Selected changes introduced by the Amendment of the Act on VAT effective as of October 1, 2012

Deposit for VAT

Among the most important changes introduced by the Amendment of the VAT Act undoubtedly belongs a brand new obligation of some of the new VAT payers to provide deposit for the VAT. This obligation concerns those persons who applied for registration as VAT payer upon effectiveness of the Amendment, i.e. as of October 1, 2012, regardless of whether such person is a mandatory VAT payer (a person who alone or in association with others gained in the preceding 12 calendar months a turnover in the amount of EUR 49,790 at minimum) or voluntary VAT payer.

The VAT deposit can be reimbursed either be depositing it directly to the account of the tax office or by means of bank guarantee provided by a bank without reservation for the period of 12 months to the benefit of the tax office in the amount of the requested VAT deposit. As already mentioned above, the obligation to provide the VAT deposit does not pertain to all new VAT payers generally but only to persons enumerated in the VAT Act as follows:

a) natural person/individual who is or was an executive or shareholder of a company,

1. which has or had as to the day of its dissolution VAT arrears amounting to at least EUR 1,000 which arose at the time when such natural person was an executive or shareholder of such company and which arrears have as to the date of request for VAT registration not been paid, or
2. the registration for VAT of which was invalidated by the tax office due to (i) repeated violation of obligation to submit tax report (more than once in one calendar year), or (ii) repeated failure to pay the VAT (more than once in one calendar year), or (iii) repeated impossibility to be approached at the address of its registered office, or (iv) repeated breach of obligations in course of tax audit (hereinafter collectively referred to as the “reasons for invalidation of VAT registration”), and these facts, which are grounds for invalidation of VAT registration, occurred at the time when the natural person was an executive or shareholder of such company;

b) executive or shareholder of the taxable person (i.e. petitioner for VAT registration) is a natural person who has VAT arrears amounting to at least EUR 1,000 which as to the day of filing of request for VAT registration have not been paid, or whose VAT registration was invalidated due to reasons for invalidation of VAT registration;

c) executive or shareholder of the petitioner for VAT registration is a natural person or company who is or was an executive or shareholder of other company

1. which has or had as to the day of its dissolution VAT arrears in the amount of at least EUR 1,000, which arrears arose at the time when such natural person or company was its executive or shareholder and which arrears have as to the day of filing petition for VAT registration not been paid, or
2. the registration for VAT of which was invalidated by the tax office due to reasons for invalidations of VAT registration and the grounds for invalidation of the VAT registration occurred at the time when such natural person or company was its executive or shareholder;

d) such taxable person (i.e. petitioner for VAT registration) does not supply any goods nor provides any services at the time of filing of petition for VAT registration but only performs preparation activities for undertaking.

The legislator substantiates levying of the VAT deposit upon a new entrepreneur (letter d) above) through judgment of the Court of Justice of the European Union in the case C – 268/83 (Rompelman), according to which a person who declares its intention to perform taxable commerce by means of purchase of property or services designated for enterprising shall be considered a taxable person performing economic activity, therefore, a person who at the date of filing of petition for VAT registration has not yet performed any actual taxable commerce cannot be denied registration for VAT. On the other hand, in line with the cited judgment a tax administration authority is entitled to request the declared intention to be confirmed by objective factors evidencing the intended performance of commerce/business activities. The most important goal of the provision under letter d) above is to prevent potential misuse of voluntary VAT registration.

Provided that the petitioner for VAT registration falls within the statutory definition of persons who are obliged to provide the VAT deposit (letter a) to d) above), the tax office shall, by special decision, determinate the amount of the VAT deposit of the petitioner. The VAT Act stipulates that the amount of the VAT deposit may range from EUR 1,000 at minimum to EUR 500,000 at maximum. The legislator has evidently provided the tax office with a broad space for application of its administrative opinion when setting the precise amount of the VAT deposit. Pursuant to the explanatory memorandum to the Amendment the tax office shall determine the VAT deposit in such amount which shall correspond to potential extent of misuse of the VAT system. The tax administration in collaboration with the Ministry of Finance of theSlovakRepublicwas in this connection assigned with a task to elaborate detailed criteria on the basis of which the tax office shall determine the exact amount of the VAT deposit in each individual case. Pursuant to the explanatory memorandum the maximum amount of the VAT deposit shall be used in cases when there will be reasonable apprehension that the VAT registration would be misused for gaining groundless advantage, such as unjustified drawing of excessive tax deductions. The maximum VAT deposit shall in particular pertain to cases when the petitioner for VAT registration participates or participated on VAT arrears approximately in the same amount, i.e. the VAT arrears are or were in the amount of EUR 500,000 or more. On the other hand, the VAT deposit in the amount of its statutory minimum shall be levied in case of a newly established entity which has not and had not any VAT arrears and there are no reasonable doubts that in the future such entity will perform taxable activities.

