Overview

In document DOING BUSINESS IN THE SLOVAK REPUBLIC 2016 (Page 26-0)

ARTICLE 6. INTELLECTUAL PROPERTY

6.1. Overview

Industrial property rights include protection of the results of technical creative work (patents and utility models), subjects of industrial design protection (industrial designs), rights to a mark (trademarks and geographical indications) and topography of semiconductor products protection. Protection is available in the Slovak Republic for national, international and Community IP rights and is harmonized with international standards and EU law.

The Slovak Republic is a contractual party of all main international treaties, such as the Madrid Agreement Concerning the International Registration of Marks and the Protocol Relating to that Agreement as well as the Paris Convention for the Protection of Industrial Property.

In the Slovak Republic, rights related to trademarks are governed by the Act on the Trademarks14, as well as relevant EU regulations and international treaties. An application for national, international as well as community trademarks may be filed through the Industrial Property Office of the Slovak Republic.

Rights related to designs are governed by the Slovak Act on Designs15, which is fully harmonized with EU law. The registration of a design into the Register of Designs is applied for by filing a design application.

Patents are granted for inventions which comply with the legal conditions for granting protection under the Slovak Act on Patents16. A patent application may be filed in respect of a technical invention which is (i) new, (ii) the result of inventive research, and (iii) industrially utilizable.

As of 1 January 2016, a new Copyright Act17 became effective in the Slovak Republic. The Copyright Act regulates copyright and related rights (e.g. rights of performing artists, producers of phonogram fixation, broadcasters and also the special right of authors of databases) is harmonized with relevant EU law relating to intellectual property rights and their enforcement. A copyright can apply to a literary work or other work of art, or a scientific work, which is a unique outcome of the creative activity of the author. Computer programs, databases and photographs are also considered to be works if original in the sense that it is the author's own intellectual creation. The copyright of a work arises the moment the work is expressed in any form objectively perceivable by the senses, regardless of the image, content, quality, purpose or form of its expression. The protection of copyright is informal – no formal requisites need to be fulfilled for protection to arise.

14 Act No. 506/2009 Coll. on Trademarks

15 Act No. 444/2002 Coll. on Designs, as amended

16 Act No. 435/2001 Coll. on Patents and Supplementary Protection Certificates, as amended

17Act No. 185/2015 Coll. on Copyright

27 Section 7.

Taxation

7.1. Tax System Overview

The current tax system in the Slovak Republic was established in 2004. Taxes are divided into three basic groups – direct taxes, indirect taxes and other taxes. Direct taxes consist of (i) personal income and corporate income taxes governed by the Slovak Income Tax Act and of (ii) property taxes governed by the Motor Vehicle Tax Act and the Municipality Taxes and Municipal Fee Act. Indirect taxes include (i) value added tax governed by the Slovak VAT Act, (ii) excise taxes governed by several Slovak acts on excise taxes, and (iii) customs duties governed by the Slovak Customs Duty Act. Other taxes consist of mandatory contributions into the Slovak social security and public health insurance system, governed by a variety of Slovak laws, and municipality taxes and fees, governed by Municipality Taxes and Municipal Fee Act and usually also by local by-laws.

Also, in 2012, the Special Levy for Financial Institutions and Special Levy from Undertakings in Regulated Sectors was introduced.

The administration and collection of taxes and fees is governed by the new Tax Administration Code, effective from 1 January 2012.

7.2. Corporate Income Tax

7.2.1. General Principles

Legal entities having their seat or place of management in the Slovak Republic are considered as tax resident companies subject to worldwide taxation, including capital gains. Permanent establishments and branch offices of foreign companies are generally taxed on Slovak source income only.

The tax base is generally calculated as the difference between income and expenses from Slovak accounting books (accounting results), adjusted for income tax purposes. The matching principle must be followed, i.e. all income and expenses should be properly accrued and/or deferred.

As of 1 January 2014, the standard corporate tax rate is 22%. The corporate tax rate is the same for both foreign and domestic investors.

