ESOP or Employee share option plan is becoming an increasingly popular tool for remuneration and engaging employees even in our region. ESOPs are also commonly referred to as employee stock ownership plans or employee benefit programs where company founders grant a portion of shares to their key employees. The sense of ownership vastly impacts the employees’ participation in the company’s development, while it also increases their motivation and productivity.

Regardless of how simple the idea seems, ESOP is very complex. Setting it up can be costly since it requires professional advisors and lawyers, and a bit difficult to manage due to complicated spreadsheets. Nevertheless, we accepted the challenge and developed an inexpensive and smart solution based on the Dutch model with international applicability.

What is ESOP and how is it used by companies?

In simple terms, ESOP is a benefit program that allows employees to obtain options, i.e., the right to buy or receive a certain company share percentage, after a certain period of work.

It is common in some European countries for employees to be liable for taxable income resulting from the use of options, including their exchange for stocks or shares. For this reason, some start-ups rather choose to issue the phantom shares instead. Phantom shares are not real stocks or shares issued to employees, but a possible increase in a start-up value (or earned profit share) paid to employees as cash benefits.

However, the payment of the benefit is subject to taxes which we all know from taxing regular wages. We have tried to solve this with our in-house solution based on so-called “exercise period” (a period when an employee can buy stocks or shares) and we came with a tax-friendly, fully automated and digitalized software that can speed up the whole process. Employees can exercise their right once the vesting period ends or when a specific milestone or event occurs – that is, at the time when they receive the real income.

The advantages of employee benefit programs

At Accace, we believe that the future of employee benefits lies in the employee equity programs (EEP). Employee stock option plans are benefit systems that allow employees to engage in the company’s operations, increase its profit and act like partners of the company they work for.

However, establishing ESOP programs as a form of EEP tends to be tricky both financially and timewise. Hence, we developed a solution disrupting the status quo. Stock option plans are no longer complicated: we can save your company’s money and time with our tax-friendly and automated ESOP platform. All in compliance with the legislation across Europe.

Automating the employee stock option experience

As a founder wishing to grant shares to employees, you can now establish ESOP plans according to your desire with just a few clicks. Forget lawyers or consultants, you can do it even without legal or economics background. Invite your co-founders or colleagues to join your option pool, verify them and sign documents online within 30 minutes. Access electronic documents from the archive and see up-to-date information.

New investor on the horizon? No worries, just update your ESOP plan and the documentation when investors step in. You can also set up your vesting period and calculate the target share of an employee in the company after the vesting period. The greatest benefit so far is that the founders don’t have to give up their shares on behalf of employees. They can issue digital certificates that allow to tax employees’ incomes as if they held shares or stocks directly.

We kept in mind one more fact: that all these processes come up with an extra administrative burden. Nonetheless, using digital certificates allows all alterations to be made without changing a single thing in the commercial registers or securities depositories.

ESOP based on the Dutch model

The solution is for everybody interested in the fair and motivational remuneration of founders and employees – from start-ups in pre-seed and seed phase up to SMEs searching for inexpensive tool. Specifically designed for limited liability companies such as BV, GmbH, s.r.o., Sp. z o.o., kft, etc. With few exemptions, we can cover several European countries such as the Netherlands, the Czech Republic, Slovakia, Hungary or Romania.

If you do your own research, you will find some already established solutions on the market. However, only a few platforms offer effective management of a so-called “captable”, i.e., keeping records of the company’s shareholders. Some tools may have wider features, but they are specifically designed for Anglo-Saxon systems or joint stock companies. In Europe, the majority of companies and start-ups are limited liability companies, which makes the existing platforms off base.

Since we are cooperating with international start-ups and SMEs across Europe, we are familiar with the issues they are facing. Through careful listening, our in-house experts constantly search for ideas that can improve our clients’ and partners’ lives. Optimize and automate your ESOP experience with us – get in touch and find out how we can help.

Peter Pašek

Managing Director | Partner | Accace Slovakia

Book a meeting with Peter

In recent years, the interest of small and medium-sized companies in ESOP (Employee Stock Ownership Plan) has visibly increased. ESOP represents a plan on how to allocate a portion or full company ownership from the current owner to everyone, or to a specific group of key employees. Find out more about ESOP forms and their present status in Slovakia below.

ESOP can be part of a founder’s exit strategy, but in Slovakia, it is rather used as a form of an employee benefit or private pension plan created by a company for its employees.However, within Europe, certain tax advantages for such plans are still missing, e.g. as we know them from the USA. There, for instance, the moment of taxation of employees’ income from their share in the company arises only at the time of their retirement or when leaving the company, and not in the moment when they are granted shares of the company they work for at preferential prices.

ESOP trusts

ESOP can have different forms, but recently, we can see a trend of setting up ESOP trusts into which a company allocates a specific part of its shares. These trusts then pay out the earned revenue as dividends from companies on behalf of its beneficiaries, or they repurchase them from employees under pre-determined conditions, for example in case of their retirement. These trusts can exist under various legal forms or tax regimes; therefore, it is important to choose the right form.

