IN ADDITION to the 19 percent flat income tax for corporations and private individuals, there are other changes in the new income tax act that took effect on January 1, 2004.
The Slovak Spectator asked tax and auditing experts about the major differences that the new law has introduced, primarily for foreigners operating in Slovakia.
Peter Chrenko, country managing partner and head of tax services at Ernst & Young; Todd Bradshaw, senior tax manager of PricewaterhouseCoopers Tax; and Mark Gibbins, tax partner at KPMG gave the following answers.
The Slovak Spectator (TSS): What other important changes have been adopted in the income tax act for foreign companies and individuals working in Slovakia?
Peter Chrenko (PC): For example, the new act has liberalised the tax loss carry-forward rules and abolished the thin capitalisation rules. The latter means that investors can fully leverage their investments with inter-company loans, without providing the required ratio of capital.
Other important changes are the abolition of restrictions on certain types of advertising expenses, the tax deductibility of some expenses based on the accrual principle and not upon the actual payment, the shortening of the tax depreciation of assets, and the removal of a price limit on passenger cars eligible for tax depreciation.
For foreign individuals - expatriates - Slovakia is becoming a good place to become tax residents. It can be expected that multinational corporations will be setting up their service coordination centres in Slovakia, as they would be very attractive to well-paid foreign employees. The 19 percent tax rate on personal income is quite unique to the region.
Todd Bradshaw (TB): As a result of the harmonisation of Slovak tax law with EU tax directives, any mergers or demergers between group companies within Slovakia or between a Slovak entity and another EU entity in the group should no longer result in a tax cost.
The strict tax loss carry-forward rules were eased under the 2004 income tax law, which is a positive step forward. The allowance of deductions for bad debts is also a significant positive change in the Slovak tax law that brings it more into line with foreign tax regimes.The reduction of the real estate transfer tax to 3 percent and the reduction in tax depreciation write-off periods were also very positive.
The tax and accounting period of an entity can be different from the calendar year. This benefits foreign investors who can now align their Slovak tax and accounting reporting period with the group reporting period.
The lower personal tax rate of 19 percent makes it more attractive for investors to send expatriate staff to work in Slovakia. Previously, the high effective tax rates made this very costly. The benefit to Slovakia is the additional personal tax revenues and the know-how the expatriates can bring and hopefully transfer to their Slovak colleagues.
Mark Gibbins (MG): There are many changes but I would highlight the reduction of tax rates for corporations, some liberalisation in the tax deductibility of costs, more flexibility in carrying tax losses forward, and the introduction of a single flat tax rate for individuals as particularly important.
TSS: What impact will it have for their activities here?
PC: The major impact it will have is on their savings. Cost-cutting is a major exercise these days for any multinational corporation.
That is why they move their manufacturing, service, and distribution centres to eastern Europe. And because taxes are costs too, the reduction of taxes on the corporate, as well as on the employee's, side makes it more attractive here. The simplification of the overall taxation system makes this even more so.
TB: The change in the tax treatment of mergers and demergers makes restructuring less risky from a tax perspective. This removes the tax barrier to corporate reorganisations, which will allow companies to more easily respond to changes in the business environment.
The reduction in the real estate transfer tax and the lower depreciation period for buildings will provide a boost to the Slovak property market.
The option to change a Slovak entity's accounting period reduces the additional time and administration related to having different Slovak statutory and group reporting periods.
MG: While many companies and individuals will benefit, in some cases savings are offset by higher indirect tax costs. The answer is therefore that it depends on the individual business.
In general, the tax reforms have been looked at sympathetically by commentators and could serve to awaken more interest in Slovakia and to help attract more foreign direct investment, both from existing and new investors. However, as I stressed above, tax is only one of several factors so at this point it is difficult to evaluate the impact.
2. Feb 2004 at 0:00 | Marta Ďurianová