The tax period is usually the calendar year. The taxpayer may opt for a fiscal year consisting of twelve successive calendar months. In order to change the tax period from the calendar year to a fiscal year, the company must inform the relevant Tax Authority within thirty days following its incorporation or at least fifteen days before the proposed starting date of its fiscal year.

There are no provisions for consolidated taxation, i.e. each company within a group subject to Slovak taxation is obliged to submit a separate corporate income tax return. Group taxation is allowed for VAT purposes only, as of 1 April 2009.

7.2.2. Tax Deductible Items

Generally speaking, all expenses incurred to generate, secure and maintain taxable income, are tax deductible items. Naturally, all documentation (invoices, receipts) must be properly kept to support tax deductibility. For tax audit purposes, a Slovak translation of such documentation may be requested.

Typical tax deductible items especially include:

(a) Operating expenses (e.g. rent, utilities, electricity, insurance);

(b) Salary costs including social security and health insurance payments;

(c) Tax depreciation and tax net book value of sold assets;

(d) Tax deductible reserves and provisions;

(e) Interest (may be subject also to special rules);

(f) Royalties and management service fees;

(g) Exchange rate gains/losses in the year in which they arise.

Typical tax non-deductible items include:

(a) Entertainment expenses;

(b) Gifts and donations;

(c) Fees paid to members of company statutory and other bodies;

28 (d) Non-contractual fines and penalties;

(e) Accounting provisions and accounting reserves;

(f) Expenses related to non-taxable or/and tax exempt income

7.2.3. Tax Depreciation

In general, tangible assets valued at more than EUR 1,700 may be depreciated for income tax purposes, either under the linear or accelerated depreciation method. The accelerated method is based on a formula using a ratio of coefficients, which vary according to the category of the relevant asset. Once a method is chosen, it must be applied over the entire life of the asset. A EUR 48,000 cap applies for personnel motor vehicles. Some assets (such as plots of land or artwork) are not eligible for depreciation.

Tangible fixed assets are classified into the following depreciation groups:

Examples of fixed assets Depreciation

group

Minimum depreciation period (years)

Office appliances and computers 1 4

Machines, pumps, cooling/freezing equipment, accumulators, aeroplanes, houses and buildings made from wood and plastic (not connected to infrastructure)

2 6

Elevators, escalators, turbines, air conditioning equipment, electric motors and generators, long-distance transmission lines

3 8

Minor buildings, assembled concrete buildings, railroad vehicles, air/space carriers

4 12

Buildings (except for buildings in group 6), engineering buildings

5 20

Apartment buildings, administrative building, hotels, buildings for culture/public health/education

6 40

Intangible fixed assets valued at more than EUR 2,400 are depreciated according to accounting standards.

R&D costs have to be depreciated at most within five years from the acquisition of the assets resulting from those costs. Goodwill has to be depreciated in seven years at the latest from the moment of its acquisition while at least 1/7 has to be depreciated every year.

7.2.4. Capital Gains (Participation Exemption)

Capital gains from the disposal of shares are subject to income tax at the ordinary rate of 22%.

7.2.5. Deductions from the Tax Base

From 1 January 2015, taxpayers may claim a so-called "super deduction" of expenses (costs) connected with R&D. The super deduction is an "additional" deduction from the tax base of expenses (costs) for R&D up to 25% of expenses (costs) stipulated by law.

7.2.6. Tax Losses

Tax losses may be carried forward proportionately for a maximum of four years. If the company started to deduct the tax losses and is dissolved without being liquidated, its tax losses may be deducted by its successor, unless the sole purpose of the dissolution was to avoid taxation.

Losses can neither be carried back, nor offset against the profits of another group company.

7.2.7. Tax Compliance

Corporate tax returns must be filed within three months after the end of the tax period. However, this deadline may be automatically extended by up to three more months if the taxpayer notifies the tax authority before the original deadline lapses. The deadline may be automatically extended by up to six

29 months if the taxpayer generates international taxable profits. This, however, does not apply to taxpayers in

insolvency or dissolution proceedings where the extension is subject to approval of the tax authority.

