Changes in the Income Tax Act valid from 1 January 2015 5 February 2015 Dr.WilfriedSerles IB Grant Thornton Consulting, k.s. Bart Waterloos VGD – AVOS AUDIT s.r.o.
Changes in the Income Tax Act • New classes and rules for tax depreciation • Luxury limits for passenger vehicles • Limits on writing off to certain receivables • Tax deductible costs after payment • Thin capitalization rules • Transfer pricing • Private use of assets • Research and Development super bonus • Other changes
Changes in depreciation groups • The number of depreciation groups was increased from 4 to 6. • Assets in the 3rd depreciation group with present period of depreciation of 12 years (production technologies) will be depreciated for 8 years. Assets in the 6th depreciation group with present period of depreciation of 20 years will be depreciated for 40 years. This change concerns assets such as administrative buildings, hotels and residential buildings.
ExampleChange in the method of depreciation period of an administrative building from 20 to 40 years • In 2009 the company acquired an administrative building for a purchase price of EUR 500.000. As the administrative building will be classifed to the 6thdepreciation group, the depreciation period will be changed from 20 to 40 years with effect from 1 January 2015. • The procedure of depreciation will be as follows:
ExampleDetermination of the depreciation group for buildings • If a building is used for several purposes, the main use will be decisive to determine to which depreciation group it belongs. • Depreciation group 5: 1 000 m2i.e. 33,33 % and depreciation group 6: 2 000 m2i.e. 66,67 %
Change in method of depreciation • The use of the accelerated depreciation method will be limited to the assets classified into the 2nd and 3rd depreciation group. • Given this, such assets as electric equipment and devices, air-conditioning equipment, furnaces and furniture can be further depreciated using accelerated depreciation method. • All other assets have to be depreciated using the straight-line depreciation method, whereby the method of depreciation must be changed from 1 January 2015, i.e. in case the assets were depreciated using accelerated depreciation method this has to be changed to straight-line depreciation method as of 1 January 2015. Depreciation charges for the previous years will not be adjusted.
ExampleChange in the method of depreciation for assets classified to the 1st depreciation group • In January 2014 the company acquired a passenger vehicle for purchase price of EUR 36,000. In 2014 the passenger vehicle was depreciated using the accelerated depreciation method. • As the passenger vehicle will be classified into the 1st depreciation group, the depreciation method must be changed from the accelerated to straight-line depreciation method with effect from 1 January 2015. • The procedure of changing of the depreciation will be as follows:
ExampleChange in the method of depreciation in case of reclassification of tangible asset from the 3rd to the 4th depreciation group • In January 2010 the company acquired a container for purchase price of EUR 12,000. The container was classified into the 3rd depreciation group with period of depreciation of 12 years and in the years 2010 – 2014 it was depreciated using the accelerated depreciation method. • As of 1 January 2015, the container has to be reclassified to the 4th depreciation group (also with depreciation period of 12 years). As the accelerated depreciation cannot be used for the assets classified into the 4th depreciation group as of 1 January 2015, it is necessary to change the accelerated depreciation method to the straight-line depreciation method with effect from 1 January 2015.
ExampleChange of depreciation method in case of reclassification of tangible asset from the 3rd to the 4th depreciation group (acquisition price EUR 12,000)
Losses on sale • Losses on sale of passenger vehicles, motorbikes, ships, sport and recreational boats, and losses on sale of property classified into the 6th depreciation group will not be tax deductible any more. • Example • In January 2013 the company acquired a passenger vehicle for purchase price of EUR 36,000. In March 2015 the company will sell this vehicle for EUR 17,000. The following table shows the impact on the tax base in 2015:
Interruption of depreciation • From 1 January 2015 the conditions under which depreciation of tangible assets must be interrupted will be extended: • In tax periods, in which the asset is not used for business purposes; • In case of change of the tax period to the fiscal year (if the tax periodis changed for the second time during a period of two consecutive calendar years); • If the validity of the preliminary permission for use of building is not extended. • But it will be no longer possible during a tax control, respectively for tax periods over which a tax control has been performed.
Changes in financial lease • Tangible fixed assets, that were acquired under the financial lease contract have to fulfil the condition of the period of lease representing at least 60% of the period of depreciation. The condition of the minimum duration of the period of lease of 3 years was cancelled. • The possibility of depreciation of the assets acquired under the financial lease contract during the period of financial lease, which in the practice led to much shorter period of depreciation, was cancelled. From 1 January 2015 they will be depreciated according to the rules of the standard tax useful life. • This new rule applies to subjects of financial lease that were leased under contracts concluded after 1 January 2004.
