In research and development cost deduction, the costs covered by the public support may not be deducted. The Amendment allows the inclusion of wage costs which were supported by a contribution provided under the active labour market policy in connection with the declaration of the state of emergency and the mitigation of its consequences.  This procedure is a financial support provided under this type of measures as a flat-rate contribution per employee depending on the drop in revenues during the state of emergency (the so-called 3B measure). This is defined in Section 30c(5)(a) of the Income Tax Act. This procedure will be applies when submitting tax returns after 31 December 2020.

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Section 2(d) of the Income Tax Act defines a legal person to be a resident of Slovakia, provided that their registered office or place of effective management is located in the territory of the Slovak Republic. The term “registered office” is being supplemented by a reference to the Commercial Code and the “place of effective management” criterion is specified as well. Within the meaning of the Amendment, the place of effective management is considered to be a place where key management decisions and business decisions are made or taken for the legal person as a whole. This applies regardless of whether these decisions are taken by the bodies of a legal person or by other persons. Consequently, decisions for smaller organisational units of a legal entity, nor decisions of an administrative nature, are not considered to be key decisions for the legal entity as a whole. These provisions are particularly important for companies with an international ownership structure, especially those with holding companies abroad.

Changes in the application of a reduced tax rate of 15%

With effect from 1 January 2021, the 15% tax rate is retained only for taxpayers (legal or natural self-employed persons under Section 6(1) and (2)) whose taxable income does not exceed EUR 49,790 per tax year. This change also applies to entities with the status of a micro-taxpayer. For these purposes, only taxable income will be considered income. For the 2020 tax year, an income threshold of up to EUR 100,000 applies for the application of the 15% tax rate.

The exception for cross-border workers is repealed

The procedure is changing in regards to determining the tax residence of natural persons under Section 2(e) of the Income Tax Act who cross the border into the Slovak Republic on a daily basis for the purpose of performing a dependent activity and who would otherwise be tax residents of the Slovak Republic. From 1 January 2021, the tax residence of these natural persons is determined according to the delimitation criteria defined in the relevant double taxation avoidance agreement. A similar procedure will be followed when determining the tax residence of legal persons, i.e. the conflict of double residence shall be resolved in accordance with the provisions of the relevant double taxation avoidance agreement.

Exemption of benefits provided under the “First Aid” active labour policy

Benefits provided under the active labour policy for projects to support job retention during the declared state of emergency in connection with the spread of COVID-19 shall be exempt from taxation. This applies to income from the use of “First Aid” contributions intended to support employers during the pandemic. Similarly, the benefits provided by the Ministry of Culture to support artists shall be exempt from taxation. Following the exemption of this income, it will be necessary to exclude expenses incurred on income not included in the tax base from tax expenses.

Tax expenditure of micro-taxpayers claiming the depreciation of receivables

Under Section 20(23) of the Income Tax Act, micro-taxpayers will be able to issue a write-down of receivables that have been included in taxable income in accordance with accounting standards. The currently approved Section 19(2)(r) of the Income Tax Act provides that from 1 January 2021, it will be possible for micro-taxpayers to claim the depreciation of a receivable for tax expenditure up to the amount of a write-down.

The annual tax settlement may be made by any employer

From 2021 it will be possible to request the annual tax settlement of any employer who is a taxpayer and from whom the employee received income from dependent activity during the relevant tax year. Until now, only the last employer, with whom the employee claimed the non-taxable portion of the tax base for the taxpayer and the tax bonus, could make the annual tax settlement. The procedure for calculating the annual tax settlement is being specified as well.

Settlement of the differences between paid and due advances will not be carried out from 2021

If the submitted tax return resulted in higher income tax advances for the taxpayers under the Income Tax Act in effect until 31 December 2020, taxpayers were obliged to settle these tax advances by the end of the calendar month after the deadline for the tax return submission. These tax advances were to be paid by the beginning of the tax year in the amount calculated on the basis of their submitted tax return.

