Exit taxation

What it means

Exit taxation is the taxing of gains that built up on assets while they were in Slovakia at the moment the assets or the taxpayer leave the country, even though nothing was sold. Without this rule a company could move valuable assets abroad, and Slovakia would never tax the gain from their later sale.

The rule was introduced by ATAD, and under the Income Tax Act it applies, for example, when assets move from a Slovak head office to a permanent establishment abroad, from a Slovak permanent establishment of a foreign company to another country, when a company’s seat or place of management moves abroad, or when the business of a permanent establishment is transferred.

The tax base is the difference between the fair value of the transferred assets and their tax value. When moving to another EU or EEA state, the taxpayer can ask to spread payment over five years, so that the tax does not ruin a company that received no cash from a sale.

How it works in practice

In a cross-border conversion or relocation of the seat, we always map which assets will remain in a Slovak permanent establishment and which will leave the country. The largest amounts usually concern intangibles such as trademarks, know-how or software, whose fair value is high and tax value low.

Measuring fair value often requires an expert valuation and ties in with transfer pricing rules. The receiving state should accept the same value as the starting tax value to avoid double taxation, which needs to be checked on the other side as well.

Instalment payment must be requested in the return, and the tax administrator may require security. If during the instalment period the company sells the assets or moves to a country outside the EU, the remaining tax becomes due immediately, so it pays to have a plan for the whole period.

What to watch out for

The most common mistake is moving a company’s activities or management abroad without a tax analysis, for example when the director moves away and runs the company from abroad. The tax authorities may treat this as a transfer of the place of management and levy exit tax, even though the company formally remains in Slovakia.

The second mistake is underestimating the value of intangibles. A brand, customer database or in-house software may not be on the balance sheet, or only at a low value, yet their fair value can be high. In an audit their value is judged by what an independent party would pay for them.