CZECH AND SLOVAK ENTITIES AS VEHICLES FOR INTERNATIONAL TAX PLANNING AND

ASSET PROTECTION

1. INTRODUCTION TO THE CORPORATE AND TAX REGIME

2. TYPICAL TAX PLANNING AND ASSET PROTECTION STRUCTURES

ABOUT US

part of a financial and international tax consulting group formed in Prague in July 1992,

based in the Czech Rep., Slovakia and Cyprus,

international tax planning and asset protection consulting,

OUR SERVICES

corporate services in the Czech Republic, Slovakia, Cyprus and Anguilla,

secretarial services, annual administration, bookkeeping,

administration of trusts (Czech Republic) and foundations (Anguilla).

PROTTECO TRUST COMPANY

Our services

TYPICAL CLIENTS

professional intermediaries from Ukraine, Kazakhstan, Russia, Poland etc.,

TYPICAL "PRODUCT"

shelf Czech company with an opened bank account in a Czech bank,

MOST REQUESTED STRUCTURE

Czech/Slovak companies acting as agents in international trade,

Czech/Slovak holding companies.

Czech Republic and Slovakia – tax regime

TAX REGIME same background and many similar attributes due to historical consequences,

implementation of EU tax directives:

EU Parent-Subsidiary Directive, EU Interest and Royalties Directive, EU 6th Directive (VAT), EU Savings Directive.

broad network of DTTs

Czech Republic – 83 DTTs including Ukraine, Slovakia - 64 DTTs including Ukraine.

both countries compliant with the automatic exchange of information

under the OECD Common Reporting Standard since 2017.

CZECH REPUBLIC – corporate tax regime (1)

TAX RESIDENCE resident companies are subject to corporate income tax on their worldwide income, company is treated as resident if it has its legal seat or place of effective management

in the Czech Rep.,

TAX RATES corporate income tax - 19%,

(effective taxation can be decreased in case of the use of agent structures), VAT - standard rate of 21%, reduced rates of 15% and 10% (food, pharmaceuticals etc.)

TAX PERIOD the taxpayer can elect a fiscal year, although a calendar year is a standard, the initial tax period can be either longer than 12 months (max. 15 months),

if the company is incorporated during last quarter of a year.

CZECH REPUBLIC – corporate tax regime (2)

TAXATION OF INCOMING DIVIDENDS original EU Parent-Subsidiary implemented, i.e. dividends tax exempt if standard conditions are

met (10% shares, 12 months), exemption applies also to dividends from non-EU subsidiaries which a) are tax resident in a country having a DTT with the CZ, b) are in a legal form comparable to a Czech joint-stock company or Ltd, c) in its country of residence, it is subject to a CIT at a rate of at least 12%, d) 12 months, 10% ownership. anti-abuse amendment of the EU Parent-Subsidiary Directive (2015) not adopted into the Czech tax laws, but the general "substance-over-form rule" and "abuse of law" rules are present (never used in practice in case of holding structures)

PARTICIPATION EXEMPTION capital gains from the sale of shares in EU as well as in non-EU subsidiaries are exempt under

the same conditions (a-d above), if the conditions are not met, the capital gains are taxed by 19%.

CZECH REPUBLIC – corporate tax regime (3) OUTGOING DIVIDENDS / INTEREST / ROYALTIES exempted under the EU PS Directive (10% share, 12 months), or reduced under the respective DTT, otherwise WHT applies:

15% for EU residents and qualified non-EU residents , (i.e. existence of a DTT or TIEA between CZ and the country of residence) 35% for non-qualified non-EU residents.

CZECH REPUBLIC x UKRAINE

Agreement on the mutual promotion and protection of investments (1995, 2008),

Agreement on the legal assistance in civil matters (2002, 2008),

DTT (1999),

Dividends Interest Royalties

WHT rates 5 / 15% 5% 10%

SLOVAKIA – corporate tax regime (1)

TAX RESIDENCE resident companies are subject to tax on their worldwide income, company is treated as resident if it has its legal seat or place of effective

management in Slovakia,

TAX PERIOD

the taxpayer can elect the beginning of a fiscal year (calendar year is a standard),

TAX RATES corporate income tax - 21%,

(effective taxation can be decreased in case of the use of agent structures), VAT - standard rate of 20%, reduced rates of 10% (food, pharmaceuticals etc.).

SLOVAKIA – corporate tax regime (2)

TAX LICENCE (not applicable since 1/2018)

till 2017, Slovak entities had to pay a minimum tax payable by each tax payer, irrespective of the derived profit (so called "tax license").

depending on the turnover of the taxpayer and the VAT status, the tax license amounts

to 480 – 2,880 EUR and is deductible from the income tax actually paid, (i.e. the companies deriving no profit pay the tax license in full). tax license has been cancelled with the effect from 1/2018, (for the last time, it will be paid in 2018 for the accounting year 2017).

CAPITAL GAINS

participation exemption non-applicable,

capital gains form part of the income of the company, and are liable to the standard corporate income tax.

