In addition, Highgate Law & Tax is also celebrating its win in the “Capital Markets” category, proving itself to be a comprehensive law firm with an extensive portfolio of expertise and the ability to successfully navigate diverse legal challenges.

The awards gala evening, which was organized by the media and educational group EPRAVO Group and the weekly TREND, was held at the Double Tree by Hilton hotel in Bratislava. For Highgate Law & Tax it was not only an opportunity to celebrate its success, but also to thank its clients and partners for their trust and support, without which this milestone would not have been possible.

This double triumph confirms Highgate Law & Tax’s excellent reputation for legal and tax services and reinforces its position as a leading player in the legal services market in Slovakia.

Článok Highgate Law & Tax and its double triumph in the prestigious Law Firm of the Year competition je zobrazený ako prvý na Highgate.

We are thus relatively intimately familiar with the related realities of this segment. Whether it is the topic of tax optimization, “employing sole traders”, investor entry, setting up a holding company, automated accounting, ESOPs, the legal, practical and tax pitfalls of scaling a business abroad, or operating with cryptos, these are all topics that we encounter in practice.

For this reason, we perceived that this conference can help many entrepreneurs to navigate through the complex tangle of more complex Slovak and foreign tax and legal issues. It was also intended to help to better understand the perspective of an investor or potential buyer in a company exit.

Sale of the company or entry of an investor :

• What are the basic situations and types of investor entry into companies?
• What are the key motivations and areas of interest for the investor and the company owner?
• What should an IT firm focus on to maximize the benefits of the investment for the firm and the business owner?
• Structured transactions and relevant tax implications from an income tax perspective (e.g. tax burden through a Slovak vs. a foreign holding company);
• Transaction Experience;

Relevant financial ratios when a company is sold or an investor enters :

• What is of interest to the investor or the buyer in accounting?
• Risks associated with incorrect accounting;
• Capitalization of the company;
• Transaction Experience;

Foreign IT contractors and work “from Bali” :

• Withholding taxes on payments to foreign contractors;
• Working from “Bali” – tax and levy implications;
• Setting up contract documentation;

ESOP – Best practice :

• What forms of shares and options can Slovak companies offer to their employees?
• Legal and practical context;
• Tax and levy context;
• Cross-border structure and practical experience;

Functioning in the crypt :

• Receiving retribution and paying contractors in the crypt;
• Types of crypto projects (token issuance, management, consulting, community token,…) and regulatory and tax aspects;
• Accounting and tax pitfalls in Slovakia and best practice when leaving Slovakia;
• Experience;

Scaling the IT business abroad :

• Do I need to have a company abroad in different business situations?
• Establishment of a permanent establishment, VAT regimes, withholding taxes;
• A company in an offshore jurisdiction from a legal, tax and practical perspective;
• Holding abroad – advantages and disadvantages;
• Investor requirements for foreign structure;
• Protection of the owner’s private property in the context of the political situation in Slovakia;
• Transfer pricing;

Software contracts :

• Framework or one-off contracts;
• Waterfall vs. agile SW development;
• Licensing Terms;
• Warranties and liability for defects in the SW;
• Problematic provisions – experience from practice;

Structuring business to the US :

• How best to enter the US market;
• Where can I get some help/information/grants?
• What is the tax and administrative burden?
• How to choose the right lawyer and accountant?
• How to get into the investors/funds horizon?
• In which state are the best conditions to enter the US market?

Tax optimization for digital and IT companies :

• Holding structure – owner protection;
• Patent Box and Supercomputing – how some IT companies do not have to pay income tax in Slovakia;
• Other tax and levy types and practical experience;
• When is tax optimisation already a criminal offence;

Schwarz system :

• Tax-tax implications and calculations;
• Impact on employees’ social insurance benefits (maternity, pension, sick leave,…);
• What impact does the change to a sole trader’s trade have on a sole trader’s pension?
• Analysis of court decisions that have dealt with the topic;
• Practice of tax administrations and labour inspectorates;
• Criminal liability;
• Setting up contracts with contractors;

Relevant financial ratios when a company is sold or an investor enters :

• What is of interest to the investor or the buyer in accounting?
• Risks associated with incorrect accounting;
• Capitalization of the company;
• Transaction Experience;

Many topics and many questions from conference participants. Companies were particularly interested in topics around ESOPs, tax optimizations or company sales. However, many attendees stayed until the end to hear the current practice in connection with the so-called In the meantime, there was a lot of interest in the practice of the shvarc system (i.e. the employment of freelancers).

