Doing business in Slovakia: What investors need to consider when entering the market

Industries

Automotive industry and related sectors (machinery and electronic) play a vital role in Slovakia. The automotive industry is the largest and most important sector (with 12% share on GDP) when it comes to export and employment. It is also a source of many foreign direct investments. Slovakia is the leading car manufacturer in the world, and it ranks among the top producers of electric cars in Europe.

Other largest industries include:

• logistics,
• chemicals and plastics (petroleum refining, fertilizers, rubber, etc.),
• engineering,
• ICT (telecommunication, computer programming, internet services, etc.).

The automotive industry has the strongest workforce in Slovakia. The labour is no longer low cost, but it is categorized as cost-effective, highly productive and skilled. The largest four car manufacturers and Tier 1 suppliers (Volkswagen, Stellantis, Porsche and Jaguar) employ directly approx. 164,000 employees. Overall, the automotive industry employs directly and indirectly around 245,000 people, and it is constantly growing.

Investment incentives

In Slovakia, regional investment incentives can be granted to SMEs, large companies, new or existing investors. Besides, research and development super-deductions or preferential tax regimes are among other support mechanisms.

In general, there are four categories of projects that can be supported by the investment incentives:

Each category has specifically defined conditions which have to be met in order to apply for the investment incentives. In general, the incentives are provided in the form of:

• an income tax relief
• a subsidy for the acquisition of material assets and immaterial assets
• a contribution for newly created employment opportunities
• transfer or exchange of immovable property at a price lower than the general asset value

Further, certain corporate income tax relief can be provided also under the Law on Research and Development Incentives.

The relief is subject to approval of the Ministry of Economy or Ministry of Finance, as the case may be.

If a taxpayer does not claim corporate income tax relief under the Law on Research and Development Incentives, a special regime for research and development expenses can be claimed if certain conditions are fulfilled.

R&D super-deductions allow companies located in Slovakia to deduct additional 100% of their R&D costs from their CIT base. The super-deduction has no industry limitation, but the project must meet the definition of R&D, as stipulated in accounting practices. The legislative framework is set in Section 30c of the Income Tax Act.

Examples of some of the investment incentives in Slovakia

• farmers – investment for starting a business activity (EUR 15,000 – 50,000)
• sustainable transport solutions (EUR 100,000 – 3,000,000)
• technology centres (min. of EUR 100,000 on fixed assets in all regions)

The provision of the state aid is governed in particular by the European Union law that establishes the basic legal framework also for the Slovak authorities.

Corporate income tax

The corporate income tax is levied at a rate of 21% in Slovakia.

A reduced rate of 15% applies to taxpayers with taxable revenues below EUR 49,790 per tax period.

With respect to profits derived from January 1^st, 2017, the single taxation system applies (i.e., exemption of profit distribution payments from tax) in the case of corporate shareholder only if the shareholder is based in other than non-cooperating state.

The tax period in Slovakia can be either the calendar or the fiscal year.

The deadline for filing the corporate income tax return in Slovakia is by the end of third month following the end of the tax period. The filing deadline may be extended by maximum 3 months. If part of the taxpayer’s tax base consists of foreign-source income, the filing deadline may be extended by additional 3 months.

A company is treated as a Slovak tax resident if it has its legal seat or place of effective management in the Slovak Republic.

Carry-forward of losses

Tax losses generated from 2020 can be carried forward 5 years.

VAT

The standard VAT rate is 20%, the reduced rate is 10%. Reduced rate of 10% is applicable for specific categories of goods, such as basic groceries, books, newspapers, magazines, medicines, etc. and accommodation services (code 55 under CPA).

The export of goods and services is zero rated. The intra-community supplies of goods are zero rated under certain conditions.

VAT registration

Resident companies exceeding a turnover of EUR 49,790 for a period of 12 consecutive calendar months are obliged to register for VAT. Taxable persons supplying property (buildings, building land) have to register for VAT purposes only if certain conditions are met. Voluntary VAT registration is also possible.

In case of intra-community acquisition of goods from other EU member states, the taxable person has to register for VAT before the cumulative value of transactions exceeds EUR 14,000 within a calendar year.

Furthermore, a taxable person has to register and pay VAT or report the supply of service in EC Sales List if the place of delivery for that service is:

• following the Article 44 of the Directive 2006/112/EC
• located in the same EU member state as the customer of that service
• person duty to tax will be the recipient of that service.

