Proposed amendment Act No. 593/2003 Coll. on Income Tax
02/10/17
Tax and Legal Alert, October 2017, Issue 2
The current issue of Tax and Legal Alert summarizes the proposed amendment to Act No. 593/2003 Coll. on Income Tax („the Act“), discussed during the recent session of National Council of the Slovak Republic and passed to second reading.
Under the amendment of the Act the government continues to implement further measures of the OECD instrument preventing from tax evasion and profit shifting (OECD BEPS). The amendment particularly introduces exit taxation and the controlled foreign company (CFC) rules. If the amendment is adopted in its current wording, the changes should further affect business combinations, increase of R&D super-deduction and partial exemption of income derived from intangible assets created in Slovakia („Patent box“).
The amendment further introduces the concept of recurring mediation of travel and accommodation services provided via digital platforms. This brings out the possibility of taxation of shared economy platforms used in Slovakia. Individuals will be able to deduct a portion of the interest on housing loans from their tax liability, also known as mortgages for young adults.
Introduction of Exit Tax
The exit tax should affect transfer of property outside of Slovakia in case that legal owner of particular property would remain unchanged. Legal entities, Slovak tax residents that transfer their property or tax residence outside of Slovakia to another country will become liable for payment of exit tax on capital gains created in Slovakia while the capital gains were not taxed here at the time of transfer. The tax should be calculated as the difference between the fair value of the transferred assets at the time of transfer and its tax value. Exit tax should also affect foreign entities, Slovak tax non-residents in case of transferring the property outside Slovakia to another country.
Tax of 21 % should be paid from separate tax base as one-off payment or in five annual instalments, subject approval of tax authorities.
If the amendment is adopted, exit tax shall apply for the first time for a financial year starting on 1 January 2018 at the earliest.
Controlled foreign corporation rules („CFC“)
The controlled foreign company rules introduce taxation of income paid out by the Slovak parent company to its "controlled foreign corporation", if the income is paid out without any economic substance or in order to obtain any tax advantage for the Slovak taxpayer. Revenues from such transactions should be allocated to paying Slovak company and it should be possible to credit the tax paid by a controlled foreign corporation against its Slovak tax liability.
A controlled foreign corporation is considered the company, of which 50 and more percent of voting/capital/profit rights are directly or indirectly held by the Slovak entity and its related parties and permanent establishment that is not subject to tax or is exempt from taxation in Slovakia. This is provided their actual corporate income tax paid abroad is lower than the difference between the corporate income tax calculated according to the Act and corporate income tax that would be paid by the controlled foreign corporation abroad.
If the amendment is adopted, the CFC rules shall be applied for the first time for a financial year starting on 1 January 2019 at the earliest.
Business combinations
As of 1 January 2018, using historic value method in case of in-kind contributions to a company’s share capital will be ceased and the taxpayers will be obliged to use the fair value method for tax purposes only. The option to use historic value method for in-kind contributions could be applied in case a Slovak entity makes a contribution of an business as going concern or its part to a beneficiary seated in EU or EEA Member State, where a Slovak permanent establishment of that beneficiary is created and the state of the beneficiary does not allow using fair value method.
Sole usage of fair value method should apply to mergers, acquisitions and de-mergers of companies and cooperatives. The historic value method could be applied only in case that a legal successor upon merger, acquisition or de-merger is a taxpayer incorporated in EU or EEA Member State, the assets and liabilities of dissolved entity will remain in its Slovak permanent establishment and the state of the legal successor does not allow using fair value method.
Patent box and R&D super-deduction
The amendment introduces exemption of 50% of income derived from granting or using of industrial property rights, utility model or software designed by the taxpayer in Slovakia from taxation. The exemption shall apply during the period of depreciation of capitazed research and development costs.
Similar exemption will also apply on that part of the revenues derived from the sale of products that have been manufactured using an industrial property right, design or utility model created in Slovakia. The taxpayer will be obliged to keep a separate evidence for the exemption purposes and disclose it based on the request from tax authorities.
The taxpayers performing R&D activities will be able to deduct up to 100% of the extra costs and expenses incurred on research and development out of their tax base, instead of the current 25%.
Tax residence of individuals
The proposed amendment extends the criteria for determining tax residence of individuals in Slovakia. As Slovak tax resident, who is taxable from his worldwide income, should be considered also an individual with permanent residence in Slovakia, although the individual spends less than 183 days of presence in Slovakia. Under the current wording of amendment, permanent residence is defined as "the possibility of accommodation, which does not serve only for occasional accommodation and where one can presume the intention of an individual to stay permanently at that place". This provision is not applicable for the stay due to short-term visits, business trips, recreation or tourism. This change should affect those individuals who declare tax residence in another country while they still have the possibility of available accommodation in Slovakia, and provided that there is no double taxation treaty between Slovakia and that another country.
Further Changes
The amendment of the Act introduced the possibility for individuals to deduct their tax liability by 50% of the interest paid on mortgage during five years, up to EUR 400 per year and from maximum value of EUR 50,000 per property. The tax bonus could be claimed by individuals of the age from 18 to 35 and whose average monthly income is up to 1.3 times of average monthly salary of an employee in the economy.
Forthcoming tax bonus should replace current state contribution for young individuals in the form of three-percent reduction of interest rate (2% reduction subsidized by state, 1% by a bank).
We will keep monitoring the actual status of draft amendment of the Act and will inform you about any potential changes.
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