Thinking about a Subsidiary in Slovakia?

Branch office or subsidiary?
Foreign investors have the option of doing business in Slovakia via local branch offices. Although the branch office is an arm of one body (a foreign company), it is required to prepare financial statements and file tax returns as if it were a separate Slovak entity. Moreover, there is another disadvantage of the branch office – the foreign company is fully liable for the debts of its Slovak branch.

Branch offices are increasingly popular with banks or insurance companies from the European Union, since they do not need to apply for Slovak licenses and are not subject to supervision by Slovak banking or insurance bodies (according to EU rules for these sectors). Manufacturing companies, however, prefer to incorporate a separate subsidiary in Slovakia.

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Legal forms of subsidiaries
Slovak law recognizes five forms of business organizations, all of which represent a separate legal entity. Besides the joint stock company, the limited liability company and the co-operative, Slovak law also recognises general partnerships and limited partnerships as legal persons. The major feature of partnerships is their different tax treatment - general partners receive their portions of the profits or losses, and these are not subject to corporate income tax at the partnership level. However, the portion of the profits received by the general partner cannot be taken outside Slovakia without being taxed first (i.e. at the general partner level). In addition, general partners are fully liable for the debts of the partnership. Not surprisingly, partnerships are not a preferred option for investors.

Joint stock company
Investors usually choose between the joint stock company (Slovak abbreviation “a.s.“) and the limited liability company (“s.r.o.”) forms. Both types of company have minimum share capital requirements, no liability/limited liability of shareholders for the debts of the company, and formalized corporate governance. Prior to their incorporation they must demonstrate the right to use the premises where their office is registered, and they must apply for a trade license. To get a license they have to fulfil certain conditions (e.g. appoint an employee who is qualified to supervise a specific activity).

The minimum share capital of an a.s. is EUR 25,000. In addition, shareholders should contribute another amount equal to 10% of the share capital to the legal reserve fund. The shares can be subscribed by the founders or in a public offer. The full amount of the share capital must be paid up within one year.

The management of the company is vested in the board of directors (at least one physical person), while the supervisory board performs a control function (at least three people, and if the company has more than 50 employees, they elect one-third of the supervisory board members). Members of the BoD who are foreigners may be registered as people signing on behalf of the company only if they have residence permit for Slovakia (this does not apply to nationals of an EU or an OECD country).

A General Meeting of shareholders must be held at least once a year to approve the financial statements of the company. The financial statements and annual report must always be audited.

Pros of setting up an s.r.o.:

● simplicity of creation and administration;
● simple management;
● limited liability of the shareholders;
● audit required only if certain thresholds are met;
● low capital cost of creation;
● no initial contribution to the legal reserve fund; lower contributions to this fund from the net profits.

Cons of setting up an s.r.o.:

● parent companies with a single shareholder may not be the sole founder or the sole shareholder of a Slovak limited liability company.

Limited liability company
The registered capital of an s.r.o. is made up of contributions from its members (shareholders) with a minimum total value of approx. EUR 5,000. Each member’s liability for the company’s obligations is limited to his unpaid portion of the contribution.

The company does not issue shares, and each shareholder’s interest equals his capital contribution, unless agreed otherwise. The company is managed by one or more managing directors. They do not create a board, so each of them can act on behalf of the company independently (unless the Articles of Association specify otherwise, such as by requiring two signatures for all acts). The General Meeting of shareholders may limit or assume some of the director’s powers. However, such limitations are not effective vis-á-vis third parties. A supervisory board is not required.

Registration with a court
After all documentation is completed (one or more weeks), an application for the company to be registered with the Commercial Register has to be filed with the appropriate district court. The registration process should take five calendar days. There are moderate court fees charged for the company’s registration (up to EUR 500) but other expenses should also be taken into account (notary, lawyer’s fees). This article is of an informative nature only.

More info: www.sklegal.sk

Source: The Slovak Spectator
By Milan Baňas
Photo: Fotolia, Milan Baňas

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