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.

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 the area of employment of “contractors” we provide our clients with:

• a financial analysis of the impact of employing “contractors”;
• Comparison of a limited company with a trade for the client’s contractors;
• analysis of the impact on social insurance benefits for specific individuals;
• analysis of the limits and possibilities of employing “contractors” in the light of current case law with regard to the so-called “contractors”. the schvarc system;
• drafting cooperation agreements with regard to:
• eliminating the risks associated with the “shvarcsystem”;
• protecting the company from “bad leaver” situations;
• protection of IP and other company assets.

Employment law at Highgate Group

Highgate Group is a tax and accounting company and law firm. In one place our client can meet a payroll accountant as well as a lawyer who deals with employment law. On the basis of inquiries from our clients, we find that such a concept represents unquestionable added value not only for our clients, but also for our colleagues. They can thus seek professional support within the office.

Such a concept must undoubtedly also mean a more comfortable position for clients as recipients of payroll accounting services. In practice, we see situations where accountants build legal information and awareness by searching for information on the internet. This information may be misinterpreted and may not even agree with the current case law of the courts.

Samples of legal documents for our clients

Our clients have the opportunity to use several templates of legal documents prepared by our law firm Highgate Group free of charge. Clients can use templates of employment contracts, termination agreements, cooperation agreements, etc.

Employment in a “trade”

Given the significant differences between standard employment and employment as a “trade”, this topic is relevant for almost every client. We look at it not only from a tax and levy point of view, but also from a legal point of view as well as with regard to social insurance benefits.

The difference between a trade and employment

Suppose an employer has an employee who is paid a gross salary of EUR 2 000. Suppose they agree that the employee will set up a business and invoice the employer for his work, with aninvoice amount of EUR 2 000.

Suppose:

• the employee has one child under the age of 6 for whom he/she claims a tax bonus;
• the employee does not claim any other tax bonus;
• the employee does not claim the non-taxable part of the tax base for the spouse or any other non-taxable part except for that under Art. 2 of the Income Tax Act;
• as a sole trader, the employee claims flat-rate expenses;
• as a self-employed person, the employee is subject to an annual social insurance settlement;
• as a self-employed person, you don’t pay unemployment insurance;
• the employer has a positive tax base;
• the employer is subject to a 21% tax rate.

What are the tax and levy implications for both legal forms? The table is based on the current tax and levy situation in force in the second half of 2021.

The financial differences between the two forms of ’employment’ are thus significant not only from the employer’s point of view, but also from the ’employee’s’ point of view. However, if the employee as a sole trader is in the so-called. levy holidays, the financial difference would be even more significant:

However, a completely different tax-tax situation arises if the contractor cooperates with the company through its legal entity. In such a case, there are other aspects that come into play that can significantly adjust the resulting savings figure.

Impact of a trade on social insurance benefits

It is not possible to look at the benefits of ‘trade’ employment in isolation through the lens of the above tables alone. The complex picture is also completed by the effect on social insurance benefits, the amount of which varies depending on a number of circumstances, including the legal form under which the individual carries out gainful employment.

The situation is also different for social security benefits for contractors who provide their services through a legal person.

Trade and maternity

The basic condition for entitlement to maternity pay is that the person has been insured for at least 270 days in the last two years before giving birth. If the sole trader is in the so-called. is not paying social security contributions as a voluntary insured person, he or she may not be entitled to maternity pay. The amount of the maternity allowance is normally 75% of the so-called. the daily assessment base. The daily assessment base is derived from the average of the assessment bases in the so-called. crucial period. The decisive period varies depending on the circumstances of the case. To simplify, the amount of maternity pay for a self-employed person depends on how much and when the self-employed person contributed to social insurance. However, it is precisely in the case of maternity allowance for sole traders that the Social Insurance Act allows for flexibility to reach a situation where the sole trader receives the maximum maternity allowance. The maximum maternity allowance for 31-day months is slowly approaching EUR 2 000 each year. For more information, arrange a personal consultation with Peter Varga. Our accounting clients enjoy a 50% discount.

Trade and incapacity for work

In general, a tradesperson may be found unfit for work in the event of illness, accident or isolation/quarantine. The standard amount of sickness benefit is based on the tradesman’s social insurance contributions as well as the type of sickness absence (the amount may be different for pandemic sickness absence).

