What changes will result from 1.1.2023 by the amendment to the law regarding Income Tax Act

Barbora Palenikova

The Ministry of Finance has prepared a proposal to amend the Income Tax Act. In this article, we present a brief summary of the areas that could be affected by the changes. We will bring more detailed information on the changes in the coming weeks, that is when the amendment is passed by the Parliament.

Transfer pricing area

A new development in this area is the introduction of a new form of calculation for determining economically related persons. The shares of close persons (e.g. husband, wife) will be counted together and if their sum is at least 25%, the entities will be considered as economically related. This is the case, for example, if the husband has a 100% interest in company A and a 15% interest in company B and the wife also has a 15% interest in company B. Under the previous wording of the provision, companies A and B were not related; under the new provision, they are now considered to be related companies.

The amendment adds a definition of a 'significant controlled transaction', which is a legal relationship or other similar relationship whereby a dependent person receives taxable income (revenue) or a tax expense that in it´s value exceeds 10 000 euro in the relevant tax year. Furthermore, a loan or borrowing with a principal amount exceeding 50 000 euro is also considered significant.

The law should also include a reference to the OECD Transfer Pricing Directive for multinational companies. This is an attempt to partially resolve the problem of the binding nature of the application of the OECD Directive in practice and in the application of the conclusions of tax audits focused on transfer pricing.

A fundamental change is the proposal to add a provision that addresses the situation of a taxpayer that does not have transfer pricing set on the arm´s length principle and is outside the intra-quartile range. In such a case, the tax authority may assess income tax according to the mean (median) of the established independent (market) comparable values. In the context of the comment procedure, the possibility was added that during the tax audit the taxpayer may demonstrate that, in the light of the circumstances, an adjustment to a different value within the range of independent values is more appropriate and, if the tax authority does accept this, the tax base will be adjusted according to this value.

Thin capitalisation rules

On 1.1.2024 the exemption for Slovakia from the application of the thin capitalisation rules under the ATAD Directive expires. Today, 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

Preventive restructuring

In Slovak legislation, a new law is in force on the resolution of impending bankruptcy in preventive proceedings through a set of restructuring measures. One of the restructuring measures is debt remission or partial debt remission. Accordingly, the Income Tax Act adds the possibility of tax write-off of receivables and the possibility of making tax provisions for such types of receivables.

Changes applying to insurance companies

Insurers 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 longer report insurance contract liabilities on a rolling 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.