On May 31, 2019, a draft amendment to Act No. 595/2003 Coll. on Income Tax, prepared by the Ministry of Finance of the Slovak Republic (hereinafter referred to as the “Income Tax Act Amendment”), was submitted to Parliament. The draft amendment to the Income Tax Act was prepared based on tasks arising from the Program Statement of the Government of the Slovak Republic for 2016–2020 and is currently undergoing editorial review after passing its third reading in Parliament. The Income Tax Act Amendment is expected to take effect on January 1, 2020, although certain provisions are scheduled to take effect later (e.g., the provision introducing the definition of a “micro-taxpayer” is expected to take effect only on January 1, 2021).
What changes should the amendment to the Income Tax Act bring?
The amendment to the Income Tax Act is expected to introduce several changes to Slovak legislation, primarily due to the incorporation of ATAD 2 (Council Directive (EU) 2017/952 of May 29, 2017, amending Directive (EU) 2016/1164, as regards hybrid mismatches with third countries), which addresses hybrid mismatches with third countries where there is abuse of differing treatment of taxpayers and financial instruments. The implementation of the ATAD 2 Directive should provide greater control over the misuse of tax revenues and their outflow from the territory of the Slovak Republic.
The amendment to the Income Tax Act should primarily bring:
- support for small and medium-sized enterprises (especially through the introduction of the term “micro-taxpayer” and adjustments to the conditions for tax loss carryforward),
- a reduction in the taxpayer’s administrative burden (primarily through simplifying the conditions for including expenses in the tax base only after payment, and the introduction of automatic registration by the tax administrator),
- an expansion of tax exemptions for certain non-monetary income of the taxpayer,
- abolition of the employee’s obligation to sign an annual declaration to claim the non-taxable portion of the tax base per taxpayer and the tax bonus,
- simplification of the calculation of the last known tax liability,
- submission of an application for the annual settlement of tax advances electronically.
Are you a business entity acting as a holder and concerned about withholding tax? The amendment to the Income Tax Act will also bring changes regarding the collection of withholding tax on payments made by holders to healthcare providers!
The amendment to the Income Tax Act will also affect the special tax regime, specifically the withholding tax collected on payments made by the holder to a healthcare provider. The amendment to the Income Tax Act is expected to introduce several changes regarding withholding tax, among which we consider the following to be the most significant:
- New wording of the provision establishing the obligation to collect withholding tax on monetary and non-monetary payments from the holder (Section 17(31) of the Income Tax Act)
The amendment to the Income Tax Act replaces the current wording of Section 17(31) of the Income Tax Act with an entirely new wording; therefore, as of January 1, 2020, Section 17(31) of the Income Tax Act should read as follows: “(31) Upon the disposal of tangible assets for which depreciation was claimed under Section 26(13), before the expiration of the depreciation period under Section 26(1) and (5), the taxpayer is required to increase the tax base by the positive difference between the depreciation already claimed under Section 26(13) and the depreciation calculated under Section 27 or Section 28.”
It follows from the aforementioned new wording of Section 17(31) of the Income Tax Act that this provision no longer concerns the taxation of a healthcare provider’s income from a holder with withholding tax. This is also consistent with the very essence of the amendment to the Income Tax Act, which consists in repealing the application of withholding tax on monetary and non-monetary payments made by the holder to a healthcare provider that is a legal entity, specifically in cases where such payments do not constitute other income earned by a natural person pursuant to Section 8(1)(l) of the Income Tax Act (note: monetary and non-monetary payments provided to a healthcare provider by a recipient). The Ministry of Finance of the Slovak Republic, as the submitter of the proposed amendment to the Income Tax Act, seeks to abolish the obligation to collect tax by withholding from those monetary and non-monetary benefits provided to a healthcare provider by a holder that do not constitute other income of a natural person within the meaning of Section 8 of the Income Tax Act. We can therefore conclude that monetary and non-monetary payments provided to a healthcare provider by the holder will also not be subject to withholding tax if they constitute income of a natural person (the healthcare provider) under Section 5 of the Income Tax Act (i.e., income from employment) or under Section 6 of the Income Tax Act (i.e., income from business, other self-employment, rental, and the use of a work or artistic performance). Thus, if they constitute income under Sections 5 and 6 of the Income Tax Act, they will be taxed via a tax return. Only monetary and non-monetary payments classified by a natural person taxpayer as income under Section 8 of the Income Tax Act will therefore be subject to withholding tax, while the obligations under Section 43 of the Income Tax Act remain in effect. In connection with the above, we also draw attention to the amendment to Section 43(3)(o) of the Income Tax Act by Section 8(1)(l) of the Income Tax Act, the wording of which will be as follows as of January 1, 2020:
“(3) Income tax on income derived from sources within the territory of the Slovak Republic by taxpayers with limited tax liability and unlimited tax liability shall be collected by withholding, in the case of
o) monetary and non-monetary payments provided to a healthcare provider by a holder, except for such payments if they are made for clinical trials,37ab) [Section 8(1)(l)].“
- Narrowing of the Scope of Non-Tax-Deductible Expenses (§ 21(2)(l) of the Income Tax Act)
Under § 21(2)(l) of the Income Tax Act, the following were not considered tax-deductible expenses of the Income Tax Act, the expenses of a healthcare provider relating to monetary and non-monetary payments received from the sponsor were not considered tax-deductible expenses, according to the interpretation of the Financial Directorate of the Slovak Republic, with the exception of expenses related to the conduct of clinical trials. The healthcare provider’s expenses related to monetary and non-monetary payments received from the sponsor were not considered tax-deductible expenses under the Income Tax Act. On the other hand, monetary and non-monetary benefits provided to the healthcare provider by the sponsor in connection with the conduct of a clinical trial were considered tax-deductible expenses. Therefore, if the sponsor provided a healthcare provider with a non-monetary benefit in connection with the conduct of a clinical trial (e.g., the sponsor paid for the healthcare provider’s airfare, accommodation, and meals due to the necessity of their presence during the clinical trial), such non-monetary benefits provided were considered a tax-deductible expense under Section 21(2)(l) of the Income Tax Act, i.e., an expense that the sponsor may include in its tax-deductible expenses.
