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Lawyers: FAQ from foreign clients

Experts from law firms in Slovakia answer the most frequent questions of their clients concerning business in Slovakia.

Illustrative stock photo(Source: SME)

Q: Is it better to establish a branch office or a company in Slovakia?
Q: What is the tax system like in Slovakia and what are the tax rates?
Q: What permits or specific conditions are foreign persons required to meet if they want to start operating their business in Slovakia?
Q: What is the state of corruption in Slovakia? What is the law enforcement like?
Q: What are the responsibilities of a statutory body?

Q: Is it better to establish a branch office or a company in Slovakia?
A:
The Slovak Commercial Code allows foreign entities to either open a branch office or to establish a separate (standalone) subsidiary company. The activity of a branch can fully replace the activities of a subsidiary company.

The main difference between a branch and a standalone subsidiary company, and at the same time the main disadvantage of a branch, is that a branch does not constitute a separate legal entity/vehicle. This means that the founder of a branch is liable for all obligations of the branch and that debts of the branch are directly enforceable on its founder. The advantages of a branch are that it is easy to open/establish and to close, and it does not have to build any initial (registered) capital. Usually, a branch is preferred in a situation in which an initial loss is expected, enabling the founder to use this loss for tax purposes abroad.

Andrej Leontiev, partner at Taylor Wessing

Q: What is the tax system like in Slovakia and what are the tax rates?
A:
Compared to western Europe, the overall tax burden is relatively low and the tax system is simple. The corporate income tax rate is 22 percent, yet can be expected to fall to 21 percent from 2017. Dividends (both received and paid) are currently tax exempt. Only dividends received by Slovak individuals are subject to health insurance (14 percent). Health insurance contributions are proposed to be abolished, in exchange for a more favourable 7 percent withholding tax on paid dividends. This tax will, however, not apply if the EU Parent-Subsidiary Directive or double tax treaty exemptions overrule the domestic tax treatment. Dividends received by companies should still remain tax exempt. VAT legislation is fully harmonised with the EU, with the VAT rate at 20 percent. A special levy is paid by certain regulated businesses (such as energy, insurance, banks, railways or airlines) at a rate of 0.363 percent of annual profit (0.4 percent in the banking sector).

Adam Hodon, partner at Kinstellar

Q: What permits or specific conditions are foreign persons required to meet if they want to start operating their business in Slovakia?
A:
In general, according to the Commercial Code, a foreign entity – i.e. natural person with residence outside of Slovakia or a legal person established outside of Slovakia – can do business on Slovak territory under the same conditions and in the same scope as Slovak citizens do. In regard to a foreign natural person as a partner or founder of a legal entity, there are no special conditions applying to them. The situation is different in the case of foreigners acting as a statutory body. Prior to their registration in the Commercial Register, as a person authorised to act on behalf of the legal person, the registration court checks whether this natural person has a valid residence permit in Slovakia. The obligation in the preceding sentence does not apply to European Union citizens or to citizens of OECD member states. According to the Slovak legislation, operating a business is one of the purposes for granting a temporary residence permit.

A foreign natural person has some additional obligations when obtaining a trade licence. According to the Slovak legislation, concerning trade notification, a natural person with residence abroad is required to provide a national authorised person for delivery purposes. A foreign person is also obliged to submit a confirmation of integrity not older than three months (Slovak state authorities provide this confirmation for Slovak nationals).

According to the Commercial Code, a foreign person can do business in Slovakia also as an enterprise of a foreign person or as a branch of a foreign person and both of them are obliged to be registered in the Commercial Register. Natural persons – entrepreneurs with residence in one of the EU member states or in one of the member states of the OECD are exempted from this obligation.

Michaela Pavlinská, junior associate at SOUKENÍK - ŠTRPKA

Q: What is the state of corruption in Slovakia? What is the law enforcement like?
A:
Corruption is a phenomenon that negatively impacts the economy, the business environment in Slovakia and most of all the trust of people in the state bodies and authorities. According to the corruption index published by Transparency International, Slovakia was the fifth worst in corruption perception among the EU countries in 2015. Inhabitants notice the corruption especially in health care, justice and the activities of ministries. This is caused particularly by the unwillingness and incapability of respective authorities to solve the corruption suspicions promoted in the media in a trustworthy way. As a result, the public sees the corrupt behaviour also in cases where there is no real corruption, for example, in cases of losing a court dispute or public competition. Such a perception of corruption, however, has its positives. People are more sensitive to corrupt practices which were considered “ordinary” in the past, like cronyism, and are ready to help in revealing them and achieve the observation of the principles of justice and equality before the law. Unlike in the past, higher transparency can be observed in the state bodies’ actions, and not only in fulfilling their legal duties. When approaching the authorities, real efforts to be helpful towards clients when implementing their projects or solving their problems can be seen.

Though the perception of law enforcement has not been improved by the measures adopted by the current government (changes to the court proceeding, and bankruptcy proceedings), this disability of the state to protect healthy business environment can be an impulse for entrepreneurs to be more responsible and far-sighted regarding their business activities and avoid situations in which they would have to rely on state bodies.

Tomáš Balún, associate at Ružička Csekes

Q: What are the responsibilities of a statutory body?
A:
Generally a statutory body is liable for any damage caused to the company by a violation of duties, unless it can demonstrate its acting with due care and in good faith of a company’s best interests. A breach of duties may result in a damage compensation claim, which can also be raised in certain cases by the creditors of a company. The liability of the statutory body cannot be excluded; any agreements concluded with the statutory body in this respect are invalid. The statutory body is also not liable for execution of a decision of general meeting, provided it is not in breach of the law or corporate documents, while this does not relate to the duty to file for bankruptcy of the company. Proper corporate governance, gathering of information prior to adopting decisions, and clear lines of responsibility, can limit exposure. Specific liability insurance for statutory bodies can add further comfort.

Michal Šimunič, attorney at ČECHOVÁ & PARTNERS

Topic: Frequently asked questions


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