ESOP and SMEs in Slovakia

Legislation in Slovakia doesn’t recognize trusts at all. Therefore, Slovak entrepreneurs are forced to use foreign structures. As usual, we note that the foreign structure shall not be deemed as illegal tax optimization. This is not the purpose of the ESOP structure. In the case of Slovakia, there is a presumption that the so-called institute of private foundation shall be introduced. The question is what its practical use for ESOP purposes will be.

In general, we believe that ESOP is still not a widely discussed topic in Slovakia, and not only in the start-up world, where this institute is already used a little more intensively. However, small and medium-sized companies are among the few companies that want to be more progressive and try to increase the involvement of their employees in the company’s success, or they think of their future once they leave the company. Nowadays, the most important thing, probably, is educating employees in companies, where the founder has opted for this form of benefit.

We often come across that employees don’t understand that it is uncommon for a company to pay 100% of its profit on behalf of its partners. Conversely, most of the profit remains in the company for investments and development.

Similarly, we need to explain the difference between net profit and free cash flow. Specifically, making a profit doesn’t automatically mean having free financial resources for profit payment. During discussions with employees, we try to explain them the meaning of net working capital and how its change may affect free financial resources. Sometimes, it is difficult to explain how the revenue growth of a company in some industries can increase the necessity to commit a bigger portion of funds in the additional stocks or liabilities with longer maturity. This has an obvious impact on the decrease of free financial resources. Of course, there are more topics to discuss.

On top of this, in Slovakia we must also deal with a simple shift in the way of thinking – having a share in a company which an employee works for is an investment in themselves, hence investing in assets that will bring financial advantage in the future. In our conditions, it is difficult to persuade people that e.g. payment of an annual bonus in cash will increase the employee’s income, but it commonly results only in higher household spending, thus consumption without any increase in value in the future.

ESOP in small and medium-sized companies is also called an “entrepreneur game” where you try to change the mindset from employee to business perspective. Personally, we believe that the popularity of ESOP among SMEs in Slovakia will grow over time. Of course, it requires time and a lot of education. A change in legislation and introduction of tax advantages when acquiring employee shares would surely help.

Having extensive experience with start-ups and SMEs, and a fully-digital tool ready to optimize and automate the ESOP process, we are prepared to discuss your possibilities when it comes to employee stock ownership plans and answer all your questions – simply just get in touch with us.

Peter Pašek

Managing Director | Partner | Accace Slovakia

Book a meeting with Peter

The last two years have been largely affected by the pandemic, forcing companies to adapt both their internal processes and the services provided to their clients. On the other hand, the process of digitization and automation has rapidly accelerated, and this trend will continue in the near future. We asked Peter Pašek, the Managing Director & Partner of our Slovak branch, about the changes that can be expected in 2022 in the field of outsourcing and consulting.

What changes will 2022 bring for consulting services and BPO?

The process of digitization, automation, and the growing involvement of AI in all areas of decision-making in this field will certainly continue. However, I personally think that beyond the already started process, there will be a gradual breakthrough, when consulting companies will stop providing consulting as a service, but rather as ready-made partial or fully comprehensive solutions that clients will be able to use by themselves for a fee.

It is understandable that during these times of acceleration, clients do not have the capacity or desire to spend financial resources to analyse their problems and find recommendations for their solution. Rather, they prefer an approach where the consultant has a ready-made solution for their current problems and which they can implement as quickly as possible.

Why should companies focus on providing innovative BPO services?

We are living in the times of high inflation and it is questionable whether it will change soon. On the other hand, a lot of clients are going through difficult periods, so they often have limited budgets for consulting or BPO services. This, of course, puts pressure on their providers in the form of rising costs with limited price increases for their services.

The only way is to innovate, which allows the better scaling of services provided. Therefore, solutions are gradually being deployed, where the client gets more for the same money, respectively the same services for less money. Without innovation, it would always be at the expense of reducing margins – losses, which on the long run is impossible to cope with, especially for BPO providers.

Where can companies look for inspiration? Or how can they differentiate themselves from the competition?

I do not think they always have to be inspired by someone else at all costs, even though using things that are already well-established and working for other companies is convenient and may come in handy. I rather think that the company can look for inspiration among the people who work or used to work for the company. It is important not to accept the “status quo”, i.e. to be satisfied with what the company has achieved.

The competitive environment is tough and at the same time everything around us is constantly changing. Some business models have been erased overnight. Just looking at the delivery services, which have experienced an unreal boom in Slovakia in the last year thanks to COVID-19 and the behaviour of people in Slovakia changed within a few months. And there are many cases such as this.

Rather, it is important to constantly adapt and try to come to the market with something new that would simply change people’s behaviour. That is the key, I think. Sometimes that change of behaviour comes immediately, sometimes it takes years. We launched OCR (Optical Character Recognition) solutions for invoicing in 2008. It has been almost 14 years now, and it is currently a much-discussed topic. At that time, we were already trying to persuade suppliers and clients to switch from paper documents to at least PDF format.

Years ago, our development team researched how to extract data according to the transparency and colour of the paper, i.e. something that current solutions do not even have to solve much, therefore if so, they will find that there can be a rather complicated solution.

