Slovakia: Amendment to VAT Act Makes Life More Difficult for LTDs
→ Stanislav Kovár
→ Monika Kormošová
The new amendment to Slovakia’s VAT Act complicates the transfers of shares in limited liability companies.
Due to protracted problems with its budget deficit, the new Slovak government decided to pass an amendment to the VAT Act (VAT Amendment), which took effect on 1 October 2012 and aims at eliminating fraudulent actions damaging VAT collection. This new piece of legislation is far reaching and touches not only tax law, but also corporate and criminal law.
Setting up a limited liability company
The VAT Amendment changes the provisions of the Slovak Commercial Code in such a way that the founder of a limited liability company (the Slovak equivalent to a GmbH) must be a person having no tax arrears. Before filing an application to register a limited liability company (LTD), the founder (including a foreign one) must ask the Slovak tax administration authority for written consent – which must be issued within three working days if the founder has no (or only minor) tax arrears.
Transfers and divisions of business shares
The same written consent is required when a business share to which at least 50% of all votes pertain (“majority business share”) is to be transferred and/or divided. This written consent is required in relation to both the transferee and the transferor of the majority business share. Without obtaining written consent from the tax administration authority, a majority share transfer cannot be registered in the commercial register and thus cannot take effect.
Transfers or divisions of the majority business share due to, for example, a merger or division do not require written consent. The written consent requirement does not apply to a foreign transferor/transferee of a business share. When written consent is not required, the application to register a share transfer must contain a written declaration of the transferor and the transferee that they are released from the duty.
Collateral for VAT
The VAT Amendment introduces new provisions on collateral for VAT arrears. When applying for VAT registration, the applicant must, under certain conditions, provide collateral for 12 months, either as a financial deposit or as an unconditional bank guarantee. The collateral requirement also applies inter alia to persons performing only preparatory activities, such as new market entrants. The amount of the collateral will be determined by the tax office for each applicant (with a cap of EUR 500,000). Failing to provide the collateral for VAT in full will cause the rejection of the application for VAT registration. Collateral not used for the settlement of tax arrears in the course of 12 months must be returned to the applicant.
Guarantee for VAT, cancellation of registration
The VAT Amendment introduces the obligation of the payer to settle VAT stipulated on an invoice that has not been paid by the supplier when due, if the payer knew or reasonably should have known (eg, inadequate consideration stated on the invoice or being a member of the supplier’s statutory body) that the supplier will not meet his tax duty.
Repeated non-compliance with the duty to submit VAT returns, to pay own tax duty, and various types of passive behaviour by the tax payer (eg, repeated breaches of the co-operation duties during a tax inspection) will now lead to the cancellation of the tax payer’s registration for VAT by the tax office.
The VAT Amendment also indirectly amends the Criminal Code and introduces two new crimes. The new crime of tax fraud was created by a separation of certain misconducts from the too-broadly defined crime of non-settlement of tax and focuses on the unlawful application for VAT or excise tax return. The crime of obstructing the tax administration sanctions various types of behaviour hindering proper tax administration; for example, damaging or destroying necessary documents or providing misleading information.
The VAT Amendment, aimed at fighting the exploitation of tax law loopholes, unfortunately brings with it complications for corporate law transactions using LTDs – the most common business vehicles in Slovakia. These complications must be considered when founding a Slovak LTD, when drafting share purchase agreements and when planning the closing mechanisms in deals involving a Slovak LTD.