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Proposed changes to the Income Tax Act

At the September’s meeting of the National Council of the Slovak Republic, the amendment to the Income Tax Act and the Tax Code was discussed in the first reading. It brings several significant changes, especially in the area of transfer pricing. A new rule about limitation of interest costs is also introduced as a part of the mandatory implementation of the Anti-Tax Avoidance Directive (ATAD).

The most important changes include the following:

  • Clarification and more precise definition of foreign related parties, controlled transactions and significant controlled transactions;
  • Amendment to the rules for determination the tax base of a nonresident’s permanent establishment in accordance with the OECD methodology.
  • Usage of median (middle value) for the purpose of adjusting the taxpayer’s tax base if the prices used in the controlled transactions are not in accordance with the arm’s length principle and are not in the interval of values of independent parties. This would not apply if a taxpayer proves that considering given conditions there is other more suitable value within the interval of independent values.
  • 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 should apply to all legal entities (residents and nonresidents), 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 would represent tax base increasing item. The proposed wording allows transfer of unused interest capacity to the following tax periods considering the stated limit of 30% of tax EBITDA.
  • A direct reference to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which is considered as important source for the application of transfer pricing rules in practice would be added to the Income Tax Act.
  • Possibility to submit transfer pricing documentation also in other than official language (Tax Authorities may, if necessary, request the Slovak version within 15 days of receiving the request).

Expected effective date of the amendment is 1 January 2023 except for the provision on limitation of interest costs which should become effective as of 1 January 2024.

We will monitor the development of the legislative process and keep you updated.

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