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.

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.

Good and bad news at the beginning

In practice, during a tax audit, we often encounter a scenario where the views of the tax administrator (tax authority, tax inspector) develop differently from the position of the tax subject (VAT payer, trading company, etc.) declared in the tax return and fail to reconcile them. Subsequently, such a dispute is decided by the court: the regional administrative court, the Supreme Administrative Court of the Slovak Republic, the Constitutional Court of the Slovak Republic or the Court of Justice of the European Union.

A new trend in the decision-making practice of the Slovak courts, which has been noticeable in the EU for a long time, is a departure from the tendency to primarily examine the (non-)fulfilment of the substantive conditions for the creation of a right to deduction. Instead, the focus is shifting to VAT fraud, where the State loses funds through the deliberate and targeted actions of the entities involved in the fraud. The following messages follow:

• Good news: During a tax audit, the tax administration should be less concerned with “endlessly” calling on the taxpayer to provide evidence that the supply under examination was actually made.
• The bad news: State financial penalties related to VAT fraud can potentially apply even to a taxpayer who has not acted explicitly unlawfully, has not directly benefited financially from the fraud, or even had no certain knowledge of its existence.

More on the good news

In its decision C-610/19 Vikingo, the CJEU addressed the scope of the circumstances in which a taxpayer’s right to deduct cannot be limited. Vikingo is a wholesaler of confectionery which claimed a VAT deduction on the packaging machines it purchased. However, after checking with the suppliers, the tax authorities concluded that the machines had been acquired from an unknown person, so that the supply had not been made between the persons named on the invoice.

In order to qualify for the deduction, the substantive conditions (the goods or services have actually been supplied, the recipient has used them in the course of his economic activity) and the formal conditions (primarily the existence of an invoice) must be met. In the case cited above, the Court concluded that it was not possible to deny the right to deduct VAT on the ground that the invoices were not reliable on the ground that:

1. the supplier named on the invoice did not manufacture and deliver the machines because these persons did not have the necessary human and material resources,
2. accounting legislation has not been complied with,
3. the supply chain was not economically justified and
4. there were irregularities in previous transactions involving the delivery under examination.

However, this is assuming that the company is not involved in the tax fraud and could not and should not have known about it (see below for more on bad governance).

It follows from the above judgment that the taxable person claiming the right of deduction is not liable for the subcontractors and should not bear the consequences of any irregularities at the upstream stages of the supply chain. Nor does the tax administration have the right to refuse a VAT deduction on the basis of its (often subjective and more or less emotional) conclusion that the supply chain does not have an economic justification. A VAT deduction is also to be granted where there are doubts about the supplier’s ability to carry out the supply because of insufficient staff and material resources.

However, all of the above applies provided there is no VAT fraud in the chain.

How VAT fraud works

The aim of the fraud is to collect VAT from the state budget without complying with the obligation to pay it, usually at another stage of the supply chain. So-called Carousel frauds have different schemes of operation, but their aim is to reclaim more VAT from the State budget than to remit VAT to the State. They use white horses, foreign companies and cross-border transactions, a combination of input VAT deduction and exempt supply at the output, fictitious transactions and invoices, significantly inflated prices and the inclusion of a genuine and honest company in the carousel.

Risks of VAT fraud

The ambition of this blog is to raise awareness of the risks of engaging in VAT fraud transactions and to provide tips to help avoid engaging in such illegal transactions. It is important to be aware of what the consequences of engaging in a set of fraudulent transactions may be, even if these transactions are not illegal in themselves:

• the right to deduct input VAT may be lost; or
• VAT may be due on supplies within the EU that were originally exempt, i.e. VAT-free, if the related transactions are fraudulent.

More on the bad news

The CJEU has ruled in several decisions that a claim for deduction may be refused if the taxable person was part of a chain in which VAT fraud was committed, if the taxable person actively participated in the fraud (even though he or she may not have directly benefited financially from it) or knew or should have known that the transactions carried out were part of the fraud.

In Case C-439/04 Axel Kittel, the Court of Justice developed the following algorithm applicable to tax fraud:

1. Proving the existence of tax evasion, i.e. that there has been tax evasion at some stage of the supply chain (the so-called objective test).
2. Proof of the objective fact that the taxpayer knew or should have known and could have known about the tax fraud (the so-called subjective test).
3. An assessment of whether the tax entity has taken reasonable steps to prevent its involvement in a possible tax fraud (the so-called Due Diligence test).

Under the objective test, fraud is proven. This may be the case where the supplier has failed to declare the supply on his tax return or has declared it but has deliberately failed to pay his tax liability. It also combines fictitious invoices, either directly with the taxable person under examination or as input invoices with his supplier.

The subjective test examines the active or passive involvement of the taxpayer in the fraud. An indication of knowledge is e.g. an unusually low price, a personal connection, a non-standard approach to the tax entity by the supplier, a non-existent legal or natural person, payment to an account in another country, etc.

