In addition, Highgate Law & Tax is also celebrating its win in the “Capital Markets” category, proving itself to be a comprehensive law firm with an extensive portfolio of expertise and the ability to successfully navigate diverse legal challenges.

The awards gala evening, which was organized by the media and educational group EPRAVO Group and the weekly TREND, was held at the Double Tree by Hilton hotel in Bratislava. For Highgate Law & Tax it was not only an opportunity to celebrate its success, but also to thank its clients and partners for their trust and support, without which this milestone would not have been possible.

This double triumph confirms Highgate Law & Tax’s excellent reputation for legal and tax services and reinforces its position as a leading player in the legal services market in Slovakia.

Článok Highgate Law & Tax and its double triumph in the prestigious Law Firm of the Year competition je zobrazený ako prvý na Highgate.

In general, we recognise two scenarios for ETF taxation:

• Short-term holding (less than one year) – Capital gains from ETFs are taxed at %/25% rate + 15% health insurance;
• Long-term holding (one year or longer) – Capital gains from ETFs can (should) be exempt from income tax. For more information on why and when, watch the Highgate Talks video podcast on the taxation of ETFs.

What is an ETF?

“An ETF (Exchange Traded Fund) is an exchange-traded fund that tracks multiple assets in a single fund, such as stocks, bonds or commodities. They are traded on an exchange like a stock and offer investors an easy way to diversify their portfolio and invest in different asset classes under one roof.

ETFs are similar to mutual funds, but there are some key differences. ETFs are traded on an exchange throughout the day, while mutual funds are only valued once a day. ETFs also tend to have lower fees than mutual funds.

Benefits of investing in ETFs:

• Diversification: ETFs offer an easy way to invest in a variety of assets, which can help reduce your overall risk.
• Low costs: ETFs tend to have lower fees than mutual funds, which can help you keep more of your returns.
• Tradability: ETFs are traded on exchanges throughout the day, so you can buy or sell them at any time.
• Transparency: ETFs are transparent investment products, so you can easily see what you’re investing in.

Which are index funds?

Examples of some of the best known index funds:

• SPDR S&P 500 ETF (SPY): tracks the S&P 500 index, which is composed of the 500 largest companies in the U.S. It is one of the most popular and liquid ETFs in the world.
• iShares Core S&P 500 ETF (IVV)
• Vanguard Total Stock Market ETF (VTI): tracks the entire U.S. stock market, including small, mid and large cap companies.
• iShares MSCI Emerging Markets ETF (EEM): tracks emerging equity markets.
• Invesco QQQ Trust (QQQ): tracks the Nasdaq-100 index, which is composed of the 100 largest companies traded on the Nasdaq stock exchange.

These are just a few examples of the many ETFs available. When choosing an ETF, it is important to consider your investment objectives, risk tolerance and time horizon.

ETFs and compound interest?

ETFs (exchange-traded funds) can have compound interest. Compound interest is achieved when interest is reinvested, increasing the underlying investment and generating even more interest.

Compound interest is a phenomenon where interest is calculated not only on the original investment but also on the interest already accrued. This leads to exponential growth of the investment over time.

What are capital gains?

Capital gains are the profits you make from selling securities such as stocks, bonds, mutual funds, real estate and cryptocurrencies. They arise when the price of a security when sold is higher than its cost basis.

There are two types of capital gains

• Short-term capital gains: these gains are taxable if you have held the security for less than one year. The tax rate is 19% or 25%, plus health levies.
• Long-term capital gains: these returns are normally tax-free if you have held the security for one year or more.

Dividends from ETFs

Dividends from ETFs (exchange-traded funds) are taxed in the standard way as other dividends. For us, it is taxed at 10% for FOs and 0% for POs. Of course, withholding tax in the source country can increase the total tax liability on dividends. In Slovakia there is no special tax relief for dividends from ETFs.