The amendment to the Act revokes the taxpayer’s obligation under Section 42(9) of the Income Tax Act to settle the difference in paid advances and payable advances from the beginning of the tax year to the end of the calendar month following the period for the tax return submission. Advances paid for the relevant tax year are offset against the tax due for the relevant tax year.

Repeal of the tax exemption of the 13th and 14th salaries

With effect from 1 January 2021, the income exemption provided to employees for work during summer holidays and the Christmas holidays, i.e. 13th and 14th salaries is repealed. This exemption could have been claimed for the last time for income paid to employees on the occasion of the Christmas holidays no later than 31 December 2020.

Gradual change in the amount of tax bonus (TB) for dependent children

Applicable until 30 June 2021:

Changes in effect from 1 July 2021

Abolition of the non-taxable portion of the tax base for thermal treatments

The non-taxable portion of the tax base for thermal treatments has been abolished from 2021. This non-taxable portion of the tax base could have been claimed for the last time for the 2020 tax year.

The definition of taxpayers from non-cooperating jurisdictions is specified

Starting in 2021, the Ministry of Finance of the Slovak Republic will exclude the following countries from the national list of cooperating jurisdictions, which is always published on 1 January of the relevant calendar year:

• countries that are on the EU list of non-cooperating jurisdictions for tax purposes published in the Official Journal of the EU, the so-called blacklist;
• countries that do not apply corporate income tax,
• countries that apply a corporate income tax rate of 0%.

If a non-cooperating jurisdiction is a contracting state of the Slovak Republic on the basis of a double taxation avoidance agreement, this state will not be included in the national list of cooperating jurisdictions. However, the aforementioned does not affect the application of the double taxation avoidance agreement in question.

Date of creation of a permanent establishment

Under the new wording of Section 49(8) of the Income Tax Act, if a foreign taxpayer (under Section 48(1)(a) of the Income Tax Act) becomes aware a permanent establishment was established in Slovakia in the previous tax year, they shall be liable to fulfil additional obligations relating to the employer who is a taxpayer in the territory of the Slovak Republic (i.e. payment of income tax from dependent activity, submission of reports, etc.). The foreign taxpayer shall submit a tax return by the end of the third month after becoming aware of this fact and shall pay the tax within the same period. The aforementioned shall apply to foreign taxpayers who employed employees with limited tax liability in the territory of the Slovak Republic. The creation of a permanent establishment is assessed from the date of commencement of the “on-site” activity, i.e. in the territory of the Slovak Republic, which results from contractual relations (e.g. commercial agreements).

Additional amendments in effect from 1 January 2021

• The preferential tax depreciation of buildings providing thermal treatments was abolished
• The preferential tax depreciation of corporate buildings was abolished
• The non-taxable portion of the personal income tax base was abolished, namely the payment for thermal treatments and related services up to the amount of EUR 50 per year

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The registration and notification obligation related to the tax registration of taxpayers – natural and legal persons – ex officio is changing. After the registration of a taxpayer (e.g. a company) in the Register of Legal Persons, the deadline for automatic tax registration performed by the tax administration is postponed to 1 January 2022. This fact is defined in Section 49a(1) of the Income Tax Act as well as in Section 52zzk(1) of the Income Tax Act.

Introduction of new rules regarding reverse hybrid mismatches – in effect from 1 January 2022

With the implementation of the Anti-Tax Avoidance Directive 2, new rules have been introduced on hybrid mismatches with the aim of preventing non-taxation of income which occurs with reverse hybrid entities. According to the Directive, an entity shall be deemed an independent taxpayer if the state where the entity was established will consider such an entity to be transparent and this perception will be shared by the country of the non-resident founder of the company. These rules apply to income that would otherwise not be taxed in either country.

