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TAX CORNER

Statutory representatives have complicated tax position in Slovakia

The recent amendment to the Slovak Commercial Code has introduced many important changes influencing entrepreneurs in Slovakia. The purpose of the amendment was to bring Slovak commercial law into harmony with European Union standards, to increase protection for creditors and minority shareholders in Slovak companies, and to set out the responsibilities of companies' statutory representatives in greater detail.
The statutory representative represents a company to third parties and is responsible for the company's management. The statutory representative is obliged to exercise his/her function with due professional care and in keeping with the company's interests.
The amended Commercial Code stipulates further responsibilities for statutory representatives, for example:

The recent amendment to the Slovak Commercial Code has introduced many important changes influencing entrepreneurs in Slovakia. The purpose of the amendment was to bring Slovak commercial law into harmony with European Union standards, to increase protection for creditors and minority shareholders in Slovak companies, and to set out the responsibilities of companies' statutory representatives in greater detail.

The statutory representative represents a company to third parties and is responsible for the company's management. The statutory representative is obliged to exercise his/her function with due professional care and in keeping with the company's interests.

The amended Commercial Code stipulates further responsibilities for statutory representatives, for example:

* assuring that all data required by the Commercial Code, and changes to these data, are entered in the Commercial Register on time, usually within 30 days;

* entering the full wordings of deeds on a firm's establishment (zakladateľská listina), memorandum of association (spoločenská zmluva) and articles of association (stanovy) in the Collection of Documents by December 31, 2002. In addition, any change in these documents plus their full wordings, financial statements, annual, audit and expert reports (if required) have to be entered in the Collection of Documents within a period set by law, usually within 30 days;

* keeping shareholder lists and minutes from general meetings;

* preparing reports on the development of the business and the property of the company;

* arranging extraordinary meetings of shareholders, upon request by minority shareholders that own at least 5 per cent interest in the company, or if the company's losses exceed one third of its registered capital;

* further duties related to increasing/decreasing the company's basic capital; etc.

If a breach of duties by statutory representatives results in damages, the company or its shareholders can claim compensation from them. The company can free statutory representatives from having to pay damages under conditions set by law. However, the company's creditors can still require damages to be paid by statutory representatives, if it is not possible to satisfy these receivables from the company. This rule does not apply if the statutory representative can prove that he/she acted with due professional care and in good faith.

In addition, if statutory representatives do not arrange to have the required data or documents mentioned above entered in the Commercial Register or Collection of Documents, they can be penalized up to Sk100,000 ($2,200).

Slovak tax law treats the remuneration of statutory representatives as income from dependant activities, which is taxed at a progressive rate from 10-38 per cent.

Surprisingly, this remuneration is not tax deductible for companies. This is illogical and unfair, as there is no doubt that the remuneration of a statutory representative is a business expense for the company. The company, after all, cannot decide not to have a statutory representative! Thus, Slovak tax law actually 'penalizes' Slovak companies for following Slovak commercial law.

On the other hand, the remuneration of any individual acting on behalf of the company based on a power of attorney is fully tax deductible for the company, if further tax law conditions are met and no obligation to the Slovak health care insurance system arises. This is again illogical, since the statutory representative does almost the same things.

Since the remuneration of statutory representatives can be a material cost item, companies often consider alternatives as to how to assure the tax deductibility of their costs.

Slovak tax law has also introduced an "economic employment structure" under which Slovak companies that give instructions to foreign individuals "behave" for tax purposes as employers, and foreign individuals as employees. Under this scenario, a foreign individual does not have any legal relationship with the Slovak company, and no participation in the Slovak health care, unemployment, sickness and pension insurance system should arise in this respect.

The scope of responsibilities of the statutory representative is wide, and it is difficult to differentiate between those activities which fall within the scope of employment / economic employment / entrepreneurship, and those that are determined as the responsibility of the statutory representative.

This presents the tax risk that the tax authorities will argue that services provided by an individual as an employee / economic employee / entrepreneur who is also a statutory representative fall within the scope of his/her responsibilities as a statutory representative. This could lead to reclassification of the remuneration of an employee / economic employee / entrepreneur to the category of remuneration of a statutory representative, which is not tax deductible.

Therefore, a very careful and professional structuring is required to minimize the tax risk in this respect.

Ingrid Jalčová, ACCA, is a chartered accountant with five years of experience with global advisory firms. She invites comments and questions at email: jalcova@gti.sk

Tax Corner is a bi-weekly column that will appear this summer. The next instalment will be on stands on July 15, Vol 8. No 27.

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