Tax and legal advice and the overall topic of tax is our flagship. Tax advice is embedded in most of our legal advice. It is this unique connection that brings our clients a qualitative comfort and, thanks to synergies (one-stop shop), also saves costs for the consultancy.
We add the essence of tax and legal advice in specific situations to each of our business conferences, including the largest in Slovakia legal and tax conferencewhich we had the honour to organise and lecture at. We comment on this topic in Media, we write articles and lectures or organize training and webinars.
Tax and legal advisory services form the backbone of our advisory revenues. Our advice ranges from simple tax advice on real estate, financial instruments or crypto-assets, through setting up ESOP plans, tax as well as legal company sales, to complex tax-legal advice on, for example, debt securitizations, large loan transactions or investment funds. In the Law Firm of the Year competition, we are the winner in the tax law category for 2023. In the previous years 2020, 2021 and 2022, we were a highly recommended firm in this category. Moreover, we link this advice to accounting, thus creating a unique advisory unit in the country retaining a boutique image.
For example, we help clients in the area of tax and tax-legal advice on the following specific topics:
Under Slovak tax law, not every illegal tax optimisation fulfils the elements of one of the tax offences. Similarly to the identification of what is and what is not lawful in reducing tax or levy liability, the boundaries between criminal and administrative law supervision (Tax optimisation – domestic and foreign options) in the commission of tax offences are not clearly delineated.
Unfortunately, Slovak tax law does not know of many cases where courts or prosecutors have looked in detail at identifying more precise boundaries. From a business point of view, it is not at all comfortable not to be able to foresee the penalty for a tax offence committed. In this context, imprisonment (in conjunction with the penalty of forfeiture of property) is certainly the most serious interference with human integrity.
The case of KTAG Andreja Kiskis a case in which a critical part of Slovak entrepreneurs can see themselves. From the perspective of the requirements of the rule of law, it is not so much the fact that the case may have been a criminal offence of tax and insurance fraud that is problematic, but that the previous practice of tax administrators and law enforcement authorities has not in any way suggested that the criminal threshold has been pushed to this level. The latter affects a huge number of entrepreneurs who are thus ultimately exposed to the potential arbitrariness of the State.
We provide our clients with comprehensive tax advisory and tax optimization services (Tax optimization – domestic and foreign options).
This includes, in addition to technical advice, legal analysis with an emphasis on the analysis of potential criminal risks.
These services are used by clients as standard in the following business process situations:
Example 2: A well-known athlete moves to Monaco and becomes a Monegasque tax resident. However, he spends a large part of the year in Slovakia for various marketing events, sleeping in his Bratislava apartment or in hotels. If he does not pay taxes on his worldwide income in Slovakia, it is
Example 3: An entrepreneur has bought a family car on which he has deducted 100% of the VAT and treats 100% of the depreciation of the car as a tax expense. However, he uses the car exclusively for family transfers. This is
Example 4: An entrepreneur owns two companies. Before the end of the calendar year, preliminary results showed that one company was expected to make a profit of 1 000 and the other a loss of 500. Therefore, the entrepreneur decided to invoice 400 from the loss-making company to the profitable company for marketing services. He thus reduced his tax liability. This is
Example 5: An entrepreneur has set up a company on a Caribbean island with a 0% tax rate and from which he invoices his IT services to Slovak clients. However, the entrepreneur is mainly located in Slovakia when performing the services. These are:
With the rising value of cryptocurrencies, the demand for tax and legal advice related to the taxation of cryptocurrencies and possibly finding legal avenues to reduce tax and levy liability is also naturally increasing.
In the basic setup, individuals who are both tax and levy residents of Slovakia are taxed at a tax rate of 19% and 25% respectively on profits from the sale of cryptocurrencies. At the same time, this profit is also subject to health levies. For legal entities, the tax base is taxed at a 15% or 21% tax rate. However, despite the relatively clear rules, the area of cryptocurrencies is in practice a very complex not only tax but also accounting topic.
For example, we work with clients on:
For more on cryptocurrency taxation, see our articles and videos. You can find them on the Highgate Group website .