However, those 15 years were worth it, as our experienced systems can not only extract data, but also design a pre-account, depending on the client. This is a huge step forward when the system knows, e.g. recognizes that the invoice from the soft drink supplier is charged as inventory at the service station network, and more of a representative cost at the software company.

Personally, I am therefore pleased to see the valuations of start-ups trying to solve similar problems thanks to their raising capital. We entered this market at a time when investors did not trust it yet, but the current situation shows that we have done well, mainly because we have remained in our endeavour until now.

What kind of innovation will Accace Slovakia bring in 2022? How do they reflect our vision and goals?

In the last two years, we have introduced a number of new services such as start-up consulting, new HR outsourcing services and we have become a temporary employment agency. I believe that there will be more of them every year, including 2022. We are currently preparing the launch of Optiomat.com.

Optiomat, is aimed at companies where their founders decide to increase the involvement of their colleagues by allocating part of the capital to them. It is for this reason that we participated in the creation of the Optiomat tool, which enables the entire process from creating an option plan to the founders, inviting their colleagues, verifying their identity to digital signing of the so-called ESOP contracts, all handled within 20 minutes. This brings incredible savings in both time and costs for consulting services from companies.

As part of the solution, we can also calculate the shares in the company that the colleague should acquire after the vesting period, as well as other additional services. The solution goes so far that, if the client wants, he can issue digital certificates at the end of the vesting period, which have the same tax consequences as if the employee owned the actual shares. We are currently testing the solution on a few start-ups in CEE, but its use is pan-European.

Our vision and goal, among other things, is to bring innovative solutions that make the work of our clients more efficient and better. It is important for us, even though we have a history of more than 15 years, that we constantly maintain our enthusiasm for new projects and ideas and put this enthusiasm in the result.

Why do you want to bring these two specific services?

We still feel that employees are the most important part of every company. As our core business is accounting, payroll, tax advisory and legal services, we perceive the space in similar projects as we know how to make the most of the employment environment in our region.

Does this mean that “traditional” advisory services will go backstage? Or how can these be developed in 2022?

Changes do not happen overnight, although COVID-19 has accelerated a lot of things, but I’ll put it this way: a few years ago we processed motor vehicle tax returns for several days for one of our clients with a fleet of over 3,000 cars. Later, the same colleagues were part of a team that reduced this process of data collection, calculation and control for the same client to about 30 minutes. This, in my opinion, is the exact example of how traditional advisory is moving forward. The consultants will gradually stop providing services directly but will be responsible for the solutions that will provide these services for them. For example, I currently perceive the same innovations in the field of processing transfer pricing documentation, i.e. expat agenda.

What other changes can be expected? Will companies prefer BPO providers who act responsibly towards their own employees and who are generally involved in the field of corporate social responsibility?

In my opinion, clients already perceive the overall reputation of their provider. It plays an important role in the selection process itself. In addition, the integrity of advisors has been and will always be important.

I rather see CSR activities as an “internal agenda”. In my opinion, the main goal should not be how the company presents itself externally through these activities. It is important for me that my colleagues understand that neither the company nor they should be seen only for themselves, for their own benefit, but also to help people and those around them who may not have been so lucky in life.

I believe that if the people, companies and the environment around us are doing well, it will return to you. It is such a cycle that in time you get back what you give. And if you don’t succeed the way you wanted, it doesn’t matter, the important thing is that you at least tried.

Peter Pašek

Managing Director | Partner | Accace Slovakia

Book a meeting with Peter

The question of intergenerational exchange in the family businesses has been solved by numerous Slovak families via allocation of their assets to a Czech trust fund. Such allocated assets are usually business shares, e. g. shares in family companies. It must be pointed out, that Slovak legislation doesn’t recognise trust fund as we know it from the Czech Republic. Thus, in practice, many questions on how to treat the taxation of dividends payment from Slovak companies on behalf of the trust fund, or the subsequent payments of „shares on profit“ (note: these are not dividends in the strict sense) from the trust fund on the behalf of its beneficiaries arise.

Hence, we decided to summarise tax opinions to tax questions from the Financial Administration of the Slovak Republic. Although, we don’t wholly agree with some of the conclusions of the Financial Administration of the Slovak Republic, we consider that it is important to share their view of the matter. Read below to find out more about Czech trust fund from the Slovak tax perspective.

Dividends paid by a Slovak company for the benefit of a Czech trust fund

A trust fund has no legal personality, is not tax transparent and for the purposes of Double taxation convention with the Czech Republic (hereby “DTC”) is considered as a tax resident of the Czech Republic. Dividends paid to a Czech fund administrator, whose final beneficiary is a trust fund without legal personality, are taxed via their administrator who is a taxpayer of such dividends. Since the trust fund is a person who is not a final beneficiary of the dividends paid, a trust fund is a final beneficiary of the dividends paid, but it is not a person who has a legal personality, a provision of § 43 par. 25 of the Income Tax Act (hereby “ITA”) should be applied, and under which the taxpayer (e.g., paying Slovak limited liability company) paying taxable dividends to a non-resident trust fund administrator will deduct a tax in the amount of 35% from these incomes.

