The Government of the Slovak Republic has presented a new package of consolidation measures currently being discussed by the National Council of the Slovak Republic, which includes a draft law introducing a tax on financial transactions. The aim of this proposal is to tax financial transactions of business entities related to their business activities as a priority. According to the explanatory memorandum, the introduction of this tax constitutes a consolidation measure, the implementation of which is intended to contribute to an increase in revenue to the State budget and to the stabilisation of public finances. With any new tax legislation naturally comes a number of initial questions. What is a financial transaction tax anyway? Who will be liable to pay the tax? How will the tax work in practice? The answers to these questions are addressed in this article.
We will also be looking at the FTT at our unique October conference, which focuses on taxation and regulation of cryptos. The use of crypto-assets for payment purposes is becoming more widespread, particularly in light of the comprehensive regulation of crypto-assets brought about by MiCA Regulation. Paradoxically, the FTT may also contribute to the widespread use of cryptoassets for payment purposes.
The Bill[1] introduces a new tax – the financial transaction tax. A financial transaction is defined as “a payment service provided by a payment service provider, carried out on the basis of an order or consent of the taxpayer, or a similar payment service provided by a payment service provider established outside the territory of the Slovak Republic, carried out on the basis of an order or consent of the taxpayer.” In order to understand this definition, it is necessary to clarify the term ‘payment service’. A payment service means, in particular:
(a) the execution of payment operations, including the transfer of funds from or to a payment account held with a payment service provider by means of a payment by credit card or other means of payment and by direct debit,
(b) the execution of payment operations on the loan,
(c) the issuing of a means of payment or the acceptance of a payment transaction; and
(d) remittances.
At the same time, the term payment transaction, which is part of payment services, means in particular:
(a) deposit of funds,
(b) the withdrawal of funds; or
(c) the transfer of funds
on the instruction of or on behalf of the payer or on the instruction of the payee to the payment service provider carried out in the context of the payment services referred to above.
These definitions are taken from the Payment Services Act[2] and cover the full range of different transactions on payment accounts. Specifically, these would financial transactions should be carried out in a so-called transaction account, according to the draft law. Transaction account means a payment account of an entrepreneur on which he/she carries out financial transactions related to the performance of his/her business activity.
The following will be subject to the financial transaction tax:
(a) financial transactions where an amount of funds is debited from the taxpayer’s account (i.e. bank transfers);
(b) the use of a payment card issued to a transaction account for the purpose of carrying out a financial transaction; and
(c) a recharged expense related to the execution of a financial transaction that relates to the taxpayer’s activity carried out in the Slovak Republic.
However, financial transactions representing payment of taxes and levies, purchase of securities by a securities dealer on behalf of a client, financial transactions related to the administration of retirement or supplementary pension savings, purchase of government bonds, exchange activities and payments at the post office, transfers of the taxpayer between his accounts in one bank or cash pooling will not be subject to the tax, provided that the accounts of the members of the group are maintained by the same payment service provider.
According to the draft law, the subject of the tax is not to be a payment transaction made by a payment card, except for a payment transaction that is a withdrawal of funds in cash. However, it is not yet clear what is intended by this exception and how it is compatible with the taxation of financial transactions where an amount of funds is debited from the taxpayer’s account.
At the outset, it is necessary to distinguish between the taxpayer and the taxpayer. The taxpayer is the person whose transaction is to be taxed, i.e. the taxable person. Under the Bill , the taxpayer is the taxpayer of the financial transaction tax:
(a) natural person – entrepreneur,
(b) a legal person, and
(c) an organisational unit of a foreign person
carrying on a business and who is also a customer of the payment service provider.
However, some entities will not be taxpayers, and thus certain entities, such as the Social Insurance Institution, municipalities and local government authorities, and finally budgetary and contributory organisations, will not be subject to the tax on financial transactions.
The payer is the person who is obliged to calculate the tax, collect it from the taxpayer and pay the tax so collected for the relevant tax period to the tax administrator. The taxpayer will generally be the payment service providers (e.g. banks) but in certain circumstances also the taxpayer himself. This will be the case in particular if the taxpayer has opened a payment account with a foreign bank which does not even have an organisational branch in Slovakia or if the taxpayer carries out transactions on a non-transaction account, e.g. on a personal account.
