NEWSFLASH. Contents. 1. Approved amendment to the Act on Value Added Tax

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1 September / 2014 NEWSFLASH Contents 1. Approved amendment to the Act on Value Added Tax 2. Approved amendment to the Act on Tax Administration (the Tax Procedure Code) 3. Draft amendment to the Act on Income Tax 4. A new motor vehicle tax draft law The Slovak government is preparing a string of measures that will further deteriorate the business environment in Slovakia and that will have a negative effect on the net results of many entrepreneurs. Certainly, some misabuses have to be tackled, but what can be the sense of introducing again the system that certain expenses such as costs for consulting, will be tax-deductible only when paid? Currently we simply don t want to consider yet the impact this will have on the accounting systems and procedures to follow-up on this. These proposed changes have passed already the first hurdle and have been approved by the government. Certainly changes might occur when being discussed in parliament and before the final laws are published. In this issue we bring up-to-date information about the approved amendment to the Act on Value Added Tax (heading 1) and the Tax Procedure Code (heading 2) and proposed changes in income tax and motor vehicle tax with the proposed effect from 1 January Approved amendment to the Act on Value Added Tax On 8 July 2014, the National Council of the Slovak Republic approved an amendment (hereinafter referred to as the Amendment ) governing Act No. 222/2004 Coll. on Value Added Tax, as amended. The Amendment will enter into force on 1 January 2015 and 1 October Below you can find the most important changes that may affect your business. Place of supply of telecommunication services, radio and television broadcasting and electronic services The Amendment accepts Article 5 of Council Directive 2008/8/ EC of 12 February 2008 amending Directive 2006/112/EC as regards the place of supply of services. As a general rule, the Directive stipulates that the place of supply of services to persons other than taxable persons is the place where the service sup- plier has a seat or place of business (establishment). In order to achieve taxation in the place of actual consumption, the provision of telecommunication services, radio and television broadcasting and electronic services is excluded upon the Directive. The place of supply of such services to non-taxable persons shall be the place where the customer has a seat, is domiciled or usually resides. The Amendment accepts this exemption with effect from 1 January Mini one-stop-shop The special arrangement regarding the mini one-stop-shop is currently used only for electronic service rendered by the providers not established in the European Union. From 1 January 2015, the use of this special arrangement will be extended to telecommunications services and radio and television broadcasting, which means that in addition to the providers not established in the European Union, also providers established therein will be able to use it. The advantage of this arrangement is that the providers of the services are not obliged to register for value added tax in all Member States where their customers are established and where the place of supply of such services is according to the original wording. The providers using this arrangement shall meet their obligation to declare and pay a tax, which is imposed on the Member State of consumption, through one tax return filed through the electronic portal