Corporate income tax must be paid within the deadline for filing the tax return. Tax prepayments may be period during which they have earned Slovak source income subject to withholding tax and claim relevant expenses against this income, if more advantageous. Should the tax withheld at the source be higher than the final income tax liability, as declared in the tax return, a refundable tax overpayment will arise to a foreign company.

7.3.1. Dividends

As of 1 January 2004 the Dividends (as defined in article 7.5.1 below) paid out to entities are not subject to taxation in Slovak Republic.

However, Dividends paid out of profits generated after 1 January 2011 by a Slovak company to an individual insured in the Slovak public health insurance system will be to a certain extent subject to Slovak health insurance contributions. For details, see Article 7.6 below.

7.3.2. Interest

Interest paid to foreign resident entities is subject to 19% withholding tax, which generally can be reduced or eliminated by virtue of an applicable double-taxation treaty, or exempt under the EU Interest and Royalties Directive. Based on the provisions implementing the EU Interest and Royalties Directive, loan interest payments to a related party seated in the EU are exempt from withholding tax if the shareholding in the Slovak subsidiary comprising at least 25% of the share capital is held for at least two years.

From 1 March 2014 if loan interest is paid to residents having its registered seat or permanent residency in a country which is not on the "whitelist" maintained and published online by the Slovak Ministry of

Royalties paid abroad are subject to 19% withholding tax that can generally be reduced or eliminated by an applicable double-taxation treaty, or as of January 2005, exempt under the provisions implementing the EU Interest and Royalties Directive. As mentioned above, tax non-residents receiving income from royalties is allowed to apply relevant expenses in their annual corporate tax return.

As from 1 March 2014 if the royalties are paid to residents having the registered seat or permanent residency in a country which is not on a "whitelist" (see 7.3.2. Interest above), a 35% rate applies.

The exemption of both royalties and interest income paid to EU tax residents from Slovak tax (i.e. with no withholding tax) is applicable under the provisions implementing the EU Interest and Royalties Directive if the following conditions are met:

(a) the interest/royalty is paid to a company resident in another EU country listed in the appendix to the Interest and Royalties Directive from sources arising in the Slovak Republic;

(b) both the paying and receiving companies are directly related via capital (minimum share of 25%) for an uninterrupted period of at least twenty-four/ months. (This condition may be fulfilled also subsequently);

(c) the recipient is the beneficial owner of interest/royalty payments and the interest/royalty payments are not attributable to a Slovak or third country permanent establishment.

7.3.4. Thin Capitalization

As from 1 January 2015, thin capitalization rules were re-introduced. The interest and expenses related to loans and credits between related parties are considered to be a tax deductible expense only up to 25% of a sum of the financial result before tax, depreciation and interest from received loans and credits.

30 Thin capitalization rules do not apply to financial institutions, collective investment undertakings or leasing

companies.

7.3.5. Transfer Pricing

If the prices agreed between related parties differ from prices that would be agreed between independent (non-related) parties in ordinary commercial transactions under the same or similar conditions, and this difference is not properly documented, the tax authorities may adjust the tax base by the determined difference and may also invoke penalties.

The term "related parties" includes entities or individuals related by capital (direct or indirect relation by participation in share capital or voting rights of 25% or more), or otherwise (relation by means of management, control, or so-called "close" persons). Transfer pricing rules also apply to transactions between persons who have entered into a commercial relationship largely for the purpose of reducing their tax base or increasing their tax loss.

An advance pricing ruling from the tax authorities may be obtained at the written request of the taxpayer subject to transfer pricing rules. The advance pricing ruling provides taxpayers with the possibility to check in advance whether the pricing policy agreed between group members (related entities) complies with the arm's length principle used. The ruling could be issued for at most five tax periods and, if requested, could be further extended by five more tax periods. The advance pricing ruling is subject to payment of a fee ranging from EUR 4,000 to 30,000.

As of 1 January 2015 transfer pricing rules apply to both transactions with non-resident and resident entities.

7.3.6. Taxation of Foreign Entities

A foreign entity is generally subject to Slovak tax on income generated in the Slovak Republic. The extent to which a foreign entity is subject to Slovak tax is determined by the type of activities carried out in, or related to, the Slovak Republic. A foreign entity can be subject to taxation by establishing creating a

"permanent establishment" or via withholding tax on Slovak-source income (see above).