Taxation of dividends in Slovakia

Dividends are a share of the profits paid by a company to its shareholders. In Slovakia, dividends are taxed in two ways:

1. Withholding tax:

• Withholding tax is automatically paid when the dividend is paid.
• The withholding tax rate is 10% or 35% for FOs; there is no withholding tax for POs (except in special cases); this may not apply if the recipient of the dividend is a foreign person;
• Withholding tax is the final tax for tax residents of the Slovak Republic;
• Non-residents of the Slovak Republic can normally offset withholding tax against income tax in the country where they are tax resident.

2. Tax return:

• Dividends from abroad are included in the taxable income of the taxpayer in the year in which they are credited to his account or possibly set off against a further deposit (i.e. reinvested).
• Dividend tax is 10% or 35% for FOs; for POs (except in special cases) there is no tax.

Is there a difference in taxation of ETFs as a natural person vs. a legal entity

There are quite a lot of differences in the taxation of ETFs between an individual and a corporation, in general:

Individual:

• Gains from the sale of ETF shares are taxed as capital income at a 19%/25% tax rate and a 15% health insurance premium;
• However, gains from the sale of ETF shares may be exempt from both income tax and insurance premiums;
• Dividends from ETF shares are taxed as standard dividends;
• The tax is taxed on the sale of ETF shares through the tax return;
• Dividends are taxed through the tax return anyway (unless they are hypothetically Slovak ETFs), but often withholding tax is applied in the source country;

Legal entity:

• Gains from the sale of ETF shares are taxed as taxable income at the %/21% tax rate.
• Dividends from ETF shares are taxed as taxable income at a 0%/35% tax rate.
• The tax is taxed on the sale of ETF shares through the tax return;

What is the time test and how to save on income tax and health insurance premiums?

Time test and income tax

The time test is a condition for exemption from income tax on the sale of securities such as stocks, bonds and units.

Length of time test

• Time test 1 year: if you hold the security for one year or more, the income from its sale is exempt from income tax.
• Time test of 3 years: it was supposed to be introduced for some types of securities, but eventually did not come into force in 2024

How to save on income tax

Watch the video podcast on the taxation of ETFs.

What are the types of funds and how are they taxed

There are several types of funds in Slovakia that differ in their investment strategy, risk and return. In terms of taxation, funds fall into two categories:

1. Mutual funds

Mutual funds pool money from investors and invest it in different types of securities such as stocks, bonds and money market instruments. The profit from the investment is distributed to investors in proportion to their share of the fund.

Taxation of mutual funds:

• “Dividends” from mutual funds are actually income and are taxed as capital gains at 19%.
• The sale of units between Slovak residents is tax exempt;
• The redemption of a unit is subject to income tax at a rate of 19%;

2. ETFs (exchange-traded funds)

ETFs are funds that are traded on a stock exchange like stocks. They invest in different types of securities and track a selected index, sector or commodity.

Taxation of ETFs:

• Dividends from ETFs are taxed as standard dividends;
• Capital gains on ETFs are taxable if the ETFs were held for less than 1 year.
• Long-term holding (1 year or longer) capital gains from ETFs can (should) be tax-free.

Fund types by investment strategy

• Equity funds: invest in equities and are suitable for investors with a higher risk profile and an expectation of higher returns.
• Bond funds: invest in bonds and are suitable for investors with a lower risk profile and an expectation of lower returns.
• Mixed funds: equities and bonds, offer a balanced risk/return ratio.
• Money market funds: are short-term money market instruments and are suitable for investors who want to “park” their money in the short term.

In which country is it worth taxing ETFs?

There is no clear answer to this question and it depends on various factors such as:

• Country of tax residence: investors pay income taxes in the country where they are tax resident. There are a number of criteria that define tax residence and these vary from country to country
• ETF type: different types of ETFs (equity, bond, mixed) are taxed at different rates.
• Amount of income: the tax rate may vary depending on the investor’s income.
• Length of ETF holding: capital gains on ETFs held for more than one year are tax-free in some countries.
• Tax breaks: some countries offer tax breaks for ETF investors.

