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.

So let us break down what was actually adopted:

In addition to income exempt from tax under Section 9, income provided as a benefit in kind acquired by an employee in the form of employee shares valued at their nominal value or a business share in a limited liability company valued at the value of the contribution determined in accordance with Section 25a attributable to the employee in connection with the performance of a dependent activity carried out for the employer whose shares or business share is so acquired shall also be exempt from tax, if:

1. that employer has not paid profit shares (dividend) out of the profits of the company from the date of registration under section 49a until the tax period preceding the tax period in which it first paid them;
2. those employee shares have not been and are not admitted to trading on a regulated market or on a similar foreign regulated market,39b) until the end of the tax year in which the consideration was acquired by the employee

In the conditions of the Slovak business world it can be simplified as follows: the acquisition of shares from the employer for whom the ESOPist works is exempt from tax, if the employer did not pay dividends in the period from its establishment until the end of the year preceding the year in which it first paid them. The same applies to self-employed persons (“self-employed persons“).

Unfortunately, there is a relatively clear split between the ambition of the ESOP amendment and the ability of its language to bring about a general consensus on its content. While it is true that a legal text (i.e. an ESOP amendment) must enjoy a certain degree of linguistic openness, given its adoption in advance for an indeterminate number of cases, the ESOP amendment displays the basal signs of semantic and, to some extent, linguistic chaos.

Interpretation 1: If I were to settle for its mechanical interpretation, any such ESOP is exempt from tax. Indeed, every single employer did not pay dividends between the time of its inception and the time it first paid them. Such an interpretation, however, is plainly inconsistent with the authentic interpretation. The legislature did not mean to say this(see the amendment in the NRSR). Nor does the Treasury Department interpret it that way in this information (“Available Interpretation“).

Interpretation 2: It appears that both the Financial Administration and the Ministry of Finance of the Slovak Republic interpret the ESOP amendment in a relatively non-standard way, not only in terms of the possible consequences that will arise in practice, but also in terms of creating a new precedent. Namely, if an ESOPist’s interest in a company is acquired in January 2024 and a profit (of any kind) is paid out in December 2024, the employer (or self-employed person) must “tax” the January acquisition of the interest after 11-12 months. Thus, the non-cash income may be non-taxable income for a period of time and at some point in the future it will turn into taxable income. Interesting design precedent.

However, such a view has a statutory basis in grammatical interpretation, which ties the phrase “up to…” to the exemption of income from the shares received and not to the period of non-payment of dividends. A peculiar choice of syntax for such an intentional interpretation. At the same time, however, such an interpretation also has ill-conceived application consequences:

• What if the employer decides, within the meaning of Art. 3, lit. (d) of the Income Tax Act not to increase the non-cash consideration (not to use the so-called “bruting”)? In the context of certain situations under Art. 3, lit. (a) of the ITA, will the employee’s income be taxed retroactively? And what about social security and health insurance contributions?
• What impact will this have on the application of sanctions? Suppose the beneficiary of the ESOP shares is a sole trader who ceases trading in February 2024 and therefore does not include this income in taxable income. How will he include that income in the tax base so that he is not penalized?
• What impact will this have on health and social insurance premiums and related penalties?
• How will the ESOPist find out about the dividend payment subsequently if he has already sold his share in the company in the meantime?

Interpretation 3: If we accept the possibility of applying Interpretation 2, we must also accept an interpretation that says that the acquisition of a share at a price below the market price is exempt from tax, but only until the company has paid the first dividends (i.e. there is no restriction to just that one calendar year). Thus, if the company pays dividends in 2050, the ESOPist/company would have to tax the non-cash income additionally. While this sounds absurd, what prevents the state from not applying such an interpretation? Where does the ESOP amendment limit this retroactive taxation to only situations that occur in the same calendar year? Relying on a reasonable (possibly axiological) interpretation of legal norms may not be entirely reasonable in Slovak circumstances. We have seen this in the case of Andrej Kiska and his tax case. By the way, if you are interested in this topic, I gave a quick tax-law excursus on it a while ago here(Did Andrej Kiska really commit a crime as a managing director of KTAG?).

Interpretation 4: What is intended to be exempt under the ESOP amendment is “employee action.” This implies that the exemption applies only to situations where the ESOPist receives such a share for free. In fact, the ESOP amendment does not speak of exempting in-kind consideration acquired on account of the difference between the fair value of the share and its acquisition value paid by the employee. Is it sufficient to use the a maiori ad minus (greater to lesser) argument to exempt the value of the non-cash income?

Interpretation 5: The ESOP amendment does not give a firm answer even on the amount of income to be exempted from tax. The available interpretations, though, try to interpret the exemption to exempt the entire income (i.e., the fair value of the shares) and for the purpose of valuing the shares so acquired with the ESOPist, the face value of the shares is to be used. And such an interpretation is also e-ratione legis.

But the problem is that (i) such an interpretation creates a manifestly inadequate structural incoherence in the ITA and (ii) the reference in the ESOP amendment to section 25a and only for SRO interests does not quite make sense. After all, a non-entrepreneurial natural person values the acquired financial assets according to sec. 5 and not under section 25a of the ITA. Such an interpretation of the e-ratione legis thus constitutes a “pandora’s box” to the “illegibility” of the ITA. Indeed, if we were to ascribe correctness to the Available Interpretation, it would mean that for any sale of financial assets, we would have to read every single provision of the ITA and look for special adjustments to the valuation of financial assets in them. And this is in view of the wording of Art. 5, lit. a) and § 25a of the ITA is systematic nonsense. Moreover, this interpretation also contradicts the theory of taxation, which I wrote about briefly in a previous newsletter).