ExampleChanges in depreciation of the subjects of financial lease • In February 2014 the company concluded the contract on financial lease of passenger vehicle at the amount of EUR 24,000 for the period of February 2014 – January 2017.
ExampleChanges in depreciation of the assets acquired under the financial lease contract • In January 2013 the Company acquired a building used for administrative purposes with value of EUR 600,000 under the financial lease contract. The period of lease was agreed for a period of 12 years (January 2013 – December 2024).
Financial lease / Technical improvements • Technical improvements of the subjects of financial lease will not be depreciated separately as „Other assets“ anymore. • For the purposes of calculation of tax-deductible depreciation the acquisition costs of the assets acquired under the financial lease contract will be increased by the amount of technical improvements. • In this way the period of depreciation will be extended accordingly.
ExampleDepreciation in case of technical improvements of the assets acquired under financial lease contract • In January 2015 the company concluded the contract on financial lease of passenger vehicle in the amount of EUR 28,000 for the period of 40 months, from January 2015 to April 2018. In January 2017 technical improvements in the amount of EUR 2,000 will be performed.
Depreciation of passenger vehicle • The amendment introduces the luxury limit in the amount of EUR 48,000 for passenger vehicles, but it only concerns taxpayers who use passenger vehicles for business purposes and whose tax profit is lower than EUR 12,000. This limit of tax base will be increased in case of the use of several passenger vehicles, depending on the number of these vehicles. For instance, if a taxpayer uses 2 passenger vehicles, the limit of profit will be EUR 24,000. • Taxpayers who do not exceed the respective limit of profit may depreciate the passenger vehicle on the basis of acquisition costs limited to the amount of EUR 48,000. Taxpayers with higher tax profits may depreciate the vehicle in full amount. • This rule does not apply to lessors of luxury passenger vehicles who may apply depreciation in individual tax periods up to the amount of income from lease of these vehicles.
ExampleDepreciation of passenger vehicle • Top cars sold in 2014 in Slovakia: Source: http://bestsellingcarsblog.com/2015/01/slovakia-november-2014-skoda-yeti-vw-golf-sportsvan-shine/#more-49701
ExampleDepreciation of passenger vehicle • In 2015 the company will purchase a passenger vehicle for purchase price of EUR 70,000. The following table shows impact during the depreciation period in years 2015-2018: For the purposes of calculation of tax residual value the tax depreciation charges in the amount of EUR 17,500 will be used, i.e. the tax non-deductible part of tax depreciation charges will not be considered as tax deductible through the tax residual value of passenger vehicle.
Example Depreciation of passenger vehicle In September 2015 the company acquires a passenger vehicle for an amount of EUR 60,000. Based on the new rules, if the tax base of the company: > = 12 000 (yearly depreciation limit from EUR 48,000) – no correction is required. < 12 000 (yearly depreciation limit from 48 000 eur) – the correction to the tax base is required.
ExampleDepreciation of passenger vehicle • In January 2015 the company will purchase 2 passenger vehicles, each for purchase price of EUR 70,000. The following table shows impact during the period of depreciation in years 2015-2018:
Lease of passenger vehicle • On the side of lessee the annual tax costs of lease are limited to EUR 14,400 if his tax profit is lower than EUR 14,400. • In case of the tax base higher or equal to EUR 14,400 the costs of lease will be tax deductible in full amount. • This limit of profit will be increased in case of use of several passenger vehicles, depending on the number of these vehicles. For example, if the taxpayer uses 2 passenger vehicles the limit of profit will be EUR 28,800.
ExampleLease of passenger vehicle • In January 2015 the company will lease a passenger vehicle with value of EUR 70,000 for the period of January 2015 – December 2018, whereby the annual cost of lease will be EUR 20,000. The following table shows impact on the tax base during the period of lease.
ExampleLease of passenger vehicle • In April 2015 the company will lease a passenger vehicle with value of EUR 60,000 for the period of April 2015 – March 2019, whereby the annual cost of lease will be EUR 18,000. The following table shows impact on the tax base during the period of lease.
ExampleLease of passenger vehicle • In January 2015 the company will lease 2 passenger vehicles, each with value of EUR 70,000, for the period of January 2015 – December 2018, whereby annual cost of lease will be EUR 20,000/vehicle. The following table shows impact on the tax base during the period of lease.
Write off of receivables • Tax deductible write off of irrecoverable receivables (e.g. in case of termination of bankruptcy proceeding, restructuring or execution proceedings, issue of the court´s ruling or death of the debtor) will be possible only for receivables that were initially included in taxable income.