However, according to the provision § 1 par. 2 of ITA, the above mentioned provisions of ITA won’t apply in an extent in which their application would lead to taxation that is not in accordance with DTC. In Art. 10 par. 1 and 2 of DTC, a regulation according to which dividends paid by a company that is a Slovak tax resident to a resident of the Czech Republic may be taxed in the territory of the Slovak Republic according to Slovak legislation exists. However, if the beneficial owner is a resident of the Czech Republic, then a tax imposed can’t exceed 5% or 15% of the gross amount of dividends in the cases provided by this provision.

The Czech trust fund is considered a legal person that is a subject to unlimited taxation in the territory of the Czech Republic and is considered a resident of the Czech Republic for the purposes of DTC according to Czech tax regulations. Therefore, the benefits of DTC apply to it. Due to the above mentioned reasons, if a real owner of the dividends paid and taxes via the trust fund administrator, is demonstrably trust fund which is a tax resident of the Czech Republic, the tax deducted by the Slovak company shall not exceed the amount of the “maximum tax” of 5% or 15%.

„Share on profit“ paid to Czech trust fund for the benefit of Slovak natural persons

Second frequently discussed topic is how to fiscally deal with the incomes earned by Slovak beneficiaries from the trust fund received e.g., from Slovak companies in the form of dividends and which are subsequently “distributed” among the beneficiaries. Please note that even though according to the Czech tax law, the trust fund is taxed similarly to a Czech company and the fund’s share on profit is taxed in the same way as dividends, it is not possible to set the level of dividend income based on a comparison of legal characteristics of the performance from the profit.

According to § 3 par. 1 letter e) of ITA, a dividend is a share of the profit paid by a company or a cooperative, which is a profit intended for distribution to persons who participate in their share capital or a member of the statutory body or a member of the supervisory body of this company or cooperative. It is true that a foreign person paying a similar income is also considered a business company or a cooperative.

Since the trust fund paying the mentioned performance doesn’t have a legal personality and is not considered a taxable person for the ITA purposes, the assets in the fund are anonymous, the fund’s beneficiary doesn’t own the property generating profit and in no way he participates in the share capital of this fund (the fund doesn’t create capital) and the performance from the fund’s profit does not represent the beneficiary’s income from holding the assets in the fund, the performance from the fund’s profit paid to the beneficiary of this fund does not represent an income similar to the income stated in in § 3 par. 1 letter e) of ITA.

As the performance from the fund’s profit doesn’t fall within the scope of income specified in § 5 to 7 of the ITA, the income of the fund beneficiary (Slovak tax resident) is income under § 8 of the ITA (other income) and is taxed directly by the taxpayer through a tax return filed by this taxpayer. Please note, that other income is subject to a tax rate of 19% or 25%. It is also important that the withholding tax deducted in the Czech Republic when paying this income in favour of Slovak tax residents can be offset against the amount of tax in the Slovak Republic.

Similar questions arise in connection with other family property management institutes used around the globe. We are glad that we could bring you a closer look to the summarized opinion of the Slovak financial administration on at least two issues related to the institute which is often used in our country due to the proximity of the Czech Republic. Please, don’t take the above as a binding tax opinion, but rather as an inspiration for the areas that should always be checked when implementing any structure to ensure the management of your family property and its intergenerational exchange.

Peter Pašek

Managing Director | Partner | Accace Slovakia

Book a meeting with Peter

From January 1, 2021, a new exemption from income tax of the legal person was established in Slovakia, for a taxpayer who is a legal person, according to § 13 par. 2 letter k) of the Income Tax Act (referred to as the “ITA”), according to which according to which are exempted e.g. benefits provided under active labour market policy according to § 54 par. 1 letter e) of the Employment Services Act. These are therefore contributions within the so-called First aid, First aid plus, or also the future First Aid plus plus.

Please note, that in terms of provisional the above-mentioned exemption shall be used for the first time also when submitting tax return from income of legal persons after December 31, 2020. This means, that the exemption will apply when  determining the tax base or tax loss of legal persons and also for a tax period of calendar year of 2020 or for a tax period that is an economic year, for which a tax return is submitted after December 31, 2020 or for another tax period for which the tax return is submitted after December 31, 2020.

Which contributions are not exempt from income tax?

However, it is sometimes mistakenly believed that revenues from other subsidies in connection with the COVID-19 situation are also exempt from the tax, e.g. rent subsidies according to the Act on the provision of subsidies within the competence of the Ministry of Economy of the Slovak Republic, revenues from the contribution to the support of tourism in connection with the mitigation of the negative consequences of the pandemic, which arose due to the COVID-19 disease according to the Act on the Support of Tourism, etc. These and other subsidies are considered taxable income and are subject to tax.

What to consider at the end of the year in relation to the received grants?

When determining tax base or tax loss in connection with the received grants, a principle of maintaining neutral effect on the tax base is applied. This means, that if the revenue from the grant in the amount affecting the economic result (note: recognized in income) is tax exempted, then then the costs related to it temporally and materially are not tax expenditures according to § 21 par. 1 letter j) of ITA.

However, if the revenue from the grant, in the amount affecting the economic result, is not tax exempted, i.e. it is a taxable income, then the time and material costs associated with it, for the payment of which subsidies were provided included in taxable income (revenues) are tax expenditures according to § 19 par. 2 letter m) of ITA.