Thus, if the sentence structure of the ESOP amendment is viewed through the prism of the systematic method of interpretation and the theory of taxation, only the face value of the shares should be exempt from tax, not their fair value (“in-kind consideration acquired by an employee in the form of employee shares valued at their nominal value” – valued is linked to the shares and determines the amount of the exempt non-cash consideration). And in other similar situations, the difference between the fair value and the value so appraised must, again in the view of the Internal Revenue Service, be taxed and thus “taxable” as noncash income.

Be that as it may, it appears (with some degree of exaggeration) that, if the ESOP amendment had had the following operative language, “The exemption is the acquisition of shares from the employer if such exemption is equitable,” it would probably have been the same in terms of the quality of the legal standard. Given the more current lament over Slovakia’s unpredictable status as a state governed by the rule of law, this is not an ideal legislative environment.

In addition to the interpretative problems, the ESOP amendment has several other shortcomings:

• The ESOP amendment did not pay any attention to SRO contractors, who are in practice a very clear alternative to the contractors of the self-employed.
• The ESOP amendment does not allow for the acquisition of shares in, for example, a cooperative, whereas we know that it is the cooperative in more robust structures that replaces the rigidity of other legal forms;
• The ESOP amendment has limited application to absolutely standard ESOP structures where the shares are not earned directly in the executive company for which the employee/employee performs the activity, but in a specially designated company;
• The ESOP amendment may not even capture situations where the ESOPist acquires an interest in the company from a shareholder;
• The ESOP amendment pays no attention to real shares, the quality of which is legally limited (bad leaver clauses, transferability, …);
• The ESOP amendment taxes the sale of shares in an SRO but, for reasons between heaven and earth, does not tax the sale of shares.

These structures are absolutely standard and are based in part on the needs of corporate law (e.g. SROs cannot flexibly own their shares or the elimination of a high number of shareholders or a high value of the minimum contribution is necessary), the preferences of contractors as well as the requirements of investors. These needs are relatively common knowledge, so it is not clear to me why they are not reflected in the ESOP amendment.

The ESOP amendment once again fully exposed the quality and (in)competence of the standard-setting process in Slovakia. As with the crypto amendment, which for example wanted to introduce non-taxation of crypto asset exchanges (I have discussed this more in this video podcast or written in more detail here), the good intention of the ESOP amendment was not translated into appropriate language. And this significantly undermines not only the rule of law, but also the efficiency of doing business in Slovakia.

The interpretation of the ESOP amendment is therefore ambiguous and its application unpredictable. We are thus still forced to look for alternative structures and solutions for our clients than ESOP intra legem not to tax. And worse, in practice, the alternative is even situations where companies give no imperative weight to the taxation of ESOPs. In either case, it is the business environment that suffers in the long run. Namely, through unnecessarily higher costs to advisors (us) and/or the existence of an unfair, arbitrary and non-transparent environment.

If you have any questions, feel free to contact me. For more of this information, subscribe to our newsletter.

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

Článok ESOP amendment: 5 different interpretations and we are only at the beginning je zobrazený ako prvý na Highgate.

The Highgate Group is very much involved in the subject of ESOPs. Peter Varga’ s well-known LinkedIn status (found here) has sparked further discussions and possibly even legislation effective from 2024. While the latter does not reflect all of the technical problems of the amendment in question, it at least addresses the fundamental schism between the ambition of the ESOP amendment and the ability of its language to produce a general consensus on its content.

Conferences on ESOPs

The Highgate Group has already organized three ESOP conferences. The first back in 2019, when the topic gradually filled the social space. In addition to lectures by Petr Varga and Tomáš Demo, it was actively attended by stalwarts of the Slovak venture capital world, namely Juraj Vaculík, Jaroslav Ľupták and Viktor Mikulášek.

In 2022, we organized a huge conference for IT and digital companies, where one of the topics was ESOP and a lecture by Petr Varga and Tomáš Dema on this topic.

However, given the dramatically evolving practice in this direction, the topic of ESOPs required a more comprehensive presentation, so we decided to organize a separate conference on this topic alone in 2023. The sold-out HubHub (approx. 100 people) was a clear proof that this topic is the topic not only of startups, but of a critical part of Slovak companies.

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

Článok Peter Varga on ESOP Taxation at the Flagship Event for SLOVCA 2023 je zobrazený ako prvý na Highgate.

The practice of businessmen in buying cars for company and (only) private use resembles the practice of the population in (not) observing anti-pandemic measures. A company buys a car also (only) for private use, claims a full VAT deduction on the purchase as well as on the fuel, and includes the cost of the car (through depreciation) and the fuel in full in its tax expenditure. And even if the car is also used (only) for private purposes, the company does not tax or deduct anything on behalf of the employee/managing director/associate (“Managing Director“).

But the rules of the game are completely different. Unlike anti-pandemic measures, the worst case scenario for non-compliance can be dramatic, even with criminal consequences (as I write below). Let us therefore look at how the law and the tax authorities treat the use of a car in a company and for private purposes, i.e. the standard Slovak use case.

What are the basic rules of the game?

