On the 6th of December 2022, the National Council of the Slovak Republic (the “NC SR”) approved an amendment to the Income Tax Act, which also amends certain provisions of the Tax Administration Act (the “Tax Code”). We wrote about proposed changes of Income Tax Act and Tax Code in more detail in the previous edition of our Newsletter. In this edition, we provide a summary of the most important changes to the enacted laws. The amended Income Tax Act will take effect on 1st January 2023 and certain selected provisions of the Income Tax Act will take effect from 1st January 2024.
The most important amendments in the Income Tax Act are as follows:
- Transfer pricing
- the definition of an economically connected person and a controlled transaction is clarified;
- the rules for adjusting the tax base in the event of non-compliance with the arm’s length principle and the rules for including costs incurred by another related party into the taxpayer’s tax base are clarified;
- in order to reduce the administrative burden on small businesses in case of low-value transactions, a “safe harbor” of EUR 10,000 is introduced, except for loans and credits, which will be considered a significant controlled transaction if their principal exceeds EUR 50,000;
- in order to ensure legal certainty in the application of transfer pricing rules, a reference to the OECD Transfer Pricing Directive is added to the act;
- if the prices used by the taxpayer in transactions with related parties do not comply with the arm’s length principle, in the event of a tax inspection the taxpayer’s tax base will be adjusted “to the median” of the independent comparable values found;
- when issuing decisions on bilateral and multilateral agreements to the use of the valuation method, the possibility is added to issue a decision for more than five tax periods if the competent authorities have also agreed to apply the valuation method for the tax periods prior to the submission of the application,
- it will also be possible to submit the transfer documentation in a foreign language, and if the tax administrator requests the documentation in the state language, the taxpayer will be obliged to submit it within 15 days of receiving the tax administrator’s request;
- foreign taxpayers doing business in the territory of the Slovak Republic through a permanent establishment will be able to determine the tax base of this permanent establishment on the basis of foreign records (e.g. from accounting records kept abroad), and thus the accrual principle is considered in this case and not the cash principle;
- the procedure for including incomes (revenues) and expenses (costs), that are recognized after the termination of a permanent establishment, into the tax base is also modified.
2. Limitation of tax deductibility of interest
- with effect from 1st January 2024, a new rule is introduced to limit the net interest expense (the difference between interest revenue and interest expense) included in the tax base;
- the limitation will only apply to taxpayers whose net interest expense exceeds EUR 3 000 000, i.e. the tax base will be increased by the amount by which the net interest expense exceeds 30 % of the EBIDTA indicator;
- net interest expense not included in the tax base in the relevant tax period will be deductible from the tax base in a maximum of five consecutive tax periods;
- the new net interest expense limitation rule is to be applied in preference to the thin capitalisation rules pursuant to Section 21a of the Income Tax Act and is not intended to apply to banks and insurance companies.
- the tax administrator will register ex officio for income tax the taxpayers registered in the commercial and trade registers and according to the notice that will be published on the website of the Financial Directorate of the Slovak Republic;
- adjustments to the tax base resulting from the implementation of IFRS 9 and IFRS 17 will be included in the tax base on a straight-line basis over three tax periods, starting with the tax period beginning no earlier than on 1st January 2023;
- it is possible to complete the application of the entire entitlement to the tax bonus for a dependent child if the taxpayer’s tax base is insufficient to apply the full amount of the tax bonus. The application of the tax bonus will be possible exclusively through the tax return, by including the tax base of both eligible persons nurturing a child into the aggregate income for the purposes of assessing the entitlement to the tax bonus;
- from 1st January 2023 to 31st December 2024, the monthly tax bonus for a dependent child who has reached the age of 18 will be EUR 50 and if the dependent child has not reached the age of 18, the monthly tax bonus will be EUR 140;revenues from bonds (with the exception of government bonds) accruing to legal entities with limited tax liability (non-residents) in the Slovak Republic will be treated as a source of income from the Slovak Republic and will be subject to withholding tax. The tax thus collected may be treated as a tax advance payment;
- the value of accommodation and transport provided in connection with a health care provider’s participation in statutorily required continuing education for health care professionals is to be tax-exempt income;
- the amendment of the Income Tax Act also regulates the extinction of a receivable as a result of its forgiveness in a so-called preventive restructuring. The receivable will be a tax expense with the creditor if a preventive restructuring plan is approved and will be to the extent that the liability is forgiven.
The most important amendments in the Tax Code are as follows:
- with effect from 1st January 2024, a so-called “second chance” is introduced when imposing penalties, where the tax administrator will not impose a penalty, which can be determined within an interval range, for the first violation of the Tax Code, but will first call on the tax entity to comply with its obligations, together with a warning that a penalty will be imposed for the next violation. The administrative offense will be solved separately by the Customs and Tax authorities;
- with effect from 1st January 2024, it is proposed to shorten the time limit for charging interest on late payment in the event of full payment of the arrears, so that the tax administrator will be able to impose the interest only within one year from the end of the year in which the arrears were paid.