From spring 2015, joint-stock companies, limited liability companies and other trading companies will be required to pay a new tax – the tax licence. It will be calculated retrospectively for 2014. It is one of the government’s measures to combat tax evasion and aims to rid the market of shell companies.

The amount will depend on:

  • the company’s turnover
  • VAT registration status

It is true that all trading companies will be required to pay it. However, it will weigh most heavily on those that made a loss in the previous year or reported a profit lower than the amount of the tax licence assessed.

Amount of the tax licence:

  • EUR 480 – non-VAT payers with turnover of up to EUR 500,000 – approximately 50,000 entities fall into this category
  • EUR 960 (i.e. double) – VAT payers with turnover of up to EUR 500,000 – approximately 83,500 entities fall into this category
  • EUR 2,880 – companies with turnover above EUR 500,000 – approximately 24,000 entities fall into this category

Entities exempt from the tax licence:

  • newly established companies in their first year of business
  • sheltered workshops

One of the arguments in favour of the tax licence is that more than 60% of companies pay no tax at all because they report no profit. Losses, however, are often generated by larger investments, for example in property or a vehicle fleet, and such an investment can leave a company loss-making for several years. Through depreciation of investments, the state has been contributing positively to companies’ development – and this support is now partly coming to an end.

A further argument put forward by the Ministry of Finance of the Slovak Republic is that corporate income tax is being cut from 23% to 22%. This reduction is presented as easing the tax burden on profitable companies. A closer analysis of the tax base, however, leads to the following example, which illustrates the impact on companies’ real tax burden.

A company that falls within the second band of the tax licence – a VAT payer with turnover of up to EUR 500,000 – makes a profit, i.e. a tax base, of EUR 2,000. Officially, it is not the type of company the licence is targeting, since it is profitable. Without the licence, at the corporate income tax rate of 22%, its tax would be EUR 440. That, however, is not enough, because the licence amounts to EUR 960 and can be avoided only by offsetting it against the tax liability, which is impossible here because the calculated tax is too low. The company will therefore pay the full licence of EUR 960, which works out at an effective rate of as much as 48% – a striking increase in the tax burden. Incidentally, this is the largest group of businesses in the Slovak Republic.

It should be noted that the company in the example could deduct the difference from a higher tax liability over the following three years, but only if it makes a higher profit. In other words, once the company’s position improves and it achieves higher profits, the licence can be deducted within three years; there are even plans to allow the tax licence to be assigned, in the same way as 2% of tax can currently be assigned to the third sector.

The proposed tax licence for companies makes no distinction between a company that is genuinely loss-making – because it is actually selling less or has made a major multi-year investment – and one that is merely optimising, i.e. using legal or semi-legal means to avoid paying income tax.

Put simply, even a loss-making company will pay at least some tax. Officially, however, it will not be a tax but an annual tax licence – essentially a sum that every company must pay to the state in every case. If a company manages to become profitable, and therefore owes tax to the state, nothing is lost: it can deduct the licence already paid and settle only the difference.

Source: Ministry of Finance

PHOTO: TASR