Draft Law on Conversions of Commercial Companies and Cooperatives

The Draft Law on Conversions of Commercial Companies and Cooperatives and on Amendments and Additions to Certain Acts (hereinafter referred to as the “Act”), of which we have already informed you in the previous issue of the Newsletter, has passed its first reading in the National Council of the Slovak Republic. The Act was drafted in order to transpose Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions.

In this issue of the Newsletter, we will present the most important changes in the field of income tax, value added tax and accounting in connection with the draft Act.

Value Added Tax Act

• Cases are added when companies, including foreign companies (taxable persons), to which the ownership of tangible or intangible assets is transferred as a result of a spin-off, cross-border spin-off or dissolution without liquidation, become a VAT payer (hereinafter referred to as a “VAT payer”) by operation of the law;
• a person who becomes a VAT payer will be obliged to submit to the tax administrator the officially certified documents on the basis of which he became a VAT payer. The foregoing shall not be required in cases where this fact is recorded in the commercial register;
• a foreign person who becomes a VAT payer will be obliged to notify the tax administrator of the fact on the basis of which he became a VAT payer within 10 days from the date of the occurrence of this fact. Such a person is also obliged to submit documents certifying this fact within this time period. The tax authority will then register the foreign person as a VAT payer within 10 days from the date of the delivery of the notification and documents;
• in the case of the division of companies by a spin-off (merger) or cross-border spin-off, the transfer of tangible or intangible assets to the successor company shall not be considered to be the supply of goods or services if the latter is or becomes a VAT payer on the date of the conversion coming into effect;
• in the case of a transfer of fixed assets, the company that is divided by a spin-off, or cross-border spin-off, will be obliged to notify the successor company of the details of the adjustment to the deducted tax;
• in the event of the dissolution without liquidation of a VAT payer whose legal successor becomes a VAT payer, the latter shall not be obliged to adjust the tax already deducted in respect of the property acquired or created by his own activity or of the property which he acquired free of tax and upon the acquisition or creation of which the tax was deducted in whole or in part by the previous owner.

Income Tax Act

• Income arising from the acquisition of new shares and interests, as well as income arising from their exchange in the event of the conversion of a company or cooperative, will not be subject to income tax;
• for the purposes of applying the exemption of income (revenue) from the sale of shares or business shares acquired by a spin-off, it is proposed to set the date of entry in the commercial register, which gives effect to the spin-off, as the time of the acquisition of the direct share in the share capital;
• the procedure for adjusting the tax base for a taxpayer who is divided by a spin-off, as well as for his successor in real values and at the original prices, is supplemented. Rules are laid down for the valuation of assets and liabilities acquired by a successor and also the method for the depreciation of assets thus acquired;
• the determination of the entry price of financial assets that are created or taken over by the successor in the process of division by a spin-off is also supplemented, depending on whether the spin-off was carried out in accordance with the principle of real values or original prices for the purposes of adjusting the tax base.

Accounting Act

• For accounting purposes, a decisive date is set, i.e. the day as of which the actions of the dissolving accounting unit are considered to be performed on behalf of the successor accounting unit. This date must be specified in the conversion project and must not be later than the date of the conversion coming into effect;
• in the case of a cross-border change of legal form as a result of a change of the company’s registered office to another state, the last statutory body shall be obliged to ensure the termination of bookkeeping and the preparation of financial statements and their entry in the register of financial statements as of the date of the company’s or cooperative’s deletion from the commercial register;
• if the legal successor is a Slovak accounting entity, the obligation to draw up interim financial statements is hereby established as of the date of the change in legal form coming into effect;
• the dissolving accounting unit will continue to have the obligation to value assets and liabilities at fair value as of the day preceding the decisive day (however, this shall not apply if the successor company is a foreign accounting unit that does not remain in business in the Slovak Republic through an organisation branch). The successor entity shall take over the assets and liabilities of the dissolving entity as of the decisive date at fair value. In the case of a spin-off, this shall include the valuation of assets and liabilities that are the subject of the split-off part of the capital.

The law is proposed to enter into effect on 1 March 2024. We will keep you informed of further developments on this law in future editions of our Newsletter.