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The Value Added Tax (VAT) Act will be subject to several major amendments from 2025. These upcoming changes to the VAT Act in Slovakia are part of several government amendments of the VAT Act. Below, we’ve summarized all the changes that VAT payers will need to prepare for from 2025.
The consolidation package, approved under an abbreviated procedure, makes only major changes in the wording of the VAT Act. However, because the changes include changes to the current VAT rates, they are crucial for all business owners.
In Slovakia, two reduced VAT rates of 5% and 10% are in effect until the end of 2024. From 1 January 2025, the standard VAT rate will increase to 23%, with reduced rates set at 5% and 19%. Below is a table outlining the changes to tax rates.
| Rate type | Goods/Services | Until 31.12.2024 | From 1.1.2025 |
| Standard rate | All taxable goods and services, not exempt nor subject to reduced VAT rates | 20% | 23% |
| Reduced rate 1 | All foods not subject to the 5% reduced rate | 20% | 19% |
| Electricity supply | 20% | 19% | |
| Restaurant services related to the serving of non-alcoholic beverages | 10% | 19% | |
| Reduced rate 2 | Selected foods (fresh meat, fish, bread, milk, milk products, vegetables, selected fruits, and others) | 10% | 5% |
| Medications and medical devices | 10% | 5% | |
| Books (including electronic books) | 10% / 20% | 5% | |
| Accommodation services | 10% | 5% | |
| Restaurant services related to the serving of food | 10% | 5% | |
| State-supported rental housing | 5% | 5% | |
| Entrance to sports events, admission to fitness centres | 20% / 10% | 5% |
Sports facilities (except fitness centres and sports events) and pool entries are no longer eligible for reduced rates. Restaurant services will have to be differentiated depending on whether food (5%), non-alcoholic beverages (19%), or alcoholic beverages (23%) are served.
Another amendment, which was submitted to the National Assembly of the Slovak Republic on October 4, 2024, changes two important areas: VAT obligations for free-of-charge supplies and adjustment of input VAT deduction on investment assets. This is a government proposal which has not yet been approved but has already been subject to extensive comment of expert public.
In line with the European Court of Justice’s rulings, the method of determining the tax base for free-of-charge supply of goods is changed. The taxable amount will be the purchase price of the goods or similar goods at the time of supply, rather than the acquisition cost. The taxable person may determine that price on the basis of various factors, for example, by comparing prices on the market or by an expert´s opinion. This replaces the previous method of calculating the tax base based on the acquisition cost or, in the case of depreciated assets, the residual value.
A similar calculation of output VAT is also applied in the case of illegal appropriation of goods by another person. The previous possibility of gradually reducing the VAT on depreciated goods by a proportional part corresponding to the amount of depreciation is completely deleted from the VAT Act. The taxable person will be obliged to calculate the output VAT on the purchase price of that or similar goods at the time of the theft or misappropriation, up to the maximum amount of initially deducted VAT.
The possibility of a partial input VAT deduction when using investment property for non-business purposes is being extended to a new category of intangible investment property. This means taxpayers will no longer have to tax the use of this property for non-business purposes as a free supply of goods or services. For subsequent changes in the use of this property, an adjustment mechanism for the deductible VAT will apply.
For goods and services that do not meet the revised definition of investment property under the VAT Act, taxpayers will be able to claim a proportional input VAT deduction, corresponding to the extent of their business use, if used partially for business purposes. The taxpayer will determine the proportion of the use of goods and services for business and other purposes based on the amount of business income and other income, the duration of use of the goods and services for business and other purposes, or according to other criteria that objectively reflect the extent of the use of goods and services for business and other purposes, similar to the current practice. The original version of the amendment also included the removal of the possibility to claim a proportional input VAT deduction of up to 80% when applying so-called flat-rate expenses for fuel consumption. However, after comments from the Ministry of Finance, this part was ultimately retained in the current version.
A new Section 52a is introduced which modifies the definitions of key terms in relation to the adjustment and correction of VAT deduction. “Initial use” refers to the first actual use of goods and services for supplies with the right to deduct VAT and is shall be considered as a criterion for the start of the period of adjustment of the VAT deduction in the future. “Investment assets of the VAT payer” means assets with a useful life of more than one year, which have not been acquired for resale. VAT deduction adjustment periods are aligned at 5 or 20 calendar years, respectively, including the year in which the property is initially used.
Following these new concepts, a new situation has been introduced requiring the correction of the VAT deduction in the case of investment assets, where the taxable person initially deducted input VAT at a higher rate than justified by the initial use. If the taxable person has deducted tax at a lower rate than he could have done on the basis of the initial use, he will have a right to correct the deduction which he does not have to make use of. The taxable person shall make the correction of the deduction in the taxable year in which the initial use occurred or in which the taxable person knew or should and could have known that there would be no initial use.
The definition of investment assets, for the purposes of the VAT Act, is aligned with the definition of tangible fixed assets in the Income Tax Act, with the introduction of a new category of investment assets as well:
The adjustment of the VAT deduction shall only be made in the period following the period in which the initial use of investment assets occurred. If there is a change in the period between the acquisition of the assets (when the VAT payer claimed the input VAT deduction) and the initial use of the assets, the VAT payer will be obliged to make a correction of the input VAT deduction instead of an adjustment of the deducted VAT.
It will no longer always be the VAT payer’s obligation to adjust the VAT deducted; if the VAT has been deducted at a lower rate than it could have been, the VAT payer will have the right to make such an adjustment, which may or may not be exercised. Until now, the adjustment of the VAT deducted has been compulsory in all cases where the legislative conditions have been met.
The same procedure for adjusting the deducted tax will be applied in the case of a change in the scope of use of investment assets for business and other purposes, as well as in the case of a change in the purpose of use for supplies eligible for VAT deduction and for supplies exempted from VAT without the right to deduction. All adjustments to the deduction of investment assets shall only start in the year following the year in which the initial use of those assets took place. The obligation to adjust the deduction shall remain in the last tax period of the calendar year; in the case of a taxable person who applies a financial year, the financial year shall be used.
