Slovak Republic: Direct taxation amendments

Author: | Published: 9 Dec 2014
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In late October, the Slovak Parliament adopted a comprehensive amendment to the income tax act, introducing changes in direct taxation that will come into force on January 1 2015. Here, we are provide a brief summary of the key changes introduced in the amendment that affect businesses.

Asset depreciation

The number of depreciation categories has increased from four to six. One advantage for taxpayers is the new, separate depreciation category for technological property (generators, transformers), which will allow this type of property to be depreciated over eight years rather than 12 years. However, there are also drawbacks. For instance, the depreciation period for buildings used for non-manufacturing purposes (such as hotels, office buildings, medical buildings and buildings used for educational purposes) was changed from 20 to 40 years. The depreciation changes are intended to affect property already being depreciated, but this has raised doubts regarding constitutionality, as many experts believe this type of retroactivity is prohibited. It will be interesting to monitor how this will evolve, and to see if any applications are made to the Constitutional Court in this respect.

Thin capitalisation rules for related entities

The amendment introduces limits on the tax deductibility of interest on credit and loans charged as expenses if the credit and loans are made among related (domestic and foreign) legal entities. Interest exceeding 25% of Ebitda (earnings before interest, taxes, depreciation, and amortisation) will be considered a non-deductible expense. For evaluation purposes, interest will include expenses related to accepting credit and loans (such as expert valuations, bank guarantee fees, commissions for brokering loans and fees for early pay-off). The purpose of this particular measure is that rather than making loans and extending credit, related entities will instead make capital contributions and thereby raise security on the debtor's liabilities. Thin capitalisation rules will not, however, be applicable to financial institutions (banks, insurance companies and leasing companies) or to entities engaged in administering collective investments.

Transfer pricing for domestic related entities

A significant change is the application of transfer pricing rules, and all the associated duties such as transfer documentation, to domestic related entities. Until the amendment was adopted, transfer pricing rules were only applicable to foreign related entities. Under the new legislation, even domestic related entities will be forced to demonstrate that the prices applied in their mutual business transactions, including prices for services, credit and loans, do not differ from the prices used by non-related entities in comparable business transactions.

Expansion of cash-based taxable income and tax deductible costs

The amendment also introduces changes relating to the moment when tax expenses become deductible. It expands the scope of expenses that will be considered tax deductible only after they have been paid, whereas under existing legislation, it is when the expense is recorded. These expenses include the costs of rent, legal and consulting services, marketing studies, market research and intermediating transactions. On the other hand, for providers of marketing and other studies and market research this income will not be taxable until after payment is received, as opposed to the existing legislation under which it is taxable once it has been booked.

Changes in deductibility of expenses

There is a change in the deductibility status of penalties, such as contractual penalties and late charges. Under the amendment, these expenses will no longer be tax deductible, even after they have been paid. On the other hand, they will be taxable for the creditor before payment is received – at the time when they are booked. The deductibility of commissions paid for the intermediation of services, for instance under agency and similar agreements, is capped at 20% of the value of the intermediated transaction. There are also changes in the tax depreciation of automobiles with an acquisition price of €48,000 ($60,000) and higher. If the taxpayer's tax base is lower than what is set out in the new legislation, they will not be able to use part of the tax depreciation on vehicles with a purchase price of €48,000 and higher. Similar limitations also apply to depreciation of vehicles acquired under operating leases with an acquisition price of €48,000. The maximum deductible amount of the annual lease cost for one such automobile is €14,400.

Daniel Futej Rudolf Sivák Lenka Horvathova