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Amendment to the Act no. 595/2003 Coll. on Income Tax (hereinafter the „Income Tax Act“)
1. Dividend Taxation
The amendment to the income tax act includes dividends from profit and other income (including shares on liquidation balances of business companies and/or cooperatives) and shares of members of land communities with legal personality on profits and on assets for distribution among members of land communities with legal personality, paid out after 01 January 2017 as subject to taxation.
For legal entities, profit shares (dividends) and other income will be subject to corporate income taxation for Slovak tax residents only if they originate from a taxpayer from a non-treaty country under Article 2(x). Profit shares (dividends) and other income will also be subject to taxation if paid to a taxpayer from a non-treaty country by a Slovak legal entity.
Shares on profit and shares on liquidation balance (and possible settlement shares) of shareholders (including dormant partners) in partnerships and of general partners in limited partnerships upon liquidation of the partnership is subject to tax of the shareholder – legal entity and included in the tax base under Article 14.
Shares of members of land communities with legal personality are exempt up to an amount of EUR 500 (income from a single land community). Shares of members of land communities will be taxable only if the share is higher than EUR 500 and only in the amount exceeding EUR 500.
In connection to the above, profit shares will not be exempt from the tax also for employees without participation on the registered capital of the company and/or cooperative and will be classified as employment income taxable by tax advances pursuant to Article 35 of the Income Tax Act. This regulation applies to profit shares (dividends) paid from profits reported for the financial year beginning no sooner than 01 January 2017 but also to the profits reported for the tax periods until 31 December 2003 paid after 31 December 2016.
For members of statutory bodies and/or supervisory bodies of business companies and/or cooperatives, remuneration paid for participating at the sessions of these bodies and/or for work for the business company and/or cooperative will be considered to form employment income. Profit shares (dividends) – royalties paid to members of statutory bodies and/or supervisory bodies of such business companies and/or cooperatives pursuant to the Commercial Code will form income under Article 3(1)(e) taxed by a 7% withholding tax.
Special Tax Base
The amendment to the Income Tax Act also introduces a special tax base for profit shares (dividends) for individuals from sources in abroad that are taxed by 7%. However, if profit shares (dividends) come from taxpayers in non-treaty countries [Article 2(x)] to an individual or a legal entity, they shall be taxed by a rate of 35%.
Profit shares (dividends) and other income (including shares on liquidation balances of business companies and/or cooperatives) and shares of members of land communities with legal personality on profit and on assets for distribution among members of the land community with legal personality, paid to individuals with tax residency in Slovakia as well as non-resident individual to abroad will be taxed by a withholding tax of 7% or using the tax rate according to a double taxation treaty. Exempt are individuals who are taxpayers in non-treaty countries under Article 2(x) for whom these incomes shall be taxed by a withholding tax of 35%. If these incomes are paid to a legal entity, they will be taxed by a 35% withholding tax only if the taxpayer is from a non-treaty country.
Tax shall be withheld from income not reduced by expenses, with the exception of the settlement share and share on liquidation balance for which the base for the withholding tax is the settlement share and/or the share on liquidation balance reduced by the amount of paid investment under Article 25a (e.g. the value of financial investment, acquisition price of the purchased shareholding, etc.). Shall a combination of income from a settlement share and income from a liquidation balance occur for a taxpayer, the taxpayer must calculate the tax base for each share separately. Losses are not considered.
Taxation of Old Dividends
With respect to taxation of profit shares (dividends) originating
- From a source in the territory of the Slovak Republic, reported for the tax periods until 31 December 2003 and paid after 01 January 2017
- Ø For individuals – Slovak tax residents and non-residents, the procedure under Article 52(24) shall not apply but they will be subject to withholding tax using a 7% tax rate.
- Ø For legal entities – Slovak tax residents, the procedure under Article 52(24) will be applied and they will be included in the tax base in a filed tax return.
- Ø For legal entities – Slovak tax residents, it is first analysed if these incomes are subject to tax under Article 52(24) and if so, they will be taxed by a withholding tax using a tax rate of 19%.
- From sources in abroad reported for the tax periods until 31 December 2003 and paid after 01 January 2017
- Ø For individuals – Slovak tax residents, the procedure under Article 54(24) shall not apply but they should be included in a special tax base and a tax rate of 7% shall be applied.
- Ø For legal entities – Slovak tax residents, it is first analysed if they are subject to tax under Article 52(24) and if so, they will be included in the tax base in a filed tax return.
Following the above, according to the amendment of the Act no. 580/2004 Coll. on Health Insurance the obligation to pay health insurance contribution shall not apply to dividends paid out from profits reported for the tax period starting on 1 January 2017.
2. Change of Limits for Lump Sum Expenditure
The amendment introduces an increase of the limit of lump sum expenditure up to 60% of the income under Article 6(1) and (2), up to a total amount of EUR 20 000. At the same time, the possibility to deduct, apart from lump sum expenditure, also insurance payments and contributions paid under special regulations in the documented amounts remains in existence. Similarly, the amount of the limit of lump sum expenditures increases for taxpayers with income under Article 6(4).