In connection with the adjustment of the deducted VAT, the method for calculating potential adjustments is being completely changed. The VAT adjustment is to be spread over several years, always only up to the amount of VAT attributable to the given calendar year. The adjustment will be made based on changes in the right to deduct VAT in the subsequent periods compared to the period of the initial use of the investment assets. For example, if in the third year of use there is a change in the purpose of use compared to the initial use of the investment assets, and this ratio remains the same until the end of the adjustment period for the deducted VAT (5 or 20 years), the VAT payer will be obliged to adjust the respective annual portion of the deducted VAT each year until the end of this period.
If the adjustment period for the deducted VAT started before 31 December 2024, according to the transitional provisions, any adjustment of the deducted VAT will follow the legislation valid until 31 December 2024.
At the end of year 2023, we informed you through our news flash about a draft amendment that was under public consultation. This amendment was published on May 17, 2024, in the Collection of Laws of the Slovak Republic, with the original proposal prepared in the spring of 2023. Below is a final summary of the changes this amendment will bring to Slovak tax legislation, with most changes taking effect from 1 January 2025.
The option of voluntary VAT registration remains as before, while the taxable person becomes a VAT payer on the date specified in the decision of the tax authorities.
Significant changes compared to the currently applicable legislation occur in the case of VAT payers who have not fulfilled their registration obligation on time or have fulfilled their registration obligation late. Since a taxable person will no longer become a VAT payer only on the date specified in the decision of the tax authorities, but on the date of fulfilment of the conditions defined in the VAT Act, in the case of late registration, a single tax return will not be filed for the period when the person should have been a VAT payer.
The VAT payer will be obliged to file all tax returns and control statements in chronological order, for all tax periods starting from the first one in which he fulfilled the conditions and became a VAT payer. Thus, late submissions will result in a penalty for late submission of VAT returns and control statements. At the same time, the VAT payer will also be entitled to claim input VAT deductions in the taxable periods concerned, in the taxable period in which this right arose, provided that the other standard conditions for entitlement to the deduction are met.
The right to deduct input VAT on supplies which the taxable person acquired before becoming liable for VAT and used for his taxable supplies, shall be claimed exclusively in the first VAT period.
The above changes will be effective from 1 January 2025, while according to the transitional provisions, the current procedure will be applied, if the application for registration is submitted by 31 December 2024 (or if the tax office finds that the obligation to submit an application has not been fulfilled).
In addition to the above changes, a new definition is introduced into the legislation – a VAT payer with an allocated VAT number.
Following the decisions of the European Court of Justice, the tax treatment of the transfer of goods based on lease contracts, which did not clearly indicate that the ownership of such goods would be acquired at the latest upon payment of the last instalment, will be changed. Under the new wording of the VAT Act, the transfer of goods under a lease agreement or similar agreement with a negotiated purchase option will also be treated as a supply of goods if, at the time of its conclusion, the exercise of the purchase option represents the only rational choice for the lessee. This is to apply to contracts concluded from 1 January 2025 onwards. This will apply in case a car will be handed over on the basis of a leasing contract, where most of the benefits and risks of ownership will be transferred to the lessee, the sum of the contractual repayments will correspond to the value of the goods, including the financing costs, and the lessee will not be required to pay a substantial additional amount when exercising the option to purchase the leased item.Top of Form
This change may significantly change the nature of the provision of finance leases from a VAT perspective. If the transaction constitutes a supply of goods, it will transfer the VAT liability and therefore the payment of VAT from the moment the goods are handed over to the lessee, rather than, as has been the case with many forms of leasing to date, gradually in monthly instalments as a supply of a service. Determining the boundary between the supply of a service and the supply of goods can be quite difficult depending on the agreed terms of the transaction and it can be assumed that the actual application of the new provision will raise a number of issues in practice.
With effect from 1 July 2025, VAT on imports of goods from third countries will no longer be levied in all cases by the customs authority, but in some cases the tax administrator is the tax authorities. In practice, this means that if the statutory criteria are met, the VAT payer will be able to use the so-called self-taxation on import, i.e., he will declare the VAT on import in the VAT return, and at the same time, he will be able to deduct this input VAT. This is a transposition of an EU directive, but the effectiveness of this measure has been postponed several times in the past, mainly due to the negative cash impact on the state budget in the first year of its introduction.
A significant positive of this measure is the impact on the cash flow of VAT payers, as VAT will be deductible in the same tax period as the tax liability on imports arises. However, the negative is that the VAT payer will only be able to apply this procedure if the following conditions are met:
In the event of a finding of a breach of the above conditions, the tax administrator shall impose on the VAT payer a penalty of 1.3% of the amount of VAT on the import of the goods that would have been levied by the customs office if self-assessment had not been applied to the import.
With effect from 1 January 2025, an EU directive introducing a special arrangement for small businesses will be transposed into Slovak legislation, the aim of which is to eliminate the administrative burden on small businesses and to achieve equal VAT treatment for both domestic and foreign persons.
The essence of the special regulation is that a small enterprise of a foreign person is entitled to supply goods or services exempt from VAT in the same way as a domestic taxable person who is not subject to VAT, once it has been assigned an individual identification number with the suffix EX for the Slovak Republic in the Member State of establishment.
A small enterprise of a foreign person may be a taxable person which in the current calendar year did not exceed a domestic turnover of EUR 62,500 (in the previous calendar year it did not exceed a turnover of EUR 50,000) and, at the same time, did not exceed a turnover in the EU of EUR 100,000 in the current calendar year (in the previous calendar year it also must not exceed a turnover of EUR 100,000).
