An offshore company is not to be understood as a company incorporated and existing in the jurisdiction of one of the Caribbean islands. For example, a critical part of Czech holding companies, which until recently were often set up by Slovak tax advisors in order to avoid capital gains taxation in Slovakia in the event of a successful EXIT, can be considered offshore companies. Even the recent sale of a well-known Slovak IT company was made through an offshore company. This was the Austrian holding company in this case. An offshore company thus does not only include companies from the so-called. tax havens that have been set up for the purpose of reducing the tax liability of the entrepreneur.

An offshore company is any company that is not located in the country of the founder or in the country in which the functions and risks associated with the income generated by the offshore company are actually carried out. An offshore company can thus also be located in the Czech Republic as well as in the British Virgin Islands. Offshore companies are also set up to achieve a degree of anonymity. In the recent past, it was common to hide assets through offshore companies with the legitimate aim of protecting them from various vested interests or violent structures. In South America, but also in Russia or Ukraine, it is still relatively common today for many businessmen to conceal their property in order to protect their lives and the lives of their family members. The disadvantages of property transparency are also experienced by many entrepreneurs in Slovakia thanks to public access to company accounts.

There are relatively many cases where part of the assignment from our client was also to achieve greater anonymity of his property disposition. The reasons may be different. From those illegitimate motives mainly related to criminal activities, it is also the need to protect the entrepreneur and his family from the attention or unreasonable demands of his business partners or employees. Offshore companies are also set up with the intention of avoiding administrative or regulatory restrictions.

In Slovakia, for example, it happens relatively often that the commercial register does not function as the law commands. Filings are also delayed for unreasonably long periods of time, creating a legitimate demand for company formation in other countries. However, does this legitimise the use of a favourable tax regime abroad? Similarly for regulation. If Slovak or European legislation allows entrepreneurs to do business in certain areas (e.g.: securities trader or collective investment fund) only with regulatory difficulties, entrepreneurs look for more flexible offshore solutions.

Slovakia is a small country, which naturally does not have the professional infrastructure and ambition to create a full-fledged legislative framework for cryptocurrencies and related business.

The result is a legally uncertain environment that is uncomfortable, especially for larger projects. This is mainly due to the lack of predictability of the decision-making activities of the relevant Slovak authorities. That is why several Slovak projects in the field of cryptocurrencies and blockchain are considering moving their legal presence abroad. In that case, they create offshore companies.

Is it legal?

Can the state interfere with this freedom and force entrepreneurs to tax profits from abroad in Slovakia?

The establishment of an offshore company in any tax haven is not in itself illegal. However, its subsequent use may become illegal. In practice, fictitious back-to-back supplies of services from tax havens via the Netherlands or the UK to a Slovak company are still relatively common. The entrepreneur is thus able to shift profits from the 21% tax rate bracket (Slovakia) to the 0% tax rate bracket (tax haven).

On the other hand, there are situations where the use of a company based in a 0% tax country may be perfectly legal and legitimate. The fact that a country does not tax corporate profits cannot in itself be problematic.

As can be seen, for example, in the subservices Patent Box and optimization for IT and development companies or Supercomputing for research and development, a 0% effective rate is relatively easy for a taxpayer to achieve even in Slovakia.

However, in a given case, it is necessary to use such an offshore company for legitimate reasons (e.g.: PR, investor’s request, better legal environment, etc.).

Slovakia has gradually adopted a number of statutory amendments to discourage Slovak entrepreneurs from illegitimate use of foreign offshore companies, primarily for tax avoidance purposes. For example :

CFC rules for individuals

The purpose of the rules is to ensure that the individual behind a foreign offshore company taxes the profits of that foreign offshore company. You can see more about this topic, for example, in the video “Is it even worth having an offshore company today? Ak áno, komu a kedy?“. Peter Varga’s criticism of these rules can be found in the article My comments to the MoF (CFC rules for individuals).

CFC rules for legal entities

Probably many taxpayers are completely unaware of the existence of this institute. The purpose of these rules is to ensure that the profits of foreign offshore companies are taxed by a related Slovak company, provided that the involvement of such a foreign offshore company resulted from one or more actions that are not genuine or were carried out for the purpose of obtaining a tax advantage.

