Peter Varga on the challenges of transaction tax at the SKDP conference

Peter Varga from Highgate Group was a speaker at a professional conference organized by the Slovak Chamber of Tax Advisors, which was devoted to the issue of the Financial Transaction Tax Act.

In his contribution, he discussed not only the concept of transaction tax itself and its practical challenges, but also the interpretation of one of the key concepts of the law – “carries on business in the domestic territory”. In his discussion, he outlined a rational approach to the interpretation of this concept, which is essential for the correct determination of tax liability.

The event was also attended by representatives of the Ministry of Finance of the Slovak Republic and the authors of the legislative proposal, which created a space for open professional discussion between practice and law makers.

You can also read Peter Varga’s expert contribution on this topic below.

Interpretation of the term “carries on business in the domestic territory” in the context of the ITA

Act No. 279/2024 Coll. on Financial Transaction Tax raises a number of questions in the professional public. One of the most prominent problems, which affects the very basis of the tax-law relationship, is the formulation of the taxpayer in Section 3 of the ITA, mainly with reference to the term “carries on business in the domestic territory”[1].

The ZDFT does not define this concept and its interpretation is thus left to practice and to some extent also to the guidance of the Ministry of Finance of the Slovak Republic (hereinafter referred to as “MoF SR”), which, however, without the enabling provision in the ZDFT, does not have a sufficient normative dimension[2]. The speed of the adoption of the ZDFT, which was subject only to an abbreviated legislative process, has a significant impact on its quality, and the legislator does not seem to be able to correct the imperfections and errors of the original bill[3] even with the help of amendments[4].

Basic elements of the tax-law relationship – the problem of the ITA and the role of the legislator

Any tax law (including the ITA) must, in accordance with the principle of legality, contain the four basic elements of a tax-law relationship, namely the subject, the object, the tax base and the rate[5]. If any of these elements is absent or unclear, doubts arise as to the legitimacy of the taxation itself.

In the case of the ZDFT, we encounter a problem with the very first element – the tax subject. By introducing the vague term “carries out activities in the domestic territory” without its clear definition, the legislator has created legal uncertainty and unpredictability, which is contrary to the requirement for the rule of law in its material meaning as it is relatively assertively formulated in its decision-making by the Constitutional Court of the Slovak Republic (hereinafter referred to as “theConstitutional Court of the Slovak Republic”)[6]. Moreover, the absence of a definition of this absolutely essential element of the tax-law relationship also plays to the detriment of the State and its public revenues, as it creates room for the administrative courts to rule in favour of the taxpayer even in situations where the alleged purpose of the ZDFT would like to presume the existence of the personal jurisdiction of the ZDFT in the particular case of a foreign person.

The Constitutional Court of the Slovak Republic has repeatedly stated that an insufficiently defined basic element of a tax-law relationship cannot be replaced by interpretation. According to Article 59(2) of the Constitution of the Slovak Republic (hereinafter referred to as the “Constitution of the Slovak Republic”), taxes may be imposed and collected by the public authorities only by law or on the basis of a law, which is done within the legislative process on the basis of a procedure established by law. In its essence, it is a constitutional safeguard, the purpose of which is to prevent the executive from imposing taxes on natural and legal persons on a discretionary basis, with the proviso that the imposition of such obligations is the prerogative of the legislature and can therefore only occur by or pursuant to statute.7 Only when the statutory conditions are met can the determination of the subject matter and scope of taxation be considered legitimate. It is therefore impermissible that the determination of what is to be taxed and withdrawn from the taxpayer’s estate should be determined in any other way outside the legislative power (for example, by the executive power – through the MoF’s guidance on the ZDFT[8]. In such a case, the constitutional principle of separation of powers is violated[9].

Thus, the primary source of normative information must be the ZDFT. Its interpretation in the context of the notion of “carries on business domestically” can be approached in theory by different interpretative methods. The issuance of the Guidance by the MoF immediately after the pressure from the professional public and several months before the recipients of the ZDFT are to make their first tax payments and its very content indicate that it is not easy to interpret this concept, nor is it possible by standard and frequent methods of interpretation, such as grammatical or teleological interpretation. This is all the more so if the interpretative consistency of this concept is not even provided by the MoF itself[10].

Despite this, in our view, it is possible to approach the interpretation of this concept through a combination of logical-systematic interpretation with elements of teleological interpretation in conjunction with the historical development of the creation of the WCT and loyalty to European Union (“EU”) law. The interpretative methodology outlined and described in more detail below will reduce the likelihood of absurd conclusions when interpreting the term “carries on business in the domestic jurisdiction” in concreto [11].

