The fight against tax avoidance is one of the greatest priorities in the field of international taxation.
Member States are obliged to implement into their national legislations the approved Council Directive (EU) laying down rules against tax avoidance practices that directly affect the functioning of the internal market (known as the Anti-Tax Avoidance Directive or “ATAD”).
The ATAD seeks to ensure that tax is paid where profits and value are generated. It contains binding measures which the Slovak Republic must implement in order to prevent aggressive tax planning. A further objective of the Directive is also to facilitate information exchange between Financial Intelligence Units engaged in identifying and monitoring suspicious transactions.
1. Hybrid Mismatches
Where individual member states do not treat the same income or entity uniformly this results in hybrid tax-related mismatches.
The implementation of the ATAD therefore sees the introduction to the Income Tax Act of a rule designed to prevent the double deduction of expenses. The aim of this rule is to prevent situations that occur or may occur between related parties. This rule seeks to prevent situations in which the same expense is considered as tax-deductible under both Slovak law and that of another Member State (i.e. double deduction of the same expense), as well as situations in which an expense is tax-deductible within the territory of the Slovak Republic without being included in the tax base of the other Member State.
Following implementation of the ATAD, the Income Tax Act defines an entity as a legal arrangement of assets (trust) or a legal arrangement of persons without legal personality (e.g. partnership) or any other legal arrangement that owns or manages assets.
- See also TPA news: Hybrid Mismatches
2. New CFC Rules
New rules for controlled foreign companies are to come into effect from 1 January 2019.
The aim of these rules is to prevent the erosion of tax bases in the territory of the Slovak Republic and profit shifting outside of the territory of the Slovak Republic. These rules will have the effect of re-attributing the income of a low-taxed controlled subsidiary to its parent company. This means any income that has been artificially diverted to the foreign subsidiary. The rules also apply to the income of permanent establishments, where the income is not subject to tax or is tax exempt within the territory of Slovakia.
The Act introducing the rules specifies the conditions that must be met in order that a foreign legal person, entity or permanent establishment be treated as a controlled foreign company. The first condition is that it is a company (entity) in which the taxpayer with an unlimited tax liability in the territory of the Slovak Republic owns more than 50% of the capital or holds a participation of more than 50% of the voting rights or more than 50% of the profits. The second condition is that the corporate tax paid by the controlled foreign company abroad is lower than the difference between the corporate tax of the controlled foreign company calculated under the Slovak Act and the corporate tax paid by the controlled foreign company abroad.
3. Original prices for tax purposes
The proposed amendment to the Income Tax Act with effect from 1 January 2018 will also have significant effects on business combinations and, as such, strictly requires that, with the exception of so-called cross-border business combinations, all non-monetary contributions and mergers and divisions for tax purposes be performed in real values only.
Under the proposed amendment, it will therefore be possible to perform non-monetary contributions for tax purposes within the territory of Slovakia in real values only. This also includes individual contributions or the contributions of a business or part thereof located outside of the territory of the Slovak Republic, including mergers and divisions of business companies.
Cross-border non-monetary contributions, mergers and divisions cover cases in which:
- the taxpayer or taxpayer wound up without liquidation is a taxpayer based in the territory of the Slovak Republic, and
- the beneficiary of the non-monetary contribution or the legal successor is a taxpayer based in another EU member state, where the assets and liabilities of the beneficiary of the non-monetary contribution or of the legal successor remain part of the permanent establishment of these taxpayers located within the territory of the Slovak Republic, and where the national legislation of the member state of the beneficiary of the non-monetary contribution or the legal successor does not allow for the taking over of the assets and liabilities of the taxpayers in real values.
Consequently, once these conditions have been met, it will be possible to apply the method of original prices for tax purposes, i.e. the method that does not affect the tax base.
4. Stricter sanctions for transfer pricing
Cases where, based on a tax audit begun in 2017 or later, additional tax is imposed on a taxpayer because the taxpayer intentionally reduced the tax base or increased the tax loss through transfer pricing will now be subject to stricter sanctions.
As a result, instead of a fine of 10% a year of the amount of additionally imposed tax difference, the fine has now been doubled to 20% a year of said amount. Moreover, in the event of an intentional reduction of the tax base or an increase in the tax loss, the taxpayer may become subject to criminal proceedings.
The legislative changes in transfer pricing set to come into force in 2018 primarily concern a further extension of the circle of related parties.
- Find out more about Transfer Pricing in CEE/SEE