As we outlined in our introductory article on withholding tax, not all payments made by recipients to healthcare providers are subject to withholding tax or taxation in general. This is because they are either not subject to tax, are exempt from tax, or are excluded from the application of withholding tax by their nature, and are taxed in a different manner.
Whether something constitutes taxable income must be assessed in accordance with Section 2(b) of the Income Tax Act. The subject of taxation is understood to mean = income (revenue) from the taxpayer’s activities and from the disposal of the taxpayer’s property, except for the specifically defined subject of taxation under Section 3 of the Income Tax Act (for natural persons) and Section 12 of the Income Tax Act (for legal entities), and at the same time income under Section 2(c) of the Income Tax Act, which is understood to mean: monetary and non-monetary benefits obtained, including through exchange, valued at prices commonly used at the place and time of performance or consumption, based on the type, quality, or degree of wear and tear of the benefit in question, unless this Act provides otherwise; For a natural person who uses single-entry bookkeeping or maintains records pursuant to Section 6(10) or (11) of the Income Tax Act, the acceptance of a promissory note as a means of payment, by which the debtor settled a claim with a creditor who is a natural person, is also considered a non-monetary benefit. At the same time, it is necessary to assess whether the specific payment is not expressly defined in the Income Tax Act as a payment that is not subject to tax.
A gift provided is also subject to pharmaceutical withholding tax pursuant to Section 43(3)(o) of the Income Tax Act. In the case of a monetary gift, the taxable amount is the sum excluding VAT. In the case of a non-monetary gift, the taxable amount is the value of the gift including VAT.
Transactions that are tax-exempt are not subject to taxation. The Income Tax Act defines certain types of monetary and non-monetary transactions provided by recipients to healthcare providers that are tax-exempt, i.e., withholding tax does not apply, and these payments do not need to be reported in notifications submitted to the Financial Directorate of the Slovak Republic. However, the conditions for income tax exemption must always be demonstrated by the taxpayer, who must be able to prove the amount and reason for the income tax exemption in the event of a tax audit.
Exempt from income tax (exclusively in relation to benefits provided by holders to healthcare providers) are benefits expressly defined in Section 9(2)(y) of the Income Tax Act, namely:
-non-monetary benefits provided to the holder in the form of the value of meals provided to the healthcare provider at a professional eventintended exclusively for educational purposes and
- non-monetary benefits provided by the holder in the form of a healthcare provider’s participation in continuing education; the value of accommodation and transportation provided in connection with such education is not considered participation in continuing education.
No monetary benefits provided by holders to healthcare providers are exempt from tax. The exemption applies only to the non-monetary benefits listed above.
For the purposes of correctly assessing whether a specific non-monetary benefit received by a healthcare provider is exempt from income tax or not, it is important to correctly identify the events in connection with which the exempt benefits are provided. Only the expressly listed non-monetary benefits provided in the following contexts are exempt from income tax:
- at a professional event intended exclusively for educational purposes (Section 2(44) of the Medicines Act),
- in continuing education (see Section 42 of the Healthcare Providers Act).
Professional event is defined in Section 2(44) of the Medicines Act, according to which a professional event is: “an event intended exclusively for professional, scientific, or educational purposes for healthcare professionals. Such an event may include, to a reasonable extent, ancillary activities, the duration of which shall not exceed 20% of the total duration of the event and which must not conflict with specific regulations (note: Act No. 147/2001 Coll. on Advertising). The time required for travel and accommodation is not included in the total duration of the event.”
Compliance with the defining characteristics of a professional event for educational purposes is demonstrated by the program of the specific event.
The program of a professional event should include activities with a clear professional, scientific, or educational purpose and should have a fixed start and end time. Any other activities should not be covered by the registration fee.
It is advisable to keep the program of a professional event at which tax-exempt supplies were provided as part of the documentation, for the purpose of demonstrating compliance with the conditions for exemption of the supply in the event of a tax audit.
A professional event is an event that meets the described criteria but is not a continuing education activity (e.g., a one-time educational activity).
The exemption applies only to professional events intended exclusively for educational purposes, and the exempt supply is limited to the full value of meals provided at such a professional event. All other supplies provided are subject to withholding tax.
Continuing education is defined in Section 42(2) of the Act on Healthcare Providers as follows: “Continuing education is the ongoing renewal, deepening, and maintenance of acquired professional competence in accordance with developments in the relevant fields throughout the entire duration of the practice of the healthcare profession. A healthcare professional’s participation in a professional-scientific event focused on the presentation of a pharmaceutical product with the participation of drug manufacturers is not considered continuing education.”
