Changes to the Income Tax Act from 1 January 2023

Barbora Palenikova

In this article, we summarize the most important changes in the Income Tax Act for companies, effective from 1 January 2023.

  1. Transfer pricing: the economic links between companies will be assessed more rigorously

The definition of economically related companies will be assessed more strictly in transfer pricing. If the sum of the shareholdings of close persons (e.g. husband and wife) in two mutually trading companies is 25% or more, the entities will be considered economically related. Example: a husband holds 100% shares in company A and a 15% of shares in company B and his wife also holds 15% shares in company B. According to the previous legislation, companies A and B were not related, however, as of 1.1.2023 they in fact are considered as related companies due to the new changes.

  1. If the company purchases a service outside the price range, it must pay the tax

A fundamental change is the addition of a provision that applies to taxpayers without an arm's length transfer pricing setup and is also outside the intra-quartile range. This is the statistical range in which, for example, the profitability of a sample of companies is located and it contains a lower value, an upper value and a mean (median). In such a case, the administrator may assess income tax according to median of the independent comparables found.

In the course of the commentary procedure, the possibility was added to the Act that in the course of a tax audit, the taxpayer may demonstrate that, under given the circumstances, it is more appropriate to adjust to another value within a given range of independent values, and if the tax authority acknowledges this, the tax base will be adjusted in accordance with this value.

  1. Transfer pricing rules will not apply to transactions up to EUR 10 000

The amendment adds a definition of a "significant controlled transaction", which is considered to be a legal relationship or other similar relationship on the basis of which a dependent person achieves taxable income (revenue) or tax expenditure in the relevant taxable period that exceeds EUR 10 000. A loan or a borrowing with a principal amount exceeding EUR 50 000 is also considered significant.

The Act also includes a reference to the OECD Transfer Pricing Guidelines for Multinational Enterprises. This is an attempt to partially resolve the problem of the binding nature of the application of the OECD Guidelines in practice and in the application of the conclusions of tax audits in transfer pricing.

  1. Thin capitalisation rules

On 1.1.2024 the exemption for Slovakia from the application of the thin capitalisation rules under the ATAD Directive will expire. Currently, the thin capitalisation rules are regulated in § 21a and this provision will remain in force after 1.1.2024 and will apply in cases where the taxpayer does not meet the criteria for the application of the thin capitalisation rules under the new provision of § 17k.

A brief summary of the rules:

Net interest expense < 3 mil. euro per annum Net interest expense > 3 mil. euro per annum
Interest towards related partiest is tax deductible up to a maximum of 25% of EBITDA. Net interest expense - interest expense in excess of interest income

Interest towards (independent) third parties is not subject to this limit
Interest is tax deductible up to a maximum of 30% of EBITDA.
Non-deductible part of the interest cannot be offset in the future tax periods Non-deductible from the tax base for up to the next five consecutive taxable periods.
The interest must be at least on an arm's length level. A broad definition of interest applies: costs that are economically equivalent to interest (expenses, fees, etc.) are treated as interest.
  The rule also applies to interest on finance leases, bonds, etc.  
  The interest must be on an arm's length basis
  1. Preventive restructuring

A brand new institute – the institute of preventive restructuring, is one of the measures of the Act on Resolution of Imminent Bankrupcy in Preventive Proceedings. What it does is that it allows for a forgiveness or a partial forgiveness of claims. From an economical standpoint, the Act allows for the tax write-off of receivables and it also introduces the possibility of making tax provisions for such types of receivables.

  1. Changes applying to insurance companies

Insurance companies are switching to the new IFRS 17 standard when accounting for insurance contract liabilities. It modifies the approach to the reporting of insurance contracts whereby an insurer no longer reports technical provisions as future estimated liabilities. Insurers will already recognise the liabilities for insurance contracts on an ongoing basis over the life of the insurance contract by discounting the cash flow to present value. Insurers will include the differences from the transition to the new standard in the tax base over three tax years, starting with the tax year beginning no earlier than 1 January 2023.

  1. Taxation of interest on bonds

The obligation to tax interest on bonds paid abroad by Slovak residents has been reinstated in the Income Tax Act. The only exceptions were government bonds and treasury bills, which are not taxed here when interest is paid abroad. This taxation will also apply to bonds already issued, which will reduce the attractiveness of such bonds.

Read more about changes in the Slovak VAT as of 1 January 2023