On 7 December 2017, the National Council of the Slovak Republic adopted Act No. 344/2017 amending and supplementing Act No. 595/2003 on income tax as amended (hereinafter only the “Act”) and amending and supplementing Act No. 563/2009 on tax administration (Tax Procedure Code) and on amendment and supplementation to certain acts as amended.
The amendment also includes further measures arising out of the responsibility of the Slovak Republic to implement the tools of BEPS (Base Erosion and Profit shifting) Action Plan and of Council Directive (EU) 2016/1164 – so called “ATAD” (Anti-Tax Avoidance Directive).
These are mainly rules against practices related to avoiding tax liabilities, which have a direct impact on the functioning of the internal market, and strengthening the level of protection against aggressive tax planning, rules against tax base erosion and profit shifting outside the Slovak Republic.
The amendment to the act applies to both the tax on income of natural persons and taxation of legal persons. The wording of the Act on Income Tax entered into effect on 1 January 2018.
Below is a summary of the most important changes to the Act on Income Tax:
- Special taxation of commercially used intangible assets
New sections have been incorporated in to the Act on Income Tax, exempting the income (revenues) from remuneration for granted rights for the use or for the use of awarded and registered patents and utility models as well as for the use of computer programs (software), patents and utility models used in the production of goods (so-called embedded assets). This exemption is conditioned by the intellectual property objects being the results of research and development conducted by the tax payer, i.e. they are the result of the tax payer’s own activity performed within the Slovak Republic. Exemption amounting to 50% applies exclusively to legal persons that are tax payers with unlimited tax liability, or to tax payers that perform their activity in the Slovak Republic through a permanent establishment, where the intellectual property objects must be functionally connected with such permanent establishment in the Slovak Republic.
- Taxing profit shares of partners in general partnerships and of unlimited partners in limited partnerships:
Accurate principles were proposed in respect of taxing profit shares, shares in liquidation balance and repayment of share of partners in general partnerships and of unlimited partners in limited partnerships. Taxation shall apply in the cases where this income is earned due to the organizations having interests in other business companies (such as s.r.o., a.s.) or in a cooperative. This change in the law orders a company – the recipient to document the final recipient of the profit shares. If a company is unable to document the final recipient (partner) of the profit shares, the paying company is responsible to deduct tax in our country from the whole amount by applying a 35% tax.
- Specification of the definition of permanent establishment
A specific definition of permanent establishment was incorporated into the Act, taking into account the newly-formed entrepreneurship models through digital platforms within the Slovak Republic. By this measure the Slovak Republic fulfils the recommendations of the BEPS project, whose aim is to prevent avoiding tax liability also through intentional distribution of activities among related tax payers into several shorter activities, with none of them exceeding 6 months. Based on the amendment, starting from the beginning of next year, such activities performed by a tax payer with a limited tax liability and its depended persons are going to be considered as a unit if these activities are associated and connect to each other. The conditions of the establishment of so-called agency permanent establishment are also defined more accurately.
- Exit Taxation
So-called moved assets sale fiction is introduced. The purpose of this regulation is that a tax payer, that moves assets and changes its tax residence outside the Slovak Republic, pays tax for the economic value of all capital profits created in the Slovak Republic. Moving assets also includes moving assets into a permanent establishment abroad. The amendment designates such taxation as taxing unrealised gains as the assets are not actually sold but only moved. The taxation uses a 21% tax rate as it only applies to legal persons. A tax payer may apply for an approval to pay the tax in instalments within 5 years.
- Rules for controlled foreign companies
Rules for controlled foreign companies will enter into effect within the Act on Income Tax from 1 January 2019. The main motif of these rules is to prevent tax base erosion in the Slovak Republic and profit shifting outside the Slovak Republic. The rules for controlled foreign companies result in the assignment of the income of undertaxed controlled subsidiaries to their parent companies. It means the income that was artificially forwarded to subsidiaries. The rules also apply to the income of permanent facilities.
- Non-financial contributions appraised only in actual values
The amendment introduces a regulation of non-financial contributions that will be possible to appraise for tax purposes only in actual values. Contributions paid within Slovak transactions as well as individual contributions or contributions of companies or their parts outside the Slovak Republic will be possible to appraise only in actual values. Original prices may only be used in certain exemptions, such as in individual contributions in form of securities or business shares; in contribution of companies or their parts; where the recipient of the non-financial contribution is a tax payer based in a EU/EEA member state, with the assets remaining in the Slovak Republic; where the country of the recipient of the non-financial contribution allows the assets to be taken over only in their original prices; or where the recipient of the non-financial contribution may choose between actual appraisal and original prices.
- Merger, amalgamation or division of business companies or cooperatives in actual values
Starting from the new year, the area of merger, amalgamation or division of business companies or cooperatives is also regulated. The amendment sets forth that taxation will only apply in actual values. Original prices will only be applied if the criteria according to the law are met. Merger, amalgamation and division of companies will be made using the original prices only where the draft agreement on the merger, amalgamation or a division project was approved before the effective day of the Act and where the application for registration of the merger, fusion or division of a company into the business register was filed latest 90 days before the effective day of the Act.