SLOVAKIA – corporate tax regime (3)

DIVIDENDS since 2004, incoming dividends are not subject to the income tax, irrespective of

the country of residence of the subsidiary, ownership share or period of ownership, from 2017, incoming dividends are subject to the income tax of 35%, if the subsidiary

is resident in a country not having a DTT or TIEA agreement concluded with Slovakia, (treaty countries include Belize, BVI, Anguilla, Mauritius but NOT include Panama or Seychelles)

N.B.: Slovakia (like other EU countries) has adopted the anti-abuse amendment (2015/121/EU) of the EU Parent-Subsidiary Directive.

According to it, incoming dividends might become subject to the Slovak income tax in case that the main purpose or one of the main purposes of the respective holding structure was to obtain a tax advantage.

too early to draw conclusions (no practical experience, court cases, disputes, guidelines), however it might be necessary for the holding companies to have a significant level of economic substance and realise other activities than a purely passive holding of shares.

SLOVAKIA – corporate tax regime (4)

OUTGOING DIVIDENDS

since 2016, they are not automatically tax exempt, tax exemption applies only if the recipient is resident in a country having a DTT or TIEA agreement with Slovakia,

otherwise WHT with a rate of 35% applies.

OUTGOING INTEREST / ROYALTIES exempt under the EU R/I Directive (10% share, 12 months), or reduced under the respective DTT, otherwise WHT applies: 19% for EU residents and non-EU residents from a DTT or TIEA country, 35% for non-qualified non-EU residents.

SLOVAKIA x UKRAINE

Agreement on the mutual promotion and protection of investments (1994),

Czech-Soviet Union agreement on mutual legal assistance (1982), DTT (1996).

Dividends Interest Royalties

WHT rates 10% 10% 10%

Summary of relevant benefits (1)

participation exemption available in the Czech Republic,

tax exemption of dividends available in Slovakia,

broad network of DTTs, including DTTs with UA,

tax residence certificate issued automatically.

Summary of relevant benefits (2)

Czech Republic / Slovakia = "white-listed" jurisdictions,

accounts in Czech banks available for Czech Czech/Slovak companies with foreign owners,

absence of registered agent / secretary,

Czech trust as a new asset protection tool.

Typical structures with Czech or Slovak companies

1. Czech / Slovak trading agent company

2. Czech / Slovak payment agent

3. Slovak holding company

4. Czech holding company

5. Czech trusts

NEW!!

1. Czech / Slovak trading agent company (1)

a special purpose company acting as an agent in its own name on behalf of a principal (usually based in a low-tax jurisdiction),

agent buys goods from foreign suppliers and resells them to final buyers, whereas the goods travels directly,

suitable alternative to a UK agent trading company,

perfect solution especially for an export from a non-EU country to a non EU-country.

N.B.:

in case of an export from the EU it is essential that the seller sells the goods in the regime of export out of the EU, in order to keep the transaction exempt from VAT,

can be used only in case that the financal statements fully reflect the movement of goods (the transactions on the bank account correspond with the agreements/invoices/bills of lading etc.).

1. Czech / Slovak trading agent company (2)

Seller of goods CZ / SK trading agent

Final buyer (Ukraine)

Invoices / payment Invoices / payment

Principal (low tax country)

Profit Commission

2. Czech / Slovak payment agent (1)

the payment agent does not buy or sell goods, merely processes the payments upon instructions of a principal,

as a result, the principal does not have to have a bank account.

N.B.:

the provision of payment services provider is a regulated activity in the EU and the payment agent must dispose of a licence, UNLESS:

- the service is provided within a group of associated companies (with the commission agreed at arm‘s length basis), or - the payment service is done by a trustee of a Czech trust (individual), or - the payment service is done as a part of a complex intermediation service between the parties (the financal statements must fully reflect the movement of goods).

2. Czech / Slovak payment agent (2)

Invoices / agreements

Payment instructions

Seller of goods

CZ / SK payment agent

Final buyer (Ukraine)

Invoices / agreements

Principal

Payment Payment

3. Slovak holding company (1)

dividend income received by the Slovak company is not subject to corporate income tax,

(but: the implemented clause of the 2015/121 EU Directive aimed at artificial structures!!)

dividends distributed to the individual or corporate shareholders resident in DTT/TIEA countries are not subject to the Slovak WHT,

only taxation potentially applying to the dividends would be the withholding tax applying in the country of the subsidiary

(unless exempt or reduced under a DTT),

in case of Ukraine, the WHT would be 10%.

3. Slovak holding company (2)

Qualified parent company

Slovak holding company

Subsidiary 1 (EU)

Subsidiary 2 (non-EU country)

………

……… ……

Tax exemption if the parent is from a DTT/TIEA country

Withholding tax (reduced under DTT)

Incoming dividends not subject to tax, BUT…

……

Exemption from WHT under EU directive

……… No tax or low tax under the local

legislation

3. Slovak holding company (3)

IMPLEMENTATION OF A SILENT PARTNER

enters into a confidential agreement with the shareholder,

provides the capital into the company (funds, shares etc.),

is entitled to the agreed part of the profit generated by the Slovak company,

the distributed profit is exempt from the Slovak WHT if the silent partner is resident in a DTT/TIEA country,

yet, the silent partner is not in a position of a shareholder and its identity is not known to the public.