If the self-employed person meets the conditions for sickness benefit (e.g. he/she is liable for social security contributions or is in the so-called protection period), the amount of sickness benefit is similar to that for employees, namely :

• 25 % of the daily assessment base in the period from 1. to 3. on the day of the PN;
• 55 % of the daily assessment base from 4. on the day of the PN.

The amount of the daily assessment depends on a number of factors. In general, however, sole traders using flat-rate expenses pay social security contributions on lower tax bases. This also has an impact on the calculation of the daily assessment. It should also be taken into account that a self-employed person cannot estimate the amount of sickness benefit in advance to the same extent as he or she can do for maternity pay.

Trade and nursing

Nursing care became an important social supplement during the pandemic and school closures. It helped not only the employees/employers but also the employers themselves in terms of cash-flow to get through the difficult pandemic period of a suspended economy.

A self-employed person is normally entitled to sick pay as long as he or she pays social security contributions or is in the so-called. the protection period. The amount of the sickness benefit also depends on the daily assessment base, which is based on the contributions of the self-employed person to the social system in the so-called. crucial period. The amount of the sickness allowance is 55 % of the daily assessment calculated in this way. Thus, similarly to sickness benefit, the amount of sickness benefit for a sole trader is affected by the lower contribution obligation of sole traders compared to employees.

Trade and pension

Although pensions are an abstract topic for many of our clients’ contractors, some of them are still interested in analysing the effects of converting to a trade in terms of future pension income. For pensions, the merit principle is normally applied – the more the insured person contributes to the social system, the higher the pension will be. However, this merit-based system is influenced by a social element, which is mainly represented by pension ceilings, the coefficient for higher pensions as well as the institution of the minimum pension.

For example, if the conversion from employee to sole trader means a lower pension of, say, €200, then with a 15-year pension the total amount is €36,000. And that is the relevant amount. Thus, when converting from employment to “contractors”, we also analyse this aspect for our clients on request.

Trade and unemployment benefit

A self-employed person is entitled to unemployment benefit only if he or she has paid voluntary unemployment insurance for at least two years in the four years before being registered as a jobseeker. A self-employed person must pay voluntary unemployment insurance to qualify for this benefit.
The amount of the benefit is 50 % of the daily assessment base, which is based on the average of the assessment bases in the reference period. The reference period for unemployment benefit is different from that for maternity or sickness benefit, for example. The decisive period for establishing the daily assessment base is the two-year period preceding the date on which entitlement to unemployment benefit accrued.

Is the “scarc system” legal?

The Schwarz system is not legal. In addition to the administrative sanction, it is also possible to fulfil the factual essence of one of the tax offences (in particular, tax and insurance premium evasion) in the case of a shvarc system. It is thus important, when setting up relationships with contractors or converting employees to contractors, to understand these steps as a project that also deserves consideration from a legal perspective. However, the aim is not only to minimise the risks associated with state sanctions, but also to set up contractual relations with contractors in such a way that the company is protected (for example, in relation to IP rights).

What does the case law of the courts have to say about the “shvarc system”?

The case law is relatively diverse. A great inspiration should be sought in the Czech judicial practice, which has produced not only the term “shvarcsystem” but also a relatively extensive system of court decisions that help us in setting up defensible legal and tax-tax frameworks for employment “on a trade”. A partly different tax-tax situation arises if the contractor cooperates with the company through its legal entity.

Článok Employing freelancers (the “Schwarz system”) and the legal and tax context je zobrazený ako prvý na Highgate.

Taxes and levies

Comparison of the tax and levy burden of a sole trader and an entrepreneur doing business through s. r. o. can be illustrated by the following simplified examples:

Example no. 1: An entrepreneur has set up a company ABC, s. for his business. r. o. The company’s revenues amount to EUR 30,000 per year and no additional costs have been incurred for the business.

In 2020, one of the major changes in the tax burden on entrepreneurs was adopted, which is a reduced 15% income tax rate for entrepreneurs with sales of up to EUR 100,000 per year. A 21% income tax rate applies for entrepreneurs who exceed this annual sales threshold. Since the sales of ABC, s. r. o. do not exceed EUR 100,000 per year, a 15% tax rate applies. Profit ABC, p. r. o. after tax will therefore amount to EUR 25,500.

