Formation expenses

What it means

Formation expenses are costs connected with setting up and incorporating a company. They include, for example, notary fees for the articles or deed of foundation, the court fee for the commercial register entry, fees for extracts, signature certification, trade licences and legal services before registration.

Under Slovak accounting rules, formation expenses are not shown as an asset but charged directly to expenses. In the past they could be capitalised as an intangible fixed asset and amortised, but the current rules do not allow this. They therefore reduce the profit or loss of the year in which they arise.

A special feature is that founders pay many of these costs before the company exists, when it has neither a bank account nor books. Once registered, the company becomes a reporting entity and records the formation costs, while the founders acquire a claim to be reimbursed if they paid out of their own pocket.

How it works in practice

In practice, the founder pays the notary and the fee for the application for a commercial register filing from their own money and keeps the receipts. Once the company exists, they hand them to the accountant, who records them as an expense and at the same time as a liability to the founder. The company then reimburses them from its account.

When a company is formed through a service provider, the full formation price is often invoiced to the new company only after it comes into existence. The invoice then includes a service package plus recharged fees. It helps if it clearly shows what is a service subject to VAT and what is a fee outside the scope of VAT.

For corporate income tax, formation expenses are generally deductible, because they relate to securing the company's future income. They must, however, be supported by documents and incurred in connection with forming that same company. If the company makes a loss in its first year, it can carry it forward to later years under the statutory conditions.

What to watch out for

Do not confuse formation expenses with period costs after incorporation or with investments. Buying a computer, a car or software before the company exists is not a formation expense but an asset, which must pass to the company through a purchase or a contribution and be reported under the rules for fixed assets.

A contribution to share capital is not a formation expense. It is the company's equity, which remains among its assets and never becomes an expense. A forgotten receipt is another common mistake: if the founder cannot prove payment to the notary or of the fee, the company cannot claim the expense and the founder will struggle to be reimbursed.