To begin, it's important to note that for the purposes of this article, selling a company refers to the sale of a business share or the sale of shares in one of the business company forms listed below.
Since 2018, the Income Tax Act has allowed for the exemption of income from the sale of a company (sale of a business share or shares) from income tax, provided the following conditions are met:
One of the conditions for income tax exemption when selling a company is that the legal entity selling shares or business interests in the company being sold must directly own these stakes or shares. A directly owned stake means, that the partner or shareholder directly owns this business stake or shares and is registered in the commercial register as a partner, shareholder, or limited partner, and participates in the management and control of the company being sold. An indirectly owned stake would be one, if the selling legal entity owned a stake in the company being sold by being a shareholder in another company, which would then own a stake in the company being sold.
One of the conditions for income tax exemption when selling a company is that the legal entity selling a stake in the company must perform essential functions, manage, and bear the risks associated with holding these shares and business stakes within Slovakia and must possess sufficient personnel and material resources to carry out these activities. This condition aims to prevent the opportunistic establishment of shell holding companies that would hold business stakes in companies being sold merely to avoid paying income tax upon their sale. Therefore, the law requires that this holding company genuinely performs active management of the company being sold. This means it should have the necessary personnel and material resources, such as employees, offices, computers, and so on.
One of the conditions for income tax exemption when selling a company is that the legal entity selling a stake in the company must have its registered office or place of effective management in the Slovak Republic or a permanent establishment.
Company's registered office in Slovakia a company has one if its registered office address in the Slovak Republic is recorded in the Commercial Register.
A permanent establishment means a fixed place or facility for carrying out business activities, through which the company wholly or partly conducts activities within the territory of the Slovak Republic. This primarily includes the place from which the company's activities are organized. Examples include a branch, office, workshop, workplace, point of sale, technical facility, or a site for exploration and extraction of natural resources, etc. A place or facility for carrying out activities is considered permanentif it is used continuously or repeatedly for the performance of activities. If it concerns a one-off activity, the place or facility where the activity is performed is considered permanent, if the duration of the activities exceeds six months (a one-off activity is performed for six months and one day), either continuously or in several periods within any twelve-month period.
Place of effective management of a legal entity is the place where management and business decisions of the statutory bodies and supervisory bodies of the legal entity are made, even if the address of this place is not registered in the Commercial Register.
Using the example of two development versions of the same startup, we will compare how many % and € you can save on income tax when selling your company. This is assuming you make the right strategic decision in time.
VERSION "A" - in this version, we will assume that the owner of the startup, Mr. Elon Musk, decided that his successful startup company, which has the legal form of an s.r.o. (limited liability company) will own as a natural person. Elon is therefore the sole shareholder and holds a 100% business stake in his LLC. Elon works hard, and in three years, the value of his business stake in the startup LLC has grown to €1,000,000. Elon plans to launch a new project because he wants to get people to MARS. For this, he needs money and decides to sell his startup LLC for €1,000,000. The taxation of the sale price will be as follows (for the purposes of this article, we will omit the technicalities of accounting regulations and other details). Let's assume the tax base will be the full €1,000,000.
Tax burden for version "A" is 19% of the tax base up to €37,981 and 25% of the tax base above €37,981. Thus, the total income tax from the sale of the business stake in this case will be €247,721. However, it is important not to forget the health insurance contribution, which is also paid on the sale of a business stake, at a rate of 14% of the assessment base, which is also the tax base. So, the health insurance contribution will be €140,000. The total contribution burden (income tax + health insurance contribution) in version "A", where the business stake is owned by a natural person, will therefore be a total of €387,721.
VERSION "B" - in this version, we will assume that the startup owner, Mr. Elon Musk, decided that his successful startup company, which has the legal form of an LLC, will be owned by a legal entity. For this purpose, Elon will establish a holding joint-stock company, which will be the sole shareholder and will own a 100% business stake in the startup LLC. Elon works hard, and in three years, the value of the business stake in the startup LLC, owned by his joint-stock company, has grown to €1,000,000. Elon plans to launch a new project because he wants to get people to MARS. For this, he needs money and decides to sell his startup LLC for €1,000,000. The taxation of the sale price will be as follows (for the purposes of this article, we will omit the technicalities of accounting regulations and other details). Let's assume the tax base will be the full €1,000,000.
Tax burden for version "B" is 0% due to meeting the conditions for income tax exemption, thanks to the smart setup of the project LLC's ownership structure. Thus, €1,000,000 became the income of the holding joint-stock company that sold the business stake in the LLC. However, Elon wants the money to be paid into his personal account, so the holding joint-stock company approves the payment of a dividend of €1,000,000 to the shareholder Elon Musk's account. In this case, the dividend is subject to a 7% withholding income tax. The total tax burden in version "B" will therefore only be €70,000.
COMPARISON RESULT: The tax burden in version "B" is more favorable by a full €317,721. In version "B", Elon Musk saved a significant amount thanks to his reasonable planning, which he can invest in sending people to MARS.
Now that you know the conditions for exempting income from the sale of your company, you can take strategic measures and "restructure" the legal framework for holding shares in your company. This is to ensure you meet the above conditions at the moment you wish to sell your project. The first measure is to own shares through a legal entity – a holding company. Such a holding company can be a joint-stock company (a.s.) or a limited liability company (s.r.o.). A quick and convenient solution is to purchase a ready-made holding company, which will save you a significant amount of time compared to establishing a company from scratch. Check out our list of ready-made s.r.o. companies or our list of ready-made a.s. joint-stock companies and reserve your holding company online today. Don't waste time with bureaucracy.
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