legislative changes income tax

Legislative changes from January 1, 2023 - Income Tax Act

legislative changes income tax

The amendment to the Income Tax Act adopted on December 6, 2022 introduces changes mainly in the area of transfer pricing and in the area that shall fight against aggressive tax planning.

The most significant changes in the area of transfer pricing are below:

  • Refinement of the term economic connection

Based on the amended wording, when calculating the direct share, indirect share or indirect derived share, the shares of “related” persons will be counted and if their sum is at least 25%, the relevant persons or entities will be considered economically connected.

  • A precise definition of a significant controlled transaction

The purpose of a more precise definition of a significant controlled transaction is to reduce the administrative burden on small companies. According to the new definition, a significant transaction is considered a transaction with a value of EUR 10,000 or more (in the case of loans, EUR 50,000 principal).

Transfer pricing rules will not apply to insignificant transactions. However, it should be noted that this is not a change in the definition of significance with which the Ministry of Finance SR works in the Guidelines for determining the scope of the documentation obligation.

  • Possibility to submit documentation in a foreign language

The amendment to the law makes it possible to submit transfer documentation to the tax administrator in a foreign language. Until now, it was necessary to apply for this exemption to the taxadministrator in advance. At the same time, the tax administrator still has the option of asking the taxpayer to submit documentation in the Slovak language.

  • Bindingness of the OECD Transfer Pricing Directive

The amendment makes a direct reference to the methodology of the OECD Transfer Pricing Directive for multinational companies and tax administration, which is generally considered an interpretative tool. Adding the appeal to the law increases legal certainty in its application and in tax audits.

In case of detection of inconsistencies with the arm´s length principle, during the tax audit, the tax administrator will charge the difference to the taxpayer up to the median value. Until now, the value at which the tax administrator shall calculate the difference has not been precisely defined.

In order to limit aggressive tax planning through debt financing, a new article 17k is introduced, which is effective from January 1, 2024. The obligation to implement this change follows from the EU ATAD directive, which gradually introduces several rules against artificial reduction of the tax base. The new rule introduces a limit for the tax recognition of net interest costs of EUR 3,000,000. Net interest expense is considered to be the difference between interest expense and interest income. In contrast to article 1a, interest on the acquisition of property is also included in the amount of interest.

In case of exceeding the limit of EUR 3,000,000, the company will have the obligation to increase the tax base by the amount of interest exceeding 30% of the EBITDA value. The new rule on the limitation of net interest costs will be applied in preference to the rules of low capitalization in accordance with article 21a, which remains in force.