We received a lot of positive feedback on the content and organisation of the conference. We are therefore very pleased that after the conference on setting up investment funds, this conference was also a success.

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

Článok Conference on legal and tax optimization for technology companies je zobrazený ako prvý na Highgate.

• 36% would immediately start taking steps to move their company abroad;
• 45% would start thinking about moving abroad;
• 19% would wait to see how the situation develops;
• 0 % would not reflect such a result

Political risks are thus perceived as a sensitive part of the added value of the Slovak economy. However, geographic and functional diversification brings several legal and tax challenges.

• Can Slovak authorities freeze a foreign bank account?
• Are Slovak interim measures enforceable abroad?
• How safe are Swiss banks?
• How to set up a trust structure correctly?
• How to tax income from a trust or how to effectively set up a holding structure?
• How to transfer a healthy core business to another company?
• How not to be on finstate?

At Highgate Group, these are precisely the issues that we address at our law firm.

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

Článok Wealth management conference in Luxembourg and the pitfalls of the current political situation in Slovakia je zobrazený ako prvý na Highgate.

In his 4-hour lecture, Peter Varga focused mainly on the issues of effective payout of owners from the company , not only from the tax and taxation point of view, but also from the legal point of view. This is because some, at first glance effective, solutions may bring with them the legal inconvenience of a natural person being liable for all of his or her assets. This may arise in particular in situations where the disbursement of funds to the holder in question has not been made in accordance with the relevant commercial law standards. In addition, if the paying company is in a more difficult financial situation, it is also possible to talk about the criminal consequences of improper payments from the company.

In addition, the topics were mainly the possibilities of setting up and operating companies abroad in the context of legal defensibility and other tax-legal pitfalls as well as the relevant administration. Establishing not only offshore companies, but any foreign companies is a very complex topic in the context of today’s legislation, partly the practice of tax authorities and administrative pitfalls. Gone are the days when it was possible to set up and run a foreign company with ease and extract profits simply by moving them into a low tax bracket. Peter Varga has been working on this topic for a long time and has also discussed it at our recent conferences on setting up investment funds and tax optimization for IT companies.

In addition to the above topics, he also discussed other commoditizable tax optimization techniques. However, many optimization opportunities arise only in the context of the dynamics of specific companies. Thus, a number of specific opportunities can only be applied to specific situations, making the range of possibilities very wide in today’s relatively complex world of tax law contexts. Either way, tax optimisation is a lively topic and we have been working on it for a long time.

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

Článok Lecture by Peter Varga on tax optimization options je zobrazený ako prvý na Highgate.

The content and themes of the conference were constructed to reflect our experience in this area as well as client enquiries. In our experience, we structure approximately 50% of our fund structures in the regulated fund space. We adjust the rest so that some exception to regulation applies, or so that the structure in question is not considered regulated for substantive reasons. This creates investment funds and fund structures for real estate, securities, derivative operations, venture capital or crypto-assets.

The themes of the conference were:

• the boundary between collective investment and standard equity finance or crowdfunding from a regulatory perspective;
• the role and practice of the NBS in the exercise of supervision, the administrative and criminal implications of non-compliance with the regulatory framework;
• types of investment funds in Slovakia and the administrative and financial cost of setting them up;
• shareholding structures in funds; founder-investor relations;
• taxation and accounting of funds;
• SICAVs and investment funds of qualified investors for Slovaks in the Czech Republic;
• Tax and regulatory implications for Slovak founders and investors in foreign funds;
• investment funds in selected countries abroad and overlaps to Slovakia;

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

Článok We organised a conference on setting up investment funds je zobrazený ako prvý na Highgate.

