The draft act has been amended to provide taxpayers with a procedure for preventative restructuring under Act 111/2002 on Resolving Potential Bankruptcies and on amendment of certain acts. This act is focused on resolving potential bankruptcies in preventative proceedings using a set of restructuring measures. Preventative restructuring is essentially active engagement with a debtor who has filed a petition to commence the process. The act regulates the resolution of a situation where an entrepreneur is at risk of bankruptcy due to imminent insolvency in preventive proceedings, which is an effective tool for timely resolution of the debtor’s situation so as to maintain business continuity and viability, and especially to avoid default and subsequent bankruptcy. A plan must be developed that contains restructuring measures and these may include forgiveness of the debtor’s liability. Within the Income Tax Act, this involves legislative provisions related to the forgiveness of the debtor’s liability and changes to the procedure for creating adjustments for receivables.
- In connection with this act, §19 (2)(h) which governs situations with respect to the lawful and tax-deductible write-down of receivables has been expanded to include the extinguishing of a receivable as a result of such forgiveness within preventative restructuring. The receivable in the scope in which the liability (debt) is forgiven based on the confirmed plan will then be a tax-deductible expense for the creditor.;
Practical application:
If a court confirms a preventative restructuring plan that involves partial debt forgiveness, under the assumption that the general conditions in §19 (2)(h) of the Income Tax Act are met, then the write-off of this debt is considered a tax-deductible expense in the tax period in which the plan was approved by the court at the earliest. On the debtor’s side, the current practice employed in the Income Tax Act for the write-off of a liability will remain in place (either as part of the economic result or by applying §17 (32).
- The provisions of §20 (2)(c) and (24) are amended to include the ability to include the creation of adjustments for receivables involving a debtor in preventative restructuring proceedings into tax-deductible expenses, and in the same manner as for receivables involving a debtor in conventional (bankruptcy) restructuring. Related amendments were made to the provisions of §20 (11) and (12).;
Practical application:
If a debtor is in a preventative restructuring proceedings and a given receivable was included in taxable income, the adjustment for such receivable is a tax-deductible expense in its full amount, i.e. up to the nominal value of the receivable or the paid purchase price.
The amendment to the act also responds in numerous provisions to the implementation of new international standards for insurance.
- 20 (8) was amended given the adoption of the new international financial reporting standard IFRS 17, which replaces the temporary IFRS 4 and which governed the inclusion of technical reserves created by insurance companies into tax-deductible expenses. According to IFRS 17, insurance companies no longer report technical reserves as future expected estimated liabilities. An insurance company will report liabilities from insurance policies continuously over the duration of such insurance policies by discounting cash-flow to the present value. Due to the fact that insurance companies will not report technical reserves with the application of IFRS 17, i.e. future estimated liabilities, but report liabilities on the basis of discounted cash-flow, the costs reported in this way no longer meet the definition of a reserve and, like other liabilities, will be a tax-deductible expense in accordance with accounting.
- During the initial application of the standards due to a change in the accounting method, which also constitutes a change in insurance policy reporting, changes reported in equity that would have an impact on taxable income or tax-deductible expenses will be included in the tax base in accordance with the proposed transitional provision §52zzn (1).;
- Tax base adjustments under §17 (2)(d) and based on international financial reporting standards IFRS 17 and IFRS 9 by insurance companies will be included in the tax base evenly starting with the tax period that begins on 1 January 2023 at the earliest, but no later than the end of the second tax period that follows the tax period beginning on 1 January 2023 at the earliest.
The draft act also covers the tax bonus adjustment effective 1 July 2022.
- Amendment of §32 (5), §33 (4) and (9), and §38 (3) creates the room necessary for an increase in the tax bonus deduction for a dependent child (or children) following the inclusion of the income (partial tax base) of both eligible persons (e.g. parents) in the total income for the purpose of applying this tax bonus.
- For the first time, it will be possible to combine tax bases for the purpose of applying the tax bonus when filing a tax return for the 2023 tax period.
Practical application:
A taxpayer, employee, has two dependent children under the age of 15, meaning they are entitled to a tax bonus of €100 per month per child beginning 1 January 2023. If they taxpayer works the entire year, the annual tax bonus in the full amount for both children totals €2,400. The tax bonus may only be used if the annual tax base (the partial tax base under §5 of the Income Tax Act) is at least €8,888.89 as the percentage limit for two children is 27% of the partial tax base (27 % x €8,889.89 = €2,400). To clarify, this hypothetical limit is the average monthly gross pay rounded to the nearest Euro cent of €855.36 (the partial tax base of €8.888.89 increased by statutory deductions for annual gross pay of €10,264.31; the monthly gross pay is then €10,264.31 / 12 = €855.36).
If the taxpayer does not generate a sufficient tax base, they will be able to top up the unclaimed tax bonus by voluntarily filing a tax return, in which they increase their partial tax base by using the partial tax base of, for example, their spouse (only a partial tax base under §5 or §6 (1) and (2) of the Income Tax Act, or their total for the year 2023), who lives with them in a shared household. This is only possible under the expectation that the spouse will be eligible for the tax bonus in 2023 (i.e. they are the other eligible person supporting a dependent child in the household). The given recalculation of the partial tax base is simply designed to determine eligibility for the child tax bonus. The financial administration will provide further details as to how taxpayers should proceed in the new individual tax return form (for example, in the instructions for the individual tax return form).
The amendment to the Income Tax Act also proposes a change in the registration process for income tax purposes.
- The manner in which select types of taxpayers register for income tax purposes is changed in §49a (1), (2), (12) and (13) effective 1 January 2023. The tax administrator will register taxpayers for income tax under its official authority using data from the register of legal entities, entrepreneurs and public authorities entered in the commercial register and the trade license register based on notification from the Financial Directorate of the Slovak Republic and published on its website.
Part 1 of the Newsletter can be found at:
An overview of additional changes is provided below.
