How to sell a company in the Slovak Republic and pay 0 € income tax using holding?

How to sell company in Slovakia without CIT.

Taxes in Slovakia 18. October 2023

Under what conditions do you not have to pay income tax on the sale of a business share in Slovakia?

At the outset, for the purposes of this article, the sale of a business is defined as the sale of a business interest or the sale of shares in any of the forms of companies listed below.

The Slovak Income Tax Act allows income from the sale of a business (sale of business interest or shares) to be exempt from income tax from 2018 onwards, provided that the following conditions are met:

  1. The exemption applies to owners of business shares and stocks only if they are legal persons – corporations. Thus, the exemption does not apply to natural persons who own shares in a business company. That is to say, a legal person must be registered as a partner or shareholder in the commercial register.
  2. The exemption applies only to those legal persons who have their registered office or place of effective management in the Slovak Republic or legal persons who have a permanent establishment in the Slovak Republic. Place of effective management and permanent establishment are defined later in this article.
  3. The exemption applies only to the sale of shares in: (a) a Slovak limited liability company LLC (s.r.o.), or (b) to the sale of shares in a joint stock company (a.s.), or (c) a simple partnership for shares (j.s.a.), or (d) to the sale of a limited partner’s interest in a limited partnership (k.s.), or (e) to the sale of shares or stock in a similar foreign company.
  4. The legal entity must have held or owned the shares in the company being sold for at least 24 consecutive months and therefore for at least 2 years.
  5. the amount of the directly held shareholding or shares in proportion to the share capital of the company being sold must be at least 10 %.
  6. the contribution to the share capital of the company being sold from which the shareholding being sold is derived must be fully paid up.
  7. the legal entity selling the shares in the company must perform the essential functions, manage and bear the risks associated with the holding of these shares and business shares in Slovakia, and at the same time must have sufficient personnel and material equipment to carry out these activities.

What is a directly held business share?

One of the conditions for exemption from income tax on the sale of a business is that the legal entity selling shares or business interests in the business being sold must own those shares or interests directly. Directly owned means that the partner or shareholder owns these business shares or stocks directly and is registered in the commercial register as a partner, shareholder or limited partner and participates in the management and control of the company being sold. An indirectly owned interest would be where the selling body corporate owns an interest in the company being sold by being a shareholder in another company which in turn owns an interest in the company being sold.

What does it mean to exercise the essential functions, management and risks associated with holding shares and stock?

One of the conditions for exemption from income tax on the sale of a company is that the legal person (holding co.) selling the shares in the company must perform in Slovakia the essential functions, manage and bear the risks associated with holding those shares and business interests, and at the same time must have sufficient personnel and material equipment to carry out those activities. This condition is intended to ensure that empty holding companies are not set up on purpose, which will hold shares in the companies being sold only to avoid paying income tax on their later sale. Therefore, the law requires that the holding company should actually exercise active management of the company being sold. This means that it should have the personnel and material equipment to do so, e.g. in the form of employees, offices, computers, etc.

What is a place of actual management and a permanent establishment?

One of the conditions for exemption from income tax on the sale of a business is that the legal entity selling the interest (holding co.) in the business must have its registered office or place of effective management or permanent establishment in the Slovak Republic.

A company has its registered office in the Slovak Republic if it has its registered office address in the Slovak Republic entered in the Commercial Register.

A permanent establishment means a permanent place or facilities for carrying on business through which the company carries on business wholly or partly in the territory of the Slovak Republic. It is in particular the place from which the company’s activities are organised. It is, for example, a branch, office, workshop, workplace, place of sale, technical installation or place of exploration and extraction of natural resources, etc. A place or facility for carrying on activities shall be deemed to be permanent if it is used continuously or repeatedly for the purpose of carrying on the activity. In the case of a single activity, the place or facility in which the activity is carried out shall be deemed to be permanent if the duration of the activity exceeds six months (a single activity is carried out for six months and one day), either continuously or in several periods in any period of twelve consecutive months.

The place of effective management of a legal person is the place where the management and business decisions of the statutory bodies and supervisory bodies of the legal person are taken, even if the address of that place is not entered in the commercial register.

How much € can you save on income tax when you sell your company? Example:

Using the example of two versions of the development of the same start-up, we will show a comparison of how much % and € you can save on income tax when you sell your company. And that’s assuming you make the right strategic decision at the right time.

VERSION “A” – in this version we will assume that the owner of the startup, Mr. Elon Musk, has decided to own his successful startup company, which has the legal form of an LLC, as an individual. Elon is thus the sole shareholder and holds 100% of the business share in his LLC. Elon works hard and in three years the value of his business share in the startup LLC has grown to €1,000,000. Elon plans to start a new project because he wants to get a man on MARS. For this he needs money and decides to sell his startup Ltd. for € 1.000.000. The taxation of the sale price will look like this (for the purposes of this article, we will leave out the technicalities of accounting regulations and other details). Assume that the tax base will be the full €1,000,000.

The tax burden for version “A” is 19% of the tax base up to €37,981 and 25% of the tax base above €37,981. Thus, the total tax on the income from the sale of the business interest in this case will be € 247,721. However, we must not forget the health levy, which is also payable on the sale of a business share, amounting to 14% of the assessment base, which is also the tax base. That is, the health levy will amount to € 140,000. The total tax burden (income tax + health levy) will thus be in version “A” when the business share is owned by a natural person in the total amount of € 387,721.

VERSION “B” – in this version we will assume that the owner of the start-up, Mr. Elon Musk, has decided to own his successful start-up company, which has the legal fomra of LLC (s.r.o.), as a legal entity. For this purpose, Elon will set up a joint stock holding company which will be the sole shareholder and will own 100% of the business stake in the startup LLC. Elon has been working hard and in three years the value of the business stake in the startup LLC owned by his joint stock company has increased to €1,000,000. Elon plans to start a new project because he wants to get a man on MARS. To do this he needs money and decides to sell his start up LLC for a price of €1,000,000. The taxation of the sale price will look like the following (for the purposes of this article, we will leave out the technicalities of accounting regulations and other details). Assume that the tax base will be the full €1,000,000.

The tax burden of version “B” is 0% due to meeting the conditions for income tax exemption and due to the smart setup of the ownership structure of the start up project LLC. Thus, €1,000,000 has become the income of the stock holding company that sold the business share in the LLC. However, Elon wants the money to be paid to his personal account, so the stock holding company approves the payment of a dividend to the shareholder Elon Musk in the amount of €1,000,000 to his account. The dividend in this case is subject to a 7% withholding tax on income in Slovak republic. The total tax burden will thus be only €70,000 in version “B”.

COMPARISON RESULT: The tax burden in the case of version “B” is more favourable by a full €317,721. Elon Musk has saved a large amount of money in the “B” version, which he can invest in the human journey to MARS.

How can you prepare to sell your company?

Now that you know the conditions for exempting the proceeds from the sale of your business, you can take strategic steps to “rebuild” the legal structure for holding shares or stock in your slovak company. This is so that the above conditions are met when you want to sell your project. The first measure is to own the shares through a legal entity – a holding company. Such a holding company can be a joint stock company or an LLC. A quick and convenient solution is to buy a ready-made holding company, which will save you a large amount of time compared to setting up a company completely from scratch. Check out the list of ready-made LLCs or the list of ready-made public limited companies to book your holding company online today.

Autor článku: Mgr. Dominik Ondrišeje

Dominik is co-founder of the SetupMART project. Dominik is responsible for corporate services and implementation of modern technologies in our services at SetupMART. Dominik is dedicated to the sale of ready-made companies since 2011. Dominik studied law at the Pan-European School of Law.