We mainly provide the following services to our clients:

• Analysis of existing client structures with respect to current tax regulations and expected changes;
• Analysis of existing client structures with respect to criminal law risks;
• the possibilities of using a foreign offshore company in specific business situations of the client;
• practical advice on setting up and using an offshore company.

What is an offshore company?

An offshore company is not to be understood as a company incorporated and existing in the jurisdiction of one of the Caribbean islands. For example, a critical part of Czech holding companies, which until recently were often set up by Slovak tax advisors in order to avoid capital gains taxation in Slovakia in the event of a successful EXIT, can be considered offshore companies. Even the recent sale of a well-known Slovak IT company was made through an offshore company. This was the Austrian holding company in this case. An offshore company thus does not only include companies from the so-called. tax havens that have been set up for the purpose of reducing the tax liability of the entrepreneur.

An offshore company is any company that is not located in the country of the founder or in the country in which the functions and risks associated with the income generated by the offshore company are actually carried out. An offshore company can thus also be located in the Czech Republic as well as in the British Virgin Islands. Offshore companies are also set up to achieve a degree of anonymity. In the recent past, it was common to hide assets through offshore companies with the legitimate aim of protecting them from various vested interests or violent structures. In South America, but also in Russia or Ukraine, it is still relatively common today for many businessmen to conceal their property in order to protect their lives and the lives of their family members. The disadvantages of property transparency are also experienced by many entrepreneurs in Slovakia thanks to public access to company accounts.

There are relatively many cases where part of the assignment from our client was also to achieve greater anonymity of his property disposition. The reasons may be different. From those illegitimate motives mainly related to criminal activities, it is also the need to protect the entrepreneur and his family from the attention or unreasonable demands of his business partners or employees. Offshore companies are also set up with the intention of avoiding administrative or regulatory restrictions.

In Slovakia, for example, it happens relatively often that the commercial register does not function as the law commands. Filings are also delayed for unreasonably long periods of time, creating a legitimate demand for company formation in other countries. However, does this legitimise the use of a favourable tax regime abroad? Similarly for regulation. If Slovak or European legislation allows entrepreneurs to do business in certain areas (e.g.: securities trader or collective investment fund) only with regulatory difficulties, entrepreneurs look for more flexible offshore solutions.

Cryptocurrencies and offshore company

Slovakia is a small country, which naturally does not have the professional infrastructure and ambition to create a full-fledged legislative framework for cryptocurrencies and related business.
The result is a legally uncertain environment, which is uncomfortable especially for larger projects. This is mainly due to the lack of predictability of the decision-making activities of the relevant Slovak authorities. That is why several Slovak projects in the field of cryptocurrencies and blockchain are considering moving their legal presence abroad. In that case, they create offshore companies.
Is it legal?
Can the state interfere with this freedom and force entrepreneurs to tax profits from abroad in Slovakia?

Is it legal to set up and use an offshore company?

The establishment of an offshore company in any tax haven is not in itself illegal. However, its subsequent use may become illegal. In practice, fictitious back-to-back supplies of services from tax havens via the Netherlands or the UK to a Slovak company are still relatively common. The entrepreneur is thus able to shift profits from the 21% tax rate bracket (Slovakia) to the 0% tax rate bracket (tax haven).
On the other hand, there are situations where the use of a company based in a 0% tax country may be perfectly legal and legitimate. The fact that a country does not tax corporate profits cannot in itself be problematic.
As can be seen, for example, in the case of under-servicing Patent Box and optimization for IT and development companies or The R&D super-deduction, a 0% effective rate can be achieved relatively easily by a taxpayer even in Slovakia.
In this case, however, it is necessary to use such an offshore company for legitimate reasons (e.g.: PR, investor requirement, better legal environment, etc.).

