28^th of August was approved a draft amendment to the Income Tax Act, which introduce so-called CFC rules valid from 2021 also for individuals.  This means that new rules for hybrid mismatches and for the taxation of the income of controlled foreign companies by natural persons are being introduced as part of anti-avoidance measures.

How does the tax heaven work?

Some natural persons try to reduce or completely eliminate their tax obligations in Slovakia by shifting their income to countries that have a lower tax burden. Shell companies are established in tax havens, which are managed by Slovak natural persons. In such cases, tax evasion may occur, as the income should be taxed in Slovakia as a dividend, but will be taxed only at the minimum tax rate, or not at all.

How do CFC rules work?

The Ministry of Finance of the Slovak Republic stated that: "By applying the CFC rules, the income of CFC company will be taxed in Slovakia at the moment of achieving this income, not when dividends are paid." Such an extension of the CFC rules to natural persons also takes into account the direct and indirect participation of the natural person in the controlled foreign company.

The draft amendment to the Income Tax Act plans to tax such personal income through a special tax payment. The aim of this amendment to the Act is to ensure compliance with the OECD global standard for the exchange of financial accounts information. The amendment to the law also regulates sanctions for holders of these financial accounts and controlling persons even if they submit a false affidavit of tax residence to a financial institution.

About what exactly are CFC rules? What are their shortcomings? And what impacts should FO owning foreign companies expect? These and many other questions will be gladly answered by our tax experts. Do not hesitate to contact us. For more information, visit our website, Facebook or Linked-In.