From 1 January 2022, Section 17j containing a definition of the terms “transparent entity” and “reverse hybrid entity” is inserted into the Act. Within the meaning of this provision, a transparent entity refers to a public company or a general partnership with a registered office in the territory of the Slovak Republic, an entity with legal personality and an entity without legal personality, established or constituted in the territory of the Slovak Republic whose income (revenue) is taxed only at the level of partners or recipients of income (revenue) received from an entity with legal personality or recipients of income (revenue) received from an entity without legal personality.

In the case of a reverse hybrid entity, this is a situation where the same entity is deemed:

• from the point of view of the state of its establishment to be transparent – income is taxed at the level of the partner, and
• from the point of view of the state of its founder to be an independent tax entity (non-transparent) – income is taxed at the level of the company – which creates the risk of double non-taxation.

Under Section 17j of the Income Tax Act, income accruing to foreign (non-resident) partners who meet the condition of owning 50% or more of the shares in a transparent company will be taxed at the level of such transparent company with a corporate tax rate of 21%, provided that this income cannot be taxed through a permanent establishment, either in the State of residence of the relevant transparent company or abroad.

Following the new rules, a new notification obligation for foreign partners of transparent companies under Section 49a of the Income Tax Act is introduced from 1 January 2022. Foreign partners meeting the criteria for participation in the share capital, voting rights or those entitled to at least a 50% share in the profits shall be obliged to declare the status of a transparent company in order to be able to apply a proper taxation method.

Extension of CFC rules to natural persons – in effect from 1 January 2022

Rules regarding controlled foreign corporations (CFC rules) refer to measures intended to prevent diverting profits to tax havens.  With the Amendment to the Act, these rules also apply to natural persons as of 1 January 2022. These are most often shell companies established in countries with minimal or no tax burden whose activities affect Slovak natural persons. Income from these companies is not taxed in the territory of the Slovak Republic as dividends but it is taxed at the minimum tax rate or not at all.

A controlled foreign corporation (“CFC”) refers to a situation where:

• natural persons by themselves or together with dependent persons have a direct, indirect, or an indirect derived share in the capital, voting rights or are entitled to at least a 10% share in the profits, or have effective control over this company;
• a controlled foreign corporation is a taxpayer of a non-cooperating jurisdiction or is not a taxpayer of a non-cooperating jurisdiction but the effective taxation of income is less than 10%.

Effective taxation is calculated as the ratio of demonstrably paid tax of the CFC income and the economic outturn of the CFC.

The new Section 51h of the Income Tax Act sets the CFC rules for natural persons as a result of which the CFC’s profit shares (dividends) will be taxed at the moment of their potential claim by taxpayers (natural persons) and not when they are paid. Such assigned dividends that have not yet been paid are taxed through a special tax base with a 25% or 35% (CFC from a non-cooperating jurisdiction) tax rate. The situations of direct and indirect participation in the CFC, as well as the tax credit, are regulated separately.

The aforementioned procedure does not apply if:

• the total amount of income attributable from the CFC does not exceed EUR 100 000,
• the share in the foreign entity is included in the corporate tax base (if, for example, a Slovak natural person is a person dependent on a Slovak legal person, where both own a share in the CFC),

the CFC is a taxpayer from an EU Member State or from a country that is a contracting party to the EEA (European Economic Area) Agreement and the taxpayer can prove that the company’s income actually resulted from the business activities in said country and the taxpayer can support the statement by the real existence of the company premises, the employee’s activities, material equipment, etc. This exemption does not apply to CFCs from a non-cooperating

Announcement of the amount and maturity of income tax advances in effect from 1 January 2022

From 2022, the tax administrator will inform all taxpayers who have submitted their income tax returns of the amount and maturity of income tax advances no later than 5 days prior to the due date of advances (Section 42(13) of the Income Tax Act).

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Recognition of Tax Expenditure Incurred for COVID‑19 Testing

Under Section 24ab of the draft Act, tax expenditures shall be considered to be expenditures (expenses) of the employers or taxpayers with income earned from business or other self-employment activities that they incurred as a result of the COVID‑19 testing.

