EY Tax & Legal NewsTax and Legal Services

2 Corporate and Personal Taxation2017 update to OECD Model Tax ConventionOpinion of the Advocate General – rejection of the social security certificate

4 Value Added Tax Margin scheme on accommodation and travel services – extension of its application to business-to-business transactionsCJEU Judgment C 132/16 Iberdrola — Deduction of input VAT in respect of services incurred for construction and improvement of a property belonging to a third party

6 Legal newsNew Act on Personal Data Protection effective as of May 2018Reversal of the European Court of Human Rights (ECHR) Chamber decision on employee monitoring Proposal for new rules on privacy protection in electronic communications

10 News in Brief

Issue1/2018

2 | EY Tax & Legal News – Issue 1/2018

Corporate and Personal Taxation2017 update to OECD Model Tax Convention

On 11 July 2017, the Organisation for Economic Co-operation and Development (OECD) released the draft contents of the 2017 update to the OECD Model Tax Convention (the OECD Convention) and its Commentaries, work on which has been ongoing since 2011. The 2017 update was approved and the condensed version of the 2017 OECD Convention published on 21 November 2017 and 18 December 2017, respectively.

The 2017 update comprises the treaty-based recommendations developed through the Base Erosion and Profit Shifting (BEPS) project, and a few other changes not developed as part of the work on BEPS. In particular, these include:

• ►AnewArticle29(EntitlementtoBenefits)aimedatpreventing treaty abuse, which includes a limitation-on-benefits (LOB) rule (simplified and detailed versions), an anti-abuse rule for permanent establishments (PE) situated in third states and a principal purposes test (PPT) rule

• ►TighteningofconditionsinArticle5(PE)anditsCommentary under which a PE should be established, aimed at preventing artificial avoidance of PE status

• ►AnamendedArticle25(mutualagreementprocedure)andrelatedCommentariestoreflecttheMAParbitrationprocedure developed in negotiation of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI)

The update also includes a few additional changes to the Commentaries, in particular:

• ►ToArticle4(Resident),relatedtotheissueofwhethera house rented to an unrelated person can be considered

a “permanent home available to” the landlord for purposes of the residency tie-breaker rule

• ►ToArticle4intendedtoclarifythemeaningof“habitualabode” for the purposes of the residency tie-breaker rule

• ►AnewparagraphaddedtotheCommentaryonArticle5,whichindicatesthatregistrationforthepurposesofVATora tax on goods and services is, by itself, irrelevant for the purposes of the application and interpretation of the PE definition

Finally, the 2017 update also includes changes and additions made to the observations and reservations of OECD member countries and the positions of non-OECD economies.

Implications

The OECD Convention is the basis for many bilateral tax treaties. Althoughnotlegallybinding,togetherwithitsCommentariesitrepresents the majority opinion of OECD member countries and hence significantly influences the interpretation of double tax treaties.

Taxpayers are therefore advised to observe changes in the 2017 update and assess what impacts it may have on both their current or planned tax structures and operations.

If you would like more information or have any questions regarding this issue, please contact the author of this article or your partner or manager at EY.

Marta Onuščákovámarta.onuscakova@sk.ey.com

tel.:+421233339153

3 | EY Tax & Legal News – Issue 1/2018

Opinion of the Advocate General – rejection of the social security certificate

TheAdvocateGeneraloftheCourtofJusticeofEuropeanUnion(CJEU)recentlypublishedhisopinioninCaseC-359/16,in which a Belgian court had rejected certificates, issued by Bulgarian authorities, confirming employees’ participation in a social security system (“certificate”).

AccordingtocurrentEUlegislation,asocialsecuritycertificatecan only be rejected by the Member State which issued it. Thus, shouldtheCJEUadopttheopinionoftheAdvocateGeneral,itcould lead to a shift in the settled case-law.

Background

ABelgiancompanyemployedpracticallynostaffforanumberof years and outsourced all manual labour to Bulgarian companies which had no activities in Bulgaria. Those Bulgarian companies provided their employees with Bulgarian social security certificates (certifying that they were contributing to the Bulgarian social security system) and assigned them back to Belgium, where no social security deductions were made.

The Belgian authorities opened an investigation and later submitted a request to the Bulgarian authority for withdrawal of the social security certificates, to no avail. Subsequently, the Belgian authorities concluded that the certificates had been obtained fraudulently, as they did not reflect the reality of the situation, and ceased accepting them.

Based on the EU legislation, as long as social security certificates have not been withdrawn or declared invalid by the issuing authority, the institutions of the host Member State areboundtoacceptthem.Additionally,ahostMemberState’scourt is not entitled to question the validity of a social security certificate.

