In comparison to executive members of a Joint Stock Company (a.s.), managing directors of a Limited Liability Company (s.r.o.) are taxed in a discriminative manner

Dividends paid to a managing director of an s.r.o. (a statutory body), who does not hold any equity in the company, are taxed in the same way as a salary.

In accordance with the provisions of Act No. 595/2003 Coll. Of Income tax valid from 1 January 2017 (hereinafter referred to as "ITA"), dividends paid out to persons holding the corporate capital or to members of statutory bodies are subject to income tax of natural persons. Thus, the dividend is taxed at a rate of 7%.

The problem arises with the taxation of dividends paid out to managing directors of a Limited Liability Company (s.r.o.), because ITA allows taxation of a dividend with a lower tax rate only by dividends paid to members of a statutory body, while the Commercial code defines the statutory body of a Limited Liability Company (s.r.o.) as one or more managing directors.

The difference between the statutory body of a Joint Stock Company (a.s.) and a Limited Liability Company (s.r.o.) is that the statutory body of a Joint Stock Company (a.s.) is defined as a board of directors with several members, while several managing directors of a Limited Liability Company (s.r.o.) are not members of a body, but each of them represents a statutory body.

According to the Financial Directorate of the Slovak Republic, dividends paid to a managing director of a Limited Liability Company (s.r.o.), who does not participate in the company capital, are considered as income from dependent activity and thus have to be taxed with the income tax rate of 19% or 25%, as the managing director is not considered a member of a statutory body.

The managing director of a Limited Liability Company (s.r.o.) thus contributes more into the state budget than a member of the board of directors of a Joint Stock Company, whose dividends are taxed only by a 7% rate. Thus, in comparison to the executive members of a Joint Stock Company (a.s.), managing directors of a Limited Liability Company (s.r.o.) are taxed in a discriminative manner.

Given the difference in tax treatment of dividends paid to statutory bodies and members of the statutory bodies of companies, it is necessary to adapt the relevant ITA provisions. 

In our opinion, an appropriate solution would be to amend the provisions of Art. 3 sec. 1(e) of ITA, so they include also managing directors of s.r.o. companies e.g. by adding the phrase "or a statutory body" into the Act.

Managing directors of a Limited Liability Company (s.r.o.) should have the same tax treatment as executive members of a Joint Stock Company (a.s.).