If the car is to be used partly for private purposes, the rules for keeping records are (simplified) as follows:

* Even if the car is used for business purposes only, e.g. 20%, the company can claim 100% of its cost (through depreciation) as a tax expense;;

** There is a flat rate of up to 80% of the cost of petrol, but in the context of using the car also for private purposes, it does not have a significant simplifying effect on administration (as I explain below)

It would only make sense to have one rule. In reality, however, the right hand (income tax) does not know what the left hand (VAT) is doing. Moreover, even in the case of income tax it is not consistent. Exemption from the obligation to keep detailed records of car use misses the practical effect, because this ratio still needs to be proven for both fuel and VAT purposes. Moreover, the phenomenon of non-cash income of the Managing Director (as I explain below) enters into it.

Figure 1: Simple structure (explained below):

What are the more complicated rules of the game? (you can skip)

While the above basic rules seem to be unfavourable for entrepreneurs (from a financial and administrative point of view), at least they seem to be easier to understand. Unfortunately, they are not – nor are they easier to understand.

That is, apart from the basic complication in the form of the obligation to keep accurate records of the use of the car for business (or private) purposes for fuel and VAT purposes in general, other administrative and tax inconveniences arise, for example:

The first The interpretation complication is the change of opinion of the Financial Administration in 2022. According to the new opinion, the Financial Administration already considers the use of property by the Managing Director as non-cash income even if the company uses the 80% flat rate. The previously presented opinion of the Financial Administration did not see non-cash income in such a context. Although the 80% flat rate should not be applied to the purchase of a company car used by the Managing Director for private purposes, the practice of some tax and accounting offices was/is different – incorrect. However, following a change of mind by the tax authorities, the use of the 80% flat rate does not even make sense anymore.

The other The puzzle is the actual fuel for income tax purposes. Even if a company decides to apply a flat rate of 80% because the car is also used for private purposes and wants to simplify the administration, it still has to be able to prove the proportion of use of the car for business (or private) purposes because of the statutory wording “up to 80% of the amount”. There is no more space in this blog about the various ways of examining car use and consumption and accepting it for tax purposes in the various ways of including the cost of petrol in tax expenses.

Third A complication is where a company claims 100% of the cost of a car as a tax expense, even though the car is also used by the Managing Director for private purposes. The company is entitled to do so if it taxes and “discharges” the Managing Director in the manner prescribed by law (1% of the cost of the car, which is progressively reduced). However, such administrative simplification cannot be applied to fuel, where the company must again keep records of individual journeys and tax and ‘account’ for the actual consumption of fuel by the Managing Director (alternatively, reimburse the Managing Director for the consumption of fuel).

By the fourth problem is the obligation to monitor the ratio of car use for business and private purposes and the obligation to adjust the amount of VAT deducted (upwards as well as downwards) regularly for 5 years, always to the last tax period of the respective calendar year. The alternative is to charge output VAT at the rate corresponding to the private use. Again, it is necessary to be able to demonstrate such a ratio.

Fifth complication arises when applying the exemption of EUR 500 under Art. 7 lit. (o) of the Income Tax Act. For example, a company that provides a car to the Managing Director for private purposes only cannot apply section 5(1)(a)(i) to such a non-cash benefit. 7 lit. (o) of the Income-tax Act as the expenditure (cost) relating to the operation of the car provided for private purposes is not a tax expenditure. It could be a tax expenditure if the private use was agreed with the Managing Director as an employee benefit. In such a case, the company could decide whether to claim the employee benefit as a tax expense under section 19(1)(b) of the Act. 1 of the Income Tax Act and tax and “withhold” the value of the benefit to the Managing Director or exclude the private use from tax expenditure and exempt the value of the non-cash benefit provided to the Managing Director from tax in accordance with section 5(1) of the Income Tax Act. 7 lit. (o) of the Income Tax Act. Simple.

Figure 2: Complex structure (explained below):

What do the tax authorities say?

As well as the logbook, the tax authorities may want to see other evidence of the journey, such as minutes of the meeting you travelled to, including the signature of the business partner. Problem.

However, this problem is not necessarily in the executive branch (i.e. the tax authorities). The problem is in the legislature. The legislator must, when making laws, act within the limits of the requirement for the so-called material rule of law (Article 1(1) of the Slovak Constitution). The principle of the substantive rule of law sets the bar for the rule of law even higher than the obligation to comply with valid and effective legal norms. It requires that the legal norms (i.e. the Income Tax Act and the VAT Act) be of a relevant quality in terms of content and value. The legislator must be able to write laws so that they are clear, transparent, and (in the context of this blog) can be complied with. But I’m afraid that even the corporation with the greatest sensitivity and commitment to compliance probably can’t objectively follow the rules of the game for company cars used for private purposes.

And so we get into an environment where the tax authorities are just doing their job. The burden of proof is primarily on the side of the taxpayer and the logbook may not be credible. But neither can the taxpayer reasonably be expected to bring signed minutes of meetings. Thus, the legislature has not only created complicated and nonsensical rules, it has created a breeding ground for procedurally intractable situations to arise within the bounds of fairness.

Do such rules have to be followed?

Yes, but sometimes maybe not. Indeed, it is questionable how these rules would stand up to constitutional law scrutiny. The Constitutional Court of the Slovak Republic (e.g.: PL Constitutional Court 9/2014) has repeatedly indicated the extent of the legislator’s freedom (and possible incompetence) in creating tax legislation. Ak pravidlá predstavujú pre a manifestly disproportionate burden on businesses that is extremely disproportionate to the public interest served, such rules are unconstitutional.

