By Martina Zdechovanova and Andrea Farinic Stefancikova, PETERKA & PARTNERS
Although Value Added Tax (VAT) is, to a great extent, subject to European Union (EU) harmonization of law, it is very important to know the particularities of local laws and strictly follow the formal requirements in order to avoid unnecessary tax inspections, rejected VAT deductions, and penalties. This Top Ten provides some hints an investor should keep in mind when doing business in Slovakia.
1. Registration for VAT
In Slovakia, there are, in practice, two main ways for a newly established Slovak company (foreign-owned or not) to become a VAT payer. If a company reaches a turnover of €49,790 it is in any case obliged to file for registration. This obligatory registration is quite quick and simple. However, newly established companies often wish to be VAT payers sooner. Voluntary registration has been an option in such cases for a long time. Now, even if this opportunity is not closed off completely, there are restrictions making voluntary registration very unpopular. Due to a fight against tax fraud, the current policy of the authorities in connection with voluntary registration includes a thorough inspection of the company's real economic activity (the necessity to prepare a business plan, background to deals made and planned, invoices). Even if a company is ready to take on this administrative burden, very uninviting is the possibility the authorities may ask a company to pay "a guarantee for future tax" of up to €500,000 and not register the company until the guarantee is paid.
2. High excessive deduction - risk of tax inspection
It is important to know that, in Slovakia, VAT payers can usually choose when to deduct their input VAT. If they already have the invoice, they may choose any month of one calendar year, beginning with the one in which the right to deduction arose. If the invoice from the supplier is delivered in a later calendar year, they lose this opportunity and must apply the deduction in the month the invoice was received. Therefore, it is recommendable to try and ask suppliers to deliver the invoices early and then plan the deduction well. To be more precise, if in one month the amount of input VAT is higher than of the output VAT (for example, because of a larger acquisition), the difference in favour of the company is called an excessive deduction. Planning the deduction well here means namely applying the input VAT in the month in which it can be deducted from a corresponding amount of output VAT, so there is not a high excessive deduction. This is important because, higher excessive deductions are very often subject to tax inspections.
3. The time it takes to get input VAT reimbursed
If an excessive deduction arises, a newly registered VAT payer may be surprised by how long it can actually take to obtain its reimbursement in Slovakia. This is caused namely because in Slovakia, unlike, for example, in the Czech Republic, the deadline by which the administrator will reimburse the outstanding input VAT often starts much later than when the input VAT is applied. To explain, the excessive deduction is shown in a VAT declaration which must be submitted, as usual, within 25 days as of the end of the respective month. If the VAT payer is not registered longer than 12 months (and in some cases, even if they are) this excessive deduction will still not be reimbursed. Therefore, such VAT payer must first use this excessive deduction to decrease its tax liability in the next month's VAT declaration. If there is still any excessive deduction left, then the tax authorities will repay it in 30 days from the moment this second VAT declaration was submitted. The VAT payer has the opportunity here to shorten the process by submitting the second VAT declaration sooner (and not on the last day, the 25th day, as many payers do). What is worse, if the authorities begin a tax inspection to check the excessive deduction, they do not have to reimburse the deduction until the end of the inspection.
4. Time limit for tax inspection
Tax inspection must be completed within one year and the tax authorities have a very limited ability to extend it. If the authorities fail to keep to this period, the inspection is considered unlawful. Consequently, the tax administrator cannot reject or reduce VAT deductions, impose tax or fines based on findings from such inspection. This conclusion was justified even by the Slovak Constitutional Court. On the other hand, despite the fact that the authorities are in charge of the inspection, companies are obliged to cooperate and prove the correctness and completeness of its records and any other necessary facts. Intentional steps to extend the duration of the inspection, for example, by lack of cooperation, could cause adverse consequences for the VAT payers.