As mentioned above, the taxpayer of the financial transaction tax will also be a natural person – entrepreneur, i.e. a self-employed person. However, the introduction of the financial transaction tax will not directly affect the way in which flat-rate expenses are calculated, nor is it intended in any way to specifically favour or disadvantage self-employed persons who apply flat-rate expenses compared to those who do not. Of course, any withdrawals from a business account or bank transfers entered into by an entrepreneur will be subject to tax, so a self-employed person who has fewer expenses or makes fewer transfers or withdrawals will be less affected by the financial transaction tax.
However, what is not explicit from the proposal is the question whether the tax will not apply to foreign persons. The language of the proposal does not allow the conclusion to be drawn unambiguously that the law should not apply to foreign persons unless they have an establishment in Slovakia. Thus, by defining a taxpayer generally as a natural person – entrepreneur or a legal person (or its organisational unit) in a positive definition without explicitly defining that such a person must have its registered office (or place of effective management) in the territory of the Slovak Republic (or a similar territorial relationship to the Slovak Republic), and at the same time not excluding foreign persons from the content of the definition, the grammatical interpretation requires that foreign persons also be viewed as taxpayers within the meaning of the proposal.
However, we are of the view that such an interpretation would be contrary to the fundamental principles of law-making in the context of the sovereignty of States. Namely, the proposal distinguishes between the taxpayer and the taxpayer. At the same time, in a situation where the payment service provider (as the primary taxpayer) of the taxpayer is not established in Slovakia, the proposal creates a taxpayer out of the taxpayer itself (Article 3(3)(3) of the proposal). If we accept that the taxpayer may also be a foreign person without any territorial relationship with Slovakia, the law would have significant extraterritorial effects. Thus, any entrepreneur, regardless of territoriality, would be subject to the financial transaction tax. And although it is clear that the above interpretation is absurd, the exclusion of such a relationship from the legislation is not supported by the wording of the proposal, but only by the basic principles of the theory of the state and law.
The proposed modification is also supported by the explanatory memorandum, which indirectly indicates that the law is to have a limited personal scope. In particular, it concerns the interpretation of Section 3 of the proposal, where the legislator, in the context of the definition of a taxpayer, describes an entrepreneur, other than a natural person carrying out agricultural production, as having a certain formal (administrative) relationship with Slovakia, without referring to a similar formal relationship in relation to a foreign country. If the legislator did not want to exclude foreign persons from the scope of this law, we see no reason for including this paragraph in the explanatory memorandum.
The currently proposed financial transaction tax rate is 0.4% for bank transfers, up to a maximum of €40 per financial transaction, and 0.8% for cash withdrawals. At the same time, an annual tax of €2 is proposed for the use of a payment card linked to a transaction account.
The originally proposed tax rate was lower, 0.35% for bank transfers and 0.7% for cash withdrawals, so it remains to be seen what the final tax rate will be at the end of the legislative process, also in view of other measures in the consolidation package.
Taxpayers will have to calculate the tax on individual financial transactions, collect it from the taxpayer himself (if the taxpayer is not also the payer) and pay the tax thus collected to the tax administrator no later than the end of the calendar month immediately following the tax period. The tax period should be the calendar month and, in the case of payment card tax, the tax period is the calendar year in which the payment card was used.
In addition to calculating, collecting and remitting the relevant tax, the payer will be obliged to submit to the tax administrator, within the same time limit, a notification of the amount of tax, which will be treated as a tax return. The payer will also be responsible for the correctness of the calculation of the tax, the collection of the tax and the payment of the tax.
The administrative burden on taxpayers is already noticeable at first sight, who, in addition to the above, will also have to keep and maintain records that the tax authorities may request for the purpose of verifying the correctness of the calculation, collection and remittance of the tax.
In practice, the draft law will bring administrative burden both for the payers of this tax (banks, but also the entrepreneurs themselves), but also in the sphere of accounting and taxes, in the accounting itself, but also in the automation of the processes themselves.
In practice, it is now common for small entrepreneurs to have a single personal account in which they hold funds both from their business activities and also their private funds unrelated to their business activities. Under the proposed bill, entrepreneurs will be required to set up a transaction account, the transactions in which, as mentioned above, will be subject to the financial transaction tax. It is proposed that they will have to comply with this obligation by 31.03.2025 at the latest.
