The latest legislative changes regarding taxation

15/08/22

Tax and Legal Alert, August 2022, Issue 2

In the current issue, we bring you an overview of the latest legislative changes as regards direct taxation and other areas.

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.
 

Amendment to the Tax Administration Act

In Article II of the proposed amendment to the Income Tax Act, some provisions of Act No. 563/2009 Coll. on Tax Administration (The Tax Code) are amended.

After its final approval, the amendment will be effective as of 1 January 2023, except for provisions dealing with penalties and late payment interest, which will be effective as of 1 January 2024.

Below we summarize the most significant proposed changes to the amendment. The proposal has yet to go through the legislative process, and the comment procedure is currently being evaluated and we will keep you informed of any changes.

Second chance system

The amendment introduces the second chance system. Under this system, the tax administrator will no longer be obliged to automatically impose a penalty for each violation of tax obligations. If, according to the tax administration, the penalty is determined by an interval, the tax administrator will not impose a penalty for the first violation of tax obligations. Instead, it will first request the taxpayer to fulfil this obligation. If the taxpayer is late in fulfilling their obligation (for example, late submission of a tax return), the tax administrator will not impose a penalty, but will warn the taxpayer that a penalty will be imposed in the event of another breach of their obligations. Violations will be assessed according to their merits by the tax office and by the customs office.

This provision will become effective on 1.1.2024 and will be applied to cases where the base for the imposition of a penalty occurs after 31.12.2023.

Takeaway

We consider the introduction of the second chance system as a welcome step for the business community, i.e. there will no longer be penalties for a first breach of obligations, but instead a warning and a chance for correction without sanctions.

Late payment interest

It is proposed to shorten the maximum period for imposing late payment interest in the event of payment of arrears (delayed tax payments, tax advances, tax instalments, tax security payments or late payment of collected tax advances or withheld tax). Late payment interest may be imposed a maximum of one year from the end of the year in which the amount of the arrears is paid.

This provision will also be effective from 1 January 2024. According to the transitional provisions, if arrears are paid in full by 31.12.2023, late payment interest will be imposed by 31.12.2024.

Takeaway

Currently, the Tax Administrator usually imposes late payment interest at the end of the maximum 5-year period. Earlier imposition of the late payment interest should bring to the attention of the taxpayer that system or organizational errors have occurred as regards tax payments and thus lead to earlier correction.

Other proposed changes effective from 1.1.2023:

  • amendments to ex officio registration
  • speeding up the return of a driver's license if distraint has been stopped
  • amendments regarding “repentance” (účinná ľútosť)
     

Tax bonus

As of July 1, 2022, an amendment to the Income Tax Act is in force which amends provisions regarding the application of the tax bonus.

A taxpayer that earns taxable income from a dependent or entrepreneurial activity may, starting from July 2022, claim a tax bonus for each dependent child living with them in a common household, up to a maximum amount of*:

a)     EUR 40 per month if the dependent child is 15+, or

b)     EUR 70 per month if the dependent child is under 15 and the dependent child does not receive a subsidy to support the healthy eating habits of the child.

*From 1 January 2023, the stated amounts will increase to EUR 50 and EUR 100 per month, respectively.

The final entitlement to a tax bonus, which will be granted to the employee, may be lower than the above amounts, as the tax bonus may only be granted up to the amount of the stipulated percentage of half of the tax base (partial tax base) from the dependent or entrepreneurial activity, or their combination thereof, depending on the number of children as follows:

No. of children

% limit of half of the tax base
(partial tax base)

1

20%

2

27%

3

34%

4

41%

5

48%

6 and more

55%

In accordance with the transitional provisions, employers are obliged to compare the amount of the tax bonus for the period from 1/7/2022 to 31/12/2022 calculated according to the partially modified new rules with the value of the tax bonus according to the rules valid until 30/6/2022, and during this transitional period the employee must be granted the more beneficial of the two calculated bonuses.
 

Increased meal allowances

A new regulation of the Ministry of Labour, Social Affairs and Family of the Slovak Republic has been published in the Collection of Laws which increases meal allowances from 1 September 2022 as follows:

  • EUR 6.40 for 5 - 12 hours;
  • EUR 9.60 for 12 - 18 hours;
  • EUR 14.50 for over 18 hours.

The above amounts are employees’ entitlements to a meal allowance for each calendar day of a domestic business trip, and are used to determine the employer's contribution to an employees’ meal allowance, providing a meal allowance via a third person, or a financial meal allowance.

If the regulation is approved, the tax-free amount for the employees and the tax-deductible cost for the employers related to the provision of meals at work will increase from the current EUR 3.30 to EUR 3.52. In addition, the minimum value of a meal voucher will increase from the current EUR 4.50 to EUR 4.80.

A new regulation determining the statutory allowance for use of motor vehicles during business trips has been published in the Collection of Laws. From 1 September 2022, the allowance for use of a personal vehicle will be EUR 0.227 per km.
 

Digital platform reporting

The amendment to the Act on International Assistance and Cooperation on Tax Administration which transposes COUNCIL DIRECTIVE (EU) 2021/514 of 22 March 2021 amending the Directive on Administrative Cooperation in the Field of Taxation, i.e. the DAC 7 Directive (“Amendment”) has been published in the Collection of Laws.

The Amendment implements new reporting obligations for operators of digital platforms facilitating or intermediating certain commercial activities of third parties in Slovakia. Platform operators will be obliged to collect, report and verify selected information about sellers and service providers who use the digital platforms to carry out their commercial activities. The first reporting period will be the 2023 calendar year.

For more information on the Amendment, please see our Tax and Legal Alert for March 2022, here.
 

Contact us

Christiana Serugová

Christiana Serugová

CEE TLS Lead Relationship Partner, PwC Slovakia

Tel: +421 903 261 010

Dagmar  Haklová

Dagmar Haklová

Partner, PwC Slovakia

Tel: +421 911 425 109

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