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.

In three entries, we focused on best practices in Slovak companies, starting with the process of setting up a functioning ESOP program with creative suggestions for types of employee compensation and the associated minimization of tax and levy implications. We also covered approaches to properly valuing a company when issuing an ESOP, seamlessly moving on to the topic of current trends associated with issuing employee stock to the setup (different approaches) and managerial handling of Good Leaver/Bad Leaver situations.

For those who missed the conference, this article provides a small taste of what we covered at the ESOP conference. If you are interested in the topic in more depth, there is a video recording of the conference, which you can find here.

In particular, we present how important it is to set up the whole structure correctly at the very beginning of the ESOP program, taking into account the potential growth of the company, the entry of an investor or even legislative innovations, which can make the existing ESOP program more effective if set up correctly.

What to consider in an ESOP?

ESOPs are a complex topic that is not enough to look at only through a legal and tax lens. In the first step, of course, it is important to work with the ESOPist’s vision and knowledge of the company that intends to set up an ESOP program. Subsequently, other issues such as:

• Economic setup – psychology and management, Good Leaver / Bad Leaver, vesting / cliff period, option / stock / shadow stock;
• Tax setup – company valuation, taxation moments, strike price;
• Legal set-up – administration, flexibility and protection of founders/company, voting and economic rights.

Our task is therefore for the client “under one roof” to take into account all relevant facts and provide the most ideal economic, legal and tax-tax setup of the option program, including service such as:

• drafting the so-called. ESOP contracts;
• drafting the so-called. “drawer contracts”;
• Tax-tax assessment and design of a specific ESOP structure;
• suggestions to minimise the risks of a possible tax audit;
• the actual execution of corporate changes;
• setting up an ESOP structure using a foreign company; or
• Prevention as well as eventual resolution of Bad Leaver situations.

ESOP Basic Conditions

The ESOP concept brings with it many concepts, and it is necessary for the client to think about them before we start setting up a specific strategy for him or her. It is mainly a decision on what conditions will be set in the ESOP. It mainly concerns:

• ESOP pool – A percentage of the total number of shares of a company’s outstanding stock that is offered to employees as a recruitment and/or retention tool.
• Strike price – also known as strike price. The price (determined at the time of grant) at which an employee can purchase shares.
• FMV – fair market value – the price that would be agreed between a potential buyer and a potential seller, neither of whom is under any obligation to act and both of whom have reasonable knowledge of the relevant facts. Three methods are commonly used to determine FMV, namely Discounted Cash Flow, Public Market Comparables, Precedent Transactions.
• Vesting period – the period during which shares “mature”. It is up to the company to choose the period of time – for example, 4 years is standard.
• Cliff period – holding participation in an ESOP, for example, in the case of a new employee. Thus, a company may determine that the vesting period will only begin after a certain period, e.g. by a year.
• Good leaver/ bad leaver – a bad leaver clause allows the company to recover vested options of an employee who leaves under pre-determined conditions. In a good leaver, the action is essentially “maturing”.

What can cause a poorly set ESOP?

An ESOP acts as a powerful motivational and rewarding tool to attract and retain employees or reduce turnover in the company. At the same time, it motivates employees to perform better at work, which is also linked to the growth of the company. However, this is only true if the ESOP is set up correctly and efficiently. In practice, we also encounter the opposite situations where we have to deal with “dead equity” in the company, namely a “non-working ESOPist” who has already been assigned a real, tangible stake in the company.

A poorly set up ESOP can also have a demotivating effect on employees, which is the opposite of the purpose of such a program. For example, after the vesting period, an employee may lose the motivation to perform his or her job as effectively as during this period of share maturation. Therefore, it is necessary to set up the ESOP in such a way that the employees have an incentive to work or stay in the company even after the “vesting period” has expired.

One of the reasons for employee demotivation can be the poor setting of Good Leaver / Bad Leaver conditions. In practice, we often deal with a variety of “bad leaver” situations, most of which require a sophisticated and complex approach. Therefore, it is most ideal for companies to set these conditions upfront as a precaution in clear and practically enforceable language and manner. Of course, setting a fair playing field also applies to the “good leaver” situation.

