Tax Guide for US Expats Living and Working in Slovak Republic
Who Is Liable For Income Taxes in Slovak Republic
Slovak residents are subject to tax on their world-wide income. Nonresidents are subject to tax on their Slovak-source income only.
Individuals who have permanent residency in the Slovak Republic are considered tax residents in the Slovak Republic. In addition, any person physically present (that is, usually staying) in the Slovak Republic for at least 183 days in a calendar year is considered resident for tax purposes. For purposes of the 183-day test, each whole or partial day spent in the Slovak Republic during the calendar year counts toward the number of days. The 183-day test does not apply to the following individuals:
- Individuals staying in the country to study
- Individuals present in the country for medical treatment
- Individuals who earn Slovak-source income from dependent activities and enter the Slovak Republic daily or at agreed-upon time periods only for the purpose of performing such activities
Individuals assigned by a foreign employer to the Slovak Republic who continue to be employed and paid by the foreign employer and who perform work for and under the instruction of a Slovak resident individual or legal entity are deemed to be employed by the Slovak resident individual or legal entity and subject to monthly withholding of personal income tax from their employment income.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Employment income includes salaries, wages, bonuses, other regular, irregular or one-off compensation of a similar nature and most benefits-in-kind. Employment income also includes fees paid to directors and partners of limited liability companies and to limited partners of limited partnerships.
Self-employment and business income. Taxable self-employment and business income consists of income from business activities and professional services. This income may be decreased by deductible expenses. Nonresidents are subject to tax on their Slovak-source business income only.
Rental income, including income from the rental of real estate and movable assets representing appurtenances of the real estate is taxed as self-employment and business income. As a result, expenses can be deducted from such income.
Investment income. Investment income from Slovak sources, including interest and other income derived from securities, and payments made from supplementary pension insurance schemes is generally subject to a 19% withholding tax. This withholding tax is considered a final tax, and the income is not included in the tax base. Residents and nonresidents are exempt from tax on dividends and on other profit distributions from limited liability companies if certain conditions are met.
Taxation of employer-provided stock options. For employer-provided stock options granted after 31 December 2009, the taxable amount equals the higher market price of the stock at the exercise date (that is, on the day on which the option is actually exercised) minus the sum of the following:
- The guaranteed exercise price of the employee’s stock
- The price paid by the employee for the option (if any)
The above amount is taxable on the exercise date. Employer-provided stock options are treated as employment income and taxed through payroll withholdings at the regular income tax rate in the month of exercise.
The income from stock options granted by employers before 31 December 2009 is taxed on the vesting date (that is the date on which the option can be exercised) under the rules applicable until 31 December 2009.
Capital gains derived from the sale of shares acquired under an option plan are calculated as the difference between the sales price and the market price on the exercise date (vesting date for options granted before 31 December 2009). These gains are subject to tax at the regular rate (see Capital gains).
Capital gains. Capital gains derived from the sale or exchange of property are taxed as ordinary income at the regular income tax rate. In general, capital gains derived from the sale of real estate or personal property are exempt from income tax if relevant conditions stipulated in the law are met (for example, the minimum required holding period). Business assets generally do not qualify for exemption.
Deductions
Deductible expenses. Mandatory sickness insurance, health insurance, old-age insurance, disability insurance and unemployment insurance contributions paid by employees (see Section C) are deductible from employment income.
Personal allowances and deductions. All taxpayers, including nonresidents, are entitled to a personal allowance. Taxpayers whose tax base for the calendar year does not exceed 100 times the subsistence minimum (€18,538 for 2011), can deduct a non-taxable amount equal to 19.2 times the subsistence minimum per taxpayer (€3,559.30 for 2011). For taxpayers whose tax base for the calendar year exceeds 100 times the subsistence minimum, the nontaxable portion of the tax base gradually decreases depending on the taxpayer’s income. Taxpayers who have a tax base for the calendar year higher than €32,775.18 are not entitled to any general allowance. Slovak tax residents and Slovak tax non-residents whose Slovak-source income represents more than 90% of their worldwide income may also claim a spousal allowance for a spouse living with them in the same household and having no or limited income of his or her own. The spousal allowance also gradually decreases depending on the taxpayer’s and the spouse’s income.
In addition, tax residents and Slovak tax nonresidents whose Slovak source income represents more than 90% of their world-wide income are entitled to a tax bonus (credit) in the amount of €20.02 per month per dependent child for 2011.
Taxpayers are entitled to an annual employment tax bonus. The principle of the employment bonus is similar to the tax bonus applicable for a child. To qualify for the employment bonus, several conditions must be satisfied, including, among others, the following:
- The taxpayer must earn income amounting to at least six times the minimum wage (currently, the minimum wage is €317 per month).
- The taxpayer must work for at least six months.
The amount of the employment bonus equals 19% of the part of the personal allowance that exceeds the tax base, but not more than €50.34 per year.
Business deductions. In general, costs and expenses incurred to generate, assure and maintain taxable income are deductible, including mandatory contributions for social and health insurance. Expenses of a capital nature, penalties other than payments of contractual penalties, income tax and expenses incurred to generate tax-exempt income are not deductible.
Instead of deducting actual expenses, individuals other than those who are value-added tax (VAT) payers for the entire tax year, may deduct a percentage of gross revenues. In general, this percentage is 40%.
Rates. Taxable income is taxed at a flat rate of 19%.