Financial instruments include, in addition to securities, derivatives, holdings in collective investment undertakings, financial contracts for differences and, in some cases, cryptocurrencies. The taxation and ‘tax treatment’ of financial instruments is not harmonised and, therefore, the specific level of taxation and, where applicable, the obligation to pay compulsory social or health insurance depends on the type of financial instrument as well as the type of income that accrues to the individual in relation to it.
For corporations, the tax situation is a bit simpler. However, especially with derivatives and derivative cryptocurrencies, the accounting is significantly more difficult.
It is important to note that the topic of accounting and taxation of more complex financial instruments and cryptocurrencies is generally not harmonised in the European Union, and thus countries create their own tax and accounting frameworks.
This has implications especially for smaller countries like Slovakia, which naturally does not have the capacity to comprehensively grasp these issues.
In addition to income tax and levies, VAT also plays a big role in property taxation. The topic is not only of interest to real estate entrepreneurs by default, but also to current non-business individuals who use real estate for the appreciation of their assets.
Cases of individuals buying investment properties are frequent.
Based on our experience, clients are particularly interested in these topics:
We advise clients in structuring their real estate business.
This is not only the case with larger development projects, which we provide as Highgate Groupbut clearly individuals as individual (and smaller) investors also find added value in this advice.
We handle employee stock and the entire ESOP comprehensively from the legal side (we draft and draft the rules for the ESOP) as well as from the accounting and tax-tax side. Thus, the client can receive a comprehensive service under one roof including:
We have been working on this topic for a long time, both by providing services to our clients and by organizing conferences and online trainings on this topic. And since we are still a young company, ESOPs are also of interest to us on a practical level.
The basic problem that we see in Slovakia in relation to ESOP structures is the timing of taxation. The current Income Tax Act provides for the generation of non-cash income – taxation at the time of acquisition of employee shares by the employee. There are even views that this moment is a little earlier in the case of option plans.
In any case, this concept contradicts the basic principle of taxation, which is based on the so-called “tax on the taxpayer”. “ability to pay” of the taxpayer. In other words, the acquisition of employee shares is to be taxed at a point in time when neither the employer nor the employee has cash income on which tax and levies can be paid.
In practice, therefore, there are often situations where an entrepreneur looks for ways to avoid this moment of taxation. Our task in these cases is to look for legal ways to set up the ESOP structure in a particular case in order to divert the moment of taxation to the moment of actually received cash income, possibly to reduce the rate of taxes and levies and also to minimize the risks of a possible tax audit. Finding a legal and tax-efficient structure appears, from our perspective, to be key to the use of ESOP structures.
Based on our experience, it appears that in the opposite case the entrepreneur is choosing between only two options:
“Employing” contractors is a very common phenomenon in startups. Apart from the fact that it may be abusive conduct under the so-called ‘shvarc system’ (Labour law, including the issue of the so-called shvarcsystem ), it may also have negative tax and levy implications in terms of “ESOP taxation”. This is based on the philosophical premise that a taxpayer’s income should be subsumed into the category of activities affected by that income. In critical situations, the acquisition of shares in a company by a contractor may result in income tax and health and social insurance arrears being assessed in the annual tax return.
The ultimate tax and levy impact of the ESOP structure in question will depend on a number of factors such as:
In practice, it is relatively common to see the issuance of tokens as a “stake” representing some value of the platform or company on which the employee or contractor is working. Not necessarily just security tokens, but also utility tokens or some derivative thereof that attracts the potential for capital gains in the future.
The tax-deductible implications of these arrangements will depend on the particular setup of the ESOP structure. For example, the issuance of tokens and their subsequent fate (e.g.: disposition on the secondary market) can also be replicated by a downstream legal “offline” regime. In that case, the tax and levy regime replicates that applied in that parallel legal “offline” world.
For example, a structure where a company issues tokens that are backed by so called. “phantom” contracts and the income from holding tokens thus follows the same tax and the levy regime as foreseen in the relevant treaties. The liquidity of these tokens on the secondary market may not change that.
Cryptocurrencies have brought a new diversity to the legal and tax world and our role as legal, tax and accounting advisors is to be able to attribute relevant and appropriate legal, tax and levy effects to this phenomenon.
