Exemption method

What it means

The exemption method is one of the two ways double tax treaties deal with income that two countries would otherwise both tax. Income that the treaty allows to be taxed abroad is excluded from the Slovak tax base, and no Slovak tax is paid on it.

In Slovakia it is most often applied to employment income earned abroad, where the treaty with that country prescribes it. Which method applies is always determined by the specific treaty, not by the taxpayer’s choice.

Exemption usually works with progression. The exempt income is not taxed but may affect the rate at which other income is taxed. The other method is the credit method, under which the foreign income is included and the foreign tax credited.

How it works in practice

A Slovak tax resident who worked abroad for part of the year files a type B tax return and reports the foreign income there together with the exemption, attaching a statement from the foreign employer or authority on the income and tax paid.

In the assessment we first check residence. If the person has moved permanently, they may be resident in another country and tax only Slovak income in Slovakia. When in doubt, a certificate of tax residence and the treaty’s tie-breaker rules help.

Exemption also affects the tax-free allowances and the tax bonus, because these are calculated from Slovak income. Where Slovak and foreign pay are combined, we therefore work out the overall result, not individual items.

What to watch out for

The most common mistake is not filing a return because the income was taxed abroad. The duty to declare worldwide income remains even with an exemption, and failing to file can lead to a fine and, at an audit, lengthy proof.

The second risk is mixing up the methods. If the treaty with a given country prescribes a credit, an exemption would mean lower tax that the tax office will not accept. The method must always be checked in the text of the specific treaty.