Example of standard ETF taxation in some countries

• Slovakia: dividends from ETFs are taxed at 10% for FO. Capital gains from ETFs may be exempt from tax if the ETFs have been held for one year or longer.
• Czech Republic: dividends from ETFs are taxed at 15%. Capital gains from ETFs may be exempt from tax if the ETFs have been held for three years or longer.
• United States: dividends and capital gains from ETFs are taxed according to the amount of the investor’s income.

Tax havens for ETFs

A tax haven is a jurisdiction that has low or no taxes and is usually considered to be secret. Tax havens are often used by individuals and businesses to reduce their tax burden.Here are a few countries that are often considered tax havens for ETFs:

• Bermuda: a British Overseas Territory with a 0% income tax rate for companies.
• Cayman Islands: a British Overseas Territory with a 0% income tax rate for companies.
• Cyprus: an EU country with a 12.5% corporate tax rate.
• Malta: an EU Member State with a corporate tax rate of 35%, but there is an imputation system that can reduce taxable income to 5%.
• Switzerland: is outside the EU and has tax rates that vary by canton. However, Switzerland is known for its banking secrecy and political stability.

What is the risk if you don’t tax ETFs?

Failure to tax ETFs can have material consequences. Depending on the severity and the taxpayer’s intent, it can threaten:

1. Penalty: the Financial Administration of the Slovak Republic may impose a penalty of 10% to 100% of the unpaid tax.
2. Interest on late payment: the taxpayer is liable to pay interest on late payment of unpaid tax. Interest is calculated from the date the tax is due until the date of payment.
3. Criminal prosecution: in serious cases, the taxpayer may face prosecution for one of the tax frauds.

How the tax administration oversees the taxation of ETFs

The Slovak Financial Administration oversees the taxation of ETFs in various ways:

1. Checking tax returns:

• The tax authorities check investors’ tax returns to make sure they have taxed their ETF income correctly.
• In case of any doubts, the financial administration may call on the investor to provide evidence of its investment.

2. Control of banks and investment firms:

• The Treasury inspects banks and investment companies to make sure they withhold tax on dividends and profits from ETF sales.
• The Financial Administration can impose fines on banks and investment companies that do not comply with tax rules.

3. International cooperation:

• The Treasury works with tax authorities in other countries to make sure investors pay taxes on ETF income in accordance with tax treaties.
• The Financial Administration automatically receives information from most foreign financial institutions about Slovak taxpayers;

4. Tax audits:

• The tax authorities can carry out tax audits on investors to make sure they have correctly taxed their income from ETFs.
• A tax audit may include a review of bank statements, investment statements and tax returns.

In conclusion

The taxation of ETFs is a complex topic that can vary depending on the type of ETF, the tax status of the investor and the country in which the ETF is traded. Before investing in an ETF, it’s important to consult a tax advisor to make sure you understand the tax implications.

Článok Taxation of ETFs je zobrazený ako prvý na Highgate.

The full recording of the conference can be found here:

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

Článok Peter Varga at the NBS conference on the digitalisation of the capital market 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.

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

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

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

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

We are thus relatively intimately familiar with the related realities of this segment. Whether it is the topic of tax optimization, “employing sole traders”, investor entry, setting up a holding company, automated accounting, ESOPs, the legal, practical and tax pitfalls of scaling a business abroad, or operating with cryptos, these are all topics that we encounter in practice.

For this reason, we perceived that this conference can help many entrepreneurs to navigate through the complex tangle of more complex Slovak and foreign tax and legal issues. It was also intended to help to better understand the perspective of an investor or potential buyer in a company exit.