Elimination of expenses in relation to grants for single-person limited liability company

Probably, the most questions in relation to this arise when eliminating the effect of grants on the tax base in case of so-called single-person limited liability company which can apply for a contribution within so-called 4B measures. It is true that single-person limited liability company accounts for the contribution under measure 4B in the time and material relation with the accounting period to which the so-called eligible period for which the applicant is applying for a contribution belongs to, in favour of account 648 – Other revenues from economic activity.

Revenue booked this way is exempt from tax and is thus a deductible item which appears on the line 230  in the tax return of legal person.  With a goal to reach neutral effect  of the received grant within the 4B measures for a tax base or tax loss, the single-person limited liability company excludes from tax expenses costs related to income not included in the tax base in accordance with § 21 par. 1 letter j) of ITA.

Please note, that in contrast to measures 1, 3A or 3B in the case of a single-person limited liability company that can claim  a contribution under measure 4B may incur no labour costs. In case of measures 1, 3A or 3B to maintain neutrality in the calculation of the tax base, these costs are excluded through the so-called “addable items”.

The purpose of the contributions within 4B measure is to support single-person limited liability company to replace missing revenues. Based on the above, it can be stated that this contribution was acquired by a single-person limited liability company in connection with its business activity. Therefore, it is necessary to exclude from the booked costs that part of the costs that are temporally and materially related to the tax period for which the contribution under measure no. 4B  was provided, up to the amount of the recognized revenue from the contribution within 4B measure. Therefore, any costs incurred by the company can be excluded.

Please consider, that the excluded costs are not tax expense and they are an item increasing the tax base, which is shown in the tax return of legal person in a table of auxiliary calculations A on line 14 (subsequently on line 130).

In practice, basically two situations can arise in this context:

• Costs for a tax period over the amount of contributions within 4B measure. In this case, a part corresponding to the amount of contributions within 4B measure that are exempt from tax, will not be included in the tax expenses.
• If the costs for a tax period, that include so-called eligible period, are not over the amount of contributions within 4B measure, will be exempted from tax expenses only in the amount in which they arose. For example, if a single-person limited liability company doesn’t report any costs, it won’t add to the tax base. Of course, the exemption of the amount of subsidy booked in income remains.

Peter Pašek

Managing Director | Partner | Accace Slovakia

Book a meeting with Peter

Recently, an idea to move in a direction of so-called Estonian way of taxation once again appears in Slovakia. To be honest, the proposals we have read so far from politicians are far from the system that works in Estonia. Therefore, it is suitable to at least shortly describe how such a way of taxation works in this Baltic country.

A distinctive way of taxation

It must be noted that this distinctive system of corporate income tax was introduced in 2000 in Estonia and it is based on a principle that companies don’t pay income tax on unpaid profits. Corporate tax base is therefore set at 0 % and the subject of tax are only dividends, or “expenses” considered as so-called “hidden” profit distribution.

In Estonia, there is no exclusion and the rule applies to incomes from active business activities, incomes from passive investment or so-called capital gains from sale of assets. It is important to mention, that unpaid profit in a such way is not a subject to yearly taxation and it is also not important, if these profits are reinvested abroad or in Estonia (note: the exclusions may be applied only to so-called tax havens).The corporate income tax is levied monthly using so-called “gross-up” tax rate of 20/80 on any actual or deemed profit distributions. This income includes dividends distributions, grants, gifts, representation expenses (exceeding values determined by a law), social benefits (e.g. expenses borne by employer, not employee) and non-business expenditures.

The corporate income tax is payable monthly based on a submitted tax return which shall be submitted by the 10^th day of the following month. In Estonia, there is no so-called annual tax return filling (with an exception of so-called hybrid mismatches, thin capitalizations, and CFC rules), traditional deductible and non-deductible items to the tax base, or amortization of tax losses. As already mentioned, even so-called non-tax expenses (e.g. representation expenses exceeding established limits) are subject to income tax calculated monthly. Simply put, the company´s non-tax expense is taxed based on monthly submitted tax return, always after its end. Probably the most interesting part of the tax law is the taxation of profit distribution. If an Estonian company makes a profit intended for distribution, e.g. in the amount of EUR 100,000, in fact, it can pay the value of EUR 80,000, while the amount of EUR 20,000 will represent the amount of income tax (rule 20/80) to be paid by the above-mentioned 10^th day following the month of payment.

An incentive for companies

As an incentive for a regular distribution of corporate profits, the Estonian government has also introduced reduced corporate tax rate 14/86, which shall automatically apply to the value of the distributed profit that is equal to or lower than the average value of the distributed profit for the last three calendar years for which the company was paying the corporate tax, regardless of whether it was calculated on the principle of 20/80 or 14/86 rate. Under certain conditions,  such profits don’t include incomes in the form of dividends received from abroad which are exempt from tax.

