The main changes in the amendment to the Income Tax Act after the first reading

The government's draft amendment to the Income Tax Act, which was discussed at the first reading at the September meeting, contains inter alia the following changes:

1. The amendment to the Act implements the Council Directive (EU) in respect of the hybrid mismatches with third countries. The rules for a reverse hybrid entity are introduced. These rules prevent existence of hybrid mismatches by considering transparent entity as a taxpayer if the entity is considered as a taxpayer by its founder. The aim of these rules is to strengthen protection against aggressive tax planning.

2. The rules for controlled foreign companies should be also applied to individuals. In general, it is the taxation of individuals, Slovak tax residents who own shares in foreign legal entities or control foreign legal entities in a different way. These rules should be applied to the profits of foreign legal entities, whose income has not been taxed at least by the minimum effective tax rate, or these entities are seated in the so-called non-cooperating countries and the relevant individual has a control or owns share exceeding 10%.

There should be exemption from the application of the above CFC rules for taxpayers of an EU member state (including Iceland, Norway, Liechtenstein) who actually perform an economic activity in that state, so that they have staff, premises and tangible and intangible assets in that state.

This type of income should only be taxable if it exceeds EUR 100,000 for one individual from all foreign controlled companies for a tax period. The proposed tax rate is the same as in case of dividend taxation of 7% or 35% in the case of a controlled foreign company from a non-cooperating country.

3. Payments provided within the active labor policy for projects that support the retention of employees in connection with the declaration of a state of emergency, emergency situation or special situation according to the Employment Services Act should be exempted from tax.

4. The Tax Authorities will notify taxpayers of the amount and the due date of income tax prepayments based on the filed tax return. According to the draft law, the Tax Authorities shall notify the taxpayer not later than 5 days before the due date of the tax prepayments, unless the Tax Authorities issue a decision on the payment of advances otherwise.

5. It is proposed to cancel the obligation to settle tax prepayments paid by the deadline for filing a tax return for legal entities within 1 month after the deadline for filing a tax return. Tax prepayments paid for the relevant tax period will be credited against tax due for that tax period.

We will keep you informed about the next steps of the legislative process.