Tax optimisation – Slovak and foreign possibilities

Even today, not only large multinational giants such as Google, Facebook or Apple, but also small Slovak companies. These even need no offshore companies to save tens of percent a year in taxes or levies in a critical number of cases.
However, not all tax optimisation is legal. The diversity of economic life as well as the complexity of the legal rules create a space in which it is difficult for a layman to know when he or she is in criminal territory in tax optimisation. This is why it is important that tax optimisation is analysed and, where appropriate, proposed not only from a tax and accounting perspective, but also from a legal and practical perspective.

Our tax optimisation services

For our clients, we analyze their business in order to set it up to be more tax and levy efficient. In cooperation with our lawyers and tax advisors, we prepare high-level and more complex tax analyses and opinions for our clients for the purpose of legal tax optimization of their business. In the area of tax optimization we provide for example:

• analysis of domestic (Slovak) options for tax or levy optimisation of entrepreneurs;
• transactional tax and legal advice;
• Advice on choosing the ideal form of business (from the level of Ltd. or trade);
• Advising on setting up local and cross-border tax structures;
• Analysis of the existing domestic or international structure with regard to compliance with relevant Slovak and international legislation;
• practical advice on offshore companies;
• advice on anonymity of ownership;
• advice on transfer pricing.

Examples of tax optimisation

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 evasion; and insurance premiums.

Example 2: A Slovak living in Slovakia sets up a company in the United Arab Emirates from where he invoices his clients for services. The tax in the United Arab Emirates is 0% and this Slovakian associates more than 183 days of the year in Slovakia. Again, no legislation prohibits the establishment and use of this company. So 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 evasion; and insurance premiums.

Example 3: An entrepreneur runs a business through his small IT services company. In order to take advantage of the preferential tax regime for sole traders, he sets up a business through which he invoices his company for marketing services. Thus, he shifts the profit from the company to his trade. Assume that the price for services is market-based. So 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 evasion; and insurance premiums.

Example 4: An IT company has 10 people on its team who work from home or on the premises full time. Of these 10 people, two are permanent and 8 have chosen to work as freelancers in order to have a higher net income. We can consider such optimization 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 evasion; and insurance premiums.

Example 5: A pregnant woman works in the company of a friend. He also owns other companies. In order to increase their maternity leave they agree. that for the last three months he will be employed by his second company, where he will also have a higher salary. Can we consider such a levy optimisation 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 evasion; and insurance premiums.

Is tax optimisation a criminal offence?

Not all tax optimisation is inherently illegal. Unfortunately, the line between what can be considered legal and illegal optimisation is often blurred. There are not many cases in Slovakia that have been analysed in this context from a theoretical point of view.

One of the exceptions is the case of Andrej Kiska‘s KTAG. The essence of this tax dispute was the inclusion of the costs of the presidential election in the company’s tax expenses. This case is not so interesting from the point of view of whether the costs in question can be regarded as tax expenditure.

Its added value lies mainly in the fact that it puts tax optimisation in this context in a criminal context. This is a relatively precedent-setting case in the Slovak tax law. This case shows us how complex, complicated and unpredictable tax law can be.

While aggressive tax optimisation constitutes a tax offence, where the entrepreneur is threatened with a tax penalty and a fine, tax fraud adds a criminal dimension. Unfortunately, economic and legal life is so diverse that it is not always possible to assign a clear place to each economic case in only one of the above sets. And therefore these sets do not intersect at one point = the entrepreneur (and hence his criminal position) is to some extent exposed to the arbitrariness of the decision maker.

Tax optimisation – help from a lawyer

Suppose a business wants to take advantage of a lower tax rate in Hungary. He sets up a company there from where he invoices his Slovak company. It shifts profits from a higher tax bracket to a lower one. If an entrepreneur does not want to invest in a relevant advisor, he can make do with the Internet and his Slovak accountant. He finds out on the internet that the Hungarian tax rate is 9% + local tax (2021 figure), finds a company that will set up the Hungarian company and provide him with a registered office, and a Slovak accountant will post the invoices. However, if he involves a relevant tax adviser in this structure, he will find that this type of first-order tax optimisation has a broader dimension. For example, the following questions arise:

• Can’t the Slovak tax office consider a Hungarian company as a Slovak company? How to eliminate this risk?
• Dividend payments from Hungary are subject to 15% withholding tax in Hungary ? How to eliminate it?
• Probably the rules for controlled foreign companies apply to the entrepreneur’s Slovak company (§ 17h of the Income Tax Act) How to eliminate this risk?

