Slovakia: setting up a permanent establishment or branch

Foreign businesses can trade in Slovakia on the same basis as Slovak businesses by setting up a subsidiary, a permanent establishment or a branch.

Here is our quick guide to some key issues and differences to be considered when setting up a permanent establishment or branch:

• When setting up a branch or permanent establishment, the foreign business must register with the Slovak tax authorities and submit a tax return for corporate income tax purposes.

• Any corporate income tax liability faced by the foreign business is likely to be offset under a double taxation treaty between Slovakia and its country of residence.

• Any branch or permanent establishment is regarded as a tax non-resident for corporate income tax purposes.

• The foreign business will be treated as having a permanent establishment through which it conducts its activities in Slovakia if it has a Slovak employee acting as its intermediary or agent with authority to enter into contracts for goods delivered in Slovakia in its name (ie without being personally responsible for business risks or costs).

• A foreign business which systematically uses a Slovak employee as its agent or intermediary in this way for commercial activities will be regarded as conducting business under the Slovak Commercial Code and must register as a branch in the Slovak Commercial Register.

• A permanent establishment of a foreign business must register for VAT purposes when it operates from a permanent address equipped with the personnel and material necessary to conduct business. The tax authorities treat this condition as satisfied when property is rented as business premises rather than purely for one-off activities.

• A foreign business does not have to register for Slovak VAT if it has a branch in Slovakia or uses a Slovak employee as its agent or intermediary to receive and sell goods in Slovakia.

• It can, however, register voluntarily as a foreign VAT payer to give itself a Slovak VAT Identification Number so that it can offset VAT on goods and services purchased in Slovakia, and enable its customers to get a tax deduction on goods purchased from it.

• A foreign business whose Slovak subsidiary, permanent establishment or branch is registered for VAT must file monthly or quarterly VAT returns and must keep records of all data relevant for VAT deduction and payment.

• Because it is the foreign business which is liable for Slovak corporate income tax based on its own accounting records, a permanent establishment does not have to maintain either single or double entry bookkeeping but does need to keep records of income and expenses.

• A branch registered in the Commercial Register is required to maintain double entry bookkeeping in parallel with the foreign business, although the branch books must follow Slovak accounting principles (which may not be identical to those operated by the foreign business).

• Liability for corporate income tax is calculated on the basis of the branch books. The Slovak tax authority will issue it with a certificate of tax paid which it may set off against its tax liability in its country of residence under the relevant double taxation treaty.

• To show that its books are being kept properly, a branch should operate a stand-alone bank account (or other efficient way to evidence payments), a method of cost allocation (ideally in writing) and efficient evidence of allocation of revenues (ideally in writing).