Slovakia: Changes to transfer pricing rules and limitations on deductibility of interest
New rule limiting the deductibility of interest that implements the EU’s Anti-Tax Avoidance Directive
New rule limiting the deductibility of interest that implements the EU’s ATAD
The Parliament on 6 December 2022 approved an amendment to the income tax law that includes changes to the transfer pricing rules, as well as a new rule limiting the deductibility of interest that implements the EU’s Anti-Tax Avoidance Directive (ATAD).
The changes to the transfer pricing rules, which generally are effective 1 January 2023, include:
- Addition to the definition of economic interrelation of close persons (e.g., husband, wife). For the purpose of calculating the direct share, indirect share or indirect derived share, the shares of close persons are counted and if the sum is at least 25%, the relevant persons or entities are considered to be economically interrelated.
- Specific definition of a significant controlled transaction (i.e., a value exceeding €10,000 or a loan with a principal of over €50,000). The intention is to reduce the administrative burden of small businesses engaged in low-value transactions. Transfer pricing rules will not apply to insignificant transactions. Please note that this is not a change in the definition of significance which is applied for determining the scope of the documentation obligation.
- The possibility to submit transfer pricing documentation by taxpayer in a foreign language without a need to request the official approval in advance. However, the tax authority may still subsequently request the translation of the documentation into the official language.
- The use of the median (middle value) of determined independent comparable values for the purpose of adjusting the tax base, if the prices used in the controlled transactions are not in accordance with the arm’s length principle. At the same time, there is a possibility for the taxpayer to demonstrate during the tax audit that it is more appropriate to use another value within the range of independent comparable values (i.e., other than the median) for the purpose of adjusting the tax base.
- Addition of the reference to the OECD transfer pricing guidelines, although the guidelines are already considered an interpretative tool in the application of transfer pricing rules in practice in terms of international treaties to which the Slovak Republic is bound.
The new rule limiting the deductibility of interest exceeding 30% of tax EBITDA, which is effective 1 January 2024, applies to all legal entities (residents and nonresidents, and both related and unrelated entities), except for certain financial institutions, debtors whose related parties are only individuals, and taxpayers whose net interest costs in a given year do not exceed €3 million. The new rule allows the transfer of unused interest capacity to subsequent tax periods.
Read a December 2022 report prepared by the KPMG member firm in Slovakia
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