At the same time, the small enterprise will be required to submit quarterly statements in the country of establishment, including data on goods and services supplied withing the EU territory. A small enterprise may decide to terminate the special scheme at any time. The special scheme (i.e., the exemption) will also be terminated if the annual domestic turnover exceeds EUR 62,500 if the foreign person has a permanent establishment for VAT purposes in the country, or the annual EU turnover exceeds EUR 100 000. If the annual domestic turnover exceeds EUR 50,000 and at the same time neither EUR 62,500 nor the annual turnover in the EU territory exceeds EUR 100,000, it may not apply the special scheme as of 1 January of the following calendar year.
Inputs used by a VAT payer applying the special scheme for small businesses in connection with supplies of goods and services to another Member State will not give rise to a right to deduct input VAT.
If you would like to know more about any of the upcoming issues, please do not hesitate to contact us.
As the year draws to a close, it is common for various laws and amendments to be submitted to the National Council of Slovakia for consideration, and this year is no different. In this article, we will examine the approved changes to the Income Tax Act in Slovakia (act No. 595/2003), effective from January 1, 2025, as well as the proposed parliamentary amendments to this act that are still awaiting parliamentary debate.
As of January 1, 2025, the threshold for taxable income from business or other self-employment activities for applying the reduced tax rate of 15% will increase from €60,000 to €100,000.The tax rate on dividend payouts will decrease from 10% to 7%. Dividends from profits for the 2025 tax year will be subject to a 7% tax rate. The reduced tax rate will also apply to liquidation balances and settlement shares.
For the tax period starting no earlier than January 1, 2025, legal entities will apply the following tax rates:
| Taxable income (revenue) | CIT rate from 1.1.2025 |
| up to € 100.000 | 10% |
| from € 100.000 up to € 5.000.000 | 21% |
| from € 5.000.000 and more | 24% |
A taxable income is any income that is subject to tax and is not exempt from tax under the Income Tax Act in Slovakia neither an international treaty. This means that, for example, dividends paid from a business’s profit, which are not subject to tax, or income from the sale of shares, if the conditions from tax exemption under § 13c of the Income Tax Act in Slovakia are met, will not be included in the taxable income for the purpose of determining the tax rate.
The amount of non-monetary income of an employee, which consists of the provision of a company vehicle for private use, is calculated at 0.5% of the vehicle’s entry price in the case of electric vehicles, specifically “BEV” and “PHEV” vehicles classified in depreciation group 0. For commercial vehicles with internal combustion engines, the non-monetary income for the use of a company vehicle for private purposes will continue to be taxed at 1% of the vehicle’s entry price.
In order to simplify matter and provide legal certainty for taxpayers, another method of proving fuel expenses for electric vehicles is being introduced. If a taxpayer chooses, for home charging, they can claim expenses for consumed electric energy as fuel costs, based on the product of the average monthly price in the Slovak Republic, as declared by the Statistical Office of the Slovak Republic, for electric energy consumed during alternating current charging for home vehicle charging, and the amount of electric energy consumed according to the vehicle’s documentation in relation to the kilometers driven.
Similarly, in order to promote the development of electromobility in Slovakia, bicycles and scooters with auxiliary electric motors are being reclassified into depreciation group 0 with a depreciation period of 2 years. Trolleybuses and electric buses are being reclassified from depreciation group 2 to depreciation group 1 with a depreciation period of 4 years. Tax depreciation for the aforementioned types of assets, which were classified by the company
before January 1, 2025, is no longer subject to retroactive adjustment.
The amount of the tax bonus for a dependent child will change as of January 1, 2025, according to the income tax act in Slovakia, compared to the current state as follows:
| Age of dependent child | Maximum amount of tax bonus for 2024 (per month) | Maximum amount of tax bonus for 2025 (per month) |
| < 15 years | €140 | €100 |
| ˃ 15 < 18 years | €140 | €50 |
| ˃ 18 years | €50 | €0 |
The amount of tax bonus € 100 will be paid for child until the child reach the age of 15, with the last payment made in the month the child turns 15. The amount of € 50 will be paid for child until the child reach the age of 18, with the last payment made in the month the child turns 18.
The amount of the tax bonus for child will be limited to a percentage of the taxpayer’s partial tax base (“PTB”) from employment income or PTB from business or other self-employment income, or from the total of these PTBs, depending on the number of dependent children as follows:
| Number of dependent children | Percentage limit of the PTB until December 31, 2024 | Percentage limit of the PTB from January 1, 2025 |
| 1 | 20% | 29% |
| 2 | 27% | 36% |
| 3 | 34% | 43% |
| 4 | 41% | 50% |
| 5 | 48% | 57% |
| 6 and more | 55% | 64% |
From 2025, the percentage of the taxable base will increase, which will have a positive impact on families with very low incomes. At the same time, there is an additional limit for high-income parents with children. If the annual partial tax base (PTB) of a taxpayer claiming the tax bonus exceeds 18 times the average monthly wage as determined by the Statistical Office of the Slovak Republic from two years prior, the amount of the tax credit for each child will be reduced by 1/10 of the difference between the taxpayer’s PTB and 18 times the average monthly wage.
An important change is that both Slovak tax residents and Slovak tax non-residents will be entitled to the tax bonus on child only if the total of their taxable income from sources within Slovakia in the relevant tax period is at least 90% of their worldwide income (from sources within Slovakia + from foreign sources). This change will affect, for example, a parent (tax resident of Slovakia) whose income from foreign sources constitutes more than 10% of their worldwide income, thereby losing their entitlement to the tax bonus on children.
From January 1, 2025, the parental pension paid by the Social Insurance Agency will be abolished. Taxpayers can donate 2% of the paid tax to each living parent receiving a retirement pension, meaning 2% of the tax for the mother and 2% for the father. The amount of the allocated tax must be at least 3 euros. For the first time, it will be possible to doane 2% of the tax to parents for the tax period of year 2025.
However, the option to donate 2% or 3% of the tax to the nonprofit sector remains in effect. To donate 2% or 3% of the paid tax, it is necessary to fill out the form Declaration for the Allocation of a Share of Personal Income Tax, if you have requested your employer to carry out the annual tax settlement, or directly in the personal income tax return if the individual is filing its own tax return.