When setting up an ESOP, it is more than desirable to comprehensively anticipate all potentially problematic situations and one of them is the possible dispute about the value of the share and therefore how to determine the “fair market value” (FMV), what methods to use to value a company or, for example, a Start-up with a unique product and difficult predictability of its development in the next stages, and who to contact to develop the FMV for your business model.

Types of employee “shares”

The company has a choice as to what kind of “shares” it offers to its employees. In the conditions of the Slovak Republic it is in particular:

• Share options;
• Shares and business holdings;
• Shadow business holdings/shares.

Already at this step, when choosing the type of shares, it is necessary to consider the economic and tax-tax implications. The choice of the type of shares is undoubtedly linked to the choice of the legal form of the ESOPist, where our legislation gives us four options to choose from, the choice of which depends on the specific realities of the intended structure, namely:

• Limited liability company (s. r. o.);
• Joint stock company (a. s.);
• Simple stock corporation (j. s. a.);
• Cooperative; or
• Alternative forms.

Each legal form has its specifics, or its advantages and disadvantages. Already at the conference we outlined the essential advantages of the less used legal form of the cooperative, as well as the use-cases of the correct set-up in practice. It is important to note, however, that there is no such thing as the “most correct” choice of legal form, but in any case it is very important to make a comprehensive assessment of which legal form is the most “ideal” choice for a given case.

In practice, it is relatively common to encounter the creation of an ESOP structure abroad. There are a number of legitimate reasons for this:

Standard ESOP milestones

ESOPs entail certain “milestones” which also need to clearly set the conditions under which they occur. We mean the following:

• Option grant;
• Exercise of the option;
• Acquisition Action;
• Sale of shares.

In the case of employee shares, a fundamental problem arises in practice from our point of view, namely the question of the timing of taxation. The Income Tax Act provides for the accrual of non-cash income – taxation – at the time of acquisition of employee shares by the employee. In the case of options, there are views that the moment of taxation occurs even a little earlier. However, such a procedure contradicts the principle of taxation, where taxation on the acquisition of employee shares is to occur at a point in time when neither the employer nor the employee has cash income on which tax and levies can be paid.

For our clients, we therefore try to find legal ways to set up the ESOP structure so as to divert the moment of taxation to the moment of actually received cash income, or to reduce the rate of taxes and levies, or to minimize the risks of a possible tax audit.

As we said in several case studies at the conference, each client needs to be considered on an ad hoc basis, and there is no sort of one-size-fits-all template that just rolls over to the firm without knowing the client’s requirements. In any case, we will be happy to create and run a tailor-made solution for your business with an optimal mix of legal and tax-efficient structure.

Taxation of employee/contractor ESOPs

The recently adopted amendment to the Income Tax Act has at least triggered a positive response within the startup environment. Under the rules in effect prior to this amendment, a critical portion of shares awarded to an employee or contractor had to be taxed as non-cash income. In practice, therefore, various arguments and structures have been devised to eliminate this risk. The amendment was intended to shift this taxation to the moment of realisation of income in the form of an “EXIT” share.

However, despite the certainly noble motive, the amendment does not fully address this need and it appears that it may be unused in practice without fiscal risks. It is therefore possible that the new legislation will still be subject to some changes.

Airdrops for employees/contractors and other forms of remuneration

As the ecosystem around crypto assets develops, we are increasingly seeing the distribution of various crypto assets to team members. This was also addressed at the conference.

If you are interested in this topic and would like to know more about it, a video recording of the conference is available right here below the article.

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

Článok Employee Stock Ownership Conference (ESOPe) je zobrazený ako prvý na Highgate.

Článok Tomas Demo in an interview about startups for startitup 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.

According to the reform compass of the Institute for Financial Policy (IFP), Slovakia has slowed down significantly in catching up with the most advanced EU countries in the past decade. Employers point out that what the economy needs above all is a stable and predictable environment.

The future brain drain, as well as tax outflow from Slovakia, can be prevented mainly by a demonstrable effort on the part of the state to deal with legislatively more complex issues, a reduction of the tax burden and a more stable legal and political environment. The Ministry of Economy (MH) of the Slovak Republic has long been trying to remedy the most acute problems in packages of measures to improve the business environment.

Read the full article here : https://www.startitup.sk/slovenske-zakony-nahravaju-spekulantom-vo-velkom-zneuzivaju-konkurzy/

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

Článok Low interest in Slovakia from new innovative companies?
Interview for STARTITUP je zobrazený ako prvý na Highgate.

