Overview of changes - Autumn 2023

In August 2023, the Slovak Ministry of Finance (“Ministry”) submitted a draft act on an additional amount of tax (top-up tax) for discussion and comments from governmental bodies and other relevant institutions. The Top-up Tax Act, expected to be effective as of 31 December 2023, implements Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (“Directive”), which introduces global rules against base erosion and profit shifting recommended by the OECD (Pillar II).

The Top-up Tax Act will apply to Slovak entities, including Slovak permanent establishments of tax non-residents, that are part of a multinational group of enterprises or a large-scale domestic group (“group”) if the consolidated annual revenue of such a group reported by the main parent entity (“parent entity”) in its consolidated financial statements is €750+ million in at least two of four accounting periods preceding the analysed accounting period. The Directive’s objective is to ensure that, in such a case, the group’s revenue in the analysed period is subject to a minimum effective tax rate of 15%. The Directive stipulates that if actual taxation is below the minimum level, a top-up to 15% will be made by either applying the primary Income Inclusion Rule (IIR), or the secondary Undertaxed Payments Rule (UTPR). An optional method under the Directive is additional taxation via the Qualifying Domestic Minimum Top-Up Tax (QDMTT).

Given that very few parent entities are headquartered in Slovakia, the Ministry has decided to apply an option in the Directive to delay application of the IIR and UTPR rules. However, given the higher number of subsidiary entities that are Slovak tax residents, the Top-up Tax Act introduces QDMTT to avoid taxation of these entities in other countries as a result of application of the mandatory IIR and UTPR rules by parent or other entities seated abroad.

Slovak entities that fall under the scope of the Top-up Tax Act based on the size criteria of their groups will be obliged to file a top-up tax return and submit a notification containing information required by law for the assessment of this tax within 13 months of the end of the taxable period. If a number of Slovak entities are part of the same group, they may select and authorise one of them to fulfil this notification duty for all of them. The Financial Directorate of the Slovak Republic will then post both documents – the top-up tax return and the notification – on its website.

The taxable period for the top-up tax is the period for which the group’s parent entity prepares the consolidated financial statements, or in some cases, a calendar year. The deadline for filing a top-up tax return (notification) may not be extended or waived, and the law stipulates sanctions for not submitting them by the given deadline.

The most extensive part of the Top-up Tax Act stipulates the procedure for calculating the effective tax rate and the potential top-up tax of entities concerned by specifying detailed rules for the calculation of the qualifying income (or loss) and adjusted covered taxes of these entities. The law also defines the method for calculating income not subject to top-up tax, and provides an exception for entities that report defined payroll costs and defined costs of tangible assets during the performance of their economic activities. If several entities are part of the same group in Slovakia that meet the turnover criteria for the application of the Top-up Tax Act, their cooperation in the preparation of tax returns will have to be intensive, as the basic indicators for the calculation of the potential top-up tax on the excess profit will be determined on a common basis for all entities of the same group located in Slovakia.

The Top-up Tax Act will not apply to exempted entities, e.g. international organizations, NPOs, pension funds, and investment funds if they are at the top of the ownership chain.

On 12 September 2023, the European Commission adopted a key package of initiatives BEFIT – Business in Europe: Framework for Income Taxation, to reduce tax compliance costs for large, cross-border businesses in the EU. The Directive, which relates to Pillar II, seeks to simplify regulations for companies and tax authorities by introducing a new, single set of rules to determine the tax base of groups of companies.

Under BEFIT rules:

• Companies that are members of a group with a total turnover exceeding €750 million will calculate their tax base in accordance with a single set of rules.
• The tax bases of all group members will be aggregated into a single tax base.
  
• Each member of a BEFIT group will be allocated a percentage of the aggregated tax base calculated on the basis of the average of the taxable results in the previous three fiscal years.
  

The package includes a proposal to harmonise EU transfer pricing rules and ensure a common approach to transfer pricing. The proposal seeks to increase tax certainty and mitigate the risk of litigation and double taxation.