3. Reduction of Tax Rate for Legal Entities
The amendment introduces a reduction of the income tax rate for legal entities from the current 22% to 21%.The reduced tax rate applies to the tax period beginning on 1 January 2017, i.e. taxpayers using a different financial year shall use the currently valid tax rate of 22% for the 2016/2017 tax period.
4. Expenses Tested for Payment
The amendment provides a clear definition and précising of expenses for lease that form a part of the tax base after payment. These include lease expenses for lease of movable objects, real estate, compensations for provision of right to use and/or for use of industrial property, computer programs (software), designs and models, plans, production-technical and other economically useful knowledge (know-how) and compensation for the right to use and/or for use of copyrights and rights similar to copyright; these expenses (costs) and compensations paid to individuals for the relevant tax period shall be recognized in an amount not exceeding the amount that is corresponding to the tax period both materially and in time.
5. Modification of Tax Base for Holders of New Motor Vehicles
This regulation is connected to a change of the Act no. 145/1995 Coll. on Administrative Fees under which the registration of a holder a completely new motor vehicle that has never been registered with the register of vehicles will be subject to an administrative fee.
Shall a holder of a motor vehicle fail to transfer the vehicle to another person within 1 year from the date of registration with the register of vehicles and fail to pay an administrative fee within 15 days following the expiration of this period, the holder will be obliged to increase the tax base by the expenses spent on acquisition, improvement, operation, repairs and maintenance of the motor vehicle recognized in the tax base, and to do so for all tax periods until the tax period preceding the tax period in which the fee under the Administrative Fees Act will be paid in the amount corresponding to the amount of the fee at first registration of the vehicle.
This regulation applies to motor vehicles registered in the registry of vehicles in the Slovak Republic after 31 January 2017.
6. Expenses for Provision of Material Aid
Provision of material humanitarian aid to abroad that the taxpayer will deliver to the Ministry of Interior of the Slovak Republic free of charge on the basis of a donation agreement will also form a tax expense. Humanitarian aid will be performed on the basis of the already valid mechanism of provision of humanitarian aid of the Slovak Republic in abroad (Resolution of the Government of the Slovak Republic no. 310 dated 12 April 2006).
7. Abolishment of Tax Licenses since 2018
The amendment to the Income Tax Act foresees that tax licenses for legal entities should be abolished (Article 46b) and licenses shall apply last for the tax period ending on 31 December 2017 and if the tax period is different from calendar year, for the tax period ending during the 2018 calendar year.
For more information concerning this topic, please contact:
Ms. Kvetoslava Čavajdová
Tax manager Mazars
Specialist in Corporate Income Tax and VAT
Changers in transfer pricing
1. Extension and More Precise Definition of Basic Terms
The amendment to the Income Tax Act provides a more precise definition of economic and personal connection in relation to connection by close persons. When considering connections of related parties it is thus necessary to consider also connections by participation of close persons (e.g. direct relatives) on the management, control, or assets of analysed parties.
The amendment also brings a new term controlled transaction. The definition of the term is linked to the provision of Article 17(5) where “controlled transaction” replaces the term “mutual business relation”. This change results from unclear interpretation of the term mutual business relation as the term controlled transaction is also used in international practice on the basis of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The amendment also specifies that controlled transactions are only relationships between persons of which at least one performs business activities (e.g. lease of real estate used for personal purposes and not included in the business assets of an individual is not a controlled transaction).
The amendment also underlines that for controlled transactions, real contents / economic substance of the transaction overrides the legal form itself.
The principle of arm’s length relation has also been made more precise; when analysing the impact of a controlled transaction on a decrease of a tax base (and/or increase of tax loss), potential differences of the conditions of controlled transactions compared to the conditions that would be agreed in comparable transactions between unrelated parties are analysed besides the price.
In addition, the condition of proving the link to business activities of the taxpayer has been extended from services also to other transactions with related parties, i.e. it will be necessary to prove the link to business activities of the taxpayer also for transactions other than services.
2. Automatic Corresponding Adjustment of Tax Base for National Controlled Transactions
The amendment permits Slovak tax residents to reduce their tax base if an adjustment (increase) of the tax base of another related party in the territory of the Slovak Republic was performed by a tax administrator in relation to transfer pricing. This introduces the possibility of the so-called automaticcorresponding adjustment of tax base for national controlled transactions where the tax base was increased by the tax administration as a consequence of transfer pricing.
Contrariwise, tax residents claiming tax relief under Article 30a or Article 30b will be obliged to perform such a corresponding adjustment if an adjustment of the tax base in line with transfer pricing was performed for another related party in the territory of the Slovak Republic.
Taxpayers will be obliged to notify the adjustment of the tax base to the tax administration in the period for filing the tax return (or the supplementary tax return) using the relevant form.
