Financial services and VAT

What it means

Financial services, for VAT purposes, are banking, lending, payment and investment services that the VAT Act exempts without the right to deduct input VAT. They include granting loans, operating accounts, payment services, trading securities and managing investment funds.

Insurance services are similarly exempt but subject to a separate insurance premium tax. The reason for the exemption is that the value on which tax would be calculated is hard to determine for financial services, as the fee is often hidden in interest or exchange rates.

An exempt supply without the right to deduct means the provider cannot recover VAT on purchases related to these services. For banks and insurers VAT therefore becomes a cost, making them sensitive to changes in VAT rates.

How it works in practice

A company that provides financial services alongside taxable activities, such as interest-bearing loans to subsidiaries, may deduct input VAT only proportionally. It applies a pro rata coefficient for proportional deduction on purchases used for both types of activity.

Not every service with a financial element is exempt. Factoring combined with debt collection, advisory services, receivables management or technical payment processing that does not change the parties' legal and financial position may be taxable, as EU Court of Justice case law confirms.

For fintech firms and intermediaries, whether their service meets the exemption conditions is often in question. Getting it wrong has consequences either way: an unjustified exemption means extra VAT to pay, while wrongly charging VAT means customers deduct it without entitlement.

What to watch out for

Incidental financial transactions, such as placing spare cash on a term deposit, are often left out of the coefficient if they are ancillary activities. They still need assessing so the company does not reduce its VAT deduction unnecessarily.

When financial services are bought from abroad, the place of supply is with the recipient, but if the service is exempt no Slovak VAT arises. The company must still report it correctly in the VAT return and reflect it in the coefficient where proportional deduction applies.