We often see that a company first grants or sells options to its employees. Subsequently, after certain conditions are met, the employee can “convert” the option into a real share in the company. In practice, there are also various derivatives of these options, such as:
Since our Income Tax Act does not provide addressable rules in identifying the tax and levy frameworks for these types of ESOP structures, we must look for analogies in foreign legislation and draw on related case law and basic philosophical concepts in tax law when analyzing the tax implications.
The diversity of the tax and levy treatment of employee shares is further enhanced by legal complexity. In a number of ESOP structures, we deal with a variety of “bad leaver” situations that require a more sophisticated approach from a legal and practical standpoint. Relevant tax and levy implications also need to be attributed to this element “under one roof”. In this context, it is necessary to bear in mind the still distorted decision-making practice in Slovakia. On the one hand, there is a kind of protective role for judges in employment disputes, which disadvantages employers; on the other hand, there is an element of time and cost.
Therefore, “bad leaver” situations need to be prepared for preemptively in a clear, straightforward and practically enforceable language and manner.
For more information on employee events and examples from practice, please visit our Highgate Group page .
In the area of employment of “contractors” we provide our clients with:
Highgate Group is a tax and accounting company and law firm. In one place our client can meet a payroll accountant as well as a lawyer who deals with employment law. On the basis of inquiries from our clients, we find that such a concept represents unquestionable added value not only for our clients, but also for our colleagues. They can thus seek professional support within the office.
Such a concept must undoubtedly also mean a more comfortable position for clients as recipients of payroll accounting services. In practice, we see situations where accountants build legal information and awareness by searching for information on the internet. This information may be misinterpreted and may not even agree with the current case law of the courts.
Our clients have the opportunity to use several templates of legal documents prepared by our law firm Highgate Group free of charge. Clients can use templates of employment contracts, termination agreements, cooperation agreements, etc.
Given the significant differences between standard employment and employment as a “trade”, this topic is relevant for almost every client. We look at it not only from a tax and levy point of view, but also from a legal point of view as well as with regard to social insurance benefits.
Suppose an employer has an employee who is paid a gross salary of EUR 2 000. Suppose they agree that the employee will set up a business and invoice the employer for his work, with aninvoice amount of EUR 2 000.
Suppose:
What are the tax and levy implications for both legal forms? The table is based on the current tax and levy situation in force in the second half of 2021.
| EMPLOYEE | ENTREPRENEUR | |
|---|---|---|
| Gross wage | EUR 2 000 | – |
| Employer costs | EUR 2 704 | EUR 2 000 |
| Health levies | 268 EUR | 76 EUR |
| Social contributions | 704 EUR | 181 EUR |
| Income tax | 211 EUR | 15 EUR |
| Net amount | EUR 1 521 | 1 728 EUR |
| Employer’s tax shield | 568 EUR | 420 EUR |
| Employer costs | 2 136 EUR | 1 580 EUR |
The financial differences between the two forms of ’employment’ are thus significant not only from the employer’s point of view, but also from the ’employee’s’ point of view. However, if the employee as a sole trader is in the so-called. levy holidays, the financial difference would be even more significant:
| EMPLOYEE | ENTREPRENEUR | |
|---|---|---|
| Gross wage | EUR 2 000 | – |
| Employer costs | EUR 2 704 | EUR 2 000 |
| Health levies | 268 EUR | 76 EUR |
| Social contributions | 704 EUR | 0 EUR |
| Income tax | 211 EUR | 52 EUR |
| Net amount | EUR 1 521 | EUR 1 872 |
| Employer’s tax shield | 568 EUR | 420 EUR |
| Employer costs | 2 136 EUR | 1 580 EUR |
However, a completely different tax-tax situation arises if the contractor cooperates with the company through its legal entity. In such a case, there are other aspects that come into play that can significantly adjust the resulting savings figure.
It is not possible to look at the benefits of ‘trade’ employment in isolation through the lens of the above tables alone. The complex picture is also completed by the effect onsocial insurance benefits , the amount of which varies depending on a number of circumstances, including the legal form under which the individual carries out gainful employment.
The situation is also different for social security benefits for contractors who provide their services through a legal person.