Sale of the company or entry of an investor :

• What are the basic situations and types of investor entry into companies?
• What are the key motivations and areas of interest for the investor and the company owner?
• What should an IT firm focus on to maximize the benefits of the investment for the firm and the business owner?
• Structured transactions and relevant tax implications from an income tax perspective (e.g. tax burden through a Slovak vs. a foreign holding company);
• Transaction Experience;

Relevant financial ratios when a company is sold or an investor enters :

• What is of interest to the investor or the buyer in accounting?
• Risks associated with incorrect accounting;
• Capitalization of the company;
• Transaction Experience;

Foreign IT contractors and work “from Bali” :

• Withholding taxes on payments to foreign contractors;
• Working from “Bali” – tax and levy implications;
• Setting up contract documentation;

ESOP – Best practice :

• What forms of shares and options can Slovak companies offer to their employees?
• Legal and practical context;
• Tax and levy context;
• Cross-border structure and practical experience;

Functioning in the crypt :

• Receiving retribution and paying contractors in the crypt;
• Types of crypto projects (token issuance, management, consulting, community token,…) and regulatory and tax aspects;
• Accounting and tax pitfalls in Slovakia and best practice when leaving Slovakia;
• Experience;

Scaling the IT business abroad :

• Do I need to have a company abroad in different business situations?
• Establishment of a permanent establishment, VAT regimes, withholding taxes;
• A company in an offshore jurisdiction from a legal, tax and practical perspective;
• Holding abroad – advantages and disadvantages;
• Investor requirements for foreign structure;
• Protection of the owner’s private property in the context of the political situation in Slovakia;
• Transfer pricing;

Software contracts :

• Framework or one-off contracts;
• Waterfall vs. agile SW development;
• Licensing Terms;
• Warranties and liability for defects in the SW;
• Problematic provisions – experience from practice;

Structuring business to the US :

• How best to enter the US market;
• Where can I get some help/information/grants?
• What is the tax and administrative burden?
• How to choose the right lawyer and accountant?
• How to get into the investors/funds horizon?
• In which state are the best conditions to enter the US market?

Tax optimization for digital and IT companies :

• Holding structure – owner protection;
• Patent Box and Supercomputing – how some IT companies do not have to pay income tax in Slovakia;
• Other tax and levy types and practical experience;
• When is tax optimisation already a criminal offence;

Schwarz system :

• Tax-tax implications and calculations;
• Impact on employees’ social insurance benefits (maternity, pension, sick leave,…);
• What impact does the change to a sole trader’s trade have on a sole trader’s pension?
• Analysis of court decisions that have dealt with the topic;
• Practice of tax administrations and labour inspectorates;
• Criminal liability;
• Setting up contracts with contractors;

Relevant financial ratios when a company is sold or an investor enters :

• What is of interest to the investor or the buyer in accounting?
• Risks associated with incorrect accounting;
• Capitalization of the company;
• Transaction Experience;

Many topics and many questions from conference participants. Companies were particularly interested in topics around ESOPs, tax optimizations or company sales. However, many attendees stayed until the end to hear the current practice in connection with the so-called In the meantime, there was a lot of interest in the practice of the shvarc system (i.e. the employment of freelancers).

We received a lot of positive feedback on the content and organisation of the conference. We are therefore very pleased that after the conference on setting up investment funds, this conference was also a success.

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

Článok Conference on legal and tax optimization for technology companies je zobrazený ako prvý na Highgate.

Our aim is to gradually push through various channels a number of proposals in order to make the fund environment in Slovakia more attractive. The most effective in this respect so far seems to be the participation of Peter Varga in the advisory team at the Ministry of Finance of the Slovak Republic, who is relatively active in this topic. In addition, it is also membership in SLOVCA or cooperation with Crowdberry that help to put pressure on state authorities. However, the aim is not so much to attract foreign fund managers, but rather to motivate Slovak fund managers not to establish funds abroad. These channels are membership in the In this context, we were approached by Hospodársky noviny to summarise the main legal, tax and accounting sticking points in Slovak legislation. There are several of these points and they are caused by the long-term disinterest of legislators in the area of collective investment. You can read more about this below

Článok Setting up funds in Slovakia – accounting and tax pitfalls je zobrazený ako prvý na Highgate.

