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Changes introduced by the amendment to the Income Tax Act from 2023 and 2024 from corporate income tax point of view

On 6 December 2022, the National Council of the Slovak Republic approved amendment to Act No. 595/2003 Coll. on Income Tax as amended (“Income Tax Act”), which brings several changes especially in area of transfer pricing and efforts against aggressive tax planning. The effective date of most provisions is from 1 January 2023. The new rule on limitation of interest costs will be effective from 1 January 2024.

Below is an overview of major changes from the transfer pricing point of view:

  1. Addition to the definition of economic interrelation of close persons (e.g. husband, wife). For the purpose of calculating the direct share, indirect share or indirect derived share, the shares of close persons are counted and if the sum is at least 25%, the relevant persons or entities are considered to be economically interrelated.
  2. Specific definition of a significant controlled transaction (a value exceeding EUR 10,000 or a loan with a principal of over EUR 50,000). The intention is to reduce the administrative burden of small businesses engaged in low-value transactions. Transfer pricing rules will not apply to insignificant transactions. Please note that this is not a change in the definition of significance which is applied by the Guidelines of the Ministry of Finance of the Slovak Republic for determining the scope of the documentation obligation.
  3. The possibility to submit transfer pricing documentation by taxpayer in a foreign language without a need to request the official approval in advance. However, the Tax Authorities may still subsequently request the translation of the documentation into the official language.
  4. The use of the median (middle value) of determined independent comparable values for the purpose of adjusting the tax base, if the prices used in the controlled transactions are not in accordance with the arm’s length principle. At the same time, there is a possibility for the taxpayer to demonstrate during the tax audit that it is more appropriate to use another value within the range of independent comparable values (i.e. other than the median) for the purpose of adjusting the tax base.
  5. Addition of the reference to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. However, the Guidelines are already considered an interpretative tool in the application of transfer pricing rules in practice in terms of international treaties to which the Slovak Republic is bound.

Effective from 1 January 2024, the new rule on limitation of interest costs for legal entities, which implements the EU ATAD directive is introduced. The aim is to limit net interest costs and prevent from an artificial reduction of the corporate income tax base through debt financing (with respect to the tax deductibility of interest Slovakia uses the transitional period until 31 December 2023). The new rule applies to all legal entities (residents and non-residents), related and unrelated entities, except for the financial institutions defined in the amendment, debtors whose related parties are only individuals and those taxpayers, whose net interest costs in a given year do not exceed EUR 3 million. Net interest costs exceeding 30% of the so-called tax EBITDA represent tax base increasing item. The amended wording of the Income Tax Act allows transfer of unused interest capacity to the following tax periods considering the stated limit of 30% of tax EBITDA. The new rule on limitation of net interest costs will be applied preferentially over the thin capitalization rules in the meaning of Section 21a, which will also remain in force.  

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