The decision by foreign investors to invest in a country is guided by many considerations, one of which is the tax environment in the target country. Generally, however, tax considerations guide the final structure of the investment rather than the actual decision to invest. Below are some of the tax issues which foreign investors are frequently concerned with.
Value added taxes
Value added taxes can impact the decision to purchase the shares in a business or merely the assets of a business. Generally, the purchase of assets will be subject to VAT. This is not the case, however, where the whole or a part of the business is being purchased. If VAT is payable, the ability of the purchasing entity to register for VAT to claim back the VAT paid is important. The purchase of shares in an existing entity is exempt from VAT.
Transactions involving land and buildings
Generally, foreigners are not able to own land directly in Slovakia. However, there is no similar restriction for a company with foreign shareholders. A valuation is required to be carried out on land and buildings which are being sold, with special rules for land and buildings being purchased by an entity with foreign owners. Investors should also remember that land transfer tax applies in Slovakia.
As mentioned above, a valuation is required in the case of the purchase of land and buildings. Another important factor when purchasing or transferring assets of a business is the value to be assigned to the other assets of the business in the books of the purchaser. Depending on the structure used to facilitate the transfer, this value may be book value to the seller, or it may be market value. Furthermore, the value for book purposes may not be the same as for tax.
There are currently no tax incentives available in Slovakia. However, it is expected that incentives for strategic investors will be introduced during the year.
Dividends paid by a Slovak company are prima facie subject to withholding tax of 15%, regardless of whether the shareholder is a resident or non-resident. This rate is often reduced by double tax treaties. Given the taxation of local dividends, it is generally inefficient to structure an investment through two or more companies in Slovakia.
When considering how to finance operations in Slovakia, it is important to take into consideration provisions restricting the deductibility of interest. For example, interest deductions will be denied where the loan funds were used for a non-income producing purpose. Also, similar to other jurisdictions, there are restrictions on the amount of debt that can be introduced by a related entity.
Considerations for the seller
It is generally important to consider the tax implications to the seller of any proposed investment. For example, individual shareholders may be in a better tax position if they sell the shares in a company rather than the assets/business of the company. This is because in some circumstances the gain on the sale of those shares will be exempt from income tax.