In the second article in our series on the pharmaceutical withholding tax, we describe the special withholding tax rate and how the withholding tax is calculated.
Tax Rate
For withholding tax, a special withholding tax rate applies pursuant to Section 43(1) of the Income Tax Act.
Two tax rates are established for withholding tax applied to payments made by holders to healthcare providers:
- 19%, or
- 35% if the income is paid, remitted, or credited to a taxpayer of a non-cooperating country pursuant to Section 2(x) of the Income Tax Act, i.e., a tax resident of a country not listed in the “List of Cooperating Countries” maintained by the Ministry of Finance of the Slovak Republic, which is publicly available at this link, The same tax rate applies if the taxpayer cannot identify the final recipient of the income paid pursuant to Section 16(1) of the Income Tax Act, i.e., in situations where the taxpayer is the holder (i.e., for monetary payments provided from sources in the Slovak Republic) and the recipient is a taxpayer with limited tax liability whom the holder cannot identify. In this case, the taxpayer does not include the recipient’s identification details in the notification of tax withholding and remittance.
Income paid pursuant to Section 16(1) of the Income Tax Act is, in this case, income from sources within the territory of the Slovak Republic of a taxpayer with limited tax liability from monetary and non-monetary payments that were provided to a healthcare provider by the holder, who is a taxpayer with unlimited tax liability or a taxpayer with limited tax liability having an organizational unit or a permanent establishment in the territory of the Slovak Republic, provided that such payments are made in connection with activities in the territory of the Slovak Republic.
The peculiarity of this taxation lies in the fact that the basis for withholding tax under Section 43(3)(o) of the Income Tax Act is, within the meaning of Section 43(4) of the Income Tax Act, only income. This refers to so-called gross income, i.e., income not reduced by expenses.
The value of a monetary benefit is the amount of money provided. The value of a non-monetary benefit should be understood as the holder’s acquisition cost (i.e., the price of the item (benefit) including VAT). This is therefore the final value that the recipient of such a non-monetary benefit would have to spend to acquire the item.
Method of calculating the tax amount
Generally, the procedure is that if a certain monetary benefit is to be paid to a healthcare provider (HCP), the holder reduces this monetary payment by the amount of the calculated 19% or 35% tax immediately upon payment, i.e., the healthcare provider is paid the already taxed amount. Subsequently, the payer is required, pursuant to Section 43(10) through (12) or (20) of the Income Tax Act, to withhold and remit the tax to the relevant tax administrator and fulfill their reporting obligation.
In practice, the procedure for calculating the tax liability may be as follows (example):
1. If the holder undertakes to pay a healthcare provider who is a natural person not engaged in business a sum of EUR 100 and there is simultaneously an agreement between the parties that the amount paid will be after tax, then the holder pays EUR 81 and withholds, remits, and pays EUR 19 to the tax administrator as withholding tax. By paying the amount of EUR 81 into the healthcare provider’s account, the holder’s obligation to provide the financial sum of EUR 100 is fully fulfilled.
2. However, if the agreement does not specify that the amount of EUR 100 already includes withholding tax and therefore the amount paid will be reduced by the withheld 19% tax, it will be necessary to fulfill the obligation by paying the full amount of EUR 100 to the healthcare provider’s account; however, at the same time, the holder must separately withhold and remit withholding tax in the amount of EUR 23.46. The total amount of the payment provided to the healthcare provider would be EUR 123.46.
In this case, this is known as “grossing up” the payment, where the amount of the tax liability is determined according to the following formula.
19% or 35% is indicated based on the withholding tax rate applied to the specific case; 19%, or 0.19 in the case of a 19% withholding tax rate, or 35%, or 0.35 in the case of a 35% withholding tax rate.
In light of the above, we recommend that holders, when making cash payments to healthcare providers subject to withholding tax, ensure the correct wording in the contract/agreement with the provider, making it clear that the agreed cash payment amount already includes the tax amount calculated by the holder, and that the healthcare provider will be paid only the after-tax amount. Otherwise, the holder’s cost for the monetary payment provided may unexpectedly increase by the amount of withholding tax.
Pursuant to the first sentence of Section 43(6) of the Income Tax Act, “A taxpayer’s tax obligation, in the case of income from which tax is collected by withholding, is deemed fulfilled by the proper withholding of tax.”
It follows from the above that the healthcare provider no longer reports this income in their tax return, nor does it include it in the tax base, and cannot deduct the withholding tax as an advance tax payment pursuant to Section 43(7) of the Income Tax Act; at the same time, it is not entitled to claim, as part of the calculation of the tax base, any expenses incurred by the taxpayer to earn income subject to withholding tax.