The planned effectiveness of the Directive is 1 January 2028 (1 January 2026 for transfer pricing provisions). The Directive still requires ratification.

As regards public country-by-country reporting, the Ministry issued Guidance No. MF/006455/2023-74 on a Report with Information on Income Tax (“Guidance”). The Guidance transposes the duties resulting from the Directive (EU) 2021/2101 and relating to the disclosure of information on income tax into Slovak legislation. Groups of companies with a consolidated turnover exceeding €750 million are obliged to disclose information on corporate income tax paid in jurisdictions in which the group is present.

The new regulations stipulate that companies that meet the above conditions will be obliged to disclose the following information about the Slovak accounting entity, its ultimate parent entity, and related parties included in the consolidated financial statements:

• Information on the financial year and currency;
• List of subsidiaries;
  
• Brief description of key business activities;
  
• Number of staff;
  
• Revenues (including those from transactions with related parties);
  
• Profit/(loss) before taxes;
  
• Corporate income tax (except for deferred tax and provisions for uncertain tax duties);
  
• Income tax paid; and
  
• Retained earnings.
  

The Guidance became effective on 22 June 2023. The first reporting applies to accounting periods beginning on or after 22 June 2024, however, the reporting form is not yet available.

All reported information will be publicly accessible. Taxpayers will not have to report information that could harm their business activities or strategies. However, they will be obliged to explain and clarify in the report the reasons for non-disclosure of some of the above information for up to 5 years after the end of the taxable period.

Don’t hesitate to contact us should you need help with preparing this report, or you have any questions.

The Ministry has issued comprehensive information on the method, form, extent, and periodicity of proving an ultimate beneficial owner’s identity for the purpose of the Slovak Income Tax Act (the “Document”).

The Document is an important additional tool for taxpayers fulfilling their duties resulting from the legal requirement to prove their ultimate beneficiary’s identity in the event of Slovak source income being paid to tax non-residents. The Document explains in detail the purpose of proving the ultimate beneficial owner’s identity, the definition of an ultimate beneficiary, and the consequences if an ultimate beneficial owner’s identity is not proven. The content of the Document is not legally binding. It is only of a recommendatory nature, and taxpayers may also use it as appropriate when applying the relevant international Double Tax Treaties.

The Document stipulates that the method, form, extent, and periodicity of proving an ultimate beneficiary’s identity depends primarily on the risk level of individual cases of cross-border (commercial) relations. The most important part of the Document includes:

• Specification of potential risk-level identifiers of cross-border relation cases;
• Classification of the risk level of individual cases of cross-border relations based on the (absence) presence / combination / extent of these identifiers; and
  
• Determination of the form and extent of the documentation proving the ultimate beneficiary’s identity, depending on the risk level.
  

How often and to what extent a taxpayer must update the relevant documentation also primarily depends on the risk level of individual cases; however, due to the variety of possible situations, this is left to the taxpayer’s discretion.

The Ministry has also published revised information on claiming a tax deduction for expenditures (costs) for fuel consumed by a legal entity in connection with the three legal options of providing evidence of these expenditures. This information includes a section on providing evidence of energy consumption for electric cars and hybrids.

On 17 August 2023, the EU adopted an Implementing Regulation on the Carbon Border Adjustment Mechanism (CBAM) that regulates the obligations of importers of certain goods during the transition period. These specific goods include cement, aluminium, iron, steel, hydrogen, electricity, and selected fertilizers. For a detailed list of the goods concerned, see: Appendix 1 to Regulation (EU) 2023/956.

During the transition period, which lasts from 1 October 2023 to 31 December 2025, importers will only report emissions released during the production of imported goods that fall under the scope of CBAM. Reports must be submitted quarterly within one month of the end of a calendar quarter.

If the data is not available, importers may use basic values published by the European Commission for imports made until 31 July 2024.

Since CBAM requires cooperation between a number of company departments, we recommend that importing companies start giving more attention to this issue now.

The draft amendment to the VAT Act we informed you about previously will probably not be enacted as scheduled. The amendment’s effectiveness is likely to be postponed and most provisions will probably come into force as of January 2025, instead of July 2024.

As regards case law, we draw attention to the ruling of the European Court of Justice in case C-232/22, Cabot Plastics Belgium SA vs. the Belgian State, in which the court dealt with the issue of creating a permanent establishment for VAT purposes in a country in which a taxable person does not have its own employees, but only a contractual manufacturer that processes raw materials and turns them into products. In the assessed situation, the service provider and the service recipient were interconnected, and the given services generated almost the entire turnover of their provider. The European Court of Justice has ruled that a permanent establishment for VAT purposes is not created under these circumstances.

• According to unofficial information, the introduction of e-invoices for the B2B (Business to Business) sector has been postponed until the ratification of the ViDA directive.
• As regards the B2G (Business to Government) sector, legislation was approved in 2019, however, the implementation ordinance has already been postponed a number of times and is yet to be issued. Under the updated schedule for B2G, it is expected the e-invoice will be launched in 1Q 2024 (instead of 3Q 2023). A technical solution is available for testing.
• Poland approved e-invoice legislation in August 2023, which will come into force as of July 2024. Thus, companies have less than 11 months for preparation and implementation. The new obligations will pertain to Polish companies and foreign entrepreneurs with a fixed establishment for VAT purposes in the country. E-invoices will apply to all transactions subject to Polish VAT in the B2B and B2G segments - the B2C segment is exempt from e-invoices. We recommend verifying whether these new obligations will apply to you, and whether your activities in Poland give rise to a fixed establishment for VAT purposes in Poland. More information can be found on the page: The act introducing mandatory e-invoicing signed by the President.

As of 1 March 2024, the Slovak Transformation Act (Act No. 309/2023 Coll. on the Transformation of Trading Companies and Co-operatives) will, among other changes concerning the legal regime of corporate transformations (such as introduction of spin-offs (in Slovak: odštiepenie)) allow the transfer of a seat of a limited liability company , or a joint-stock company to another EU Member State.

The transfer of business activities to another country will be newly possible via a cross-border change of the company’s legal form. Shareholders will be able to choose the optimal jurisdiction as regards corporate income tax, stability of the legal environment, or flexibility in regulating the corporate business.

The project of a cross-border change to the legal form (“Project”) will be the key legal document. In the Project, the company will have to declare inter alia all state aid received over the previous five (5) years from the original state of incorporation, provide guarantees to creditors, and clarify the impact of the transfer on employment. New statutes complying with the legal system of the target country will also need to be attached to the Project.

The respective company will be obliged to inform the tax office and creditors who have a lien on an ownership interest (LLC) or shares (joint-stock company) about the development of the Project (currently, the same obligation applies for mergers). Company creditors will be able to request adequate securement for their receivables if guarantees given in the Project are considered insufficient. They will also have the right to take legal action against a company in a Slovak court for two years after transfer to another country.

Under the currently effective Slovak legislation, a European joint-stock company and a European cooperative society are already entitled to transfer their seat out of Slovakia. The regime under the Slovak Transformation Act effectively extends this possibility also to other types of companies. 

In this sense, the companies not wanting to wait until the next year may also consider transferring their seat to another EU Member State based on the  judgement of the European Court of Justice (Case C-106/16, POLBUD). In the context of the “freedom of establishment”, the court has permitted the transfer of a company seat to another EU Member State, including a change to the legal order governing the company’s “internal life”. In addition, the European Court of Justice has forbidden the state of origin to create undue barriers to such a transfer if the company meets the registration requirements specified in the national law of the target state. The necessity to carry out commercial activities in the target state is not a condition for such a transfer. These activities may be performed in the state of origin even after transferring the company seat (e.g. in the form of a permanent establishment), unless the seat transfer is an artificial construct and there is an intent to misuse the freedom of establishment. 

That said, the regime under the upcoming Slovak Transformation Act provides more clarity and legal certainty regarding the cross-border transformation processes and their practicalities (including with respect to cross-border changes of legal form and seat) compared to current status.