Despitetheabove,theAdvocateGeneralsupportedtheconclusion of the Belgian authorities and stated that in the

event of fraud, the court of the host Member State may cancel application of a social certificate issued by another Member State.

Next steps

TheopinionoftheAdvocateGeneralisnotlegallybindingand this issue is still subject to the CJEU’s review. However, it generally corresponds with stricter conditions for the posting of workers, which have recently been implemented. Moreover, should it be adopted by the CJEU it might change the current case-law. We will continue to monitor the case and keep you informed of its further developments.

If you would like more information or have any questions regarding this matter, please contact the author of this article or your partner or manager at EY.

Matej Oravecmatej.oravec@sk.ey.com tel.:+421233339217

4 | EY Tax & Legal News – Issue 1/2018

Value Added Tax Margin scheme on accommodation and travel services – extension of its application to business-to-business transactions

TheapprovedamendmenttoActno.222/2004Coll.onValueAddedTaxextendstherangeofentitiesrequiredtoapplythespecialVATschemetoincludethosewhich:

• ►Procuregoodsandservicesforthepurposeofajourney/travel from other taxable persons (“accommodation and travel services”)

• ►Actintheirownnametowardscustomers,whethertheyaretaxable or non-taxable persons

The margin scheme does not apply only to travel agencies and travelagentsinthetraditionalsense,buttoallVATpayerswhoprocure travel services such as accommodation and transport in their own name. This may include services linked to the organization of an educational, marketing or other event, where the costs are recharged to group companies, third parties or to participants. The margin scheme also applies to situations withazeroornegativemargin,wherenoobligationtopayVATarises.

The most important change is the introduction of an obligation to apply the margin scheme in situations where customers are taxable persons (businesses). So far, the scheme has been applied by providers of services rendered to non-business customers (travelers). The margin scheme brings an additional administrativeburdentoVATpayersassociatedwithtrackingandkeepingseparateVATrecords,changestothewayhowinvoices are issued, changes to the method of determining theVATbaseandtheneedtotrackthecostsassociatedwithaccommodation and travel services, for which the right to deductVATisnowblocked.

Underthemarginscheme,theVATbaseisdeterminedasthedifference between the sale price and aggregate amount of travel, accommodation and other services purchased from third parties. The place of supply is where the provider is established. Therefore, in many cases the previously applied reverse-chargingofVATbythecustomerwillnotbepossibleandSlovakVATwillneedtobepaidatthestandardrateof20%.TheprovidermustnotstatetheamountoftheVATtheypayunderthe margin scheme, they must only include information on the invoice that the margin scheme is applied.

AnothermajorchangeisabanfortheproviderondeductingVATincurredontheacquiredgoodsandserviceslinkedtotheaccommodationandtravelservicesrendered.GiventhattheprovidermustnotshowontheinvoicetheVATpaidonthemargin,andcannotdeducttheVATincurredontheassociatedpurchases, the margin scheme will cause a substantial increase in the cost of transactions. Compared to the previously applied rules,thecostwillrisebytheamountofnon-deductibleVATandbytheVATpaidonthemargin.

Forcompleteness-theVATpayer’sownservicesprovidedinconnection with the event will not be subject to the margin schemebutwillbegovernedbythestandardVATregime.Forexample, the cost of a provider’s personnel or cost of own premises, if charged to the customer, is to be excluded from the marginschemeandthestandardVATregimeshouldbeappliedinstead.

ThisisafundamentalchangeintheVATtreatmentofaccommodationandtravelservicesundertheSlovakVATActand many aspects of its practical application are currently not

Juraj Ontkojuraj.ontko@sk.ey.com

tel.:+421233339110Jana Ontkovičová

jana.ontkovicova@sk.ey.com tel.:+421233339113

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clear. If there are indications that extension of the scheme to “business-to-business” transactions affects you, we recommend consulting your tax advisor on the impacts and possible solutions.

If you are interested in more detailed information or have any questions concerning the above, please contact your usual EY partner or manager.

CJEU Judgment C 132/16 Iberdrola — Deduction of input VAT in respect of services incurred for construction and improvement of a property belonging to a third party

The Court of Justice of the European Union (CJEU) issued itsdecisioninCaseC132/16Iberdrola,concerningrightofataxablepersontodeducttheinputVATinrespectofservicesincurred for construction or improvement of a property owned and used by a third party.

Situation

ABulgarianmunicipality,actingasadeveloper,obtaineda building permit in order to upgrade a waste-water pumping station serving a holiday village. Iberdrola had purchased several parcels of land in that holiday village as a private investor, in order to construct apartment buildings for seasonal use. The holiday village, once completed, was intended to generate rental income.

