functions will be subject to enhanced reporting obligations and will be required to provide additional information to their supervisor as part of the reporting process on the delegated persons, e.g. the number of full-time equivalents of staff used by the AIFM to perform day-to-day portfolio management or risk management tasks, a list and description of the activities related to portfolio management and risk management functions that are delegated, the number of full-time equivalents of staff used by the AIFM to monitor delegation arrangements, the number and dates of periodic due diligence reviews carried out by the AIFM to monitor delegated activity, and others.

Similarly, the enhanced conditions regarding entrustment will also apply when applying for an AIFM authorisation, where the applicant will also have to provide, for example, the following information: (i) a detailed description of the human and technical resources used by the AIFM to carry out the day-to-day tasks of portfolio management or risk management and monitoring of the entrusted activities, or, for example (ii) a description of the regular due diligence measures to be carried out by the AIFM to monitor the delegated activity.

Depositary from another Member State

In order to increase competition in depositary services, AIFMD II introduces a regime under which Member States have the possibility to allow their supervisory authorities to allow the designation of a depositary established in another Member State. Currently, under Art. 21 para. 5 of the AIFMD, the depositary must be established in the home Member State of the AIF (if the AIF is domiciled in the EU).

The designation of a depositary from another Member State will be possible under AIFMD II provided that the following conditions are met[13]:

(a) the AIFM has received a reasoned request from the competent supervisory authority for permission to designate a depositary established in another Member State and that request demonstrates a lack of depositary services in the AIF’s home Member State that are capable of effectively meeting the needs of the AIF with regard to its investment strategy; and

(b) the total amount of assets entrusted to custody on the national market of the depositaries of the home Member State of the AIF on behalf of EU AIFs authorised or registered under the relevant national law and managed by the EU AIFM does not exceed EUR 50 billion or the equivalent in any other currency.

Provision of information to investors

The regulation of the provision of information to investors, which is regulated in Article 23 of the AIFMD, will also undergo changes. Under the new legislation, the AIFM will be required to make available to investors before making an investment, in addition to the information previously required, for example (i) the fees, costs and expenses which it incurs and which subsequently accrue, directly or indirectly, to the AIF or to one of its investments; or (ii) information on redemption rights in both normal and exceptional circumstances, existing redemption arrangements with investors and the possibilities and conditions for the use of liquidity management tools.

The AIFM will also be required to provide investors with the following information on a regular basis for each AIF it manages and distributes in the EU:

(a) the composition of the loan portfolio,

(b) once a year, all fees, costs and expenses directly or indirectly borne by investors,

(c) once a year, any parent undertaking, subsidiary or special purpose vehicle used in connection with the AIF’s investments by or on behalf of the AIFM.

Given the transposition deadline of two years, we will have to wait some time for the relevant draft amendment to the Collective Investment Act. It will also be interesting to see whether Slovak AIFMs take the opportunity to create AIFs with an investment strategy focused on lending. In the Slovak realities, this issue is inevitably linked to the fact that it is common for a Slovak AIFM to be part of a group that includes a banking institution, thus potentially representing direct competition for the AIF providing credit.

If you are interested in this topic, please do not hesitate to contact us:

• Peter Varga, e-mail: peter.varga@hg.amcef.com
• Roman Baranec, e-mail: roman.baranec@hg.amcef.com

We have been involved in the field of collective investment for a long time, as evidenced by our award in the prestigious Law Firm of the Year 2024 competition , in which we won the “Capital Markets” category.

Alternatively, you can address your specific questions in a consultation with our partner Peter Varga, who specialises in financial regulation and tax law. You can book a consultation here:

[1] Directive (EU) 2024/927 of the European Parliament and of the Council of 13. 2024, amending Directives 2011/61/EU and 2009/65/EC as regards delegation agreements, liquidity risk management, supervisory reporting, the provision of depositary and custody services and the provision of credit by alternative investment funds.

[2] Directive 2011/61/EU of the European Parliament and of the Council of 8. June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulation (EC) No. 1060/2009 and (EU) No 1095/2010.

[3] Directive 2009/65/EC of the European Parliament and of the Council of 13. Directive 2009/65/EC of the European Parliament and of the Council of 16 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS).

[4] Article 4, para. 1 lit. (at) AIFMD, as amended by AIFMD II.

[5] Article 4, para. 1 lit. (ar) AIFMD, as amended by AIFMD II.

[6] European Securities and Markets Authority.

[7] In the Slovak Act No. 203/2011 Z. z. on collective investment, as amended (hereinafter referred to as the “Collective Investment Act“), the additional services that an AIFM may currently perform (if it is authorised to do so) are defined in section 27 para. 6. The adoption of AIFMD II will require an amendment of this provision as well.

[8] Article 15 of the AIFMD, as amended by AIFMD II.

[9] As defined in Article 13(25) of Directive 2009/138/EC of the European Parliament and of the Council.

[10] It does not apply to AIFs engaged in lending, only to AIFs engaged in lending.

[11] Annex V of the AIFMD, as amended by AIFMD II.

[12] Art. 8 par. 1 lit. (c) AIFMD, as amended by AIFMD II.

[13] Art. 21 par. 5a AIFMD, as amended by AIFMD II.

Článok AIFMD II: Summary of the key changes introduced by the new Alternative Investment Fund Managers Directive je zobrazený ako prvý na Highgate.

Crowdfunding is a modern and increasingly established method of alternative fundraising, especially for startups and small and medium-sized enterprises. The essence of crowdfunding is to bring together investors (individuals and legal entities) who have free capital with businesses seeking to finance their activities. As the term ‘crowdfunding’ itself implies, crowdfunding generally involves a large number of investors in the financing of individual projects. This type of financing also allows access to finance for a group of entities that find it difficult or almost impossible to obtain bank financing.

The most common forms of crowdfunding

Crowdfunding can most commonly be divided into four basic categories:

• Donor crowdfunding: In this model, investors contribute money without expecting any reward. This type is often used to fund charitable and social projects.
• Reward crowdfunding: contributors receive some form of reward, which can be a physical product, service or other form of compensation. This model is popular among creative projects and startups.
• Investment crowdfunding: investors take a stake in a company or project to which they have contributed. This model is similar to the traditional investment process, where contributors expect a financial return.
• Loan crowdfunding: this model allows contributors to provide loans which are then repaid with interest. It is an alternative to traditional bank loans and microfinance.

Crowdfunding legislation

Crowdfunding legislation is harmonised across the European Union. The basic legislation governing crowdfunding is Regulation (EU) 2020/1503 of the European Parliament and of the Council of 7. October 2020 on European crowdfunding service providers for business and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937 (the “Crowdfunding Regulation“), which has been applicable in the European Union since 10. November 2021.

Crowdfunding is further regulated by the Commission’s implementing and delegated regulations, which are a set of regulatory and implementing technical rules further regulating certain provisions of the Crowdfunding Regulation.

Finally, the European Securities and Markets Authority (” ESMA “) also provides interpretative opinions on the legal regulation of crowdfunding.ESMA“).

In particular, the Crowdfunding Regulation regulates:

• requirements for the provision of crowdfunding services,
• the organisation of providers of crowdfunding services, and
• the authorisation of providers of crowdfunding services, including the supervision of their activities.

Our partner Tomáš Demo also commented on the topic of crowdfunding regulation in the Investing show on TA3 television:

Crowdfunding actors and crowdfunding platform

In crowdfunding, three types of entities meet:

• crowdfunding service provider – is a legal entity authorised by the relevant regulator to manage or operate a so-called ‘crowdfunding service provider’. A crowdfunding platform through which supply and demand meet between project owners and investors,
• project owner – any legal or natural person seeking to raise capital to finance the performance of its activities through a crowdfunding platform; and
• investor – is any legal or natural person that provides financing to project owners through a crowdfunding platform.

As is also clear from the above, the key concept for the Crowdfunding Regulation is therefore the “crowdfunding platform”, which is defined as a publicly accessible online information system operated or managed by a crowdfunding service provider.1 The provision of crowdfunding is thus defined in the Crowdfunding Regulation exclusively as crowdfunding that is carried out in an online space.

Loan and investment crowdfunding

The Crowdfunding Regulation regulates two types of crowdfunding:

• loan crowdfunding, which facilitates loans from investors as lenders to project owners as borrowers, at an agreed interest rate; and
• investment crowdfunding, whereby transferable securities are placed through a crowdfunding platform and the so-called ” investment crowdfunding“, whereby transferable securities are placed through a crowdfunding platform and the so-called “investment crowdfunding“. The crowdfunding platform involves the placement of accepted instruments for crowdfunding purposes issued by project owners or special purpose vehicles and the acceptance and forwarding of investor instructions to acquire these transferable securities and so-called “securities”. accepted instruments for the purpose of crowdfunding.

Loan crowdfunding and investment crowdfunding are activities through which a crowdfunding platform matches the interests of investors and project owners for funding (crowdfunding services).

A loan under the Crowdfunding Regulation has the following characteristics:

• has a due date,
• the project owner’s commitment to repay the borrowed funds is unconditional,
• the loan is interest-bearing, and
• the project owner is obliged to repay the principal of the loan together with interest in accordance with the repayment schedule.

Investment crowdfunding involves the provision by the crowdfunding service provider of two investment services and activities defined in MiFID II[2]:

• Receiving and forwarding instructions, and
• Placement without firm commitment.

Both of the above services relate to transferable securities[3] and the so called. accepted instruments for the purposes of crowdfunding which are specific instruments defined and defined in the Crowdfunding Regulation. This defines them as ‘shares in a private company limited by guarantee which are not subject to restrictions which would effectively prevent their transfer, including restrictions on the manner in which such shares are offered or advertised to the public’. The National Bank of Slovakia (hereinafter referred to as “NBS“) states that it “does not consider shares in limited liability companies, limited partnerships, public partnerships or cooperatives to be such instruments.”[4] The list published by ESMA[5] also shows that there are no instruments that would qualify as accepted instruments for the purposes of crowdfunding in the Slovak Republic.

Authorisation to provide crowdfunding services

Only the following may provide crowdfunding services (i) legal persons which (ii) are established in the Union; and (iii) have been authorised to carry on activities under the Crowdfunding Regulation . Povolenie podľa prechádzajúcej vety udeľuje v Slovenskej republike NBS, a to po splnení podmienok stanovených v Nariadení o crowdfundingu.