VAT registration in Slovakia is mandatory for non-resident companies before they carry out any activity subject to VAT in Slovakia and the „reverse charge” mechanism is not applied.

VAT returns

VAT returns must be filed, and VAT liability paid within 25 days from the end of the taxable period. The taxable period is a calendar month or a calendar quarter under specific circumstances. An essential and inseparable part of the VAT return is so called control statement through which the VAT payer provides the tax authority with specific information about all transactions carried out with business partners. Both the VAT return and the control statement must be filed with the tax authority electronically.

Other taxes

Entitlement to work

In Slovakia, any natural person who is over 15 years old and has completed a compulsory education is entitled to work. However, non-EU citizens have to have a working permit.

Employing foreigners of EU or EEA is possible based on the same conditions as employing Slovak citizens, since they have the right to free entry and stay in the Slovak Republic. The employer must inform a respective Office of Labour, Social Affairs and Family (ÚPSVaR, in short) about hiring such employee.

Employing foreigners who are citizens of third countries is possible only with valid national visa (when the employment is in the interest of SVK), which is granted only for the duration of employment (max. of 1 year), with permanent residence permit or temporary residence permit for the purpose of employment, granted asylum or tolerated stay.

Employment contracts

The following employment contract are available in Slovakia:

• employment contract for definite period, which may not exceed 2 years in duration (it is possible to prolong such contract only twice during these 2 years)
• employment contract for indefinite period, available for both full-time or part-time work (is an employment relationship that shall last for an indefinite period unless a definite period has been expressly agreed)

In Slovakia, there are also agreements on work performed outside the employment relationship, such as:

• agreement on working activity: max of 10 hours / week
• specific work agreement: max of 350 hours / calendar year
• student work agreement: approx. 20 hours / week (possible to conclude only with natural person who holds a status of secondary school / university student and who is up to 26 years old)

Slovak tax residents are taxable on their worldwide income while Slovak tax non-residents are taxed on their Slovak-source income.

The personal income tax is levied at the following rates in Slovakia:

• 19% on annual taxable income below EUR 38,553.01 (except for income from business activity, capital and dividend income)
• 25% on annual taxable income exceeding EUR 38,553.01 (except for income from business activity, capital and dividend income)
• 15% on income from business activity if its annual taxable value is below EUR 49,790. Otherwise, 19% rate applies for taxable business income up to EUR 38,553.01 and 25% rate applies to the amount above that threshold
• 19% on income from capital
• 7% on income from dividends paid out of pre-2004 profits and profits derived from January 1st, 2017 (note: 35% on dividends from foreign sources of a non-cooperating states)
• Certain types of income are not aggregated but are subject to a withholding tax of 19% or 7% in case of dividends paid by a domestic company

The tax period for personal income is the same as the calendar year.

The tax return deadline falls on March 31, but it may be extended with written notification by up to 3 calendar months or by up to 6 calendar months, if part of the taxable income is from foreign sources.

In Slovakia, tax residency is based on fulfilling at least one of the following criteria:

• The individual has a registered permanent residence, a habitual abode or actual residence in Slovakia
• The individual has their habitual abode in Slovakia, if they are present in Slovakia for at least 183 days in a calendar year, except for purposes of study or medical treatment.

Individuals who are Slovak tax residents are taxable on their worldwide income. Taxable income of an individual is usually calculated by aggregating the separate net results of the following income categories:

• employment income
• rental income and income from the use of work and art performance
• other income (e.g., income from occasional activities)

Income from capital, dividend income and income from business activities are not aggregated, but on each income category a separate tax base is to be calculated.

Non-resident individuals are taxed only on their income earned from Slovak sources. In case the company seat is situated outside of Slovakia and the employee has not been present in Slovakia for more than 183 days in 12 consecutive months, the income from such employment is exempt from tax. However, this exemption does not apply to artists or sportsmen, or to permanent establishments. The income of non-residents is generally taxed according to the rules applicable to residents, unless a law or a tax treaty specifies otherwise.

The income of natural persons is subject to further deductions in Slovakia, if falling under Slovak social security system, specifically due to contributions. The employer pays 25.2% of the social security contributions while the employee pays 9.4%. Regarding health insurance contributions, 10% is paid by the employer and 4% is paid by the employee.