Did you know that dividends from ETF funds do not meet the definition of dividends under Slovak tax law?

This fact may surprise many investors interested in investing in ETFs (Exchange Traded Funds), a popular investment tool.

ETF funds track the performance of specific indices, commodities, or groups of assets and pay out regular returns. On annual statements, these funds call such returns “dividends”. However, we should not be misled by this term. According to Slovak law, these returns should be taxed differently than traditional dividends from shares.

Under Slovak tax law, dividends are understood as a share in a company’s profit paid to shareholders. However, ETF funds are not companies in the traditional sense, but rather collective investment schemes that manage a portfolio of assets. According to Slovak legislation, returns for individuals from ETF funds are therefore considered income from capital assets/interests and other returns from securities, not dividends.

Higher Tax for Investors

This distinction has significant consequences for investors. Income from capital assets is subject to different tax rules than traditional dividends. The main disadvantage is that individuals are taxed at a higher rate (19% compared to 7% or 10%).

It is important for investors to be aware of these differences and to report fund returns correctly in their tax returns. Also, let’s not forget that a Slovak tax resident must declare all their worldwide income in their tax return, including income already taxed by withholding abroad. Tax withheld abroad can only be credited in the Slovak tax return up to the amount allowed by the relevant double taxation treaty (usually from 0 to 15%). If a higher amount of foreign tax was withheld, KPMG can help you with its refund.

The legislative rules for the correct classification of returns from various funds are not simple. However, the responsibility for correct reporting in the tax return lies with the taxpayer.