The European Court of Human Rights (SWENSKA MANAGEMENTGRUPPEN AB v/SWEDEN) refers to taxes as an unbearable burden which, if it exists, is contrary to the European Convention on Human Rights. The Czech Constitutional Court makes a similar point. It refers to the unconstitutional rule in the field of taxation as a rule that does not stand the test of legitimacy and rationality. Legitimacy of a tax is not exhausted by the manner of its adoption and by the reason consisting in the fulfilment of the state budget (Pl. ÚS 29/08).

From a procedural point of view, the road to success would resemble Ulysses’ road, which, moreover, thanks to the derogatory effects of the Constitutional Court’s rulings in administrative (tax) proceedings, may be only partially successful at the end of the day. Be that as it may, it can be a concomitant argument supporting the legitimacy of the taxpayer’s actions acting within the bounds of what can fairly be expected of him.

I confess that with company cars I have no procedural experience with this reasoning yet. And of course, this is just my humble digression into this complex area of law, which, given the scope of this blog, cannot even aspire to be exhaustive. At the very least, however, it provides a glimpse of the issue from a different argumentative perspective. In any event, I look forward to testing it in our practice of representing clients in tax audits.

What are the penalties and why am I writing about this?

Making laws is thus clearly an art. And if not mastered, it creates the discomfort of unpredictability in a more warped rule of law.

In the grammatical interpretation of the law and without the application of the so-called. material correctives , one car in the company used also for private purposes, and for which full VAT deduction and 100% of tax expenses were applied, and if the Managing Director is not taxed and does not “justify” non-cash income, can cause the following:

With tax reform unlikely anytime soon and the outcome of the September elections unpredictable, the legal set-up of business and asset ownership needs to be diversified in addition to investments.

On a thick bag, a thick patch. For simpler as well as more complex examples of setting up legal-tax structures, see the figures above in the text. The goal is to minimize the impact of the biggest risks of an unpredictable state (not only in the area of company car use rules).

So if you have any questions on this topic or on legal structuring, feel free to get back to me. For more interesting information like this, please subscribe to our newsletter.

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

Článok Peter Varga’s view on the topic: car (for private purposes) in company expenses, VAT deduction, tax audits and worst case scenario je zobrazený ako prvý na Highgate.

The amendment introduces the so-called minimum employee health levy. The previous legislation did not provide for such a thing . Do účinnosti tejto novely the employee paid the insurance premiums on the gross salary or remuneration earned in the relevant month. On that basis, he was provided with general health insurance, often literally “for a few euros”. For example, under the old system, if an employee earned a gross salary of EUR 100 in a given month, he also paid a total of EUR 14,00 in insurance premiums on that amount, namely EUR 4 for the employee and EUR 10 for the employer.

The same was true for managing directors, if the managing director had a monthly remuneration of EUR 10, EUR 1.40 per month was paid to the health insurance company for him, while he was fully covered by public health insurance. This fact often led in practice to the conclusion of many speculative employment contracts. This was because if a person was registered as voluntarily unemployed, he or she would be obliged to pay insurance premiums at the level of the minimum levy, which for 2022 was EUR 79,31 (currently already EUR 84,77 for 2023). After all, it was precisely the desire to prevent speculative remuneration, speculative employment and the avoidance of levy obligations that led the legislator to adopt the aforementioned amendment.

Who will be most affected by the amendment?

At first gl ance, it may seem that the amendment will affect only employees or persons who receive remuneration from dependent activities with income below the minimum subsistence level, which is EUR 234.42 as of 01.01.2023. However, it will also affect employees with a monthly income higher than EUR 234.42, up to EUR 328.00 per month if they claim a deductible in health insurance. As we have already indirectly outlined, this will also affect members of statutory bodies (e.g. managing directors who are also owners of the company) whose remuneration is below the current minimum subsistence level, i.e. j. less than EUR 234,42.

Amount of minimum health levies

According to the amendment, the insurance premiums together with the advance payment for insurance premiums must be at least the amount that the employee would pay together with the employer if the employee’s salary were equal to the minimum subsistence level for a single natural person, i.e. j. the aforementioned EUR 234,42.

The Health Insurance Act, in turn, provides that the premium rate for the employee is 4% of the assessment base and for the employer 10% of the employee’s assessment base.

Taking into account the condition that the minimum health levy, as we have mentioned above, is calculated on a minimum of EUR 234.42, a simple calculation leads to the conclusion that the minimum health levy is EUR 32.81 per month.

However, the employee’s minimum advance shall be reduced by the proportionate part attributable to the number of calendar days during which the employee has been employed:

• at the same time a self-employed person;
• at the same time insured by the state (e.g. student, pensioner, person receiving sickness benefit, maternity benefit,…);
• a person with a disability;
• declared a missing person;
• the insured person was not considered an employee.

Example:

The person was registered as an employee with the health insurance company during January 2023, but at the same time, between 01.01.2023 and 25.01.2023, the person was incapable of work and received income compensation from the employer and sickness benefit from the Social Insurance Institution. As a result, the person was not also insured by the State for 5 days. Therefore, the calculation will be as follows:

• EUR 32,81 x (5/31) = EUR 5,29

In this case, the employee’s minimum advance payment will be EUR 5.29 for the month of January.

What if a person’s monthly wage/remuneration is less than the living wage?

These are cases where the calculated health levy would not reach the required minimum amount and therefore the difference would have to be made up. Once the employee’s health levy comes out below EUR 32,81, the employee is obliged to make up the levy up to that amount. This also implies that the employer’s levy burden does not change and any additional payment up to the amount of the minimum advance payment is paid in full by the employee.

For the sake of simplicity, let us give the following examples (for the purposes of the calculations, we assume that the employees do not use any deduction):

1. An employee with a monthly salary of EUR 200.00 was obliged to pay a health insurance premium of EUR 30.00 (EUR 8.00 for the employee and EUR 22.00 for the employer), which is less than the minimum health levy under the amendment, and therefore the difference of EUR 2.81 will have to be paid by the employee, i.e. from 2023 it is EUR 32.81 (EUR 10.81 for the employee and EUR 22.00 for the employer).
2. An employee with a monthly salary of EUR 10.00 was obliged to pay a health insurance premium of EUR 1.40 (EUR 0.40 for the employee and EUR 1.00 for the employer), now it is EUR 32.81 (EUR 31.81 for the employee and EUR 1.00 for the employer).
   

Minimum health levies for managing directors

As we have already mentioned, the amendment will also affect directors with a symbolic remuneration, below the minimum subsistence level. This is mainly because the managing director of a company who pays himself remuneration is also considered an employee, as this is a dependent activity.

Despite the introduction of minimum health levies, such income optimisation will still be to some extent advantageous for statutory bodies. However, it may also not be the most efficient solution because of the various tax-insurance benefits, which include social insurance benefits or tax bonuses. If executives continue to pay themselves less than the living wage despite legislative changes, they could “overpay” on health insurance prepayments .

In order to avoid only “topping up” health levies, one solution could be to increase the executive’ s remuneration to the subsistence level, or even a little higher. As a consequence, although directors would have higher tax and social security contributions, they would also benefit from the social security system in the long run.

Managing directors who decide to increase their remuneration to the living wage level can save approximately EUR 40.00 per year on their regular remuneration by doing so.

If the directors increase their remuneration to, for example, EUR 400.00 per month, they would pay an extra EUR 200.00 per year to the health insurance company. Although the amount of their income would also affect the amount of their social security contributions, they would also be entitled to a minimum pension if other conditions were met. The amount of social contributions calculated on the basis of income is, among other things, also responsible for a higher tax bonus, affects sickness benefits and other benefits paid under social insurance.

Another possible alternative is for the managing directors to consider moving to an employment relationship with a monthly salary of EUR 329.00. In this case, they would be able to save approximately EUR 36,00 per year.

More of our comments on the issue can also be found in interviews for Trend(From the new year, health levies must be paid also by statutory officers with a symbolic salary), Hospodárske noviny (From the new year, even statutory employees with a token salary have to pay health levies. At least approximately 30 euros ), or .week(Even LLCs and low-wage employees must already pay minimum health insurance premiums).

Who is not covered by the minimum health levy?

The employee’s minimum advance does not apply to an employee who is:

• at the same time a self-employed person;
• at the same time insured by the state (e.g. student, pensioner, person receiving sickness benefit, maternity benefit,…);
• a person with a disability;
• declared a missing person.

In short, this means that if the employee was also insured by the state during the whole month, the minimum employee health insurance contribution does not apply.

However, if the employee was also insured by the State for only part of the month, as we have already mentioned earlier in this article, the amount of the minimum advance payment will be reduced by an aliquot amount.

In addition to the above, minimum health contributions do not apply to persons who do not receive any wages or remuneration, such as a contract worker who has no wages in a particular month.

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

Článok Minimum health levies 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.

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.

What pearls people put in their expenses (you can multiple examples)

It is not rare in Slovakia when sole traders or owners of eseroces try to optimize taxes through personal items. It often happens that they include luxury watches, expensive handbags, clothes, microwaves or other household appliances, dentist treatments, cinema or theatre tickets, glasses or even a holiday – which they try to label as a business trip – in the costs associated with their business activities. It is important to note, however, that in defending these costs, the burden is primarily on the taxpayer and the tax authorities or the courts may not recognise these costs. In certain circumstances, this may also have criminal ramifications.

Which of the costs mentioned above were still okay? And which were no longer? And why?

This is always individual. Every entrepreneur may have some reason why they need a more expensive watch, clothes, handbag and so on to run their business. However, that reason must be legitimate enough. For assets of a personal consumption nature, their proximate causality to the generation of income is important. It must be remembered that the taxpayer bears the primary burden of proof in procedural terms. Given the unpredictability of the decision-makers, I recommend, at least for larger transactions, to have this assessed by experts in the field. When good faith is maintained, it is just such an assessment that protects against criminal liability. However, if a business avoids proving itself to the tax authorities, it can still take advantage of the 80%-20% expense claim for personal property,”

So what is the tax office focusing on when checking these items?

It is the aforementioned legitimacy and whether the acquisition of these items is necessary for the exercise of the profession, respectively. business activity. For example, the internal rules of the Slovak Bar Association require attorneys to take care of the dignity of their appearance. For women, this means wearing a skirt or trouser suit, blouse, dress and dress shoes appropriate to the season. And, in turn, male attorneys must wear a men’s suit. And supposedly airline pilots must have a second pair of goggles purchased.

Under what circumstances are these costs recognised?

In the case of personal items – especially if they are expensive and luxury items – the taxpayer must demonstrate the necessity of such a standard in order, for example, to gain the confidence of certain clients if he works in an industry where a certain standard is expected and the absence of such a standard will diminish that confidence. At the same time, he must be able to explain satisfactorily that such equipment is not used privately (e.g. by storing the watch in a safe after work and showing that the taxpayer has his own social watch for non-business purposes, etc.). If these conditions are met, the cost of acquiring such items should be treated as a tax expenditure.

