Foreign entities that conduct or intend to conduct business activities in Slovakia via Slovak branches should take a close look at the activities performed, the status of their VAT registration, and their entitlement to VAT deductions arising from purchased services.
Depending on the activities actually performed in the territory of Slovakia, a Slovak branch might be treated as a Slovak taxable person or as a foreign entity. Being treated as a Slovak taxable person means that the branch conducts the activities as an independent entity itself. Being an independent entity means that it acts independently towards its customers and concludes contracts with them by itself, it has its own bank accounts, it takes management decisions, it is able to receive and deliver service on its own, and so on (in other words, it is considered an “active branch”).
Being treated as a foreign entity means the branch does not perform these activities independently and does not function as an entity itself, in which case the branch performs activities only for its founder (in other words, it is considered a “passive branch”).
Provided an active branch purchases services from Slovak suppliers, such a branch is entitled to deduct VAT arising from such purchased services on its Slovak VAT return. However, when a passive branch purchases services from a Slovak supplier, the taxation of such services should follow the general rule, which is that the place of supply is the place where the founder has its seat. In the case of a VAT audit, the Tax Authority might challenge the deduction of VAT arising from such services where local VAT of 20% was applied and the reverse charge mechanism should have been applied and services should have been taxed in the state of the founder.
Lucia Bellanová
bellanova@bdoslovakia.com