Identification of the shvarc system

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

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

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

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

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

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

Motivation for the use of tradesmen

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

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

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

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

Comparison of tax and levy obligations

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

Effective levy rate: Who pays less?

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

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

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

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

Legal and regulatory challenges

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

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

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

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

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

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

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

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

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

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

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

The law also defines non-monetary sanctions such as:

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

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

Legal vs. factual: What does reality say?

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

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

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

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

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

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

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.

If you are more interested in this topic, you can book a personal consultation with Peter Varga.

Článok Peter Varga on taxation of investment instruments at TA3 conference je zobrazený ako prvý na Highgate.

In the interview, in abbreviated form, and at the conference, in a comprehensive form, we paid particular attention to the following topics:

• Where is the threshold after which it is no longer possible to “employ” a sole trader;
• What are the penalties;
• When is it a crime;
• How about one-person SROs;
• What are the implications for social insurance benefits?

You can watch the full interview here: https://www.trend.sk/ekonomika/zamestnavanie-zivnostnikov-ma-svoje-limity-ktorym-firmam-hrozia-postihy?itm_brand=trend&itm_template=news&itm_modul=denny_suhrn_sprav&itm_position=1

Článok Peter Varga for Trend on the issue of “employing” freelancers je zobrazený ako prvý na Highgate.

Článok Hello world! je zobrazený ako prvý na Highgate.

“Crypto Novel” 2023

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

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

Taxation of Bitcoins and other cryptocurrencies from 2024

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

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

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

Changes in taxation of cryptocurrencies in Slovakia in 2024

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Non-recognition of cryptocurrency income

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

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

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

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

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

Tax optimisation via offshore company or tax haven?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In our practice, we often encounter structures where it is not entirely clear whether or not they should be regulated. Unfortunately, in some cases, ignorance can even lead to criminal law. Peter Varga demonstrated this risk with examples at our conference, which focused on real estate financing through various regulatory and tax structures. However, Peter Varga also spoke briefly about this at the TA 3 investment conference.

Scams with funds, bonds or other investment structures and opportunities?

As the regulatory jurisdiction of the NBS and the OČTK is often territorially limited, many investors in Slovakia fall victim to fraud. However, some of these fraudulent schemes are purely Slovak.

Taxation of funds in Slovakia?

At the time of the conference, there was a law in place that gave tax advantages to certain types of fund structures that was to be effective January 1, 2024. Although Peter Varga described the new tax regime, he quite astutely stated that the debate on the taxation of funds may be premature given the activities of the new government.

We have been actively dealing with the topic of funds in our practice for a long time, if you are interested in this topic, we attach links where we deal with it in more detail, namely:

in the following articles or lectures:

at our successful unique conference:

or in our video podcasts and online training:

Tokenised financial instruments and real estate

Tokenisation of assets undoubtedly brings with it a number of benefits, but also challenges. Peter Varga summarized them at the conference as follows.

If you are interested in the topic of tokenised financial instruments, we have covered it in more detail in the following article:

Taxation of portfolio rebalancing

In most cases, Slovak tax law has the ambition to tax the generation of income when rebalancing portfolios. However, there are institutes where taxation on rebalancing does not occur. Peter Varga also commented on this at the conference.

Článok Peter Varga on financial regulation and taxes at TA3 conference on investing je zobrazený ako prvý na Highgate.

For those who did not attend the conference, this article provides a brief overview of the topics we covered. At the same time, if you would like to watch the whole conference, or just some parts of it, we have video recordings of the conference available for you, which can be found at this link.

What types of investment funds do we know in Slovakia?

We opened the conference with a comprehensive discussion of different types of investment funds. When setting up a structure through investment funds, a number of factors have to be taken into account, hence their division mainly according to:

• investment policy;
• legal form;
• passport options;
• taxability of income;
• application of VAT on management fees;
• the type of investor to whom the investment fund may be distributed;
• the type of offer; or
• whether a permit is required for its establishment and operation.

At the same time, not all types of investment funds are suitable or possible to use for real estate financing, and those that may have real estate in their portfolio consequently differ significantly in their specific parameters. Therefore, an initial comprehensive regulatory, legal and tax assessment of the above factors is crucial in the creation and establishment of investment funds.

What are the rules for distributing a retail investment fund? Slovak SICAV?

The first panel was devoted to the so-called. Small investment funds. These are investment funds whose managers are limited by the maximum amount of assets they can manage. On the other hand, these investment funds are subject to very limited application of collective investment legislation, do not have a statutory investment policy (so they can invest in real estate) and are primarily aimed at professional investors and, to a limited extent, qualified investors.

