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Advantages of a Holding or Parent Company in Slovakia

Slovak and European legislation provides several important reasons for registration of legal entities in the Slovak Republic; one of the most important is the use of the Slovak company as a parent holding company for subsidiaries within the EU and outside. The holding company gives an opportunity to minimize taxes, making profit in Slovakia from other countries with minimum tax expenses, or even without any additional taxes.

 

The benefits of holding company registration in Slovakia:

The following text provides examples of how to use the Slovak company as a parent company for tax optimization.

 

No Tax on Dividends

According to the Act 595/2003 Coll. on Income Tax of the Slovak Republic, the object of taxation is not:

"Shares of profits (dividends) paid out of profit of companies or cooperatives to be distributed among persons holding their registered capital or members of statutory or supervisory bodies of such companies or cooperatives... a company or a cooperative is considered also as an equivalent company or cooperative with the registered office abroad."

Income Tax Act implies that the dividends are tax-exempt if the profits are paid to a shareholder, a member of executive body (LLC Chief Executive Officer or Corporate Director) or a member of supervisory body. It is important to note that the Act means that a business entity that pays dividends is also a business entity with the registered office abroad, besides the Act in this context makes no differences between foreign countries, which are also legal entities from other EU member states, as well as, for example, from offshore countries.

Consequently, no matter which company pays dividends to the Slovak shareholder, the Slovak taxpayers do not pay in Slovakia an income tax on dividends that are paid by a company, registered in any country of the world.

At the same time, if the dividends are paid by the Slovak company to its shareholders, members of executive body or members of supervisory body, neither company nor they pay the dividend tax, regardless of their country tax residence and citizenship.

So what advantages does it really give? See this real example for the use of tax exempt dividends in Slovakia.

 

EC Council Directive 2011/96/EU

The full title of the Directive:

"Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States"

However, it is better known as "Parent-Subsidiary Directive".

Parent-Subsidiary Directive was adopted by the EU Council on 30.11.2011 and replaced the Directive 90/435 / EEC then in effect. The Directive applies if the subsidiary company is located in one EU member state and the parent company – in another member state. According to Part A Annex #1 of the Directive, the Slovak parent company must have the following form:

  • akciová spoločnosť = corporation (joint stock company)
  • spoločnosť s ručením obmedzeným = Limited Liability Company, or
  • komanditná spoločnosť = limited partnership.

The legal forms of all legal entities in EU member states are listed in the Annex, and mostly they are LLC and joint stock companies.

One of the conditions of the Directive is that the subsidiary must be a tax resident of the country, where it has its registered office, under applicable law of the same country, and the Slovak company should be a tax resident of Slovakia, according to Slovak legislation. At the same time, none of the companies should be a tax resident of non-EU member state on the basis of an Avoidance of Double Taxation Agreement (DTA) with  non-EU member state.

According to the Article 3, Part 1, paragraphs i), letter a) of Parent-Subsidiary Directive, the parent company is a company that has "minimum holding of 10% in the capital of a company of another EU member state", which becomes a subsidiary. According to the Part 2 Article 3 of the Directive EU member states have the right to:

  1. replace, by means of bilateral agreement, the criterion of a holding in the capital by that of a holding of voting rights;
  2. disapply this Directive to companies of that Member State, which do not maintain for an uninterrupted period of at least 2 years holdings qualifying them as parent companies, or to those of their companies in which a company of another Member State does not maintain such a holding for an uninterrupted period of at least 2 years.

Important guidelines are listed in the Article 5 of the Directive:

"Profits which a subsidiary distributes to its parent company shall be exempt from withholding tax".

According to the Directive, if a company from another EU member state has one of these forms (mostly limited liability company or joint stock company), the Slovak company has one of the indicated Slovak forms, and companies are residents, respectively, of another EU member state both Slovakia and the Slovak company own more than 10% of corporate stock (or the voting right in the case of exceptions), then the dividend tax in another EU member state is not collected and the dividends are transferred to Slovakia to the full extent. If another EU member state limits a dividend tax exemption in its legislation, using a two-year mandatory holdings of shares in subsidiary companies, the dividend tax in that another EU member state will not be collected after two years of the company’s stockholding.

Here you can see what advantages are given to your Slovak company by the Parent-Subsidiary Directive.