A provider of crowdfunding services with an authorisation granted by the NBS may subsequently, after submitting the relevant notification, also provide crowdfunding services in other Member States of the European Union.

The basic conditions for obtaining a licence to provide crowdfunding services are that the following requirements are met in particular:

• Prudential (capital) requirements. Crowdfunding service providers must continuously comply with financial guarantees, which must amount to at least EUR 25 000 and to one quarter of the fixed overheads for the previous year, if the crowdfunding service provider also facilitates loans. The crowdfunding service provider may meet these requirements through its own resources, an insurance policy or a combination thereof.
• Staffing requirements. Persons responsible for the management of a crowdfunding service provider must demonstrate that they are of good repute and have sufficient knowledge, skills and experience to manage a crowdfunding service provider.
• Organizačno-technické požiadavky. Poskytovatelia služieb hromadného financovania musia vypracovať postupy a opisy systémov, ktorými sa bude riadiť ich činnosť, ako napríklad:
  • opis mechanizmov riadenia a vnútornej kontroly poskytovateľa služieb hromadného financovania na zabezpečenie súladu s Nariadením o crowdfundingu, vrátane riadenia rizík a účtovných postupov;    
  • a description of the systems, resources and procedures of the crowdfunding service provider to control and protect the data processing systems;
  • a description of the crowdfunding service provider’s internal rules to avoid conflicts of interest; and other.

Obligations of the provider of crowdfunding services

In accordance with the Crowdfunding Regulation, a crowdfunding service provider is obliged, inter alia, to:

• make an assessment in relation to the non-professional (retail) investor, in particular to assess whether the investment is suitable for them. To this end, the crowdfunding service provider shall assess the investor’s investment experience, investment objectives and understanding of the risks associated with the investment,
• provide potential investors with a Key Investment Information Document prepared by the project owner,
• publish annually the failure rate of projects offered through the crowdfunding platform; and
• advise investors that their investments are not covered by the Deposit Protection Fund or the Investment Guarantee Fund.

How long does it take to get a crowdfunding license?

Before actually applying for a licence (authorisation to provide crowdfunding services), the entire application must be thoroughly prepared. Depending on the specific business model and the range of services to be applied for, this pre-licensing process can take a couple of months.

In the case of an application for authorisation to provide crowdfunding services, the NBS is obliged to assess whether the application is complete within 25 working days of receipt of such an application. If the application is not complete, the NBS shall set a deadline by which the application must be completed.

Only upon receipt of a complete application is there a time limit of 3 months to assess whether the applicant meets the conditions set out in the Crowdfunding Regulation and to decide whether to grant or refuse the application.

For whom does it make sense to apply for a crowdfunding license?

The crowdfunding platform’s revenue comes from the fees of its users. The crowdfunding service provider does not directly lend its funds or act as an issuer of securities. Therefore, when considering setting up a crowdfunding platform, it is necessary to consider, among other things:

• Whether the entrepreneur wants to manage the funds himself on his own behalf and on behalf of investors,
• Whether the entrepreneur is interested in collective or individual portfolio management,
• Whether the entrepreneur wants to enter directly into the investment or is content to act as an intermediary, and
• What resources does the entrepreneur have and how is their financial plan built.

At the same time, it is always necessary to comprehensively compare and assess other available regulated structures, not only from a legal but also from a tax perspective, with the relevant adviser dealing with the issue. Only after such an assessment (feasibility study) can it be evaluated whether a crowdfunding licence is a suitable solution for a particular business model.

Crowdfunding vs. peer-to-peer (P2P) lending

Crowdfunding and peer-to-peer (P2P) lending share a similar goal – financing projects or needs of individuals and businesses through online platforms. However, there are important differences between them in terms of the legal framework.

In P2P lending, individuals most often borrow funds from other individuals, while such a model is not legally regulated in Slovakia, neither by the Regulation on Crowdfunding, nor is it subject to consumer credit regulation. However, the regulation of P2P lending may be different in other Member States.

A common feature of P2P lending and crowdfunding is the existence of a platform that, in the role of intermediary, links the interests of investors (lenders) on the one hand and borrowers on the other, with these two groups entering into direct contractual relationships.

How can Highgate help you with crowdfunding?

If you are interested in providing crowdfunding services under the Crowdfunding Regulation, we at Highgate can help:

• assess your business plan and its compliance with relevant legislation, including tax analysis,
• prepare an application for authorisation to provide crowdfunding services, including the necessary by-laws and other annexes,
• to provide comprehensive representation throughout the licensing procedure before the NBS, up to the actual granting of the licence.

Highgate has a long-standing interest in financial regulation and capital markets, an area in which crowdfunding regulation clearly falls. Our expertise in this area is evidenced by our recent success in the prestigious Law Firm of the Year 2024 competition, in which Highgate, in addition to winning the Tax Law category, also won the Capital Markets category.

If you have any questions about the legal regulation of crowdfunding, please do not hesitate to contact our experts:

• Peter Varga, e-mail: peter.varga@hg.amcef.com
• Roman Baranec, e-mail: roman.baranec@hg.amcef.com

Alternatively, you can discuss your specific questions with our partner Peter Varga, who specialises in financial regulation and tax law. Book a consultation here:

[1] Art. 2 par. 1 lit. (d) Crowdfunding Regulations.

[2] Directive 2014/65/EU of the European Parliament and of the Council of 15. 2014 on markets in financial instruments amending Directive 2002/92/EC and Directive 2011/61/EU (“MiFID II“).

[3] Transferable securities as defined in Article 4(1)(a) of Directive 2009/65/EC shall not be transferable securities as defined in Article 4(2) of Directive 2009/65/EC. 1(44) of MiFID II.

[4] Cited on the NBS website here: https://nbs.sk/dohlad-nad-financnym-trhom/dohlad/trh-cennych-papierov/crowdfunding/ (cited on 13.7.2024).

[5] Available online here: https://www.esma.europa.eu/sites/default/files/library/esma35-42-1305_crowdfunding_tables.pdf (cited on 13.7.2024).

Článok Crowdfunding or crowd funding je zobrazený ako prvý na Highgate.

Identification of the shvarc system

In the past we have analysed in detail the history and advantages or disadvantages associated with the shvarc system, which you can read about in our article The Schwartz System: Do you want to work as a freelancer or employ freelancers? Be careful not to get knocked on the door by Cobra or the CID.

The issue of the shvarc system is often perceived as a hunt for a fictitious sole trader (but also a one-person SRO), i.e. a self-employed person (self-employed person) without own employees who does not meet at least two of the following criteria:

• autonomy – has more than one client for whom he works,
• subcontracting – it has the possibility to employ staff if necessary,
• Decision-making power – it is capable of important decisions regarding its planning.

Although this definition is vague and neglects many variables, the state tries to identify and punish such tradesmen because they are “robbing” the public finances, failing to pay pension contributions and other compulsory contributions.

Let’s look at this issue from a different angle. Why is the shvarcsystem so controversial? And what are its real advantages and disadvantages for sole traders and employers? These questions open the way for an interesting debate and bring new perspectives to old problems.

Read more to find out how you can safely navigate the world of the shvarcsystem without unnecessary risks.

Motivation for the use of tradesmen

In Slovakia, the number of sole traders is constantly growing, which brings us to the question: what motivates people to become sole traders?

One of the main reasons for this is the significant disproportion between the tax and levy obligations of sole traders and employees. This imbalance in the tax system creates more financially favourable conditions for sole traders, which naturally attracts many who are looking for ways to optimise their income. However, the state is looking at this phenomenon critically and intervening to prevent abuse of the system. It should be noted that if there is such a disparity in the law between the different regimes, the intervention of the state is legitimate.

At the conference, Peter Varga addressed this topic from a different perspective. He stressed that if the tax system were more neutral, the decision of individuals to become a sole trader or an employee would not be considered fraudulent. It would not be an attempt to avoid tax, but a free choice of the legal form that best suited individual needs. In situations where the individual expects social insurance benefits (mainly a pension), the optics are more neutral for a change. Be that as it may, it is the knowledge of the complex perspective of taxes, levies and social insurance benefits that is a prerequisite for a greater likelihood of defending a business relationship with a contractor. In other words, it can be argued from the case law that legal analysis alone is not sufficient and that legal analysis must reflect the existence or non-existence of a financial disproportion in the adjustment of the relationship. These are also the conclusions of our conference.

In the absence of a disproportion, we would be on a level that would allow a freer choice of the appropriate legal form for a particular natural person. Within the relevant legal models, employment, single-person LLCs, trades, but also IP relationships and other forms of cooperation, such as silent partnerships, were presented in more detail. Watch the video recording of the conference to learn more about why working as a sole trader is so attractive and what advantages and disadvantages it brings for both employers and sole traders. A deeper look at the motivations for using sole traders and the contractual freedom in choosing the legal form is presented by Peter Varga in the video from the Švarc system conference : “Employing freelancers” – where is the limit?

Comparison of tax and levy obligations

The motivation of market participants on the part of employees is to seek other forms in order to increase their income. For better clarification, we also provide a summary of the tax rates, the basic models that frame the issue

Effective levy rate: Who pays less?

At the conference, we made a detailed comparison of levy rates for different working regimes based on an income of €1,000 gross salary for an employee and €1,000 on an invoice for a sole trader (other alternatives were also discussed).

The results clearly show that the effective tax and deduction rate for an employee is 42%, while a sole trader who uses the deduction holiday pays only a tiny 10%. When compared to a managing director with. r. o. we can see that this scheme is not so advantageous, since with the executive remuneration of the minimum subsistence level, i.e. j. 269 € per month, which is the most efficient in terms of minimum health levies, and we assume that it pays 15% corporation tax, so the effective levy rate is 28%. From the above, we can seem to understand why the incidence of sole traders in Slovakia is so high. To clarify, we provide a brief summary.

Peter Varga at the conference explained in detail the individual items and evaluated the changes in the effective tax-tax rate with increasing wages/remuneration, the obligation of a sole trader to pay social contributions , including the possibilities for SROs to reduce the tax burden through the standard ways in practice for small SROs to optimize (legal/illegal) taxes (e.g. purchase of a car, etc.) and thus reduce the % of the effective tax rate in this table.

