The Slovak Ministry of Finance has submitted the proposed wording of the most important part of the planned tax reform. At the beginning of September, the parliament approved the proposal of the new Income Taxes Act in the first reading. Its final approval is expected by the end of October, and it should come into effect from 1. 1. 2004.
KEY CHANGES
1. "One Flat Rate of 19 %"
The most significant change is the proposed flat tax rate of 19%, both for personal income tax (instead of the former progressive rates from 10 % to 38 %) and for corporate income tax (instead of the current rate of 25 %).The application of a unitary 19 % withholding tax rate is proposed with respect to selected types of income (e.g. interests and other yields from deposits, yields from participation certificates, bonds and treasury bills) instead of the current system of withholding taxes (from 5 % to 25 %).
2. Dividends without Taxation
Dividends will not be subject to either withholding tax applied at the source or taxation in the hands of the recipient. Based on the proposed wording, this rule will only be applicable to profits reported after 1. 1. 2004. However, the EU Parent Subsidiary Directive, which has priority over the Slovak legislation (see also part 5. below), provides for an exemption earlier. In this connection, proper tax planning, including timing of the dividend distribution, will directly effect the tax burden (non-taxation) of dividends. Non-taxation of dividends will most probably draw attention as an excellent tax-planning tool. As a "stepping stone", Slovakia will provide access to companies from non-EU countries to enter the European Union, with its extensive network of double tax treaties without having to pay any taxes on outgoing dividends.
3. Refund of Overpayments
The system of collecting withholding tax will change in principle. In effect from 1. 1. 2004, the collected withholding tax will be treated as an advance (with a few exceptions, e.g. non-profit organisations) instead of the current system, under which the withholding tax is considered to be the final tax. If the amount of withholding tax will exceed the calculated tax liability of the tax payer (e.g. due to a deduction of allowances), the tax payer will be entitled to a refund of the overpayment based on a filed tax return.
4. Harmonisation with OECD Countries
The proposed wording of the law is also aimed at harmonisation with the generally accepted rules of international tax law. In this regard, the following definitions of terms may be considered to be the most important ones: related party, permanent establishment (narrower definition), financial lease, tax residence of legal entities will be determined according to place of effective management (however the current formalistic approach to determine tax residency of individuals based on issued permits will be kept), business year, i.e. application of tax period is different from calendar year (see Corporate Income Tax part for more details).
5. Non-discrimination
In addition to rules like the Parent Subsidiary Directive mentioned in part 2 above, EU law in general (e. g. non-discrimination and the four fundamental freedoms based on the EU Treaty) will also start to apply to income taxes, in effect from 1. 5. 2004. EU law will have priority over the proposed Slovak Income Tax Act. From this perspective the following are seen to be problematic: 19% tax guarantee, travel expenses of expatriates assigned to work in Slovakia, tax deductible allowances for non-residents, etc.
Article will be continued in next issue No. 38.
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Author: By Renáta Bláhová, MBA, ACCA, LLM
