With a small population of only 5.5 million people and high economic growth, the country positively treats foreign investment for its economic growth. Every person has the right to register as an entrepreneur or set up his own company in Slovakia.
Doing business in Slovakia is also attractive in terms of the location of the country, businesses in Slovakia can conduct their activities in other EU countries. The Slovak jurisdiction also boasts such advantages as low company formation costs, a competitive and business-friendly tax regime, and no restrictions on foreign ownership and employees. However, the sphere of cryptocurrencies in Slovakia still needs a clear legal and taxation regime.
There is no comprehensive regulation for crypto assets in the Slovak Republic. Certain efforts for the legal regulation of crypto assets can be drawn and interpreted from the norms of public law.
The first regulation of crypto assets in the Slovak Republic began with an amendment to the Income Tax Law. The concept of the so-called sale of virtual currency and its inclusion in the taxpayer’s obligation to tax income received from the exchange of virtual currency for property was introduced.
Later, the Ministry of Finance of the Slovak Republic issued a methodological guide on the taxation of virtual currencies. The definition of the concept of virtual currency was introduced for the first time. According to this methodological guide, virtual currency is defined as a digital value carrier that is not issued or guaranteed by a central bank or public authority, nor is it necessarily tied to legal tender, does not have the legal status of currency or money, but is accepted by some natural or legal persons as means of payment and which can be transferred, stored or traded electronically. In the meantime, the same definition is set out in the Law on Protection against Money Laundering and Protection against the Financing of Terrorism (hereinafter: – “AML Law”).
It should be added that crypto assets are not considered to be financial instruments and do not belong to the securities, as they do not qualify as securities in accordance with the Law on Securities and Investment Services.
Virtual asset service providers (VASPs) are not a regulated activity from the perspective of the National Bank of Slovakia (hereinafter: – “NBS”), therefore, VASPs do not need any NBS licence to operate in Slovakia. And although the NBS is not a regulatory body, it has recognized various crypto assets and defines cryptocurrencies as digital assets based on cryptography (encryption), are decentralised (not issued by a relevant competent authority) and mostly use the so-called blockchain technology. Mining is explained as the process of creating cryptographic assets.
Also, NBS distinguishes between types of digital assets:
- Virtual Assets – no rights are attached to them; they can only be used as a means of exchange for fiat currencies and other virtual assets or as a means of payment for goods and services;
- Utility – tokens – can be used, for a future purchase of services or products provided by the entity that ‘issues’ the tokens;
- Investment tokens – can give an investor the right to participate in the management or assets (future profits) of the entity that ‘issues’ the tokens.
Anti-money laundering requirements
In order to make the cryptocurrency business more transparent and reliable, Slovakia follows the rules for combating money laundering (hereinafter: – “AML”) and terrorist financing (hereinafter: – “CFT”) set by the EU.
AML/CFT rules crypto companies must adhere to the following principles:
- Determining the nature and complexity of cryptographic operations and types of clients in the context of the relevant rules.
- Development and implementation of policies and procedures to manage the risks associated with money laundering and terrorist financing.
- Ensure that staff are adequately trained and able to navigate money laundering, terrorist financing and data protection laws related to financial crime mitigation, as well as identifying high-risk clients and situations.
- Develop and implement CDD (customer due diligence) and KYC (know your customer) policies to ensure customer identification throughout all business relationships.
- Implement internal procedures to identify political actors.
- Constant monitoring of operations in accordance with the principles of risk assessment.
- Report suspicious transactions and customers to the competent authorities in accordance with the AML Law.
AML/CFT compliance is enforced by the Slovak Financial Intelligence Unit, which develops and implements control over cryptocurrency transactions. This body monitors crypto companies and is authorised to request relevant reports containing customer data, which removes the anonymity factor in crypto activities but strengthens the credibility of Slovak crypto companies.
Based on the AML Law, all VASP companies planning to offer cryptocurrency exchange services (including exchanges with fiat money) or cryptocurrency wallet provider services in or from Slovakia must be registered with the Commercial Register of the Slovak Republic and obtain a trade licence in order to provide these services in Slovakia. Registration is carried out by the Office of Trade Licensing.
Depending on the type of cryptocurrency activity, the Trade Licensing Authority grants the following licences types:
- a licence for crypto exchange services for companies that facilitate the trading of cryptocurrencies for other cryptocurrencies, fiat money and other assets, including equipment such as crypto ATMs;
- Licence for companies introducing wallets for cryptocurrency storage, creation of encrypted client keys, as well as their storage and transfer crypto assets.
To obtain a trading licence, a company must meet the following requirements:
- A company registered and with a legal address in Slovakia;
- Pay official fee;
- Develop models for data protection;
- Create internal AML / CFT policies;
- Implement KYC procedures for customer identification;
- Provide following set of documents (must be translated into Slovak):
- Charter and other corporate documents;
- Proof of premises obtained for the registered office in Slovakia (virtual office allowed);
- Confirmation of the permanent residence of the founders and directors of the company;
- Evidence of a representative of the appropriate qualifications to carry out cryptocurrency activities;
- Certificate of non-conviction of all founders and managers.