Measures taken by Slovakia against offshore companies

Slovakia has gradually adopted a number of statutory amendments to discourage Slovak entrepreneurs from illegitimate use of foreign offshore companies, primarily for tax avoidance purposes. For example:

CFC rules for individuals

The purpose of the rules is to ensure that the individual behind a foreign offshore company taxes the profits of that foreign offshore company. You can see more about this topic, for example, in the video “Is it even worth having an offshore company today? Ak áno, komu a kedy?“. Peter Varga’s criticism of these rules can be found in the article My comments to the MoF (CFC rules for individuals).

CFC rules for legal entities

Probably many taxpayers are completely unaware of the existence of this institute. The purpose of these rules is to ensure that the profits of foreign offshore companies are taxed by a related Slovak company, provided that the involvement of such a foreign offshore company resulted from one or more actions that are not genuine or were carried out for the purpose of obtaining a tax advantage.

35% tax

Certain payments made by a Slovak company abroad are subject to 35% withholding tax in Slovakia. On the other hand, certain dividends, liquidation proceeds or distributions are subject to 35% tax for the Slovak recipient in Slovakia. This is why it is nowadays problematic to “just” use, for example, a company established in the United Arab Emirates.

The place of the actual wiring

Based on the analysis of the place of the actual management of the company, the tax administrator is able to attribute Slovak tax residency to the foreign company despite the fact that the company is legally established and existing under a different legal order.

Final beneficiary

When applying withholding taxes, the tax administrator may check whether the Slovak taxpayer has investigated who is the final recipient of the income paid. The aim is to prevent the use of shell holding companies or other intermediaries.

Transfer pricing

In Slovakia, the perception of transfer pricing is undersized. The OECD Transfer Pricing Directive provides for its use even in situations where the taxpayer would not normally expect it. These include, for example, various internal reorganisations and the transfer of activities from one company to another. Indeed, such activities should be taxed.

Many more

In addition to other technical provisions, laws as well as case law, it is also familiar with substantive instruments. These are different concepts of substantive fairness or abuse of discretion under which a tax administrator may, in certain circumstances, take action against a structure that in no way formally contradicts the language of the tax code.

Offshore companies and practical advice

The analysis of the possibility of using an offshore company in a specific environment for a specific client should not only include tax and accounting elements. It is also necessary to look at the structure from a legal and practical point of view.

Suppose a business wants to take advantage of the tax exemption on the gain from the sale of shares or business interests in Cyprus. If an entrepreneur does not want to invest in a relevant advisor, he can make do with the Internet and his Slovak accountant. He finds out on the internet that Cyprus does not tax these profits by default, he finds a company that will set up a Cypriot company and provide him with a registered office, and a Slovak accountant approves it.

However, if he involves a relevant tax adviser in this structure, he will find that this type of tax optimisation has a broader dimension. For example, the following questions arise:

• Can’t the Slovak tax office consider a Cypriot company as a Slovak company? How to eliminate this risk?
• Are the rules for natural or legal persons not applicable to a Cypriot CFC company?
• Are profits of a Cypriot company from any disposition of shares or stock really not taxable? Aren’t there exceptions?

Counsel brings to the whole context the necessary legal dimension in situations where the written law does not give a clear answer. When interpreting, it uses case law, analysis of various interpretations of law (teleological, grammatical, historical, etc.) as well as philosophy and theory of law, which are necessary to reach in unclear situations. For example, the following topics may be covered:

• If the tax authorities take a different view of the whole structure, has the entrepreneur committed the offence of tax and premium evasion with this structure?
• If a Cypriot company rents some premises, will this be sufficient “substance” for the purposes of Slovak tax law? What is the perspective of EU law in the context of the right of establishment in other EU countries?
• Can the sale of a shareholding through a Cypriot company be considered an abuse of law?

In addition, you also need to have relevant practical experience with tax optimisation. For example, the following aspects may also be involved:

• How much does it cost to set up and maintain such a company?
• What is the trend and what can we expect in the future?
• Is it mandatory to audit the company (which will significantly increase the cost of document administration)?
• Where can I open a bank account?
• Will banks have a problem with revenues that have their source in Slovakia? If so, what might be the consequences?
• How much does it cost to liquidate such a company?