Iberdrola entered into a contract with the Bulgarian municipality for refurbishment of the pumping station, for which Iberdrola had undertaken to carry out the required work at its own expense and had contracted those works to a third party. Reconstruction of the local municipal waste-water infrastructure was central to the project, enabling connection of the village to the communal sewerage system, since the existing independent system was inadequate. In other words, without upgrading the pumping station, Iberdrola would not have been able to carryoutitseconomicactivity.IberdroladeductedinputVATinrespect of the costs incurred in connection with construction of the sewerage system, which was subsequently refused by the local tax authority, on the basis that Iberdrola had supplied the Bulgarian municipality a service free of charge.

On appeal, the Bulgarian administrative court held that the fact that supply of services was free of charge did not justify therejectionoftherighttodeducttheinputVAT,giventhatthose services were used in the context of Iberdrola’s economic activity, namely the connection of the buildings for which a building permit had been granted for the pumping station project. Such costs form part of the general costs of the taxable person and constitute a component of the price of services to be supplied by Iberdrola (rental fees). It is irrelevant that the works carried out relate to a property belonging to the municipality.

The tax authority appealed this decision and the Bulgarian AdministrativeSupremeCourtreferredthecasetotheCJEU.ItaskedwhetherIberdrolawasentitledtodeducttheVATincurredin respect of the supply of services relating to construction or improvement of a property, used both by the recipient of the supply (Iberdrola) and by the third party (municipality) which owns the property, for the sole reason that the third party enjoys the result of those services free of charge.

Decision of the CJEU

The CJEU stated that the taxable person has the right to deduct inputVATinrespectofasupplyofservices,consistingoftheconstruction or improvement of a property owned by a third party, when that third party enjoys the results of those services free of charge and when those services are used both by the taxable person and by the third party. This applies in the context of their economic activity, if the services do not exceed some

Monika Fábryovámonika.fabryova@sk.ey.com

tel.:+421233339165

6 | EY Tax & Legal News – Issue 1/2018

necessary extent which allows the taxable person to carry out the taxable output transactions and simultaneously their cost is included in the price of those taxable output transactions (rental fees in this case).

In accordance with settled case-law, a taxable person has the righttodeductVATevenwherethereisnodirectandimmediatelink between a particular input transaction and an output transaction, where the costs of the services in question are part of their general costs and are, as such, components of the price of the goods or services which they supply. Such costs should have a direct and immediate link with the taxable person’s economic activity as a whole.

In the case at hand, the CJEU concluded that reconstruction of the pumping station was essential for completion of the project and that, consequently, in the absence of such reconstruction, Iberdrola would not have been able to carry out its economic activity. This demonstrates the existence of a direct and immediate link between the reconstruction service, in respect of the pumping station belonging to the municipality, and the taxable output transaction performed by Iberdrola. The fact

that the municipality also benefits from the service cannot justifydenialoftherighttodeducttheinputVAT.Inthelightof this, the input reconstruction service is considered to form a component of the cost of a taxed output transaction performed by Iberdrola.

Practical considerations

TheCJEUjudgmentincreaseslegalcertaintyofVAT-payersby means of strengthening the principle of a direct and immediate link between input and output transactions and its furtherinterpretation.AdirectandimmediatelinkisacrucialcriterioninrespectoftherighttodeductinputVATandcannotbe jeopardized by other circumstances, such as side benefits gained by third parties. On the other hand, the judgment might open up the opportunity for further challenges as to whether the level of services is considered “necessary”.

If you have any questions or would like to obtain more information regarding this topic, please contact the author of the article or your usual contacts within EY.

Legal newsNew Act on Personal Data Protection effective as of May 2018

AnewActonPersonalDataProtection(“theAct”)recentlyreceived presidential approval. Its aim is to harmonize Slovak legislationwithEURegulation2016/679oftheEuropeanParliamentandoftheCouncilof27April2016,ontheprotection of natural persons with regard to the processing of personal data and on the free movement of such data (“the Regulation“).TheActalsotransposesintoSlovaklawEUDirective2016/680oftheEuropeanParliamentandoftheCouncilof27April2016,ontheprotectionofnaturalpersons

with regard to the processing of personal data by competent authorities for the purposes of the prevention, investigation, detection or prosecution of criminal offences or the execution of criminal penalties, and on the free movement of such data (“the Directive“).

The new law reflects the current trend towards large-scale use of information-communication technologies and transfers of data within global undertakings.

