Step by step, the Slovak tax system has become less business friendly. The planned reintroduction of a dividend tax and other changes to the tax code, shall place an additional burden on entrepreneurs.
Business-friendly tax system eroded by financial crisis
Slovakia introduced a flat-rate income tax in 2004. At that time, a revolutionary tax re-form, along with other factors led to an inflow of foreign investment and record economic growth. One of the essential pillars of the Slovak tax system was the principle that profit is taxed only once, at the level of the company that earned the profit. The subsequent distribution of profit to the company’s partners or shareholders in the form of a share in profit or dividend (“dividend“) was not subject to an income tax, as this payment was made from already taxed profit.
The financial crisis in 2008 led to a loss of tax revenue, in response to which the Slovak government began adjusting the country’s tax system. First came an increase to the corporate income tax rate, then reductions to the amount of tax-deductible items. In 2011, the government introduced something known as the health insurance contribution from dividend, a kind of hybrid between a tax and mandatory health insurance. A health insurance contribution of 14 % must be deducted from dividends that legal entities pay to a Slovak natural person, and must be remitted to the Slovak insurance company that provides compulsory health insurance to the dividend recipient. However, the health insurance contribution is not calculated from the whole dividend, but only from an amount capped at approximately EUR 50,000.
New package of changes to tax code further tightens the screw
Recently, the Slovak government put forward a package of proposed changes to the tax code that galvanised the entire business community. The package aims not only at in-creasing the tax burden, but also at strengthening the position of the tax authorities in several sensitive areas, such as transfer pricing, transactions with tax havens and VAT returns. Under the proposed changes, the burden of proof in a tax inspection will be par-tially shifted to the taxpayer, the time that the state has to refund excess VAT returns will be extended, and penalties for transfer pricing will be doubled. An increase of the tobacco excise tax is also planned. The special contribution imposed on regulated industries (energy, insurance, pharmaceutical, etc), which was introduced as an interim measure and was supposed to be abolished this year, will continue to apply and will be doubled.
Dividend tax on the horizon
The most surprising part of this package, however, is the planned dividend tax. This tax will be imposed on income from dividends paid by:
- (i) a Slovak commercial company or cooperative and similar foreign legal entity (“foreign legal entity”) to a Slovak natural person;
- (ii) a foreign legal entity from a non-signatory state to a Slovak natural person; and
- (iii) a Slovak commercial company or cooperative to a foreign legal entity from a non-signatory state,
while the term “non-signatory state” includes both typical tax havens as well as various third-world countries.
The dividend tax is supposed to substitute the current health insurance contribution from dividends as of 1 January 2017. Currently, a tax rate of 7 % is proposed (the originally planned 15 % rate was decreased after strong protests from the business community) in the cases mentioned in (i) above and a tax rate of 35 % is proposed in the cases men-tioned in (ii) and (iii) above. An important difference is the fact that the dividend tax should be paid from the full amount of the dividend received, ie the current cap on the health insurance contribution will not apply to the dividend tax. The dividend tax will be deducted not only from dividends, but also from payments to a silent partner, from a set-tlement share payable upon the withdrawal of a partner from a company, and from a share in the company’s liquidation balance.
Impacts on Slovakia’s attractiveness for business
It has become clear that the health insurance contribution from dividends was just a transitory measure leading to the introduction of a fully functional dividend tax. The only good news for businesses is that the implementation of a dividend tax should be com-pensated by a decrease in the corporate income tax rate from 22 % to 21 %. It is ques-tionable, however, whether this will be enough to attract foreign investment in competition with the neighbouring states, which all have a significantly lower corporate income tax rate. Indeed, the proposed changes to the tax system risk decreasing Slovakia’s at-tractiveness for business to the point where the once business-friendly tax environment becomes a thing of the past.
Recently, the Slovak government put forward a package of proposed changes to the tax code that galvanised the entire business community.