The following factors play a key role in the distribution of small investment funds that invest in real estate:

• identification and assessment of the professional investor;
• taking into account the criteria of a professional investor with regard to the investment policy of the fund;
• limits for qualified investors in terms of their number, their share of the fund’s assets and their share of the assets managed by the manager;
• the distribution channels through which qualified investors may be approached; and
• restrictions on the promotion of such funds.

Small investment funds can be set up as a variety of companies or cooperatives. At the same time, only an investment fund can take the legal form of a company limited by shares with a variable share capital (SICAV). This is a flexible legal form which is adapted to the needs of collective investment. Only a small investment fund set up as a SICAV can create sub-funds as accountably separate parts of the assets with different investment strategies.

Where is the collective investment frontier? When do I need the fund?

The second panel focused on various alternative forms of raising capital from investors and investing in foreign real estate. The first topic was defining the boundaries of collective investment, i.e. answering when a particular business model constitutes a fund and when it is a legal structure without any permission from the NBS. When analysing a particular business model from a collective investment perspective, it is necessary to assess whether this business model:

• cumulatively fulfils all the statutory characteristics of collective investment;
• meets the characteristics of one of the collective investment exemptions, e.g. it is a joint venture (JV) or a holding entity;
• there are other indications that are a prerequisite for a business model to be a fund or not.

Crowdfunding and bond financing

Crowdunfing is a relatively still new regulation that makes it possible to connect investors on the one hand and entrepreneurs seeking funding for their projects on the other. The Crowdfunding Regulation aims to facilitate financing, especially for small and medium-sized enterprises, for which, for example, bond financing with a prospectus may be too costly. At the same time, crowdfunding platforms, as online platforms, are widely accessible to a large range of investors, including retail, and thus allow project owners to find funding, either through loans or by placing the securities they issue on that platform.

Thus, for example, a crowdfunding platform allows a developer to issue bonds (only up to a certain amount) in order to build a specific development project. Bonds can of course also be offered outside the crowdfunding platform, while the issuance of bonds represents a standard traditional method of financing, which is widely used in Slovakia and by developers. The legal regulation of bond issues is very flexible, which gives issuers a lot of room to set the individual parameters of the bonds according to their needs, starting with the way of calculating the yield, setting the rules for early maturity of the issue, the period during which the bonds will be issued, or their subordination to bank financing. At the same time, when financing real estate through bonds, an interesting institute is the security agent, in whose favour, as an agent of the bondholders, the bonds can be secured by the real estate.

How is it possible to invest in foreign real estate?

Acquiring real estate outside the Slovak Republic can be an interesting investment opportunity. For investment structures that allow Slovak investors to make such investments, taxes are one of the most crucial parameters. Setting up the structure in such a way that it can be competitive for investors with other “domestic” investment products is a very complex matter, taking into account in particular the existing risk of double taxation.

European Investment Funds EuVECA and ELTIF

The third panel, which also included two panelists from Slovak asset management companies, was devoted to larger investment funds, i.e. funds whose establishment and operation in Slovakia requires the permission of the NBS. The venture capital fund or “EuVECA” is primarily intended for investments in the so-called “EuVECA”. However, with a relatively broadly defined investment policy, it is possible under certain circumstances for such a fund to invest, for example, in companies owning real estate. While such a fund can also be established by a registered manager, in order to use the EuVECA designation, a number of requirements that are normally required (of course to a greater extent) for licensed management companies must be met, such as qualification requirements for persons managing venture capital funds, prudential requirements for the manager, and a number of internal policies. Not forgetting the correct tax set-up.

EuVECA and ELTIFs have the advantage that they can be distributed across the EU to a wider range of investors than other AIFMD alternative investment funds. ELTIF is also the only alternative investment fund that can be offered to retailers across the European Union. The investment policy of this fund is primarily focused on investments in long-term assets (including real estate). Although ELTIF is a closed-end fund, under certain conditions investors may be allowed to redemption before the life of the fund expires.

Qualified investor fund, real estate fund and alternative investment fund

Typical investment funds used by Slovak asset management companies to invest in real estate (and which they also refer to as “real estate funds“) are qualified investor funds, which do not have a statutory investment policy, and then public special real estate funds, which can invest directly in real estate or in so-called “real estate funds”. They can also invest in real estate, in particular in real estate companies, and have to follow rules for limiting and spreading the risk in their portfolio. If certain criteria are met, it is also possible to acquire a commercial company that may own real estate as part of the assets of a public special alternative investment fund. Both real estate funds and alternative investment funds can be offered in Slovakia and to the retail sector without a minimum investment amount limitation.

Why investment funds are set up abroad?

