The Financial Directorate of the Slovak Republic has published the Information on the exemption of income from the sale of shares and capital shares under the provisions of Section 13c of Act No. 595/2003 Coll. on Income Tax. This provision may be applied upon the subject of conditions – to selected legal entities or permanent establishments of taxpayers with limited tax liability located in the territory of the Slovak Republic.
Due to extensive list of various conditions for application of the new exemption, we bring You with a comprehensive overview.
▢ Exempt revenues
Exemption from taxation of income from the sale of shares and capital shares applies to the sale of:
- shares in a shareholder of a limited liability company
- ordinary shares or shares representing rights similar to those of a shareholder of a limited company in shares
- a share of a shareholder in a limited liability company or a limited partner in a limited partnership (including similar partnerships abroad) and shares of tax resident or permanent establishment of a foreign corporation in Slovakia
At the same time, it is specified that the exempt incomes include only such income from the sale of shares or capital shares which is owned by a tax resident or a permanent establishment located in Slovakia.
The Tax Directorate specifies in the published Information that exempt income does not include income which represents:
- a membership right in a cooperative society, which is not exempt due to its absence in the exhaustively defined scope of exempted income
- a business interest in a foreign company when the taxpayer exit the territory of Slovakia and if it is part of the assets and liabilities of that taxpayer (the change of residence and transfer of interest abroad does not generate income and there is no change of ownership or legal transfer)
▢ Conditions for claiming the exemption
The exemption from taxation for shareholders, partners and limited partners located in Slovakia can only be claimed after several tests have been met, all conditions must be met at the same time. These are:
| Test | Conditions |
| Time test | The incomes from the sale of the financial investment are tested to be earned no earlier than 24 consecutive calendar months after the acquisition of the share |
| This is based on the date on which the sale is accounted for in the accounting (the basis for this is the contract for sale of shares or capital share) | |
| Minimum shareholding test | Condition of holding at least 10% of the share capital |
| Function and risk tolerance test | The performance of the essential functions (the exercise of shareholder and voting rights), the management and bearing of risks associated with the ownership of shares and capital shares including the disposition of the personnel and material equipment used to perform the rights and functions, are tested |
| This is based on accounting or IFRS records and cannot be a “shell company – passive company” or a “third party” that performs functions and management on behalf of the owner of the share or shareholding |
The above tests of minimum shareholding and bearing of functions and risks shall be tested over a period of 24 months from the acquisition of the shareholding.
The above test of exemption of income and application of exemption shall not be used:
- in the case of a securities dealer
- for a dealer in liquidation
- on the sale of ordinary shares by a shareholder of a limited company of share or a business interest by a taxpayer in liquidation, bankruptcy or restructuring
- on the sale of treasury shares
The Tax Administration clarifies that for tax purposes, only the actual execution of the restructuring plan is considered – the restructuring is completed after the plan is executed and the sale during that execution (if the exemption tests are met) – is not exempt from taxation.
The intent is to apply the exemption only to “healthy” companies that employ employees and report activity or have proceeded with a turnaround plan (going concern rule).
▢ Holding of a direct shareholding
For purposes to meet the conditions for application of the exemption of income from the sale of shares from taxation, it is also necessary to verify (test) the date of acquisition of the direct shareholding according to the conditions summarised below:
| Date of acquisition of the direct holding | Conditions |
| Full repayment of the cash deposit | The date of registration in the Commercial Register is verified |
| Repayment of the non-monetary contribution | |
| Completion of a plan to purchase, donate or inherit shares or capital shares | – Day of registration of shares in the records of the central depository – Day of transfer by endorsement and delivery of the certificated share – Effective date of the agreement on the transfer of shares to a limited liability company / limited partnership |
| Acquisition of shares or capital shares in a business combination or corporate reorganisation if: – the successor sells the shares or capital shares acquired from the dissolved company without liquidation in a business combination after 1 March 2024 – a shareholder or member of the dissolving company without liquidation sells shares or an capital shares acquired in a business combination after 1.3.2024 | The date of registration in the Commercial Register is verified |
| Relocation of the company’s headquarters to Slovakia | The date of registration in the Commercial Register is verified |
| The effects of the conversion of the company have occurred and the shares or capital shares acquired by the spin-off are sold | The date of registration in the Commercial Register is verified |
| Change of legal form (not valid for period of cooperative society) | The date of registration of the change in the Commercial Register is verified |
Taxpayers need to beware of when the date of acquisition of shares is not considered to be the date of holding a direct interest – and therefore the ownership condition is not met:
- Entering into a contract where the shares or capital shares are transferred in the future or after other conditions precedent have been met
- the purchase of an option
- acquisition of a pre-emption right over the share
In general, the rule is not possible to verify that the condition of holding a direct interest for period of 24 month has been met because of the conclusion of contract in future (short period of shareholding) – the exemption to time test does not apply.
▢ Tax deductibility of costs of sale
It remains the case for corporate taxpayers that costs equal to the cost of the shares or capital shares are not treated as a tax expenses in the taxable year in which the sale of the shares occurs.
Implication of exempted incomes on the tax base is shown in table below:
| Row | Item | Impact on tax base |
| 130 | Expenses (costs) that are not considered as a tax expenses | The purchase price of the shares or capital shares increases the tax base in the year of sale of the shares or interests |
| Interest arising from the provision of a loan or credit for the acquisition of shares increases the tax base in the year of the sale of the shares | ||
| 260 | Exempt income booked in the accounts | Recognised sale proceeds decrease the tax base in the year the shares are sold |
The rule of exemption from taxation of income from the sale of shares or capital share can be applied in the tax return for 2020 and later, however, the holding period of direct shareholding is tested for ownership retrospectively before 2018.
▢ Impacts on holding companies
The updated Information regarding the exemption of proceeds from the sale of shares and capital shares does not considers the practical consequences of holding companies operating in the ownership structure of its subsidiaries that sell shares.
The practical considerations of holding companies are primarily related to the test of bearing the functions and risks of owners of shares as defined by the Slovak law, while having the necessary material and staffing facilities necessary for this exercise.
The Slovak Commercial Code defines among the essential functions associated with the ownership of shares in particular:
- the right to attend general assembly of the company
- to vote at general assembly
- to request information concerning the affairs of the company or of persons controlled by the company
- information relating to the management and financial affairs of the company
The practical area of holding company operations has therefore defined holding companies which hold shares in subsidiaries from which they derive only passive income:
- income from the sale of dividends
- gains on the sale of shares
- income from loans in the form of interest
- income from the sale of royalties
Parent holding companies usually own only the tangible or intangible assets of the subsidiary, while the subsidiaries carry on the business (they use the assets under a fee-based lease with the parent company). The risk is transferred from the business activity to the subsidiaries.
Since holding companies only use the assets in order to legally protect the assets and control the specific business risk, while the (underlying) risk itself is borne by the subsidiaries – the basic test of bearing the risks and functions is not met and the above exemption cannot be adequately applied to the holding company.
Reasons for not-applying exemption
In our experience, the most common reasons for the tax authorities not to accept the exemption from taxation of holding company include, in particular, the absence of:
- Defining the nature of a pure holding company (one that bears no business risk)
- The application of only extensive material and personnel provision for the performance of functions
- Proof of tax residency (exempting the rule conditioning all holding companies to be shell companies)
- Inclusion of assessment and testing of specific functions and risks that correspond to the nature of the holding company
- Assessing the activities of other group companies within the jurisdiction