The Due Diligence test then examines how the tax entity has verified the supplier and how it has responded to any indications of risk. Of course, the written documents proving the manner and extent of the verification before or during the transaction under review are particularly relevant in a tax audit.

The concept from the Axel Kittel case law has been adopted in other decisions of the CJEU as well as in the decision-making work of administrative courts in the Slovak Republic.

How does the tax office deal with fraud?

The CJEU has ruled in several cases concerning VAT fraud that:

• a taxable person who knew or should have known that he was involved in a fraudulent transaction by purchasing the goods may be refused the right to deduct the related input VAT;
• a taxable person who knew or should have known that the supply was part of a tax fraud committed by the buyer may be denied the right to exempt the intra-EU supply to that buyer.

The tax authorities shall apply the principles set out in those cases where they are satisfied, having regard to objective factors, that the taxable person knew or ought to have known that he was involved in a transaction involving VAT fraud and failed to take all reasonable steps within his power to prevent his own involvement in that fraud.

Risks for VAT-exempt supplies

A frequent finding in tax audits is that the taxpayer fails to prove the entitlement to VAT exemption. Especially critical is the situation when goods are supplied to another Member State and the supplier does not have sufficient evidence of the supply of goods with transport outside the Slovak Republic, or the customer does not acknowledge the supply in his own State.

A seemingly simple situation hides many aspects that need to be taken into account when claiming and documenting the exemption, such as. whether the transport is provided by the supplier, the customer or the postal company, whether the transport is carried out by the customer’s own means of transport, what documents are certified by the customer, how the contractual terms are agreed, how and when the customer’s VAT registration is checked.

A useful aid in setting up processes to eliminate the risks of non-recognition of exemption is the EU Regulation on the documentation of exemption, which sets out for each type of transport a set of documents that create a rebuttable presumption of proof of exemption, thus significantly narrowing the possibilities of the tax administrator to require more and more documents proving exemption.

Guarantee for tax to be paid by the supplier

The tax authority may require the taxable person to reimburse the tax that should have been paid by the supplier who supplied the goods or services to the taxable person, even if the invoice has been paid to the supplier. The institute of liability for tax arises in the following situations:

1. The delivery price is unreasonably high or low without economic justification.
2. The supplier and the tax entity/customer are related persons.
3. The delivery price was paid into an account other than the supplier’s bank account published on the website of the Financial Administration.

When defending against a possible recourse on the grounds of liability, it is important to have documents proving that the legal conditions for liability were not met at the time of delivery or payment, e.g. the price did not show signs of unreasonableness or the supplier’s bank account was published in the relevant lists of the Financial Administration of the Slovak Republic. Thus, it is not sufficient to carry out the verification alone, but it must also be documented and be able to be proven in the event of tax proceedings.

Final recommendations

For a successful long-term operation, it is advisable for the tax entity to know where its potential tax risks are. This includes, for example, an analysis of how the business operates in terms of tax and specifically VAT aspects. Subsequently, the identified weaknesses need to be eliminated by appropriate procedural or commercial-legal adjustments.

For example, in order to prevent VAT fraud and tax evasion, it is beneficial for the tax entity to set up and actually carry out and archive checks on its business partners. Business partner checks are also recommended for reasons other than tax, e.g. In order to eliminate the risk of non-payers and reputational risk.

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

Článok VAT risks or how bad things can happen to good people je zobrazený ako prvý na Highgate.

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

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

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

Článok Highgate Law & Tax named Tax Law Firm of the Year 2023 je zobrazený ako prvý na Highgate.

SMART watch for business

With SMART watches, it seems easy to argue for their use for the purposes of texting, time keeping, navigation and other functions that are practical for business. However, unlike a mobile phone, a watch feels more “private” and therefore, in the worst case scenario, the tax office may want you to prove that you only used it for business purposes. And at worst, it might want to show that you did not use it for private purposes (although it is relatively settled that no one can fairly be asked to prove the non-existence of a particular legal fact).

Luxury watches for business

With luxury watches, oddly enough, it can be easier. Here, though, it looks at first glance like a “representation”, which is not recognised as a tax expense by default. However, there are other types of “representation” that are recognised as a tax expense. Why can a superior office space (i.e., location, classification, or reception desk appearance) be recognized as a tax expense and a luxury watch not? After all, we don’t necessarily need both “representations” for business? However, the problem arises in how we can construct the argument that we are only using them for business purposes. Thus, while unique office spaces in themselves indicate their use only for business purposes, luxury watches do not automatically enjoy such an attribute.

Watches for business

Something extra must therefore be done to make them tax deductible. To give them the hallmark of corporate use. For example, get a safe for your office.

