Draft act to amend Act 595/2003 on Income Tax, as amended (part 3/3)

Effective 1 January 2024, the draft amendment to the Income Tax Act amends the implementation of a new interest expense limitation rule targeted against practices that artificially reduce the income tax base by utilising excessive debt financing. The proposes measures are a result of the transposition of Directive (EU) 2016/1164. For such reason, a new §17k is added – Interest expense limitation rule.

Slovakia will continue to employ an exception under Article 11 (6) of the ATAD Directive until the end of 2023 and under which interest expense limitation under §21a only applies to dependent entities. The new provisions of §17k of the Income Tax Act will apply to any interest expenses, including bank interest expenses. The rule says that if the amount of net interest expenses is higher than €3,000,000, the tax base is increased by the amount by which such net interest expenses exceed 30% of the total tax bases increased by net interest expenses and depreciation included in the tax base for the given tax period (the EBITDA indicator, which is based on tax items). Net interest expenses are defined as the amount by which expenses (costs) for received credit and loans that are tax-deductible expenses exceed the interest income and other income economically equivalent to interest income, which is taxable income.

As opposed to §21a, net interest expenses include those interests that are part of the purchase price or internal costs of an asset (so-called capitalised interest).

21a (1) of the Income Tax Act, in connection with the implementation of §17k and applied practices, specifies that §21a is not applied to interest expenses capitalised into assets in the valuation of internal costs. A new subsection 4 is added to §21a of the Income Tax Act, which stipulates that subsections 1 to 3 concerning the low capitalisation rule do not apply if a taxpayer increases their tax base pursuant to §17k and therefore gives priority to examining the applicability of §17k of the Income Tax Act.

Practical application:

A taxpayer reports total net interest expenses of €250,000 at the end of 2024 based on a loan agreement with a related party concluded on 1 January 2024. The interest expense limit rule under §17k of the Income Tax Act does not apply to the taxpayer. However, the taxpayer must examine if the low capitalisation rules under §21a of the Income Tax Act are met in connection with these interest expenses (not reduced by interest income).

The new §52zzo defines the transitional provisions in place from 1 January 2024, whereby §17k of the Income Tax Act will be used on net interest expenses generated on credit and loan agreements concluded after 31 December 2023, including addenda concluded after 31 December 2023 for agreements concluded prior to 31 December 2023.

The basic differences in application between the proposed §21a of the Income Tax Act and §17k of the Income Tax Act are provided in the table below:

Basic application differences	§21a of the Income Tax Act – Low capitalisation rules	§21a of the Income Tax Act – Interest expense limit rule
To what interests do the given provisions apply?	Interests paid on credit and loans and related expenses (costs) for received credit and loans if the creditor is a dependent entity in relation to the debtor.	Interest costs associated with all types of debt, other costs economically equivalent to interest, expenses incurred by the debtor in obtaining the funds obtaining funds regardless of the creditor’s standing.
Is a level defined above which this rule will be applied?	No, the rule is applied regardless of the amount of interest expenses.	Yes, only if the net interest expenses are higher than €3,000,000.
What indicator is used in the calculation?	EBITDA for accounting purposes	EBITDA for tax purposes
Do these provisions take capitalised interests into account?	No, the balance of credit and loans does not include credit and loans, or parts thereof, from which interests are part of the purchase price or internal costs of an asset.	Yes, interests are considered when part of the purchase price or internal costs of an asset, and specifically in the ratio of what extent these interests amount in the purchase price of the asset or internal costs of the asset, including technical improvements, or in the proportion in which these interests amount in the residual price.
Do these provisions take interest income into account?	No.	Yes, the calculation includes net interest costs, which in the relevant tax year are tax-deductible expenses and exceed taxable interest income.
Can unused deductions be carried forward?	No.	Yes, unrecognised interest costs may be carried forward in no more than 5 immediately following periods.
Exceptions from the rule	If a debtor is a financial institution such as a bank, a branch of a foreign bank, an insurance company, or a leasing company.	If a debtor is a financial institution such as a bank, a branch of a foreign bank, or an insurance company. The exception extends to debtors who are legal entities and whose dependent parties are exclusively natural persons.
Is the date on which the credit / loan is provided decisive?	No.	Under the transitional provisions, the net interest expense rule will be applied on credit and loan agreements concluded after 31 December 2023, including addenda concluded after 31 December 2023 for agreements concluded prior to 31 December 2023.