In the area of social security contributions, from 2025, the maximum assessment base for paying social insurance contributions will increase from 7-times to 11-times the average monthly wage in the Slovak economy from 2 years prior. For example, for the year 2025, this means an increase in the maximum assessment base from €10,010 to €15,730. This change will mainly affect high-income employees and self-employed individuals.
The above-mentioned changes in the area of taxes and contributions were approved by the National Council of the Slovak Republic on October 3, 2024, as part of a consolidation package of measures to improve the state of public finances. For the law to take effect, it must still be signed by the President of the Slovak Republic and published in the Collection of Laws.
Parliamentary proposals regarding income tax have been submitted for discussion in the National Council of the Slovak Republic, and they are included in the agenda of the current sessions. However, their final validity is still uncertain. Below, we present some of these proposals:
For the changes in the Income Tax Act in Slovakia to take effect, they must be approved by the members of the National Council of the Slovak Republic, signed by the President of the Slovak Republic, and the amended text of the law must subsequently be published in the Collection of Laws of the Slovak Republic.
For many small and medium-sized family businesses, financial or operational leasing represents an attractive option for purchasing necessary assets such as machinery, vehicles or technological equipment, without the need for significant upfront financial investments. Sale and leaseback can also be a beneficial form of financing in case of limited financial resources. For these companies, which often do not have a large accounting team at the disposal, leasing can be challenging in terms of correct handling of the accounting and tax aspects of such transactions.
Although leasing is generally popular and considered a relatively straightforward way of financing, it can be demanding in terms of complex and specialized assessment from a VAT perspective. Recent changes in legislation have classified several leasing-related transactions differently than in the past, and it is also expected that as of January 1, 2025, an amendment to the VAT Act will bring further changes that will affect this area of the economy.
As a result of the application of the case law of the European Court of Justice, with effect from April 1, 2023, there is a different interpretation of Slovak VAT legislation. This change affects leasing agreements, as well as other contracts where the recipient is obligated to pay additional sums under various titles, such as fees, fines, compensations, etc. Most of these fees were previously considered as out of the scope of VAT (a form of financial compensation without receiving any consideration for the customer), or there was different treatment for similar types of transactions due to unclear interpretation.
As of April 1, 2023, amounts paid in connection with the supply of goods and services based on contractually agreed conditions, such as excess mileage, downtime, late return of the leased item, or contamination of the rented item, are to be considered as supplies that are subject to VAT, regardless of how these payments are formally named (e.g., as fines, fees, reimbursements, compensations). A similar situation arises with fines/fees for early termination of the contract, where the lessor has the right to claim compensation for unpaid instalments until the time of commitment. Such a fee is considered as consideration for the service provided, i.e., rent and is subject to VAT. The case law of the Court of Justice does not provide an exact procedure depending on the reasons for the early termination of the contract, whether it is an agreement, withdrawal, or termination of the contract.
On the other hand, a late payment interest or compensation for damage of goods remains outside the scope of VAT, as there is no consideration that the lessee would receive for the amounts paid.
Many companies use leaseback as a form of financing, and until December 31, 2023, such a form of leasing was considered for VAT purposes as two transactions: the supply of goods to the leasing company and subsequent acquisition of the service of renting the movable property.
As a result of the leaseback transaction, there is a formal change in the legal ownership of the leased item, but the economic owner remains the original owner (lessee), who receives additional financial resources.
Such a type of sale and leaseback agreement concluded after December 31, 2023, where most benefits and risks remain with the lessee (original owner of the goods) and after the expiration of the contract, it is assumed that the ownership will be transferred back to them, is from January 1, 2024, considered a financial transaction eligible for VAT on leasing in Slovakia exemption. Old contracts concluded until December 31, 2023, will be treated in the original manner.
In the context of European case law, the aim of such transaction is to obtain additional financial funds, while there is no actual transfer of the right to the future lessee to dispose of the financing object as an owner. From a VAT on leasing in Slovakia perspective, it is not a supply of goods but an exempt financial service.
It is also necessary to note that the classification of the transaction for VAT purposes should be preceded by a detailed assessment of contractual conditions, which in the practice may vary from case to case, and therefore they cannot be generalized.
The new wording of the VAT on leasing in Slovakia Act expands the definition of the supply of goods to situations where goods are delivered based on a lease agreement or similar agreement with an agreed purchase option, provided that this option is the only reasonable choice for the lessee when concluding the contract. The amendment to the VAT Act is expected to enter into force on January 1, 2025, and this change will affect leasing agreements concluded after this date.
This leads to a substantial change in the tax regime since until now, only situations with the pre-agreed purchase obligation after the end of financial leasing were considered as the supply of goods. The right of purchase was considered as the provision of services, and the supplier paid VAT from monthly instalments. If the transaction will be characterized as the supply of goods after January 1, 2025, the lessor will be required to pay VAT at the time of delivery of the goods. There is a fine line between the supply of goods and services and the final treatment will depend on specific contractual conditions.
In December 2022, the National Council of the Slovak Republic approved an amendment to the Income Tax Act, the provisions of which also brought changes in cross-border tax relations, namely clarification, additions and amendments to the rules in domestic and cross-border transfer pricing, and the adjustment of the transfer price to the median in Slovakia.
The effect of the amendment from 01.01.2023 means that these changes will be applied for the first time for FY 2023. The tax auditor can send to tax subjects a notice about the opening of the tax audit for FY 2023 as early as April 2024. That is why this topic is actual.
One of the biggest changes in the field of transfer pricing was the enactment of the possibility for the tax administration to use a statistical method, which is the determination of the mean value (median) from the established independent comparable values after a tax audit focused on transfer pricing.
The intention of this adjustment in the Income Tax Act was to ensure legal certainty both on the part of the tax administration and on the part of the taxpayer. The Income Tax Act added the procedure of the tax administration in situations where the prices used by the tax subject in a transaction with a related person do not correspond to the arm´s length principle, especially when the value used by the tax subject is outside the interquartile range. The tax auditor will determine this difference during the tax audit according to the mean value (median) of the independent comparable values found.
