Slovakia Axes Dividend Tax

by Ulrika Lomas, Tax-News.com, Brussels

05 February 2004

Slovakia is attempting to cement its growing pre-eminence as the low tax jurisdiction of Central Europe with elimination of taxation on dividends as part of the new income tax act.

"One of the objectives of the whole tax reform was to keep this rule - to tax all income only once," Peter Papanek, spokesman for the finance minister, told the Slovak Spectator, whilst noting the “positive secondary effects” the legislation will have on investment by encouraging foreign and domestic entrepreneurs.

Slovakia has also taken other significant strides in encouraging business activity, consumer spending and investment with a somewhat controversial flat tax, levied on personal and corporate incomes at a rate of 19%. The flat rate also applies to VAT (Value Added Tax) although this entailed an increase in tax.

While the Slovak President, Rudolf Schuster initially vetoed the legislation late last year, fearing that the tax would create greater social inequality, parliament overruled him, with the majority of lawmakers sharing the view of Finance Minster Ivan Miklos who has said that the changes will create a "fair, simple, and investment-oriented tax environment.”

Analysts generally support the abolition of the dividend tax, observing that it will help to generate interest in the nation’s fledgling capital markets. However, others note that the capital gains tax regime may encourage many firms to distribute profits within Slovakia before reinvesting them abroad. Also, the jury is still out as to whether it will cut down on the incidence of tax evasion.

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