The new amendment to Slovakia’s VAT Act inter alia complicates the transfers of shares in limited liability companies.
Due to protracted problems with its budget deficit, the new Slovak government decided to pass an amendment to the VAT Act (“VAT Amendment”) which should take effect on 1 October 2012 and is aimed at eliminating fraudulent actions damaging VAT collection. This new piece of legislation is quite far-reaching and touches not only the field of tax law, but also corporate law and criminal law.
Corporate Law Aspects
Setting up a limited liability company
The VAT Amendment changes the provisions of the Slovak Commercial Code in such a way that it shall be required for the founder of a limited liability company – the Slovak analogy to GmbH - to be a person having no tax arrears. Prior to filing an application for the registration of a limited liability company (“LTD”), the founder - including a foreign one - must ask the Slovak tax administration authority for the issuance of a written consent. The written consent shall be issued within three working days if the founder has no tax arrears (apart from very minor ones).
Transfers and divisions of business shares
The same written consent from the tax administration authority shall be required in those cases in which a business share to which at least 50 % of all votes pertain (“majority business share”) is to be transferred and/or divided. This written consent shall be required with respect to both the transferee and the transferor of the majority business share. Without obtaining written consent from the tax administration authority, a majority share transfer cannot be registered in the commercial register and thus cannot take effect.
Transfers and/or divisions of the majority business share due to e.g. a merger or division are released from the duty of obtaining such a written consent. It is worth noting that the duty to obtain written consent from the tax administration authority does not apply to a foreign transferor or a foreign transferee of a business share. In those cases when the above-mentioned duty does not apply, it shall be necessary to enclose to the application for the registration of a share transfer a written declaration of the transferor and the transferee that they are released from the said duty.
VAT Law Aspects
Collateral for VAT
The VAT Amendment introduces new provisions on collateral for VAT arrears. When applying for VAT registration, the applicant is under certain conditions obliged to provide collateral, either as a financial deposit or as an unconditional bank guarantee, for a period of 12 months. The collateral requirement applies inter alia also to a person performing just preparatory activities, i.e. a new market entrant. The amount of the collateral will be determined by the tax office individually for each applicant (with a cap of EUR 500,000). Failing to provide the collateral for VAT in full amount will cause the rejection of the application for VAT registration. The collateral (or a part of it) that is not used for the settlement of tax arrears during 12 months as of the provision thereof shall be returned to the applicant.
Guarantee for VAT, cancellation of registration
The VAT Amendment introduces the obligation of the payer to settle VAT stipulated on an invoice which has not been paid by the supplier when due, if the payer knew or should have known on reasonable grounds - such as inadequate consideration stated on the invoice or due to being a member of the statutory body of the supplier - that the supplier will not meet his tax duty.
Repeated non-compliance with the duty to submit VAT returns, to pay own tax duty, and various types of passive behavior by the tax payer, such as repeated breaches of the co-operation duties during a tax inspection, will now lead to the cancellation of the tax payer’s registration for VAT by the tax office.
Criminal Law Aspects
The VAT Amendment indirectly also amends the Criminal Code and introduces two new crimes. The new crime of tax fraud was created by a separation of certain misconducts from the too broadly defined crime of non-settlement of tax and focuses on the unlawful application for VAT or excise tax return. The crime of obstructing the tax administration sanctions various types of behavior hindering proper tax administration, e.g. damaging or destroying necessary documents or providing misleading information.
The VAT Amendment, which is aimed at fighting the exploitation of tax law loopholes, unfortunately brings with it inconvenient complications for corporate law transactions with respect to LTDs, which are the most often utilized business vehicles in Slovakia. These complications will need to be taken into account when founding Slovak LTDs, as well as when drafting share purchase agreements and when planning the closing mechanisms in any deals involving Slovak LTDs.