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.

“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 However, since it has been repealed, I will not go into it in detail in this article.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.

The awards gala was organised by the EPRAVO Group and the weekly TREND, and its eleventh edition took place on Wednesday 26. April. The event took place at the Double Tree by Hilton Hotel in Bratislava, where the winners of the individual categories received their awards for their year-long work.

We would like to thank our clients and partners for their cooperation, thanks to which we have achieved this success.

If you are interested in a consultation, please do not hesitate to contact us.

Článok Highgate Law & Tax named Tax Law Firm of the Year 2023 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.