When are these items over the line?

If the taxpayer were using items of a luxury nature, which, by default, the number already strays outside the bounds of what is reasonable to assume to be rational in the ordinary course of events.

Is there a specific case where the SAO or a court has not recognized something? What was the reason?

For example, the courts have dealt with a case concerning the procurement of spectacles by a crane operator who had an eye defect. In that case, the court did not consider such a cost to be a tax expense because the crane operator would have had to acquire the glasses anyway.

What is the difference if a sole trader and a one-person Ltd. put such beads in their costs?

It makes no difference whether you are a sole trader or a sole proprietorship – it must always be clearly demonstrable that the personal items are necessary for the conduct of the business. However, there is another problem with eserocoses – in the Slovak environment it is common practice for eserocos owners to confuse the company’s cash register with the statutory officer’s wallet.

How, for example, can the owner of even a one-person proprietorship dispose of the money in his business account?

Whether and how the money from a business account or cash can be used depends on whether you are a sole trader, an eseroca or a large company. Self-employed persons have a free hand in the use of money from their business account. They don’t have to worry about when and how they withdraw money from the business so that they can use it for private purposes as well. However, this is no longer the case if the business is an LLC – even a sole proprietorship. Smaller businesses in particular forget that an LLC is a business entity that is strictly separate from its owner corporately, accountingly and tax-wise, and the potential penalties for tax or legal offenses can be manifold as well. So it’s not just a question of whether a business can put a microwave in expenses because you heat up your lunch in it during home office hours. If an LLC owner wants to legally use the profits for private purposes, he or she must pay dividends (there are other options, but dividends are the basic, legal alternative), which are subject to withholding tax. In addition to paying dividends, there are other ways to cash out of a small company. The applicability of these is on a case-by-case basis.

What is the risk if he does not state that it was private consumption, etc.

In extra-legal terminology, it is a tunnelling of the company’s assets, for which not only the statutory body but also the recipient(s) of the benefits themselves are liable. And it may have criminal consequences in connection with other, non-tax offences (for example, defamation of a creditor). The topic of private use of corporate assets is thus very complex and the potential penalties for both tax and legal offences can be manifold.

Do large companies also make mistakes in taxing, for example, non-cash income? What are the most common things?

In larger companies, accounting and economic transparency is more present. Although the level of taxpayer aggressiveness discussed is lower by default, even larger companies cannot avoid technical errors. These include, for example, situations where corporate assets are used with full VAT deduction for employees’ private purposes, giving away shares in the company to employees without taxing and “justifying” this income, various non-cash benefits, and so on.

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

Článok Peter Varga in an interview for Forbes: Watches, holidays or luxury handbag: will these items stand up on tax returns? je zobrazený ako prvý na Highgate.

“Paying for holidays with a company card” – what about the law and taxes? [TRAINING]

Especially smaller entrepreneurs doing business, for example through their LLCs, forget that the business company (and therefore the LLC) is corporately, accountingly and tax strictly separate from its owner. If this were not the case, a shareholder of an LLC, for example, would not be able to enjoy the benefits of relatively absolute limited liability for the obligations of his corporation. It would be easy to run a business with limited liability of a partner and at the same time use the company assets for private purposes.

With the increasing social and economic situation in Slovakia and the rate of information development in public administration, the maturity of the Slovak business sector and the possibilities of the state to fight more effectively against these legal and tax ills will probably increase as well.

In the first instance, this seems like bad news for a businessman who does not respect these basic rules. However, the current legislative as well as its executive position in Slovakia can be, upon deeper reflection, much more uncomfortable.

A more chaotic business environment is associated with a higher degree of volatility in the predictability of decision-making by public authorities. For example, the Kiska and KTAG case showed how unpredictable the practice of tax and law enforcement authorities can be. The case concerned the claiming of expenses for the alleged private use of Andrej Kiska as tax expenses of the company.

However, if clearer boundaries to these practices were introduced in Slovakia and there was a relevant practice, the taxpayer would be able to estimate in advance what the nature of the sanction for his tax offence would be (i.e., for example, a fine or imprisonment).

Corporate vs. private money

SZCO vs. one-person s.r.o. vs. s.r.o.

In addition to very generous flat-rate expenses (60%), less administration and a relatively low tax burden, small entrepreneurs often choose a self-employed business ( e.g.: a sole proprietorship) due to its practical flexibility. With a self-employed person (also a sole trader), the entrepreneur does not have to worry about when and how to withdraw money from the business in order to use it for private purposes.

He will simply use them for private purposes.

So-called one-person LLCs are an alternative to the sole proprietorship. Entrepreneurs choose them mainly due to:

• limited liability (although there are a number of exceptions, as discussed in the video “Paying for holidays with a company card” – what about the law and taxes?),
• optional obligation to pay social contributions (if the entrepreneur does not pay himself a salary/statutory remuneration – more in Can I have zero or minimum wage in my own company? or Is it worth paying social contributions? ),
• and a 15% income tax rate.

On the other hand, among the disadvantages we include, besides the risks associated with not paying market wages/statutory remuneration, using company property for private purposes, the practical peripeties associated with the aforementioned legal and tax separation of the company from its owner.

This is because if the owner wants to legally use the profit for private purposes, he must pay himself dividends (there are other options, but dividends are the basic, legally presumed alternative), which are subject to withholding tax.