Interpretation of the concept of “carries on business domestically” in the context of seeking to meet the requirements of the substantive rule of law

According to the Explanatory Memorandum to the Amendment to the ZDFT[12] (the “Amendment”), which introduced the term “carries out activities in the domestic territory” into Section 3 of the ZDFT (the “Explanatory Memorandum”), it was only a legislative-technical clarification[13]. In the original version of the ZDFT (i.e. until the adoption of the Amendment) (hereinafter referred to as the “Original Law”), the definition of a taxpayer in Section 3 did not include the term “carries on business in the domestic territory”.

If the legislator intended the Amendment to extend the personal scope of the ZDFT to a new category of taxpayers by adding the attribute “carries on business domestically”, it would be contrary to the principle of expediency and publicity and the principles of legal certainty to do so without a clear explanation and justification. It would also be contrary to Act No 400/2015 Coll. on the drafting of legislation and on the Collection of Laws of the Slovak Republic and on amendments and supplements to certain acts, as amended (hereinafter referred to as the“ZTPP”) (as set out below).

The rational legislator theory and its relevance to the interpretation of the FTAA

That the concept of “carries on business in the domestic territory” does not aspire to create a new category of taxpayers can to some extent be verified and the content of this concept further approached through the theory of rational legislator.

It is a legal-philosophical concept which assumes that the legislator acts logically, systematically and purposefully to achieve just and coherent legal norms. This theory serves as an interpretive tool that allows one to assume that the legislator had a rational intention and did not enact norms that were nonsensical, illogical, or inconsistent with other legal norms[14]. It is interpretation through the rational legislator theory that is helpful where linguistic interpretation or other methods of interpretation are insufficient to remove the ambiguity of a legal norm. In the case of the interpretation of “carries on business domestically,” this theory helps us as follows:

• The concept of a foreign person carrying out activities in the domestic territory cannot cover a wider range of situations than a foreign person with an organisational unit established in the Slovak Republic. If this hypothesis were not valid, the mention of a branch of a foreign person in the definition of a taxpayer in Section 3 of the ITA would be completely redundant, since any foreign person with a branch in the Slovak Republic would fulfil the characteristics of carrying on an activity in the domestic territory.
• At the same time, the Explanatory Memorandum to the Original Act adds the attribute “carrying on business” to the organisational unit. The notion of activity is a concept broader in content than the notion of business. Thus, every business is an activity, but not every activity is a business. It would thus be unnecessary to retain in the definition of a taxpayer in section 3 of the ITA the organisational unit of a foreign person if it is covered by the scope of the feature of carrying on business in the domestic country.

On the basis of the above, it can be concluded that the term “carries out activities in the domestic territory” cannot include a larger set of cases than the set of cases in which a foreign person has an establishment in the Slovak Republic.

Explanatory Memorandum to the Original Law and Rational Interpretation

As the Amendment did not aim to create a new category of taxpayers by introducing the term “carries out activities in the domestic territory”, it is possible (and in principle the only alternative) to base the interpretation of this term on the explanatory memorandum[15] to the Original Act. The latter adds the aforementioned attribute “carrying on business” to the aforementioned foreign person in the context of section 3 of the Original Act.

This suggests that only those foreign persons who are engaged in (qualifying) domestic business should be subject to tax under the ZDFT. Therefore, the legislator in the Original Law addressed relatively correctly in the normative text the need to capture this group of persons through the mention of the organisational unit of a foreign person. At the same time, he may have meant that the degree of activity of a foreign person in terms of doing business in the Slovak Republic must be so strong that it requires the establishment of an organisational unit. This means that doing business in the Slovak Republic through the provision of services from abroad (e.g. by making use of the right of free provision of services under the Treaty on the Functioning of the European Union) is not a sufficient qualifying feature for such a foreign person to be subsumed into the position of a taxpayer within the meaning of the ITA.

And further in line with this reasoning, the introduction of the term “(or) carries on business in the domestic territory” in the Amendment is intended to serve as an anti-avoidance measure for all foreign persons who do business in the Slovak Republic and the degree of their presence in the Slovak Republic is so strong that they should have an established organisational unit or legal entity in the Slovak Republic.

In accordance with the above, it is therefore possible to draw a preliminary conclusion that the term “carries on business domestically” is to be interpreted as referring to those foreign persons who carry on business activities in the territory of the Slovak Republic in a manner that requires the formalisation of such business through an organisational unit or a legal entity, but have not (yet) proceeded to such formalisation (hereinafter referred to as the “Rational Interpretation”). Such a Rational Interpretation has a rational basis and undoubtedly more predictable legal connotations.

