The trap called CFD: You think you are buying an ETF?
Popular apps like eToro, Plus500 or Trading212 (in CFD mode) attract users with a simple interface and names such as 'Apple stock' or 'S&P 500 ETF'. But beware – on these platforms you very often do not buy a real stock or ETF. You are buying a CFD – Contract for Difference.
A CFD is a derivative instrument that tracks the price of an underlying asset, but you never become its actual owner. This has fundamental legal and tax consequences.
How do you recognise a CFD on a platform?
The platform's terms and conditions mention a CFD provider or spread betting.
You can trade with leverage (e.g. 1:5, 1:10) – with ETFs/stocks this is not standard.
You do not receive a confirmation of holding the security (e.g. from CDCP or a foreign depository).
The platform does not pay you real dividends – only their equivalent as a cash adjustment.
ETF taxation: Why they are a tax haven for long-term investors
Slovak legislation (Act No. 595/2003 Coll. on Income Tax) contains one of the most favourable provisions for long-term investors in Central Europe – the time test.
The one-year time test – tax exemption
If you sell a security (a stock or ETF) more than 1 year after purchasing it, the income from the sale is exempt from personal income tax. This also applies to any exchange-rate gain. For most long-term investors this means:
Zero tax on capital gains after 12 months of holding.
The income is not reported in the tax return (if it concerns exempt income only).
Index-replicating ETFs (e.g. MSCI World, S&P 500) are fully exempt once the condition is met.
What if I sell the ETF within 1 year?
If you sell an ETF sooner than after a year, the gain is taxed as other income under Section 8 of the Income Tax Act, i.e. at a rate of 19% (for income up to 176 times the subsistence minimum) or 25% (above this threshold). At the same time you pay health insurance contributions of 15% of the tax base – this is often a surprise.
Dividends from ETFs
Distributing ETFs that pay dividends are subject to taxation regardless of the holding period. Dividends from sources in the EU/EEA are taxed at 7%, and from sources outside the EU at 35% withholding tax (or according to the double taxation treaty). That is why most Slovak investors prefer accumulating ETFs, where dividends are automatically reinvested and the tax liability arises only on sale.
CFD taxation: No time test, no relief
Practical example: Same return, different tax
Imagine two investors – Peter and Pavol. Both invested €10,000 18 months ago and are selling today with a profit of €2,000.
Peter bought real ETFs through a broker (e.g. Interactive Brokers, Saxo Bank). The gain after a year is exempt. Tax: €0. Health contributions: €0.
Pavol traded CFDs on a platform he mistook for ETFs. He taxes the €2,000 gain at 19% = €380 tax + 15% health contributions = €300. Total levy: €680.
Difference: €680. On the same profit. Just because of the wrong choice of instrument.
How to correctly distinguish an ETF from a CFD – a checklist before investing
Check the terms and conditions: Is the platform regulated as a securities dealer, or as a CFD provider?
Verify the depository: Real ETFs are recorded with an authorised custodian (e.g. Euroclear, CDCP). Ask where your security is held.
Leverage = warning sign: If a platform offers leverage above 1:1 on stocks/ETFs, it is highly likely a CFD.
Look at the ISIN: Every real ETF has an assigned ISIN (e.g. IE00B4L5Y983 for iShares MSCI World). CFDs do not have one.
EU regulation: Regulated ETFs are subject to the UCITS directive. Look for the UCITS ETF designation in the prospectus.
Special cases: Cryptocurrencies, commodities and foreign accounts
The investment world is varied and not everything fits into the ETF or CFD category. A few important exceptions:
Cryptocurrencies: Bitcoins and altcoins are a different matter – they are not subject to the time test and are always taxed. Beware: crypto ETFs (e.g. Bitcoin ETP) may have a different regime – it depends on the product structure.
Foreign accounts: If you have a broker abroad (e.g. Interactive Brokers UK or DE), you still have to tax the income in Slovakia – the residence principle. At the same time, an obligation to report the foreign account to the Financial Administration may arise.
Mutual funds: Domestic fund units have their own tax regime – upon redemption after 3 years from the first purchase they may be exempt from tax. This needs to be verified case by case.
Do you need help with the taxation of investments?
At Mandat we help individuals and companies correctly handle the taxation of income from investments – including ETFs, CFDs, cryptocurrencies and foreign brokerage accounts. If you are dealing with a tax return or want to optimise your investment structure, we will be happy to talk with you.