Net profit ABC, s. r. o. however, may be slightly lower. For smaller s. r. o. it is common practice for a managing director to be employed by a company or to be paid a director’s fee[1], these costs must therefore be deducted from the entrepreneur’s after-tax profit for the calculation of the entrepreneur’s net profit. For simplicity, however, in this example we will assume that the entrepreneur does not pay himself a salary or a director’s fee.

A 7% dividend tax must then be deducted from the amount of the after-tax profit if the entrepreneur earns the profit ABC, s. r. o. will be paid as a dividend and used for private purposes. After deducting the dividend tax, we arrive at EUR 23 715.

If the entrepreneur is not employed alongside the management of his/her company, he/she is obliged to pay a minimum amount of health contributions as a self-employed person, which for 2020 amounts to EUR 70.91. As regards social contributions, he is not obliged to pay them unless he is employed or pays himself a director’s remuneration.

Example no. Example 1: An entrepreneur is a sole trader with sales of EUR 30,000 per year and no other costs incurred in his business.

The legislation for sole traders is currently very generous. For tradesmen who have no costs, resp. It allows so-called flat-rate expenses of 60% of the total income from the business, up to a maximum of EUR 20,000. After deducting the lump-sum expenses, the amount of EUR 30 000 of sales is EUR 12 000, which will serve as the basis for calculating the amount of health, social security and income tax contributions.

When setting up a business, the entrepreneur – self-employed person always initially pays a minimum advance payment for health insurance. Their actual amount is determined by the entrepreneur’s health insurance company in the annual settlement, based on the entrepreneur’s tax return.

We calculate the amount of the entrepreneur’s health levy by dividing EUR 12,000 by 1.486 = approximately EUR 8,000 and applying a 14% health insurance rate. The resulting amount of the entrepreneur’s health insurance contributions will be approximately EUR 1 130.

As regards the calculation of income tax, for simplicity we can state that the entrepreneur has been running a business for 12 months, during which he has paid minimum advance payments for health insurance in the aggregate amount of approximately EUR 800. After deducting this amount from EUR 12,000, we arrive at EUR 11,200, from which the tax-free parts of the tax base can be further applied. From 2020, the most basic tax-free part of the tax base will increase from around EUR 3,800 to EUR 4,400[2]. After deducting the tax-free part of the tax base, we arrive at EUR 6,800, on which income tax will be calculated.

As with the income of an entrepreneur running an LLC, a reduced 15% income tax rate applies to sole traders from 2020. The income tax for a sole trader with sales of EUR 30,000 will therefore be approximately EUR 1,000.

After adding income tax and advance payments for health insurance, we arrive at the final amount of EUR 2,100 as the final tax-tax burden for a sole trader with an income of EUR 30,000. In this case, the effective tax-tax burden of the entrepreneur is well below 10%, which may seem very advantageous and attractive.

What about social contributions? Unlike health levies, social levies are subject to a levy holiday for those starting a business. In practice, a levy holiday means that the sole trader does not pay social security contributions until his annual income exceeds a threshold of around EUR 6,000. As soon as the income of the sole trader for a calendar year exceeds this threshold, from 1. June or from 1. October of the following year[3], the sole trader starts to pay social contributions. The amount of social contributions is calculated by the Social Insurance Institution on the basis of the entrepreneur’s tax return, but unlike health insurance companies, the Social Insurance Institution does not carry out an annual reckoning.

In practice, we often encounter that in order to avoid paying social contributions, entrepreneurs start a business on the basis of a trade, which they subsequently close down at the end of the tax holiday and set up a limited liability company through which they continue their business.

The legal context of the transformation of a business from a trade to a s. r. o.

According to the above examples, a sole proprietorship appears to be the most advantageous choice for an entrepreneur with regard to his tax and levy burden. An even more attractive solution, which a number of entrepreneurs use, is to dissolve the trade and set up a s. r. o. in order to avoid having to pay social security contributions.