The amendment in question to the Income Tax Act mainly concerns taxpayers who transfer prices (or profit indicators) do not have determined in accordance with the arm´s length principle and prices are outside the interval of comparable independent values, or interquartile range.
However, the taxpayer still could convince the tax auditor that, given the circumstances of the audited transaction, it is more appropriate to use a different value within the interquartile range.
Transfer pricing deals with prices between related persons who carry out transactions with each other. If these prices are not determined at the market level, the income tax base must be adjusted for the difference. This difference is determined by comparing controlled transactions with comparable uncontrolled transactions.
The comparability of controlled and uncontrolled transactions is ensured in practice through comparability analysis, or benchmarking study.
We have prepared for you an example and three model situations that explain the effects of this amendment to the law.
The taxpayer (Slovak company A) is a contract manufacturer of food products for its parent company in Austria (Austrian company B).
For this transaction, the taxpayer chose the transactional net margin method applied on costs, and the transfer price was determined using a net mark-up indicator of 2.5%, which is added to the total costs attributable to this transaction.
Pursuant to the Guidance of the Ministry of Finance of the Slovak Republic on transfer pricing documentation, Slovak company A is obliged to prepare full documentation, i.e., prepares and submits a comparability analysis to prove the correctness of the transfer price setting.
The Slovak company is undergoing a tax audit for FY 2023 focused on transfer pricing. Taxpayer – company A was requested to submit transfer pricing documentation, which also includes a comparability analysis.
The taxpayer did not submit a comparability analysis to the tax auditor during tax audit. To determine the correct amount of the profit mark-up, the tax auditor prepared his own comparability analysis, on the basis of which he calculated an interquartile range of profit mark-up from 3% to 6.5% with a median of 4.5%. The profit mark-up calculated by the taxpayer in the value of 2.5% is not within the interquartile range. The tax auditor based on § 18 par. 1 and § 17 par. 5 letters a) of the Income Tax Act adjusted the taxpayer’s profit mark-up to the value of 4.5%, i.e., on the median.
During the tax audit, the taxpayer submitted a comparability analysis to the tax auditor, based on which he calculated the interquartile range of profit mark-up from 2.1% to 7% with a median of 5%.
The tax auditor checked the taxpayer’s analysis. He did not find significant errors and mistakes in the analysis, and he accepted the taxpayer’s analysis.
In this case, the tax auditor based on § 18 par. 1 and § 17 par. 5 letters a) of the Income Tax Act accepted the taxpayer’s profit mark-up in the value of 2.5%, as it falls within interquartile range of profit mark-ups determined by him (2.1% – 7%).
During the tax audit, the taxpayer submitted a comparability analysis to the tax auditor, based on which he calculated the interquartile range of profit mark-up from 2.1% to 7% with a median of 5%.
The tax auditor checked the taxpayer’s analysis. He found significant errors and mistakes in the analysis and did not accept the taxpayer’s analysis. He prepared his own analysis with results ranging from 3.1% to 6.5% with a median of 5%.
The taxpayer submitted the relevant economic arguments to the tax auditor, on the basis of which he adjusted the transfer pricing. The profit markup after adjustment represented a value of 3.1%.
The tax auditor based on § 18 par. 1 and § 17 par. 5 letters a) of the Income Tax Act in this case did not adjust the profit mark-up to a median of 5%, but he adjusted the profit mark-up to 3.1%, because he accepted the economic arguments of the taxpayer.
In the event of the tax difference being collected due to the violation of the arm´s length principle between related persons, it is also necessary to expect higher sanctions, the mentioned offense is subject to sanctions in the amount of 6 times the basic interest rate of the ECB (min. 20%) p.a. calculated from the amount of the tax difference.
If you suppose that your company may be subject to the obligation to process transfer documentation, including a comparability analysis, or you have doubts about how to set the transfer price correctly so that it falls within the interquartile range and you would like to obtain additional information, our experts in the field of transfer pricing will be happy to advise you on this area.
In order to fight against tax avoidance and in connection with the Exchange of information according to the implemented EU Directive DAC4, multinational groups of companies with consolidated group revenues of at least 750 mil. EUR are subject to the so-called “country by country reporting“ (CbCR) rules. The relevant rules have been in force in the Slovak Republic for several years.
The rules include reporting obligations in the tax area for entities that are members of such a multinational group of companies. Information about the so-called reporting entity (the entity that is required to file a country-by-country report on behalf of the multinational group), or about its change, is each member of the multinational group obliged to announce within the deadline for filing of the income tax return.
The obligation to announce the reporting entity does not arise repeatedly for group members, i.e. in case the reporting entity has already been announced in the past, a new announcement is required only if there is a change of the reporting entity, its identification data, or the group data.
The CbCR rules are a tool for tax administrations to detect transfer pricing risks, other risks related to base erosion and profit shifting, and for the purposes of economic and statistical analyses.
The rules for CbCR apply to multinational groups of companies with consolidated revenues per group of at least 750 mil. EUR and impose on them the obligation to annually submit a “country-by-country report“ to the tax administrator. The subject of this report according to the prescribed model is summary information on revenues, profit or loss before taxation, income tax paid, income tax payable, registered capital, retained earnings, number of employees, tangible assets other than cash and cash equivalents, namely for each state of residence for tax purposes in which the multinational group of enterprises operates, including a list of individual basic entities (i.e. members) and the nature of the main economic activity of the basic entity. The reports in question are the subject of automatic exchange between the states in which the individual companies – members of the multinational group – are located.
Under certain conditions, the rules allow for the transfer of country-by-country reporting obligations from the ultimate parent entity to the surrogate parent entity. The rules also define exceptions to the obligation to report by the ultimate parent company when the obligation arises for the underlying entity, i.e. an enterprise in a multinational group of enterprises that is not the ultimate parent company.