35% tax

Certain payments made by a Slovak company abroad are subject to 35% withholding tax in Slovakia. On the other hand, certain dividends, liquidation proceeds or distributions are subject to 35% tax for the Slovak recipient in Slovakia. This is why it is nowadays problematic to “just” use, for example, a company established in the United Arab Emirates.

The place of the actual wiring

Based on the analysis of the place of the actual management of the company, the tax administrator is able to attribute Slovak tax residency to the foreign company despite the fact that the company is legally established and existing under a different legal order.

Final beneficiary

When applying withholding taxes, the tax administrator may check whether the Slovak taxpayer has investigated who is the final recipient of the income paid. The aim is to prevent the use of shell holding companies or other intermediaries.

Transfer pricing

In Slovakia, the perception of transfer pricing is undersized. The OECD Transfer Pricing Directive provides for its use even in situations where the taxpayer would not normally expect it. These include, for example, various internal reorganisations and the transfer of activities from one company to another. Indeed, such activities should be taxed.

Many more

In addition to other technical provisions, laws as well as case law, it is also familiar with substantive instruments. These are different concepts of substantive fairness or abuse of discretion under which a tax administrator may, in certain circumstances, take action against a structure that in no way formally contradicts the language of the tax code.

The analysis of the possibility of using an offshore company in a particular environment for a particular client should not only include tax and accounting elements. It is also necessary to look at the structure from a legal and practical point of view.

Suppose a business wants to take advantage of the tax exemption on the gain from the sale of shares or business interests in Cyprus. If an entrepreneur does not want to invest in a relevant advisor, he can make do with the Internet and his Slovak accountant. He finds out on the internet that Cyprus does not tax these profits by default, he finds a company that will set up a Cypriot company and provide him with a registered office, and a Slovak accountant approves it.

However, if he involves a relevant tax adviser in this structure, he will find that this type of tax optimisation has a broader dimension. For example, the following questions arise:

• Can’t the Slovak tax office consider a Cypriot company as a Slovak company? How to eliminate this risk?
• Are the rules for natural or legal persons not applicable to a Cypriot CFC company?
• Are profits of a Cypriot company from any disposition of shares or stock really not taxable? Aren’t there exceptions?

Counsel brings to the whole context the necessary legal dimension in situations where the written law does not give a clear answer. When interpreting, it uses case law, analysis of various interpretations of law (teleological, grammatical, historical, etc.) as well as philosophy and theory of law, which are necessary to reach in unclear situations. For example, the following topics may be covered:

• If the tax authorities take a different view of the whole structure, has the entrepreneur committed the offence of tax and premium evasion with this structure?
• If a Cypriot company rents some premises, will this be sufficient “substance” for the purposes of Slovak tax law? What is the perspective of EU law in the context of the right of establishment in other EU countries?
• Can the sale of a shareholding through a Cypriot company be considered an abuse of law?

In addition, you also need to have relevant practical experience with tax optimisation. For example, the following aspects may also be involved:

• How much does it cost to set up and maintain such a company?
• What is the trend and what can we expect in the future?
• Is it mandatory to audit the company (which will significantly increase the cost of document administration)?
• Where can I open a bank account?
• Will banks have a problem with revenues that have their source in Slovakia? If so, what might be the consequences?
• How much does it cost to liquidate such a company?

The patent box is a new instrument to support research and development in Slovakia, which makes it possible to exempt revenues from the provision of intangible assets (the so-called licensing revenues) and revenues from the sale of products for the production of which a patent or utility model is used from corporate income tax, up to 50% of these revenues. In other words, if a Slovak company accounts correctly and meets other conditions, it can qualify for the benefit of taxing profits at 10.5% instead of the standard 21%.

The Patent Box thus exempts from income tax up to 50% of the profits that the taxpayer earns from royalties for the grant of a right to use or for use:

• an invention protected by a patent or a technical solution protected by a utility model which results from research and development carried out by the taxpayer;
• a computer program which is the result of development by the taxpayer;

The Patent Box also allows taxpayers to benefit from this exemption from income tax if they derive income from the sale of products which are the result of research and development carried out by the taxpayer and which are wholly or partly based on an invention protected by a patent or a technical solution protected by a utility model.

The taxpayer can achieve an effective tax rate of 10.5% through the Patent Box. As we often combine the Patent Box with theR&D Super Deduction for our clients, the effective tax rate can be 0% for several years.