Slovakia is a country where a number of interesting startups have emerged in recent years, which are also an attractive investment opportunity. Investment capital is one of the ways they can move forward and expand into new markets.

Read the full interview here : https://disrupter.refresher.sk/116757-Advokat-Tomas-Demo-Zakladatelia-by-mali-dbat-na-dobru-pravnu-dokumentaciu-a-poriadok-v-uctovnictve

Článok Tomáš Demo in an interview for Refresher about investors’ entries into startups je zobrazený ako prvý na Highgate.

Exemption from income tax on the sale of shares

From 2018 (with application for the first time from 2020) it is possible to sell shares in companies in Slovakia without the proceeds of such sale being taxable income. However, the Income Tax Act makes such a possibility conditional upon meeting a number of conditions. First of all, the exception in question concerns only legal entities, so that under structuring of the business holding companies are the right instrument for such tax optimisation. In addition to this condition, the Income Tax Act requires that the legal entity is not an “empty shell”, has held the business share(s) for more than 2 years and has at least a 10% direct shareholding in the share capital of the company in question.

Dilution (“dilution”) of the founder

Startup founders with investor input typically gradually reduce their level of participation in the company. There can be several reasons for this: (i) sale of part of the company, (ii) entry of an investor, or (iii) some ESOP structure (i.e., employee stock).

The consequence of these movements in the company’s ownership structure is usually the so-called “diluting” of the founder. And if the founder holds his interest in the company in question through his holding company, he may thus benefit from income tax exemption on the sale of individual parts of the company or a complete “exit” (otherwise he would be taxed as in the case of sale of a cryptocurrency).

However, if the founder’s interest in the company falls below 10%, is it still possible to exempt this income from income tax?

Share below 10% and exemption from income tax

In my view, a founder diluted in this way is no longer entitled to exemption from income tax, notwithstanding the fact that his shareholding in the company was originally even dramatically higher than 10%. Such a return would therefore have to be taxed by the founder’s holding company, and in the present case the tax base would be the difference between the sale amount and (by default) the amount of the paid-up contribution.

Such a tax base would be subject to income tax at a tax rate of 15% (if the holding company had total annual taxable income of less than €50,000) or 21% in other cases. However, it is also common for the founder to set up a holding company abroad, where the rules for income tax exemption are more flexible than in this country.

But let us imagine a situation where the founder owns a 19.5% stake in a company and plans to sell it equally in two stages. If he sells 9.75% first and then the remaining 9.75%, he would have taxable income on the second sale. However, if he had structured this sale as a sale of a 9.5% stake in the first round and a 10% stake in the second round, he would have avoided taxation altogether.

Is there any other way to avoid taxation?

In practice, there are a number of creative ways to address this “tax problem” in a way that avoids negative tax consequences. However, it is important to remember that any tax optimization must stand on firm ground.

I have written/discussed many times in various forums as well as on our website about when tax optimization is defensible. I have addressed this topic in more depth, for example, in connection with the KTAG of Andrej Kiska (untenable optimization) or the case of Dominika Cibulka’s move to Dubaia (untenable optimization).

If you are further interested in the topic, you will find many more of my articles, statements or interviews on this topic on the Internet. Alternatively, you can contact me/us.

Článok Is the “diluted” partner/shareholder entitled to exemption from income tax? je zobrazený ako prvý na Highgate.

Slovak law currently regulates the issue of employee shares only in the case of a simple joint stock company. However, even this is only a framework, which gives companies a relatively high degree of flexibility in setting up their employee share plans. Although the commercial law does not expressly provide for the issuance of shares to employees in the case of limited liability companies, the issuance of employee shares is not only legally possible but also common in Slovakia. In our experience, statistically, employee shares are even more prevalent in LLCs. The issuance of company shares is also not limited to company employees. Many growing startups, especially in the IT sector, operate “on invoice” and can also motivate their key suppliers with shares in the company and its profits.

Slovak companies have basically three options (although there are different functional derivatives) as to what form of shareholding to offer to their key employees and suppliers. The first one is a direct transfer of the business share or shares of the company. In practice, the firm will thus transfer a portion of the shares in the firm to an employee or supplier for a nominal contribution. However, in our practice, we see this option as rather an exception.