You can subscribe to the full video recording of the conference here:

Legal and regulatory challenges

At the conference, we also highlighted the legal risks associated with the shvarc system. This issue of illegal employment and dependent work is under scrutiny and falls under the jurisdiction of not only the tax authorities, but also the Labour Inspectorate, the Social Insurance Institution and, until recently, the Social Welfare and Family Labour Office. Employers who resort to this employment model risk heavy fines and even criminal prosecution. In order to define some kind of boundary, it is also necessary to analyse the different legal concepts that we may encounter in this issue.

In the case of the Labour Inspectorate and illegal employment, as a concept that is regulated by law č. 82/2005 Coll. on undeclared work and illegal employment, which defines several types of undeclared work, but primarily prohibits the classic shvarcsystem. It is understood by law as dependent work performed by an individual for an entrepreneur without an employment relationship or a state employment relationship existing between them. The performance of work by a self-employed person for an entrepreneur cannot in all circumstances be subsumed under the definition of a shvarcsystem. The essence is that the cumulative fulfilment of the features of dependent work found in Art. 2 of the Labour Code, under which it is the work performed:

• In the relationship of superiority of the employer and subordination of the employee;
• The employee performs it personally for the employer;
• As instructed by the employer;
• On behalf of the employer; and
• The employee performs work at the time specified by the employer.

In the case of tax administration and tax authorities, the issue is that of dependent activities, which is regulated in Section 5 of the Income Tax Act. Simply put, a dependent activity is a situation where a person is obliged to follow the instructions or orders of the payer of the income. A mechanical interpretation of dependent activity could lead to the erroneous conclusion that any instruction or direction given to someone is a dependent activity. Such an interpretation would not only be totally illogical, but more importantly, it would not reflect the state of affairs and the purpose which the legislature sought to achieve by the above formulation.

It is important to understand that the concept of dependent activity is broader than the concept of dependent work. This means that all dependent work is dependent activity, but not all dependent activity is dependent work. This distinction is key in controlling and sanctioning the shvarcsystem.

Controls and penalties: what can you expect in the scarcity system?

The Shvarcsystem is under the strict supervision of a number of supervisory authorities. The main institutions carrying out controls are:

• The Labour Inspectorate, which controls illegal employment under Art. on illegal employment;
• The tax authority controlling the dependent activity pursuant to Art. on income tax;
• Social Insurance Institution, which refers to the Income Tax Act.

Each of these authorities has the authority to carry out separate inspection activities, but we know from decision-making practice and findings that inspections are often initiated by the Labour Inspectorate. If it finds a breach of duty and determines that an offence has been committed, it issues a report and informs the Social Insurance Institution.

Employers who violate their obligations face heavy fines not only from the Labour Inspectorate but also from the Social Insurance Institution. The Labour Inspectorate can impose a fine of between EUR 2 000 and EUR 200 000 under the law. The Social Insurance Institution may impose a fine of up to EUR 16 600 and may also impose a penalty of 0.05% for each day of non-payment of insurance premiums, which amounts to 18% per year.

The penalties imposed by the tax office are different and this is related to the fact that the tax office has the power to carry out an audit even several periods back, which makes it impossible to determine the maximum amount and could therefore lead to liquidation consequences for the company. During the conference, Peter Varga spoke about the possibilities of how to avoid such liquidating sanctions from the tax office.

The law also defines non-monetary sanctions such as:

• Inability to obtain subsidies from the state budget;
• Inability to participate in public procurement;
• Inclusion in a public list of persons fined for illegal employment;
• And others.

Professor of criminal law Tomáš Strémy in a discussion with Petr Varga at the conference also spoke about the criminal aspect of the shvarcsystem. In extreme cases, a prison sentence of up to 12 years can be imposed. More about the criminal aspect of the shvarcsystem can be found in the video from the conference Shvarc system: “Employing freelancers” – where is the line?

Legal vs. factual: What does reality say?

In law, the principle is that the state of the law must correspond to the state of the facts. Simply put, the contract must reflect the actual situation. You cannot have a contract to do job A if the employee is actually doing job B. This is often referred to as a legal sham. For a better understanding and preparation of employment contracts, here are some of the indicators that should, or should not, be included in contracts. For example, such indicators are:

• Instructions: clear instructions regarding the work to be done.
• Representability: the ability of an employee to be represented.
• Project: work on specific projects.
• Holidays: rules on holidays and time off.
• Penalties: possible penalties for non-compliance.

These indicators can serve as an aid in assessing and proving the true nature of the contractual relationship in a dispute with the tax authorities or the Labour Inspectorate. When setting up relationships for clients, we focus on several details that neither an entrepreneur nor an attorney who does not deal with taxes and levies in detail will notice at first glance. If you would like to If you are interested or would like to assess/set up relationships at your company, let us know.

The shvarcsystem may seem at first glance to be an attractive employment model, but it hides a number of risks and potential negative consequences. At our conference, we offered an in-depth look at this issue, highlighted the importance of complying with laws and regulations, provided advice on how sanctions can be avoided, and opened a discussion on the opportunities and challenges associated with this model.

If you have any questions or need professional assistance in this area, please do not hesitate to contact us. We are here to help you find the best solutions for your business.

Článok The Schwarz system: Don’t you face up to 12 years for “employing” freelancers? je zobrazený ako prvý na Highgate.

The Income Tax Act regulates in relative detail the taxation of personal income, including income from the sale of real estate. According to the provisions of the law, income from the sale of real estate is classified as other income of individuals, which is included in the tax base and must be declared in the tax return. Such sale income may be taxed at a rate of up to 25% under certain conditions, and is also subject to a health levy of 15% of the assessment base. However, there are also legally defined conditions that allow the income from the sale of real estate to be exempt from tax, which is important from the point of view of financial efficiency and tax optimisation.

Income from the sale of real estate

Income from the sale of immovable property is classified as other income under the Act, namely income from the transfer of ownership of immovable property. This applies except where the immovable property is used in connection with business income from other self-employment or rental income pursuant to Section 6(6)(a) of the Act. 1 and 2 of the Income Tax Act and is included in business assets.

Income from the transfer of ownership of immovable property may be income accruing to a taxpayer who uses the property for personal or business purposes and at the same time the property has not been classified as a commercial property or for rental purposes. If the taxpayer receives income from the sale of real estate that is not exempt from income tax, he or she is obliged to report this income in the tax return.

Income from the sale of real estate is treated as passive income of the taxpayer for tax purposes. Passive income also includes rental income from real estate, royalty income, interest and income from securities, etc. If a taxpayer earns taxable income in a tax year only from the sale of real estate, he or she is not entitled to reduce the tax base by deducting the non-taxable portions of the tax base, and cannot reduce the tax by the child tax bonus or mortgage interest paid. If an individual taxpayer earns only income from the sale of real estate, he or she is not subject to the legal obligation to register with the tax office.

An essential element in income taxation is determining when the income will be included in the tax base. The taxpayer shall include the income from the sale of real estate in the tax base or partial tax base in the relevant tax year in which it is received, regardless of the date of conclusion of the contract of sale or acquisition of ownership rights to the real estate.

Method and correct determination of the time of acquisition of immovable property

For the purposes of taxation, it is essential to correctly determine the moment of acquisition of ownership of the property. The moment of acquisition of immovable property depends on how it was acquired, whether by contract, inheritance or a decision of a public authority.

• Contract: The moment of acquisition of the property in a contract, e.g. purchase, gift or exchange is determined by the entry into the Land Registry. Therefore, it is not the date of receipt of the money nor the date of signing the contract that is decisive, but the date determined by the decision on the authorisation of the entry into the land register.
• Inheritance: in the case of inheritance, the moment of acquisition of the immovable property is determined on the date of the death of the testator, as the ownership is acquired on the death of the testator, not only on the entry in the land register.
• Decision of the state authority: When acquiring ownership of immovable property on the basis of a decision of a state authority, the moment of acquisition is determined by the date specified in the decision; if not specified in the decision, the ownership is acquired on the date of the decision becoming final.

The correct determination of this moment of acquisition of the real estate is essential for the correct assessment of the possibility of tax exemption of the income from the sale of the real estate.

Exemption of income from tax

It is important to remember that some income from the sale of real estate may be exempt from income tax under the provisions of the Act. The most common cases of exemption include:

• sale of real estate not included in commercial property: After the expiry of 5 years from the date of acquisition of the property, the income from the sale of such property is exempt from tax.
• Inheritance of real estate in direct line: if the real estate is inherited by a person in direct line, i.e. j. parents, children, or after a spouse, the income from the sale is exempt after 5 years from the date of the proven acquisition of the property in the ownership or co-ownership of the heirs.
• Inheritance of real estate in indirect line: in case of inheritance from other relatives, e.g. sister, uncle, etc., the income from the sale of the real estate is exempt after five years from the acquisition of the real estate. In the case of inheritance, the moment of acquisition is determined differently than in the case of a contractual transfer of immovable property, since in the case of inheritance, ownership is acquired on the death of the testator, not on entry in the land register.
• sale of real estate issued under restitution laws or included in the bankruptcy estate
• the sale of real estate included in commercial property: The exemption applies to the proceeds from the sale of immovable property included in commercial property, after a period of 5 years from the date of removal of the property from commercial property.

If the income is exempt from tax, it is not necessary to report this income on the tax return. However, even in such a case, the taxpayer may be obliged to file a tax return for other reasons. Therefore, it is important to consult with a professional or monitor changes in tax regulations to minimize the possibility of breaking the law and incurring unforeseen tax liabilities.

Peter Varga also spoke about the income tax on the sale of real estate in more detail in 1. Real estate podcast NARKS, which you can watch here:

Possible tax expenses

Tax expenses are an important aspect in the taxation of income from the sale of real estate. Their application depends on how the property was acquired and the purpose for which the property was used. The buyer can claim the purchase price paid, in case of inheritance it is the general price of the real estate determined in the inheritance order.