 

No Restrictions on the Slovak Companies’ Owners

A great comparative advantage of company’s establishment in Slovakia is that it does not matter a resident or citizen of which country is the founder or the owner of the Slovak company. A citizen of any country or even a company from any country, including offshore jurisdictions, can register a legal entity in Slovakia and become its owner without any geographical limitation.

We have registered companies in Slovakia for the founders from Cyprus, Hong Kong, Panama, Belize, Dominica, the BVI (the British Virgin Islands), the UK, Austria, Germany, the Czech Republic, Hungary, Serbia, Croatia, Lithuania, Latvia, Estonia, Belarus, Ukraine, Russia, Kazakhstan, Kyrgyzstan, Israel, Turkey, China, the USA, Iran (hope we didn't forget to mention anyone).

Taking into consideration the above mentioned tax-exempt dividends, not only the commercial register, but also the Slovak tax authorities do not oppose to the registration of Slovak companies with foreign founders. From a tax point of view, it does not matter who owns the company, as this owner never pays dividend tax in Slovakia.

Below is given a real example of the absence of restrictions on the owners of Slovak legal entities

 

Agreements on the Promotion and Reciprocal Protection of Investments

Agreement on the Promotion and Reciprocal Protection of Investments also called bilateral investment treaties or simply BIT. They are important international treaty documents, and have the form of the standard agreements made between sovereigns of international public law for the purpose of creating a favorable business environment for mutual cooperation development and business initiative stimulation.

The practical result of making the agreement on the promotion and reciprocal protection of investments should be the economic and legal environment development for the promotion of joint ventures establishment, foreign direct and indirect (portfolio) investments. Agreement on the promotion and reciprocal protection of investments is an agreement setting the conditions for individuals and legal entities investment of one state in another state. Most of bilateral investment treaties provide a number of guaranties for investment of entities of one state in another state, such as:

  • promote and create favorable conditions for investors from another contracting state,
  • full and unconditional legal protection of investment from another contracting state,
  • fair and equal treatment,
  • protection against expropriation,
  • prohibition against undefended or discriminatory measures that could impede the investment management, maintenance, use, ownership or disposal,
  • granting the regime of most favored nation, which means creating conditions no less favorable than those that are provided for its own investors or investors from any third state. 

A distinctive feature of many agreements on the promotion and reciprocal protection of investments is that if any dispute between one state and the investor from another state arises and if is not settled through negotiations within a certain period of time, the investor has a right to submit the dispute to international arbitration. For this purpose International Center for Settlement of Investment Disputes, better known as ICSID (from English) most commonly is used.

This means that the prohibition of foreign investor discrimination and the regime of most favored nation give more opportunities for foreign investors for dispute resolution than for domestic investors, as the domestic investor is entitled to petition only the domestic courts, while the foreign investor is entitled to petition straight International Court of Arbitration.

The Slovak Republic has made an agreement on the promotion and reciprocal protection of investments with 50 countries of the world, among which are all important trading partners of Slovakia. For the CIS countries Agreement on the Promotion and Reciprocal Protection of Investments is in force between Slovakia and: the Russian Federation, Ukraine, Belarus, Moldova, Tajikistan, Turkmenistan and Uzbekistan. Agreement with Kazakhstan has been signed but is not yet in force. For those who want to get acquainted with the agreements we give the full version of two agreements:

The specific feature of the agreement between Ukraine and Slovakia is that in the case of any discrepancies, the English language shall prevail, but not the Ukrainian or Slovak language. And, surprisingly, but in such important text, as an international treaty, are differences in the Slovak and Ukrainian texts. Therefore, we show the English version too:

Below you can find the advice on how to protect your property or investment in Russia or Ukraine, using the Slovak company.

 

Examples of Using the Slovak Company as a Parent Company for Tax Optimization

Subsidiaries of the Slovak parent company in the EU 

Supposing that, the Slovak company owns subsidiaries, for example in Germany, France and Austria. These companies have made a profit and now pay income tax according to the law of those states. Afterwards they transfer dividends to the full extent to Slovakia and dividend tax in these third countries will not be collected. The Slovak company receives dividends from these third countries and makes profit for the accounting period too. After filing tax return, General Meeting of the Slovak parent company has decided to pay dividends to shareholders. If the shareholders of the Slovak parent company are the residents of Slovakia, the tax will not be collected.

