The latest legislative changes regarding taxation

Amendment to Income Tax Act

The Ministry of Finance of the Slovak Republic has published a draft amendment to the Income Tax Act for comment procedure (“Amendment”). Most provisions will become valid as of 1 January 2023. We summarize below the planned changes, although the Amendment may be subject to changes:

Transfer pricing amendments

A number of provisions of the Income Tax Act (ITA) regulating transfer pricing will be amended, such as:

• Clarification of the definition of the economic connection of persons in the ITA, including the introduction of the calculation of the shares of close persons for the purpose of the determination of the economic connection.
• Introduction of the negative definition of a controlled transaction which is generally not considered to be a legal or other similar relationship, which generates income from the dependent activity of a natural person, regardless of whether it includes income from the dependent activity of employees, shareholders, or statutory representatives.
• Introduction of the definition of a significant controlled transaction which will be considered a legal relationship or other similar relationship, on the basis of which one or more dependent persons generate in the relevant tax period taxable income (revenues) or tax expenditure (cost) in an amount exceeding EUR 10,000, and a credit or a loan with principal of over EUR 50,000 will also be considered a significant controlled transaction. After the approval of the Amendment, the definition of a significant transaction will be modified in the new Guidelines of the Ministry of Finance of the Slovak Republic on determining the content of transfer pricing documentation.
• Adoption of the right to a corresponding adjustment of the tax base in cases where the primary adjustment is made at a Slovak legal entity and the counterparty to the transaction is a Slovak establishment of a Slovak tax non-resident.
• Introduction of a reference to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in the ITA provisions which regulate the determination of the related party’s tax base and supplementing the tax administrator's procedure in a situation where the price used by the taxpayer in a transaction with its related party does not correspond to the arm’s length principle. It is proposed that the tax administrator should be allowed to determine the transfer pricing adjustment during a tax audit according to the median value of the identified independent comparable values, unless the taxpayer demonstrates that, given the circumstances, an adjustment to another value within the range of independent values is more appropriate.
• Changing the procedure for submitting transfer pricing documentation, so that it is possible to submit transfer pricing documentation in a foreign language and, if the tax administrator also requires the documentation in the Slovak language, this will be requested from the taxpayer subsequently. The taxpayer would have 15 days from the date of delivery of a request to submit such subsequently requested documentation.

Interest limitation rules

Based on the Amendment, provisions of COUNCIL DIRECTIVE (EU) 2016/1164 laying down rules against tax avoidance practices (“ATAD Directive”) will be implemented into Slovak tax legislation. The new rules concern the limitation of net interest (exceeding borrowing costs) to be included in the tax base.

The main principles are as follows:

• The limitation will apply to taxpayers whose net interest costs, i.e. the difference between borrowing costs and taxable interest revenues in the relevant tax period is more than EUR 3,000,000. 
• For the purposes of this provision, borrowing costs / interest revenues are considered to be the costs / revenues for received / provided credits and loans associated with all forms of debt that arose in connection with obtaining (providing) funds from / to the taxpayer, i.e. including interest from credits and loans, from bonds and treasury bills, from financial leases, derivative operations, exchange rate differences and any other fees related to credits and loans, and in relation to all creditors, not only with respect to the related parties of the taxpayer.
• A taxpayer that meets the above limit would be required to adjust (increase) its tax base by the amount of interest costs that exceed 30% of the so called “tax EBITDA”. This will be calculated as a sum of tax bases, net interest costs (exceeding borrowing costs) and tax depreciation of assets included by the taxpayer in its tax base in the particular tax period.

The new interest limitation rules will apply from 1 January 2024 and will take precedence over the existing Slovak thin capitalization rules, which limit the tax deductibility of interest costs from loans received from related parties. This means that if, from 1 January 2024, the interest limitation rules are not applied due to the volume limits not being met (i.e. the value of the taxpayer's net interest costs does not exceed EUR 3,000,000), the taxpayer will be obliged to apply the existing thin capitalization rules in the relevant tax period.

Tax base determination of non-resident

The Amendment will amend provisions on the determination of the tax base (tax loss) of a taxpayer with limited tax liability in the Slovak Republic who carries out activities via a permanent establishment (“PE”) situated in Slovakia.

The proposed change will allow foreign taxpayers with a PE in Slovakia to determine the tax base of their Slovak PE based on the difference between the revenues and costs attributable to this PE (accrual principle) and not as the difference between the income and expenses (cash principle).

The Amendment also governs the procedure for inclusion of revenues and costs attributable to the Slovak PE into its tax base, after the tax period in which the PE ceased to exist.

Other

• In connection with the adoption of the Act on Solving Impending Bankruptcy, which regulates public and non-public preventive restructuring, the Income Tax Act is supplemented with provisions on the creation of tax-deductible bad-debt provisions and write-off of receivables against the debtor in preventive restructuring.
• Following the adoption of the new IFRS 17 – Insurance Contracts, a legislative regulation governing the inclusion of technical reserves created in the insurance industry into tax-deductible expenses is proposed.

In connection with the implementation of the standards IFRS 17 (Insurance Contracts) and IFRS 9 (Financial Instruments) by insurance companies, it is also stipulated that adjustments to profit/(loss) due to a change in the accounting method arising from the application of IFRS must be included in the tax base during three tax periods, starting with the tax period beginning on January 1, 2023.