Taxation of the operating profits of a branch office (constituting a permanent establishment for corporate income tax purposes) is similar to the taxation of profits of a business company, both being taxed on the accounting profit and loss basis, as adjusted for tax purposes by tax non-deductible or/and non-taxable items (following the same tax rules). The tax base is subject to the standard corporate income tax rate of 22%, as of 1 January 2013.

As opposed to company taxation, a branch office (constituting a permanent establishment) may apply for an alternative method of taxation (e.g., percentage of total revenues) which is usually more simple from an administrative point of view and may also result in lower corporate tax liability. However, this typically applies in situations where there are objective obstacles in determining the tax base of the permanent establishment (e.g. due to the impossibility to attribute profits to the permanent establishment). However, the tax authorities are not obliged to accept the alternative method of taxation proposed by the permanent establishment.

A branch office which does not constitute a permanent establishment in the Slovak Republic is technically not subject to Slovak taxation (nevertheless, each particular case must be reviewed very carefully; it is uncommon for a branch office to exist without simultaneously triggering a permanent establishment).

7.3.7. Permanent Establishment (PE)

A permanent establishment means the taxable presence of a foreign entity in the Slovak Republic (not necessarily a legal entity or branch office). Under the Slovak Income Tax Act, a PE is defined as a permanent place or facility through which taxable parties with limited tax liability fully or partially carry out their activities in the Slovak Republic, in particular a place, from which the business of the taxable party is organized, branch, office, workshop, sales point, technical facility or the point of research and extraction of natural resources. The place or facility is treated as permanent if it is used for the activities systematically and repeatedly. If there is a non-recurring activity, the place or the facility where the activity is performed is treated as permanent if the duration of the activities exceeds six months, either continuously or intermittently during one or more intervals within any twelve consecutive months. A building site, or construction and assembly works site is treated as a permanent establishment only if activities are carried out there for longer than six months. A permanent establishment also includes any party which acts on behalf of the taxable party with limited tax liability, and which systematically or repeatedly negotiates and enters into agreements on behalf of that taxable party under a power of attorney. The above applies unless an applicable double-tax treaty overriding Slovak legislation stipulates otherwise.

31 7.3.8. Securing Tax

A Slovak individual or entity may be required to secure tax from payments made to foreign taxpayers receiving Slovak-source income.

When paying, transferring or crediting an amount to a foreign entity other than a tax resident of another EU member state, the Slovak taxpayer must withhold 19% from the income derived from sources in the Slovak Republic (as defined by the Slovak Income Tax Act). As from 1 March 2014 if the recipient of such income has its registered seat or permanent residency in a country which is not on a "whitelist" (see 7.3.2. Interest above), a 35% rate applies.

The amount of secured tax is treated as an advance tax payment of the foreign entity and may be credited against the final corporate income tax liability as declared in its annual corporate tax return.

7.4. Double-Taxation Relief and Tax Treaties

Generally, foreign tax relief is available under relevant double-tax treaty provisions. The Slovak Republic has a broad double-tax treaty network; currently sixty-five tax treaties are in force. The table below lists the countries, with which the Slovak Republic has a valid double-tax treaty, as well as the withholding tax rates applicable to dividends, interest and royalty payments made by a Slovak tax resident company to a foreign recipient (unless EU Interest and Royalties rules overriding the double-tax treaty provisions apply).

7.4.1. Table – Applicable Double-Tax Treaties

Withholding tax rates under the Slovak Republic's tax treaties (%)

Country Dividends* Interests** Royalties***

Australia 15 10 10

Austria 10 0 5 (i) / 0 (c)

Belarus 15 / 10 10 10 / 5(c)

Belgium 15 / 5 10 5

Bosnia and Herzegovina 15 / 5 0 10

Brazil 15 15 / 10 25(tm) / 15

Bulgaria 10 10 10

Canada 15 / 5 10 10 / 0(c)

China 10 10 10

Croatia 10 / 5 10 10

Cyprus 10 10 5(i) / 0(c)