The transfer of dividends according to indicated scheme and tax-exempt income are shown in the following picture:

TBD 

If the shareholders of the Slovak parent company are not tax residents of Slovakia, the tax is not collected in Slovakia, but the shareholder must be ruled by his residence-country law, and it is possible that he will be required to pay dividend tax here. To avoid this, the company from BVI, for example, may become the owner of the Slovak company. In this case, the tax is not paid neither in Slovakia nor in the BVI.

In this regard, it is worth turning attention to the Commercial Code of the Slovak Republic (Act 513/1991), according to which "Company Members have the right to receive a profit share in the amount corresponding to their redemption shares in the registered capital, unless the memorandum provides otherwise." It is important when, for example, a shareholder of the company is a resident of the country where obligation to pay dividend tax from the Slovak company arose and for whatever reason it is undesirable when absolute or majority owner of the Slovak company is an offshore company. In this case, an offshore company may have, for example, ten percent (10%) stake in the Slovak company. Or even one percent (1%). The law allows the General Meeting to modificate Memorandum of association so timing of dividend payments will be changed in the contract in such way that the dividends will be paid based not on the ratio of redemption shares in the registered capital, but all dividends will be received, for example, by minority shareholder – the company from offshore.

As a result of such Slovak holding company use, dividend tax is not paid by the subsidiaries, for example, in Germany, France and Austria. The tax also is not paid by the parent company in Slovakia. If the shareholders of the Slovak company are tax residents of Slovakia or offshore residents, dividend tax is not paid in Slovakia.

In this regard, please note that for Parent-Subsidiary Directive application the Slovak parent company can’t be established and can’t exist only for the sake of dividends receiving from other EU member states and the transfer of dividends, for example, to an offshore jurisdiction, without any other activity in Slovakia. If the Slovak company will not have any other activity, German tax office, for example, based on previous judicial decisions could suppose that actually this isn’t about the dividend payment within the EU, but about the dividend payment from Germany to offshore. The tax in Germany is collected when the dividends are paid from Germany to offshore. However, this can be easily avoided if the business will be carried on by the Slovak holding parent company too.

To sum up, if, for example, a citizen of the CIS countries will become a company owner in Germany, he is obliged to pay dividend tax in Germany. However, if he transfers his share in the German company to the Slovak company, he will become the owner of the Slovak company, and if a citizen of the CIS will become a tax resident in Slovakia or the Slovak company dividends will be received by an offshore company, dividends from Germany will not be taxed anywhere.

 

Subsidiary of the Slovak Parent Company in the EU - modified 

The Slovak company receives dividends under the previous scheme. As we know, dividend tax is not paid neither in any other EU member states nor in the Slovak holding company.

The Slovak company does not pay dividends to its shareholders, but continues to receive dividends from other EU member states. A few years later, it does not matter in five or ten years, the Slovak company will decide to pay all dividends for all previous years. It is known that the issue of the dividend recipient residence is raised at the moment of dividend payout. Therefore, it is enough to think about the dividend recipient and his residence at the moment of the transfer of dividends from the Slovak company to its shareholders. When it comes to individuals, let us consider the Tax Residency on a yearly basis, which means that if the Slovak company has several shareholders, it is enough that one of them has changed the country of residence on Slovakia only for one calendar year. And this shareholder will receive all dividends from European subsidiaries for the whole time. Since he is a tax resident of Slovakia and dividends are not taxed in Slovakia, he doesn’t pay the dividend tax.

In case if you can’t change the Tax Residency on Slovak, there is an opportunity to make a modification in the commercial register and transfer the entire company to an offshore. You can transfer not the entire company, but the part of it, 20%, 10% or 1%. As you wish. And this minority shareholder will receive all dividends for the whole time. After a while, in one year, six months, in a month or a week, you can make this modification and the offshore company will transfer its entire share in the Slovak company to the former owners and thus, will withdraw from the shareholders.

The above tax residency benefit is shown in the following diagram:

TBD 

As a result of such Slovak company use, free of tax dividends from European subsidiaries, for example, during ten-year period could be received by offshore company, that has owned the Slovak company, for example, for one month, or a citizen of the CIS, who has become a tax resident of Slovakia only for one year.

