Changes in amendment Act No. 595/2003 Coll. on Income Tax

Introduction of tax exemption for intangible assets 

The amendment introduces a tax exemption of 50% for income from considerations for granting a right to use, or for using a protected patent, utility model, or software created by the taxpayer (basic patent box). Tax exemption refers only to assets created by own activities and will apply to tax periods in which amortisation of an intangible asset is included in tax expenses.

A similar exemption will also apply to a certain part of income from selling goods which were manufactured on the basis of a protected patent or a utility model (extended patent box). Tax exemption will account for 50% of income attributed to the sales price, less related costs and less profit margin.

If intangible research results acquired from another person are used to develop intangible assets, the tax exemption will be reduced by a coefficient.

It will not be possible to transfer an entitlement to a tax exemption within the basic or extended patent box to a legal successor in the event of a merger, fusion, or demerger, or to a beneficiary recipient of an in-kind contribution.

For tax exemption purposes, each taxpayer will be obliged to keep separate records substantiating the entitlement to the benefit drawn and, if requested, submit these records to the Tax Office within 8 days.

Entities applying this tax exemption will be made public via a register kept by the Financial Directorate of the Slovak Republic.

Higher deduction of R&D costs

Taxpayers performing R&D will be able to deduct 100% of R&D costs and expenses from their tax base, instead of the current 25%. The deduction may also include the cost of software licenses for software used in performing R&D activities.

Introduction of tax exemption when selling ownership interests 

The amendment introduces an exemption from corporate income tax when selling shares and ownership interests (hereafter “participation”) in Slovak and foreign companies. However, the tax exemption will not apply to taxpayers whose core business activity is trading in securities.

The conditions for applying a tax exemption are as follows:

• Income from the sale of a participation is obtained no sooner than after 24 consecutive calendar months as of the day on which at least a 10% share in the registered capital of the company being sold is acquired (and this period commences no sooner than on 1 January 2018); and
• The selling taxpayer, thanks to personnel resources and material equipment, performs substantial functions in Slovakia and bears and manages the risks associated with the participation ownership.

In the context of the new tax exemption, other ITA provisions are also amended, e.g. assessment of tax deductibility of a loss from the sale of shares, adjustment to the tax deductibility of interest on loans received for the purpose of acquiring a participation.

Introduction of a tax for certain non-residents when transferring a participation 

The list of income from Slovak sources for tax residents from other EU member states has been extended by payments from Slovak tax residents when transferring shares or ownership interests in a trading company or membership rights in a cooperative seated in Slovakia.

However, the final tax will still depend on the wording of the applicable Double Tax Treaty.

Refined criteria for creating a permanent establishment in Slovakia 

Following the implementation of measures set out in the OECD action plan for tackling base erosion and profit shifting, the amendment refines criteria for creating a permanent establishment in Slovakia, e.g. in the following situations:

• Repeated mediation of transportation and accommodation services, even via a digital platform;
• Place of implementing construction and assembly projects with a duration of more than 6 months in aggregate; and
• Activities carried out by a representative if this person plays a main role in contract conclusion.

New rules for taxing business combinations 

The option to use historical prices for tax purposes is significantly limited for in-kind contributions to the share capital paid in as of 1 January 2018, which means that taxpayers will have to use the fair-value method.

The option to measure in-kind contributions for tax purposes at historical prices is only retained for cases where a Slovak tax resident contributes a security, an ownership interest, a business (or part thereof) to a beneficiary seated in an EU or EEA member state and the beneficiary takes over the contribution at historical prices and has a permanent establishment in Slovakia that the contribution remains functionally linked with.

The fair (market) prices tax mode will be used for most mergers, fusions, and demergers of trading companies and cooperatives with a decisive date after 1 January 2018.

The historical prices mode may only be applied when the legal successor is a taxpayer seated in an EU or EEA member state, the assets and liabilities of the abolished entity remain in the legal successor’s Slovak permanent establishment and this legal successor, in line with the local law, takes over assets and liabilities at historical prices.

These exceptions for using historical prices in business combinations will still be subject to a GAAR test (General Anti-Abuse Rule).

There are also other legislative amendments to the tax method of using fair (market) prices in business combinations. For example, if a Slovak tax resident uses this method to treat his contribution of a business, or part thereof, to a beneficiary seated outside Slovakia, he will no longer be able to split the tax on the difference between the value of this in-kind contribution recognised as a shareholder’s contribution and its carrying value into seven years. The entire difference will be taxed in the period in which the contribution is paid up.