Although the draft law does not explicitly state that the transaction account must be a business account, it is likely that the legislator intended to regulate the need for a business account (separate from a personal account). This inaccuracy will either be removed in the legislative process or will only become apparent in practice.
The FTT will cause an additional administrative burden either on the part of the firm itself, or the firm will shift this burden to its accounting department (whether internal or external). The introduction of this tax will thus be faced not only by entrepreneurs (increased costs), accounting software operators (likely to have to incorporate reporting forms and calculation methodologies), but also by the accountants themselves (new form of monthly reporting and additional calendar obligation).
For entrepreneurs (natural persons – entrepreneurs and legal entities) who have their transaction account in banks located in Slovakia, the reporting will be covered by the banks. If the entrepreneur has a transaction account with foreign banks (e.g. Revolut) which do not have an establishment in Slovakia, this burden will fall on the shoulders of the entrepreneur himself. It will be a matter of monthly reporting of bank transactions on the output, on which the tax itself will be calculated according to their volume. Individual transactions will have to be broken down on the basis of their nature and amount: withdrawals from the account, payments for levies (tax, health insurance, social security and others), other payments and then the rate applicable to the transaction. As we are also intensively involved in automation of accounting processes, we can help you in this area as well.
Any legislative change that affects taxpayers’ assets is naturally associated with an attempt to optimise the tax burden or to avoid paying the relevant tax altogether. In this case, it naturally leads to the consideration of cash transactions. This is an option, but for many medium or larger sized businesses it is not an administratively sustainable solution. In addition, a ban on cash payments above EUR 15,000 should also be kept in mind.3 This might only make sense for smaller businesses that do not carry out a large number of transactions in a tax year.
We believe that there will undoubtedly be an increase in cash transactions, but practice will tell to what extent. Crypto-asset payments are also an alternative, in particular so-called “cash payments”. e-money tokens.
Entrepreneurs can try to circumvent the FTT, but any method adopted must be legal, otherwise entrepreneurs may face penalties (ranging from a financial penalty to the threat of criminal prosecution).
The first of the ways in which it will be possible to reduce your exposure to FTT is undoubtedly the use of cash, which we discuss above. We feel that there will undoubtedly be an increase in cash transactions, but to what extent will be seen in practice.
As an alternative to bank transfers, which are subject to the financial transaction tax, crypto-asset payments, in particular the so-called “crypto-asset” payments, may also be considered. e-money tokens.
Finally, entrepreneurs may also seek to transfer their business abroad. However, if, for example, bank transfers in their foreign accounts are related to their business activities in Slovakia, such transfers will still be subject to the financial transaction tax.
If we look abroad, Hungary has a very similar model of a financial transaction tax, where a financial transaction tax was introduced in 2013. The rate of the financial transaction tax on bank transfers is 0.3% with a ceiling of EUR 25 per financial transaction, and from 1 October 2024 this rate will increase to 0.45% with a maximum tax per transaction of EUR 50. The tax rate on cash withdrawals in Hungary is currently 0.6%, rising to 0.9% from 1.10.2024. In addition to Hungary, this tax is also introduced in Peru and Argentina.
According to the current proposal, the Financial Transaction Tax Act should enter into force on 1 January 2025, with the first tax period being April 2025 (except for the flat-rate payment card tax, where the tax period is the calendar year in which the payment card was used).
What the real impact of the financial transaction tax will be remains questionable for the time being, as this tax represents an increased burden on the business environment, which is already struggling with a high tax and tax burden. In addition to the above, the FTT may significantly weaken the competitiveness of Slovak entrepreneurs vis-à-vis foreign entities. As we have already outlined above, a side effect of the FTT may be an increase in the interest of entrepreneurs in crypto-asset payments.
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[1] Available here: https://www.nrsr.sk/web/Default.aspx?sid=zakony/zakon&MasterID=9953
[2] Act No. 492/2009 Coll. on Payment Services and on Amendments and Additions to Certain Acts, as amended.
[3] Section 4 of Act No. 394/2012 Coll. on the restriction of cash payments, as amended.
Law & Tax
Tomas Demo
tomas.demo@highgate.sk
Accounting
Peter Šopinec
peter.sopinec@highgate.sk
Crypto
Peter Varga
peter.varga@highgate.sk
Highgate Law & Tax
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