The fourth panel was devoted to foreign funds whose securities or holdings can be offered to Slovak investors. There are various motivations for the decision not to set up an investment fund that will be offered (to a large extent) to Slovak investors, ranging from the stability of the legal environment, the variability of structures that do not exist in Slovakia, for example, but also for reasons of a more robust infrastructure (many Slovak entrepreneurs set up, for example, SICAVs in the Czech Republic, which are managed by “external” management companies).

A big challenge for Slovak investors in setting up investment funds abroad (also) is their tax structuring. Adding to the complexity of this issue are the various legal and tax-transparent structures that need to be dealt with when disbursing income to Slovakia.

In terms of distribution, foreign alternative investment funds (including non-European alternative investment funds) can be offered in Slovakia to all types of investors, but the individual conditions for achieving such distribution will vary depending primarily on:

• where the management company that wants to distribute the fund is based;
• where the Fund is established;
• whether the securities or holdings of such a fund should be offered only to professional investors or also to retail investors.

Acquisition financing

In the fifth and final panel, we addressed the topic of acquisition financing. In a broader sense, financing includes not only bank financing, but also the use of own funds, which have several specificities and limitations, and, for example, various alternative forms of foreign financing.

At the same time, different types of financing can be combined, in which case the potential regulatory aspects of such combinations also need to be considered.

Slovak law brings several specifics, resp. Legal restrictions related to the provision and subsequent repayment of own financing. This not only implies high demands for creative structuring of acquisition transactions using own funds, but also places on the statutory bodies the burden of responsibility for compliance with these rules and a common obligation to compensate for damages in the event of their breach. In particular, the following institutes serve to protect the company’s capital and its shareholders and creditors against transactions between the company and its related parties which are not market-standard:

• prohibition on the return of deposits;
• a society in crisis;
• financial assistance.

If you are interested in the above topics and would like to learn more about them, you can find video recordings of the individual conference panels right here:

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

Článok Real Estate – Taxes and Financing Conference (Unique conference on fund and tax structures, crowdfunding, bonds, bank financing, etc.) je zobrazený ako prvý na Highgate.

Tax optimisation is a mythical topic. However, when discussing it and its eventual practical implementation, it is important to bear in mind the legal limits within which it must operate. It is not possible to set up a company in Hungary and benefit from lower taxation without there being some non-tax reason for doing so, and at the same time there is no relevant justification for the transfer of profits to Hungary itself. Otherwise (especially in the case of some fictitious invoices), this may even amount to the criminal offence of tax and insurance fraud.

In fact, in some tax-optimisation schemes, the taxpayer may cross the line and get into the criminal arena. Also to avoid such risks, it is important to set up any tax optimisation and related schemes with legal aspects in mind and not to be satisfied with tax advice alone.

In fact, in some tax-optimisation schemes, the taxpayer may cross the line and get into the criminal arena. Also to avoid such risks, it is important to set up any tax optimisation and related schemes with legal aspects in mind and not to be satisfied with tax advice alone.

We have also covered the topic of tax optimisation in our online training courses, which are available here:

“Paying for holidays with a company card” – what about the law and taxes? – 2021

It is still a phenomenon in business practice to use company money or other assets for private purposes…

VAT turnover overrun – legal and tax risks – 2020

The spinning of non-DPA companies may also have criminal implications..

Tax optimisation as the main purpose?

In tax practice, there are a number of situations where it is important to have a rational justification for an action in order to defend a particular tax position. Often there is talk about the so-called. main purpose. Otherwise, the tax administrator may treat the transaction or act as a special purpose t. j. abuse of the law and taxpayer to be taxed.

However, there are situations where the main purpose may be to obtain a tax advantage (e.g. to favour a trade over an SRO), but this is not an abuse of the law because the step does not contradict the purpose of the law.

If you are interested in the topic of aggressive tax optimization, we recommend you to read the interesting cases we have dealt with in this regard:

Did Andrej Kiska really commit a crime as the managing director of KTAG? Tax – legal analysis

Determine whether a particular tax optimization is legal or can be sanctioned…

Acquisition credit and aggressive tax optimisation

In lectures and meetings with clients, we often mention a type of tax optimization that, while not illegal, is also not legal. Simply put,…

Lecture on tax optimisation

In addition to these topics, Peter Varga’s lecture focused on various legal and legitimate tax and legal technicalities that normally lead to a reduction of the tax and/or levy burden. We have also organized several conferences on this topic, we give presentations at various forums and write professional articles.

A recording of our conference on tax optimisation can be found here:

Tax optimization for IT companies – 2022

A recording of an 80-minute presentation from our conference on legal and tax optimization for technology companies, which we organized…

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

Článok Peter Varga on tax optimization for the educational company ESEMINARE 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.