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

Článok Tax optimisation and offshore companies je zobrazený ako prvý na Highgate.

We can thus say that the CFC rules pursue a legitimate objective and that is to limit artificial foreign structures, the purpose of which is to evade the payment of taxes in Slovakia. However, as we will show below, it is questionable whether the CFC rules really pursue only this objective and whether it would not be appropriate to modify them to pursue this objective more specifically.

One of the stated reasons why the CFC rules were postponed to 2022 was that they were not ready to be put into practice. Part of this problem was, and to a large extent still is, a number of terminological ambiguities and illogicalities embedded in the rules. Moreover, the concept of the CFC rules contradicts the basic philosophical principles of taxation and constitutional principles. Thus, in this article, I will try to name several problems we have encountered in the application of these rules in practice.

For the purpose of grasping the various points of concern, let us imagine a situation where:

• A Slovak tax resident (“FO”) has a joint venture company in the Czech Republic (“HoldCo”) which he has set up with his Czech partner, and he and his Czech partner share 50-50 in the profits and share capital of HoldCo;
• HoldCo is a holding company that invested capital in a start-up in the Czech Republic (“Startup”) for which it received a 25% equity and profit interest;
• HoldCo is just a holding company with no permanent office and no employees (objectively it doesn’t need them);
• The startup will report a profit of EUR 1,000,000 in 2021 and distribute dividends; HoldCo will thus receive dividends of EUR 250,000 in 2022;
• HoldCo has no other expenses, so the EUR 250,000 dividend from Startup represents its bottom line;
• As such dividend income is not subject to income tax in the Czech Republic (as it would be in Slovakia), HoldCo does not pay any income tax on the EUR 250,000 profit.

(“Example“)

If you want to know more about the CFC rules, watch a training session with Peter Varga or arrange a consultation with him

Do the CFC rules apply to this Example?

Yeah.

FO must pay 25% “CFC tax” in 2023 tax return for 2022. The FO will thus pay EUR 31 250 to the State. If the FO subsequently pays a dividend from HoldCo to Slovakia, it will also pay 15% dividend tax in the Czech Republic in the amount of EUR 18,750. The total tax liability of the FO is thus EUR 50 000. If they set up the joint venture with a Czech partner in Slovakia, the FO’s total tax liability would be EUR 8 750.

Taxation of property

The CFC rules do not aspire to tax income, but rather function as a quasi-tax on wealth. The FO has not earned any income in the “Example”, but nevertheless taxes a sort of deemed income in the form of its HoldCo’s profits.

The concept of the CFC rules as thus set up is contrary to the basic principles of taxation and it would be appropriate for it to be subjected to a constitutional legal excursus.

In connection with the taxation of some presumed income of the FO, the question arises what if the FO does not have the funds in the account to pay such tax liability? Indeed, the CFC rules tax the FO in situations where the FO does not have such income and it is not even certain whether it will ever receive it (i.e. the absence of the so-called ability to pay).

In principle, it has three options:

• Failure to acknowledge income = criminal offence;
• Admits income but fails to pay tax = tax execution;
• It will borrow the money to pay the tax liability.

An obvious problem with the above example is that the CFC rules also penalise controlled foreign companies (such as HoldCo) which, if they were tax resident in Slovakia, would not tax the gain anyway.

Principled injustice

Let us imagine a situation where a taxpayer, an individual with unlimited tax liability in Slovakia, has a company controlled abroad by a company from a non-cooperative country and the company achieves the following results:

Amount of rates

The 25% tax rate is also disproportionately high in light of the above Example. The stated intention of the CFC rules was to force individuals, Slovak tax residents, to pay themselves dividends from their foreign companies.

35% tax rate for the so-called. non-cooperative states can be understood. However, the set of so-called. The set of non-cooperative states is broad and so even a standard and traditional company located in such a country would be liable to pay a 35% “CFC tax” for FOs . Moreover, such a universal application of the 35% tax rate appears to be contrary to the free movement of capital as defined by the case law of the CJEU.