In this relation it should be noted that the tax office has actually no authority to decide whether or not to request the VAT deposit. Given that the conditions for VAT deposit are met (i.e. the petitioner falls within the criteria under letter a) to d) above) the tax office is obliged to request the VAT deposit and is only entitled to decide on its precise amount. Subsequently, the petitioner is obliged to deposit the VAT deposit within 20 days as of receiving resolution of the tax office thereupon.

The tax office shall decide on the VAT deposit by a special decision against which the petitioner may appeal in 8 days period commencing as of delivery of the tax office´s decision on the VAT deposit. Appeal against such decision is, however, without any dilatory effect, i.e. even in the event that an appeal is filed the petitioner´s obligation to deposit the VAT deposit persists.

In the event that the petitioner for VAT registration does not comply with its obligation to deposit the VAT deposit, it is important to distinguish whether such petitioner is voluntary or mandatory VAT payer. If the petitioner falls within the definition under letter a) to c) above, and at the same time such petitioner is obliged to request for VAT registration (such petitioner has in the preceding 12 month reached alone or in association with others turnover amounting to at least EUR 49,790), and such petitioner does not comply with its obligation to duly and in full deposit the VAT deposit, than the tax office is entitled (and obliged) to collect the VAT deposit in a tax execution procedure. On the other hand, if the petitioner files for VAT registration voluntarily, and provided that such petitioner fails to deposit the VAT deposit, than, regardless of the reason substantiating the tax office´s decision to request the VAT deposit (i.e. letter a) to d) above), the tax office may not collect the VAT deposit in a tax execution procedure but merely denies registration for VAT.

The purpose of the VAT deposit is its potential later use for reimbursement of those VAT arrears which arose upon the petitioner´s VAT registration. Similarly to determination of the VAT deposit amount, also when using the VAT deposit the tax office shall issue a separate decision thereupon against which the VAT payer is entitled to appeal. The appeal, however, is without dilatory effect; therefore, its filing does not inhibit the tax office from using the VAT deposit in line with its decision.

The VAT deposit is of temporary nature only. If in the period of 12 months as of deposition of the VAT deposit there arose no reason to use it (or part thereof) the tax office shall return the VAT deposit (or the respective part thereof deposited in cash at the tax office´s account) within 30 days as of the day when the 12 months period elapsed. The above limitation should be positively appreciated, on the other hand, it does not go unnoted that throughout duration of the VAT deposit the petitioner (later as a VAT payer) is not entitled to any interest from the deposited sum. From the practical perspective that means that during 12 months as of deposition of the VAT deposit the VAT payer cannot in any manner dispose with the deposited sum (e.g. cannot invest it into its enterprise) and this sum remains “conserved” without any appreciation, quite the contrary, due to inflation the VAT payer will be returned less than what was originally deposited. The VAT deposit may lead to slow-down of the VAT payer´s entrepreneurial development especially in cases of higher amounts of the VAT deposit, after all the VAT deposit may reach up to EUR 500,000.

One of the disadvantages of the VAT deposit is prolongation of the period for registration for VAT from 30 days to 60 days. The VAT deposit can be in general deemed as certain sanction against those petitioners for VAT registration who failed to comply with their tax obligations or who as executives or shareholders failed to secure fulfilling of tax obligations of companies in which they held position of executives or shareholders. One could consider such persons as “risk entities”, as from empirical perspective there exist a reasonable assumption that such persons will continue to breach their tax obligations (persons under letter a) to c) above). Certain questions and doubts may arise when levying the VAT deposit obligation upon a petitioner who at the time of filing for VAT registration performs only preparation activities for undertaking. In this case the person is evidently a new entrepreneur who filed for VAT registration before even commencing performance of any entrepreneurial activity, ergo, as to the day of filing for VAT registration no VAT arrears could possibly have arisen (person under letter d) above). VAT deposit vis-à-vis a new entrepreneur clearly does not function as a sanction but merely as a security measure.

Tax period

The Amendment of the VAT Act changes also the rules determining the length of the tax period. Similarly to the previous legislation, also the amended VAT Act stipulates a general one month tax period. However, the new VAT Act eliminates the exception under which a VAT payer who achieved in the previous calendar year a turnover below EUR 331,939.19 has a 3 months tax period. The above changes concern both new (registered after September 30, 2012) and also the already existing VAT payers (provided they were not obliged to pay the VAT on monthly basis before effectiveness of the Amendment).

Pursuant to new legislation a VAT payer may opt for a 3 months tax period provided that as of the end of the calendar month in which it became a VAT payer more than 12 months have elapse and during these 12 consecutive calendar months the VAT payer´s turnover were lower than EUR 100,000. The VAT payer is obliged to notify such change to the tax office within 25 days as of elapse of the calendar month in which conditions mentioned above necessary for change of the tax period were fulfilled.

