Taxation of income from computer programs (software) for taxpayers with limited tax liability

From 1 January 2026, Slovakia is changing its approach to the taxation of software – instead of the almost automatic classification of payments as licence fees and the associated application of withholding tax, their actual economic substance will now be examined. The change stems from the withdrawal of the reservation regarding the provisions of Article 12 of the OECD Model Tax Convention and significantly alters the taxation of income arising from such cross-border transactions.

The decisive factor is the nature of the supply (licence vs. service), not the form or title of the contract.

For supplies where the substance is the provision of a service (SaaS), taxation is generally shifted to the supplier’s country of residence.

 

Change in approach to software taxation from 2026

With effect from 1 January 2026, the Slovak Republic has withdrawn its reservation regarding Article 12 of the OECD Model Tax Convention (royalties). This change has a significant impact on the taxation of software revenue in cross-border transactions.

Until 31 December 2025, Slovakia treated almost all payments for software as licence fees and applied withholding tax at source, i.e. in Slovakia. From 1 January 2026, it is switching to the approach applied by most OECD countries, which examines the true nature of the supply – that is, whether it is actually a licence fee or merely the provision of a service.

 

Guidance from the Ministry of Finance

In connection with this change, the Ministry of Finance of the Slovak Republic has issued Guideline No. MF/016959/2025-724. This applies to income relating to computer software where such income is received by a taxpayer with limited tax liability from a tax resident of the Slovak Republic or a permanent establishment within the territory of the Slovak Republic.

 

Relationship to the Double Taxation Convention and domestic law

When assessing the taxability of income for non-residents, the procedure is governed by the Income Tax Act and the relevant double taxation agreements (DTA), which take precedence over domestic legislation.

If income is received by a non-resident from a country with which Slovakia has not concluded a DTA, the Income Tax Act applies exclusively.

The Slovak Republic also declares that it applies a dynamic interpretation of the OECD Model Tax Convention, meaning that it takes into account the current version of the Commentary on the OECD Model Tax Convention rather than the interpretation in force at the time the DTA was concluded. From 2026, it will no longer apply the reservation regarding Article 12 and will agree with the OECD’s interpretation.

 

Special cases – a broader definition of royalties

Particular attention must be paid to DTAs that explicitly include revenue from the use of software in the definition of royalties. In such cases, the specific wording of the DTA takes precedence over the OECD’s general interpretation.

As a result, even the ordinary use of software as a service may be classified as a royalty (e.g. in agreements with certain countries, such as India, these are classified as technical services).

 

Key rule – substance over form

For the correct taxation of income, the nature of the rights acquired, which determine the manner of use of the software, is particularly decisive.

On this basis, the applicable provision of the law or DTA is determined, along with the subsequent classification of the income, whilst neither the title of the contract nor the form of performance is decisive, as the rule of substance over form applies here too.

 

Mixed contracts

A separate category is that of so-called mixed contracts, in which a single contract contains elements of different contract types and performances, e.g. the sale of goods together with software or a service. In the case of such contracts, it is necessary to separate the individual performances from one another where possible; if this is not possible, the contract is assessed according to the predominant part of the performance and the nature of its main subject matter. In this case too, the contract must be assessed primarily on the basis of the actual content of the performance and not merely on the basis of its formal wording.

 

Classification according to the Ministry of Finance guidelines

In its guidance, the Ministry introduces and defines a classification of software revenue into five categories, which enable the determination of the tax treatment of the revenue in question. These are the following supplies:  

• the provision of software as a service,  
• the provision of the right to personal use of software as a product,  
• the provision of the right to commercial use of copyright in software,
• the provision of a secret formula, secret process or know-how for the development of software,
• the transfer (disposal) of copyright in software.

 

Tax obligations in relation to software as a service

The most significant change resulting from the withdrawal of the reservation concerns the provision of so-called software as a service.  

• Whereas under the original rules such payments would have been treated as licence fees, with the recipient of the software in Slovakia obliged to withhold and pay tax in accordance with Article 12 of the DTA,  
• under the new rules, these payments are subject to taxation (provided that a double taxation agreement has been concluded between the Slovak Republic and the country of residence of the software supplier) in the country of residence of the software supplier, in accordance with Article 7 of the DTA.  

 For other categories of income from software, the following procedure applies:  

• Where  the right to personal use of the software as a product is granted, involving the provision of a copy of the software with limited copyright rights applicable only to basic personal use, this income is treated as an industrial licence fee, regardless of the degree of standardisation of the software. The taxation of this income is further distinguished according to the relevant DTA – it is either subject to withholding tax in Slovakia in accordance with Article 12 of the DTA (if the software falls within the definition of a licence fee), or to taxation exclusively in the state of residence of the software supplier, in accordance with Article 7 of the DTA.  
• The granting of the right to commercial use of copyright in software involves granting the recipient the right to use the software commercially and to interfere with the software, for example by copying or further processing and modifying it. This income is considered a licence fee and is subject to withholding tax in Slovakia under Article 12 of the DTA.  
• Where a secret formula, secret process or know-how is provided for the development of software, a characteristic feature is the granting of consent to the recipient to use technical knowledge, algorithms and other information. This income is considered an industrial licence fee and is subject to withholding tax in accordance with Article 12 of the DTA.   
• In the case of a transfer (disposal) of copyright in software, where the copyright in the software is transferred to the recipient in full, this income is not considered a licence fee, but as a transfer of rights and is subject to taxation exclusively in the state of residence of the software provider, in accordance with Article 13 of the DTA.  

 

Examples

Conclusion

This change necessitates a thorough analysis of existing contractual relationships relating to software. Incorrect classification may lead to incorrect taxation and risks during an audit. In view of this change, we recommend analysing existing contracts and the relevant tax arrangements.