In larger companies, accounting and economic transparency is more present. Although the level of taxpayer aggressiveness discussed is lower by default, even larger companies cannot avoid technical errors. These include, for example, situations where corporate assets are used with full VAT deduction for employees’ private purposes, giving away shares in the company to employees without taxing and “justifying” this income, various non-cash benefits, and so on.

Payments from a corporate vs private account

In practice, it is not rare for an entrepreneur to use the company account to pay for a dentist, cinema tickets or a holiday in Thailand. In addition to the obvious tax implications, which we describe in part below or more fully in the video (“Paying for a holiday with a company card” – what’s the law and tax implications?), these transactions also have significant legal connotations.

In extra-legal terminology, it is a tunnelling of company assets for which not only the statutory body but also the recipient(s) of these benefits are liable. And this may have criminal consequences in connection with other, non-tax offences (for example, defamation of a creditor).

Common examples and mistakes when using company money for private purposes

I recently wrote an article about the “deductibility” of the cost of acquiring an expensive watch. I was also inspired by the accounting practices of corporations, where its owners/statutors not infrequently demonstrate their de facto flexibility. Similarly, we could look at suits or more expensive cars. Given the current appetite and fearlessness of entrepreneurs, the tax benefits of including costs in tax expenditures, as well as for VAT purposes, appear to be driving relatively significantly the demand in the economy for more luxurious goods.

Company car and petrol for private use

In business practice, such more luxurious goods include expensive cars. The VAT deduction, together with the possibility of gradually applying the purchase price of the car to tax expenses, is perhaps a stronger motivator to buy a car for the company than a well-targeted advertisement.

Generally speaking, if a car is also used for private purposes, whether by the owner of the company, a statutory officer or an employee, this needs to be taken into account not only from a tax point of view but also from a legal point of view. If such property is used by the owner of the company without adequate consideration (rent), this is contrary to the Commercial Code and both the statutory body and the owner in question, each from a different legal position, are ‘liable’ with all their assets.

From a tax point of view, it is necessary to distinguish in which regime the car in question is located. The tax laws allow the taxpayer to take into account the private use of the car. Even in the case of income tax and, to some extent, VAT, the legislator has been so generous as to allow the taxpayer to include 80% of the cost of the car (i.e. depreciation, repairs and other related costs) and the petrol in the tax expenditure without the taxpayer having to prove the extent of the private use of the car. This is a significant aid and used in practice in part.

But it’s not that straightforward. The problem may be the ambiguous classification of non-cash income of either an employee or a company’s statutory officer, which arises from the use of company property for private purposes. VAT is also an issue, as the VAT Act does not provide for a flat deduction of 80% for the acquisition of a car partly for private purposes, as is the case under the Income Tax Act. Thus, what appears to be generous in terms of income tax may be at cross-checking at VAT cross-checks.

As with other types of company expenses, it is important to remember the criminal dimension of any grossly aggressive tax optimisation. I stress to clients, and in many of my lectures and articles, that the threshold for crossing from the “penalty” to the criminal liability zone is very unclear in Slovakia (and not only in Slovakia). This leaves a wide margin for law enforcement authorities to exercise their own, even more arbitrary, discretion. For more on this topic, see the video (“Paying for a holiday with a company card” – what about the law and taxes?).

Holidays from company money

Taxpayers like to refer to holidays as business trips for the purposes of reducing their tax liability. I dealt with this topic relatively intensively, also from practical experience of tax audits, in my lecture : Does the “Danko 15% tax” bring new opportunities for tax optimization?

For example, taxpayers classify trips to Southeast Asia as business trips in order to gain new customers or even as a necessity for the purpose of gaining new work inspiration. There is not quite space in this article to discuss this issue, but in defending these positions it is important to keep in mind the basic procedural relationship between the taxing authority and the taxpayer. The burden of proof lies primarily on the taxpayer.

Property from company money

The investment demand for real estate has been shaken by the amendment to the VAT Act of 2018, under which the rental of flats, apartments and family houses is considered exempt from VAT. This means that the standard business model of buying a property with VAT deduction for rental purposes can no longer be practiced in the form and to the extent it was until the end of 2018.

Nevertheless, interest in “tax-advantaged” purchases of investment properties is still very high.

Learn more about the tax and levy aspects of buying and renting property.

In addition to the VAT deduction, various other scenarios are standard for real estate tax modelling in practice. These include, for example, renting an office in a flat or repairs for business purposes. These are very common situations in practice. More about this in the video(More about the tax and levy aspects of buying and renting real estate) or in a personal consultation.

Restaurants and alcohol from company money

The Income Tax Act allows, to a very limited extent, for the inclusion of representation expenses as a tax expense. Similarly for VAT. If representation costs appear in the company’s accounts to a greater extent and without relevant justification, the tax authorities may treat such costs as income of the company’s statutory body or owner. In such a case, differences in the classification of such income then arise in practice. The tax authorities may treat them as dividends, employment income or other income. The exact classification depends on the circumstances of the case as well as the preference of the tax authorities. From a tax burden perspective, there is a significant difference whether the tax authority reclassifies the income as dividends rather than as employment income or other income.

Business phone for private use

A very common case in practice is the use of small tangible assets for private purposes. Probably the most prominent example in practice is a company mobile phone for private purposes. Here, much the same rules apply as for cars. This can be particularly problematic from a VAT point of view.

Tax optimisation

For more information on tax optimisation options in general, please see the section “Tax optimisation” or visit our law firm Highgate Group’s website. Manoeuvring and being able to justify costs as tax expenses or supplies for which a VAT deduction can be claimed is also part of tax optimisation. Tax optimization is all the more complex when we represent the client in potential tax audits.