Lucia Batloválucia.batlova@sk.ey.com tel.:+421233339390

Adam Pichleradam.pichler@sk.ey.com tel.:+421233339117

7 | EY Tax & Legal News – Issue 1/2018

TheActhassixparts,thefirstandsecondofwhichcopytheprovisions of the Regulation, thus encompassing the processing of personal data by subjects not covered by the Regulation. The third part represents a transposition of the Directive and deals with processing of personal data for the purposes of prevention and detection of criminal activities.

The fourth part supplements the rules of the Regulation with exceptions and deviations specific to Slovakia. For example, it stipulates conditions for processing personal data without the consent of a data subject, conditions for publication or disclosure of personal data with respect to employment, conditions of processing a birth number and processing of sensitive personal data.

Asdatacontrollers,employerswillbeentitledtoprovideorpublish the personal data of a data subject only to the following extent:

• ►Title,name,surname

• ►Employment,serviceorfunctionalposition

• ►Personaloremploymentnumber

• ►Organizationalunit

• ►Placeofwork

• ►Phoneandfaxnumber,worke-mailaddressandidentificationdata of the employer

Abirthnumbermaybeprocessedonlyifpermittedbyaspeciallaw for a particular purpose and its publication is forbidden. The Actalsogovernstheprocessingofpersonaldataofdeceasedpersons. Personal data of deceased persons may be processed only with a close person’s consent. If another close person expresses their objection, this renders the consent invalid.

Additionally,theActgovernsthedataprocessingconfidentialityobligations of controllers and processors. These obligations also apply to individuals accessing the data of the same subjects and continue after termination of their employment or other relationship with the controller or processor.

The fifth part contains provisions, delegated by the Regulation for Member State adjustments. It governs the position, scope and powers of the Data Protection Office, including its sanction mechanism, plus the regulation of new institutes, codes of conduct and certification. Codes of conduct represent industry-specific rules, which subjects may access to, and agree to comply with. They will be approved by the Slovak Data Protection Office.

Certification is issued or renewed by the Slovak Data Protection Office, or its accredited body, for a maximum period of three years. Either accessing an approved code of conduct or certification may serve as proof of compliance with personal data protection rules.

TheAct,similarlytotheRegulation,willbecomeeffectiveasof25May2018.

If you would like to obtain more information or have any questions regarding this issue, please contact authors of this article or the appropriate EY partner or manager.

8 | EY Tax & Legal News – Issue 1/2018

Reversal of the European Court of Human Rights (ECHR) Chamber decision on employee monitoring

InJanuary2016,theECHRChamberruledinthecaseBărbulescuvs.Romania,thatundercertaincircumstancesan employer has the right to monitor employees and thereby verify whether they are properly performing their tasks during working hours.

Inthecase,Mr.Bărbulescu,aRomanianemployee,arguedbefore the ECHR that the employer’s intervention into his private sphere was beyond permitted limits, in particular the monitoring of his internet network use during working time. Mr.Bărbulescuclaimedthattheemployer’smonitoringbreachedhis right to respect for private and family life, recognized by Article8oftheEuropeanConventionfortheProtectionofHuman Rights and Fundamental Freedoms (“the Convention”). However, the Chamber decided that the rights guaranteed by the Convention were not infringed. Under its decision, the monitoring of employees can be considered as appropriate, provided that there are no other means to determine an employee’s disciplinary misconduct.

Mr.BărbulescufurthersubmittedhiscomplainttotheECHRGrandChamber,which,asanECHRsecondinstancebody,reachedadecisionon5September2017thattherighttorespect for private and family life had been infringed. The ECHR thus definitively concluded that the Romanian bodies had erred during the court proceedings, when they did not determinewhetherMr.Bărbulescuhadbeenfullyinformedofthe possibility, nature and extent of the monitoring, as well as the access of the employer to correspondence content, prior to the its commencement.

In essence, the ECHR did not consider monitoring to be illegal as such, but highlighted the fact that the employee had not been thoroughly informed about the methods and extent of the monitoring.AccordingtotheECHR,eachstatehastoensurethat monitoring is conducted by an employer, only to an extent which does not infringe employees’ rights.