Relief for losses. An individual may carry forward losses incurred in the tax years immediately preceding the year in which he or she first declares a positive tax base. Losses incurred after 31 December 2009 may be carried forward for seven consecutive tax years following the year of the loss. Losses incurred before this date can be carried forward for five years. Losses may not be offset against employment income.
B. Inheritance and gift taxes
The inheritance and gift taxes were eliminated in 2004.
C. Social and health insurance
Contributions. If an employee is subject to the Slovak social security system, both the employer and the employee must pay social security contributions. Slovak social security contributions consist of sickness, old-age, disability, unemployment, guarantee and accident insurance, and contributions to the reserve fund. In general, every person performing an income-generating activity for which he or she is entitled to a regular monthly compensation (and also irregular for the purposes of pension insurance) subject to income tax is deemed to be an employee for Slovak social security purposes. Rental, capital or other income is not subject to social insurance.
Slovak health insurance contributions are for health care. Individuals having income subject to income tax (including dividends paid to employees not participating in the registered capital of a company that are generated from profits for accounting periods beginning after 1 January 2011, and capital and other income) is subject to health insurance. Persons acting as members of statutory or supervisory bodies for employers, with a registered seat in the Slovak Republic, are not subject to Slovak health insurance if they are not permanently resident in the Slovak
Republic and are subject to a health insurance system in a non-European Union (EU) state.
The combined rate for the employee’s social and health insurance contribution is 13.4% of his or her assessment base, which is, in general, his or her monthly taxable employment income. The employer’s contribution rate is 35.2% of the employee’s assessment base. The maximum monthly assessment base for all types of insurance (excluding accident insurance) equals the average wage in the Slovak economy multiplied by a coefficient (1.5 for sickness and guarantee insurance, 3 for health insurance and 4 for the other types of insurance). The minimum monthly assessment base for health insurance is linked to the minimum wage in the Slovak Republic (the minimum assessment base is not set for other types of insurance). The assessment base for accident insurance is not limited.
The EU regulations on social and health insurance are binding in the Slovak Republic. Consequently, the respective regulations for European Economic Area (EEA) and Swiss citizens, and the applicable totalization agreements for other foreigners (see Totalization agreements) must be taken into account when determining the social and health insurance obligations of foreign individuals working in the Slovak Republic.
If a statutory representative enters into a contract with a Slovak company for the execution of a function, both parties are required to contribute only to the Slovak health insurance system as employee and employer.
Totalization agreements. To provide relief from double social security taxes and to assure benefit coverage, the Slovak Republic has entered into totalization agreements with the following jurisdictions.
Australia (a)
Germany
Romania
Austria
Hungary
Russian Federation
Bulgaria
Israel
(a) Spain
Canada
Korea (South)
Switzerland
Croatia
Luxembourg
Turkey (a)
Cyprus
Netherlands
Ukraine
Czech Republic
Poland
Yugoslavia (b)
France
Quebec
(a) This agreement has been signed, but it is not yet in effect.
(b) This agreement was entered into between the former Czechoslovakia and the former Yugoslavia in 1957. The Yugoslavia agreement applies to Bosnia-Herzegovina, Macedonia, Montenegro, Serbia and Slovenia.
Totalization agreements with EU member states continue to be valid. However, effective from 1 May 2004, the EU regulations superseded these agreements. Under Slovak law, employers from non-EU and non-EEA countries (without a registered seat or a branch in the Slovak Republic)
that have employees in the Slovak Republic are required to register for social security purposes in the Slovak Republic, to remit employer and employee contributions to the Slovak social system and to handle the related administration (unless their employees’ income is exempt from tax in the Slovak Republic or unless the Slovak Republic has entered into a bilateral agreement with the respective country).
Tax treaties
The Slovak Republic has entered into double tax treaties with the following countries.
Australia
Israel
Russian Federation
Belarus
Kazakhstan
Singapore
Belgium
Korea (South)
Slovenia
Bulgaria
Latvia
South Africa
Canada
Libya
Switzerland
Croatia
Lithuania
Syria
Czech Republic
Macedonia
Turkey
Egypt (a)
Malta
Turkmenistan
Estonia
Mexico
Ukraine
Finland
Moldova
United States
Hungary
Poland
Uzbekistan
Iceland
Portugal
Vietnam
Indonesia
Romania
Yugoslavia (b)
Ireland
(a) This treaty has been ratified by Egypt, but it is not yet in effect.
(b) The treaty signed with Yugoslavia applies to Montenegro and Serbia.
The Slovak Republic honors the double tax treaties entered into by Czechoslovakia with the following countries.
Austria
India
Spain
Brazil
Italy
Sri Lanka
China
Japan
Sweden
Cyprus
Luxembourg
Tunisia
Denmark
Mongolia
United Kingdom
France
Netherlands
Yugoslavia
Germany
Nigeria (former)*
Greece
Norway
* The Yugoslavia treaty that was signed in 1981 applies to Bosnia-Herzegovina.
The method of elimination of double taxation is applied based on the tax treaty entered into between the Slovak Republic and the source country. However, for employment income from foreign sources, regardless of the method for the elimination of double taxation provided in the respective tax treaty, Slovak tax residents may apply the exemption method if both of the following conditions are satisfied:
- The income was provably taxed abroad.
- Such treatment is more favorable for the individual.
If the Slovak Republic has not entered into a double tax treaty with the source country, the exemption method can be used for employment income that is shown to have been taxed in the source country.
We have been preparing US income tax returns for US Citizens and permanent residents living in Slovak Republic for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Slovak Republic and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Slovak Republic.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email