Individuals with shell companies in tax havens received the stop sign

Even though the bill has passed the standard legislative process, some changes were submitted literally at the latest possible moment – shortly before the second reading.

(Source: TASR)

Following several delays, the Parliament has approved not only the long awaited Amendment to the Income Tax Act, but has also closed the 2017 loophole in the law which enabled people to shift income to shell companies in controversial jurisdictions. According to Bisnode, 4881 Slovak businesses had direct ownership links to tax havens in 2018.

On 2 December 2020, legislation for the taxation of controlled foreign companies (CFC) was also adopted in relation to individuals. In 2017, the Parliament only dared to introduce CFC rules for legal entities.

Compared to the original proposal, there were several relaxations and the entry coming into force was postponed until 01/01/2022. Accordingly, the rules will be first applied when filing tax returns in 2023 for the previous year.

The aim was to take measures mainly against aggressive oligarchs hiding behind shell companies in various controversial jurisdictions willing to cover corruption schemes, and make them do business through Slovak legal entities, ideally through Slovak holdings.

New rules for tax havens and other changes to income tax Read more 

This aim has been declared by the Finance Minister on several occasions. I have every confidence that his appeal will not go unnoticed. The list of the 50 biggest taxpayers in Slovakia contains only three private companies with exclusively Slovak capital (headed by Eset) and is dominated by German companies.

Compared to CFC rules for legal entities, CFC rules for individuals are stricter (for example they apply to ownership starting with a 10% share as compared to 50%). On the other hand, they apply only if income from the tax havens exceeds €100,000. Unlike the original proposal submitted in the Summer, the list of countries where actual business activities may be subject to tax was narrowed from “third countries” to “non-cooperating countries”.

According to our current legislation, these countries are defined through the White list updated by the Finance Ministry annually on 1 January. Starting next year, the list should also include the countries applying a zero tax rate.

Illustrative comparison of CFC rules in selected countries can be found at the end of the commentary. In terms of scope and criteria, the new Slovak legislation comes closest to the ones in France and Poland.

Where do I personally see the most room for improvement? Undoubtedly in the way of adopting new legislation. Even though the bill has passed the standard legislative process, some changes were submitted literally at the latest possible moment – shortly before the second reading.

That is a dangerous precedent. Despite the sincere efforts of the Finance Ministry officials and employees, tax legislation is unpredictable for entrepreneurs under these circumstances. My plan for the project of pro-business legislation, which I have prepared in close cooperation with the Finance Minister for the year to come, will include the principle that important legislation should be adopted by the Parliament not only once a year with effect from 1 January but also not later than 3 months before the law comes into effect, i.e. in September at the latest.

I am curious as to what the chances are that this suggestion will make it to the second set of pro-business measures.

The author is partner and tax advisor in BMB Partners and also worked on this issue as advisor to the Minister of Finance.

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