Where do we advise?

In tax consulting we place a strong emphasis on innovative companies whose goods or services cross Slovak borders, and therefore the flexibility to use various preferential Slovak or foreign tax regimes is higher. We therefore advise them not only in terms of legal and tax-accounting settings when scaling their business abroad, but also in effectively setting up their overall tax-tax obligations.

In addition, we advise not only on transactions such as (i) company sales, (ii) development projects or (iii) setting up investment structures for smaller or larger investment companies, but also on the tax and tax optimization of standard business and life situations for entrepreneurs (including “sole proprietorship SROs”) or smaller or larger investors (typically the owners of the companies we advise). Thus, we assist clients on the following specific topics, for example:

• How to tax income from securities, derivatives or real estate? What are the legal options to reduce tax?
• How to legally and tax efficiently cash out of a company as a partner? What are the options?
• Is it better to buy an apartment / cottage / securities as an individual or a corporation?
• Is it better to have a sole proprietorship or an LLC? What about social security contributions? Is it possible to invoice to your own company as a sole trader?
• Use of freelancers in business (for more information, see “Employment” of freelancers (Švarc system);
• Scaling business abroad, using foreign companies;
• Is it better to have a sole proprietorship or an LLC? What about social security contributions? Is it possible to invoice to your own company as a sole trader?
• Use of favourable tax regimes for Slovak innovative companies (e.g. Patent Box or Supercomputing);

In addition to its strong professional side, our firm is also distinguished by the fact that its advice is structured to understand the dynamics and context of the business. This is guaranteed by the fact that technical and comprehensive advice in this area is provided by the firm’s partners with extensive business experience (building the Highgate Group), and so an understanding of the practical context can reasonably be expected to a degree that cannot be expected from legal or tax advisers without business experience.

Tax optimisation advice should therefore not only involve a strict “excel” view, but also a comprehensive look at the legal and practical implications. Indeed, tax optimisation cannot be viewed solely through the prism of “setting up a company abroad” and simply taking advantage of a reduced tax rate. It is necessary that any structure (Slovak or foreign):

• had the potential to be vindicated;
• it does not expose legal or natural persons to criminal risks; and
• does not constitute an undue administrative burden.

That is why we also provide our clients with tax optimisation advice in these areas:

• Analysis of existing client structures with respect to current tax regulations and expected changes;
• Analysis of existing client structures with respect to criminal law risks;
• the possibilities of using a foreign company in specific business situations of the client;
• practical advice on setting up and using holding structures and/or foreign companies.

Defensibility of tax optimisation

In general, tax optimisation must be based on real business or legal reasons. It must be sufficiently “honest” to have the potential to be defensible before the tax authorities or the courts. And it is very much the role of the legal and tax adviser to be able to legitimise a particular business scheme with relevant economic and/or legal arguments. Often times a tax-optimisation scheme does not make economic (other than tax) sense at first glance, but the legal reasons for its introduction are its main purpose, and thus the potential for defending such a scheme should be high.

Limits of criminal liability in tax optimisation

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-legal supervision in the commission of tax offences are not clearly delineated.

As long as the tax optimization is only about deciding between LLC or sole proprietorship, it is a legal and legitimate tax optimization. The same is generally true in the case of the sale of a shopping centre, for example, where it is standard practice to decide between selling the company or transferring individual assets in different legal forms. These are legal and legitimate ways of managing the overall tax and levy liability.

However, running 10 companies that are not VAT payers in order to avoid mandatory VAT registration is already aggressive tax optimization. And it can also have criminal connotations in certain circumstances. Even more extreme is the failure to declare income and fabrication of expenses.

Unfortunately, Slovak tax law does not know many cases where courts or prosecutors have dealt in detail with the identification of these boundaries. From a business perspective, it is not at all comfortable not to be able to foresee the penalty for a tax offence. Indeed, a prison sentence (potentially in conjunction with a forfeiture of assets) is surely the most serious interference with human integrity in this context.

The case of Andrej Kiska’s KTAGis 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 premium evasion that is problematic, but the fact that the previous practice of tax administrators and law enforcement authorities did not in any way suggest pushing the criminal threshold to this level. The latter affects a huge number of entrepreneurs who are thus ultimately exposed to the potential arbitrariness of the State.

Examples from practice

Example 1: A firm makes a profit. However, it does not pay the profit to the shareholder as a dividend, but gives it to the shareholder as a gift and thus avoids dividend tax. The legislation does not formally prohibit such action. We can consider it as:

• legal tax optimisation (avoiding tax on dividends);
• illegal tax optimisation, with the only penalty being a tax fine and a fine;
• illegal tax optimisation, which is also a criminal offence of tax and premium evasion.

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

• legal tax optimisation (avoiding Slovak taxes);
• illegal tax optimisation, with the only penalty being a tax fine and a fine;
• illegal tax optimisation, which is also a criminal offence of tax and premium evasion.

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

• legal tax optimisation;
• illegal tax optimisation, with the only penalty being a tax fine and a fine;
• illegal tax optimisation, which is also a criminal offence of tax and premium evasion.

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

• legal tax optimisation;
• illegal tax optimisation, with the only penalty being a tax fine and a fine;
• illegal tax optimisation, which is also a criminal offence of tax and premium evasion.

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:

• legal tax optimisation;
• illegal tax optimisation, with the only penalty being a tax fine and a fine;
• illegal tax optimisation, which is also a criminal offence of tax and premium evasion.

What is our experience?

For example, we have the following experience in tax and levy optimisation:

• Continuous legal and tax advisory services for the business of the most famous foreign digital platform in Slovakia in relation to various innovative business models;
• Continuous legal and tax advisory services for a wide range of Slovak innovative companies in connection with setting up business structure, tax optimization (use of effective tax regimes), cross-border activities, establishment of companies abroad, asset protection, etc;
• Regular legal and tax advice to small (including “sole proprietorships”), medium-sized and larger companies in connection with adjusting their tax burden;
• Comprehensive legal and tax advisory services to a Slovak property development group in connection with its internal reorganisation, including mergers, transfer pricing, establishment of foreign structures, etc;
• Tax advice to a healthcare group in connection with various healthcare VAT regimes, a group reorganisation and day-to-day operational tax implications;
• Tax and regulatory advisory services to a Slovak bank in setting up and creating a new innovative product for early payment of wages, including advising on VAT aspects of such a business model and the possibility of applying the Patent Box preferential tax regime;
• Comprehensive tax and tax advisory services (income tax, VAT, obligations in connection with the establishment of a permanent establishment, payroll advisory services) in connection with the change of the distribution model of a global cosmetics brand;
• Tax advice to an international payment institution on a minor reorganisation of its group;
• Comprehensive legal, regulatory and tax advice on the creation of investor structures such as fund, bond, investment and other structures.