The basic condition for entitlement to maternity pay is that the person has been insured for at least 270 days in the last two years before giving birth. If the sole trader is in the so-called. is not paying social security contributions as a voluntary insured person, he or she may not be entitled to maternity pay. The amount of the maternity allowance is normally 75% of the so-called. the daily assessment base. The daily assessment base is derived from the average of the assessment bases in the so-called. crucial period. The decisive period varies depending on the circumstances of the case. To simplify, the amount of maternity pay for a self-employed person depends on how much and when the self-employed person contributed to social insurance. However, it is precisely in the case of maternity allowance for sole traders that the Social Insurance Act allows for flexibility to reach a situation where the sole trader receives the maximum maternity allowance. The maximum maternity allowance for 31-day months is slowly approaching EUR 2 000 each year. For more information, please arrange personal consultation with Peter Varga. Our accounting clients enjoy a 50% discount.
Generally, a tradesperson may be found unfit for work in the event of illness, accident or isolation/quarantine. The standard amount of sickness benefit is based on the tradesman’s social insurance contributions as well as the type of sickness absence (the amount may be different for pandemic sickness absence).
If the self-employed person meets the conditions for sickness benefit (e.g. he/she is a social security contributor or is in the so-called protection period), the amount of sickness benefit is similar to that for employees, i. e.:
The amount of the daily assessment depends on a number of factors. However, in general, sole traders using flat-rate expenses pay social contributions on lower assessment bases. This also has an impact on the calculation of the daily assessment base. It should also be taken into account that a self-employed person cannot estimate the amount of sickness benefit in advance to the same extent as he or she can do for maternity pay.
Nursing care became an important social supplement during the pandemic and school closures. It helped not only the employees/employers but also the employers themselves in terms of cash-flow to get through the difficult pandemic period of a suspended economy.
A self-employed person is normally entitled to sick pay as long as he or she pays social security contributions or is in the so-called. the protection period. The amount of the sickness benefit also depends on the daily assessment base, which is based on the contributions of the self-employed person to the social system in the so-called. crucial period. The amount of the sickness allowance is 55 % of the daily assessment calculated in this way. Thus, similarly to sickness benefit, the amount of sickness benefit for a sole trader is affected by the lower contribution obligation of sole traders compared to employees.
Although pensions are an abstract topic for many of our clients’ contractors, some of them are still interested in analysing the effects of converting to a trade in terms of future pension income. For pensions, the merit principle is normally applied – the more the insured person contributes to the social system, the higher the pension will be. However, this merit-based system is influenced by a social element, which is mainly represented by pension ceilings, the coefficient for higher pensions as well as the institution of the minimum pension.
For example, if the conversion from employee to sole trader means a lower pension of, say, €200, then with a 15-year pension the total amount is €36,000. And that is the relevant amount. Thus, when converting from employment to “contractors”, we also analyse this aspect for our clients on request.
A self-employed person is entitled to unemployment benefit only if he or she has paid voluntary unemployment insurance for at least two years in the four yearsbefore being registered as a jobseeker. A self-employed person must therefore have paid voluntary unemployment insurance to be eligible for this benefit.
The amount of the benefit is 50 % of the daily assessment base, which is based on the average of the assessment bases in the reference period. The reference period for unemployment benefit is different from that for maternity or sickness benefit, for example. The decisive period for establishing the daily assessment base is the two-year period preceding the date on which entitlement to unemployment benefit accrued.
The Schwarz system is not legal. In addition to the administrative sanction, it is also possible to fulfil the factual essence of one of the tax offences (in particular, tax and insurance premium evasion) in the case of a shvarc system. It is thus important, when setting up relationships with contractors or converting employees to contractors, to understand these steps as a project that also deserves consideration from a legal perspective. However, the aim is not only to minimise the risks associated with state sanctions, but also to set up contractual relations with contractors in such a way that the company is protected (for example, in relation to IP rights).
The case law is relatively diverse. A great inspiration should be sought in the Czech judicial practice, which has produced not only the term “shvarcsystem” but also a relatively extensive system of court decisions that help us in setting up defensible legal and tax-tax frameworks for employment “on a trade”. A partly different tax-tax situation arises if the contractor cooperates with the company through its legal entity.
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
Nivy Tower, Mlynské Nivy 5,
821 09 Bratislava
Slovak Republic
Highgate Accounting
Nivy Tower, Mlynské Nivy 5,
821 09 Bratislava
Slovak Republic
E-mail
info@highgate.sk
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