ExampleWrite off of receivable in case of termination of the bankruptcy proceeding due to the lack of assets of the debtor • The company reports in the accounting a receivable from loan in the amount of EUR 13,000. The amount of the outstanding principal is EUR 10,000 and outstanding interest on the loan represent the amount of EUR 3,000. Due to the lack of assets of the debtor the bankruptcy proceeding was terminated. The receivable from the loan in the amount of EUR 13,000 will be written off in the year of termination of the bankruptcy proceeding. • Impact on the tax base:
Tax deductible costs after payment • The amendment extends the group of costs that will be tax-deductible no sooner than settled: • Costs of marketing studies and other studies, costs of market survey; • Costs of consulting and legal services; • Payments to taxpayers resident in states with which the Slovak Republic has not concluded international double taxation treaty, will be considered as tax-deductible after the withholding tax will be remitted to the tax authority and the respective notification will be delivered to the tax authority or after the security of tax is performed on these payments; • Agency commissions, including those paid under mandate and similar contracts (e.g. commercial on commercial representation), will be tax-deductible after their payment up to 20% of the value of mediated transaction. This provision does not apply to certain financial institutions (e.g. banks, insurance companies and their branches, etc.); • Costs of obtaining of standards and certificates will be included in the tax base evenly during their validity, but not longer than during a period 36 months starting from the monthof their payment; • The change in tax deductibility of costs after their payment will have to be reflected in the calculation of deferred tax.
Tax non-deductible reserves • Reserves for: • unbilled supplies and services, • preparation, audit and publication of annual financial statements, including their annex, • preparation of tax return • will not be tax-deductible any more.
ExampleTax deductible costs after payment and reserves • During the year 2015 the company recorded the following transactions: • Invoice for consulting services in the amount of EUR 2,000 and invoice for market survey in the amount of EUR 3,600; none of the invoices was settled by 31.12.2015; • Reserve for unbilled supplies in the amount of EUR 4,500; • Reserve for the preparation of annual financial statements and tax return for FY2015 in the amount of EUR 4,000; • Unpaid contract fine toward the contract partner in the amount of EUR 500.
ExampleTax deductible costs upon payment and reserves • In 2016 the company will pay: • Invoice for consulting services from the year 2015 in the total amount of EUR 2,000; • Invoice for market survey from the year 2015 in the amount of EUR 3,600; • Invoice for unbilled supplies in the amount of EUR 4,500 and invoice for annual financial statements and tax return in 2015 in the amount ofEUR 4,000; for this purpose the company used provisions recorded in 2015; • The company will record provision for preparation of annual financial statements and tax return in the amount of EUR 3,500; • The company will further record contract fines and late payment interest in the amount of EUR 300, which were not paid as of 31.12.2016.
ExampleTax deductible costs after payment and reserves • Illustration of impact on the tax base of the company in 2015 and 2016:
Non-deductible costs • Tax deductible advertising items, the value of which must not exceed EUR 17 per unit, do not include tobacco products and alcoholic beverages; these advertising items will be tax-deductible only at producers of tobacco products and alcoholic beverages. • Wine is an exception. Wine bottles as advertising gift will be tax deductible in the total amount up to 5% of the tax base of the taxpayer. These limiting rules do not apply to producers of alcoholic beverages. • Contract fines and contracted late payment interest or default charges, that were tax-deductible after payment, will not be tax-deductible any more.
Tax deductibility of interestcosts • So-called „thin capitalisation rule“ for financing between related parties is introduced. • Costs of credits and loans provided by related party will be tax-deductible up to 25% of EBIDTA (earnings before interest, taxes, depreciation and amortization). • Activated interest in fixed assets remains unaffected by this prohibition of deduction. • Leasing companies, banks and insurance companies are exempt from this rule.
ExampleTax deductibility of interestcosts • A Slovak production company received from its parent company a loan for building of its production plant. Total interest expenses of the company amount to EUR 2,800,000, of which interest paid to the parent company represent the amount of EUR 2,500,000.
ExampleTax deductibility of interestcosts • After consideration of the rate of the corporate income tax the additional tax burden in this specific case represents the amount of EUR 277,750.
Transfer pricing • From 1 January 2015 it is necessary to include transactions between domestic related parties in the transfer pricing documentation.