In the case of a donation, the application of the expenses examines whether the income was exempt with the donor at the time of the donation of the immovable property. If the income would be an exempt expense for the donor, the value of the property is the value as determined by a forensic expert at the time of the gift. If the gift income would not have been exempt with the donor at the time of the gift, the expenditure with the donor is the purchase price of the property for which the donor acquired the property. In addition to the expenses related to the purchase, inheritance or gift of the property, the taxpayer can also reduce the tax base by other expenses:

• Expenditure on the acquisition of assets: This includes, for example, interest on a mortgage, fees associated with a loan, the cost of building materials or services used to construct the property.
• Expenditure on technical evaluation, repair and maintenance: This includes funds spent on the repair, maintenance and technical improvement of the property, such as the cost of roof repairs, legal services, etc.

These expenses can be claimed on the tax return, reducing the tax base and avoiding overtaxation. The taxpayer can claim tax expenses in the tax return up to a maximum of the income from the sale of the property, so there can be no tax loss where the tax expenses exceed the taxable income.

Tax burdens and health levies

Income from the sale of real estate, as outlined in the introduction, is subject to both income tax and health levies. Income that is not exempt from tax is subject to taxation at specific rates determined by the Income Tax Act. These rates depend on the size of the tax base and can be as high as 25% for higher incomes. The tax base is calculated as the sum of income from employment, income from entrepreneurship and other self-employment and other income earned in the relevant tax period.

If the taxpayer’s tax base does not exceed €47,537.98 (for 2024), the 19% rate applies. The amount above this threshold is taxed at 25%. In addition to the above tax burden, the income from the sale of the property is also subject to a health levy of 15% of the assessment base. These contributions are calculated by the health insurer in the annual health insurance statement after the tax return is filed. Taxpayers have the option to reduce their tax base by the health levies paid in the following tax year.

Example for calculating income tax for an individual whose taxable income from the sale of real estate exceeds EUR 60,000

The taxpayer calculates tax on the tax base of EUR 47 537.98 at a rate of 19 %, i.e. j. EUR 9 032.22 and on the amount exceeding EUR 47 537.98 (i.e. on the amount of EUR 12 462.02) it calculates the tax at a rate of 25%, i.e. j. EUR 3 115,51. The tax liability is therefore the sum of 9 032,22 and 3 115,51, which is a total of EUR 12 147,73.

In the last four years, the Financial Administration has been undertaking the so-called. letter campaign. This is an action to remind taxpayers of the obligation to file a tax return and pay tax on the income from the sale of real estate. Based on data from the Real Estate Cadastre, it sends letters to taxpayers who may become liable for tax in connection with the sale of a house, cottage or garage within five years of their acquisition. These letters serve as a reminder of their tax responsibilities. In terms of tax, the tax administration focused in particular on properties where there had been at least two changes of ownership within a five-year period. It has to be said that the previous actions were very successful and brought EUR 29 million to the state budget.[1]

Compliance with relevant tax obligations and understanding tax exemptions are key aspects to minimise the risk of unwanted consequences such as penalties or fines from tax authorities. Given the complexity of the Income Tax Act and the particularities of individual income taxation, it is advisable for individuals to take all steps to help them avoid potential risks of non-compliance with their tax obligations. Such a step can be a consultation with a tax specialist who will assess the specifics and provide the necessary advice and knowledge to properly meet your tax obligations. This is the only way they can manage their financial affairs effectively and minimise the risk of tax problems in the future.

In connection with this topic, Peter Varga also talked about VAT on the sale of real estate in the NARKS real estate podcast. You can watch it here:

[1] Source: https://www.financnasprava.sk/sk/pre-media/novinky/archiv-noviniek/detail-novinky/_prizn-nehnut-ts/bc

Článok Taxation of income from the sale of immovable property je zobrazený ako prvý na Highgate.

Accounting for small and medium-sized companies, as we know it today in Slovakia, will not survive the current technological development. We strive to implement these technological innovations, also because they reduce the overall costs not only for the client, but also for us. We recommend suitable invoicing applications to our clients so that they can be automatically imported into the accounting software, we extract and try to digitize. We can recommend suitable applications that act as a data repository for the client and also have integrated approval processes with the ability to export payments directly to the bank. For companies that have an e-shop we provide automatic import of payment gateways (for example, via Stripe, GoPay, PayPal, Wise or Revolut).

For some of our clients, thanks to automation, we have been able to get as low as 10 – 20 cents per accounting item even with incoming documents , while the average market price of an accountant is 1 euro. Just selecting the right invoicing system can also help with the actual recording of cost invoices, and with an effective link to the accounting software, the right invoicing system can provide online reports and outputs directly from the accounting system. Whether such scope for automation exists at a client is, of course, individual. Automation of accounting processes helps not only the client, but also us, as it reduces the volume of low-skilled work, which is already very expensive today, and helps us to focus on services with higher added value. And these are things like tax optimization, setting up controlling, accounting per centers/activities/contracts, for smaller companies replacing CFO, financial reporting and setting up an automated and efficient process to operate.

2. We are engaged in tax and levy optimization as attorneys, tax advisors and accountants

Most of our accounting clients (including the smallest ones) use our services to efficiently set up their tax and tax burden. Not only multinational companies, but also medium-sized and smaller Slovak companies are able to optimise. As we are also attorneys and tax advisors, our job is to look for solutions that have the potential to be defensible. At the same time, we try to show our clients in which cases a tax optimization technique already interferes with the criminal law.

In addition, our law firm is Tax Law Firm of the Year in 2023 and 2024, we organize the largest legal-tax conferences in Slovakia on the topic of tax optimization and the search for legal techniques and methods. Recent conferences have been held, for example, on the following topics: employing freelancers – where is the line?, tax investment structures, tax optimisation for IT and digital companies or employee share ownership (ESOP). At the same time, we have extensive experience in scaling businesses abroad, as well as in the legal use of foreign companies, including offshore ones. Thus, we provide legal, tax and accounting services under one roof, which has the potential to be a more efficient (i.e. cheaper and better quality) service, mainly due to synergies.

3. Clients use the following benefits for accounting

Access to the most widely used legal documents

These are the most widely used legal documents in practice, so you don’t have to “google” them or pay other legal advisers to draw them up (e.g. loan agreement, employment contract, sole shareholder’s resolution, purchase agreement, share transfer agreement).

75% discount on our conference recordings (e.g. when you can employ freelancers, tax optimization options, …)

Probably every one of our clients is interested in when they can “employ” labour as a sole trader, what the penalties are, how to set up a contract with such a contractor. Several clients are also interested in what tax optimization options exist or how to set up employee stock ownership plans (ESOPs) at their company. On all these topics, we have organised conferences with detailed content, for which you can see the recordings.

75% or 100% discounts on online courses (e.g. property taxes and levies, management fees, …)

As an accounting client, you have access to a wider range of video courses delivered by Peter Varga on a variety of practical business topics.

Issuing invoices in Superfaktur

We will make the best Slovak online invoicing system Superfaktúra available to you free of charge (also for your mobile phone), where you can issue invoices, register cost invoices, or automatically send reminders to your clients after linking with the bank.

Consultations with Peter Varga and Tomas Demo for 50% price

You can consult on various business topics such as taxation of cryptocurrencies, use of foreign companies, the shvarc system, sole proprietorship vs. LLC, setting up investment funds, employee stock ESOPs. You can find the consultation topics here.

4. Cleaning up the books (e.g. for the purpose of taking over from another accountant or potential investor input)

When setting up accounting systems, we do not only focus on the technological aspect, but also on its “cleaning”. Often we have client accounts that come to us that not only need to be set up, but also cleaned up. Having transparent accounting is important not only for the convenience of the owners and to avoid penalties from the tax authorities (e.g. for improper accounting of development activities, accounting for contracts, use of crypto assets), but also as a demonstration for an investor or a prospective buyer.

In our legal-tax practice we have been on the side of a number of buyers or investors, where not only financial/accounting indicators, but also administrative (accounting) “orderliness” of the owners of the company played a primary role in deciding whether or not to enter the company.

5. We are passionate accountants and legal and tax advisors

Just check out the Linkedin profile of our founder Petr Varga and you will know how many legal, tax and accounting topics we set the trend in Slovakia. These are, for example, attractive topics such as “Using a car for business purposes“, “Putting your watch into expenses” or “Taxation of ETF funds“, about which Peter Varga writes and lectures. In addition to these activities, as well as our professional conferences, we write a number of articles as part of the Highgate Group, assist states in drafting better legislation (e.g., assisting states in creating the legal environment for taxing ESOPs, cryptoassets, creating investment funds, superannuation or patent box applications), and educate on accounting automation (see our conferences, collaborations with technology partners, and articles on our website).

Článok 5 reasons to let Highgate Group manage your accounting je zobrazený ako prvý na Highgate.

The MiCA regulation, commonly known as. The Markets in Crypto-Assets Regulation (or MiCA for short ) is a robust regulatory framework for cryptoassets within the European Union(EU).

The EU’s main objectives that led it to adopt MiCA were:

1. Creating a harmonised regulatory environment in which cryptoasset service providers and issuers of different cryptoassets can operate across the EU without the need for 27 different permits and licences;
2. Providing protection to consumers who purchase cryptoassets or use other services of cryptoasset providers;
3. Creating legal certainty for cryptoasset service providers with a clear set of rules for different services (token issuance, exchange, custody, etc.);
4. Taking EU leadership in the global regulation of cryptoassets to boost technological and economic innovation in the EU.

The MiCAs are subject to modification by:

1. Rules for the issuance of cryptoassets (known primarily as “ICOs”), the obligations of their issuers, and the rules for the admission of cryptoassets to trading on a cryptoasset trading platform;
2. Rules for the authorisation of issuers of asset reference tokens ( ARTs) and issuers of electronic money tokens ( EMTs);
3. The procedure, requirements and process for the authorisation (licensing) of cryptoasset service providers;
4. Protection of clients of cryptoasset service providers and holders of cryptoassets issued and cryptoassets admitted to trading.

Although MiCA is a comprehensive regulation, it does not regulate the following areas directly related to cryptoassets:

1. NFTs (which are therefore not yet regulated); and
2. Tokenised financial instruments (which are subject to the DLT Regulation and the regulation of “standard” financial instruments)).

MiCA applies in the European Union from 30.6.2024 in relation to ARTs and EMTs and from 30.12.2024 in the rest, in particular in relation to cryptoasset service providers.

