In late 2016, the Slovak parliament passed an amendment to the income tax act that introduced several tax-related changes. Along with a reduction in the corporate income tax rate from 22% to 21%, the most important changes concerned taxes on dividends, to be implemented progressively beginning January 1 2017.
While Slovakia is re-introducing dividend tax after more than 12 years, health insurance contributions will no longer be payable on dividends paid out from profits generated for tax periods from January 1 2017 onwards.
In terms of changes in tax legislation, dividends may be divided into two categories: (i) dividends on profits generated after January 1 2017 (new dividends); and, (ii) dividends on profits generated between 2004 and 2016 but paid out after January 1 2017.
The first category concerns dividends paid on profits generated in tax periods beginning after January 1 2017. The amended legislation lays down two different rates for these dividends, either seven percent or 35%. The tax rate is determined according to whether the taxable person is (i) a natural person or legal person; and, (ii) whether the taxable party is resident in a contracting state or a non-contracting state. A contracting state is a state with which the Slovak Republic has concluded a treaty for the avoidance of double taxation or an agreement on the exchange of tax information.
|Lenka Paluchová||Byung Sung Park||Rudolf Sivák|
The seven percent tax rate is applied to dividends paid to natural persons who are tax residents in the Slovak Republic or tax residents in a contracting state. This would apply, for instance, to dividends paid by a company that is a tax resident in Slovakia to a shareholder who is a natural person tax resident in Slovakia or the UK (as a contracting state).
Dividends paid to legal persons are generally not taxed, except where the dividends are paid (i) by a Slovak tax resident to a tax resident of a non-contracting state, or vice versa (ii) by a tax resident of a non-contracting state to a Slovak tax resident. In these cases, even legal persons as recipients of dividends are subject to dividend tax at the rate of 35%. If dividends are paid by a tax resident company in Slovakia to a tax resident of Belize, the dividends are taxed at 35% regardless of whether the latter resident is a legal person or natural person. This is because Slovakia has not concluded a treaty for the avoidance of double taxation or an agreement on exchange of tax information with Belize. The 35% rate is also applicable where the payer of the dividends is a tax resident in a non-contracting state – again, Belize, for example – and the dividends are paid to a tax resident in Slovakia (once again without any differentiation between legal and natural persons).
The amendment reduces the paperwork burden for dividend recipients not resident in Slovakia who receive dividends from a Slovak tax resident. These recipients will not have to file a tax return in Slovakia, as tax on the dividends will be withheld by the Slovak dividend payer. In other words, dividend payers who are tax resident in Slovakia (Slovak companies) will pay dividends to recipients net of taxes.
Since concluded international treaties take precedence over national law, in cases where there is a treaty for the avoidance of double taxation between states, the dividends will be taxed under the regime governed by that agreement, regardless of Slovak legislation.
The second category of dividends, on profits generated between 2004 and 2016 that will be paid out after January 1 2017, is subject to the legislation in effect at the end of 2016. This means that these dividends will not be taxed, but in some cases may be subject to payment of health insurance contributions. For the sake of entirety, dividends on profits generated: (i) between 2004 and 2010 are not subject to any health insurance contributions; (ii) between 2011 and 2012 are subject to health insurance contributions of 10%; and, (iii) between 2013 and 2016 are subject to health insurance contributions of 14%. Health insurance contributions are calculated on the amount of the dividend paid out; in any event, the amount on which these contributions must be paid is capped at €53,000 ($56,000).
Following the adoption of this amended legislation, after January 1 2017 it will be necessary to differentiate between dividend recipient and dividend payer. Tax residents of states with which Slovakia does not have a treaty for the avoidance of double taxation or an agreement on exchange of tax information will be at a substantial disadvantage. If you are unsure as to whether your dividends are subject to taxation, or if you are unsure about which tax rate will be used, please feel free to contact us. We will be pleased to assist you.
Lenka Paluchová, Byung Sung Park and Rudolf Sivák
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