Exemption of capital gains in Slovakia and Austria for corporate taxpayers
The Amendment to the Slovak income tax act effective from 1 January 2018 implemented participation exemption rules exempting capital gains from taxation also to the Slovak tax legislation. Due to transitional provisions Slovak tax resident corporate taxpayers and foreign corporate taxpayers having a permanent establishment in Slovakia can benefit from these rules for the first time in 2020. In cooperation with Austrian KPMG we also provide you an overview of the rules applied in neighboring Austria an comparison of approaches in both countries.
The conditions for the application of the participation exemption rules in Slovakia are as follows:
Income from the sale of shares in a joint stock company, sale of ordinary shares or shares with special rights in a simplified joint stock company, sale of shares in a limited liability company, and sale of shares by a limited partner in a limited partnership, or shares in a similar foreign company, is derived earliest after 24 consecutive calendar months from the acquisition of a direct share of at minimum 10% in the share capital of the company sold, and
The seller performs significant functions in the territory of Slovakia in relation to the financial investment, manages and bears the risk connected to the ownership title to the shares, while he has the needed personal and material equipment necessary for performing these functions, and
The seller determines his taxable base based on double entry accounting rules or IFRS standards.
If these conditions are met, the income from the sale of shares is exempt from taxation in Slovakia. Brokers and other traders with shares cannot benefit from the participation exemption.
The exemption does not apply if:
- The company on which shares are sold is in liquidation, bankruptcy or restructuring proceedings;
- The seller is in liquidation;
- Own shares of the company are being sold by the company.
For the purposes of the tax exemption the date of acquisition of a direct share in the share capital of the company is defined as
- The date of the full settlement of a cash contribution that cannot be earlier than the registration of the contribution in the company register;
- The date of the settlement of the in-kind contribution that cannot be earlier than the registration of the contribution in the company register, the same approach is taken to the recipient of the contribution if he sells shares that he acquired as the contribution of individual assets or a part of the contribution of business or its part;
- The date of finalizing the acquisition process, that is
- the date of registration of shares in the evidence of the central depository or the member of the central depository;
- the date of transfer by endorsement and handover of the certificated shares (in paper form);
- the date of the effectiveness of the written agreement of the sale of shares in a limited liability company or limited partnership;
- The date of registration in the company register by which the merger, amalgamation or demerger of companies takes legal effect, if the legal successor of this reorganization sells shares acquired by the company dissolved without liquidation as a consequence of the reorganization; the same approach is taken in the case of a seller who by the dissolution of a taxpayer without liquidation acquires shares in the legal successor;
- The date of registration in the company register of the transfer of the legal seat of a company to the territory of Slovakia.
Entering into an agreement based on which the transfer of shares will be affected in future, or only after meeting the agreed postponing conditions, or some other similar agreement, as well as the acquisition of an option, or receiving the pre-emption right to the purchase of the shares does not qualify as the acquisition of a direct share in a company.
Based on transitional provisions, the participation exemption rules can for the first time be applied by a qualifying corporate taxpayer with the taxable period equal to the calendar year effective from 1 January 2020, if the conditions for their application were met and the seller owned the required direct share for at least 24 consecutive calendar months prior to its sale. If the taxpayer has a taxable period different from the calendar year, the exemption can for the first time be applied after 24 consecutive months starting from the first day of such taxable period that commenced after 31 December 2017.
In Austria, a distinction must be made between the sale of a participation in an Austrian resident company resp. in a non-resident company:
Capital gains from the sale of a participation in an Austrian resident company realized by an Austrian resident company are part of the taxable income and are taxed at the ordinary CIT rate (25%). With regard to shares in a domestic company the tax exemption is limited to dividends but does not include capital gains.
Contrary, under the international participation exemption dividends as well as capital gains from the sale of participations are exempt from corporate income tax. The following conditions must be fulfilled to apply the exemption for capital gains:
- a direct or indirect participation of at least 10% in the share capital
- with the participation having been held for an uninterrupted period of minimum one year
If these conditions are met, the extent of the sold participation is irrelevant for the exemption. However, if the extent of the participation falls below 10% as a result of a previous sale, the remaining participation is no longer subject to capital gains exemption.
Only entities which are by virtue of their legal form obliged to keep accounts under company law (e.g. stock corporation (AG), limited liability company (GmbH), Societas Europaea (SE), certain cooperatives, Societas Cooperativa Europaea (SCE)) are entitled to this tax exemption. Furthermore, foreign companies subject to unlimited tax liability are entitled to tax exemption, if the legal form of the foreign company is comparable to a qualifying domestic corporation.
The participation must be held in a nonresident company comparable to a domestic corporation resp. in a company listed in the EU Parent-Subsidiary Directive. Furthermore, the foreign participation must not be a low-taxed company that generates predominantly passive income, as otherwise the exemption method will be replaced by the credit method.
The tax neutrality of the international participation exemption extends to impairments as well. Therefore, capital losses originating from depreciations as well as from the disposal of participations are not taken into account in taxation. However, if real and final losses are sustained such as in case of insolvency or liquidation, they are allowed to be deducted for tax purposes.
Under the international participation exemption, the parent company can also exercise an option for tax effectiveness upon filing of the CIT return for the year of acquisition or for the year in which the international participation exemption is applicable the first time. Exercising this irrevocable option results in a loss of the tax neutrality of the participation. Thus, depreciations as well as losses from the disposal of participations can be claimed for tax purposes (spread over 7 years), whereas capital gains and appreciations will also increase the taxable profit.
If a participation in an Austrian company is sold by a Slovak company, the taxation right is attributed to Slovakia in accordance with Article 13 of the Double Tax Treaty between Austria and Slovakia.
|Required minimum direct share in share capital||10%||10%|
|Minimum holding period||24 months||12 months|
|Personal and material equipment to manage investment||Yes, and significant functions required in the territory of Slovakia||General Principles|
|Qualifying shares||Shares in joint stock companies, limited liability companies, simplified joint stock companies and shares of limited partners in limited partnerships, and shares in similar foreign companies||All forms of qualifying capital shares (e.g. including share in stock corporations, limited liability companies and in qualifying cooperatives)|
|Who can benefit||Slovak tax resident corporate shareholders and Non-resident corporate shareholders having a permanent establishment in Slovakia||Companies which are subject to unlimited tax liability that are obliged to keep accounts under company law|
|Applicability of the rules for the first time||1.1.2020||n/a|
Article was written in cooperation with Rainer Goetz from KPMG Austria and was also published in annual bulletin of Slovak - Austrian Chamber of Commerce.