In connection with the new MiCA regulation, we provide legal services to clients currently doing business with cryptoassets (in particular through trade licenses to provide virtual currency exchange services and virtual currency wallet services), as well as to clients interested in operating in this area as a regulated institution, on how to comprehensively prepare for the new MiCA regulation, including preliminary consultations with the National Bank of Slovakia on their (planned) business model.

The MiCA Regulation and what it entails was also covered more comprehensively in our video podcast, which you can watch here:

At the same time, we will also discuss the regulation and taxation of cryptos and implementation in investment structures in more detail at conference on cryptosto be held in October 2024.

What activities with crypto-assets will require a MiCA permit?

According to MiCA, a permit will be required for:

1. Public offering of tokens other than ART and EMT;
2. Acceptance of tokens other than ART and EMT for trading on a cryptoasset trading platform;
3. Public offering of ARTs and their admission to trading;
4. Provision of cryptoasset services.

What are the benefits of a MiCA permit?

MiCA is a harmonised regulation of crypto-assets, i.e. an authorisation granted in one EU country is valid in other EU countries. Therefore, for example, public offerings of crypto-assets will be feasible throughout the EU and it will not be necessary to analyse legislation in individual Member States for this purpose. Also, the provision of cryptoasset services will be able to be carried out across borders on the basis of the so-called passporting, as MiCA will make cryptoasset services subject to uniform rules across the EU.

At the same time, by imposing different conditions on cryptoasset service providers or token issuers to carry out their activities, MiCA provides a greater guarantee for the security of cryptoasset investments and investors/clients compared to the completely unregulated environment in many EU countries.

The MiCA also establishes a level playing field for cryptoassets business across the EU, thus creating the prerequisite for a healthy business environment in this area.

What are the consequences of doing business without a permit under the MiCA?

In the event of any activity being carried out in contravention of the MiCA, i.e. even in the case of activities requiring authorisation under MiCA, the competent authorities of an EU Member State, in Slovakia the National Bank of Slovakia, have the power to impose sanctions under national law, which may be administrative or criminal sanctions. In particular, under the MiCA, Member States must ensure that the following financial sanctions are imposed:

1. in the case of a natural person, a maximum administrative fine of at least EUR 700 000;
2. in the case of a legal person, a maximum administrative fine of at least EUR 5 000 000;
3. for certain infringements by a legal person, fines of at least 3 % to 12,5 % of the total annual turnover; and
4. maximum administrative fines of at least twice the amount of the gains made or losses avoided as a result of the infringement.

Token issuance and admission to trading

Tokens other than ART and EMT

The public offering of tokens other than ART and EMT will not be possible in the EU unless a cryptoasset whitepaper is produced. This document will then have to be notified to the NBS at least 20 working days before the date of its publication, without the approval of the NBS being required.

Public offerings of these cryptoassets are subject to similar exemptions as public offerings of securities under the Prospectus Regulation.

The development, notification and publication of a whitepaper are also required for the acceptance of tokens other than ARTs and EMTs for trading on a cryptoasset trading platform.

ART and EMT

The public offering of ART for legal entities other than credit institutions will be possible only upon the granting of permission by the NBS. Again, a whitepaper is required to be produced and published.

The public offering of EMT will only be possible for credit institutions or electronic money institutions that develop, announce and publish a whitepaper on the relevant EMT.

Cryptoasset service providers

Who are the cryptoasset service providers, the so-called. CASP?

MiCA introduces a new concept of “Crypto-asset service providers” ( CASPs), which are regulated persons who will be authorised to provide cryptoasset services within the European Union.

CASPs will be authorised to provide cryptoasset services and will be required to comply with a number of requirements, in particular:

1. Prudential (capital) requirements, which for CAPS must be at least EUR 50 000 to EUR 150 000 (depending on the services provided) or one quarter of the fixed overheads for the previous year, whichever is higher. CASP may meet these requirements with its own resources, an insurance policy, or, where appropriate, a. a comparable guarantee, or a combination thereof.
2. Personnel requirements, namely, both the requirement that the members of the CASP’s governing body be of sufficiently good repute and of sufficiently good knowledge, skill and experience to manage the CASP, and that all direct or indirect shareholders and members who hold qualifying interests in the CASP be of sufficiently good repute.
3. The internal rules that will govern the CASP’s activities, e.g. Regulations relating to the procedure for segregation of crypto assets and client funds, complaint handling procedures, governance mechanism, internal control mechanisms, policies and procedures for identifying, assessing and managing risks, including money laundering and terrorist financing risks, business continuity plan, etc.
4. Other requirements, e.g. IT provisioning requirements, or the location and place of effective management in the EU.

What are cryptoasset services under MiCA?

Cryptoasset services are those services and activities related to any cryptoasset under the MiCA:

(a) providing custody and management of cryptoassets on behalf of clients;
(b) operating a cryptoasset trading platform;
(c) the exchange of cryptoassets for funds;
(d) the exchange of cryptoassets for other cryptoassets;
(e) the execution of orders relating to cryptoassets on behalf of clients;
(f) placement of crypto-assets;
(g) receiving and transmitting orders relating to cryptoassets on behalf of clients;
(h) the provision of advice on cryptoassets;
(i) the provision of cryptoasset portfolio management;
(j) the provision of cryptoasset transfer services on behalf of clients;

Who will need a CASP licence under MiCA?

In practice, any legal persons or businesses that wish to carry out the above cryptoasset activities, respectively. to provide the above cryptoasset services in the European Union will need a CASP authorisation. This includes, for example, the following current business models:

(a) Various cryptocurrency platforms and exchanges;
(b) Cryptocurrency wallet providers;
(c) Managers of various cryptomining strategies;
(d) Intermediaries of exchange of cryptocurrencies for FIAT currency or other cryptocurrency;
(e) Advisory services for investments in cryptocurrencies or cryptoassets in general.

How long does it take to get a CASP license?

(a) Prior to the actual hearing of an application for a permit before CASP, the recommended to consult the business plan of the prospective CASP with the NBS and then proceed with the preparation of the application itself – this process may take varying lengths of time depending on the readiness of the CASP, in our experience with licensing proceedings for financial institutions, approximately 3 months should be expected;
(b) Once the application has been prepared, the application shall be submitted to NBSwhich must confirm whether the application is complete within 25 working days of receipt of the application;
(c) If the application is not complete, NBS will set a deadline for completion of the application (this deadline will be individual depending on the extent of the required completion, we expect this deadline to be between 30 and 60 days). If the application is complete, NBS will notify the applicant; if it is not complete even within the additional time period, NBS will reject the application.
(d) Within 40 business days of the submission of a complete application, NBS will issue a decision (grant permission / deny permission). This period may be suspended for 20 working days if the NBS requests further documentation.

What is Highgate’s role in obtaining a permit under MiCA?

What are our services?

Given that no one except CASP and some financial institutions will be allowed to provide cryptoasset services under MiCA, we advise clients both in analysing their business models to determine whether they fall under the new regulation or other regulation within the financial sector (e.g. collective investment or provision of investment services and activities) and in the case of applying for a CASP authorisation before the National Bank of Slovakia.

If the client decides to apply for a CASP licence, we represent the client from the initial consultation of its business plan with the National Bank of Slovakia and subsequently in the preparation of the licence application, including the individual annexes, in cooperation directly with the client and, where appropriate, its other advisors, for example, in the field of IT security. After the application for a licence has been submitted, we represent the client before the National Bank of Slovakia in the licensing procedure itself, in which the National Bank of Slovakia will comprehensively assess the application with all its annexes.

Given our experience with ICOs and STOs, as well as with securities issues, we also advise clients on the preparation of whitepapers for various types of tokens, the preparation of their marketing communications for the purpose of token issuance in accordance with the requirements of MiCA, and the fulfillment of obligations to the NBS in connection with the issuance of tokens or their admission to trading.

What is our experience in cryptoassets legal advice?

Although MiCA is a relatively new piece of legislation, the regulation of cryptoassets has long been comprehensively addressed, whether in the context of taxation, in the field of tokenised financial instrumentsor by speaking directly at NBS conference on MiCA. In the past, we have provided legal and tax advice to clients in, for example:

(a) the creation of a platform for cryptocurrency trading, including the legal structuring of staking strategies,
(b) the primary issuance of hybrid tokens, as well as their placement on a decentralised exchange as part of a secondary sale,
(c) primary token issuance (ICO) and security token issuance (STO),
(d) the establishment and management of alternative investment funds located in offshore jurisdictions and investing in crypto-assets,
(e) structuring the business model in connection with the creation of cryptocurrency portfolio management services,
(f) assessing the compliance of the cryptocurrency business model with the regulation of payment services and electronic money,
(g) creating investment products investing in crypto assets for client customers,
(h) creating a study for the client aimed at establishing the legal and tax framework for the operation of its internal token system.

At the same time, as we have been involved in financial regulation for a long time and thus represent clients in authorisation, registration and sanction proceedings before the National Bank of Slovakia, our know-how is an elementary prerequisite for qualified representation of a client before the National Bank of Slovakia in the licensing procedure for CASP activities, in the preparation of white papers or in applications for a public offering of tokens or their admission to trading. Demonstrating our extensive experience in the area of financial regulation are the successful conferences (some of the largest of their kind in the country) that we have organised, whether regarding real estate financing or regarding the establishment and operation of investment funds.

If it is not clear to you whether your business model will be regulated by MiCA and therefore whether you should prepare for licensing proceedings before the National Bank of Slovakia, do not hesitate to contact our experts:

1. Peter Varga, e-mail: peter.varga@hg.amcef.com
2. Roman Baranec, e-mail: roman.baranec@hg.amcef.com

Alternatively, you can discuss your specific questions with our partner Peter Varga, who has long been involved in the regulation and taxation of cryptocurrencies:

If you are interested in the taxation of cryptocurrencies, please do not hesitate to contact us.

Článok Licensing procedures under the MiCA Regulation je zobrazený ako prvý na Highgate.

You can book a consultation with Peter Varga here:

Článok Can I sell an apartment for €200,000 so that €20,000 is the apartment and €180,000 is the furnishings in it? Peter Varga bol hosťom vo videopodcaste Národnej asociácie realitných kancelárií (NARKS) je zobrazený ako prvý na Highgate.

