Planned amendments to the Income Tax Act

Čo v článku nájdete:

• Selected additional proposed amendments to the Income Tax Act expected to take effect from 1 January 2023:
• The bill also addresses:

The planned amendments to the Income Tax Act aim to implement Article 4 of Council Directive (EU) 2016/1164, which lays down rules against tax avoidance practices. Currently, interest expense is limited for the purpose of calculating the tax base under Section 21a of the Act (25% of EBITDA—earnings before tax, interest and depreciation) only for related parties. The amendment will add another rule limiting the net interest expense of legal entities to reduce excessive use of debt financing to artificially reduce the income tax base. This rule will not apply to taxpayers whose net interest expense (the difference between interest expense recognised as tax-deductible expenses and taxable interest income) does not exceed €3 million for the relevant tax period. For taxpayers not covered by the statutory exemption, the tax base will be increased by the amount of interest exceeding 30% of so-called tax EBITDA, calculated from tax items. The proposed effective date of this new provision is 1 January 2024.

Selected additional proposed amendments to the Income Tax Act expected to take effect from 1 January 2023:

From 1 January 2023, the transfer pricing rules should be clarified and supplemented, among other things.

This will mainly concern the definition of a foreign related party and a controlled transaction, adding a definition of a significant controlled transaction and supplementing the rules for determining the tax base of a permanent establishment of a taxpayer with limited tax liability (a non-resident of the Slovak Republic).

For the purpose of determining an economic connection, the interests of close persons will newly be added together, so the 25% ownership threshold will be assessed as the aggregate holding of all close persons.

The definition of a controlled transaction will also be clarified. In general, dependent activity falling under Section 5 of the Act (employment income) will not be considered a controlled transaction, regardless of who performs it—a shareholder, managing director or employee of a related party.

The amendment will directly define a significant controlled transaction in the Act as a legal or similar relationship under which one related party receives taxable income and the other incurs a tax expense exceeding €10,000 in the relevant tax period. For loans and borrowings, a different threshold of €50,000 will apply because significance is assessed by the principal amount of the underlying asset rather than the interest arising from it. This change is intended to reduce the administrative burden on small businesses in low-value transactions.

The method of submitting transfer pricing documentation should also change so that a taxpayer may submit the documentation in a foreign language at the request of the tax administrator.

Non-residents of the Slovak Republic who conduct business in Slovakia through a permanent establishment that is not required to keep accounting records will be able, when determining the establishment’s tax base, to use the difference between revenue and expenses identified from the taxpayer’s foreign records. The amendment also clarifies other provisions on calculating the tax base of a permanent establishment so that they comply with the current OECD Guidelines.

The bill also addresses:

– the area of the tax bonus deduction for a dependent child, including the possibility of adding the tax base, or a proportionate part of the tax base, of the other eligible person living in the same household with the dependent child to the total tax base for calculating and claiming the tax bonus in a tax return; and clarification of the calculation where the number of dependent children changes during the tax period;

– ex officio income tax registration based on data from the Commercial Register, Trade Register and other registers, according to a notice published by the Financial Directorate; new businesses established after the amendment takes effect (expected from 1 January 2023) will no longer need to apply for registration and will instead be registered for income tax automatically;

– the taxpayer’s (creditor’s) procedure in preventive restructuring, including the creation of a provision for receivables from debtors in preventive restructuring and the write-off of receivables when they cease to exist because they are forgiven. Once finally approved, the amendment will allow a creditor to claim provisions for such receivables as tax-deductible expenses, as is already the case in ordinary restructuring, and to claim the write-off as a tax expense when the receivable is forgiven as part of preventive restructuring.

At the time this article was written, the amendment to the Income Tax Act was in its second reading in the National Council of the Slovak Republic.

We are monitoring the legislative process and will inform you about final approval and the effective dates of the proposed changes.