For mergers, fusions, and demergers treated by the fair-value method, the amended ITA introduces the obligation to tax in an one-off payment the valuation variance, or part thereof, not yet included in the tax base if this valuation variance is paid out, and also indirectly, i.e. via a reduction of the share capital, or the capital reserves from contributions which were previously increased from the valuation variance.

Transport of employees to work

Effective from 1 January 2018, the transport of employees to their place of work and back arranged by the employer may be considered the employee’s tax-free income if the employee contributes to the employer’s costs for the transport of employees to work and the following conditions are met:

• Employees cover at least 60% of the employer’s costs for arranging their transport to work; or
• Employees cover at least 30% of the employer’s costs for arranging their transport to work if production employees work in shifts and such transport is used by at least 30% of the total average registered number of employees.

If payments from employees are less than the stipulated limit, the difference between the amount corresponding to 60%/30% of expenses verifiably incurred by the employer for the transport of employees to work and the total payment from employees, divided by the number of employees using this type of transport, must be included in the employees’ tax base from employment.

The wording of the provision regarding tax deductibility of employer’s expenses for the transport of employees to their place of work and back has also been modified. Employer’s expenses for such transport carried out via motor vehicles for transporting at least 10 persons (e.g. buses) will be tax deductible if there is either no public transport to the place of work, or its capacity does not meet the employer’s needs.

Extended criteria for the assessment of tax residence 

The assessment of a taxpayer’s tax residence is the key condition for determining the extent of tax obligations of taxpayers in Slovakia. Therefore, a new criterion for assessing the tax residence of an individual is given in the ITA.

According to the new rules, an individual is also considered a Slovak tax resident if he has a residence in Slovakia, i.e. accommodation not intended only for occasional use, and it is evident that the individual intends (due to personal and economic reasons) to stay here.

Income from the sale of business property in the joint ownership of a married couple 

Income derived by a married couple from the sale or transfer of property or an intellectual right jointly owned by them which was registered as the commercial property of one partner will have to be taxed by that partner who included this property or intellectual right in their commercial property.

This means that it is no longer possible to split the income from a sale between the partners based on their agreement. The partner who registered the property or intellectual right as a business property most recently will be liable to pay tax on the total income.

Tax-free amount for spa care 

At the end of the tax period, taxpayers may claim a tax-free amount of EUR 50 p.a. from verifiable payments for spa care. They may also claim the same amount for their spouse or dependent children. However, only one of them can claim this tax allowance.

Modified conditions for taxing income from occasional activities 

An individual’s occasional income of up to EUR 500 per calendar year is considered tax-free. However, if the individual carries out these activities on a contractual basis and this remuneration is a tax expense for the payer, then the individual is liable to pay tax on such income.

Pensions of former soldiers, policemen, and firemen for years in service received from abroad 

When assessing the claim for a tax-free personal allowance, Slovak pensions of former soldiers, policemen, and firemen for years in service (hereafter “military, police and fire service pensions”) must be treated in the same way as similar pensions received from abroad. This means that if taxpayers draw a military, police, or fire service pension from Slovakia or from another country at the beginning of the tax period, they either cannot claim a tax-free personal allowance, or the tax-free amount is decreased by the pension paid.

Claiming a tax bonus for a dependent child 

A tax bonus for a dependent child may also be claimed by a foster parent who is a “substitute parent” after the dependent child attains full age if this child is continually preparing for employment by studying and if, prior to attaining full age, the child was placed into substitute parental care.

Introduction of rules for controlled foreign corporations (as of 2019) 

The rules for controlled foreign corporations seek to tax income artificially diverted by a Slovak parent company to a controlled foreign corporation (hereafter “CFC”) if the income is paid without economic justification, or to obtain a tax advantage for the Slovak company.

A company is considered a CFC if:

• It is controlled or managed, directly or indirectly, by the Slovak company (e.g. by voting rights, share capital, or share in profit); and in addition
• The corporate income tax paid in another country is lower than 50% of the tax the CFC would pay in Slovakia.

If income is diverted to a permanent establishment, it will only be sufficient (for purposes of the CFC assessment) to fulfil the second condition (i.e. the condition regarding the hypothetical Slovak tax).

The CFC’s income will be taxed in Slovakia by including the CFC’s tax base in the tax base of the Slovak parent company to the extent it is attributable to the assets/risks related to the significant functions of the Slovak company which manages and controls the CFC.

To avoid double taxation, the Slovak parent company will be able to factor in the tax paid by the CFC abroad when calculating/paying tax in Slovakia.

The application of adjustments to the CFC tax base in line with transfer pricing rules will take precedence over the application of CFC rules for the taxation of profits.

The CFC rules will be applied for tax periods commencing on or after 1 January 2019.