In general, we recognise two scenarios for ETF taxation:

• Short-term holding (less than one year) – Capital gains from ETFs are taxed at %/25% rate + 15% health insurance;
• Long-term holding (one year or longer) – Capital gains from ETFs can (should) be exempt from income tax. For more information on why and when, watch the Highgate Talks video podcast on the taxation of ETFs.

What is an ETF?

“An ETF (Exchange Traded Fund) is an exchange-traded fund that tracks multiple assets in a single fund, such as stocks, bonds or commodities. They are traded on an exchange like a stock and offer investors an easy way to diversify their portfolio and invest in different asset classes under one roof.

ETFs are similar to mutual funds, but there are some key differences. ETFs are traded on an exchange throughout the day, while mutual funds are only valued once a day. ETFs also tend to have lower fees than mutual funds.

Benefits of investing in ETFs:

• Diversification: ETFs offer an easy way to invest in a variety of assets, which can help reduce your overall risk.
• Low costs: ETFs tend to have lower fees than mutual funds, which can help you keep more of your returns.
• Tradability: ETFs are traded on exchanges throughout the day, so you can buy or sell them at any time.
• Transparency: ETFs are transparent investment products, so you can easily see what you’re investing in.

Which are index funds?

Examples of some of the best known index funds:

• SPDR S&P 500 ETF (SPY): tracks the S&P 500 index, which is composed of the 500 largest companies in the U.S. It is one of the most popular and liquid ETFs in the world.
• iShares Core S&P 500 ETF (IVV)
• Vanguard Total Stock Market ETF (VTI): tracks the entire U.S. stock market, including small, mid and large cap companies.
• iShares MSCI Emerging Markets ETF (EEM): tracks emerging equity markets.
• Invesco QQQ Trust (QQQ): tracks the Nasdaq-100 index, which is composed of the 100 largest companies traded on the Nasdaq stock exchange.

These are just a few examples of the many ETFs available. When choosing an ETF, it is important to consider your investment objectives, risk tolerance and time horizon.

ETFs and compound interest?

ETFs (exchange-traded funds) can have compound interest. Compound interest is achieved when interest is reinvested, increasing the underlying investment and generating even more interest.

Compound interest is a phenomenon where interest is calculated not only on the original investment but also on the interest already accrued. This leads to exponential growth of the investment over time.

What are capital gains?

Capital gains are the profits you make from selling securities such as stocks, bonds, mutual funds, real estate and cryptocurrencies. They arise when the price of a security when sold is higher than its cost basis.

There are two types of capital gains

• Short-term capital gains: these gains are taxable if you have held the security for less than one year. The tax rate is 19% or 25%, plus health levies.
• Long-term capital gains: these returns are normally tax-free if you have held the security for one year or more.

Dividends from ETFs

Dividends from ETFs (exchange-traded funds) are taxed in the standard way as other dividends. For us, it is taxed at 10% for FOs and 0% for POs. Of course, withholding tax in the source country can increase the total tax liability on dividends. In Slovakia there is no special tax relief for dividends from ETFs.

Taxation of dividends in Slovakia

Dividends are a share of the profits paid by a company to its shareholders. In Slovakia, dividends are taxed in two ways:

1. Withholding tax:

• Withholding tax is automatically paid when the dividend is paid.
• The withholding tax rate is 10% or 35% for FOs; there is no withholding tax for POs (except in special cases); this may not apply if the recipient of the dividend is a foreign person;
• Withholding tax is the final tax for tax residents of the Slovak Republic;
• Non-residents of the Slovak Republic can normally offset withholding tax against income tax in the country where they are tax resident.

2. Tax return:

• Dividends from abroad are included in the taxable income of the taxpayer in the year in which they are credited to his account or possibly set off against a further deposit (i.e. reinvested).
• Dividend tax is 10% or 35% for FOs; for POs (except in special cases) there is no tax.

Is there a difference in taxation of ETFs as a natural person vs. a legal entity

There are quite a lot of differences in the taxation of ETFs between an individual and a corporation, in general:

Individual:

• Gains from the sale of ETF shares are taxed as capital income at a 19%/25% tax rate and a 15% health insurance premium;
• However, gains from the sale of ETF shares may be exempt from both income tax and insurance premiums;
• Dividends from ETF shares are taxed as standard dividends;
• The tax is taxed on the sale of ETF shares through the tax return;
• Dividends are taxed through the tax return anyway (unless they are hypothetically Slovak ETFs), but often withholding tax is applied in the source country;

Legal entity:

• Gains from the sale of ETF shares are taxed as taxable income at the %/21% tax rate.
• Dividends from ETF shares are taxed as taxable income at a 0%/35% tax rate.
• The tax is taxed on the sale of ETF shares through the tax return;

What is the time test and how to save on income tax and health insurance premiums?

Time test and income tax

The time test is a condition for exemption from income tax on the sale of securities such as stocks, bonds and units.

Length of time test

• Time test 1 year: if you hold the security for one year or more, the income from its sale is exempt from income tax.
• Time test of 3 years: it was supposed to be introduced for some types of securities, but eventually did not come into force in 2024

How to save on income tax

Watch the video podcast on the taxation of ETFs.

What are the types of funds and how are they taxed

There are several types of funds in Slovakia that differ in their investment strategy, risk and return. In terms of taxation, funds fall into two categories:

1. Mutual funds

Mutual funds pool money from investors and invest it in different types of securities such as stocks, bonds and money market instruments. The profit from the investment is distributed to investors in proportion to their share of the fund.

Taxation of mutual funds:

• “Dividends” from mutual funds are actually income and are taxed as capital gains at 19%.
• The sale of units between Slovak residents is tax exempt;
• The redemption of a unit is subject to income tax at a rate of 19%;

2. ETFs (exchange-traded funds)

ETFs are funds that are traded on a stock exchange like stocks. They invest in different types of securities and track a selected index, sector or commodity.

Taxation of ETFs:

• Dividends from ETFs are taxed as standard dividends;
• Capital gains on ETFs are taxable if the ETFs were held for less than 1 year.
• Long-term holding (1 year or longer) capital gains from ETFs can (should) be tax-free.

Fund types by investment strategy

• Equity funds: invest in equities and are suitable for investors with a higher risk profile and an expectation of higher returns.
• Bond funds: invest in bonds and are suitable for investors with a lower risk profile and an expectation of lower returns.
• Mixed funds: equities and bonds, offer a balanced risk/return ratio.
• Money market funds: are short-term money market instruments and are suitable for investors who want to “park” their money in the short term.

In which country is it worth taxing ETFs?

There is no clear answer to this question and it depends on various factors such as:

• Country of tax residence: investors pay income taxes in the country where they are tax resident. There are a number of criteria that define tax residence and these vary from country to country
• ETF type: different types of ETFs (equity, bond, mixed) are taxed at different rates.
• Amount of income: the tax rate may vary depending on the investor’s income.
• Length of ETF holding: capital gains on ETFs held for more than one year are tax-free in some countries.
• Tax breaks: some countries offer tax breaks for ETF investors.

Example of standard ETF taxation in some countries

• Slovakia: dividends from ETFs are taxed at 10% for FO. Capital gains from ETFs may be exempt from tax if the ETFs have been held for one year or longer.
• Czech Republic: dividends from ETFs are taxed at 15%. Capital gains from ETFs may be exempt from tax if the ETFs have been held for three years or longer.
• United States: dividends and capital gains from ETFs are taxed according to the amount of the investor’s income.

Tax havens for ETFs

A tax haven is a jurisdiction that has low or no taxes and is usually considered to be secret. Tax havens are often used by individuals and businesses to reduce their tax burden.Here are a few countries that are often considered tax havens for ETFs:

• Bermuda: a British Overseas Territory with a 0% income tax rate for companies.
• Cayman Islands: a British Overseas Territory with a 0% income tax rate for companies.
• Cyprus: an EU country with a 12.5% corporate tax rate.
• Malta: an EU Member State with a corporate tax rate of 35%, but there is an imputation system that can reduce taxable income to 5%.
• Switzerland: is outside the EU and has tax rates that vary by canton. However, Switzerland is known for its banking secrecy and political stability.

What is the risk if you don’t tax ETFs?

Failure to tax ETFs can have material consequences. Depending on the severity and the taxpayer’s intent, it can threaten:

1. Penalty: the Financial Administration of the Slovak Republic may impose a penalty of 10% to 100% of the unpaid tax.
2. Interest on late payment: the taxpayer is liable to pay interest on late payment of unpaid tax. Interest is calculated from the date the tax is due until the date of payment.
3. Criminal prosecution: in serious cases, the taxpayer may face prosecution for one of the tax frauds.

How the tax administration oversees the taxation of ETFs

The Slovak Financial Administration oversees the taxation of ETFs in various ways:

1. Checking tax returns:

• The tax authorities check investors’ tax returns to make sure they have taxed their ETF income correctly.
• In case of any doubts, the financial administration may call on the investor to provide evidence of its investment.

2. Control of banks and investment firms:

• The Treasury inspects banks and investment companies to make sure they withhold tax on dividends and profits from ETF sales.
• The Financial Administration can impose fines on banks and investment companies that do not comply with tax rules.

3. International cooperation:

• The Treasury works with tax authorities in other countries to make sure investors pay taxes on ETF income in accordance with tax treaties.
• The Financial Administration automatically receives information from most foreign financial institutions about Slovak taxpayers;

4. Tax audits:

• The tax authorities can carry out tax audits on investors to make sure they have correctly taxed their income from ETFs.
• A tax audit may include a review of bank statements, investment statements and tax returns.

In conclusion

The taxation of ETFs is a complex topic that can vary depending on the type of ETF, the tax status of the investor and the country in which the ETF is traded. Before investing in an ETF, it’s important to consult a tax advisor to make sure you understand the tax implications.

Článok Taxation of ETFs je zobrazený ako prvý na Highgate.