Let us imagine a situation where an IT firm carries out an experimental development after completion of which it has licensing revenue. Assume that the company will record revenues and expenses as shown in the table below (amounts are in EUR):

The basic prerequisite is to carry out R&D activities and to account for them correctly. Based on our experience, mainly from audits of the accounts of young IT companies, we have observed a number of cases where such companies have incorrectly accounted for software development. Not only does this commit an offence under the Accountancy Act for which they are liable to a fine of up to 2% of the value of their assets, incorrect accounting can also unjustifiably reduce a business’s tax liability and disqualify them from using the Patent Box.

It is therefore essential to account for the Patent Box correctly and to anticipate its use in advance. Moreover, the relevant Patent Box provisions indicate in several places a requirement for the taxpayer to exploit its own research and/or development result. In other words, the Patent Box requires that only employees of the taxpayer are part of the personnel apparatus that produces the relevant intangible R&D results.

Due to the high tax-tax burden on labour, it is naturally more economically advantageous for taxpayers to reach for so called. contractors (i.e. self-employed, sole proprietorships)where the tax and levy burden is significantly lower. In certain circumstances and with well-drafted contracts covering the creation of works and other intangible results, the requirement for employees may be waived. Therefore, if a taxpayer does not work with an attorney who is knowledgeable about Patent Box issues, it may have a negative impact on the use of Patent Box.

The Patent Box should therefore be seen as an instrument whose statutory application affects not only tax law but also accounting and intellectual property law.

This is a very complex topic from both a legal and tax and accounting point of view. It was discussed in detail by Peter Varga at the recent methodological days of the Slovak Chamber of Tax Advisors, where he also lectured on the topic of the Patent Box together with a representative from the Ministry of Finance of the Slovak Republic and where the topic of the use of the so-called “patent box” was also outlined. freelancers(sole traders or trading companies). In certain circumstances, a company may use such outsourcers without reducing its Patent Box tax benefit. However, it needs to adjust its factual and legal position accordingly.

We deal with the topic of Patent Box relatively frequently. We write articles on the topic and give commercial or methodology talks. You can find more information in our articles and media releases or videos and conferences.

Working with our lawyers, we provide the following Patent Box services to our clients:

• bookkeeping and accounting consultancy;
• analysis of the tax calculation and preparation of the relevant accounting documentation for the Patent Box;
• drafting contracts/implementing elements into existing contracts to take advantage of Patent Box and IP protection;
• transactional advice related to Patent Box;
• representation of the client before the tax authorities and courts;
• in cooperation with the Czech technical company RESEA, we also provide a technical audit of the taxpayer’s research and development activities in order to identify whether these activities can be considered research and development activities.

The origins of the Patent Box can be traced back to the 1970s in Ireland. years of the last century. Legislation at the time allowed companies licensing certain forms of intellectual property to reduce their income tax. The concept has been gradually applied by other countries, including France, Luxembourg, Cyprus and the UK. Recently, it was quite common to set up an offshore company in Cyprus, for example, and benefit from a reduced tax rate of 2.5% on income from the use of intellectual property when invoicing within the group.

The Patent Box concept is very popular today legislatively. Everywhere, however, the so-called. nexus principle, which prevents tax abusive practices. As can be seen from the figure below, Slovakia ranks among the progressive countries in this respect.

We have worked on a number of “blochchain based” projects. For example, the following projects:

• the creation of investment funds investing in cryptocurrencies;
• the creation of a decentralised stock exchange;
• regular savings through cryptocurrencies;
• preparation of documentation for the cryptocurrency management service;
• tax advice and tax optimization in the taxation of cryptocurrencies;
• security token offering;
• utility token offering;
• accounting

For more information about our cryptocurrency practice, please visit Highgate Group. Anyway, even R&D activities of programmers in the field of blochchain can in principle qualify for the Patent Box regime.

The crypt area cannot be seen in isolation. Although it often falls outside the standard recognisable world, it is necessary to attribute to it the corresponding legal and tax frameworks.

One such framework is the Patent Box or Supercomputing (R&D Superdeductible).

The taxpayer can achieve an effective tax rate of 0% through the Super Calculation. As we often combine the Super Calculator with the so-called. Patent Box, the effective taxation can thus be below 5%.