An entity files country-by-country report (reporting entity) in the state of its tax residence. There is a minimum number of such entities in the Slovak Republic
Part of the rules for CbCR also includes a notification requirement on the identification of the reporting entity, which is required to submit a country-by-country report. In the Slovak Republic this notification requirement applies to every Slovak member of a multinational group of companies with consolidated revenues for the group of minimum 750 mil. EUR.
The notification requirement also applies to foreign entities having an organizational unit in the Slovak Republic. In the respective notification, the company shall indicate whether it is the ultimate parent entity, the surrogate parent entity, or the primary entity that files country-by-country report. If it is not one of such entities, it shall notify the Financial Directorate of the Slovak Republic of the business name, registered office, and identification number of the reporting entity, including the state in which the reporting entity is a resident for tax purposes, within the deadline for filing of the corporate income tax return.
A special form is established for the purposes of this notification.
The notification obligation related to members of multinational groups with the obligation to identify reporting entities shall not fulfilled repeatedly, if there are no changes.
A new notification must be submitted if there is a change in the identification data of the reporting entity (name, address, group name, etc.) or a change of the reporting entity for the respective group.
The deadline for submitting a new notification remains the same, i.e. within the deadline for filing of the tax return. In the same period, if is also necessary to report the eventual termination of the notification obligation, if the value of the consolidated revenues of the multinational group falls below the threshold value of 750 million EUR, through the General form for tax administration.
The tax office can impose a fine of up to 10,000 EUR for failure to submit a country-by-country report. A fine of up to 3,000 EUR can be imposed for failure to notify the reporting entity.
In order to comply with reporting obligations, we recommend verifying with the group´s global tax team the appearance of any changes in the reporting entity, which is required to report the country-by-country report, on a yearly basis.
We also draw your attention to the new legislative obligation regarding multinational groups with consolidated revenues of more than 750 million EUR. From 2024, entities belonging to such groups may be required to calculate the so-called top-up tax and comply other related obligations. We informed you about these obligations in our News Flash.
We also recommend paying more attention to the issue of transfer pricing and documenting applied transfer prices in transactions with replated persons. In this context, we bring to your attention our current eBook: Transfer pricing in Slovakia 2024.
In this edition of our News Flash, we present you a case concerning with application of value added tax (VAT) when providing the subscription gift to new subscribers.
The European Court of Justice (ECJ), in its judgment C‑505/22 of October 5, 2023, addressed of whether free supply of a tablet or smartphone in exchange for a new subscription should be considered as a part of a single transaction respectively a supply that is ancillary to the principal transaction (the subscription to the magazine), where consideration is payment of subscription, or whether this transaction is different from a subscription and shall be considered as a free supply of goods.
The judgment concerns the company Deco Proteste – Editores Lda, a Portugese magazine publisher. During promotional campaigns to attract new customers, the company offered new subscribers a gift, which could be a tablet or smartphone with the unit price always below EUR 50. The condition for obtaining the gift was the payment of the initial subscription fee, which the customer could subsequently cancel at any time, as there was no minimum subscription period.
According to Portuguese legislation, magazine subscriptions are subject to a reduced VAT rate , while the free supply of goods for business purposes is not considered a supply of goods for consideration and it is not a subject to VAT, if the limits for the unit price (50 EUR) and the annual turnover (the value of the gifts must be less than 0.5% of the total annual turnover) are met. In Slovakia, the equivalent of these limits is the unit price of EUR 17. In case of exceeding the legal limits, even the free delivery of goods for business purposes is subject to VAT.
During the tax audit for the years 2015 – 2018, the Portuguese tax authorities found that the subscription gifts met the unit price condition, but their total value exceeded the legal turnover. As a result, the transactions were considered as a free supply of goods and were subject to VAT. This led to VAT being charged on donated tablets/smartphones which together with related penalties amounted to almost EUR 3 million.
The case reached the Tribunal Arbitral Tributário in Portugal, which decided to suspend the proceedings and ask the ECJ preliminary questions. In these preliminary questions, it is asked whether the providing of a gift for a magazine subscription should be considered as the supply of goods for consideration (i.e. part of the subscription) or whether this transaction is different from the subscription, i.e. it should be considered as a free supply of a goods.
The company pointed out that donated tablets or smartphones enabled new subscribers to better use the principal service, i.e. subscription in the digital version. In the judgment, the ECJ repeated that transaction should be considered as a ancillary to a principal service if it does not constitute for customers an end in itself but only a means of better enjoying the principal service supplied.
In this specific case, the ECJ decided that the provision of a subscription gift in return for taking out a subscription to periodicals represents a supply that is ancillary to the principal service of supplying periodicals. Providing gift falls within the concept of ‘supply of goods for consideration’ together with the subscription, and shall not be considered as a free supply of goods.
In practice, this case means that in certain cases, even the delivery of a gift that exceeds the limit established by law (in the context of the Slovak Republic, the unit price of EUR 17) can be consider as a supply that is ancillary to the principal service. The substantial element of the judgment remains the fact that the ancillary supply should be a means to better use of the principal service.
In this edition of our News Flash, we would like to introduce you to the approved law on the so-called top-up tax in Slovakia, which transposes Council Directive (EU) 2022/2523 of December 14, 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union. The aim of the introduction of the top-up tax is to limit tax competition between states in the area of low effective corporate income taxation and to ensure minimum level of taxation of companies in the Slovak Republic, that are part of multinational groups of at least 15%. The Act on top-up tax is effective from December 31, 2023.
In order to avoid adverse impacts on smaller MNEs (multinational enterprises) in the internal market, the top-up tax should only apply to entities located in the European Union that are members of MNE groups or large-scale domestic groups that meet an annual consolidated revenue threshold of at least EUR 750 million in at least two of the four fiscal years preceding the tested fiscal year.
That threshold is consistent with the threshold of existing international tax rules such as the country-by-country reporting rules (CbCR rules). The Ministry of Finance of the Slovak Republic estimates that the new obligation will affect approximately 5,000 tax subjects in the Slovak Republic.