Counsel brings to the whole context the necessary legal dimension in situations where the written law does not give a clear answer. When interpreting, it uses case law, analysis of various interpretations of law (teleological, grammatical, historical, etc.) as well as philosophy and theory of law, which are necessary to reach in unclear situations. For example, the following topics may be covered:

• If the tax authorities take a different view of the whole structure, has the entrepreneur committed the offence of tax and premium evasion with this structure?
• Since the so-called. The CFC rules (Section 51h of the Income Tax Act) apply to foreign companies whose effective tax rate is less than 10% (one of the conditions), do Hungarian companies also fall within this framework, or can Hungarian local taxes be considered relevant for the purposes of the CFC rules?
• If the tax authority requires the business to have a relevant presence in Hungary (i.e. premises, employees, etc.), is this in line with the EU’s fundamental right of establishment in another country? Can I rely on this right in structuring? To what extent does it protect me? Do I really need to have rented premises in Hungary?

In addition, you also need to have relevant practical experience with tax optimization .
Especially when using foreign companies, an entrepreneur needs to know in advance what the practice of banks is, for example, to what extent the exchange of information works, or how many administrative and financial pitfalls can be expected (i.e. mandatory audits, AML procedures, onboarding on foreign crypto-exchanges, etc.).

V Highgate Grouptherefore, we combine all elements into one coherent service. This is the essence of linking law, tax and accounting under one roof.However, our task is also to cultivate the Slovak business environment. Indeed, there are still elements of the early capitalist period, manifested, for example, in a very aggressive perception of the opportunities for tax optimisation. If we are to foster a sense of the rule of law and social responsibility in society, our role as a leader in tax law in Slovakia simply has to be to point out the legal limits.Tax optimisation has to be legal, it has to be based on relevant economic and legal motives, and it has to be authentic.

Tax law is complicated

The Tax Act The Income Tax Act today contains approximately 100,000 words. This is about three times more than in 2004, when the great “Mikloš” tax reform came into force. While the number of words in the law may seem like a meaningless statistic at first glance, the more complicated the income tax law is, the more opportunities for tax optimisation it can provide. And that is why they know how to optimize even “one-person plots”.

Tax optimisation must be honest

Just like Google search indexing, tax optimization today must be honest, real, and believable enough to be successful. Even if an agency achieves temporary success by applying a new, unnatural way to improve a website’s search ranking, it’s likely that it’s only temporary and Google will get over it.

The same in taxes. It is not possible to rely on the current practice of financial administration, for example, to analyse more complex operations and structures. The statute of limitations is as long as 10 years in some cases. This also applies to cryptocurrencies. Society is gradually limiting itself to absolute transparency, and therefore tax optimization today must be built on solid foundations in order to qualify for the set of legal and legitimate tax optimization.

So if this trend of arming the financial administration continues, it may catch up with the taxpayer in a few years.

Tax optimisation and foreign options

If you do business across borders, the possibilities for optimisation expand. Never in history has the physical movement of people and goods been as easy as it is today. In the same way, it has never been easier to provide services from one end of the world to a customer located on the other side of the world. In the world, borders are blurring, distances are becoming relative and many business opportunities are becoming more and more real. The open world thus brings opportunities to exploit countries’ tax advantages to optimise taxes, the flow of finance and asset protection.

However, international tax rules and regulation are constantly changing, with increasing globalisation complicating the taxation of both cross-border and domestic operations. Detailed knowledge of this regulation enables us to design and implement efficient and effective tax structures for our clients in cooperation with our foreign partners that meet current regulatory requirements.