What is substance?

For companies from the so-called. cooperating countries (e.g. HoldCo) can be exempted from the CFC rules if the company in question has personnel, premises, tangible assets and intangible assets. Thus, the company must have so-called substance.

I specifically address the topic of “substance” in my training on the tax exemption for the sale of shares in Slovakia. A certain discourse has emerged in the professional community on this topic, which helps to create substance for this institute. In the case of the CFC rules, I have not yet seen such a discussion, and so more exposure to arbitrariness on this topic by the tax administrator.

A 10% shareholding in a foreign company is sufficient for the CFC rules to apply

In our fund practice, we have established a number of smaller investment funds within the Highgate Group, where often some investors will take a stake in the fund in excess of 10%. Fund investing is passive investing and it does not entirely make sense for it to be subject to CFC rules which are designed to penalise active taxpayers moving profits offshore (or not remitting profits to Slovakia as the Explanatory Memorandum says).

Under the CFC rules, up to a 50% threshold applies to foreign companies . Therefore, this 10% threshold seems to me to be unreasonably low, which may also mean that in practice the taxpayer may not even be aware that the CFC rules apply to him. This is also what the OECD report recommends. And even if the threshold should fall below 50%, it should only be for aggregated dependants’ shares.

How about tax transparent companies?

In tax-transparent companies, the profits of such companies are not taxed at their level, but this profit or tax base is shifted to the individual shareholders, who tax it. Is a tax transparent company capable of triggering an individual’s liability to CFC tax? Unfortunately, the law does not give us a clear answer to this.

What about trusts or mutual funds and other atypical entities?

For the CFC rules, the Act refers to the term “taxpayer“, which has a clear definition in the Act. Thus, can entities, pools of assets or various forms of legally transparent companies not be considered as a taxpayer for the purposes of the CFC Rules?

The effective tax rate is below 10%

One of the prerequisites for the application of the CFC rules is that the foreign company in question taxes at an effective rate lower than 10%. However, by comparing the profit or loss(it is not clear whether net or gross) with the tax paid, this condition does not take into account, for example, the various tax-advantaged schemes (in our case, for example, the Patent Box or the Super Deduction) or the application of accumulated tax losses. In such a case, even the country with the highest corporate tax rate may simply fall into the “tax haven” regime.

Given the limitations of this paper, it is not possible to grasp the entire issue of CFC rules in this one place. If you would like more information, please see training with Peter Varga or you can book a consultation with him.

Sources:

1. OECD (2015), Designing Effective Controlled Foreign Company Rules, Action 3 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264241152-en , dostupné k 12.11.2021 na https://www.oecd.org/publications/designing-effective-controlled-foreign-company-rules-action-3-2015-final-report-9789264241152-en.htm

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

Článok CFC rules from 2022 – how they work and what errors they show je zobrazený ako prvý na Highgate.

You can listen to the full interview here: https://www.rtvs.sk/radio/archiv/11292/1585264

Článok About tax optimization with Matej Kačaljak in Radio FM je zobrazený ako prvý na Highgate.

This net profit will be paid to the Company in 2022 1. Assume that the dividend payment from Firm 2 to Firm 1 is not subject to dividend tax at the level of Firm 2’s country and the Czech Republic (for example, because of the corporate dividend tax exemption).

The FO has to file a tax return in 2022, where he pays “CFC tax 1” of (25% of €475) – €25 = €93.75.

Despite the fact that Firm 1 does not pay dividends because it sets off the profit against past losses or reinvests it or decides not to pay them for some other reason, the FO must file a tax return in 2023 where it will pay “CFC tax 2” also for Firm 1 – the Czech company (as it is an “empty” holding company). The amount of this “CFC tax 2” is 25% of €475 = €118.75.

The total tax liability of the FO is thus EUR 93.75 (“CFC tax 1”) + EUR 118.75 (“CFC tax 2”) = EUR 212.5.