Correctness of the Rational Interpretation

Since the subject of tax under the ZDFT for foreign persons is any financial transaction, and thus also those that are not related to the Slovak Republic[16], the broad interpretation put forward by the Guideline of the Ministry of Finance of the Slovak Republic would be in significant contradiction with the principle of territoriality, which is the cornerstone of public law[17]. This confirms the correctness of the reasoning towards the Rational Interpretation.

At the same time, the legitimacy of the Rational Interpretation can be verified:

• through ZoTPP;

• through the fundamental theoretical-legal imperative for norm creation, which requires that norms be capable of compliance. If the legislator wanted to extend the scope of the ZDFT as provided for in the MoF Guidelines also to entities that do not conduct business in the Slovak Republic or conduct business only on the basis of cross-border provision of services, it would further have to be able to deal with, for example, the following practical issues that suggest an objective impossibility for such taxpayers to regulate their behaviour in such a way that they would certainly not violate the ZDFT:

• through the wording of certain exemptions from the subject matter of the tax:

Interpretation of the term “carries on business in the country” in concreto

The interpretation put forward by the Guideline of the Ministry of Finance of the Slovak Republic would very likely encounter constitutional limitations in specific situations.

One of them is the preference for an interpretation, in the context of a substantive understanding of the rule of law, which will ensure the full, or more fully realized, rights of natural and legal persons guaranteed by the Constitution of the Slovak Republic[24].This principle follows directly from the Constitution of the Slovak Republic and is a structural principle of a liberal democratic state, which expresses the priority of the freedom of natural and legal persons over the state[25].

It is a matter and responsibility of the state (legislator), if it wants to introduce and collect a certain tax, to determine the conditions for setting and collecting this tax clearly and definitely (i.e. the notion of carrying out activities in the country). If it fails to do so, it must take into account that, when interpreting the relevant provision, the administrative court will prefer the alternative which does not interfere, or interferes as little as possible, with the taxpayer’s right of property[26][27].

It is unlikely that the legislator would want to proceed with the interpretation of the term “carries on business in the domestic territory” in the way the MoF SR has taken in the MoF SR Guideline. In a dispute over the preferred interpretation, it could easily “pull the short end of the stick” as opposed to the Rational Interpretation. In fact, the MoF Guideline not only goes beyond the ZDFT, but, compared to the Rational Interpretation, it is significantly more absurd, discriminatory, illogical and contrary to the rules on rulemaking on the issue of personal jurisdiction and territoriality.

Conclusion

We are of the view that the interpretation put forward by the MoF Guideline goes beyond the scope of the ZDFT. Such an interpretation leads to more absurd conclusions on the issue of the territorial scope of the ZDFT than the Rational Interpretation, is more discriminatory than the Rational Interpretation, illogical and contrary to the explanatory memorandum of the ZDFT and the ZTPP (i.e. Act No. 400/2015 Coll. on the Creation of Legislation).

In contrast, the Rational Interpretation, which interprets the term “carries out activities in the domestic territory” in such a way that it is intended to capture those foreign persons who carry out business activities in the territory of the Slovak Republic in a manner that requires the formalisation of this business through an organisational unit or a legal entity, but have not (yet) proceeded to such formalisation, is more logical, in accordance with the explanatory memorandum of the ZDFT and the ZoTPP.

[1] § 3(1) ZDFT.

[2] The Guideline of the Ministry of Finance of the SR represents an internal normative act, which is binding only in relation to the authorities performing tax administration, but not in relation to tax subjects or judicial authorities. The Guideline of the MF SR is not a generally binding legal regulation and cannot change or extend the scope of the law itself, the implementation of which it is intended to facilitate. For example, the ruling of the Constitutional Court of the Slovak Republic PL. ÚS 12/01: ” From the basic constitutional principles and specific provisions of the Constitution containing references to statutory regulation it can be deduced that all fundamental social relations that are not directly regulated in the Constitution must be regulated by law. This stems in particular from the democratic nature of law-making and the concept of the principle of separation of powers between the legislative and executive powers in the Slovak Republic. At the same time, it protects the individual against the arbitrariness of the public authorities. The law must be clear about the content, purpose and scope of the executive’s powers. The scope of the minimum legal basis cannot be set in general terms, as it will always vary according to the subject matter of the legislation. The extent to which the legislator makes use of this area of the minimum legal basis depends mainly on how he assesses its necessity, which is variable. In doing so, it is necessary to bear in mind the purpose and meaning of the acts of the executive. In particular, they cover matters which the legislator has regarded as irrelevant in terms of statutory form and has therefore not regulated directly, but which, although regulated by a secondary rule of a delegated authority, are nevertheless necessary or at least appropriate or expedient. Last but not least, there are also matters which are unforeseeable at the time of the adoption of the law, that is to say, matters which may be subject to change, but which are also details of a mainly technical or highly expert nature, etc. “

[3] Text of the ZDFT promulgated in the Collection of Laws on 25.10.2024.