In essence, except for the first distribution of profits, a part of the value of dividends distributed is subject to a reduced tax rate of 14/86 and the remaining part is subject to the standard 20/80 tax rate. The tax rate 20/80 or 14/86 is considered as a deferred corporate tax of Estonian companies. We draw your attention to this, because it is often mistaken for withholding tax on shareholders´ dividends. For this reason, this tax can´t be offset against the tax liability of the partner in the country of his tax residence upon receipt of dividends.

In Estonia, there are no rules or restriction on companies debt-to-equity ratio. On the other hand, it must be taken into account, that a loan granted to a parent company or a subsidy might be considered as a hidden dividends distribution, if the substance of the transaction refers to profit distribution, e.g. if the due date of the loan provided to a parent company or a subsidy is longer than 48 months, then it is considered as a hidden dividends distribution and the Estonian company is obliged to prove the opposite. The tax authorities in Estonia provide 30-day period for such a proof. Unless there is a demonstrated interest in repaying the loan or a reasonable ability to repay it, the loan is considered as hidden dividend distributions, which must be taxed in Estonia under the 20/80 rule.

In case of withholding taxes applicable to tax non-residents, they don’t generally apply to the dividends and interest paid to companies. However, the situation is different in case of dividends distribution to tax non-residents individuals who are subject to withholding tax of 7 %, provided that these dividends were taxed at a company level by the above-mentioned reduced tax rate of 14/86. There are several double tax treaties concluded with Estonia, which allow to reduce the 7 % withholding tax rate even more. Again, it is important to mention, that this withholding tax doesn’t apply to the dividends distribution to companies, regardless of the country of the tax residency.

Royalties are subject to the withholding tax of 10 % according to the local Act on income tax, unless the relevant double tax treaty didn’t provide for a lower tax rate, or grants the right to tax the royalties only in the country of the receiver of such a payment. Of course, in Estonia as EU member state, royalties are excluded from taxation if considered as exempt payments between related persons within the EU, with mutual participation of 25 %, provided that the two-year holding period has been fulfilled by the date of payment of royalties.

Capital profits made by a non-resident from the sale of estates situated in Estonia, resp. from the transfer of shares in so-called “real estate corporations” are subject to income tax rate of 20 %. The real estate is a company whose property at the time of the transfer of shares or in the two years prior to the transfer involves more than 50 % directly or indirectly of immovable property in Estonia, with the seller holding at least 10 % share on the company at the time of the transfer. At other times, the capital profits made by non-residents from the sale of shares of Estonian companies are not subject to Estonian income tax.

As can be seen, the change of the system to the Estonian model is very complex and to be effective in practice, it really requires a comprehensive change of tax laws.

Peter Pašek

Managing Director | Partner | Accace Slovakia

Book a meeting with Peter

From 2021, new institute of so-called micro-taxpayer in Slovakia will come into effect and its main purpose is to support SMEs. The micro-taxpayers will gain certain advantages as compared with other taxpayers. We point out that the status of the micro-taxpayer can be gained for the first time in the taxation period starting at the earliest on January 1, 2021. For example, the taxpayers with the financial year starting on December 1, 2020  will have to wait for other 12 months.

Who is a micro-taxpayer?

A micro-taxpayer is a natural person – entrepreneur, i.e. a self-employed person or a legal person whose taxable incomes (revenues) for the taxation period don’t exceed the amount of EUR 49,780. The taxable income (revenue) means an income (revenue) that is not exempt from tax or exempt from the subject of the tax. The exempt income (revenue) is for example, grants specified as “first aid”. Application of this regime is not based on whether the taxpayer is or is not the VAT payer.

On the other hand, regardless of the above-mentioned, the micro-taxpayer is not a taxpayer who is dependant person and who carries out controlled transaction for the respective taxation period, or which was declared a bankrupt, entered the liquidation or was allowed the repayment calendar (in case of debt relief of natural person), respectively, whose taxation period is shorter than 12 consecutive calendar months, excluding death.

Condition for compliance with absence of a controlled transaction

The most problematic is a condition for compliance with absence of a controlled transaction, since in practice, the controlled transaction might be, for example, also a remuneration paid to the executive manager – a partner in single-person limited liability company. There is thus an assumption that a vast group of taxpayers will be excluded from the tax institute even if the conditions of a taxable income (revenue) for the tax period are met. According to our opinion, it would require a change in law, or methodological guidance, since we don’t assume that the goal of the legislator was to strictly punish any dependant relationship and controlled transaction of the taxpayer.

The tax areas in which the micro-taxpayer can apply the advantage are tax depreciation, amortization of tax losses, creation of provisions and depreciation of receivables. According to our opinion, the possibility of using 15% income tax rate from 2021 only by so-called group of micro-taxpayers is misinterpreted. We are of the opinion, that the tax rate will be possible to apply to any natural person – entrepreneur, self-employed person or legal person with taxable incomes (revenues)  up to EUR 49,790. Of course, due to the nature of the definition of the micro-taxpayer, this tax rate will also apply to micro-taxpayers, but according to us, it will apply to other taxpayers who, for example, won´t pass the controlled transaction test.