Czech Republic 15 / 5 0 10(i) / 0 (c)

Denmark 15 0 5(i) / 0(c)

Estonia 10 10 10

Finland 15 / 5 0 10(i) / 5(op, r) / 1(fl) / 0(c)

France 10 0 10(ot) / 0(c)

Georgia 0 5 5

Germany 15 / 5 0 5

Greece 19 10 10(i) / 0(c)

Hungary 15 / 5 0 10

Iceland 10 / 5 0 10

India 25 / 15 15 19

Indonesia 10 10 15 (c, i) / 10 (r)

Ireland 10 / 0 0 10(i) / 0(c)

Israel 10 / 5 10 / 5 / 2 5

Italy 15 0 5(i) / 0(c)

Japan 10 / 15 10 10(i) / 0(c)

Kazakhstan 15 / 10 10 10

32

Korea 10 / 5 10 10(i) / 0(c)

Kuwait 0 10 10

Latvia 10 10 10

Lithuania 10 10 10

Libya 0 10 5

Luxembourg 15 / 5 0 10(i) / 0(c)

Macedonia 5 10 10

Malta 5 0 5

Mexico 0 10 10

Moldova 15 / 5 15 10

Mongolia 0 0 0

Montenegro 15 / 5 10 10

Netherlands 10 / 0 0 5

Nigeria 15 / 12,5 15 10

Norway 15 / 5 0 5(i) / 0(c)

Poland 0 / 5 10 5

Portugal 15 / 10 10 10

Romania 10 10 10(i) / 15(ot)

Russia 10 0 10

Serbia 15 / 5 10 10

Singapore 10 / 5 0 10

Slovenia 15 / 5 10 10

South Africa 15 / 5 0 10

Spain 15 / 5 0 5(i, r) / 0(c)

Sri Lanka 15 10 10(i) / 0(c)

Sweden 10 / 0 0 5(i, r) / 0(c)

Switzerland 15 / 0 5 5(i)/ 0(c)

Syria 5 10 12

Taiwan**** 10 10 10 (ot) / 5 (re)

Tunisia 15 / 10 12 15(i) / 5(c)

Turkey 10 / 5 10 10

Turkmenistan 10 10 10

Ukraine 10 10 10

United Kingdom 15 / 5 0 10(i) / 0(c)

United States 15 / 5 0 10(i) / 0(c)

Uzbekistan 10 10 10

Vietnam 10 / 5 10 5(i) / 10 (tm) / 15 (ot)

*a lower rate applies if a certain percentage of the share is owned, the percentage differs treaty by treaty

**interests paid on government loans provided by one of the contracting states are frequently exempt from withholding tax; in Brazil a lower rate applies with long-term loans (10Y)

***some double-tax treaties recognize different rates for specific types of royalty payment: cultural (c); industrial (i);

financial leasing (fl); films and recordings (r); operational (op); rent of equipment (re); trademarks (tm); technical services (ts); other (ot)

**** administrative treaty entered into with a non-sovereign area which acts independently in international affairs Egypt – the contract is signed but not yet effective (signed on 10 September 2011)

33 7.5. Personal Income Tax

7.5.1. General Principles

The scope of taxation depends on the tax residency status of the individual. Slovak tax residents are generally taxable on their worldwide income, while Slovak tax non-residents are generally taxable on their Slovak-source income only.

For tax purposes, an individual is a Slovak tax resident if he/she has permanent residence in the Slovak Republic (i.e., a place of permanent residence under circumstances indicating his/her intention to dwell there permanently) and/or if he/she is present in the Slovak Republic for 183 or more calendar days during a calendar year (including partial days). If the individual is considered a resident in more than one country, the applicable double-tax treaty should determine the final tax residency status of the individual. Most

For tax purposes, an individual is a Slovak tax resident if he/she has permanent residence in the Slovak Republic (i.e., a place of permanent residence under circumstances indicating his/her intention to dwell there permanently) and/or if he/she is present in the Slovak Republic for 183 or more calendar days during a calendar year (including partial days). If the individual is considered a resident in more than one country, the applicable double-tax treaty should determine the final tax residency status of the individual. Most

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