Slovak Republic: Foreign companies set to face new income taxes
Daniel Grigel of Credis Law explores the implications of the CFC tax rules being altered to include individuals
The Slovak Republic will be expanding taxation on income derived from controlled foreign companies (CFCs) to include individuals. The CFC rules implemented in 2019, concerned only controlling companies and not controlling individuals, and this is set to change in 2021.
The purpose of CFC rules for individuals is to ensure that dividends from a CFC are paid out in the Slovak Republic. Includible income from a CFC is a new type of taxable personal income introduced by the CFC rules. Includible income will be the annual income of the CFC, net of the corporate income tax levied in its resident country.
The new taxation rules will apply irrespective of whether an individual has actually received the dividends. The taxation will apply as soon as the individual becomes eligible to receive the dividends from the CFC or even if the CFC decides to re-invest the profits without a distribution to the individual. Determination of the includible income will not take into account any prior losses reported by the CFC.
To avoid double taxation of the same income where there is a chain of controlled companies, the received dividends for which the individual was already taxed as includible income from another CFC will be excluded from the income of the CFC.
Regardless of nationality, an individual who is tax resident in the Slovak Republic and liable to unlimited taxation can be considered a natural person controlling a CFC. This is any individual with a registered permanent address or place of normal residence in the Slovak Republic or whose habitual residence is in the Slovak Republic.
Place of normal residence means any type of accommodation not intended for occasional use and, considering all related circumstances including the individual’s personal and economic ties to the Slovak Republic, it is apparent the individual’s intention is to reside permanently at such place of normal residence. A habitual residence in the Slovak Republic is where an individual is present in the Slovak Republic at least 183 days in a calendar year, whether consecutively or accumulatively spread out over the year (all days, even partial days, count toward the total).
A foreign company controlled by an individual will be a company that is domiciled abroad, where an individual either solely or together with related persons controls the foreign company or has direct or indirect participating interest, voting rights or is entitled to at least 10% of the dividends. At the same time, however, the foreign company must also be tax resident in a country which, for tax purposes, the Slovak Republic deems to be a non-cooperative jurisdiction without a double taxation treaty or where the foreign company’s residence country has an effective income tax rate of less than 10%.
The effective tax rate is calculated as the ratio between the taxes levied on the foreign company in its residence country and its income. For example, if a foreign company is subject in its residence country to a nominal corporate income tax rate of 15% and reports an income of $100,000, but for a variety of reasons only paid $5,000 on this income, the effective tax rate will be $5,000/$100,000 x 100, i.e. 5%, which is lower than the legal 10% minimum required by Slovak law.
There will be several exceptions to the CFC rules; for instance, they will not be applicable where the total amount of includible income of an individual from a CFC does not exceed €100,000 in the respective tax period. However, if the includible income exceeds €100,000, the entire amount (not just the amount in excess of €100,000) will be included in the individual’s tax base in the Slovak Republic.
Where the controlling person of a CFC is an individual as well as a legal entity (i.e. duplication of control of the foreign company), the CFC rules must be applied by the controlling legal entity according to the regime applicable to legal entities, and the CFC rules for individuals will not apply.
The CFC rules of taxation for individuals will apply to the foreign companies they control if their residence country deems the Slovak Republic as a cooperative jurisdiction for tax purposes and the individual can demonstrate that the company does in fact conduct business activities in the given country, and can prove the existence of business premises, activities, staff and equipment.
If an individual has includible income from a CFC that is tax resident in a cooperative jurisdiction, that income will be subject to a special tax rate of 25%. If the individual has includible income from a company that is tax resident in a non-cooperative jurisdiction, the tax rate for that income will be 35%.
Partner, Credis Law