The amendment to the Income Tax Act introduces a new wording of Section 21(2)(l) of the Income Tax Act, pursuant to which expenses of a healthcare provider relating to a monetary or non-monetary gift to the healthcare provider received from the taxpayer shall not be considered tax-deductible expenses.
It follows from the above that, under the amendment to the Income Tax Act effective as of January 1, 2020, only monetary and non-monetary gifts from a holder to a healthcare provider will be considered non-tax-deductible expenses. Therefore, if the holder donates a medical device to a healthcare provider in April 2020, such a non-monetary gift will notbe considered an expense included in tax-deductible expenses under Section 21(2)(l) of the Income Tax Act amendment. For the sake of completeness, we would like to note that the gift constituted a non-monetary benefit and, based on the wording of Section 21(2)(l) of the Income Tax Act, was also not considered a tax-deductible expense. However, from the amendment to the entire provision of Section 21(2)(l) of the Income Tax Act, we can infer the legislature’s intention to narrow the scope of non-tax-deductible expenses, which is also evident from the explanatory memorandum to the amendment to the Income Tax Act.
- Clarification of the Status of the Recipient of a Non-Monetary Payment
In the amendment to the Income Tax Act, the legislature clarified the status of the recipient of non-monetary benefits as a natural person, thereby eliminating long-standing and frequently occurring practical problems with the status of a legal entity as a recipient of non-monetary benefits, which de facto is unable to utilize certain non-monetary benefits (e.g., consuming meals, using transportation, etc.). By establishing exclusively a natural person as the recipient of non-monetary benefits, the legislature resolved issues where the holder provided non-monetary benefits to a healthcare provider as a legal entity (e.g., a hospital) for participation in a professional event intended for educational purposes, attended by doctors from that healthcare provider. In connection with the above, several interpretation and application issues arose in practice where the status of the healthcare provider as a legal entity was unclear (e.g., whether the hospital was in the position of an intermediary, i.e., the holder, or in the position of the recipient of the non-monetary benefit). Doubts thus arose as to whether the taxpayer in the case of non-monetary benefits is the healthcare provider in the position of a legal entity (e.g., healthcare facilities as the legal recipient of the benefit) or in the position of a natural person (e.g., a physician participating in a professional event who was the ultimate user of the benefit).
The amendment to the Income Tax Act provided a clear answer to this question, as is also evident from the separate explanatory memorandum to the amendment, according to which a healthcare provider acting as a legal entity will no longer be liable to pay tax under Section 43 of the Income Tax Act,
i.e., only a natural person will be the taxpayer on non-monetary benefits provided by the holder. We view this amendment very positively, considering it a clarification of the numerous previous interpretative and application inconsistencies in this regard, even though the law, in its current wording, already excluded several benefits provided by holders to healthcare providers from the withholding tax regime. This amendment to the Income Tax Act introduces this change through the explicit wording of legal provisions.
The amendment to the Income Tax Act also modifies the wording of provisions governing the taxpayer’s reporting obligation. These are minimal changes compared to the original wording.
Through the amendment to the Income Tax Act and the changes to the wording of its provisions, the legislature seeks to resolve the problems currently arising in the area of income tax and subsequent tax liability, which often arose as a result of vague, vague legal framework supplemented by inconsistent and contradictory interpretations provided by the Financial Directorate of the Slovak Republic in its methodological guidelines. Through the amendment to the Income Tax Act, the legislature seeks to establish clearer conditions and strike a balance between the rights and obligations of both the taxpayer and the tax payer. Whether the amendment to the Income Tax Act will yield more positive results than the currently valid and effective Income Tax Act is a question that will only be answered once the new legislation is implemented in practice.