3. Slovak holding company (4)

ownership share – 100% agreed profit share

Slovak company

Sole shareholder (100% legal owner)

non-EU subsidiaries

Silent partner (offshore company)

EU subsidiaries

ownership share – 0% agreed profit share

Exemption from WHT further to the EU Directive or DTT

Exemption from WHT further to DTT

4. Czech holding company (1)

dividend income and capital gains received from qualified subsidiaries is

not subject to income tax:

a) EU subsidiaries meeting the 12 months, 10% ownership rule,

b) non-EU subsidiaries meeting the following requirements:

resident in a country having a DTT with the CZ,

legal form comparable to a Czech joint-stock company or Ltd,

subject to a CIT with a rate of at least 12% in its country of residence,

12 months, 10% ownership.

WHT does not apply in case of dividends paid to EU parent companies.

4. Czech holding company (2)

WHT 0%

Parent company resident in a DTT country

Exemption of incoming dividends Exemption of capital gains

Czech company

Qualified subsidiary

Qualified EU parent company

WHT 0% or further to the DTT

Other

WHT 19% or 35%

WHT 0% or further to the DTT

5. Czech trust (1) TRUST CONCEPT IN THE CZECH REPUBLIC

introduced in 2014 by the new Civil Code, based on the Quebec trust legislation,

does not have a legal personality but is considered as a legal entity for tax purposes,

a founder assigns certain property (shares, real estate, liquid funds, receivables) to a trustee who

manages it for the benefit of specific or non-specific beneficiaries,

the trustee can be any individual (corporate trustees are not allowed as yet), no restrictions relating to the nationality, residence, or regulation of a trustee,

the founder can be an individual or a legal person. It can be the same person as

‐ the beneficiary (or one of them), ‐ a trustee but in such case, there must be more trustees appointed, acting jointly,

the beneficiaries can be specific individuals, specific legal persons, or just a generally determined

group of persons/entities. They do not have to be appointed or even to exist at the moment of establishment of the trust.

NEW!

5. Czech trust (2)

assets vested into the trust have no legal owner. In official registries and banks, the trustee appears as an owner/shareholder, with an indication "as a trustee",

during the existence of the trust, other assets can be vested into the same trust by a third party,

the trust legislation presumes the existence of a guardian/protector,

the trust is dissolved

- on expiry of the period for which it was established, - once the intended purpose is fulfilled, - on the decision of the court decision, or - if all beneficiaries renounce their right to receive payment from the trust,

the way of distribution of assets from the dissolved trust is determined by the statute. Usually, the assets are distributed to the beneficiaries or returned back to the founder.

NEW!

5. Czech trust (3) 2014-2016 only a few Czech trusts has been established due to the fact that banks, official local and foreign Registries were not prepared for a concept of property (shares, real estate) without an owner. February 2017 the Minister of Finance "legitimised" the practical use of trusts by transferring his substantial

business assets to newly established trusts (in order to avoid the conflict of interest). May 2017 the current exemption of incoming dividends is extended to trusts. (i.e. if at least 10 per cent share in the capital of a subsidiary will be held in trust for more than 2 months,

incoming dividends will not be subject to tax)

NEW!

5. Czech trust (4)

NEW! 1/2018 the mandatory registration of trusts in an official Registry of Trusts becomes effective, i.e. there will be an Official Register of Trusts. This will help the trust

arrangements to be better recognised by the local and foreign authorities. the Official Registry will contain only a limited information that will be made publicly available:

‐ name and registration number of the trust, and its purpose, ‐ trustee(s),

(information on founders, beneficiaries, protectors will not be publicly available).

5. Czech trust (5) TAXATION OF INCOME profit is taxed in the same way as a corporation, business income of the trust is taxed by a standard income tax (19%),

incoming dividends/capital gains are exempt under the same conditions as in case of companies.

TAXATION OF DISTRIBUTED PROFIT/ASSETS distribution of profit to the non-resident beneficiaries is subject to a WHT of 15%, unless a lower

rate applies thanks to a DTT (according to the Ukraine-Czech DTT, profit from a trust is treated as dividends, and the WHT rate remains at 15%).

distribution of assets to the beneficiaries (or other persons at the moment of termination of the

trust arrangement) is subject to the Czech income tax UNLESS - the beneficiary is a related party (family, close relative etc.), or - the income is exempt further to the conditions of the mutual DTT (for UA residents, according to the Ukraine-Czech DTT, this type of income is exempt in the

Czech Rep. and taxable in Ukraine only).

NEW!

THANK YOU FOR YOUR ATTENTION!

Ing. Tomáš Chrobák Executive Manager

Tel.: +420 255 725 910 chrobak@protteco.com

PROTTECO TRUST COMPANY

Palac Archa, Na Porici 24-26, 110 00 Prague, Czech Republic

www.protteco.com