The Law Firm of the Year poll is organised by the Czech company EPRAVO Group s.r.o. in Slovakia in cooperation with the weekly Trend. The poll was established in the Czech Republic in 2008 and the awards have been sold in Slovakia since 2013.

We put a lot of effort into tax and accounting. We strive not only to educate and advise, but also to lecture to the wider public. For example, our offshore or cryptocurrency taxation training courses have become a firm part of the offering for enquiring clients and professionals in the field. Moreover, this pandemic period has (we firmly believe that the past tense will remain valid) placed an additional burden not only logistically, but unfortunately also health-wise. And this ranking in the only Slovak advisory survey of this kind should also be seen as a great satisfaction for our tax team.

Článok We are again a highly recommended law firm in tax law – Law Firm of the Year 2021 je zobrazený ako prvý na Highgate.

The fact is, among other things, that in a broader time span (for example 2008), corrections are naturally included. And you just don’t have those in a few day “equity rout” and so it looks more dramatic (EDIT: 2.3.2020 the stock market had a significant correction).

A few months ago, I offered readers my financial-tax perspective on the difference between investing in real estate and a traditional passive stock ETF (How to Tax Rental Property Income and Is It Still Better to Invest in a Stock Index?) In all years studied, the stock index came out the winner. In the context of the current stock slumps and the increased number of our clients investing as FOs or POs renting out Bratislava apartments, in this blog I will try to summarize the basic tax-legal rules of renting out real estate.

Letting of immovable property by a natural person

A natural person is normally able to rent out the property and achieve the so-called. passive income or active income. Passive income is a passive gainful activity that does not show signs of active participation of the landlord in the creation of the content of the services supplied (e.g.: the landlord does not change the linen or invoice the utility costs). If this content is partly created by the natural person, it is a business for which it is obligatory to obtain a trade licence.

Passive income of a natural person

This basic legal definition also has tax-tax implications. In the case of passive rental property, an individual’s income is subject to a fixed 19% tax rate, while if his tax base, together with the tax base on employment and other income, exceeds EUR 37,163 (note, effective from 2020), the tax rate is 25%. As this is passive income, the FO cannot take advantage of deductions from the tax base or the tax bonus, which in certain circumstances can significantly reduce the FO’s tax liability. Hence, this puts the landlord at a disadvantage compared to an active lease. However, the possibility to exempt such income from income tax up to an amount of EUR 500 is a certain tax advantage. However, in such a case, the tax expenditure must then be reduced proportionately.

In general, income from passive activity is not subject to health or social security contributions. Of course every system needs to have exceptions. For us, this exception is, for example, some old dividends, which are subject to a 14% health insurance premium, or some income from capital assets or other income, which is also subject to a health insurance premium. However, rental income is not subject to either health or social insurance, which is a significant advantage for many landlords.

For this type of letting, it is sufficient to register for a VAT number if it has not already been allocated to the landlord on another occasion. The landlord can only use real costs and may or may not have the property classified as a business asset. Whether it is worthwhile to have a property listed as a business asset is very individual (the amount of depreciation, the existence of a mortgage, the intended action with the property, the landlord’s individual position, etc.) and this assessment is the subject of a service called tax optimisation. The variety of such scenarios is enriched by the variant in which the landlord has the property in BSM.

If the landlord does not have the property classified as a commercial property, he can only include some real expenses in his tax expenses, such as utilities, property management, internet, or movables (if agreed in the contract with the tenant). However, if the landlord had the property included in business property, this range of possibilities to reduce the overall tax liability would be extended , for example, to include the aforementioned depreciation, any technical appreciation, interest or taxes and insurance.

Active income of a natural person

This income is governed by the standard tax and levy rules as a trade. You can read what taxes and levies a sole trader pays and what legal pitfalls a sole trade entails in another blog here or watch the video blog directly here and here. If we were to simplify it, a big advantage of renting through a trade is the possibility of claiming flat-rate expenses, non-taxable parts of the tax base or a tax bonus. In addition, from 2020, a landlord can benefit from a 15% income tax rate and also this income is not cumulated with some other income in one tax base, reducing the chances of the 25% tax rate being applied.

