When Can a Slovak Business Owner Take Advantage of Lower Taxes in Another Country?

A Slovak entrepreneur may live in Slovakia, own a Slovak company, and also use a company incorporated abroad alongside it. This arrangement is not prohibited in and of itself, nor is it automatically problematic. The problem arises mainly when the foreign company exists only on paper and has no real business purpose or actual economic substance outside of Slovakia. From a tax perspective, the simple rule that a company’s profits are taxed exclusively in the country where the company is registered does not apply. What matters most is where the business activity is actually carried out, from where the company is managed, where key business decisions are made, and where economic value is actually generated. Slovak tax law therefore considers not only the company’s formal registered office but also the actual substance of its entire structure.

For an individual, the key factors are whether they remain a Slovak tax resident and how they receive income from a foreign company. For a legal entity, the key factors are whether it has its registered office, place of effective management, or a permanent establishment in Slovakia. It is precisely the place of effective management that can lead to a company established abroad being considered a Slovak tax resident under Slovak tax law. In addition, a foreign company may also establish a permanent establishment in Slovakia, particularly if part of its business activities is actually carried out from Slovakia (including from the apartment of its managing director). Special attention must also be paid to payments to or from so-called non-cooperative jurisdictions, for which Slovak tax law may apply a stricter regime, including a 35% tax rate.

Individual

If a Slovak entrepreneur, as a natural person, lives in Slovakia, has a family, a residence, or economic ties here, or spends most of the year here, he or she will generally be a Slovak tax resident. Slovak law considers a natural person to be a taxpayer with unlimited tax liability (i.e., a tax resident) primarily if they have permanent residence or domicile in Slovakia or usually reside here for at least 183 days in a calendar year. Such a taxpayer is taxed in Slovakia on both their income from Slovakia and their foreign income.

In practice, however, a situation of dual tax residency may arise if an entrepreneur meets the criteria for tax residency in more than one country at the same time. In such cases, the resulting tax residency is generally determined in accordance with the applicable double taxation treaty, particularly based on where the individual has a permanent home, the center of vital interests, habitual residence, or nationality.

Not all profits of a foreign company owned by a Slovak individual are automatically considered the individual’s personal income. As long as the profit remains within the foreign company, it remains the company’s profit, and the Slovak individual is not taxed on it as of 2023. For the Slovak owner, taxable income is recognized only when the company actually pays or otherwise provides a benefit to the owner that constitutes income for that individual, such as a dividend.

Dividends from a Foreign Company

If the profit remains with the foreign company, it is considered the profit of that company, not the income of its Slovak owner. For an individual, taxable income generally arises only when the profit or other value from the company is actually paid out to the individual—most often in the form of a dividend—but in practice, other forms of payment also occur (such as the use of a company credit card). For dividends paid from abroad, the Slovak Income Tax Act and the relevant double taxation treaty—if the country is a treaty partner—are subsequently applied. Currently, dividends from profits for tax periods beginning on or after January 1, 2025, are generally taxed at a rate of 7% for Slovak individuals, unless the income is derived from a source in a non-cooperating country.

It is also important to distinguish between the tax paid by a foreign company and the tax paid by a Slovak owner. Corporate income tax paid abroad is a tax on the company itself, not a tax on a Slovak individual. Therefore, it cannot be automatically credited against Slovak dividend tax. Any foreign withholding tax on dividends, which a foreign country collects directly at the time of dividend payment, is treated differently. Whether such a withholding tax is taken into account in Slovakia depends on the relevant double taxation treaty and the provisions of the Slovak Income Tax Act.

If a dividend is paid by a company from a non-cooperative country, the Slovak tax regime may be significantly stricter. In such a case, a 35% tax rate may apply. Therefore, it is not only important to consider the standard tax rate in the foreign country, but also whether that country is considered a cooperative or non-cooperative country under Slovak tax law.

Change in Tax Residency of an Individual

Establishing a foreign company does not automatically mean that a Slovak entrepreneur, as an individual, ceases to be a Slovak tax resident. These are two separate issues, namely:

• Where are the profits of a foreign company taxed?
• Where is the income of its owner, as an individual, taxed?

A Slovak individual may therefore own a foreign company while remaining a Slovak tax resident. An actual change in an individual’s tax residency occurs only when the entrepreneur moves the personal and economic center of his or her life abroad. In practice, the authorities primarily examine where the entrepreneur has family, where they live, where they spend most of the year, from where they manage their business, and where their main economic interests, bank accounts, and assets are located. If the entrepreneur retains most of these ties in Slovakia, it will be difficult to argue that his or her tax residence has actually shifted abroad. However, the assessment is made on a case-by-case basis and depends primarily on the wording of the relevant international treaty with the country in question (if any), the interpretation of individual provisions (which may vary from country to country), and case law.

A Slovak individual therefore ceases to be a Slovak tax resident only when they no longer meet the Slovak criteria for tax residency or, in the case of dual tax residency, it is determined under the applicable double taxation treaty that their tax residency is in another country.

In practice, therefore, it is not enough simply to move formally, establish a company abroad, or obtain a foreign address. What matters most is where a person has their actual home, family, and center of personal and economic interests—where they usually reside and from where they actually manage their business.

Practical steps that can support a change in tax residency include, in particular, relocating one’s residence and family abroad, changing one’s habitual place of residence, severing or weakening ties to Slovakia, relocating economic and social ties abroad, and properly establishing one’s tax status in the new country. However, none of these steps alone automatically guarantees a change in tax residency. The overall factual circumstances are always taken into account.

