1. Exit tax on income already in Slovakia
As recommended by the EU Council in the ATAD, the amendment to the Income Tax Act with effect from 1 January 2018 should introduce an exit tax.
The objective of the proposed regulation is to ensure that where a taxpayer moves assets or its tax residence outside of the country, the Slovak Republic taxes the economic value of any capital gain created within the country, even if that gain has not yet been realised at the time of the exit.
Exit tax will be calculated using a special tax base and a 21% tax rate will be applied.
2. Deduction of R&F costs
With effect from 1 January 2018, the proposed amendment to the Income Tax Act changes the way of calculating the deduction of research and development costs, which increases the so-called super deduction of costs up to 100% of the research and development expenditure (costs) entered in the accounts.
The method of calculation itself has also been changed. For example, the wages of employees performing research and development work will no longer enter the calculation as a separate item and will instead represent part of the total costs relating to research and development. However, overall, the proposed changes will significantly increase the amount of fiscal support in the area of research and development.
3. Income tax exemption: Patent Box
Income tax exemption on licence fees relating to intangible assets – the so-called patent box
With effect from 1 January 2018, the amendment to the Income Tax Act currently in the legislative process will introduce a new tool aimed at supporting research and development – the so-called patent box.
This will take the form of a special tax regime under which it will be possible to exempt from income tax up to 50% of any revenues derived in the form of licence fees relating to the provision of intangible assets (e.g. inventions protected by patents, technical solutions protected by utility models, software, etc.). However, it will only be possible to apply the exemption during the period of tax depreciation pertaining to the capitalised costs relating to the development of the invention protected by patent, the technical solution protected by utility model or the software.
A separate tax regime will also be introduced for the commercial utilisation of so-called embedded royalties, i.e. inventions protected by patents or technical solutions protected by utility models used in product manufacturing. As a result, a part of any revenues derived from the sale of products manufactured based on an invention protected by patent or a technical solution protected by utility model will also be exempt from income tax.
These income tax exemptions are to be applied on the condition that the intellectual property in question is the result of the taxpayer’s own activities carried out within the territory of the Slovak Republic.
4. Planned income tax changes in Slovakia
Further important changes to the Income Tax Act with effect from 1 January 2018 currently under preparation include:
4.1 Businesses on digital platforms
An extension of the condition requiring creation of a permanent establishment to businesses operating via digital platforms. For that purpose, a definition of “digital platform” has been introduced to the amendment to the Act. The aim of this provision is to ensure that even entrepreneurs who provide services in the Slovak Republic without a physical presence still pay tax on income derived within the country, thus eliminating the discrepancy existing between the aforementioned entrepreneurs and those that duly pay tax on income derived within the territory of the Slovak Republic.
A modification of the necessary conditions relating to the creation of construction and installation permanent establishments, as a follow-up to the duties arising out of the Base Erosion and Profit Shifting project (known as the BEPS). The aim here is to prevent the intentional division of activities carried out by related taxpayers into several shorter-duration activities, none of which exceed six months.
The activities carried out by a taxpayer with limited tax liability and its related parties will be considered as one unit if the activities in question are related to each other and follow on from one another, i.e. when in assessing the creation of a construction permanent establishment, the entire period relating to the execution of the building, i.e. the construction itself and the various related installation projects, will be taken into account.
4.3 Dependent Agent
A more precise statement of the condition requiring the creation of a permanent establishment by a “dependent agent”, with the aim of preventing the abuse of commission contracts for the purpose of avoiding the need to create a permanent establishment, again as a follow-up to the BEPS project.
4.4 Tax on Profit Sharing
A more precise statement of the tax on profit sharing, liquidation balance sharing and the repayment of partners of general partnership and limited partners of limited partnership in cases where such income is earned because the general partnerships and limited partnerships hold a participating interest in another company or cooperative. As a result of using a different way of taxing general partnerships and limited partnerships, there is a risk that the above income earned by partners of general partnership and limited partners of limited partnership will be taxed at a rate of 19% or 25%. This would result in the unequal tax treatment of profit sharing paid out, for example, to partners in limited liability companies and partners in general partnerships. Therefore, the purpose of this regulation is to ensure the equal taxation of dividends at the level of partners of general partnership and limited partners of limited partnership, as is already the case for partners of limited liability companies or joint-stock companies.
5. Tax secrecy reform in Slovakia
The amendment to the Act on Tax Administration (Tax Procedure Code) with proposed effect from 1 January 2018 introduces, inter alia, the following changes:
- The so-called “Tax Reliability Index“ – an assessment of the reliability of a tax entity, allowing the entity in question to utilise special tax regimes (with advantages available within the framework of statutory duties for tax entities with the highest reliability)
- Publication, on a quarterly basis, by the Financial Directorate of the Slovak Republic, within the framework of the fight against tax evasion and tax secrecy reform, of a list of tax entities and their corporate income tax liability, including any additionally imposed tax or tax loss, as well as a list of tax entities and the amount of applied excess deduction or additionally applied excess deduction
- Various reforms to tax secrecy rules. For example, information as to whether a particular entity has been or is currently subject to a tax audit or tax execution procedure, and the date of registration for VAT or excise duties, or the type of registration, is no longer subject to tax secrecy.
- Reduction of the price for preparation of binding opinions by one half.
6. Planned amendments to the Act on Accounting Services
Under the draft amendment to the Act on Accounting Services, the period of storage pertaining to accounting documents has been extended from 5 to 10 years, thus harmonising the archiving period for financial statements with that of the background documents used in their preparation.
If the tax authority identifies repeated instances of administrative tort consisting in a failure to keep accounts, a failure to prepare financial statements, accounting out of account books, accounting in fictitious accounting cases, concealment and a failure to account on facts occurred, the tax authority can apply for cancellation of the trading licence.
The draft amendment also introduces the possibility of filing the financial statements of dissolved accounting entities with the Register of Financial Statements by their legal successors.
In order to simplify business within the European Union, the draft amendment stipulates that financial statements drawn up according to IAS/IFRS Standards can also be prepared by European companies and European cooperatives based in the Slovak Republic that prepared the financial statements in question before the relocation of their registered offices to the territory of the Slovak Republic. The draft amendment also states that European companies and European cooperatives will not need to reassess their pricing of assets and liabilities, including depreciation and adjusting entries.
If you have questions on the current tax changes and various new tax rules contact our local tax advisors in Slovkia . TPA offers a German Advisory Desk at every tax & audit office in 11 Eastern Europe Countries.
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