Taxation of branch offices of foreign companies in Slovenia

Many foreigners are considering the possibility of expanding their business in Europe. If they have an existing LTD company abroad, they can open a branch office in Slovenia and start their business in Slovenia through that branch. The business of that branch office has to abide by the Slovenian legislation. But there are certain exceptions when it comes to branch office, especially when it comes to taxation.

A branch office is not an independent legal entity. This means that it is not automatically a tax resident of Slovenia. When it does a certain business activity on the territory of Slovenia, it has to pay corporate income tax (DDPO) as a non-resident.

The accountants at company Data can offer your company accounting services and tax consultation in accordance to Slovene accounting standards. In addition, we also have 45 experts from several fields, that can offer you consultation on taxation. We also have a legal department that assist you in the process of company registration. Additionally, they provide explanation of Slovene legislation as well as preparation of contracts that your company needs.

Taxation – corporate income tax for the branch office

In most cases, the branches are permanent units in Slovenia. It means that they carry out taxable activities on the territory of Slovenia (purchasing or selling goods or services). Such branch offices establish their tax base on the basis of the Corporate Income Tax Act (ZDDPO). The taxation in this case is 19%.

Most EU countries have aligned their legislation regarding corporate income tax. Hence, the parent company has to check how to incorporate the profit of the branch in the financial report in their country. In addition, they have to find out how to calculate tax, which is already paid in Slovenia (either deduction method or exemption method) in accordance to international conventions that Slovenia has with the parent company’s country.

Sometimes it happens, that the effective level of taxation (taking into account the tax relief) is higher in the parent company’s country then in Slovenia. Because of that it can occur to have to pay a corporate tax surcharge. If the taxation level in the parent company’s country is lower, the corporate income tax has to be calculated again at the effective tax rate. In the country of the parent company, they can regard this kind of taxation as reduced.

You have to keep in mind that in case of tax loss or having a tax base at “zero” for the parent company, the tax cannot be calculated, regardless if you have paid it in Slovenia.

Branch office that is supported with grants from the parent company

There is another kind of branch office that only receives grants from the parent company to support its business conduct. The business conduct of the branch does not generate independent profit. It only generates expenses, which the parent company covers with so-called “grants”. They are transactions of financial resources to support business conduct in Slovenia for the branch office.

This occurs when the branch conducts only preparatory or ancillary activities. The key to determining what these activities are is determining whether they form an essential or significant part of the business of the enterprise as a whole. Therefore, in these cases, the inflow from the parent company (grant) is not treated as taxable income. No profit (or loss) can be made here, therefore there is no tax basis, and therefore no taxation.

Such a branch does not have the “status” of a business unit in accordance to the Corporate Income Tax Act. It means that the branch does not have to pay corporate income tax in Slovenia. All expenses are taken into account for the tax base in the parent company’s country. The parent company includes the turnover of the Slovenian branch in its tax reports.

In our experience, the branch offices in Slovenia engage in business activities related to marketing on the Slovenian market. If the branch office does not generate its own income, it is important to attribute to the branch office the income it would generate if it engaged in marketing activities independently.

For this purpose, you can perform a financial analysis of comparability to determine how much profit on average firms that engage in this market and are independent in the market (not part of a larger group of companies) earn.

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