European Low Tax Home For Your Limited: 7 Quick Facts

Undiscovered low tax lands in Europe

Many European countries offer business opportunities that often remain unnoticed. In this article, we give you a clear idea about the benefits of a limited (s.r.o.) in Slovakia. The changes in the tax code from the end of 2020 are considered.

Limited Establishment—EUR 249

A typical establishment of a limited liability corporation can cost as little as 250 EUR in Slovakia. The consulting fees start at 99 EUR and the court fees are 150 EUR. There is no initial capital payment required.

Corporate Income tax—15% / 21%

Companies with income up to 49,790 EUR are taxed with only 15%. With more income, the standard tax rate of 21% applies.

Dividend tax—7%

The standard withholding tax for dividends is only 7%. However, if the shareholder is not a tax resident of Slovakia additional tax may apply in their country of residence. This depends on the international double taxation treaty with that state. If there is no treaty and no agreement about information exchange, by rule 35% dividend tax is due in Slovakia.

Overall income tax—20.95% / 26.53%

The 15% income tax and 7% dividend tax add up to 20.95% tax burden for local shareholders (15% + 7% x 0.85= 20.95%). If the annual income exceeds EUR 49,790 and the higher income tax applies, the overall burden is 21% + 7% x 0.79 = 26.53%. For comparison, in Austria the corporate income tax is 25% and die standard dividend tax is 27.5%, resulting in a burden of 45.63% (25% + 27.5% x 0.75 = 45.625%). Please note that additional dividend tax might apply, depending on the shareholder’s tax residence.

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CEO’s health insurance—EUR 76 / month

It is a common case that CEO is also the only shareholder of a limited liability company without a contract of employment. The CEO in such still has to have health insurance. If they don’t have any other health insurance in the EU, a payment to the Slovak health insurance of 76.44 EUR is due monthly. No health insurance fee is due if the CEO is already insured with a different employer or in a different EU country (which is the case for most people with another primary occupation).

Do want to know more about social security for international in Europe?—Or do you have your own experience to share? Please leave a comment and let us know.

Added bonus—an unexpected tech talent pool

Slovak tech companies are nothing new. Any simple quick search will return a handful of names you may have heard before such as Eset or Slido. However, in recent years more credit has been given to the developer base as well. Skill-Value, an IT sourcing company, conducted a worldwide assessment of freelancing programmers and surprisingly found Slovak developers to come on top. Now this research would possibly not hold as scientific research of any kind, yet it might be an interesting insight.

(source: SkillValue publishes the IT Ranking on the Best Developers in the World—link)

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Internationals’ common mistakes

If you intend to legally run your limited company in Slovakia but live abroad there are a few additional legal factors that can spoil that intention. The most common mistakes are—

  • Lack of physical presence: It is not enough that you establish a corporation in Slovakia (or any foreign country for that matter). The tax authorities in Slovakia may deny you tax registration if you cannot prove any business activity within their borders. Also, the tax authorities in your country of residence may claim that your business is fully taxable in your home country regardless of the foreign establishment. That is for example if the country of the CEO’s residence is the only place of operation and there are no employees or physical premises to prove otherwise. It is important to note that even if the tax registration of the corporation abroad is deemed valid, there is still the possibility that—at the same time—a permanent establishment arises in the country of the CEO’s residence and taxation of the business will be split between the two countries. All these things should be considered beforehand.

Hold on a second—doesn’t Amazon legally sell everything in Europe from Luxemburg?
Do you want to discuss digital companies? Please leave a comment and let us know.

  • Untaxed dividends: The second common mistake is the wrong treatment of foreign dividends. The taxation is mostly split between the country of establishment and the country of the shareholder based on the international tax treaty between the two countries. In most cases, the tax authority in the country of the shareholder’s residence has no knowledge of foreign dividends being paid. The shareholder has to come forward and disclose this fact in their tax filing. Note that in Europe increasingly criminal proceedings are being initiated against people who neglected to declare their foreign passive income correctly. Additionally, dividend taxation can be triggered even if no “formal” dividend payout had taken place—this is by principle the case if you as the only shareholder use your company’s money for private purposes.

Would you like to discuss foreign dividends further?
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Side-note: One way to implement better compliance and control over the point dividend taxation is a written loan agreement between the corporation and the shareholder covering such a scenario (further legal requirements are not discussed in this article). However, signing such an agreement in retrospect (with an earlier date) to achieve a tax advantage constitutes tax fraud and is treated as a criminal offense in most European countries. This why tax planning is important.

A way to spot a good tax attorney might be to see how eager they are to discuss your future plans.
It is never a good idea to patch what already happened with quick fixes.
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Conclusion

Slovakia offers good conditions for starting a small business. On one hand, there is a low dividend tax and on the other a pool of talented workforce. Nevertheless, there are a few additional challenges and potential mistakes one should be aware of, especially the international tax law can spoil the intended benefits. The most common mistakes of international founders are insufficient physical presence and wrong tax treatment of dividends.

Please note that this article is illustrative and cannot provide all specifics regarding this topic. Your case may differ. We always recommend consulting an experienced specialist before making decisions.

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