Continuing education for healthcare professionals in the relevant healthcare profession is provided by their employer, the professional societies of the Slovak Medical Society, and the chamber in which the healthcare professional is registered, either independently or in cooperation with educational institutions or other internationally recognized professional societies, professional associations, and providers.
Continuing education, pursuant to Section 42(4) of the Act on Healthcare Providers, is conducted either
- in an accredited study programfor continuing education conducted by an accredited educational institution; accreditation is granted by the Accreditation Commission of the Ministry of Health of the Slovak Republic;
- in non-accredited educational activities; a non-accredited educational activity is defined as a one-time educational activity.
Each educational activity is assessed based on its content (program). One-time educational activities are listed in Decree No. 74/2019 Coll. on the criteria and method of evaluating continuing education for healthcare professionals.
If an educational event is to be considered a continuing education activity, it should be approved in advance by the relevant professional chamber so that taxpayers can avoid the event being subsequently rejected as a continuing education activity and, consequently, the incorrect taxation of services provided at that event.
A proposal for the approval of a continuing education activity is usually submitted to the relevant professional chamber in accordance with that chamber’s internal regulations and conditions.
Failure to approve the event as a continuing education activity will result in it not being considered a continuing education activity, and therefore it is not possible to apply the tax exemption to non-monetary benefits provided to the recipient in the form of the healthcare provider’s participation. In such a case, however, it will likely be possible to consider the activity as a professional event for educational purposes, provided that the other conditions mentioned above are met.
In practice, a situation may arise wherethe exempt benefit is part of the total price for participation in the event, e.g., the registration fee includes meals, accommodation, and transportation, or other non-monetary benefits (we can therefore speak of a so-called comprehensive registration fee), withholding tax is paid only on the value of supplies that are not tax-exempt. If the registration fee includes both taxable (e.g., accommodation, transportation) and non-taxable (e.g., meals) benefits, it is entirely up to the taxpayer to determine how to ensure that the amount of taxable benefits is correctly calculated.
In such a case, it is advisable to have precisely quantified amounts of non-monetary benefits provided, broken down by item. This is also necessary to fulfill the holder’s reporting obligation to the healthcare professionals to whom the benefits were provided.
As we noted above, when fulfilling the holder’s reporting obligation to the tax administrator and the healthcare provider pursuant to Section 43(17)(b) and (19) of the Income Tax Act, the holder reports only the amount of taxable payments(income) pursuant to Section 2(h) of the Income Tax Act, i.e., does not report the amount of payments (income) that are tax-exempt.
The application of pharmaceutical withholding tax is always excluded when the subject of the tax is payments made for clinical trials. Withholding tax does not apply to payments provided in connection with the conduct of clinical trials, even if the other conditions for the application of withholding tax were met. Taxation is carried out by determining the tax base in the tax return, and in this case, the recipient of the payment (the taxpayer) may claim expenses demonstrably incurred in connection with the conduct of the clinical trial.
Practical example (question): If the sponsor provides a physician, a natural person who is not an entrepreneur, working on a clinical trial with a non-monetary benefit —a working lunch at which the physician and a representative of the sponsor met to discuss the procedure regarding the clinical trial (i.e., such a benefit is not provided for the purpose of conducting the clinical trial)—is this benefit subject to withholding tax?
Answer: Yes, if the meal provided by the sponsor in the form of a working lunch for a physician working on a clinical trial is related to the clinical trial, but does not constitute the actual conduct of the clinical trial within the meaning of the Medicines Act, i.e., it is a non-monetary benefit subject to withholding tax.
Withholding tax also does not apply to benefits provided if they are provided entirely independently of the healthcare provider’s practice of the medical profession as well as of the status of the benefit provider as a sponsor. If the benefit is in no way related to the fact that the provider of the benefit is a holder and the recipient is a healthcare provider, such benefits are not subject to withholding tax.
However, we consider it important to note that in such cases, this involves an assessment of subjective facts that the taxpayer would have to prove to the tax authority in the event of a tax audit. For this reason, we recommend recording and retaining relevant documents, evidence, and justifications that will sufficiently and clearly demonstrate that the relationship between the entity providing monetary or non-monetary benefits, which has (also) the status of a holder, and the entity receiving monetary or non-monetary consideration, which has (also) the status of a healthcare provider, has no connection to their respective statuses. The burden of proof in tax proceedings to demonstrate the independence of this relationship shall rest with the party who would be subject to the statutory obligation if withholding tax were applied to the case in question.