The disadvantage is that the income from the trade enters into the assessment base for the calculation of health insurance and, if certain conditions are met, also social insurance. The resulting tax-tax amount may thus be higher or lower than in the case of passive renting.

Lease of real estate by a legal person

What the tax-tax implications are associated with renting out property through a PO are equally shown in the above blogs.

In addition, for a legal entity, it is often requested to know whether it is possible to claim a VAT deduction on the purchase of, for example, an apartment. In most cases this is not possible due to a relatively recent amendment to the VAT Act, but there are exceptions where the law and the case law of the CJEU allow it. If the client claims a VAT deduction, they will have to account for some VAT on the output. There are exceptions here as well and the amount of output VAT can be modelled within the limits of transfer pricing for both income tax and VAT purposes.

Sale of property and income tax

Selling an apartment as an FO is, but also not more profitable. If the FO owns the property for more than 5 years and also has had it out of business property for more than 5 years (if it has had it listed), the income from the sale of the property is exempt from income tax. Otherwise, it falls under other income and the gain on the sale (= difference between the sale price and the purchase price or tax residual value) is subject to 19% or 25% income tax and 14% health levy.

In the case of a corporation, income from the sale of real estate is always subject to income tax at a tax rate of 15% or 21%. The taxable amount of the sale is calculated as the difference between the sale price and the taxable residual value, whereas if the subject of the sale is land, it is not depreciated for income tax purposes and its taxable residual value is equal to its purchase price.

Tax optimisation

In practice, I see clients having the flexibility to model their activities so that at the end of the day, even in combination with other activities of the client or their companies and the opportunities provided by the law, this represents a more tax-efficient tax burden. It’s fundamentally a simple tax or levy optimisation, which is both fully legal and legitimate. It is important to note that tax laws are not neutral = they do not provide only one solution to an economic cause, and therefore any fitting of a certain economic situation into some other tax frameworks cannot automatically be seen as tax avoidance. If you are interested in this topic, I recommend my blog “What can the Paradise Papers have to do with an “escheat” or a trade?”

So is it better to invest in a stock index?

In a previous blog, I was very clear about my preference for investing in a stock ETF rather than, for example, figuring out the structures for a full VAT deduction when buying a property for investment purposes and/or worrying about furnishing and renting. Apart from the fact that it has always worked out better financially so far, it saves time, adds to life’s comforts and also works out better from a tax point of view. My conviction was reinforced by a subsequent experience when on 25.12.2019 at 1:30 in the night (and therefore quasi on Christmas Eve) a radiator burst in the flat (about 10 years old new building) that I rent and was empty at that time. I flooded 4 floors below the apartment…

Paradoxically, however, this January I just sold part of my stock funds so that I could also buy an apartment in a new building in Bratislava. In my defence, I will add that I did not buy the flat for rent, but for my grandmother from Handlová, where, admittedly, she has lived a real life so far, and I would like her to live the autumn of her life unrealistically. I have thus neatly avoided the coronavirus. On the face of it, a “smart decision” (albeit completely accidental). But if I didn’t have to, I certainly wouldn’t do it.

Although the coronavirus panic effect fully exposes the fragility of the stock market (for example, after the twin towers crashed in September 2001, the stock market closed for several days due to panic fears), historical analysis whispers to me to stay true to this preference of mine. It’s also more flexible in terms of territoriality and liquidity, and we’ll know in a year if it will be more profitable in 2020 :).

Photo: Freepik.com

Článok How to tax rental income from property and is it still better to invest in a stock index? je zobrazený ako prvý na Highgate.

Since my business is not capital intensive and I don’t exactly need to invest in new machinery, after I paid off my mortgage I also faced this dilemma. As a lay consumer of passive investment options, I gave it some thought, enriched my thinking with some tax considerations and made a decision.

