Foreward by Andrew Chilvers
During the past two decades the key nations of Central and Eastern European (CEE) have grown significantly following moves to liberalise their economies. On average Poland, the Czech Republic, Hungary, Bulgaria and Romania, to name a few, increased their per capita GDP by 115% between 2004-2020. Employment was at its lowest ever at a mere 4.6% and productivity levels were catching up with the developed states of the EU.
In CEE countries growth has been the result of several factors such as the prosperity of the traditional industries, competitive exports and foreign investment, as well as the significant inflow of various funds from the EU and others.
However, this growth ground to an abrupt halt last year with the onset of the Covid-19 pandemic. As elsewhere, the pandemic hit the CEE region on several fronts, with disruptions to the regional services sector and global supply chains – this was particularly damaging to those countries with large vehicle manufacturing sectors. Nevertheless, the CEE economies are known for their economic resilience and many believe they are better positioned to cope with the aftermath of the Covid-19 crisis than their West European counterparts.
Indeed, many analysts predict that the next year or so will be only a temporary setback as CEE economies quickly find their feet again. With this gradual re-opening, the economies in the region are forecast to grow by a healthy 4.1% in 2021 from what was a severe 5.1% contraction last year, according to Moody’s Investors Services.
Overall, economic growth is expected to be more robust in the region compared with countries to the West due to the regional economies’ reliance on traditional manufacturing and heavy industry, with less exposure to hospitality and tourism. The collapse of the latter sectors has had devastating effects on countries such as Croatia and Greece but has spared the majority of CEE countries.
Slovakia: an emerging business destination on the Danube
Slovakia: Limited Partnership in the context of international tax law
During the past 15 years Slovakia has come a long way from the successful economic reforms at the beginning of millennium, when the country was labelled as the economic tiger of Central Europe. Unfortunately, during the past 10 years conditions for doing business in Slovakia have deteriorated and that has been compounded by the coronavirus pandemic. Nevertheless, Slovakia has been achieving steady but slow economic growth and entrepreneurs have lost none of their desire to do business. After the elections in 2020, Slovakia opted again for a pro-reform government that promises to improve the business environment and remove bureaucratic barriers.
The Slovak economy is an open economy and foreign entrepreneurs have the same rights and obligations as Slovak entities. Foreign investors entering the Slovak market may choose several forms of legal entities: the Slovak Commercial Code is the fundamental piece of legislation regarding corporate law. There are no limitations for foreign investors when it comes to setting up companies. A foreign person or a legal entity may set up any form of a company either as a sole shareholder (in the capital companies) or together with other Slovak or foreign persons or entities.
Advantages of a limited partnership
The most commonly used corporate form among entrepreneurs is a limited liability company. In this article, however, we would like to draw attention to a limited partnership, which tend to be less common in Slovakia. This may be due to the lack of awareness by entrepreneurs about this form of business. Yet a limited partnership has several advantages when doing business. For instance, the low capitalisation (a deposit of limited partner costing €250 is sufficient) and low level of liability (especially if the general partner is a limited liability company).
But the most significant advantages by far are the tax benefits. Essentially, the limited partnership is a tax transparent entity that is not liable to tax. Instead, its achieved profit is divided between the general partner and the limited partner according to the agreed profit split and taxed at their individual levels. With the right business structure and method of profit distribution, significant savings can be made on taxes.
As a law firm specialising in international tax law, we would like to use one particular example of tax advantages of the limited partnership in relation to the Double Taxation Agreement between Slovakia and Cyprus.
Let’s imagine the limited partnership was formed in Slovakia with its general partner (komplementar) being a Cypriot Ltd company, which holds the majority (e.g.) 90% stake and the limited partner (komanditista) being a Slovak Ltd company that holds the minority (e.g.) 10% stake in the limited partnership. In the case of the Slovak limited liability company, the profit of 100 would be taxed by the corporation tax at its rate of 21%, i.e. the tax is 21. However, since the limited partnership is the tax transparent entity, as mentioned above, the corporation tax does not apply here and its members (i.e. the general partner and the limited partner) are only liable to tax individually according to their residency.
Thus, in the above example the limited partner is liable to 21% of 10%, i.e. the tax is 2.1 of 100 profit and the general partner (Cypriot Ltd company) is taxed by the Cypriot corporate tax rate of 12.5%, i.e. the tax is 11.25 of 100 profit. Overall, the tax is 13.35 instead of 21 which is a significant tax mitigation of approx. 40%.
Although according to the Slovak tax laws the above profit of the general partner should be taxed in Slovakia by the Slovak corporation tax rate of 21%, the Double Taxation Agreement between Slovakia and Cyprus that takes precedence over the Slovak tax laws allocates such taxation to Cyprus by its corporation tax rate of 12.5%. This is because the Cypriot company, when correctly structured, does not meet conditions for being regarded as the permanent establishment according to the aforesaid Double Taxation Agreement, hence for being taxed in Slovakia.
Moreover, it can be said that the above scenario also applies in situations when the Slovak limited partnership owns property in Slovakia and receives rental income or any other income or profit related to real estates in Slovakia.
To conclude, the limited partnership in Slovakia can be regarded as a useful legal form and utilised in various situations, in particular in the context of international tax law and business structuring – those are two domains of our work we enjoy the most in Vasil & Partners and which help us to constantly stay ahead of the curve.