Tax expenditures shall be considered expenses for testing incurred:

a) by the employer as a result of the testing of employees, including close persons living with such employees in the same household,
b) as a result of the testing of sole proprietors, including close persons living with the taxpayers in the same household,
c) by the taxpayers as a result of the testing of natural persons who carry out professional activities for the taxpayers in the place of their business (e.g. employees of an external company who carry out logistics activities, service activities, cleaning activities in the form of service provision).

The aforementioned shall apply to the entire pandemic period, i.e. also retroactively for the 2020 tax year.

In the case of testing employees and their close persons, the non-monetary benefits provided in this way shall not be subject to employee tax during the pandemic period.

If the employer has already performed the annual clearance of advances from income from employment for the 2020 tax year or has already issued a proof of taxable income for 2020, the employer may issue a corrective annual clearance of advances or a corrective proof of taxable income for 2020.

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Under §22 (1) of the Act, a special deadline for filing corporate income tax returns for 2019 was introduced (the period expired or was scheduled to expire during the pandemic), specifically until the end of the calendar month following the end of the pandemic period. By the same deadline, the taxpayer must pay any income tax due for the 2019 tax period.

This change in the deadline for filing a 2019 tax return also affects advance payments.

In accordance with §42 (7) of the Income Tax Act, a taxpayer pays advance corporate income tax payments until the deadline for filing the tax return for the previous tax period based on its tax obligation as reported on the tax return for the previous tax period, which in this case is the 2018 tax return.

Therefore, taxpayers whose deadline for filing a corporate income tax return expires during the pandemic (any time after 12 March 2020) shall pay advance payments based on their 2018 tax obligation until the end of the calendar month following the end of the pandemic. The above applies to taxpayers who filed their tax return in the period specified under the Income Tax Act, i.e. by 31 March.

Please note that any delay in payment of advance corporate income tax payments during the pandemic shall be subject to default interest pursuant to §156 of the Tax Code.

The government approved an amendment of Act No. 67/2020 Coll. on 16 April 2020 (the law took effect on the date of its publication in the Collection of Acts). Via this amendment, advance income tax payments for the period in which a taxpayer is obliged to pay such advance income tax payments due during the pandemic are not paid for the period immediately following a period in which the taxpayer’s revenues decreased by at least 40% compared to the same period in the previous calendar year. Non-payment of advance payments is applied by submitting a statement stating the taxpayer fulfils the specified conditions at least 15 days in advance of the end of the payment term for such advance income tax payment.

Please feel free to contact us at any time about this issue.

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1. The lower threshold for paying quarterly advance tax payments rose from €2,500 to €5,000.

2. All calculations are rounded to two mathematical decimal places effective 1 January 2020.

3. A change was made to the procedure for calculating advance tax payments following the changes made in §42 (6) and (7) of the Income Tax Act:

“Tax for the previous tax year is understood as the tax calculated from the tax base less the deductible tax loss specified in the tax return for the tax year immediately preceding the tax year for which advance tax payments are made, while applying the tax rate pursuant to §15 of the Income Tax Act as specified in the tax return filed for the tax period immediately preceding the tax year for which advance tax payments are made reduced by any tax relief specified hereunder” (§42 (6) of the Income Tax Act).   

Effective 1 January 2020, the calculation of advance tax payments until the filing of the tax return uses the tax rate valid in the tax year immediately preceding the tax year for which advance tax payments are made (until 31 December 2019, the tax rate valid in the tax year in which the advance payments were actually paid was used).  As of 1 January 2020, tax is only reduced by the tax relief provided under the Income Tax Act, while until 31 December 2019, the tax was reduced by other items: a set-off for taxes paid abroad and withholding tax (§43 of the Income Tax Act”) were considered advance payments.

the payment of advance tax payments is laid down in §42 of the Income Tax Act:

• by the tax return filing deadline, in which the tax for the previous tax year will be specified based on the last known tax obligation and
• after the tax return filing deadline based on the tax for the previous tax year.