If you bought an apartment in Bratislava at the end of March 2018 for €200,000, rented it out for 12 months and sold it after a year, you would have made. If we assume that the rent after deducting costs (e.g. utilities, management, etc.) is EUR 500, you would earn EUR 14 000 (profit from renting and selling). Of course, this also needs to be taxed and “accounted for”. You tax the rent (without trade) and the sale of the flat at 19%-25%. When you sell the flat, you still pay health levies at 14%. You could have a net profit of around EUR 10 000. Yes, you don’t have to sell the flat. You can wait 5 years to have the profit from the sale exempt from taxes and levies.

What financial instrument does it compare to? It has always been presented to me that an actively managed mutual fund is the right solution for building a brighter tomorrow. However, not only with the classic product headache called investment life insurance, which has been offered indiscriminately by financial intermediaries here for several years, you are far from achieving the promised geometric growths. Even with standard mutual funds (100% equities), it seemed to me that such an index as the S&P 500 was somehow growing faster than the value of my portfolio.

Whether active management (fund managers systematically analyzing the companies and sectors in which they invest) produces statistically higher returns than an ETF fund (a set of, for example, stocks that replicate an index (e.g., the S&P 500)) should be the subject of analysis. In any case, active management should absolutely beat the index, as active management fees are multiples higher. Moreover, mutual fund income is taxable. So the challenge for mutual fund managers is not only to beat the index on the fee differential, but in many cases on the tax liability as well. Thus, the performance of manager-managed portfolios must outperform by at least 19% and by about 25% after including estimated fees. Anyone can easily Google whether this is indeed the case for each fund offered.

If you put that €200,000 into an ETF fund with a 1% annual management fee and with stock titles replicating the Dow Jones index, you would have earned €15,900 over the same period, even after deducting the fee. In addition, the sale of such shares is exempt from income tax and levies.

If you compare other years, assuming the same variables and assuming the stock index in question does not generate dividend income, in March 2019 you would have these earnings:

In every year observed, you would have earned more on the stock index even after deducting the 1% management fee. In addition, the table in question does not include the tax and levy burden, which only applies to investing in property. It also does not take into account the time you spend “owning and renting” the property (e.g.: remodeling, tenant, paying bills, etc.) as well as the likely downtime between tenants. All of this makes investing in property even less attractive.

There is an argument that the stock market is volatile, can fall significantly and an investor can lose most of their investment. Of course, this is possible. But even if such a situation arises, the property market will not remain untouched. In other words, if the financial world falls, the whole world falls. And if the whole world falls, so will the property market. However, one cyclical, non-apocalyptic experience has taught us that the real estate market is less volatile even to the downside and reacts differently than the stock market. The Dow Jones index’s low in March 2009 was about 50-55% of its pre-crisis high. For real estate in Bratislava it was up to about 80%.

Today’s time brings not only in business a lot of possibilities what to devote your working and leisure time to. On the other hand, this abundance of options can trap a person in a trap in which he can get stuck. Not only can we get stuck with a multitude of responsibilities that are increasing faster than those that have been successfully completed, but also with a multitude of projects, functions, foreign languages that we cannot successfully complete, perform and learn. And that’s also why (not only because of excel) minimalism won for me. I put my money in a stock index and don’t solve anything. Even though I use a pretty decent human outsourcer, I personally don’t want to deal with furnishing the apartment, the reasons why the tenant couldn’t pay last month’s rent, or whether it’s better to fix the washing machine or buy a new one. That takes time and focus. I apply this approach in our consultancy. We primarily focus on narrowly dynamic and young companies in connection with the legal, tax and accounting set-up of their business, including cross-border expansions. We therefore do not focus on family, criminal or employment law. I don’t want to budget the cost of utilities, I’d rather read the latest court decision and be a better tax lawyer. Unless you’re a genius, you can’t learn 4 languages fantastically. You’ll fall into the trap of not even knowing English properly.

Článok Is it better to invest in a rental property or a stock index? je zobrazený ako prvý na Highgate.