The second option is to grant a right (option) to acquire the company’s shares in the future, at a predetermined, usually below-market price. In this case, the employee or contractor can decide whether to exercise this right in the future and ask the company to transfer an agreed number of shares.

A third option is to issue shadow shares or shares in the company. Unlike the first two options, in this case the employee or contractor does not become a registered shareholder or partner of the company. By virtue of a contract with the company, the employee or contractor receives a “shadow” share in the company’s business, which grants him or her the same de facto range of property rights and benefits as standard shareholders and partners. In some respects, shadow shares resemble a silent partnership, which may have tax benefits. However, the terms of their issue are considerably more flexible. In our experience, shadow shares are the most common form of employee remuneration in Slovak companies today, especially for small start-ups. In practice, the acquisition of employee shares, options or shadow shares is usually linked to the fulfilment of agreed conditions. Most often, these include staying in the company for an agreed period of time, or achieving the planned revenues, or employees completing specific tasks.

Regardless of which of the three options a company chooses, it is crucial that not only a lawyer but also a tax advisor is already sitting in the boardroom when planning the issuance of employee stock. Ideally in one person. Employee stock issuance, especially with the third option, need not be particularly complicated. Issuing them, however, brings with it a number of tax and levy burdens on the part of the employee or contractor, as well as the company, which can add a rather bitter flavour to the benefit.

In more than one case that landed on our office desk, the owners did not give much thought to the tax burden of employee stock. Or they left that thinking to the standard tax adviser who had not thought about the alternative options the law offers that can lead to avoiding high taxes and levies. That is to say, even a legally sophisticated employee stock issuance plan is a ticking time bomb without tax analysis. Generally, a tax advisor is naturally unable to legally evaluate whether proposed alternative solutions are legally sound. The logic behind this is logical. After all, the tax advisor may not be familiar with other legal options for setting up employee stock and option plans, and even if he or she is familiar with them, he or she cannot by default evaluate whether they are legitimate or illegitimate tax optimizations. And the lawyer, in turn, is naturally unfamiliar with the tax aspects of such alternative arrangements.

Here at Highgate Group, we have not only lawyers with extensive experience in employee share legal setup under one roof, but also tax lawyers, tax advisor and accountants with whom we can tailor the proposed structure so that it does not cause excessive tax and levy burdens for companies and employees. Therefore, we can cover the issues related to the issuance of employee shares not only legally, but also tax and accounting under one roof, which is more convenient for the client than dealing with these two complements through two different addresses (lawyer and tax advisor) in the best case, or not at all in the worst case. We are therefore able to analyse and create legal and tax complex structures that ensure our clients’ employee actions remain truly beneficial.

Článok Employee shares and interests.
A benefit that doesn’t have to have a bitter taste. je zobrazený ako prvý na Highgate.

Since we have IT companies among our clients, we decided to organize a conference on 24.4.2019 at the Falkensteiner Hotel in Bratislava on the topic tax optimization for Slovak IT companies.

The aim of the conference was to show in a practical way, using our examples from practice, what opportunities tax optimization brings in the IT sector. The content of the conference included a number of interesting topics presented by partners and tax experts Peter Varga and attorneys Tomáš Dem and Lukáš Makaro. We discussed what options exist for more advantageous taxation of software income (Patent box) not only for established but also start-up IT companies, how the super deduction works and what are the current trends in the optimization of operating profits. In the first part of the conference, we also discussed how to set up taxes and levies for employee shares and what tax risks should be considered when selling a company/investor entry.

We managed to put together a great discussion panel consisting of Peter Fusek (COO Instarea), Grigor Ayrumyan (CEO WEZEO) and Ivan Melay (Head of Central Europe BENDURA BANK AG) whose members talked about their practical experience with tax optimization in their IT companies.

Článok Tax optimization for IT companies je zobrazený ako prvý na Highgate.

Highgate Group as a conference partner, together with the members of the discussion panel composed of Peter Fusek (COO Instarea) and Grigor Ayrumyan (CEO WEZEO) and Ivan Melay (Head of Central Europe BENDURA BANK AG) will share their practical experience with tax optimization in the IT sector.

More information and registration can be found here: http://danova-optimalizacia-pre-it.sk/

Článok CARPATHIAN and Tax optimization for IT companies je zobrazený ako prvý na Highgate.