Legal Entity

The second situation arises when a Slovak entrepreneur does not own a foreign company directly as a natural person, but through a Slovak legal entity. In such a case, it is necessary to assess, in particular, whether the foreign company engages in its own business activities and whether the profit it generates truly corresponds to the functions it performs, the risks it bears, and the economic value it creates. If a foreign company actually conducts business abroad, has its own management, personnel, and assets there, bears risks, and has reasonable business justifications (so-called“substance”), its profits are taxed abroad. If it subsequently pays a dividend to its Slovak parent company, the Slovak tax regime may be favorable. A dividend received from a legal entity in a cooperating country is generally not subject to tax in Slovakia, unless it is a payment that constituted a tax-deductible expense for the paying company. However, in the case of Slovak legal entities, special attention must be paid to the CFC rules—that is, the rules for controlled foreign corporations. These rules may apply when:

• a Slovak taxpayer directly or indirectly owns more than 50% of the share capital, voting rights, or profits;
• The tax actually paid by the foreign company is less than 50% of the tax the company would have paid if it were a Slovak resident.

If these conditions are met, the income of a controlled foreign company derived from transactions that are not genuine and were carried out for the purpose of obtaining a tax advantage may be included in the tax base of a Slovak legal entity.

The place of the actual wiring

For foreign companies, the place of effective management is one of the key tax risks. This is because Slovak law does not consider only the location where a company is formally established or registered in the commercial register to be decisive. A legal entity may be a Slovak tax resident even if it has its place of effective management in Slovakia. The place of effective management is the location where fundamental management and business decisions for the legal entity as a whole are made or received, even if this address is not listed in the commercial register. For entrepreneurs, this means that it is not enough to simply establish a company in a country with a lower tax burden; they must also be able to demonstrate that the company is actually managed from there. If a Slovak entrepreneur resides in Slovakia and makes decisions here—for example, regarding strategies, business contracts, financing, pricing, client selection, and the risks of the foreign company—the Slovak tax authority may argue that the foreign company has its place of effective management in Slovakia. In such a case, the issue would no longer be limited to the taxation of the Slovak owner’s dividends; rather, the tax authority could argue that the foreign company itself is a Slovak tax resident, and therefore its profits should be taxed in Slovakia.

However, the situation is entirely different for companies that are less demanding in terms of active management. While the theory does use the concept of “place of effective management” even in such cases, but in the context of, for example, investment companies located in a country with a favorable tax regime for capital gains or cryptoassets, the meaning of these terms is associated with an entirely different context. In such a case, it would be much more difficult for the Slovak tax authority to take a static view and overlook the fact that the interpretation should be placed in context. And in many cases, this would allow for much more flexible use of such foreign structures.

Permanent facility

Even though a foreign company is not a Slovak tax resident, it may establish a permanent establishment in Slovakia. Slovak law defines a permanent establishment as a fixed place or facility for conducting business through which a foreign company carries out all or part of its business in Slovakia. This may include, for example, an office, a workplace, or a point of sale. In the case of a one-time activity, the location is considered permanent if the activity exceeds six months within any period of twelve consecutive months. The tax consequence of establishing a permanent establishment is that Slovakia taxes the portion of the foreign company’s profits attributable to the activities carried out through that permanent establishment. In other words, although a company may be formally established and registered abroad, if a certain part of its business is conducted in Slovakia through a permanent establishment, the profits related to this Slovak activity are subject to taxation in Slovakia.

35% tax rate

A particular risk associated with foreign structures involves payments to or from so-called non-cooperative jurisdictions. Slovak tax law applies a stricter regime to such payments, and in certain cases, a 35% tax rate may apply.

This rate may apply, for example, to dividends, interest, royalties, or other income if it is paid to a taxpayer from a non-cooperative country or if it is income from a source in a non-cooperative country. The risk of a 35% tax rate may also arise if the beneficial owner of the income cannot be identified or if the foreign structure is set up in a non-transparent manner.

For a business owner, this means that when selecting a foreign jurisdiction, it is not enough to consider only the local income tax rate. It is equally important to assess whether the country is a cooperating state, whether a double taxation treaty exists, how intercompany payments are taxed, and whether it will be possible to demonstrate a genuine economic rationale for the foreign structure.

Conclusion

A Slovak entrepreneur who continues to live in Slovakia can benefit from lower taxation abroad, particularly if the foreign company is not merely a shell entity but has its own economic significance, genuine business reasons, and actual decision-making outside Slovakia. A foreign address, bank account, or registration in a country with a lower tax rate is not sufficient on its own. The decisive factor is whether the foreign company actually conducts business activities in that country and whether its profits correspond to its actual operations.

In practice, it is always necessary to distinguish between the profit of a foreign company and the income of its Slovak owner. The profit of a foreign company is not automatically considered income for its Slovak owner. As a general rule, the owner is taxed only when the profit or other value from the company is actually paid out to him or her, for example, in the form of a dividend. However, this is not an absolute rule if special rules apply, such as the CFC rules for Slovak legal entities.

In the case of a foreign structure, four questions in particular must be assessed separately: where the entrepreneur, as a natural person, is a tax resident; where the foreign company is a tax resident; whether the foreign company has a permanent establishment in Slovakia; and whether special rules apply, such as the 35% tax rate for non-cooperative jurisdictions, CFC rules, transfer pricing, or general anti-abuse rules.

A more secure offshore structure, therefore, does not rely on formal registration in a low-tax country, but on genuine economic substance, a business rationale, appropriate documentation, and consistent conduct on the part of both the entrepreneur and the foreign company. Tax savings may be a legitimate consequence of an offshore structure, but they should not be the sole or primary reason for the existence of a foreign company if the structure lacks its own business and economic substance.