And note that no profits need to be paid to the FO. And that’s more about 44% of the profit share actually produced in the group (but not paid up to the FO).

The CFC rules are completely inconsistent with the concept of income taxation in the first place (and quite possibly with constitutional principles as well). Indeed, the CFC rules do not aspire to tax income, but rather function as a kind of wealth tax. The FO in the above example has no income and yet taxes some sort of deemed income. But what if the FO therefore does not have the funds in the account to pay such a tax liability? In principle, he has three options:

• failure to declare income = criminal offence
• declares income but fails to pay = tax execution
• borrows

The second problem is the amount of the tariff. 25% is a lot, even given the example above. Even if the dividend is distributed in full to the shareholders as soon as possible, e.g. for a direct shareholding in a non-EU/EEA production company, the real rate would remain 25% and not 7%. This is in stark contrast to the stated aim of the law to tax unpaid dividends on artificial profits declared in tax havens.

I therefore propose to retain the 7% and to extend the exemption under § 51h para. 3, lit. (c) to all jurisdictions with which we have a double tax treaty.

The third problem is the taxation of indirect shareholdings and holding companies. This is because here the same profit is taxed several times in succession as it is paid out through the different levels in the ownership structure.

I therefore propose, for example, the non-application of the CFC tax to holding companies and the possibility of offsetting the dividend tax on indirect business holdings against the CFC tax paid by the subsidiary of the holding company (today’s legislation does not allow this in section 51i(3)) so as to exclude multiple taxation of the same profit.

The fourth problem is the definition of “substance.” The proposal says in § 51h par. 3, para. (c) “…the economic activity actually carried on in the State for which it has personnel, facilities, tangible property, and intangible property.” Based on this definition, it appears that all 4 conditions must be met cumulatively. This is not feasible in critical cases.

In practice, the possibilities for the FO to prove that the above conditions are met are doubtful, as the foreign company is not governed by Slovak law. Moreover, neither the law nor the tax administration specifies in what specific way the fulfilment of the conditions is to be demonstrated.

I therefore propose to specify this condition while not requiring all 4 of the above conditions to be met.

The fifth problem I see in the too low proportion (10%), as defined in § 51h par. 2, lit. c). Such a “shareholding” (i) impinges on legitimate private fund structures, (ii) increases the risk of being “forgotten” (since 10% is enough to be held with dependents, which the taxpayer may not really notice; at the same time, the definition of a dependent is very broad and extremely incomprehensible not only to non-experts – Section 2(n) of the Income Tax Act); and (iii) it is inconsistent with other “shareholdings” that the Income Tax Act is already familiar with – creating a disjointed environment with different rules.

I therefore propose a 50% share as is already the case with the CFC rules for corporations (section 17h).

Článok CFC rules and the problem of the current proposal je zobrazený ako prvý na Highgate.

CFC rules apply not only to tax havens but also to standard countries

The CFC rules may apply to you even if you have a holding company in Austria or a service company in the Czech Republic. The basic condition for the application of the CFC rules is that the ratio between the actual tax paid and the result of the foreign company is less than 10%. And you can achieve such a ratio in any European Union country.

However, if well structured, the CFC rules, apart from increased compliance costs, may not have any negative impact on taxpayers. In fact, there are several ways in which the impact of the CFC rules can be eliminated. One of them is the application of the so called This can be used in various forms, whether for direct, indirect or indirectly derived interests.

Online training on CFC rules

As this is a sensitive topic for many Slovak entrepreneurs, we have prepared an hour-long online training course in which we deal with it in relative detail. In it you will find:

• which foreign companies are affected;
• what are the penalties for non-compliance;
• why these rules are contrary to the fundamental principles of taxation;
• how the impact of this taxation can be reduced;
• and others.

You can also view the entire topic with the CFC Rules for Individuals – Trainingpresentation:

Článok Controlled Foreign Company Rules (CFC Rules) je zobrazený ako prvý na Highgate.