A foreign company controlled more than 50% by a Slovak taxpayer, paying far less tax abroad than it would in Slovakia, and earning qualifying passive income. That income is then added to the Slovak taxpayer's tax base.
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CFC Rules: Controlled Foreign Companies
CFC Rules: Controlled Foreign Companies in practice
A low-taxed foreign subsidiary does not necessarily mean less tax for its Slovak owner. The controlled foreign company rules in Section 17h of the Slovak Income Tax Act add certain income of the subsidiary to the tax base of the Slovak parent. This mainly concerns passive income such as interest, royalties and dividends, where the subsidiary pays far less tax abroad than it would in Slovakia.
We prepare a written CFC assessment for both planned and existing structures. We look at ownership and control, the tax the subsidiary actually pays, the nature of its income and whether it carries on genuine economic activity. For existing structures we propose remedies, such as strengthening staff and facilities abroad or changing the structure. We prepare documentation that will stand up in an inspection, and we represent you if one takes place.
What we help with
- Written CFC assessment of a planned structure
- Review of an existing structure with proposed remedies
- Classifying income as active or passive
- Documenting genuine economic activity abroad
- Representation in tax inspections
Worth knowing
Control above 50%
A foreign company is controlled if a Slovak taxpayer, alone or with related parties, directly or indirectly holds more than 50% of the capital or voting rights or is entitled to more than 50% of profits (Section 17h of the Income Tax Act).
Low tax abroad
The second condition is that the tax actually paid abroad is lower than the difference between the tax the company would pay under Slovak law and that foreign tax.
Passive income
The rules mainly pick up interest, royalties, dividends and gains on shares, finance lease income, income from financial activities and intra-group invoicing with little added value. Active trading income is not included.
Exception and burden of proof
The rules do not apply if the taxpayer shows that the foreign company carries on genuine economic activity with adequate staff, equipment, assets and premises. The burden of proof is on the Slovak taxpayer.
Common questions
- With employment contracts for local staff and directors, an office lease, minutes of board meetings held in the country concerned, invoices for local services, an organisation chart and transfer pricing documentation.
- No. Once the subsidiary's profit has been taxed under the CFC rules, a dividend paid later is not taxed again.
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This page is for general information, reflects Slovak law at the time of writing and is not a substitute for advice on your particular matter.