TAX Taxation of property transactions in Slovakia Mark Gibbins, Partner 10 November 2005

2 Taxation of property transactions in Slovakia Key general features of Slovak taxation Peculiarities of Slovak tax system Acquisition and disposal of property Funding of acquisition Tax depreciation Restructuring of property holdings Real estate tax VAT The future?

3 Key general features of Slovak taxation The 19% flat rate No tax on dividends Transfer pricing still in its infancy No wealth tax, gift tax or inheritance tax No real estate transfer tax from 1 January 2005 (progressive reduction from 20%) Aim of simplified coherent tax structure only partly achieved Tax rulings more widely available than previously VAT aligned with EU requirements

4 Peculiarities of Slovak taxation Security tax and Permanent Establishments Narrow definition in practice of costs related to taxable income? Lack of detailed anti-avoidance legislation (e.g. no CFC rules and general substance over form concept is limited) No fiscal grouping BUT many of the unusual features have gone (e.g. restrictions on carry forward losses, deduction for costs only if paid, restrictions on deductible advertising costs)

5 Acquisition and disposal of property Purchase of shares or assets? Shifting of the equation in recent years For vendor less incentive to sell shares than previously due to - elimination of transfer tax - reduction in tax rates - flexibility in tax loss regime - loss on disposal of assets (except land) now tax deductible BUT For vendor still in many cases tax efficient to sell shares - to avoid tax altogether at 19% on gain (sale of shares by foreign owner not taxed in Slovakia under most double tax treaties)

6 Acquisition and disposal of property For purchaser normally asset purchase preferred since achieves step up in value and avoids acquiring “history of company” but share purchase can give access to tax losses Other structures can be considered such as de-mergers, contributions in kind as part of the planning process. These will often lead to accounting (but not tax) step up in value. Likely increasing use of direct ownership from abroad / partnership structures driven by foreign tax planning Key issue in all cases is to plan exit strategy in advance !

7 Funding of acquisition Debt or equity decision Relatively low tax rates in Slovakia Therefore debt preferable only if lower tax rate / tax shelter for interest income abroad Debt Interest tax deductible for income tax purposes (subject to test of relating to taxable income) Transfer pricing - arm’s length principle in case of related parties (extension to unrelated parties for tax driven transactions) No withholding tax under EU Interest and Royalties Directive and many double tax treaties No thin-capitalization rules

8 Tax depreciation Land not depreciable for tax purposes Buildings and other constructions tax depreciable over 20 years (reduction in period) Other assets tax depreciable over 4 to 12 years Tax depreciation can be disclaimed (useful planning tool e.g. expiry of tax losses) Key distinction between “technical improvements” and repairs Right to depreciate asset for lessee under finance lease (specific conditions / recent development)

9 Restructuring of property holdings Mergers and de-mergers – tax neutrality? Contributions in kind – tax deferral Sale of property – taxation of gains Recent developments - greater certainty in merger/de-merger process - potential to transfer tax losses - abolition of transfer tax - lack of transfer pricing rules between Slovak entities? Provide greater flexibility in restructuring than before

10 Real estate tax From 1 January 2005 real estate tax on land due on the value of the land Real estate on buildings and flats based on m 2 The tax rates are: 0.25% of the tax base for land SKK 1 /m 2 for buildings and flats the rates can be increased by the municipality although flexibility is planned to be more limited from 1 January 2006

11 VAT Single VAT rate of 19% VAT automatically applied on sales of new buildings (5 years from construction) and development land Other transactions (sale of “old: buildings / rental) VAT exempt Option to charge VAT on otherwise exempt transactions ( in the case of leases only if counterparty is VAT registered) Capital goods scheme if change of use (exempt / Vatable) supplies) in 10 year period Voluntary registration available if intend to make taxable supplies Slovak authorities generally good at refunding VAT Timing of VAT registration crucial since VAT incurred on services pre registration is not recoverable

12 The future What will happen to corporate tax rates? Is zero real estate transfer tax sustainable? Are thin capitalisation rules gone for ever? When will Slovakia get tough on transfer pricing? Will withholding tax be reintroduced on dividends? Will we have two rates of VAT again? More complex acquisition and funding structures inevitable? Think about planning opportunities now because they may not be available tomorrow

13 Presenter’s contact details Mark Gibbins KPMG Slovensko Advisory, k.s The information contained herein [or insert the title of the presentation, report, or talkbook] is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © (year) KPMG (member firm name if applicable), the (jurisdiction) member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in (country). (Insert document code)