[4] Act No. 354/2024 Coll. , amending Act No. 222/2004 Coll. on value added tax as amended and amending certain acts and Act No. 26/2025 Coll. on amendment and supplementation of certain acts in connection with changes caused by the Building Act

[5] Pauličková A. and Grúň L., Financial law in Slovakia, Eurounion, 2007, 246 s. ISBN 8088984948, p. 62.

[6] “The substantive rule of law is fundamentally different from the formal rule of law, which favours the principle of legality in the narrow sense of” value-free positive law “The essence of the substantive state is to bring into the system of positive law and formal legality the fundamental principles and values on which democratic society is based….”Constitutional Court of the Slovak Republic in its ruling PL. ÚS 17/08.

[7] Judgment of the Constitutional Court of the Slovak Republic, no. k. II. ÚS 362/2019

[8] Guideline of the Ministry of Finance of the Slovak Republic No. MF/008722/2025-77 on the procedure for assessing the taxpayer’s domestic activities, the method of taxation of recharged costs and automated compensation of balances under Act No. 279/2024 Coll. on Financial Transaction Tax and on Amendments and Supplements to Certain Acts, as amended.

[9] Supreme Administrative Court of the Czech Republic, 5Afs/45/2011.

[10] Compare, for example, slide 51 of the presentation of Mr. Tosko Beran and Ms. Ildigo Viraga Milkovic dated 15.01.2025 or 03.02.2025 with the Guideline of the Ministry of Finance of the Slovak Republic on the relationship of a permanent establishment with the fulfillment of the feature “carries out activities in the domestic territory” within the meaning of the ZDFT.

[11] However, the conclusions in specific cases are predetermined by the interpretation put forward by the MoF in the Guideline of the MoF.

[12] Amendment No. 354/2024 Coll.

[13] The recital of the Amendment to this modification of the definition of taxpayer states the following: “As regards points 1 to 4, these are legislative and technical clarifications and changes in relation to the clarification of the existing footnote to reference 1 and in relation to the clarification of the notion of payment account, which is defined in Article 2(9) of Act No 492/2009 Coll. “

[14] HODÁS, M.: Elimination of contradictoriness of norms in application practice and the doctrine of rational legislator, Legal Obzor, 94, 2011, No. 4, pp. 372-375.

[15] Explanatory Memorandum to the Original Act, p. 24.

[16] For example, providers of information services in the field of food delivery, which operate in the Slovak Republic on the basis of the right of free provision of services, would also have to subject financial transactions relating to their business in Australia to the ZDFT.

[17] GERLOCH A.: Theory of Law, 8th updated edition, Prague, Aleš Čeněk, 2021, 352 s., ISBN 9788073808389, p. 69.

[18] This, among other things, is confirmed by the extensive discussion on this topic as well as by the Guideline of the Ministry of Finance of the Slovak Republic itself.

[19] Explanatory Memorandum to the Original Act, p. 24.

[20] Judgment of the Constitutional Court of the Slovak Republic PL. ÚS 14/2014-72, paragraph 77

[21] We assume that the legislator had in mind the payment of insurance premiums to the Social Insurance Institution.

[22] The term “carries on business domestically” would be interpreted in accordance with the Rational Interpretation, whereby in the case of financial transactions in relation to employees, only those where the employees are covered by the social security regime in the Slovak Republic within the meaning of the Regulation would be subject to tax.

[23] Under the Treaty on the Functioning of the EU in conjunction with Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments and ESMA’s (European Securities and Markets Authority) MiFID II Supervisory briefing: supervision of cross-border activities of investment firms of 14. 12. 2022, the main difference between the ZOCP and the PZOCP is the fact of the geographical anchorage of the place of provision of the respective services. While a PZOCP operates from the territory of the country in which it has an established branch, a ZOCP provides services in the territory of the host country (i.e. the Slovak Republic) from its home country.

[24] Judgment of the Constitutional Court of the Slovak Republic, II ÚS 148/06-33, Judgment of the Constitutional Court of the Slovak Republic, I. ÚS 241/07

[25] Supreme Administrative Court of the Czech Republic, 1As 21/2010, 4Afs 68/2015, 2Afs 4/2014, 7Afs 54/2006, 2Afs 16/2011, 5Afs 86/2009, 7Afs 69/2007, 3Afs 106/2017.

[26] Even if such an interpretation would be contrary to the fundamental (structural or other) principles of the tax in question.

[27] Supreme Administrative Court of the Czech Republic, 7Afs 54/2006. 7Afs 301/2016.