ExampleTransfer pricing • In 2014 and 2015 the company Alfa SK is engaged in the following transactions with the parent company Alfa AT established in Austria and affiliated related company Beta SK established in Slovakia. • The obligation to report the transactions in the transfer pricing documentation in the company Alfa SK in 2014 a 2015:
Private use of assets • Costs of acquisition, operation and maintenance of assets that are used for both business and private purposes must be reduced in the proportion to their actual use for private purposes • It will be further possible to deduct 80% of costs without provision of special evidence • So either proof of actual percentage of use; or the lump-sum of 80% • The same percentage will then apply to the depreciation
ExampleUse of assets for private purposes • In January 2015 the company will acquire for its employees 10 notebooks at cost of EUR 2,000/unit. The employees can partially use NTB for private purposes. In 2015 the company will incur costs of repair of NTB in the amount of EUR 500. The company will decide to apply the lump-sum amount of 80% on the depreciation charges of NTB and the repair costs. • Impact on the tax base: • For the purposes of calculation of the tax residual value of NTB the tax depreciation charges in 100% amount have to be used, i.e. the 20% of the tax depreciation charges considered as tax non-deductible will not be reflected in the tax residual value and will represent final tax non-deductible cost.
ExampleDepreciation of passenger vehicle, used for 80% • In 2015 the company will purchase a passenger vehicle for purchase price of EUR 80,000. The following table shows impact during the depreciation period in years 2015-2018:
Research & Development • Research and development will be tax-supported in the following period. • The support will have the form of a 125% „super-deduction“ of R&D costs. • The super-deduction applies to: • All research and development costs • Personnel costs of graduates working in the area of research and development • Increase of R&D costs • Its application is made conditional upon a written research and development project, which must be submitted in case of tax audit.
ExampleTax deduction of R&D costs • In 2015 and 2016 the company will develop a new product. The project will be implemented with participation of employees of company, for whom the legal conditions for recognition of deduction in 2016 are fulfilled (graduates). • Calculation of tax deduction in 2016:
Taxation of monetary and non-monetary benefits provided by pharmaceutical companies • Subject of taxation: • Monetary benefits and non-monetary benefits provided to the health care provider, its employee or health professional by the marketing authorization holder, wholesale distribution authorization holder, production authorization holder and from 01.01.2015 by the pharmaceutical company. • Tax rate: 19% • Payment of withholding tax/notification obligation: • monetary benefits – the tax will be withheld by the provider upon payment of benefits by the 15th day of each month for the previous calendar month. The notification obligation arises to the provider in the same period. • non-monetary benefits – obligations resulting for the recipient and the provider of benefits • Recipient of non-monetary benefits – will pay the tax before the end of the calendar month following the calendar quarter, in which the non-monetary benefits were received. • The notification obligation arises to the recipient in the same period. • Provider of non-monetary benefits – The provider of non-monetary benefits must fulfill the notification obligation by the 15th day after the end of the calendar quarter,in which the benefits were provided.
ExampleTaxation of non-monetary benefits provided by pharmaceutical companies • In May 2015 a pharmaceutical company provides to the practitioner the free participation in specialized event involving the presentation of new medical products in the seat of the parent company abroad. In addition to the fee for participation, the pharmaceutical company will reimburse to the practitioner the transport and accommodation costs. The pharmaceutical company determined non-monetary benefits for the practitioner on the basis of actually incurred costs in the amount of EUR 1,500. • Obligations of the practitioner: tax paymentin the amount of EUR 285 by 31.07.2015. Delivery of the notice of payment of the withholding tax to the tax authority (using the form issued by FR SR) • Obligations of the pharmaceutical company: submission of the notice of provision of non-monetary benefits (using the form issued by FR SR) by 15.07.2015. In addition to the basic data, the notice will indicate the amount • of non-monetary benefits and the date of their provision.
Tax losses • The amendment explicitly provides that tax losses must be evenly utilized over a period of 4 years.
Foreign services • The withholding tax is applicable to services provided by service providers not tax resident in Slovakia (commercial, technical and other consulting services, services of agents, construction and assembly works, etc.) only in case such services would be provided in the territory of Slovakia. • It will lead to the decrease of the number of cases affected by the 35% withholding tax rate.
ExampleConsulting services provided by a Liechtenstein company • A Liechtenstein company will provide to a Slovak Ltd. consulting services and charge EUR 100,000 for them. • Option 1: The services will be provided in Liechtenstein • Option 2: The services will be provided in Slovakia
Other changes • Member contributions arising from the voluntary membership of a legal person established in order to protect the interests of the taxpayer in total up to 5% of the tax base, with a ceiling of 30,000 per year. • Obsolete stocks The inclusion in the tax base is limited for the cost of inventories at their disposal because of the expiration date. However, conditions are introduced, after fulfilment of which can the cost of liquidated stocks still be considered tax deductible, if the tax payer: - Until the expiry of that period demonstrably takes steps to promote their sale by gradually reducing prices, or - Delivers such food supplies free of charge to the Food Bank of Slovakia. Equally the discarding of inventories due to their classification as dangerous goods under the Consumer Protection Act will not be considered a tax deductible expense.