The law sets a minimum tax rate of 15%. First, entities that are members of MNE groups or large-scale domestic group located in the territory of the Slovak Republic shall monitor their effective tax rate to ensure it is at least 15%. If the effective tax rate for these entities falls below the minimum tax rate, the entity is obliged to pay the difference in the form of a top-up tax.
The effective tax rate is calculated as the proportion of covered taxes, which are mainly payable or deferred corporate income tax, withholding taxes from interest, license fees, dividends, a special levy on business in regulated industries and the accounting result (profit or loss) adjusted for certain items defined in the law. Since the effective tax rate applies to a particular state, entities of one multinational or national group located in the Slovak Republic, will have to coordinate with each other at certain point and calculate the effective tax rate together.
The law also specifies the calculation of income that will not be subject to the top-up tax. The major aim is to provide an exemption from taxation to those constituent entities that in the performance of their economic activities report payroll costs for employees and independent contractors who participate in the ordinary operating activities of the MNE group or large-scale domestic group under the direction and control of the MNE group of enterprises or a large-scale domestic group and which in the performance of their activities use tangible assets located in the Slovak Republic. The wording of the law also stipulates that the transactions between constituent entities must be established based on the arm’s length principle. If these transactions are not consistent with the arm’s length principle, the necessary adjustments must be made.
In addition, the law provides for several exceptions, where there is no obligation to calculate top-up tax at all, while some exceptions are of a temporary nature.
De minimis exclusion will basically apply to groups conducting business in the Slovak Republic through smaller entities. The condition for applying the exception is that each entity within the given group has revenues of less than EUR 10 million and an economic result of less than EUR 1 million. In both cases, these values must be adjusted in accordance with the law (referred to as qualifying revenues and qualifying income) and recalculate the average values for all entities in the Slovak Republic and for the current and two previous accounting periods belonging to each individual entity. In essence, after the recalculation, either all the group’s constituent entities in the Slovak Republic meet the exception, or none.
The exemption based on a qualified report by individual states applies, for example, if the total amount of revenues of constituent entities in the Slovak Republic reported in the DAC4/CbCR report for a given accounting period does not exceed EUR 10 million and the total amount of their economic results does not exceed EUR 1 million. Alternatively, the exemption is applicable if the simplified effective tax rate of constituent entities in the Slovak Republic will not exceed:
Governmental entities, international organizations, non-profit organizations, and pension funds are excluded from the scope of this Act. Investment funds and real estate investment entities are excluded if they are the ultimate parent entities. If an investment fund or a real estate investment entity is part of a group subject to the top-up tax obligation, but is not the ultimate parent entity, the special provisions for investment entities will apply. Under certain circumstances, entities that directly or indirectly own the abovementioned excluded entities are also excluded from the scope of the law.
The entity to which the top-up tax applies is obliged to submit a notification with information to determinate the top-up tax no later than 15 months after the end of the relevant tax period. According to the legislative wording, this deadline cannot be extended or missed. However, in the first year, which is 2024 (for business entities applying calendar year), the deadline for submitting a notification with information to determine top-up tax will be extended by three full calendar months (i.e. until the end of June 2026).
Within the same period, entities will be obliged to file a tax return and pay the relevant tax. If there are several taxpayers from the same group in the Slovak Republic, they can agree on the fulfilment of the obligation by only one of them, or under certain circumstances, the obligation can also be fulfilled through notification of the ultimate parent entity.
If you believe that your company may be subject to the obligation of the top-up tax calculation from 2024 and you would like to obtain additional information, our tax experts will be happy to provide you with consulting in this area.
In this edition of our News Flash, we present a case recently decided by the European Court of Justice (ECJ), which concerns the application of the right to input VAT deduction of a holding company from services that were the subject of a non-monetary contribution by a partner to subsidiaries.
In judgment C-98/21 from 8 September 2022, the ECJ deals with the question, whether a managing holding company that provides taxable output services in the form of management and accounting services to its subsidiaries has the right to deduct tax from the services which are received from third parties. These services are contributed to subsidiaries for a share in the general profit.
The judgment concerns the German company W, which through VAT returns deducted the entire VAT amount paid on the input from transactions. These transactions were subsequently put as a non-monetary contribution by the partner to subsidiaries, as well as transactions related to the provision of accounting and management services for consideration.
The German tax authority refused to recognize the right to deduct input VAT, arguing that the amounts paid as input VAT in connection with the partner’s non-monetary contribution to the subsidiaries due to their gratuitous nature, do not constitute the subject of a commercial exchange and should qualify as non-taxable activities, from which do not have the right to claim VAT deduction.
The case reached the Federal Court of Germany, which decided to suspend the proceedings and ask the ECJ preliminary questions related to the holding company’s right to deduct input VAT from transactions, which the holding puts in subsidiaries for a general profit share. However, these fulfilments are not directly related to taxable transactions provided to subsidiaries and do not belong to the general cost elements of the holding company’s own economic activity.
According to the ECJ, what conditions need to be considered when applying input VAT deduction of a holding company to activities?
In the given case, the ECJ states that the holding company, which carries out output transactions in favour of its subsidiaries (management and accounting services) does not have the right to deduct input VAT from fulfillment procured from third parties, which are then put into subsidiaries for a share in total profit. This applies if:
In the judgment, the ECJ again emphasized the necessity of a connection between input transactions with output transactions. The argument of insufficient proof of this connection with output transactions is increasingly becoming a reason for additional tax collection in the case of tax controls. You can read about practical problems related to tax controls in our previous news.
On January 1, 2023, the Slovak republic implemented a European Directive 2021/514, known as DAC7 by Act no. 250/2022 Coll. amending Act no. 442/2012 Coll. on international assistance and cooperation in tax administration. You can find more detailed information on DAC7 rules in our News Flash.