“Crypto Novel” 2023

In the summer of 2023, a law amending the Income Tax Act (the “Amendment“) was enacted providing that, beginning in 2024, individuals would be able to tax long-held virtual currencies (note only virtual currencies, not all crypto-assets) at a rate of 7% and without health levies. Overall, however, this Amendment contained more attractive changes for investors. However, since it has been repealed, I will not go into it in detail in this article. Who would be interested in it, however, I attach:

• my Linkedin blog, where I discussed the issue of exchanging virtual currency for other currency and justified why it should be taxed anyway (poorly written Amendment);
• my professional publication with my colleague for the Ministry of Finance of the Slovak Republic, in which we address why the taxation of staking should be postponed (it is also partly applicable in today’s situation)
• video podcast on taxation of crypto assets:

Taxation of Bitcoins and other cryptocurrencies from 2024

Something changes from 2024 onwards. Whereas the health levy was 14%, from 2024 it will be 15%. So the profaned “25 + 14” has become “25 + 15”. On the other hand, the increase in the level at which the progressive 25% tax rate applies can be considered positive news with a marginal effect. Whereas in 2023 it was EUR 41,445.46 for every EUR above the tax base, from 2024 it is EUR 47,537.98.

This threshold is 176.8 times the applicable minimum subsistence level (the socially recognised minimum threshold of income of a natural person below which a state of material deprivation arises). Thus, as the minimum subsistence level increases, the threshold for the progressive tax rate also increases. The amount of the minimum subsistence level is determined by a measure of the Ministry of Labour, Social Affairs and Family of the Slovak Republic.

Note that it is not enough to cross this threshold with income from the sale of cryptocurrencies (I use the term cryptocurrencies in this article because this taxation does not apply to all crypto assets). For example, income from employment, income from the sale of securities (if not exempt), real estate (if not exempt), or miscellaneous passive income (such as rental income earned without doing any active management) are also included in the same tax base.

Changes in taxation of cryptocurrencies in Slovakia in 2024

Planned changes in the taxation of cryptocurrencies in Slovakia, which were to come into force on 1. 530/2023 Coll. (consolidation package).

This means that in 2024 cryptocurrencies in Slovakia will be taxed according to the current rules:

• Income from the sale of a cryptocurrency made after one year of its acquisition is taxed at 19% or 25% income tax rate + 15% health insurance premium.
• Income from the sale of a cryptocurrency earned within one year of its acquisition is taxed at19% or 25% income tax rate + 15% health insurance premium.
• A tax expenditure on cryptocurrency can only be claimed if it was used to acquire the cryptocurrency.
• Profits from cryptocurrency mining are taxed the same as “other income” at 19% or 25% income tax rate + 15% health insurance premium.

Beware, the law still only talks about virtual currencies. It does not talk about crypto assets. Thus, there may be crypto assets whose underlying asset is an asset that is not taxable in Slovakia once certain conditions are met. However, with the advent of the MiCA Regulation, this diversity is likely to be removed and all crypto assets will be subject to the same tax regime (and accounting regime) irrespective of the underlying asset.

Taxation of Bitcoins and other cryptocurrencies in legal, tax and accounting contexts

While cryptocurrency by default includes only those crypto-assets that are equivalent to standard FIAT currencies (i.e., cash), the term crypto-asset is a broader term, encompassing a variety of other types of assets that serve purposes other than standard payment transactions.

Proper classification has significant relevance not only in the regulation of crypto assets, but also from a tax perspective. Therefore, for example, it is not valid to claim that the sale of any crypto asset is exempt from VAT, or even within the scope of VAT. Indeed, there are several types of crypto-assets (e.g. some NFTs or utility tokens) that are subject to VAT regulation.

Nor is the claim that every sale of a crypto asset is taxed at the “25+15” rate valid, as some types of crypto assets may even be exempt from income tax under current law.

In terms of financial regulation, there are crypto assets that are subject to MICA regulation or crypto assets that are not subject to MICA and are subject to, for example, MIFID II regulation or, in some cases, even no regulation at all. Be that as it may, legal classification is in some respects important in finding opportunities for tax optimization in more complex contexts.

Who would be interested in this topic in general, we have covered it more here:

• our articles on this topic;
• footage from a talk at our November 2022 IT and Digital Conference, where we also covered topics around tax optimisation for IT and digital companies;
• a crypto asset accounting manual for entities dealing in crypto assets; or
• the issue of double taxation on the purchase of goods and services through crypto assets (by the way, this should finally be regulated in the amendment to the Income Tax Act 2024, even after our pressure).

The crime of not paying taxes on the sale of cryptocurrencies?

It is very bold to believe that the taxation of cryptocurrency sales set up in this way (i.e. 25+15) will bring more revenue to public budgets than the taxation envisaged by the Amendment. One reason for this is the apathy of individuals to declare cryptocurrency income, for example because of the high tax burden and/or aversion to the current political representation. However, such conduct is considered to cross the Rubicon in the notional classification of tax offences and thus fall within the criminal law.

Thus, the failure to declare income or fabricating tax expenses for individuals constitutes a standard course of conduct fulfilling the elements of the offence of tax and insurance evasion. As part of this procedure, the natural person will have to pay income tax and possibly also health insurance premiums, but at the same time he or she may also face imprisonment or other punishment provided for in the Criminal Code. In some cases, however, it is possible to avoid a prison sentence, even though the tax offence in question is classified by the law enforcement authorities as so socially dangerous that it fulfils the objective aspect of the relevant criminal offence.

Recognising the line between aggressive tax optimisation(a fine and additional tax payment) and tax fraud(a criminal offence – potentially a custodial sentence) is more difficult in many situations. Therefore, it is important to have the expertise of an attorney who practices tax law in connection with various optimization structures (some of which are discussed below). By default, such an opinion should protect the taxpayer from criminal liability. However, it is standard practice to obtain such an opinion from reputable law firms that have a proven track record of dealing with the subject matter.

So how to reduce the tax burden on the sale of Bitcoins and other cryptocurrencies?

Not only in practice, but also in the theory of taxation, a number of structures and settings emerge where it is not entirely clear whether or not they are statutory mechanisms. In general, not all tax optimisation is illegal and immoral. For example, deciding whether to operate as an SRO or a sole proprietorship can only be a fully informed decision based on a tax-tax comparison of the two regimes. Although the subjective motive is clear (i.e. to optimise tax and levy), such action does not contradict the purpose of the legislation. Therefore, the tax authorities cannot, after some time, ask you to change your legal form of business to one that is, from your point of view, less favourable.

A similar logic applies to the taxation of cryptocurrencies. However, in finding legitimate structures to reduce/eliminate taxation, in practice we find that proposals from clients are often contrary to the purpose of the legislation. Thus, this is not entirely parallel to SROs and the self-employed. As an example, I will give taxation at the level of the individual and the legal entity respectively.

Taxation of sales of Bitcoins and other cryptocurrencies through a natural person or a legal entity?

If you are deciding whether to buy cryptocurrency in the name of an individual or a corporation, making such a decision even on the basis of a purely tax-deductive motive does not defeat the purpose of the legislation. However, if you own the cryptocurrency as an individual and transfer it at face value to a legal entity before selling it to avoid the “25+15”, it is already more problematic. In that case, you need to tinker with the subjective side of the transaction to make it meet the requirements for a genuine transaction.

By comparison, on a Slovak legal entity, an individual will normally achieve an effective taxation rate of 28.9% (21% corporate tax rate + 10% dividend tax). Of course, this is the case if dividend tax is also paid, but this can be avoided in some cases and structures. In terms of social and health contributions, this is a relatively neutral situation. Such a structure generally does not require the payment of levies, except for marginal obligations in relation to:

• minimum health levies (see my Linkedin status on this topic); and
• obligations for minimum executive remuneration and invoicing to your own firm (see my online training).

Non-recognition of cryptocurrency income

Failure to declare cryptocurrency income may be considered a criminal offence. In contrast, aggressive tax optimization (acting in accordance with the text of the law but contrary to its purpose) is in theory punishable outside the criminal law. The tax authorities have gradually, albeit relatively slowly so far, made some tools available to detect tax evasion. Also in the context of the gradual adoption of legislative initiatives by the EU and the OECD, it is reasonable to assume that these tools will gradually become more invasive. Naturally, however, the state has to learn how to work with them.

What will the state gain by repealing the amendment on cryptocurrency taxation?

Only time will tell. In the context of the adoption of the consolidation package, I had the opportunity to take part in the deliberations of the relevant committee of the National Assembly. It was in the communication with the State Secretary of the Ministry of Finance that the phenomenon of the so-called “consolidation” was highlighted. The Laffer curve was highlighted.

The latter, simplistically, presents that a higher tax rate does not automatically mean higher tax revenues for the state. This is precisely because taxpayers have a greater incentive to avoid tax. Either by some legitimate tax optimization (if they know the way and have the resources), aggressive tax optimization or flagrant tax violations by not declaring income.

Moreover, it was the better rate for taxation of cryptos that gave Slovakia an easy prestige and in autumn 2023 we even had as Highgate several inquiries from abroad asking to transfer tax residency to Slovakia.

Tax optimisation via offshore company or tax haven?

Relatively similarly to a Slovak legal entity, it also works on a philosophical level with a foreign company. Nevertheless, there are a number of important differences. Namely, when setting up, as well as when the foreign company itself exists in a jurisdiction with lower taxation, it is necessary to keep in mind the rationale for its establishment and continued existence. This requirement stems from Slovak law, as EU law is not harmonised in this respect (at the end of the day, any EU directives are implemented into Slovak law anyway and such wording is primarily followed in application). Nevertheless, EU law is a kind of guarantor that the will of the Slovak tax authorities is not absolutely arbitrary and, for example, when it is necessary to tax your company in Hungary, Cyprus or Malta, for example, such intervention of the Slovak tax authorities must be in accordance with the fundamental EU law – the right of establishment.

In general, from the perspective of the defensibility of such a foreign structure, where a Slovak individual wishes to achieve minimal taxation through the sale of cryptocurrencies through a foreign company, the following circumstances should be borne in mind:

• výber jurisdikcie s ohľadom nielen na výšku sadzby dane, ale aj:
  • the overall tax system (as the tax rate itself may not be the final tax burden);
  • set-up and maintenance costs;
  • the ability to build so-called substance for local as well as Slovak purposes;
  • the extent of the administration required;
  • the predictability of the jurisdiction in terms of changing conditions; or
  • perception from the perspective of Slovak legislation and practice;
• the issue of the so-called. place of effective management from the point of view of the Slovak tax authorities;
• the issue of the emergence of the so-called. permanent establishment from the point of view of the Slovak tax authorities;
• application of the 35% tax rate;
• general rules against illegitimate tax optimisation;
• CFC rules for legal entities;
• the possibility of opening and operating a bank account; and
• forthcoming European legislation (in particular the so-called Unshelling or DAC 6 Directive).