5. Corrections of VAT deductions
If the company realizes later that it had an input VAT, which was not applied when it should have been, or that its excessive deduction should have been higher, they usually can submit an additional VAT declaration (corrective declaration). However, something not widely known is that a VAT payer can be limited to use such corrective declaration when it should relate to a matter for which a tax inspection was already done. Here is a practical example: a VAT payer can apply VAT deductions only after it has received an invoice meeting all the legal requirements. If a VAT payer deducts input VAT based on invoices not meeting certain requirements, the tax authorities may begin an inspection and reject the deduction on this ground. A repeated deduction made in a corrective declaration based on new, corrected invoices may be rejected because the deal was already subject to inspection. It is for this reason it is important that the correctness of invoices be checked also by their receivers.
6. Purpose of use of input goods or services
VAT payers can usually deduct only the input VAT related to goods and services they used to deliver their own goods or services on which again VAT (output VAT) is charged. If the output goods or services are exempt from VAT, the input VAT cannot be deducted. If only part of the input goods and services are used to further taxable supplies, the amount of the input VAT must be reduced and calculated according to a statutory coefficient. Moreover, if the purpose of use of some input goods (such as real estate or valuable movable assets) changes within 5 years or, in the case of real estate, 20 years after the respective VAT deduction (for example, change to non-commercial use), the VAT payer must adjust the amount of the already deducted VAT.
7. Lease of real estate
Companies often forget that unless the VAT payer does not decide to waive the exemption, in most cases, lease of real estate situated in Slovakia is exempt from VAT. The waiver can be made only by the landlord being at the same time a VAT payer. The tenant does not have to be a VAT payer but it has to be at least an entrepreneur (taxable person). In this matter it is also very important to keep in mind that when the landlord is a company from another EU state (or third state), the Slovak output VAT from the lease usually has to be applied by the tenant (reverse-charge system). There are several exceptions to this rule, one of the most common being that the landlord has a VAT establishment in Slovakia (often without even realizing it). In such case the Slovak VAT should be paid to the state by the landlord. The question of who should apply the VAT when a foreign person is the landlord of Slovak real estate, or even if such person can waive the exemption can be complicated and it is always advisable to check with a specialist.
8. Consecutive supplies
If goods or services (including construction) are delivered partially or repeatedly over a period longer than 12 months and the payment for them was agreed after this period, the VAT liability arises on the last day of each 12th calendar month until the delivery of goods or services is completed. Thus, invoices must be issued at least annually (within 15 days from the VAT liability). Such situation is often in long-term developer projects. Failure to follow these rules usually ends in sanctions for the supplier; however, it may, in the end, cause problems for the receiver of the goods or services as well. In large developer projects sanctions related to a 20-percent VAT or even its loss could be very significant.
9. Use of Slovak VAT declarations by foreign companies
In effect since October 2012, the Slovak VAT Act includes a strict rule for foreign companies when using a Slovak VAT declaration for deductions. Now foreign companies, even if they are registered Slovak VAT payers, in most cases they cannot use a Slovak VAT declaration to deduct input VAT arisen in Slovakia and have to ask for a VAT refund based on the procedure set by Directive 2008/9/CE. A foreign company may only use a Slovak VAT declaration for deducting input VAT, if the respective input goods or services are used by the foreign company (being a naturally registered Slovak VAT payer by then) for further delivery of goods or services in Slovakia, from which the foreign company pays the output VAT to the state. Therefore, to be able to use a Slovak declaration not only the company must deliver some goods or services in Slovakia, they also must be the kinds of goods and services that do not fall within the reverse charge system (a structure, in which the output VAT is paid to the state by the goods or services' recipient and not the supplier).
10. Deduction of input VAT arisen before registration for Slovak VAT
The Slovak VAT Act enables entrepreneurs to deduct input VAT related even to assets acquired before the moment a company becomes a VAT payer. For this, several rules apply. For example, such input VAT can relate only to goods. Entrepreneurs often forget that any input VAT paid for the services obtained before the moment of registration can no longer be deducted. However, the situation is not so simple with goods either. For this, it is especially important to plan the acquisition so that it is in the same calendar year as the buyer becomes a VAT payer (do not forget to count also the time it takes the authorities to make the registration). This is essential because otherwise the deduction may have to be reduced by obligatory depreciation of the bought assets done by the end of the year. Different ways of deducting the VAT retroactively may apply with foreign entities and/or in cases of late registration.