The payment of advance tax payments until the tax return filing deadline (from 1 January 2020 to 31 March 2020) or an extension to the 2019 tax year is based on the last known tax obligation as specified in the tax return for the 2018 tax year, which effective 1 January 2020 is calculated as follows:

row 1110 = (row 500 × 21%) – row 610 of the tax return for the 2018 tax year

Attention! Taxpayers may not use the tax paid in row 1110 of the 2018 tax return to define the amount of advance tax payments until the filing of the tax return as this amount was calculated under §42 of the Income Tax Act valid until 31 December 2019 as follows: (row 500 x 21%) – (row 610 + row 710 + row 1030). Advance tax payments were also rounded down to the nearest cent.

Advance tax payments in the 2020 tax year due after the 2019 tax return filing deadline, meaning after 31 March 2020, are calculated using the tax from the preceding tax year as follows:

row 1110 = (row 500 × 21%) – row 610 of the tax return for the 2019 tax year

4. Effective 1 January 2020, the amount of advance payments for newly established taxpayers shall be settled by the end of the calendar month following the tax return filing deadline (until 31 March 2019, all such entities were obliged to settle their advance payments by the tax return filing deadline.
5. Under the transitional provisions of §52 zza (21) of the Income Tax Act, these changes are applicable to the payment of advance tax payments effective 1 January 2020.

The methodology instruction for payment of advance corporate income tax payments (in Slovak only) is available at:

https://www.financnasprava.sk//_img/pfsedit/Dokumenty_PFS/Zverejnovanie_dok/Dane/Metodicke_pokyny/Priame_dane_uct/2019/2019.12.03_24_DZPaU_2019_MP.pdf

Advance personal income tax payments – entrepreneurs

The advance tax payment limit for trade license holders increased to €5,000 while the calculation of the advance tax payments under the regulations in force until 31 December 2019 is applicable until the beginning of the advance tax period in 2020 (i.e. until 31 March 2020). This means that the changes regarding the calculation of advance tax payments effective 1 January 2020 are enforced after the tax return filing deadline.

Under the new regulations,  the last known tax obligation for calculating the advance tax payments is understood as the tax calculated  from the partial tax base determined from income pursuant to §6 (1) and (2) less the deductible tax loss reported on the most recent tax return. The tax rate of  19% is always used to calculate advance tax payments.

Last known tax obligation = (Tax base _{§6 (1) and (2)} – Deductible tax loss) × 19%

Effective 1 January 2020 (given the changes implemented in Act No. 301/2019 Coll.), the amount of the last known tax obligation does not influence the structure of the taxpayer’s tax base.

Income from gainful activities under §5 of the Income Tax Act, rental income under §6 (3) of the Income Tax Act and income from the use of works and artistic performances under §6 (4) of the Income Tax Act are eliminated from the calculation effective 1 January 2020. The amount of the last known tax obligation will no longer include the amount of the deduction recognised under §11 (2) of the Income Tax Act or the tax bonus for a dependent child or children under §33 of the Income Tax Act. In calculating the last known tax obligation, the progressive rate valid in the tax year in which the advance tax payments are made is not applied.

Last known tax obligation (until 31 March 2020) = [Tax base _§5 + (Tax base_{§6 (1) and (2)} – deductible tax loss) + Tax base _{§6 (3) and (4)}] × Tax rate

The methodology instruction for payment of advance personal income tax payments from the beginning of the advance payment period in 2020 (in Slovak only) is available at:

https://www.financnasprava.sk//_img/pfsedit/Dokumenty_PFS/Zverejnovanie_dok/Dane/Metodicke_pokyny/Priame_dane_uct/2019/2019.12.02_23_DZPaU_2019_MP.pdf

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