However, the change of legal form from a trade to a limited liability company is not explicitly regulated in the Commercial Code. The most elegant solution for transferring a business from a trade to a limited liability company seems to be the use of the institute of sale of the company. When the business is sold, the entire live part of the sole trader’s business is “wrapped up” and, together with all contractual obligations of the sole trader, is transferred to the s.r.o. At the moment of the effectiveness of the contract on the sale of the business, the sole trader ceases to carry on business within his trade and starts doing business through the s.r.o. The advantage of this variant is that the s.r.o. to which the business has been transferred does not have to conclude new contracts, since all contracts concluded by the sole trader until then remain valid.

Despite its apparent simplicity, however, this variant of the solution is hardly ever used in practice. The big disadvantage of this form of transformation from a trade to a s. r. o. is the fact that the sole trader is liable to pay taxes on such a sale of the business. Moreover, as the sale is a purchase and sale between related parties, the price for the sale of the business must be market price and cannot be reduced in order to pay less tax.

In practice, this situation is solved by entrepreneurs who simply cancel their trade and start invoicing from s. r. o. If we look at such a solution from a purely “spreadsheet” perspective, such a transformation from trade to s. r. o. makes absolute sense for entrepreneurs and many of them use such a solution. However, if we put a similar situation in a different context in the optics of larger, multinational companies, we can see that such a solution is not the right one from a legal point of view.

As an example in this context, we can mention the case of our client, a multinational company, which had a subsidiary established in the Slovak Republic. r. o. This p. r. o. performed certain activities in the Slovak Republic for other companies within the group, from which it also generated income. However, from one day to the next, the parent company of the Slovak s. r. o. decided that the following activities of the Slovak s. r. o. will no longer be exercised and its competences will be transferred to a second foreign-based subsidiary within the Group. From one day to the next, the Slovak s. r. o. ceased to generate income that could be taxed in Slovakia (in the same way as a sole trader would close down his trade from one day to the next and stop generating income from it). In order for the entire restructuring to be carried out in accordance with the transfer pricing rules, the Slovak s.r.o. had to be compensated by the foreign company to which the functions and risks were transferred. By analogy, this case can be applied to the termination of “invoicing” in a sole proprietorship and the commencement of invoicing through an LLC.

Liability in the context of a trade vs. with. r. o.

One of the most common planes on which the trade and s. r. o. compare, is the plane of liability. It is perhaps already common knowledge that a sole trader is liable with all his assets and a partner with. r. o. only up to the amount of its outstanding contribution to the company’s share capital – so practically not at all. In practice, however, situations may arise where the extent of liability in s. r. o. will change.

For example, this may be the situation if s. r. o. owes so large an amount to its creditor that the entrepreneur decides that it does not want to continue in business at the level of that s. r. o. go ahead and decide this with. r. o. “drown”. In such a case, the creditor of the company can claim its rights in various ways, either directly from the managing director with. r. o.[4], or even directly from its shareholder[5]. The creditor can assert his rights through a number of institutes, which are enshrined in the Commercial Code, the Bankruptcy and Restructuring Act and the Criminal Code[6].

[1] Remuneration of the managing director, resp. His/her income from employment, especially in small companies, is usually very low, often at the minimum wage.
[2] When applying the non-taxable part of the tax base, various modifications may occur for a particular entrepreneur (e.g. a higher tax base, the entrepreneur is a recipient of an old-age pension, the entrepreneur has a wife who takes care of a child, etc.). For the sake of simplicity, we assume only the basic non-taxable part of the tax base without modifications.
[3] Depending on when the sole trader filed the tax return.
[4] An example is the institute of the liability of the managing director. The managing director of a company is obliged to behave economically towards the company. If the managing director decides from one day to the next to cancel revenue generating contracts or to sell the company’s assets for an unreasonably low amount, such conduct will not be considered to be economical, as a result of which the managing director could be sued by the company’s creditors.
[5] For example, if the shareholder’s actions have caused the company’s bankruptcy to a large extent, including by the fact that the company has ceased to carry out business activities.
[6] For example, the offence of defamation of a creditor under section 239 of the Criminal Code.

Full lecture in video format. The topic is divided into two parts:

Článok The difference between a trade and a Ltd. je zobrazený ako prvý na Highgate.