Let’s imagine that natural person – Slovak tax resident (“FO“) has a joint-venture company in the Czech Republic (“Company 1“) with a Czech partner. Company 1 is only a holding company without a permanent office and employees (objectively there is no reason to have an office and employees). This company has invested in a company outside the EU (such as the US or Israel) (“Company 2“). Company 2 performs R&D on the basis of which it is subject to a preferential tax regime in its jurisdiction (in our country the equivalent of § 30c or § 13a of the Income Tax Act). Company 2 will achieve a profit of EUR 1,000 in 2021, which, however, is taxed at a rate of only 5% (due to the tax incentives for R&D that we also have in Slovakia). The net profit is thus 950 EUR. Of this profit belongs to FO 50% = 475 EUR.

This net profit will be paid to Company 1 in 2022. Assume that the payment of dividends from Company 2 to Company 1 is not subject to dividend tax at the level of Company 2 and the Czech Republic (for example, due to the exemption of corporate dividend taxation).

The FO must file a tax return in 2022, paying “CFC tax 1” in the amount of (25% of EUR 475) – EUR 25 = EUR 93.75.

Despite the fact that Company 1 does not pay dividends because the profit is offset against past losses or reinvested or decides not to pay them for another reason, FO must file a tax return in 2023, where he will pay “CFC tax 2” for Company 1 – Czech company (as it is an “empty” holding company). The amount of this “CFC tax 2” is 25% of EUR 475 = EUR 118.75.

The total tax liability of the FO is thus EUR 93.75 (“CFC tax 1“) + EUR 118.75 (“CFC tax 2“) = EUR 212.5.

And I note that FO does not have to pay any profits. And that is more than about 44% of the share of profit actually produced in the group (but not paid up to the FO).


The CFC rules are, in the first place, in conflict with the concept of income taxation (and quite likely with constitutional principles). CFC rules do not have the ambition to tax income, but work more like a kind of property tax. In the above example, the FO has no income and nevertheless taxes some alleged income. However, what if the FO does not have funds in its account to pay such a tax liability? It has basically three options:

  • does not admit income = criminal offence;
  • admits income but does not pay = tax execution;
  • it will borrow the money.

The second problem is the level. 25% is very much in view of the above example. Even if the dividend is fully distributed to the shareholders as soon as possible, e.g. with a direct share in a production company outside the EU / EEA, the real rate remained at 25% and not 7%. This is in stark contrast to the declared aim of the law to tax unpaid dividends on artificial profits reported in tax havens.

I therefore propose to keep 7% and extend the exemption according to § 51h par. 3, letter c) to all jurisdictions with which we have a double taxation agreement.

The third problem is taxation of indirect shares and holding companies. Here, the same profit is taxed several times in succession, as it is paid through the various levels in the ownership structure.

I therefore propose, for example, the non-application of CFC tax to holding companies and the possibility of offsetting dividend tax on indirect business shares with CFC tax paid by a holding company’s subsidiary (today’s regulation does not allow this in § 51i (3)) to exclude multiple taxation of the same profit.

The fourth problem is the definition of “substance”. The proposal speaks in § 51h par. 3, letter (c) “…the economic activity actually carried out, for which he has staff, spatial equipment, tangible assets and intangible assets in that State”. Based on this definition, it appears that all 4 conditions must be met cumulatively. This is not feasible in critical cases.

The possibilities of how the FO can prove the fulfillment of the above conditions are doubtful in practice, as the foreign company is not governed by the law of the Slovak Republic. In addition, the law and the financial report do not specify in what specific way the fulfillment of conditions is demonstrated.

I therefore propose to specify this condition and at the same time not to require the fulfillment of all 4 of the above conditions.

I see the fifth problem in too low a share (10%), as defined in § 51h par. 2, letter c). Such “shareholding” (i) interferes with legitimate private fund structures, (ii) increases the risk of “forgetting” (since 10% is enough to have with dependents, which the taxpayer may not really notice; at the same time the definition of dependent is very broad and extremely for non-experts – § 2, letter n) of the Income Tax Act) and (iii) is inconsistent with other “shareholding”, which the Income Tax Act already knows – creates a heterogeneous environment with different rules. I therefore propose a 50% share, as is already the case with the CFC rules for legal persons (§ 17h).