In this recent decision, the ECHR provides criteria which should be taken into account by national authorities when assessing the proportionality and justification of measures adopted by an employer for monitoring private employee correspondence. In particular, the following must be assessed:

• ►Whethertheemployeewasinformedaboutthepossibilityofcorrespondence monitoring

• ►Theextentofthemonitoringandthedegreeofintrusionintothe employee’s privacy

• ►Whetherthereasonsformonitoringcorrespondenceandgaining access to its content are justified

• ►Whetheralessintrusivemethodofmonitoringexists

• ►Howmonitoringresultsareused

• ►Whethersafeguardsexisttopreventanemployerfromaccessing an employee’s correspondence content without prior notification

The ECHR decision indirectly indicates the need for additional legislation on employee monitoring. Slovakia is one of the few European countries with this issue explicitly addressed in its legislation. This allows an employer to monitor employees only on serious grounds, relating to the specific nature of the employer’s activities. Prior to the establishment of monitoring, it is essential to consult with employee representatives and inform employees in advance of the extent of the monitoring, methodsofimplementationandduration.Atthesametime,the principles of individual privacy protection and personal data protection have to be respected.

Where employee monitoring becomes necessary, it is advisable to implement detailed internal procedures and directives

Soňa Hankovásona.hankova@sk.ey.com tel.:+421233339202

9 | EY Tax & Legal News – Issue 1/2018

familiarizing employees with its methods and extent. Thus, the employer can maintain confidence among employees that information obligations are being properly observed. In the event of failure to meet the legal obligations, employee monitoring could be assessed as an unlawful breach of fundamental rights. In addition, information about the

infringement of duties by employees, obtained by the employer through illegal monitoring, will be rendered inadmissible.

If you would like to learn more, or if you have any questions regarding this topic, please contact the author or your EY partner or manager.

Proposal for new rules on privacy protection in electronic communications

AttheendofOctober2017theEuropeanParliamentapprovedthe Proposal for Regulation of the European Parliament and of the Council concerning the respect for private life and the protection of personal data in electronic communications (“the ePrivacy Regulation“). The aim of ePrivacy Regulation is to increase trust in digital services and to improve their security. The new regulation should apply also to services such as Messenger,SkypeandWhatsApp,whereasprotectionshouldapply not only to the content of electronic communications, but also to protection of metadata (e.g., location data, call duration).

Similarly, a new, simpler regulation of cookies should be introduced by the ePrivacy Regulation. It should distinguish between the cookies of providers and third parties.

The ePrivacy Regulation also recognizes regimes of unsolicited communications, based on consent and in connection with the prior sale of products or services. However, individuals should be provided with the option to object to such communications.

Penalties for the breach of particular obligations under the ePrivacyRegulationmayreach€20,000,000or4%ofoverallglobal turnover.

The proposed effectiveness of the ePrivacy Regulation is 25May2018,althoughconsideringsubsequentlegislativestages of the proposal, it is expected that this deadline will not be met.

If you would like to learn more, or if you have any questions regarding this topic, please contact authors or your EY partner or manager.

Adam Pichleradam.pichler@sk.ey.com tel.:+421233339117

Lucia Batloválucia.batlova@sk.ey.com tel.:+421233339390

10 | EY Tax & Legal News – Issue 1/2018

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News in Brief• ►The Register of Public Sector Partners

Customers of state-owned utility companies (including electricity and gas suppliers) may be subject to obligatory registration with the Register of Public Sector Partners. UnderthenewAnti-LetterboxCompaniesAct,personswhoreceive assets (including electricity or gas) from companies where the majority of the managing or controlling body’s members are appointed by the state, may be considered as PublicSectorPartners.Althoughthelawisratherambiguous,the interpretation of the Ministry of Justice of the Slovak Republic applies a threshold of €100,000 to qualification. In other words, customers will not be considered Public Sector Partners, unless the value of electricity or gas they receive from a state-owned utility company exceeds €100,000 in a calendar year.

• ►The decision of the CJEU on the Uber transport service On 20 December 2017, the Court of Justice of the European Union (CJEU) issued its long-awaited decision on the Uber transport service. The CJEU had deliberated on a European legal interpretation, at the initiative of the Commercial Court in Barcelona, which acted in the matter of the action brought by the organization of Barcelona taxi drivers against the Uber company in Spain. The CJEU ruled that the Uber service does not solely represent a brokering service. Its brokering service is deemed to be an integral part of the service as a whole, which is essentially transport. In the court‘s opinion, it is obvious that Uber has a decisive influence on the conditions under which its drivers provide their services. In light of the decision, if Uber cannot be considered solely as a brokering service, it does not qualify as an information society service and is therefore subject to Member State-specific requirements for transport service providers. Consequently, Uber has to request licenses and permits under the appropriate legislation of individual EU states, thus fulfilling the same legal requirements as other transport service providers. Besides its direct impact on the transport service sector, the decision may have a wider influence on the operation and regulation of other shared economy platforms, which provide brokering services as part of their overall operations (e.g., Airbnb,BlaBlaCar,yuVe,Rukie,Jaspravim,Žltýmelón).