Withholding tax

What it means

Withholding tax is collected at the moment of payment: the payer deducts the tax, pays the recipient the balance, and remits the deduction to the tax administrator. Responsibility for withholding correctly lies with the payer, not the recipient.

It applies to defined categories of income - profit shares, royalties, interest, or certain non-residents’ income from Slovak sources. The scope and rates are set by the Income Tax Act.

Withholding tax should not be confused with payroll tax advances. Those are also deducted by the employer at payment, but they are only advances on the annual tax and are settled in the annual reconciliation or a return. Withholding tax, by contrast, is calculated on the gross amount of the income, with no expenses of the recipient taken into account.

How it works in practice

For some income the withholding settles the liability in full and the income is not reported in a return. For others it counts as an advance to be credited - a question to settle before payment, not after.

On a payment abroad a double tax treaty may reduce the rate, but only if the payer holds a certificate of the recipient’s tax residence at the time of payment.

Before paying a royalty to a foreign company or distributing a profit share, we check whether the income is subject to withholding and at what rate. If it is, the partner receives the net amount and the withheld tax is remitted. The expense is booked in full, but the withheld part is recorded as a payable to the tax administrator.

What to watch out for

Tax not withheld or miscalculated is recovered from the payer with interest - and getting it back from the recipient afterwards is usually awkward. The deadline for remittance and notification is short and tied to the month of payment, not to the year end.

If the contract says the partner receives the amount free of withholding, the company pays the tax out of its own pocket and the base is grossed up, so the total cost rises. Such a clause should be agreed knowingly and in writing. When the contract is silent and the company forgets to withhold, the question of who bears the tax is settled only at an audit, and usually against the payer.