The licensing process usually takes four to six weeks, and if all the required information and documentation is provided correctly, the trade licensing authority issues a licence within three business days.
There is also a possibility to obtain an Electronic Money institute (EMI) licence, for which the different licensing procedures apply. This is a licence that is issued to an electronic money institution (hereinafter: – “IEP”) to obtain the right to issue electronic money. IEP – is a legal entity based in the Slovak Republic, authorised to issue electronic money, manage electronic money and carry out payment transactions related to the issuance of electronic money. In addition to issuing and managing electronic money, he can carry out other business activities, but cannot accept deposits. It is subject to terms and conditions in accordance with Payment Services Law. As per the law, IEPs are considered to be legal entities with an official address in the territory of the republic and eligible to carry out operations related to such areas as:
- issuing electronic funds;
- providing payment instruments and closely-related services involving e-money;
- maintenance and support of payment and exchange services.
The NBS accepts applications and makes a decision to issue a licence to issue electronic money or to change an issued licence to issue electronic money. If the organisation provides services not involving the issuance of e-money, it is required to adhere to the monthly transaction limit of three million euros. This limit is calculated as the yearly average by dividing the total by 12, taking into account the remarks of the NBS. The licence is granted after one month once all required documents are received. The validity period of the licence is indefinite, but may be withdrawn upon violation or non-fulfilment requirements set out by NBS.
In accordance with the Income Tax Law, income received from the sale of virtual currency is subject to taxation. For tax purposes, any exchange is considered a sale of virtual currency, i.e. exchange of virtual currency for property or exchange of virtual currency for the provision of a service or its transfer for a fee, including exchange for another virtual currency.
In the case of taxation of cryptocurrencies, it is necessary to distinguish whether it is the income of an individual whose virtual currency is not included in the assets of the business, or the income of an individual whose cryptocurrency is included in the assets of the business, or whether it is the income of a legal entity. In the case of taxation of cryptocurrencies, the method of taxation differs depending on the taxpayer, that is, the person receiving the income. Cryptocurrency is not taxed if a physical person or legal person holds cryptocurrency on his account without movement and does not receive income.
Personal income tax
For physical individuals who do not have cryptocurrencies included in business assets, the tax rate is 19% or 25%. The income tax rate depends on the tax base of the taxpayer. It is applied as follows:
- 19% of that part of the tax base that does not exceed the amount of 41445.46 EUR (inclusive);
- 25% of that part of the tax base which exceeds the amount of EUR 41,445.47 (i.e. EUR 41,445.47 or more).
A very important fact when assessing the tax rate for individuals who do not have cryptocurrency included in business assets is the obligation to pay health care contributions. All taxable income under section 8 of the Income Tax Act is subject to health tax and the premium rate is 14%. This is a significant disadvantage compared to the taxation of cryptocurrencies for legal entities that do not pay for health insurance.
Corporate income tax and individuals’ entrepreneurs
For physical a person of an entrepreneur who receives income from the sale of cryptocurrencies included in the assets of the business, the following income tax rates for 2022-2023 are taken into account:
- 15%, but only for those individuals. persons of entrepreneurs whose taxable income (income) does not exceed the threshold of 49,790 EUR for 2022,
- 19% of that part of the tax base which does not exceed the amount of EUR 41,445.46 (inclusive),
- 25% of that part of the tax base which exceeds the amount of EUR 41,445.47 (i.e. EUR 41,445.47 or more).
Individual entrepreneurs are obliged to pay taxes for medical and social contributions.
For a legal entity that receives income from the sale of cryptocurrencies, the following income tax rates for 2022-2023 apply:
- 15% if the taxable income (income) for the tax period does not exceed the amount of EUR 49,790;
- 21% if the taxable income (income) for the tax period exceeds the amount of 49,790 EUR.
As mentioned above, in the case of a legal entity, there is no obligation to pay insurance premiums. It is worth noting that, All businesses that are associated with cryptocurrency are required to register with the tax office. Companies can choose a yearly period from the date of company registration or coinciding with the standard tax year. This type of profit should be noted in the column “other income”.
Despite the lack of a clear regulatory framework for cryptocurrencies, cryptocurrency companies can legally operate in Slovakia as long as they follow the general rules. In terms of further expanding crypto regulation, Slovakia plans to make changes to taxation and become one of the first countries in the world to adjust to the so-called staking cryptocurrencies. Staking refers to the storage of virtual currency in a cryptocurrency wallet or on some exchanges, while its owner receives a reward for this. Changes to cryptocurrency legislation are also expected, after the adoption by the European Parliament Markets in Crypto-assets (MICA regulation). This is expected to be the most fundamental comprehensive regulation of crypto assets.
The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.