Tax haven

What it means

A tax haven is a country or territory with very low or zero taxation, weak information exchange and often no requirement for real activity. Companies are set up there mainly to shift profit away from the country where it is actually generated.

The EU keeps a list of non-cooperative jurisdictions, and Slovakia also classifies countries by whether it has a double tax treaty or an information exchange agreement with them. A country without one is a non-treaty state, and payments to it face stricter rules.

The concept overlaps with foreign companies lacking economic substance, meaning no office, staff or real management. International rules such as the global minimum tax are gradually making tax havens less attractive for large groups.

How it works in practice

Payments to a non-treaty state are subject in Slovakia to an increased withholding tax of 35 percent instead of the usual rate, for example on interest, royalties or certain services. The payer must withhold and remit the tax, or it becomes liable for it.

CFC rules allow Slovakia to tax the undistributed profit of a low-taxed controlled foreign company. If a Slovak taxpayer controls a company in a tax haven, its profit may be added to the taxpayer's tax base even if it was never paid out as a dividend.

In dealings with companies in tax havens, the tax authority focuses on transfer prices and on whether services were really provided. The company should keep contracts, service outputs and pricing calculations to defend the expense.

What to watch out for

Public sector partners and state contracts require identification of the ultimate beneficial owner and registration in the public sector partners register. Shell companies in tax havens therefore complicate business more than they help, and banks often refuse to open accounts for them.

Tax planning through a tax haven without real activity may be treated as abuse of law and, where intentional, as a tax crime. Legitimate international structures rest on real activity, adequate substance and transparent reporting.