Income Tax Act Amendment contains several changes

A draft amendment to Act No. 595/2003 Coll. on Income Tax as amended (hereinafter “the SITA”), prepared by The Ministry of Finance of the Slovak Republic, should enter into force as of 1 January 2018 upon approval of the Parliament and signature of the President. The draft amendment is rather extensive and introduces several new provisions also in connection with the implementation of the EU Council Directive of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (ATAD Directive). Please find below an overview of the main proposed changes:

• When buying residential property, young people aged from 18 to 35 will be entitled to apply for a tax bonus for paid mortgages interest of 50% of the interest paid in the respective tax period, however up to €400 per year. The tax bonus is calculated from the amount of the mortgage up to €50,000 per property. The tax bonus will be applicable to a taxpayer whose average monthly income for the previous year did not exceed the amount of 1.3 times the average monthly salary of an employee published by the Statistical Office of the Slovak Republic. The tax bonus can be claimed during five consecutive years starting form a month when the mortgage interest began. 
• A new tax allowance on expenses paid in spa facilities is introduced in order to support development of the Slovak spa industry. Tax allowance in the amount of up to €50 will be applicable for provably paid expenses on food, accommodation and spa treatments which are not reimbursed from the compulsory health insurance. A taxpayer will also be entitled to claim the allowance for his/her spouse or dependent child. 
• So called Patent boxes are introduced as a new provision with the intent to support industrial R&D. Income for the use or the right to use of granted and registered patents, utility models and software created by the taxpayer (not purchased) will be partially exempted from a tax. The exemption will also be applicable to income generated by sale of products manufactured using a registered patent or a technical design protected by a utility model.
• If a taxpayer decides to transfer assets or business activities abroad, an obligation to tax the economic value of all capital gains generated in Slovakia will arise (so called Exit tax) despite the fact that the profit has not been realised at the time of exit. The exit tax will be reported within a special/partial tax base and taxed at a rate of 21%. Assets transferred outside the territory of Slovakia will be subject to tax even if no sale/change of the legal ownership arises, as long as the Slovak Republic loses its right to tax this income due to transfer of the property. It will be possible to pay the exit tax also in instalments within the period of 5 years provided that the assets are transferred to a country which enables effective collection of receivables, e.g. when the assets, tax residence or business activity are transferred, for example, to an EU Member State. Otherwise the exit tax is payable within the deadline for filing of the tax return. 
• The Government introduces rules for controlled foreign companies (CFC) which should be effective as of 1 January 2019. A controlled foreign company is a company which is registered and conducts business in a different jurisdiction than the residency of the controlling owner. A non-resident company will be treated as a CFC if it is controlled by a Slovak resident himself or jointly with his related parties by direct or indirect share participation in the share capital or voting rights at least 50% or at least 50% profit share, and the corporate income tax of CFC paid abroad is lower than 50% of the Slovak tax. In such a case the corporate income tax base of CFC should be included into the corporate income tax base of its Slovak controlling company, taxed in accordance with the Slovak tax legislation and the respective part of the foreign tax paid can be credited against the final tax liability. 
• It is proposed that within business combinations of domestic companies it will be possible to perform contributions in-kind, mergers, amalgamations or demergers of companies in principle only at fair values for tax purposes. The proposed Amendment to the SITA enables to apply tax regime of historic values only for certain cross-border transactions upon specific conditions.

We will keep you updated on further development of this legislation.