INCOME TAX ACT

business woman holding tear paper with 2019, new year concept

The draft amendment to the income tax act modifies several aspects. This newsletter covers the most significant changes including:

introduction of the term micro taxpayer and related changes to the taxation of this group of taxpayers

Under the draft amendment to the income tax act, the new term micro taxpayer is used to define a natural person or legal entity those income or revenues in a given tax period do not exceed the amount laid down in the VAT Act of EUR 49,790 (the threshold for mandatory VAT registration). Significant changes in connection with the introduction of this new term in the income tax act concern the depreciation of rented tangible assets, where micro taxpayers are permitted to include such depreciation allowances in their tax-deductible expenses regardless of the amount of accrued rental income (revenue).

Another advantage for micro taxpayers is the ability to depreciate tangible assets classified into depreciation groups 0 to 4 during their depreciation period (up to a maximum of the entry price, except for passenger cars with an entry price of more than EUR 48,000), i.e. the amount of tax depreciation of tangible assets is at the discretion of the micro taxpayer. On the other hand, the draft amendment of the income tax act proposes that a micro taxpayer applying this preferential regime of depreciating tangible assets be ineligible for any interruption in their depreciation.

Likewise, a micro taxpayer choosing to dispose of such property prior to the expiration of the depreciation period shall be obliged to increase their tax base by the positive difference between the total of previously applied depreciation in tax deductible expenditures and the amount of depreciation under the standard depreciation period, i.e. under §27 or §28 of the income tax act.

The introduction of the ability for micro taxpayers to create tax deductible adjustments for receivables per their accounting:

Micro taxpayers utilising the double-entry bookkeeping system will be able to include adjustments for receivables in their tax deductible expenses if there is a risk that the debtor will not complete full or partial payment in the amount in which it has recorded such amount in its accounting records.

depreciation of electric vehicles

Given in the increased popularity of electric vehicles, the draft amendment introduces a new depreciation group 0 with a depreciation period of 2 years. Such depreciated assets include personal electric vehicles with BEV (Battery Electric Vehicles) or PHEV (Plug in Hybrid Electric Vehicle) as their officially recognised fuel type or power source.

changes in deduction of tax losses

Another proposed change is an extension of the ability to deduct tax losses from four to five consecutive and subsequent tax periods. The flip side here is the limit on the maximum amount that a taxpayer will be able to deduct in tax losses from the tax base, which is capped at 50% of the tax base. This limit does not apply to micro taxpayers who will be able to deduct a tax loss up to the full amount of their defined tax base.

payroll changes for employees and employers

The draft amendment should also simplify the application of the non-taxable allowance for employees by the employer whereby employees would no longer be required to file an annual declaration; instead, they would file a declaration when starting a new job and then only to report changes with an impact on the application of such non-taxable allowance for the employee.

The employee’s obligation to demonstrate the fulfilment of the conditions for recognition of the tax bonus to the employer is unaffected by this amendment.

Employees will be able to file this declaration in paper form if they do not agree on electronic communication with their employer.

changes in expenses becoming tax deductible after payment

Proposed changes in the area of expenses that become tax deductible after payment are manifold. The most significant of these is the condition that payment must not always be followed for expenditures if they become included in the acquisition cost or are incorporated in the production costs of assets. The amendment likewise plans to cancel the limit on the recognition of tax-deductible expenditures after payment of up to 20% of the value of an intermediated transaction. However, new expenditures that may be recognised as tax deductible after payment shall include expenditures on consulting services in the field of business management and expenditures for company management as well as the lump sum compensation for costs associated with the enforcement of receivables, contractual fines, default-related fees and interest for debtors and severance payments for authorised parties, which are currently classified as non-tax deductible expenditures.

The amendment also stipulates that taxpayers will not have to follow the condition of payment for expenditures (costs) to obtain standards and certificates or otherwise gradually include them in expenditures over their valid term.

obligation to pay advance tax payments.

Another proposed change is to modify the threshold for payment of advance income tax payments, which should change from EUR 2,500 to EUR 5,000 for natural persons and legal entities. This means that only those natural persons whose tax liability was more than EUR 5,000 and those legal entities whose tax exceeded EUR 5,000 will be required to pay advance tax payments.

introduction of a lump sum employer contribution towards travel costs

The amendment in §5 (7)(m) of the law stipulates that non-financial benefits provided by an employer to an employee to secure their transport to and from the workplace under §19 (2)(s)(1) is capped at a maximum of EUR 60 per month. Under the stipulated conditions, employees would only be taxed on amounts above EUR 60.

determination of the non-time-barred status of debts

The income tax act only permits a tax deductible adjustment to be created for a specific debt if it was included in taxable income and so long as such debt is not time-barred with certain exceptions (including principal on outstanding loans to banks and taxpayers who carry out business activities in the provisioning of consumer loans).

The fact that a debt is not time-barred is also used to determine eligibility to apply a tax-deductible expense upon the write-off or assignment of such debt. Given the practical problems involved in applying a tax deductible expense upon the write-off of a debt or the creation of an adjustment for a specific debt, the amendment involves determination of the time-barred status of such debt not at the date of creation of the adjustment, or the date of the write-off or assignment of the debt, but rather by the final day of the tax period in which the adjustment is created, the debt is assigned or the debt is written off.

Under the amendment, a debt in such case would be considered not time barred if was not time barred for a minimum of 1 calendar day in the given tax period

change in the application of the super deduction of research and development expenditures

For taxpayers conducting research and development activities, the tax advantages involved in deducting research and development expenditures (costs) and their impact on the tax base, referred to as the super deduction, are increasing. This deduction may be used by taxpayers engaged in research and development projects and who incur related expenses (costs) that impact their earnings, and which are eligible for a deduction from the tax base less the deduction of any tax loss in the amount of 200%.

introduction of new provisions concerning hybrid discrepancies.

In addition to the above areas, the income tax act introduces the completely new provisions of §17i with the name of hybrid discrepancies, which concern modification of the tax base in situations arising between a taxpayer and dependent entities if such situation could result in an unjustified tax advantage.

changes to income sourced from Slovakia for taxpayers with limited tax liability

Sources of income sourced from Slovakia are amended to include income from the reallocation of a capital fund created from contributions. Such income is considered income sourced from a reduction in the registered capital of a company if it was previously increased using funds from a capital fund created from the contributions of its partners.

For taxpayers with limited tax liability, this income will be taxed as a withholding tax, while the income paid may be reduced by the value of the contribution to the capital fund from contributions paid directly by the taxpayer.

Increase in the catering allowance after 1 July 2019:

Act No. 283/2002 Coll. on Travel Reimbursement stipulates the following:

§1 Catering allowances are defined for specific time bands, specifically: