Amendment to the Income Tax Act effective from 1 January 2017
11/29/16
Tax and Legal Alert, November 2016, edition 5
Our current newsletter contains information about changes related to the most recent amendment to the Income Tax Act with effect from 01.01.2017. The amendment was adopted by the National Council on 23 November 2016. The amendment is currently awaiting the President’s signature and publication in the Journal of Laws.
News and changes to Income tax
- Taxation of Dividends and Liquidation Balance
- Tax license repeal
- Increase of lump-sum expenses for self-employed persons
- Expenses deductible upon payment – cash basis
- News and changes to transfer pricing
- Stricter car registration rules for car dealers
Taxation of Dividends and Liquidation Balance
The amendment to the Income Tax Act introduces taxation of dividends paid to individuals as follows:
- Dividends paid from profit reported for the period up to 31.12.2003 will be subject to a withholding tax of 7%.
- Dividends from profit reported for the period 1.1.2004 – 31.12.2016 will not be subject to tax.
- Dividends from the profit reported for the period from 1.1.2017 will be subject to withholding tax of 7%.
Dividends paid to residents with a limited tax liability (i.e. non-residents) will be considered as income earn in the Slovak Republic and will be subject to withholding tax. If a Double Tax Treaty exists, withholding tax can be reduced under this treaty.
A withholding tax rate of 35% will apply to dividends paid by Slovak companies to a resident of a non-contracting state or received from a resident of a non-contracting state. A non-contracting state is a state with which the Slovak Republic has not concluded a Double Tax Treaty, or an agreement on the exchange of information for tax purposes.
Due to the reintroduction of dividend taxation, dividends from profit after 1 January 2017 will not be subject to health insurance contributions for physical persons (individuals). The amendment also introduces taxation of settlement shares and shares in a liquidation balance.
Tax license repeal
The last period for which taxpayers will be required to pay a tax license (minimum tax) is 2017, or a tax period ending in the calendar year 2018 if the tax period is a fiscal year. The right to set-off of paid tax licences may be applied after this period, in accordance with conditions specified in the act.
Increase of lump-sum expenses for self-employed persons
The upper limit for lump-sum expenses will be raised from 40% to 60% up to a maximum of EUR 20,000 per year. The maximum annual sum of expenses up to 31 December 2016 is EUR 5,040.
Expenses deductible upon payment – cash basis
The amendment modifies the existing provision on the tax deductibility of some expenses on a cash basis principle. From 2017, certain license fees (e.g. for granting a right to use, or for the use of industrial property, software, know-how, etc.) will be tax deductible upon payment.
News and changes to transfer pricing
The amendment to the Income Tax Act specifies the obligation to prepare transfer pricing documentation by defining the term “controlled transaction” that replaces the term “mutual business relationship”.
There will be legislative changes to the setting of the price for the approval of transfer pricing methodology (APA). The current fee of 1% of the volume of expected transactions is replaced by a fee set by the Income Tax Act of EUR 10,000 for a unilateral agreement and EUR 30,000 for a multilateral agreement on transfer pricing methodology.
A significant change is an increase of the penalty for evasion of a tax liability by incorrect price setting in controlled transactions. In such a case, the tax administrator will be entitled to double the penalty set by the Income Tax Act if a tax audit uncovers the following:
- The taxpayer did not set prices with related parties correctly which resulted in a decrease of his tax base or an increase of the tax loss.
- The taxpayer set incorrect prices with related parties to decrease his tax base.
The tax administrator may apply an exception from a doubling of the penalty if a taxpayer recognises his error and pays the difference of the tax liability set by the tax administrator on time.
Stricter car registration rules for car dealers
The amendment introduces new provisions related to changes to registration fees for passenger cars. From February 2017, car sellers registered as the holders of new vehicles they are selling, must pay a minimum registration fee of EUR 33. However, if dealers do not sell these vehicles within one year of the initial registration, they will be required to pay the difference between the regular registration fee and a minimum fee.
If the dealers do not pay the difference, their tax base must be increased by the cost of acquisition, technical improvement, repairs and maintenance of vehicles including depreciation charges and an interruption of the depreciation charges application will not be permitted. Sellers will also be required to increase their tax base in subsequent periods, until the period when the difference is paid.