In this article, we would like to guide you through some of the most important deadlines for companies arising from DAC7 in Slovakia.
A year of 2023 is considered as the first reportable period. All subjects who operate digital platforms that allow sellers to connect with the buyers and qualify as reporting platform operators will have a reporting obligation. By January 31 of the year immediately following the reportable period, they will be obliged to report Slovak Financial Administration all required information about sellers qualified as reportable, i.e., for 2023, all required information shall be reported by January 31, 2024. The form of an electronic notification will be published on website of the Financial Administration of the Slovak republic (note: the form hasn’t been published by today).The platform operator will also be obliged to provide the reported information to the seller qualified as reportable to whom it relates and within the same period.
If the reporting platform operator is present in several member states (e.g., the operator has an establishment outside the country of his/her residence), an obligation to notify which member state he/she has chosen for reporting under DAC7 rules is arising in such countries. In Slovakia, the period is within 15 days from the day when the subject becomes the reporting platform operator.
A form of an electronic notification shall be used for reporting. Currently available in Slovak language as Oznámenie o výbere členského štátu pre DAC7/DPI is published on the website of the Financial Administration of the Slovak republic.
If the reporting platform operator is located outside of the European Union and is not qualified platform operator of a qualified non-member state, he/she is a subject to a special registration obligation. If such operator is planning on registration in the Slovak republic, he/she must electronically register on Tax Office Bratislava immediately after the start of the activities of the platform operator.
For such event, the form Žiadosť o registráciu, oznámenie zmeny údajov, žiadosť o zrušenie registrácie DAC7/DPI is available both in Slovak and English language on the website of the Financial Administration of the Slovak republic.
The reporting platform operator is obliged to verify the sellers within the extent stipulated by the law. This verification must be done by December 31 of the respective reportable period. In case of the sellers registered on the platform before January 1, 2023, the verification can be done within longer period, i.e., by December 31, 2024.
The seller is obliged to cooperate with the reporting platform operator during the verification process. If the seller doesn’t provide the required information even after repeated two calls from the operator, he is at risk of the platform operator cancelling his/her account and preventing him from registering on the platform. It is operator’s duty to act in such way.
The digital platform operators should set their internal systems and contractual relationships with sellers in such manner they are able to collect the required data and comply with DAC7 obligations.
In the Slovak Republic, failure to report the required information about sellers to the tax administrator and failure to verify the seller is punishable by a penalty of up to EUR 10,000, failure to notify the member state selection obligation of up to EUR 3,000, and failure to fulfil the above-mentioned registration obligation of up to EUR 5,000. The fine may be imposed repeatedly.
If unclear situations or questions during your implementation of the DAC7 obligations arise, do not hesitate to contact us. We will be happy to assist you.
In December 2022, we informed you in our News Flash about the amendment to the VAT Act, which, among other things, brings an important change from January 1, 2023 for VAT payers who have deducted input VAT from received supplies and at the same time have not paid their suppliers for these supplies.
Since the obligation to return the deducted VAT represents a significant limitation of input VAT deduction compared to system applicable until December 2022, and for thousands of VAT payers might lead to an additional VAT payment to the state budget already in the VAT return for January 2023, we bring you a summary of the most important highlights on this topic.
Pursuant to the VAT Act valid from January 1, 2023, the VAT payer has the obligation to return the VAT deducted from the received supplies based on supplier invoices issued with Slovak VAT, if there is more than 100 days from the liability´s due date.This obligation shall be proceeded in the tax period in which 100 days since the due date of the liability occurs. To avoid retroactivity, the correction of the deducted VAT shall not be applied to older liabilities for which 100 days from the due date occurred before January 1, 2023. The amended VAT Act only requires the refund of the deducted input VAT in case of unpaid liabilities that exceed 100 days from the agreed due date after January 1, 2023, and at the same time these liabilities will not be paid by the end of January 2023.
In such a situation, the VAT payer will be obliged to correct the deducted input VAT in the VAT return for January 2023 to the extent of the unpaid liability, for which 100 days have passed since the due date in January 2023.
If, after the VAT payer has returned the deducted VAT to the state budget, partially or fully pay for the liability to his supplier, the VAT payer has the right to correct the corrected input VAT, i.e., additionally deduct the VAT amount again. The VAT payer (customer) will be able to additionally claim input VAT deduction to the extent in which he paid the liability, namely in (i) the tax period of the payment, if he has not received from the supplier a document on the correction of the tax base for uncollectible receivable by the deadline for filing of the tax return, or (ii) in the tax period in which he received a correction document from the supplier on the correction of the tax base due to the fact that he received payment in connection with the uncollectible receivable.
With regard to the system of VAT, the correction of deducted VAT does not apply to overdue liabilities, in which the transfer of the tax liability to the recipient (reverse-charge) is applied, i.e. the recipient of the performance is responsible for the payment of output VAT.
In conclusion, we would like to draw your attention to the fact that based on the above-mentioned amendment the obligation to return the VAT deducted from unpaid invoices will be stricter to the customers, but at the same time, for the suppliers there will be easier to obtain the VAT from the state from supplies for which they did not receive payment.
However, the right to refund the paid output VAT arises to the supplier later than the customer’s obligation to return the deducted input VAT, namely after 150 days after the receivable is due. In addition, the VAT payer – supplier, must prove that he has taken any action to collect the claim, and for claims worth more than EUR 1,000 (including VAT) he must meet other legislative conditions set out in the VAT Act (execution proceedings, court action).
For more information about the supplier’s right to refund paid VAT, read our article, in which we informed about the changes in the VAT Act.
If you are more interested in this issue, do not hesitate to contact us.
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Accace operates internationally as Accace Circle, a co-created business community of like-minded BPO providers and advisors who deliver outstanding services with elevated customer experience and erase the borders of service delivery. Covering over 50 jurisdictions with nearly 2,500 professionals, we support more than 15,000 customers, mostly mid-size and international Fortune 500 companies from various sectors, and process at least 200,000 pay slips globally.