Tax depreciation

The micro-taxpayer will be able to depreciate the assets classified in the depreciation groups 0 to 4 (e.g. consumer electronics, computers, communication equipment, buses,  etc.) with an exception of a car with an entry price of EUR 48,000 or more, at most during the depreciation period according to the relevant depreciation group (group 0 = at most 2 years, group 1 = at most 4 years, group 2 = at most 6 years, group 3 = at most 8 years, group 4 = at most 12 years) in the amount specified by him, up to the amount of the entry price.

It should be noted that the preferential regime will not be applied to for example, to depreciation of flats, office space, etc., i.e. assets included in the depreciation group 5 and 6. The moment of acquisition of a property will also be a limit, as the preferential regime may be applied to assets acquired from January 1, 2021 and later. Subsequently, the condition for use of the preferential depreciation will be an asset put into use, respectively, included in the business property during the taxation period in which the taxpayer met the established conditions of the micro-taxpayer. Subsequently,  it won´t matter if these conditions are met also in the following years, as the preferential regime will apply to this asset until the end of its depreciation period.

Please consider, that the micro-taxpayer won´t be able to interrupt the tax depreciation on assets depreciated on the preferential basis, on the other hand, he has a relative freedom in determining the amount of the tax depreciation for the relevant tax period until the depreciation period expires.

Likewise, in the case of a property lease, the micro-taxpayer will not be a subject to the tax depreciation limit up to the amount of the rental incomes (revenues). However, it applies only to a property included in the depreciation groups 0 to 4,  where in the case of the micro-taxpayer natural person, the leased asset must be classified as the business property.

Amortization of tax losses

Unlike the usual taxpayer, the micro-taxpayer will be able to apply tax loss up to the amount of the full calculated tax base in the tax period in which he wants to apply its amortization. The taxpayer must be regarded as a micro-taxpayer in the tax period in which he wants to apply the amortization. The fact, whether he was or was not a micro-taxpayer in the tax period for which the tax loss was recognized is not relevant. It should be noted that the micro-taxpayer will only be able to apply the preferential regime in case of a loss reported for tax periods starting at the earliest on January 1, 2021.

Provisions and depreciation of receivables

The micro-taxpayers accounting in double-entry bookkeeping system will be able to claim the creation of provisions for nonexpired receivables and receivable accessories included in taxable income for tax expenses in accordance with accounting. They won´t have to count so-called time tests. Please note, that this doesn’t apply to receivables attained by assignment or receivable that can be offset against with payables due to the creditor. In addition, there is another limit, namely that the preferential regime may be applied to the creation of provisions for the receivables and receivable accessories included in the taxable incomes in the taxation period in which the taxpayer was a micro-taxpayer.

The currently approved amendment from 2021 modifies that it would be possible for the micro-taxpayer to claim the depreciation of a receivable for tax expenditure up to the amount of the provision which would be recognized as a tax expenditure up to the amount in which it would be charged in the expenses in accordance with accounting. The tax depreciation will be used for the first time for depreciation of a receivable or receivable accessory that occurred in the taxation period in which the taxpayer is considered as a micro-taxpayer, and it is a receivable depreciation or its accessory included the taxable incomes in the taxation period in which the taxpayer is considered as a micro-taxpayer, as well.

Peter Pašek

Managing Director | Partner | Accace Slovakia

Book a meeting with Peter

The Government of the Slovak Republic approved the Amendment to the Income Tax Act in Slovakia at the end of August. One of the planned changes valid from 2021 is the introduction of the so-called CFC (Controlled foreign corporation) rules for individuals to prevent the outflow of tax revenue abroad. This is another step to prevent tax fraud. Read all important information related to CFC rules for individuals in our latest eBook.

At the end of June, the National Council of the Slovak Republic approved extensive proposal for amendments to several laws from the Ministry of Economy of the Slovak Republic that covers numerous areas of business life. So-called Lex Korona in Slovakia ultimately represents simplification of many obligations that put administrative burden on entrepreneurs. There is an extension of many tight deadlines, as well as the abolition of reporting obligations related to facts that a state can ascertain them from other sources.

Simona Klučiarová, Senior Associate from our own law firm Accace Legal in Slovakia, prepared a selection of the most interesting adopted and planned changes for businesses in Slovakia.

Warranty complaint handling may be extended

Until now, the seller was obliged to handle the warranty complaint within 30 days of its application. From now on if an object of the complaint is taken over by a seller on a later day than the day of the warranty complaint, the period for handling the warranty complaint begins from the day of take-over of the object of the complaint by the seller, but at the latest from the moment when the seller prevents or precludes the take-over of the object of the warranty complaint.

The limit for carrying out a statutory audit was increased again

Despite the fact, that the limits for carrying out a statutory audit were increased as of January 2020, thanks to “Lex Korona” another change takes place, even twice.

For the accounting period beginning on January 1, 2021, the auditors´ statutory audit is required if the total amount of assets exceeds EUR 3,000,000, the net turnover exceeds EUR 6,000,000 or the average recalculated number of employees in one accounting period exceeds 40 and at least two of these conditions must be met.

For the accounting period beginning on January 1, 2022, these limits are increased once more, as follows: the total amount of assets must exceed EUR 4,000,000, the net turnover must exceed EUR 8,000,000 or the average recalculated number of employees in one accounting period must exceed 50.

