Did you know the difference between withholding tax and tax guarantee?

Withholding tax is directly linked to income and is withheld when it is paid, while security tax is a preventive measure to ensure future compliance with tax obligations.

Withholding tax

Tax collection by withholding represents a specific method of collecting income tax, where in most cases, withholding tax is considered to have fulfilled and settled the tax obligation.

Income subject to this method of tax collection is listed in Section 43 of the Slovak Income Tax Act. According to this provision, the tax collected by withholding applies to income from sources in the territory of the Slovak Republic for taxpayers with limited tax liability (non-residents of the Slovak Republic), but also for taxpayers with unlimited tax liability (residents of the Slovak Republic).

The local withholding tax rate is 19% or 35% in the case of non-cooperating jurisdictions, or 7% in the case of distributing dividends to individuals tax resident in cooperating countries (in general 10% if distributions of dividends are made from 2024 profits). The local rate can be reduced by a respective double taxation avoidance treaty, if applicable.

In the case of a withholding tax, the responsibility for withholding and payment of tax is transferred to the taxpayer – the person who makes the payment to the recipient of the income. The taxpayer withholds tax from the amount paid and remits it to the Tax Authorities. The withholding tax is carried out before the net payment is made to the recipient, i.e. the recipient receives the payment reduced by the amount of withheld tax.

However, in some cases (Section 43(6) of the Slovak Income Tax Act), the taxpayer has the option of deciding whether the tax obligation will be considered fulfilled by withholding tax, or whether the income in question will be included in the tax return and thus the withheld tax will be considered an advance payment for tax. An exception is also income paid to an individual according to the Copyright Act.

Security tax

The second institute for collecting tax at source is security tax according to Section 44 of the Slovak Income Tax Act.

Security tax is a form of payment of advance payments for income tax, which is used mainly in relation to taxpayers with limited tax liability (non-residents of the Slovak Republic). The payer of income is responsible for collecting and paying the tax advance payment - a person who pays, transfers or attributes income to a non-resident of the Slovak Republic. Subsequently, the taxpayer is obliged to settle his tax liability by filing a tax return.

The tax rate is 19% or 35% in the case of non-cooperative countries. At the same time the Tax Authorities may impose the obligation to withhold 9,5% security tax from payments to a different taxpayer. If the beneficial owner of income is not known, 35% security tax must be withheld.

If the taxpayer does not file a tax return, the tax authority may decide that the tax obligation has been fulfilled by withholding the amount for security tax, because security tax collects the tax that would also be collected through a tax return, since the security tax is withheld from the amount of payment to abroad, not reduced by potential costs related to the respective income.

Tax security applies to taxable income of non-residents of the Slovak Republic that derives from sources in the territory of the Slovak Republic (and the right to tax is attributed to the Slovak Republic) - except for income from which tax is collected by withholding;

• if it is income from dependent activity (from which an advance payment is deducted);
• if the taxpayer submits a confirmation from the tax authority that he pays tax advances pursuant to Section 34 or Section 42 of the Slovak Income Tax Act; or
• it concerns income of taxpayers with limited tax liability who are residents of an EU Member State or EEA taxpayers.