There is no concept of group CIT in the Slovak Republic. Each company in a group is taxed individually.
Under the transfer pricing rules, prices in transactions between a Slovak company and its related parties should be at arm’s length, which means the prices should be at rates similar to those that would be charged between unrelated parties for the same or similar transactions under comparable conditions. Although the OECD Transfer Pricing Guidelines were not formally implemented, they are usually followed for determination of arm’s-length prices.
The transfer pricing documentation requirements also apply to domestic-related parties in addition to the rules for foreign-related parties. This means that the prices used between two Slovak related parties need to be set at an arm's-length basis for tax purposes. All provisions of the law on methods of determining such prices for the purpose of adjusting the tax base and the obligation to keep associated transfer pricing documentation also apply to domestic-related parties.
If transactions between the related parties are not made at arm’s length, and this results in a reduction in the Slovak entity’s corporate tax base, then the tax authorities can adjust the corporate tax base to that which it would have been if arm’s-length prices had been used.
Based on the amendment of the ITA as of 1 January 2017, Slovak tax residents can request approval of an advance pricing agreement (APA) by the tax authorities. The amendment also sets fees for such APA approval in an amount of EUR 10,000 for unilateral APA approval and EUR 30,000 for multilateral APA approval (approval based on application of DTT).
In some cases, doubled penalties can be imposed for transfer pricing adjustments made by the Slovak tax authorities as a result of a tax audit initiated after 1 January 2017.
Transfer pricing documentation
All Slovak taxpayers must keep sufficient transfer pricing documentation to justify prices charged by or to their foreign-related parties. The Slovak Ministry of Finance has issued a guideline setting out detailed requirements for transfer pricing documentation (the Guideline).
The EU code of conduct was not formally implemented. However, the Guideline requires maintaining transfer pricing documentation in a form generally in line with the EU standards.
Slovak tax inspectors may require transfer pricing documentation. The deadline to provide transfer pricing documentation for taxpayers is 15 days, and the tax authority may request transfer pricing documentation without the formal opening of a tax audit. Without such documentation, transfer pricing adjustments (increased tax base) are much more likely to be imposed.
Country-by-country (CbC) reporting
An amendment to the Act on International Cooperation in Tax Administration valid from 1 March 2017 introduced CbC reporting based on the base erosion and profit shifting (BEPS) plan with an aim to introduce automatic exchange of tax information between countries.
If consolidated revenues for a multinational enterprise (MNE) group of entities are higher than EUR 750 million for the immediately preceding financial year, the group is required to file CbC reporting.
The amendment defines parent entity, substitute parent entity, and principal entity. In most cases, the parent entity is obligated to file CbC reporting in the country in which it is the tax resident.
If a Slovak tax resident is not considered to be a parent entity, a substitute entity, or a principal entity (i.e. the entity that is required to file CbC reporting), it must announce to the Financial Directorate of the Slovak Republic the business name, address, identification number, and country of tax residence of the reporting entity by the filing due date of its income tax return. This notification requirement should already apply to the 2016 tax period.
The concept of a secondary obligation has also been introduced, which delegates the obligation to submit the CbC report to a surrogate parent entity or to another basic entity of the MNE if the parent or surrogate parent entity that is not the Slovak company does not prepare and submit the CbC report in the country of its tax residence. Therefore, Slovak tax residents may also be required to prepare a CbC report.
For the accounting periods starting from 22 June 2024, the Slovak companies that are members of the MNE groups will have to disclose information about the CIT paid in the jurisdictions of the group’s presence. Generally, Slovak legislation regarding this disclosure is in line with the relevant EU Directive. The Slovak company may not be required to prepare the report but must provide reference to the report prepared and published by another group’s member. As required by the EU Directive, the report will be publicly available.
The limit for the maximum amount of tax-deductible interest and related fees on credits and loans between related parties is established as 25% of the adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA), i.e. the sum of:
- accounting profit before tax
- depreciation and amortisation, and
- interest expenses included in the accounting profit before tax.
From 1 January 2024, additional interest limitation rules will apply, though only to the contracts and amendments to the already existing contracts concluded after 31 December 2023.
A taxpayer first checks if the interest expenses fall under the interest limitation rules; if not, the ’already in place‘ thin capitalisation rules should be checked. The main features of the Slovak interest limitation rules are generally in line with the ATAD:
- The Slovak company should compare its net interest expenses with the EUR 3 million threshold. Net interest expenses are calculated as a difference of interest income and interest expenses.
- If the amount of the net interest is below the 3 million threshold, the already-in-place thin capitalisation rules are checked.
- If not, then the amount of the net interest expenses exceeding 30% of the sum of the tax base, net interest expenses, and tax depreciation cannot be deducted.
- Non-deducted interest can be carried forward and deducted within the next five years, still subject to the above limit check.
The law provides examples of the interest income and interest expenses to be used for the net interest calculation. However, as the list includes other similar payments equivalent to interest, there could be some uncertainty about the net interest expense calculation in some cases.
Banks and insurance companies are not subject to the interest limitation rules and not subject to the thin capitalisation rules.
Controlled foreign corporations (CFCs)
The rules for CFCs seek to tax income artificially diverted by a Slovak parent company to a CFC if the income is paid without economic justification or to obtain a tax advantage for the Slovak company.
A company is considered a CFC if:
- it is controlled or managed, directly or indirectly, by the Slovak company (e.g. by voting rights, share capital, or share in profit), and
- the CIT paid in another country is lower than 50% of the tax the CFC would pay in Slovakia.
If income is diverted to a PE, it will only be sufficient (for purposes of the CFC assessment) to fulfil the second condition (i.e. the condition regarding the hypothetical Slovak tax).
The CFC’s income will be taxed in Slovakia by including the CFC’s tax base in the tax base of the Slovak parent company to the extent it is attributable to the assets/risks related to the significant functions of the Slovak company, which manages and controls the CFC.
To avoid double taxation, the Slovak parent company will be able to factor in the tax paid by the CFC abroad when calculating/paying tax in Slovakia.
The application of adjustments to the CFC tax base in line with transfer pricing rules will take precedence over the application of CFC rules for the taxation of profits.
The CFC rules apply for tax periods commencing on or after 1 January 2019.
As part of the Slovak financial administration activities against tax evasion, the CFC rules will be extended to natural persons. Based on these, individuals who are Slovak tax residents will be taxable on income attributable to them from their foreign company or an entity controlled by them, provided the CFC’s income has not been taxed abroad at the minimum level of the effective tax rate or the CFC is established in a non-cooperative jurisdiction.
The attributable income will be taxed at 25% or 35% at the moment of the right to a claim (i.e. without the need for its actual payment). The amendment provides for exceptions where this procedure will not apply.
Treatment of inter-company items
Dividends are not treated as taxable (subject to anti-avoidance provisions) if they are paid out of the profit after tax earned in the years 2004 to 2016. For tax treatment of dividends paid out from profits realised before 2004 and from 2017 onwards, please see Dividend income in the Income determination section.
In general, royalties, commissions, and other payments paid to foreign-related parties are tax deductible, provided they are incurred for genuine business reasons and the charges are in line with transfer pricing rules.