January 2017 - The Slovak Government and Parliament made several changes to the tax system with effect from 1 January 2017. The recently adopted amendments concern – among others – corporate and personal income tax, value added tax, special levy in regulated industries, as well as social security and health insurance contributions. Here is a preview of what we can expect in 2017.
The corporate tax rate will drop one percent, from 22% to 21%, for fiscal years starting on or after 1 January 2017. Companies may therefore reduce their tax advances payable from 1 January 2017 to the level corresponding to the new 21% rate.
The promised abolishment of so-called ‘tax licences’ (i.e. the minimum tax payable even if a company declares zero profit or loss) was postponed to 1 January 2018.
Personal income tax
Personal tax rates remain unchanged. However, there is a reduction of the tax burden of some self-employed entrepreneurs by means of an increase of the lump-sum amount of expenses that can be deducted from taxable income without the need to document them (from 40 to 60%, subject to a maximum of EUR 20,000).
Taxation of dividends changes significantly as of 1 January 2017, but the changes only apply to profits generated after that date. Thus, dividends paid out of profits generated in prior fiscal years will continue to be subject to the old regime, even if paid to shareholders after 1 January.
The new regime abolishes the 14% health insurance contribution on dividends received by individuals. Instead, the following tax rates will apply:
- No tax: dividends paid/received by legal entities resident in Slovakia or in a treaty state;
- 35% tax: dividends paid to legal entities or individuals resident in a non-treaty state or dividends received by Slovak residents from a legal entity in a non-treaty state;
- 7%: dividends paid to individuals resident in Slovakia or in a treaty state or dividends received by individuals resident in Slovakia from a treaty state.
‘Treaty states’ are listed on the Ministry of Finance website, namely states that have signed a double taxation treaty or similar with the Slovak Republic.
Dividends paid out of profits generated before 1 January will remain subject to the old regimes:
- 2004-2010: dividends not subject to any tax or health insurance contributions;
- 2011-2012: dividends received by individuals subject to health insurance contribution at the rate of 10% and limited by caps applicable in the year when the dividends are received;
- 2013-2016: dividends received by individuals subject to health insurance contribution at the rate of 14% and limited by caps applicable in the year when the dividends are received;
Social security and health insurance
The cap on social security contribution is increased from five to seven times the country’s average wage.
The cap on health insurance contribution is removed. Employees and self-employed entrepreneurs will therefore be subject to the mandatory 14% health insurance contribution on their total income. The cap will remain for dividend payments (60 times the country’s average wage).
These increases will have a negative impact on labour costs of employees whose average income far exceeds the average wage.
The amendments broaden the definition of ‘related parties’, which now includes parties controlled by the same persons or their ‘close persons’ under the Slovak Civil Code (e.g. family members). To further clarify terminology, the notion of “controlled transaction” was introduced, which refers to legal or similar relationship between two or more related persons (but excludes non-commercial real estate lease).
The amendments also include more formal rules for the approval of transfer pricing methods by the tax authority, as well as fixed fees, which replace the previous variable one (EUR 10,000 for a simple approval and EUR 30,000 if based on the application of a double taxation treaty).
Fines for breach of transfer pricing rules are now double the standard fines under the Tax Code, unless the taxpayer does not contest the tax authority’s decision, in which case the standard fine applies.
Value Added Tax
The introduction of reverse charge on VAT for imported goods – which would greatly simplify the process – was deferred and made subject to a pre-defined level of public budget deficit, which means it will likely not come into effect before 2020.
As a result of several Court of Justice’s judgements in relation to the application of Article 183 of the VAT Directive, the Slovak VAT Act now includes rules on interest applicable to excess VAT deductions belatedly refunded by the state. The tax authority will have to pay interest at twice the European Central Bank base rate (but not less than 1.5% p.a.) on excess VAT deductions withheld for more than 6 months without good reason.
Special levy on businesses in regulated industries
The rate of the special levy on businesses in regulated industries (energy, telecoms, public health insurance, etc.) doubles as of 1 January, to 0.726%. This rate should be lowered to 0.545% in 2019 and to 0.363% in 2021.
Consequently, as of 1 January 2017, a regulated entity with trading income exceeding EUR 3,000,000 will pay a levy calculated as follows: trading income X a ‘coefficient’ (i.e. proportion of regulated activities) X the levy rate. The levy is not paid unless it exceeds EUR 1,000 in the relevant month.
Under the previous law, a regulated entity had to pay the levy only if its turnover from regulated activities was at least 50% of its total turnover. In addition, the levy was paid on trading income above EUR 3,000,000 and was calculated by reference to all trading income rather than a coefficient.
As of 1 January the monthly minimum wage is increased from EUR 405 to EUR 435, i.e. EUR 2.5 per hour.