Photos from weddings of family and friends must exude a different watch. Don’t buy “ROLEXes.” With ROLEXs as standard, you can harden up in winter, go to the beach in summer, and the more expressive ones with their sleeves rolled up can imagine a Friday outing to a more student-oriented area in them. However, brands such as A. LANGE & SÖHNE or NOMOS Glashutte look much more authentic when worn exclusively for work purposes. And perhaps even as much as those office spaces.

Tax check watch on the company

However, a dispute with the tax office can take less pleasant forms. That is to say, the financial administration’s penalties are based on the amount of the ECB’s base interest rate, and these have already reached a threshold beyond which the penalties are higher than we have been used to for many years. In addition, there is the risk of taxation of the employee’s/statutor’s non-cash income, or the legal risks (including liability for private assets) associated with the deposit return institution. Either way, in the context of lower political (and therefore legal) predictability, this is another reason confirming how important it is to pay at least basic attention to prevention in the context of asset and business protection. For example, through the legal structuring of business and asset ownership.

I also dealt with a similar topic in my lecture “Paying for holidays with a company card” – what about the law and taxes?which is available on our website.

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 Can I put a luxury watch “in expenses”? 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.

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.

Under Slovak tax law, not every illegal tax optimisation fulfils the elements of one of the tax offences. Similarly to the identification of what is and what is not lawful in reducing tax or levy liability, the boundaries between criminal and administrative law supervision (Tax optimisation – domestic and foreign options) in the commission of tax offences are not clearly delineated.

Unfortunately, Slovak tax law does not know of many cases where courts or prosecutors have looked in detail at identifying more precise boundaries. From a business point of view, it is not at all comfortable not to be able to foresee the penalty for a tax offence committed. In this context, imprisonment (in conjunction with the penalty of forfeiture of property) is certainly the most serious interference with human integrity.

The case of Andrej Kiska’s KTAGis a case in which a critical part of Slovak entrepreneurs can see themselves. From the perspective of the requirements of the rule of law, it is not so much the fact that the case may have been a criminal offence of tax and premium evasion that is problematic, but the fact that the previous practice of tax administrators and law enforcement authorities did not in any way suggest pushing the criminal threshold to this level. The latter affects a huge number of entrepreneurs who are thus ultimately exposed to the potential arbitrariness of the State.

Our services

We provide our clients with comprehensive tax advisory and tax optimization services (Tax optimization – domestic and foreign options). This includes, in addition to technical advice, legal analysis with an emphasis on the analysis of potential criminal risks.

These services are used by clients as standard in the following business process situations:

• transactional advisory services, which also include tax advisory services;
• when assessing an already existing tax and legal structure;
• in setting up the client’s business with an emphasis on tax efficiency;
• when representing a client before the tax authorities or courts.

Examples from practice

Example 1: A firm makes a profit. However, it does not pay the profit to the shareholder as a dividend, but gives it to the shareholder as a gift and thus avoids dividend tax. The legislation does not formally prohibit such action. We can consider it as:

• legal tax optimisation (avoiding tax on dividends);
• illegal tax optimisation, with the only penalty being a tax fine and a fine;
• illegal tax optimisation, which is also a criminal offence of tax and premium evasion.

Example 2: A well-known athlete moves to Monaco and becomes a Monegasque tax resident. However, he spends a large part of the year in Slovakia for various marketing events, sleeping in his Bratislava apartment or in hotels. If he does not pay taxes on his worldwide income in Slovakia, it is

• legal tax optimisation (avoiding Slovak taxes);
• illegal tax optimisation, with the only penalty being a tax fine and a fine;
• illegal tax optimisation, which is also a criminal offence of tax and premium evasion.

Example 3: An entrepreneur has bought a family car on which he has deducted 100% of the VAT and treats 100% of the depreciation of the car as a tax expense. However, he uses the car exclusively for family transfers. This is

• legal tax optimisation;
• illegal tax optimisation, with the only penalty being a tax fine and a fine;
• illegal tax optimisation, which is also a criminal offence of tax and premium evasion.

Example 4: An entrepreneur owns two companies. Before the end of the calendar year, preliminary results showed that one company was expected to make a profit of 1 000 and the other a loss of 500. Therefore, the entrepreneur decided to invoice 400 from the loss-making company to the profitable company for marketing services. He thus reduced his tax liability. This is

• legal tax optimisation;
• illegal tax optimisation, with the only penalty being a tax fine and a fine;
• illegal tax optimisation, which is also a criminal offence of tax and premium evasion.

Example 5: An entrepreneur has set up a company on a Caribbean island with a 0% tax rate and from which he invoices his IT services to Slovak clients. However, the entrepreneur is mainly located in Slovakia when performing the services. These are:

• legal tax optimisation;
• illegal tax optimisation, with the only penalty being a tax fine and a fine;
• illegal tax optimisation, with the only penalty being a tax fine and a fine;

Článok Private: Limits of criminal liability in tax optimisation je zobrazený ako prvý na Highgate.