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Corporate tax designation in Slovakia vs. Foundational Investment Fund in Czech republic

This article compares the corporate tax designation mechanism in Slovakia and the foundational investment fund in Czech Republic, exploring their impact and changes over the years.

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Corporate tax designation in Slovakia vs. Foundational Investment Fund in Czech republic

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  1. Bird in the hand or pigeon on the roof? Corporate tax designation in Slovakia vs. Foundational Investment Fund in Czech republic FedorBlaščák freelance analyst, secretary of Association of Corporate Foundations in Slovakia

  2. Founding fathers TomášJežek Minister of privatization CR 1990-1992 Ivan Mikloš Minister of privatization SR 1991-1992 Minister of finance SR 2002-2006

  3. Corporate Tax Designation in Slovakia • In 2002 a decision was made (Ivan Mikloš) to open the tax designation mechanism to corporate entities, beginning in 2004. • In 2003 the percentage had been raised from 1% to 2% for both groups of providers which led to unprecedented growth of the revenues from about 3.2 million € in 2003 to more than 28 million € in 2004.

  4. Foundational Investment Fund in Czech republic • Aim: “…to set up a parallel structure for financing public benefit services.” (TomášJežek, 1992) • Mechanism: Capitalizationof foundation’s endowments • Method: 1% of revenues from privatization in Czech republic • Launch: Starting in 1999 with about 14 million € distributed among 39 foundations

  5. Czech Context in 1990’s • In 1996 there were about 4.5k foundations in CR • In 1997 – new Act on Foundations (re-registration of existing foundations upon new/strict criteria e.g. grant-making in previous 2 years more than 13.000 €) • In 2000 the number of foundations in CR decreased to about 300

  6. Financial output of the Fund • Estimated loss of about 20-30million € due to postponement of Fund’s operation • Throughout the 1999-2002 the total revenues of about 50 million €were distributed among 69 foundations (average endowment capital input at about 500-700k €) • The share of Fund’s input into the endowments of foundations in CR reached about 75% (2003) • The revenues from investments of endowments reached 1-1.5 million € annually (in 2003)

  7. Proliferation of corporate foundations • In 1990’s only 23 corporate foundations were registered in Slovakia • After 2002 the number of foundations established by corporate entities started to grow • As of 2002-2007 there were 58 new corporate foundations established. Many would bear the same name as the founder. • In 2011, there were up to 90 corporate foundations that makes 20% of all foundations. • Corporate foundations obtain about 30% of tax designation revenues • Up to 80% of the revenues is being distributed through open grant programs

  8. Financial output Amounts of tax designations 2002-2014 (in thousands €)

  9. Principal changes • In 2009 the government pushed through the gradual reduction of percentage for the corporate taxpayers. The percentage had been lowered to 1.5% with prospects to gradually decrease on annual basis (down to 0.5% in 2018). The “matching principle” was introduced outlining the incentives for businesses to engage with CSOs through direct financial support from their own profits (corporate taxpayers who donated to a CSO from their own profits could designate a slightly higher percentage). • In 2015 the new agreement between the Ministry of Finance and the civil sector reversed the harmful changes of corporate tax designations made in 2009 and put forward a model that motivates corporations to donate even more (the new arrangements will bring an additional 7-8 million € annually). The actual adjustments reinforce the “matching principle” of corporate tax designation mechanism: if private donations from company profits exceed 0.5% of corporate income tax, the company may designate 2% of their income tax; otherwise, the tax designation percentage falls to 1%.

  10. Distribution of corporations according to the use of designation (2004–2013, in %)

  11. The efficient percentage in the corporate tax designation (2004-2013, in %)

  12. Bird in hand or pigeon on the roof? • As of the period 2003-2015 the revenues from investments of endowments distributed among recipients in CR could be about 15-20 million € (rough estimation). • Revenues from privatization in Slovakia in 2000-2004: 8,6 bill. € 1%=86 million €. • As of the period 2004 – 2015 the total revenue from the corporate tax designation mechanism in Slovakia exceeds the sum of 300 million € (and growing..)

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