Those VAT payers whose tax period was under previous legislation 3 months may under the amended VAT Act become monthly VAT payers. In the transition provisions the Amendment stipulates that a VAT payer whose tax period before September 30, 2012 was 3 months may continue in this tax period only till the end of the calendar quarter in which it ceases to fulfill the statutory conditions for such a tax period. Given the above, if after September 30, 2012 the VAT payer achieved in the preceding 12 months a turnover amounting to at least EUR 100.000 or is a VAT payer who is registered as a VAT payer for a period shorter than 12 months, than such VAT payer may be a 3 months VAT payer only until the end of the calendar year 2012. As of January 2013 even such VAT payer shall automatically become a monthly VAT payer.

Invalidation of the VAT registration

The Amendment expands the powers of the tax office to invalidate the VAT registration of some VAT payers. The tax office is entitled, but not obliged, to invalidate the VAT registration, apart from the already existing reasons, also to a VAT payer who:

1. does not perform or ceased conducting enterprising, whereas for the purposes of the VAT Act enterprising means each gainful activity, including activities of manufacturers, merchants and service suppliers, including mining, construction and agricultural activities, activities performed as so-called “free occupation” (such as attorneys, notaries, executors) under applicable legislation, intellectual activities, sports, etc., or
2. repeatedly during one calendar year fails to submit the tax report, repeatedly during one calendar year fails to pay the VAT, is repeatedly unreachable at the address of its registered office, place of business or place of operation or repeatedly breaches its obligations in course of tax audit.

The tax office decides on the VAT registration invalidation in special decision which shall determine the exact date after which a company or natural persons ceases to be a VAT payer. No appeal can be filed against such decision and the person whose VAT registration has been invalidated is obliged to submit the VAT registration certificate to the tax office within 10 days.

VAT guarantee

Another change brought about by the Amendment is improvement of the institution of guarantee for VAT (introduced on May 1, 2004 on basis of Article 21(3) of the sixth regulation, currently as Article 205 of the Regulation 2006/112/EC), which proved to be an effective measure in controlling tax frauds in several EU member countries (e.g. GB, Portugal, Czech Republic, Belgium and Denmark).

The VAT payer who was or will be supplied with goods or provided with service within the territory of the Slovak Republic shall guarantee for VAT from the previous instance determined by the invoice in the event that the supplier shall fail to pay such VAT or became incapable of paying it, and provided that at the time of occurrence of the tax duty the VAT payer knew or reasonable could have known or should have known that VAT or part thereof will not be paid. The amended VAT Act defines the reasons which are sufficient for the VAT payer so that he reasonable could or should have known that VAT or part thereof will not be paid, as follows:

1. the equivalent for the performance determined by the invoice is without any economic justification unreasonably high or unreasonably low;
2. the VAT payer continued to perform taxable commerce with other VAT payer, with respect to whom reasons for invalidation of VAT registration exist, even upon its publishing in the respective list maintained by the Financial Headquarters of the Slovak Republic, or
3. at the time of occurrence of the tax duty such VAT payer´s statutory organ or member of statutory organ or shareholder was statutory organ or member of statutory organ or shareholder of the VAT payer who supplied the goods or provided the services.

The purpose of the guarantee for VAT is to eliminate taxable commerce the sole aim of which is misuse of law and unjustified drawing of excessive tax deductions, whereas these cases often include commerce with services where clarification whether such commerce is only fictive (with the purpose of gaining tax advantage through misuse of law) is difficult.

The institution of VAT guarantee may be applied upon cumulative fulfillment of the following conditions:

(i) on the part of the supplier/provider: the VAT determined by the invoice is not paid,

(ii) on the part of the customer:

• the price is clearly different from regular market prices (letter a)), or
• the customer continues in transactions with provider/supplier even upon warning from the tax administrator (letter b)) – the Financial Headquarters of the Slovak Republic shall publish which VAT payers have fulfilled the criteria for invalidation of VAT registration through the list of such persons available on its web page, or
• the customer is personally interconnected with the supplier/provider (letter c)).

In connection with the aforementioned, it should be noted that the Amendment adds a new provision – Section 69b, which governs the process of VAT guarantee application by the tax office vis-à-vis the VAT payer. The VAT determined by the invoice yet unpaid in time by the supplier/provider or paid only partially (hereinafter referred to as the “unpaid VAT”) shall be reimbursed by the VAT payer who is the guarantor (hereinafter as the “guarantor”). The amended VAT Act explicitly stipulates that the guarantor´s obligations vis-à-vis the tax office shall not cease to exist upon dissolution of the provider/supplier without legal predecessor.

In the event that the statutory conditions under (i) and (ii) above should by met, the respective tax office (competent according to the place of registered office of the provider/supplier) shall impose on the guarantor, in a separate decision, an obligation to pay the unpaid VAT. The guarantor is subsequently obliged to pay the unpaid VAT within 8 days as of delivery of the decision against which the guarantor may file an appeal, however, without any dilatory effect.