Example from practice

Consider a case from practice: the cost of sponsoring a sports club or a social event. The practice of the tax authorities today is that they generally do not consider such sponsorship to be a relevant activity for subsuming the expense in question as a tax expense and an expense for which VAT can be deducted.

However, if you put a different practical lens on the cost in question, the tax authority may already look at the cost in question as being related to the generation of income and the carrying out of taxable transactions at the output. In order to identify this boundary, it is necessary to be familiar with the relevant Slovak, as well as Czech case law, which has provided quite meaningful insights in this respect.

In addition to sponsorship, there are many other cases in economic practice where the line between ‘recognisability’ and ‘non-recognisability’ is not clearly discernible in practice. For example, this may be the cost of purchasing a property with a VAT deduction, the taxation of cryptocurrencies or the aforementioned purchase of an expensive watch.

Tax optimization is mainly about knowing the law and the boundaries within which the taxpayer can move. We will be happy to help you with that.

In conclusion

The topic of the use of company property for private purposes is thus very complex and the potential penalties for tax and legal offences may be diverse. It is not just a question of whether you can “put a microwave in expenses because you heat your lunch in it during home office”. Also, given the aforementioned unpredictability of the decision makers, I recommend, at least for larger transactions, the opinion of an attorney. In good faith, it is precisely such an opinion that protects against criminal liability.

Článok Corporate money for private purposes: examples and most common mistakes je zobrazený ako prvý na Highgate.

The pandemic, in addition to what is often inflected, has brought, for example, a change in the view of the law on the legality of taking money out of the company. It has also increased the state’s appetite to be even more assertive about certain legal and fiscal contexts (for example, the fight against aggressive tax optimization, the sanction of confiscation of part of assets, etc.).

The property of the company is not the property of its owner

In the context of doing business through a company, it is first of all important to note that a company is a separate legal entity from its ultimate owner – a natural person. This statement is not just a legal cliché, but has significant legal and tax implications. For example, in certain circumstances, it may even be a criminal offence to withdraw/send funds from your own company. In less serious cases, there are various tax risks or the illegality of paying out old profits.

High treasury or unpaid profits

In practice, it is perfectly natural for smaller companies not to earn smaller profits at all. The entrepreneur feels that he can freely dispose of his own company’s funds and can pay them out at any time in any form or simply withdraw them from the account. In addition, for smaller numbers and owner-managed companies, it is not normally comfortable for such owners to pay a 7% withholding tax on dividends when profits are paid out. It is even less financially comfortable to pay yourself a standard salary as an employee in your own Ltd. (another trading company) or the remuneration of a managing director (mainly due to high levies).

This results in, for example, high cash, receivables from owners on the balance sheet (a loan to a shareholder) or high unpaid profits. And if in such a situation the company in question were to experience financial problems, this could have the following legal consequences (depending on the situation that preceded it):

• liability of the statutory body with all its assets for the non-compliance of the treasury with the actual situation;
• the obligation of an owner to pay the company its entire claim, such owner being exposed to the full amount of its assets in connection with that obligation;
• the owner’s liability for the company’s insolvency (for example, including for the payment of dividends), where the owner is liable for the whole of its assets; or
• the illegality of the payment of profits from the company;

Non-transparent payments from the company and the practice of the tax authorities

The practice of the tax authorities in this respect varies. In some cases, however, the tax authorities tend to reclassify such unnamed income of owners from the company as employment income (i.e. taxed and then “taxed” as +- income of employees) or as so-called. other revenue. They are subject to a 19%/25% income tax rate and a 14% health levy.

Payment of dividends

The Commercial Code prohibits a company from distributing its net profit or other own resources to its owners if, taking into account all the circumstances, it thereby causes its bankruptcy. It should be noted here that there may not be a direct temporal link between the payment of profits and bankruptcy. And this is a very important note at a time of pandemic. Thus, in certain circumstances, the owner may not be able to legally access these profits. If the company pays dividends “fair weather”, the owner can partially avoid a number of risks as a precautionary measure. In some cases, it is even possible to pay dividends without applying the 7% dividend withholding tax, and so such legal structuring can also have pleasant side effects.

In the same way, an owner may not be able to legally access the funds in his company if it has negative equity or is in a so-called (whispering): Crisis. In some types of business (for example, property rental), this financial situation is quite common and standard. Nevertheless, some limitations do exist and should not be forgotten, even in the context of the risks outlined above.

Setting up the legal and tax structure

At Highgate Group, we advise our clients in setting up their business operations from a legal and tax perspective. There are many legal pitfalls in the legal order and the level of the legal and tax system in Slovakia today. On this topic, it is not just a question of disbursement of profits/funds from the company during a pandemic and possible tax considerations. From 1 January 2021, entrepreneurs are also interested in the issues of protective measures of seizure of part of the property or seizure of things, which the state can now apply relatively flexibly and sufficiently invasively to such an extent that the entrepreneur loses even the firm ground under his feet. The new legislation on the legalisation of proceeds of crime also appears to be risky for entrepreneurs. Its effects can be very negative for entrepreneurs, even in the case of trivial business mistakes.

The legal and tax environment is increasingly complex. Business life is also more complex. That is why it is wise to address these challenges in a preventive way.

Tomáš Demo from our law firm discussed this topic in more detail from a legal point of view here or in an expert opinion for the daily SME here.

Článok Disbursement of money from the company during a pandemic je zobrazený ako prvý na Highgate.