Employer´s obligations to the Social Insurance Agency are changing

From January 1, 2021 the employer´s obligation to deregister from the Social Insurance Agency within eight days from the day on which he/she no longer employs any employee is abolished.

The Social Insurance Agency will terminate the employer´s registration in the register of employers by deregistering its last employee from the register of insurers and savers of old-age pension savings.

From January 1, 2023 within the meaning of the amendment, the obligation of the employer to announce the beginning and the end of the maternity leave or parental leave is abolished. Until then, employers must continue to fulfil this obligation.

Changes in OSH

The employer´s obligation to regularly evaluate the concept of occupational safety and health policy (OSH) is changing. From now on, the employer is obliged to evaluate the existing concept of OSH only if it is necessary, for example, if he/she accepts its changes.

Another change in this area is that not every employer is obliged to appoint one or more employees as employee safety representatives.

Pursuant to the adopted amendment, this obligation is effective only for the employers who employ at least ten employees or whose code according to the statistical classification of economic activities is given in Annex no. 1 to the OSH Act. Other employers can do so voluntarily.

In connection with the OSH, another significant change is planned, and that is adjustment of the employer´s and employee´s obligations in case of work from home (so-called home office) in the field of OSH, fire protection, working time records and ergonomics at the workplace.

The Ministry of Labour, Social Affairs and Family of the Slovak Republic should submit a draft act to the government for discussion by October 31, 2020 at the latest.

A possible end of meal vouchers in Slovakia

The previously mentioned draft act by the Ministry of Labour, Social Affairs and Family of the Slovak Republic should also cover the possibility for employees to choose between meal vouchers and financial contribution for meals.

The interruption of the commercial trade will be possible even for 1 month

Currently, self-employed persons can interrupt their business activities for at least 6 months.

However, the Ministry of Interior of the Slovak Republic shall submit a draft act by October 31, 2020, in which this period will be shortened to 1 month.

Peter Pašek

Managing Director | Partner | Accace Slovakia

Book a meeting with Peter

Have you been brewing your great business idea when the COVID-19 pandemic hit the world? It may seem wild, but you should not be afraid to go on with your project. As a matter of fact, many successful businesses started in times of crisis. The economic downhill provides a strict yet valuable environment for validating ideas, as customers use or buy only what they really need. In general, the amount of required investment significantly decreases, such as the price of workforce due to the increased unemployment rate. But what does – and should – remain the same is the passion for exploring new opportunities, which is the most important asset to invest into your start-up, no matter the crisis.

The key to pull through: a good business model

Examples from the past have taught us that a standalone idea or unique technology does not guarantee success. Although an ambitious mindset is important, the abilities to achieve the break-though is even more crucial. The key is a successful business model, but to create one, you need to identify and know your target audience or customers – what they need, what added value can you offer to them and how the revenues will be generated.

Bear in mind that most investors are no longer seeking companies with the potential to achieve the economies of scale, but instead they are looking for start-ups that can deviate from creating a mass product, in order to offer a customizable solution that adapts to the individual needs of each customer.

When it comes to investments, consider the phase of your business life cycle

At some point, every start-up gets the opportunity of investment – but it all depends on the phase of the business life cycle. As the company develops over the time, so do the investment rounds and investors who are keen on investing.

The first “investors” are usually family members, friends and so-called “fools”; later, there are angel investors, VC funds and finally, PE funds or strategic investors. However, it is always necessary to know exactly what the investment is intended for and to which phase of the business cycle should it transfer you. If a company is already heading to the so-called “A” financing, it often needs an investment from EUR 500,000 to EUR 2,000,000 in order to expand its distribution channels, increase the costs for marketing, business development and sales while proving its ability to do business on a larger scale. It is a completely different scenario from the case of a company that needs EUR 10,000 up to EUR 30,000 at the beginning to materialize the initial idea into a viable product that can be offered to the first potential clients.

Fulfil the commitments towards your stakeholders

While a prudent investor will make sure you do not spend the investment on something that is not agreed in advance or is in contrary to your financial or business plan, in any case, you should always spend the money on what you are committed to by contract. The investor often holds a place in various “advisory boards” and over a certain amount the money cannot be spent without their consent or risk of start-up sanctions. In addition, the company often receives tranches, so the money flows into the business gradually, upon meeting the agreed sub-goals.

 There is still a risk that the start-up may run out of resources before it can reach the next phase and start another investment round. Currently, the problem is the working capital. As companies lose their sales, they are under obligation to pay their employees and suppliers. Their so-called “runway” is simply shortening and it is very likely that numerous start-ups will end before they can “take off”, as they have been running out of resources. Being left without real funds is the biggest risk nowadays.

Take more time to reach your goals during a crisis

More than ever before, start-ups should be aware of how long their current funds can last. If they are in an investment round, it is necessary to acknowledge that the next round may come 3 to 6 months later due to COVID-19.  If the company brings light to the fact that they may not survive till the next investment round, then it is crucial to cut the costs as much as possible and consider the option of a “bridge” financing. At least they can gain some time – which has become one of the most valuable assets every start-up needs currently.

Peter Pašek

Managing Director | Partner | Accace Slovakia

Book a meeting with Peter