Recent Developments in Slovak Tax Law
1. Modification of investment tax relief
Corporate income tax relief was introduced in 2008 and since then it has become the most popular form of state aid granted by the Slovak government. However, only a certain portion of the tax base reported in the tax return could be exempt from taxation. In other words, to calculate the tax relief the overall tax base for one tax period needs to be multiplied by a coefficient. Until the end of July 2011, the coefficient was calculated separately for each tax relief period as follows:
Value of investment for which the aid is granted (eligible costs)1
Coefficient = ———————————————————————————————
Equity2 + Value of investment for which the aid is granted
(1) But not higher than the total amount of fixed assets acquired after the investment incentives were granted by the Government, and not later than the end of the year for which the tax relief is claimed.
(2) As of the year-end in which the eligibility for the provision of aid was confirmed.
The recently adopted amendment to the rules for the provision of investment aid for regional development as a form of state aid resulted in an amendment to corporate income tax legislation.
Without a doubt, the greatest advantage regarding tax relief will be the extension of the period for the application of tax relief from 5 to 10 years. The first tax period for which the tax relief may be claimed is the tax period in which the decision on the approval of the aid was issued and in which the taxpayer fulfilled all of the other conditions stipulated in the Act on Investment Aid. However, the first tax period may be no later than the tax period in which three years will have elapsed since the date of the decision on approval.
The obligation to deduct cumulated tax losses and other tax deductible items to the maximum extent before drawing tax relief will be preserved. Under certain circumstances, these changes could also affect those investors who were granted aid before this amendment became effective.
As regards the calculation of the annual portion of tax relief, investors will be able to choose between two options: (i) the currently effective complicated calculation of tax relief by means of eligible costs and equity (see above), or (ii) a simple 80% flat reduction of the income tax base. This change will only apply to aid approved after August 1, 2011. Further, the investor must use the same option during the entire period in which tax relief is drawn.
The amendment also toughens the granting of such aid and thus the tax periods in which the tax relief is claimed will be subject to a mandatory tax inspection by a tax administrator.
Although the new rules have been adopted, the future of tax relief remains uncertain. Compared to last year, there was a significant drop in the number of projects receiving tax relief or investment aid as a whole (possibly due to other priorities of the Government). According to the latest statements of the minister of economy, in the upcoming years selective investment aid should be continuously replaced by improvements in the business environment for everyone.
Therefore, it can be assumed that investment aid would only be approved in the form of tax relief and only with regard to especially justified cases.
2. Project Unitas
One of priorities of the Slovak Government is the ongoing reform of tax and customs administration so that these activities will be performed by a single state institution. As a result, the Ministry of Finance has prepared strategic documentation related to this goal – it is called the UNITAS program (Latin for “Unity”). Due to the complicated system for the collection of taxes, customs duties and insurance contributions, the changes are expected to be implemented in several steps.
Such reform is necessary because the current tax system in Slovakia is complicated and thus prone to abuse. Furthermore, regular tax compliance often involves duplicate and burdensome administration. According to reports of certain international institutions, the current system does not sufficiently fight against the biggest macroeconomic issue – unemployment, as it substantially differentiates (in terms of social security costs) between regular employees, occasional “employees” with concluded working agreements and sole traders.
As a result, the following technical changes to the Slovak tax system will be made:
- Apart from injury insurance, the employer will no longer be obliged to pay any payroll taxes for employees. However, the employer will be obliged to calculate and deduct payroll taxes on behalf of employee
- The current payroll taxes will be merged. The unified base for calculating payroll taxes and personal income tax will be a super gross wage that includes the gross wage and the contributions currently paid by the employer for the employee. Instead of the current 8 payroll tax levies, there should remain only two: (i) health insurance and (ii) social insurance. Both levies will be capped – in 2012; the proposed annual caps are EUR 4,247 for health insurance and EUR 8,966 for social insurance. In addition (iii) personal income tax is still being assessed. It is expected that all payments could be reconciled annually in one income and payroll tax reconciliation
- The rates introduced for health and unified social insurance payroll tax levies continue to differentiate between selected groups of workers; but the differences are notably lower than currently.
- In general, payroll taxes will only be paid from active income (employment and business income). Dividends are the only exception – they will be subject to both social security and health insurance tax, subject to the applicable caps.
- Personal income taxation will remain at the current 19% flat level. The calculation of personal allowances will be changed. The individual allowance will be slightly reduced and the spouse allowance will be limited to spouses taking care of a child. The progressive reduction of both personal allowances (the “millionaire tax”) will be abolished – thus, personal allowances will be equal for each tax payer. In order to keep the payroll tax base unified for the purposes of social security, health insurance and personal income tax, payroll taxes will not be deductible for personal income tax purposes.
- The most significant change with respect to sole-traders not registered for VAT is the drastic cut in the current flat expenditure allowance at the level of 40% of the business income to the life subsistence level (roughly EUR 200 per month). On the other hand, sole-traders should be allowed to depreciate/amortize acquired non-current assets for tax purposes at their sole discretion (e.g., in one tax period).
However, the legislative procedure with respect to particular amendments of the particular tax laws has only been begun. In addition to approval by the Slovak Government, each amendment must be approved by the Slovak Parliament (changes may be proposed during the adoption procedure) and signed by the President. According to the latest news, it seems that certain coalition MPs do not agree with the draft concept of payroll and personal tax reform prepared by the Government because it would negatively impact a large group of people, mainly sole-traders. The Ministry of Finance, which is responsible for this document, has indicated its willingness to negotiate changes. Thus it is probable that the some of the announced changes will be slightly amended.
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The Bratislava office of White & Case, established in 1997, is perennially acknowledged by the independent benchmarking publications as one of the leading international law firms in the Slovak Republic. It offers multi-jurisdictional advice and provides legal services to major domestic and international corporations. Our 17 lawyers and tax advisors have acted as advisors on some of the largest corporate and commercial, financial and real estate projects, in addition to arbitration and litigation and tax matters in the Slovak Republic Matej Firický, an associate in the Bratislava Office of White & Case, is a lawyer and an accountant. He is a member of the Slovak Bar Association and has an ACCA (Association of Chartered Certified Accountants) Diploma in International Financial Reporting. He regularly provides tax advisory services to multinational clients. His work in the field of direct taxation involves tax advisory services to non-residents working in Slovakia, as well as ad-hoc advisory services to various domestic and international non-financial companies on issues concerning corporate taxation.
He has also been involved in audits of domestic and foreign companies and has acquired considerable experience in due diligence investigations and in representing clients in tax inspections. At present, he is also engaged in structuring, restructuring (mergers, acquisitions, de-mergers) and tax optimization projects for international companies active in Slovakia. Mr. Firicky can be contacted on +421 2 5444 5100 or by email at firstname.lastname@example.org