Imagine a situation where an IT firm carries out experimental development after completion of which it has licensing revenue. Assume that the company will record revenues and expenses as shown in the table below (amounts are in EUR):

To qualify for the super deduction, the taxpayer must carry out one of the following research and development activities:

• Basic research: this is theoretical or experimental investigation carried out primarily for the purpose of acquiring new knowledge of the basic principles or phenomena of observed facts, not primarily aimed at the application of the results in practice. It is an exploration, without a focused purpose for the final product.
• Applied research: this is also theoretical or experimental research aimed at gaining new knowledge. This examination is primarily focused on achieving a specific outcome. It is thus an investigation carried out to confirm a hypothesis (e.g.: product characteristics).
• Experimental development: is a systematic investigation combining, shaping and using existing knowledge from research and business practice to design a new or sustainably improved product, process or service. This is a very common example, especially with software companies.

In order for a taxpayer’s research and development activity to meet the necessary characteristics, it is important that it has the following elements:

• Novelty – The search for undiscovered structures or relationships, the application of knowledge or technique in a new way, the element of novelty or novelty (within the range of possible information that may be available at the time).
• Creativity – New concepts, not ordinary tasks, respectively. changes and routine activities. New methods developed to perform common tasks are included in the project.
• Uncertainty – Uncertainty in the achievement of results, uncertainty in cost or timing. Project objectives set prior to implementation (in terms of achievability of objectives, how to measure outputs). Achieving the goals themselves.
• Systematicity – To study phenomena and processes according to a definite, theoretically and practically justified plan, deliberately, purposefully and not randomly and improvisationally. Project phasing, milestones, decision-making process, staff matrix of R&D activities, staff qualifications and positions.
• Transferability – Possibilities for transfer of new knowledge, new, deeper understanding of phenomena, relationships, principles with broader meaning, expected benefit, i.e. patent, license, protected design, etc., connection to the larger whole (e.g., other activities of the enterprise).

As legal and economic advisors, we are naturally unable to assess whether a client’s activity meets the characteristics of a research and development activity. Nor should it fall within the client’s remit because of conflicts of interest.

We therefore cooperate with the Czech company RESEA, which specializes only in research and development activities. Its task is to assess whether the case is indeed a research and development activity and to prepare all the necessary technical documentation.

The tax authorities currently have minimal experience with superannuation. They are therefore looking for inspiration in cooperation with the Czech tax administration, which, after so many years, has a relatively rich experience in tax audits and litigation with taxpayers before the courts.

Therefore, in preparing the taxpayer for a potential tax audit, it is important to anticipate and set up the documentation and processes already in the process of implementing the super tax calculation, taking into account the existing practice in the Czech Republic. That is why we cooperate with the Czech company RESEA, which has been working on this issue for almost 15 years.

It is important to note that the procedural position of the taxpayer under the Tax Code is against the taxpayer at the first stage. If the tax administrator raises doubts about the legality of the application of the super deduction, the taxpayer has the burden of proof to prove its claims in the tax return. If the burden of proof is not sustained, it is up to the tax authority to prove otherwise.

In cooperation with our lawyers, we represent clients in a range of tax proceedings, from representation at tax audits to court proceedings where the client must be represented by an attorney.

Thus, in cooperation with us on the supercomputation, the client receives an absolutely comprehensive service from the analysis, through the setup, the tax calculation, to the eventual representation to the European Court of Human Rights.

Complexity:

• The client in cooperation with us on the supercalculation gets an absolutely comprehensive service from the analysis, through the setup, the tax calculation, to the possible representation before the courts, where the client only needs to be represented by a lawyer.

Technical documentation:

• Technical documentation:Supercomputing is also about the amount of formal as well as technical documentation that we comprehensively provide for the client. Above all, the technical documentation must be both transparent and technically robust. The documentation has to be written with the view that it will be read by the tax office one day. Since we have experience with our partners from Czech tax audits, we try to make it defensible at the end of the day.

A broad team:

• A broad team: In cooperation with our Czech partner RESEA we have more than 10 years of experience in supercomputing. We have gained a lot of experience in various technical, science and IT fields. The client thus has a broad team of technical experts with whom it can navigate the defensibility of R&D activities.