Eight major changes introduced by amendments to the Income Tax Act
Members of Parliament at their September meeting have approved an amendment to the Income Tax Act proposed by the Government, as well as two proposals by MPs, which introduce several interesting changes. The aim of the government’s amendment is to support small and medium-sized enterprises and the automotive industry in Slovakia, simplify tax calculation, reduce administrative burden, and last but not least, implement the EU directive for the prevention of tax avoidance with regard to hybrid mismatches (ATAD 2). The amendments proposed by MPs decrease the tax rate for small entrepreneurs and increase the personal tax allowance for individuals.
Amendments to the Act include the following major changes:
1. Tax loss amortization – the amendment to the Act extends the period for amortization of tax loss from the current four to five tax periods. The law amendment abolishes the condition of equal amortization and introduces a limit on the amortized loss to 50% of the reported tax base. This limitation will not apply to microtaxpayers (see definition below under 6.). The revised tax loss amortization provisions will apply to tax losses reported for tax periods beginning not earlier than 1 January 2020.
2. Cash basis items – as part of the measures aimed at reduction of the administrative burden for taxpayers, the provisions concerning items subject to the payment condition have also been modified. The amendment abolishes additional restrictions on tax deductibility, e.g. in case of intermediary fees the tax deductibility limit of 20% of the intermediated trade is abolished. At the same time, items that are part of the acquisition price of assets, or part of own costs, as well as expenses incurred for obtaining norms and certificates, are excluded from the payment condition. On the other hand, expenses on business management services or advisory services related to business management will be tax deductible only upon payment. Contractual penalties, late payment interest and penalties will be tax deductible again upon payment.
3. Hybrid mismatches – implementation of the EU directive for the prevention of tax avoidance with respect to hybrid mismatches introduces rules that prevent from benefiting from hybrids which arose as a result of a different tax treatment of financial instruments and/or taxpayers and which lead to decrease of tax liability.
Hybrid mismatches rules apply to situations that arose between the taxpayer (legal entity) and its related parties and include also unrelated parties that are part of a structured scheme, i.e. agreements that contain a hybrid mismatch.
A hybrid mismatch results mainly in deduction of an expense, cost or loss that has not been included in taxable income or revenues or in multiple deduction of expenses by several related parties. The respective legislative provisions further define tax base adjustments in case of such a hybrid mismatch.
4. Super-deduction of research and development costs – approved wording of the Income Tax Amendment increases tax benefit in case of R&D projects. Taxpayer carrying out R&D activities will be entitled to apply for 200 % deduction of R&D costs instead of currently applied 100%.
According to the transitional provisions, the R&D deduction will amount to 150% already for the calendar year 2019, or a tax year which began after 1 January 2019, and the final increase of R&D deduction to 200% will be applicable for 2020, or a tax year beginning after 1 January 2020.
The deduction period is also prolonged from four to five tax periods (in case the taxpayer cannot claim R&D deduction due to tax loss or insufficient tax base after tax loss carry forward).
5. Increase of the limit for tax prepayments – the Tax Act amendments increase the limit for tax prepayments from the current EUR 2,500 to EUR 5,000.
6. Taxation of microtaxpayers – to support small enterprises, the amendment defines the term microtaxpayer, defined as an individual or a legal entity whose income (revenues) does not exceed EUR 49,790 in the respective tax period, and complies with certain other conditions.
Taxpayers meeting this definition will benefit from several tax advantages, e.g.:
- Assets – in accordance with the approved wording of the amendment to the Income Tax Act, micro taxpayers will be able to depreciate the tangible assets (except buildings in tax depreciation groups 5 and 6) up to the time specified for individual tax depreciation groups. The amount of tax depreciation will therefore be at the discretion of the microtaxpayer, while the provision on the suspension of depreciation can not be applied. At the same time, the amendment abolishes the limitation of tax depreciation charges to the amount of accrued rental income for the asset provided for lease.
- Tax loss amortization – micro taxpayers will be able to continue to amortize the tax loss up to five years, while not being subject to the aforementioned limitation of the tax loss amortization up to 50% of the tax base.
- Provisions against receivables – creation of provisions against receivables that have been included in taxable income and where there is a risk that the debtor will not fully or partially pay them will be included in the tax base in accordance with the accounting principles.
The provisions concerning the microtaxpayers will enter into effect on 1 January 2021.
7. Reduction of tax rate – starting from the tax period beginning on 1 January 2020, the tax rate for legal entities and individual entrepreneurs, whose income (revenues) does not exceed EUR 100,000 per year, was reduced to 15%.
8. Increase of the personal tax allowance for individuals – starting from 2020 the personal tax allowance will be increased from 19.2 times to 21 times of the substinence minimum. This provision applies mostly to low- and middle-income earners.
The Amendment to the Income Tax Act also amends various provisions dealing with the personal income tax and employers’ obligations. We will cover further details in this respect in the following issue of our tax and legal news.
The approved amendments to the Income Tax Act have yet to be signed by the President of the Slovak Republic. We will keep you informed on further developments of the legislative process.