The use of so-called. offshore companies can , in certain circumstances, be a relevant and also a defensible tool to reduce the tax burden. However, the set-up must be of a high quality, in order to reduce not only the risk of losing a potential tax dispute, but also the practical risk for any tax dispute. Fictitious invoices from abroad are a criminal offence.

In which countries is it worth selling cryptocurrencies to avoid paying taxes?

There is no universal answer. The tax rules for cryptocurrencies vary considerably from country to country and are constantly evolving.

Some factors to consider when choosing a country to sell cryptocurrencies:

• Tax rates: some countries tax cryptocurrencies as capital gains income, others as business income. Tax rates can vary considerably.
• Tax exemptions: some countries offer tax exemptions for cryptocurrencies held for more than a certain period of time.
• Tax relief: for investors in cryptocurrencies.
• Regulation of the cryptocurrency market: varying levels of regulatory requirements for cryptocurrency trading.

There are countries that are known in the media for their favourable tax conditions for cryptocurrencies:

• Portugal: offers a 10-year income tax exemption for cryptocurrencies held for more than one year.
• Malta: taxes cryptocurrencies as capital gains at a 5% tax rate.
• Germany: taxes cryptocurrencies as capital gains income, but offers a tax exemption for cryptocurrencies held for more than one year.
• Switzerland: taxes cryptocurrencies as capital gains income, but the tax rate varies by canton.

It is important to emphasise that the choice of a country to sell cryptocurrencies should not be made on the basis of tax breaks alone. Other factors should also be considered, such as the regulation of the cryptocurrency market, the availability of cryptocurrencies, the possibility of establishing a banking infrastructure, the defensibility from the point of view of the Slovak tax authorities, as well as the stability of the political and economic environment.

Known forms of tax optimisation in the taxation of sales of Bitcoin and other cryptocurrencies

Other forms of tax optimisation can be divided into those that are already illegal on the face of it and those that, if set up correctly, can be legal and even legitimate from a moral and ethical point of view (although this dimension is entirely subjective). At the same time, tax optimisation techniques can also be divided into those that are generally known and those that are not.

Various forms of practical obfuscation and opacity are clearly illegal. While the practical risk is low in today’s reality, the burden of proof remains problematic. This is borne by the taxpayer. In principle, the state could be a little more intelligent and consistent in its application of the law and could also address such practices in a relatively punitive manner (e.g. through the so-called aids in the Tax Code).

Among the commonly known techniques I include, for example, the change of tax residency. Although this has its technical specifics, the public is aware of this possibility in principle. However, this instrument is often simplified (for example, various unilateral authorisations in countries such as Panama or Paraguay) and taxpayers are presented with various miracle solutions. Boris Becker, the former successful German tennis player, also simplified the complexity of changing tax residency (he claimed to be resident in Monaco but stayed in Germany relatively frequently). He was eventually prosecuted for this conduct.

I also consider various donations to friends “to the Czech Republic”, payment cards for secured cryptocurrencies or various forms of borrowing to be common knowledge.

Unknown forms of tax optimisation in the taxation of sales of Bitcoin and other cryptocurrencies

However, there are also techniques unknown to the public. For some, there is no need to use complicated foreign structures at all. Their existence is due to the diversity of Slovak tax regulations, which due to their growth (in terms of number of words) automatically create various inconsistencies and thus create opportunities for tax optimization. And as long as the structure in question is authentic in terms of “business” rationalisation, not only can it not be a criminal offence, but the tax authority does not even have a legal mandate to sanction you for using the “loophole” in the law in question.

The basis for this assertion is provided by relatively extensive Slovak (but also Czech) case law. It is a matter and responsibility of the state (legislator), if it wants to introduce and collect a certain tax, to determine the conditions for setting and collecting this tax in a clear and definite manner. If it fails to do so, it must take into account the fact that, when interpreting the relevant provision of the tax law, the court will prefer the alternative which does not interfere, or, in the alternative, will not interfere. least interferes with the property right of the taxpayer (i.e. the individual selling the cryptocurrency), even if such an interpretation would be contrary to the fundamental (structural or other) principles of the relevant tax (i.e. i.e. a tax advantage will be obtained which the tax authority will consider illegitimate – it will be contrary to the principle of fair tax collection).

If you want to learn more about tax optimization options for crypto assets, you have the option to arrange a paid personal consultation (more about consultations with me by clicking below) or a more comprehensive consultation (by individual agreement).

If you are interested in the taxation of cryptocurrencies, please do not hesitate to contact us.

Článok Taxation of Bitcoins and other cryptocurrencies (virtual currencies) after the repeal of the crypto amendment – tax optimisation options je zobrazený ako prvý na Highgate.

1/ The Ministry of Finance of the Slovak Republic submitted for inter-ministerial comment procedure, which started on 3. 8. 2023 A draft law on a top-up tax to ensure a minimum level of taxation for multinational enterprise groups and large domestic groups. What do you think of this news, which follows on from the EU’s activities?

Peter Varga: This proposal for a global minimum tax represents a continuing effort to eliminate the tax practices of multinational corporations, through which they shift profits to jurisdictions where they are subject to no or very low taxation. It is the minimum tax that is intended to discourage multinationals in this endeavour and thus level the overall playing field. There are well-known cases of large technology giants who, thanks to the openness of countries such as the Netherlands or Ireland, are able to tax their profits from countries such as Slovakia at minimum rates. This puts them at a possibly unfair competitive advantage economically. Any competitor of such companies that does not have the infrastructure to shift profits to more favourable jurisdictions is thus at an economic disadvantage. This is because it has to tax its profits even if it wants to reinvest them, thus reducing its investment potential and putting it at a disadvantage against companies that effectively (abusively) exploit different tax regimes in different countries.

And so from the point of view of the idea and the vision, it seems like a sensible step. I am concerned, however, whether it will be too much of an administrative burden for the companies and groups concerned to comply with the requirements of this legislation. For example, the relatively recently adopted EU DAC Directive 6, which pursues a similar objective, often poses a perhaps disproportionately high administrative and interpretative challenge for those concerned. A number of affected entities are addressing this challenge by ignoring this legislation. Certainly, Slovakia itself, which is most responsible for the concrete implementation in practice, will have a say in this potential for simple implementation and unambiguous interpretation. It is therefore to be hoped that the actual implementation in the individual Member States will be easier and that those concerned will be able to set up their procedural procedures with relative agility.

2/ In practice, various items not included in the calculation of the tax base or various tax reliefs are also a problem. Does this mean that realistically these items would already be taxed, or how can this be understood? Please clarify.

Peter Varga: Exactly. At EU level, there is currently no harmonisation of tax bases for income taxation as we know it for VAT. As Member States have not conferred this competence on the EU in primary law, the issue of direct taxation is therefore a matter for Member States to legislate on. There are, of course, exceptions where EU law takes precedence over national law on direct taxes, but these exceptions relate primarily to fundamental economic freedoms, in particular the freedom of establishment. Thus, in the absence of greater harmonisation in the area of income tax to date, this Directive must also address the issue of harmonisation of effective tax rate calculations. Thus, it cannot be calculated simply by taking the tax liability of the entity concerned and comparing it with the revenue or taxable income under local rules. For this purpose, a relatively complex procedure for calculating a harmonised base and a harmonised effective tax rate needs to be applied.

For example, for the calculation of the effective tax rate, the Directive differentiates between dividends from the so-called portfolio investments and other dividends. On the basis of this differentiation, the effective tax rate calculated on the basis of Slovak regulations is modified. Slovak tax regulations do not distinguish between dividends in this context. And there are many such examples. As a result, the effective tax rate determined under the Directive does not necessarily even approach the effective tax rate calculated under Slovak regulations. Since the harmonisation modifications are relatively complex and the Directive is to be followed by local Slovak legislation, it would certainly be beneficial to the Slovak addressees of these changes if the law implementing the Directive was adopted as soon as possible and was in the required interpretable form.

3/ Only large entities belonging to multinational groups or large national groups are likely to be realistically affected by the top-up tax. Try to be more specific about what companies are involved, who will be realistically affected, and what level of tax rate will the entities be taxed at compared to current market conditions?

Peter Varga: It doesn’t necessarily have to be only multinational entities. The legislation also affects companies from the so-called. a “large-scale domestic group”, where all the companies are located in one EU Member State. The ultimate real impact on the taxation of the group is difficult to predict from this position as it depends on a number of individual circumstances such as the set-up of the structure, the income and cost structure or the tax incentives in place and so on.

4/ This is a very specific tax affecting very few entities. Since the consolidated turnover of EUR 750 million was set for all EU Member States, the turnover set in this way is obviously very high for Slovakia. How do you see it realistically? Will any company operating domestically ever achieve such a turnaround?

Peter Varga: We have several dozen companies in Slovakia that individually have revenues exceeding EUR 750 million. If we add to this the Slovak companies whose group revenues reach this level, we certainly get an interesting number of companies that are to some extent affected by this regulation. The extent to which this is the case depends mainly on the position of these companies in the groups or the level of taxation and jurisdiction of the individual companies in a particular group. Some complexity is added by the fact that Slovak companies can also tax their profits at an effective rate lower than 15% under Slovak law (without taking into account the aforementioned harmonisation modifications), which also has an impact on the obligations under this legislation. So the extent of the impact of this legislation on Slovak businesses is probably not fully graspable at this point.

5/ What do you foresee the impact of this legislative innovation on the market – specifically on business, the state budget, etc.? What benefits or risks do you see there? Is it not just a formal tax, the terms of which do not really translate into practice?

Peter Varga: I believe that the main motive of this regulation is not necessarily to increase tax revenues for individual Member States, but to achieve a greater degree of fairness in taxation. It is the large foreign conglomerates that have the means and flexibility to arrange their tax affairs in a way that can reduce the effective taxation of corporate profits in the so called “onshore” jurisdictions to single digits, in some cases even approaching zero. However, only practice will tell what the real impact will be.

If you are interested in this topic, please do not hesitate to contact us.

Článok Peter Varga on the so-called. dorovnávacej dani je zobrazený ako prvý na Highgate.