This special newsletter is to provide you with the information about the updated changes in the Act on Income Tax, effective from 2017.
1. Changes to the Act on Income Tax:
1.1 Profit shares, dividends
Adopted amendment to the Act on Income Tax
A meeting of the National Council of the Slovak Republic was held on 23 November 2016, at which new rules governing the taxation of dividends in the Slovak Republic were adopted with the effect from 1 January 2017.
Compared to the previous draft act, which we reported about in the previous newsletter, one of the principal changes is that profit shares (dividends) of natural persons will be taxed at the rate of 7% instead of the initially proposed 15% or at 35% of the special tax base and they won’t be a subject to contribution to health insurance.
Taxation of dividends in cases of natural persons will be assessed separately depending on the years for which they are paid:
1) Dividends paid from profits generated until the end of 2003 – when paid after 2016, these dividends will be taxed by deduction at the rate of 7%; these were taxed as a part of the tax base of the taxpayer – natural person at 19% or eventually 25% in the period from 2004 to 2016;
2) Dividends paid from profits generated in the period from 2004 – 2016 – for these dividends, the existing tax regime will be applied; i.e. the dividends haven’t been subject to the tax and, when paid after 2016, they won’t be taxed but these dividends will still be subject to contributions to health insurance depending on the legislation valid in the respective periods (2011 – 2012 at the rate of 10%, 2013 – 2016 at 14 %);
3) Dividends paid from profits generated from 2017 – taxation of dividends paid to natural persons by deduction at the rate of 7% is being introduced, where the dividends won’t be subject to contribution to health insurance;
4) For dividends paid to/received from another country, articles of the respective double taxation agreement apply, which take priority over the Act on Income Tax.
Dividends paid to natural persons, residents of non-contracting states, or received by natural persons, Slovak residents, from business companies based in non-contracting states are subject to a special tax rate of 35%.
Rules for taxation of dividends (profit share) are equally applied to taxation of balance interest, share in the surplus upon liquidation, profit share and share in assets of a member of the land association.
Exemption: Exemption of share of a land association member with legal personality
Share of a land association member with legal personality is exempted to the amount of EUR 500. Share of a land association member will be taxed only where amounting to more than EUR 500, in a sum exceeding this amount.
From 1 January 2017, the amendment to the Act on Income Tax will significantly affect employees without participation in registered capital of a trading company or cooperative:
Income in the form of dividends in employees will be classified as income from employment, with equal liabilities in respect of health and social insurance as in the case of a salary. Dividends paid to employees without participation in registered capital from profits generated in the accounting period from 1 January 2014 to 31 December 2016 are exempted from the income tax.
Shares and dividends of partners in general partnerships and general partners in limited partnerships:
Share in profit of a partner of a general partnership and that of a general partner of a limited partnership, share of a partner of a general partnership and that of a general partner of a limited partnership in the surplus upon liquidation and balance interest at the cease of participation of a partner in a general partnership and that of a general partner in a limited partnership is subject to the tax at the part of the partner – legal person as a part of tax base following section 14 – corporate tax base.
Taxation of dividends in legal persons:
These dividends are still not subjects to the tax.
The only exception is dividends paid to legal persons – residents of non-contracting states or dividends received from legal persons from non-contracting states, which will be taxed at the special rate of 35%.
Taxation of dividends of legal persons, paid in the taxation period from 1 January 2017 from profits reported until 31 December 2003 in legal persons, doesn’t change and such dividends are subject to taxation.
All the changes in terms of implementing taxation of dividends and other income will be applied to profits reported for the taxation periods starting latest on 1 January 2017; in the case of share of a land association member, to profits reported for the taxation periods until 31 December 2016; in the case of share in the surplus upon liquidation, where the trading company or cooperative entered the liquidation until 1 January 2017, and in the case of balance interest, whose amount was determined based on annual accounting statements for the accounting period starting latest on 1 January 2017.
1.2 Change of the tax rate:
The rate of corporate income tax for the taxation period starting latest on 1 January 2017 is decreased from 22% to 21%.
1.3 Tax licence repeal:
The companies (e.g. s.r.o.) with taxation period of one calendar year will pay tax licence for the last time for 2017. The companies that apply economic year as the taxation period will pay the tax licence for the last time for the taxation period ending in 2018.
1.4 Increase of lump sum expenses
The limit of lump sum expenses rises to 60% from income from business activities and other self-employed activity to the maximum amount of EUR 20,000.
The amendment to the act applies to the taxpayers whose income comes from business activities following section 6 (1), income from self-employed activity following section 6 (2) as well as from income from the use of works and artworks following section 6 (4). The regulation doesn’t apply to the taxpayers whose income comes from rental following section 6 (3) of the Act on Income Tax.
1.5 Changes in transfer pricing
Rules for adjustment of tax base of inland dependent persons change so as no approval of tax administrator will be required to make corresponding adjustments. Similarly, new rules are introduced in respect of primary and corresponding adjustments where one of the participating parties is a taxpayer claiming tax relief, including introduction of the obligation to report adjustments of tax base to the tax administrator.
The process of filing an application for approval of the valuation method by the taxpayer is regulated in detail. Fixed fees for issuance of a decision on approval of the valuation method are determined as follows:
· EUR 10,000 for unilateral approval of the valuation method according to Act on Income Tax or
· EUR 30,000 for bilateral approval of the valuation method based on the respective double taxation agreement by the tax administrators of both contracting states.
New section 18a is inserted to the transfer pricing rules, whose purpose is to impose higher sanctions for intentional avoiding paying taxes due to transfer pricing. Where the tax or tax difference is levied on an entrepreneur by the respective tax authority based on a transfer pricing tax inspection on the grounds that the entrepreneur’s conduct had no economic justification and resulted in intentional avoiding or intentional reduction of tax liability, the entrepreneur will be imposed double the fine. However, the fine will not be doubled where the taxpayer doesn’t lodge an appeal against the decision of the tax administrator, by which the tax administrator has increased the tax reported in the tax return or amended tax return, and pays the tax difference within the determined appeal period.
1.6 Other changes to the Act on Income Tax
Changes in determining tax base and tax expenses
1. Detail definition of rent included in tax base only after payment – application to all payments of rent for both the movable and the immovable items, rights for the use of copyrights, industrial rights and related rights.
2. Stricter process of taxing treatment of motor vehicles designated for presentation and testing purposes in respect of the obligation to pay administrative fees for the first registration (by one year) and following tax recognisability/non-recognisability of expense related to the operation and maintenance of such motor vehicles (upon passing of a one-year period where the amount of the administrative fee is not paid in full on time).
3. Introduction of tax recognisability of:
o expenses of corporate entities, provided in the form of material humanitarian aid organized through the Ministry of Interior of the Slovak Republic based on the adopted directive for procedures of delegations participating in the World Humanitarian Summit in Istanbul and based on Slovak Government Resolution No. 310 of 12 April 2006 on the mechanisms of providing humanitarian aid of the Slovak Republic to foreign countries (humanitarian aid = granting necessary materials, technology, food and other products by humanitarian organizations);
o mandatory contribution for crisis management following Act No. 371/2014 on Resolution in the Financial Market.
