The latest Amendment to the Income Tax Act introduced several substantial changes in transfer pricing area in Slovakia. The most of changes have come into effect from 1 January 2023. In addition, the Slovak Ministry of Finance announced updated guidelines defining the contents of transfer pricing documentation.
The changes which will start to apply from 1 January 2023 are as follows:
- New definition of a significant controlled transaction that is considered as significant only if related taxable income or tax-deductible expense exceeds EUR 10,000. This stipulation aims to introduce a „safe harbour” and reduce the administrative burden for taxpayers for low-value transactions. The tax authorities will not review compliance with the arm’s length principle in the case of non-significant transactions.
- The use of the median (middle value) by tax authority when the price or rather profitability is not evidently in line with the arm’s length principle. However, if the taxpayer, during the tax audit, will support the appropriateness of the use of another value within the range of the independent values with evidence (i.e. other than the median), the tax base will be adjusted according to this value. This provision will clarify an ambiguity regarding the procedure of the tax authorities when determining market prices and profitability values.
- Addition to the definition of the economic interrelation of close persons (according to the Slovak Civil Code´s definition such as a relative in a direct line, sibling, husband/wife, etc.). The shares of close persons will be counted for the purposes of calculating the direct share, indirect share, or indirect derived share. If the sum of shares is at least 25%, the relevant persons or entities are considered related persons.
- The OECD Transfer Pricing Guidelines (“OECD Guidelines”) have been introduced into the Slovak legislation by adding a reference to them in the Income Tax Act. OECD Guidelines were generally used so far as an interpretive guide for the area of transfer pricing but decisions of Slovak courts have challenged their effect and the use of the Guidelines as a source of Slovak law. The provision improves legal certainty in this issue.
- The bilateral and multilateral Advance Pricing Agreement (APA) may be issued with effect for more than 5 tax periods if the relevant authorities of contracting states have agreed on a longer period.
- Taxpayers can submit transfer pricing documentation in any foreign language without a need to request official approval in advance. However, the tax authorities may request to submit documentation in the Slovak language within 15 days.
- The amendment changes the rules for determining the tax base of a Slovak non-resident’s Permanent Establishment in Slovakia. The aim is to harmonize the Slovak Income Tax Act with the OECD approach, in particular in assessing costs demonstrably incurred for a PE by its founder. Foreign taxpayers doing business in Slovakia through PE are allowed to assess the tax base as the difference between the income and expenses attributable to the permanent establishment, not at the cash-flow basis.
Updated Guidelines on the contents of the documentation
The Slovak Ministry of Finance announced new guidelines defining the contents and scopes of transfer pricing documentation. The main change is the incorporation of the concept of a significant controlled transaction (following the amendment to the Income Tax Act) into Guidelines. This change will reduce significantly the number of taxpayers required to prepare and keep transfer pricing documentation in shortened simplified form.
In simple terms, the taxpayer will not be obliged to prepare transfer documentation for relevant insignificant transactions (less than EUR 10,000) in sense of the new definition of significance.
According to the updated Guidelines, taxpayers are not even required to prepare and keep documentation in shortened simplified form if transactions cannot be considered as significant in sense of definition of materiality according to the Accounting Act in the and meantime one of the conditions should be met in a given tax period as follows:
a) taxpayer did not report a tax loss in financial year;
b) did not apply the tax loss deduction or
c) applied the specific tax rate of 15% (taxpayers whose turnover for a maximum of 12 previous consecutive calendar months did not reach EUR 49,790)
However, increased documentation requirements and the obligation to keep documentation even for insignificant transactions should be applied in cases where, for example, the taxpayer applies for APA, obtains tax relief or perform transactions with non-cooperative jurisdictions.
Reporting documentation obligation for such a controlled transaction will be fulfilled by a properly completed income tax return for the relevant tax period.
These Guidelines have effect for tax periods beginning on 31 December 2022 and subsequently.