3. Advance Pricing Arrangements
The amendment regulates the conditions of applying for issuing an approval of use of a specific pricing method, the so-called Advance Pricing Arrangements (“APA”).
Apart from a precise definition of the requirements on the application, the most significant change relates to the change of the application fee. The amount of the fee will not be derived from the value of the transaction but will be set to EUR 10 000 for issuing a unilateral APA and to EUR 30 000 for APA issued by tax administrations of at least two countries (the so-called bilateral and multilateral APA).
4. Doubling Sanctions for Transfer Pricing
The amendment doubles the amount of sanctions for reporting lower tax base for transfer pricing if the taxpayer reached the lower tax base using aggressive tax planning or tax evasion.
A doubled sanction (two times triple the base interest rate of ECB, currently 10% p.a.) shall apply if the tax administration finds, during tax inspection, that the taxpayer reduced their tax base using transfer pricing on the basis of transactions lacking economic substance and resulting in intentional evasion of tax duty (under Article 3(6) of the Tax Code) or violating anti-avoidance rules (Article 50a of the Income Tax Act).
However, shall the taxpayer admit their fault (and not file an appeal against the additionally charged tax) and pay the difference of the additional tax in the set period, the basic sanction shall apply. Double sanction shall neither apply if the taxpayer asks for APA and the tax administration started a tax inspection in the period of filing of the application (or for two preceding periods), and the anti-avoidance rules are not applied therein.
Amendment to the Act no. 442/2012 Coll. on International Assistance and Cooperation in Tax Administration (“Amendment”)
The Amendment is currently in the legislative process in National Council of the Slovak Republic and should be discussed in January 2017. Should the Amendment be approved in its current wording, it would come into force as of 1 March 2017.
An overview of the most significant changes is provided below:
1. Country-by-Country Reporting
The legislative proposal on Country-by-Country Reporting (“CbCR”) regarding transfer pricing is a part of the proposed Amendment of Act no. 442/2012 Coll. on International Assistance and Cooperation in Tax Administration, which reflects the wording of the legislation presented by OECD within the BEPS Action 13 Implementation Package. CbCR rules represent the international efforts of tax administrations to increase the transparency of transfer pricing structures applied by the largest Multinational Groups (“MNE Groups”) within OECD Member States. The aim is to reveal specific information about particular activities of MNE Group members via submission of standardized reports to the tax authorities. Member states should exchange CbC Reports in order to identify tax avoidance via transfer pricing.
According to the proposed Amendment, Ultimate Parent or Ultimate Surrogate Parent companies (being a Slovak tax resident) of MNE Groups will be required to submit the CbC Report to the tax authorities if in the preceding tax year its consolidated group revenues reach EUR 750 million.
The obligation to submit the CbC Report shall be applicable for Constituent Entities (being a Slovak tax resident), if one of the following three conditions is met:
- Ø the Ultimate Parent entity of the Group is not obliged to submit CbC Report in its tax residence jurisdiction, or
- Ø the Ultimate Parent Entity´s tax residence jurisdiction has a valid Multilateral Administrative Assistance Convention with Slovakia in tax matters, but does not have a valid Automatic Tax Information Exchange Agreement by the deadline for submission of the CbC Report, or
- Ø there has been a systemic failure of the Ultimate Parent Entity´s tax residence jurisdiction (e.g. suspended automatic exchange of CbC Reports or repeatedly failing to automatically provide the CbC Reports) that has been notified to the Constituent Entity by the competent Slovak authority.
The CbC Reports for the respective tax period should be submitted within 12 months of the last day of the tax period.
After the approval of the Amendment, the first CbC Reports would be submitted as follows:
- Ø for the tax period starting on 1 January 2016 and ending on 31 December 2016 - if the Slovak tax resident is an Ultimate Parent/Surrogate Ultimate Parent of the MNE Group, e.g. for the period 1 January 2016 – 31 December 2016 the obligation to submit the report by 31 December 2017,
- Ø for the tax period starting on 1 January 2017 – if a Slovak tax resident is the Constituent Entity of the MNE Group.
In addition the Amendment introduces specific notification obligations for all Constituent entitiesthat are Slovak tax residents which have to notify Slovak tax authorities about their status (i.e., whether they qualify as Ultimate Parent, Surrogate Ultimate Parent or Constituent Entity) as well as submit the information about the MNE Group entity filing the CbC Report.
The notification obligations have to be fulfilled by the corporate income tax return filing deadline for the notified tax period. Based on the wording of the Amendment, the notification obligation would also affect the tax period starting on 1 January 2016, i.e. notification obligation by 31 March 2017.
The Amendment also proposes specific penalties for non-compliance : up to EUR 10 000 for failure to file the CbC Report and up to EUR 3 000 for failure to comply with the notification obligations.
We would therefore recommend that taxpayers who are a part of MNE Group review whether their Group qualifies for filing CBC Reports in order to get ready for the new reporting or notification obligations in Slovakia.
For more information about this topic, please contact:
Mr. Martin Smatana
Tax manager Mazars
Transfer Pricing Specialist