 

Using the Slovak Company for Receiving the Dividends from Offshore

Let's say that there is a foreign company, registered, for example, in an offshore jurisdiction. This company does business well, and the time is ripe for dividend payment. Let us assume that for some reason it really matters for the company to make public who is the owner. For example, it matters for its partners. Or its owners just want to get money from offshore legally. The owners of this offshore company decided to pay dividends for several years. The owners of this offshore company moved to Slovakia for one year and became its tax residents.

The benefits they got can be found here:

TBD 

As a result of changing the tax residency on Slovak, the shareholders of the offshore company do not pay tax on dividends received from an offshore company.

In this way it becomes possible and, primarily, legal for CIS citizens to get an offshore company profit in the form of dividends paid to Slovak tax residents without any dividend taxes.

 

Using the Slovak Company for Property Protection in the Home Country

The Slovak holding company can be used as a parent company for its subsidiaries too, registered outside the EU countries, with which Slovakia has concluded agreements on the promotion and reciprocal protection of investments. 

Let us assume that Ukrainian businessman holds an enterprise, plant or real estate in his native country. If he is afraid of funds shortage for business development, he can use one of the debt financing forms. If he is concerned about the responsibility for harm or damage caused by company operation or even bad weather conditions, he can apply to insurance companies. But what should he do in case of illegal takeover or expropriation? What if he is afraid of armed conflict, insurrection or even war? Where he can seek help in such cases? It is necessary to think about this previously and prepare for these more or less potential hazards. To eliminate such hazards it is easier to refer to the above agreement, the point of which is not only to promote the investments, but also to protect them.

Agreement on the Promotion and Reciprocal Protection of Investments between Slovakia and Ukraine gives the right to compensate for a damage caused by:

  • war, armed conflict, a state of national emergency, revolution, insurrection, riot or other similar events, or as a result of their property confiscation or destruction by its forces or authorities, which was not caused by military actions or was not required by necessary situation, or because of nationalization, expropriation or subjected to measures having effect equivalent to nationalization or expropriation.

If the above events occur with the domestic investor’s property, it is still possible to petition only the national authorities, in most cases – the court. It’s not hard to imagine what will be the result of this. However, the foreign investor have the right to turn not to the national authorities, but immediately to international organizations such as the International Centre for Settlement of Investment Disputes, better known by its acronym ICSID (from English). ICSID is an independent international organization for international investment dispute resolution. Thus, the foreign investor has more options for dispute resolution, as the national investor has the right to petition only domestic courts, while the foreign investor may petition the International Court of Arbitration.

Who is this foreign investor that is entitled to turn to the ICSID to resolve the dispute? The definition of investor and investment is about the same in all the agreements. As for our example, the Slovak-Ukrainian agreement has the following requirements for investor-legal entity:

  • legal entity registered or established according to the law of one of the Contracting Party,
  • has a main office in the territory of a Contracting Party, and
  • is recognized under its law.

None of the agreements contain the restrictions regarding the nationality of the founders or representatives of the investor, there are no rules requiring, for example, that the investor’s dominating business is carried on in his native country, there are no questions to the origin of the invested funds. As precedent shows the decisions on well-known jurisdiction "Tokios Tokeles" against Ukraine and if the agreement doesn't restrict, the foreign investor in Ukraine is, for example, the Slovak legal entity, owned by citizens of Ukraine, the money invested by the Slovak person comes from Ukraine, and the company doesn't conduct any business activity in Slovakia.

Consequently, the Ukrainian businessman can take advantage of the agreement on the promotion and reciprocal protection of investments in such way that he will register legal entity in the territory of Slovakia, will be its owner and representative, and at the same time will become the Slovak investor in its founder’s native country. Afterwards the Slovak company will buy or in any other legal way get ownership of the property, previously owned by the Slovak company’s founder. The Slovak company’s owner can also deposit funds to the Slovak company and invest them back in founder’s native country. Such investment will be a foreign investment - Slovak and will be protected by the agreement. And in case of above-mentioned negative occasions foreign investor – the Slovak company will be able to petition the International Court of Arbitration.

 

 

 



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