Methods for elimination of double taxation

There are two methods for eliminating double taxation in the Slovak Republic: the exemption method and the tax credit method.

Income Exemption Method: The taxpayer’s home country (= residence state) exempts certain income from taxation if it is already taxed in the foreign country;

Tax Credit Method: Taxes paid to a foreign country are credited against the taxpayer’s domestic tax liability in the residence state.

Double taxation agreements (Double Tax Treaties) specify the method for eliminating double taxation when income is taxed in the country of employment and must also be declared in the taxpayer's country of residence, where they have unrestricted tax liability. In situations where no Double Tax Treaty is in place, foreign-source income that has been demonstrably taxed abroad may be exempt from taxation in Slovakia under the conditions laid down in the Slovak Income Tax Act, provided that the taxpayer submits appropriate proof of taxation abroad. This exemption applies solely to taxpayers with unrestricted tax liability in the Slovak Republic.

Article 23 (or similar) - Based on the Model Tax Convention on In come and on Capital, OECD:

Income exemption method (simplified version)

Where a resident of a Contracting State (= residence state) derives income which
may be taxed in the other Contracting State (= work state) in accordance with Methods for elimination of double taxation the provisions of this Convention, the firstmentioned State (= residence state) shall exempt such income from tax. Where in accordance with any provision of the Convention income derived by a resident of a Contracting State (= residence
state) is exempt from tax in that State (= residence state), such State may nevertheless, in calculating the amount of tax on the remaining income of such resident, take into account the exempted income.

The provisions of paragraph 1 shall not apply to income derived by a resi
dent of a Contracting State (= residence state) where the other Contracting State
(= work state) applies the provisions of this Convention to exempt such income from tax.

Tax credit method (simplified version)

Where a resident of a Contracting State (= residence state) derives income which may be taxed in the other Contracting State (= work state) in accordance with the provisions of this Convention, the firstmentioned State (= residence state) shall allow as a deduction from the tax on the income of that resident, an amount equal to the income tax paid in that other State (= work state);

Such deduction in either case shall not exceed that part of the income tax, as computed before the deduction is given, which is attributable, to the income which may be taxed in that other State (= work state).

Where in accordance with any provision of the Convention income derived by a resident of a Contracting State (= residence state) is exempt from tax in that State (= residence state), such State may nevertheless, in calculating the amount of tax on the remaining income of such resident, take into account the exempted income.

Elimination of double taxation in Slovak Income Tax Act (§ 45)

1. If a Slovak tax resident earns income from a country with a Double Tax Treaty, double taxation is generally resolved based on the rules in that Treaty. When a Double Tax Treaty applies the tax credit method, taxes paid abroad can be credited against Slovak taxes. This credit is limited to the amount of Slovak tax attributable to the foreign-source income, in accordance with the applicable Double Tax Treaty and the Slovak Income Tax Act.
   

   Alternatively, where permitted by Section 45 of the Slovak Income Tax Act, a Slovak tax resident may apply the income exemption method instead of the tax credit method if this is more favourable and the foreign income has been demonstrably taxed abroad.

2. If a Slovak tax resident earns income from  a country without a Double Tax Treaty, the income exemption method applies, provided the income has been demonstrably taxed abroad.

In sum:

Income exemption method

• Income that has been taxed abroad will be exempt from taxation by the taxpayer in his/her Slovak tax return (= residence state).
• Taxpayer (tax resident) will declare the income in the tax return as part of the worldwide income, but no tax will be paid from this income in Slovakia.

Tax credit method

• Taxpayer will offset the tax paid abroad from the income sourced abroad against the tax calculated in accordance with the Slovak Income Tax Act.
• If the foreign tax is lower than the Slovak tax attributable to that income, the taxpayer may be required to pay the difference in Slovakia, subject to the applicable Double Tax Treaty and the Slovak Income Tax Act.

Methods for elimination of double taxation per country