2 in the Member State where they will identify themselves for the use of this arrangement (the so-called Member State of identification). Persons interested in applying the special arrangement of the mini one-stop-shop from 1 January 2015 may commence to submit their notifications along with the required data in October Time limit for filing a VAT ledger statement ( Kontrolný výkaz ) The requirement to file a VAT ledger statement on the same day as a tax return has been repealed. With effect from 1 January 2015 the time limit for filing the VAT ledger statement will be twenty five (25) days after the end of a tax period. Time limit for filing a recapitulative statement ( Súhrnný výkaz ) The Amendment harmonizes the time limit for submission of the recapitulative statement in case of the importation of goods for represented importers with the time limit stipulated by Article 80 of the Act for the other payers, i.e. within twenty five (25) days after the end of the respective calendar month, instead of the previous twenty (20) days. This provision will come into effect on 1 January Changing conditions in filing the recapitulative statement on a quarterly basis The basic time limit for filing the recapitulative statement is one (1) month. Under the applicable wording of the Act, the taxpayer may file the recapitulative statement for a calendar quarter if the value of goods exempt from tax supplied to other Member States does not exceed the amount of EUR 100, in the respective calendar quarter as well as in the preceding four calendar quarters. The Amendment reduces this limit to EUR 50, This provision will come into effect on 1 October Approved amendment to the Act on Tax Administration (the Tax Procedure Code) from 1 January 2015 and 1 July 2015 The amendment brings the introduction of a partial protocol, specification of the order of use of unmarked payments, and shortening of the time test for deletion from the blacklist of VAT payers. Partial Protocol (effective from 1 July 2015) If the tax authority starts a tax audit within the period for repayment of excess tax, it shall return the excess deduction within ten (10) days of the audit completion. Since the tax audit may take up to a year, one of the ways of its completion is service of a protocol to the audited entity. The partial protocol introduced by the amendment will shorten the time limit for repayment of the excess tax. Based on it the tax authority may refund part of the excess tax related to the already audited part of documents. Drawing up of a partial protocol is defined as an option, not an obligation. The tax authority can not draw up the partial protocol if auditing the entity published in the list of tax-risk entities or if the audit is carried out on the initiative of law enforcement authorities. Specification of the order of use of unmarked payments In the context of the amendment, the tax administrator shall use the unmarked payment in the following order: - to pay a tax claim for which the payment has been determined with the oldest date of maturity at the time of receiving the payment; - to pay arrears of tax for which the payment has been determined with the oldest date of maturity at the time of receiving the payment; - to pay advance tax for which the payment has been determined with the oldest date of maturity at the time of receiving the payment; - to cover the costs of distraint and cash expenses, tax claims incurred in relation to any other tax, arrears of any other tax, payable advance on any other tax, arrears of customs duty and arrears of any other payments with the oldest date of maturity at the time of receipt of the payment; - to compensate the tax arrears, payable advance on tax, arrears of customs duty and arrears of any other payments to other tax administrators tax offices or customs offices. If at the time of receipt of the payment there are several tax claims, tax arrears, payable advances on tax, costs of distraint, cash expenses and arrears of any other payments with the same due date, the payment received shall be used to pay them in ascending order. Extension of data on VAT payers published in the so-called blacklist and shortening of the time test for deletion from the blacklist If there are any reasons for deregistration of a VAT payer (e.g. in a calendar year he repeatedly fails to perform the obligation to file VAT returns or VAT ledger statements, or he repeatedly fails to pay tax liabilities, and the like), he shall be published in the list of tax-risk entities. The VAT payer satisfying his obligations shall be deleted from the list of tax-risk entities and entered in a special list of taxpayers being deleted from the list of tax-risk entities. Under the applicable wording, the condition for deletion from the blacklist is termination of the grounds on which the VAT payer got blacklisted and the time test lasting twelve (12) months during which the VAT payer has not breached any obligations. The amendment shortens this time limit from the current twelve (12) months to six (6) months. 3. Draft amendment to the Act on Income Tax (proposed effect from 1 January 2015) After completion of the commenting process, on 20 August 2014 the Government of the Slovak Republic approved an amendment to the Act on Income Tax. The amendment was forwarded to the National Council of the Slovak Republic for consideration and approval. The exact impact of many of these changes will be known only once the final wording of the laws have been approved. But because some of them are so significant, we decided to list them here, so that you can start reviewing how they might impact your business. Once the final laws will be published, we will be pleased to consult with you the specific changes that affect your activities. We would like to point out the most important parts of the amendment: Changes in expenditure on cars - Small companies with a low tax base will be affected by the depreciation limit for passenger cars with an entry price at least EUR 48, The amendment introduces a test of total annu-

3 al depreciation against the tax base. If the tax base is lower than multiple of number of passenger cars with entry price at least EUR 48,000 and yearly tax depreciation calculated from entry price EUR 48,000, the tax base shall be increased by the difference between the depreciation calculated from whole entry price and depreciation calculated from entry price EUR 48,000. If the tax base is higher, depreciation shall not be adjusted. - The ceiling of EUR 48, will also affect the inclusion of passenger car rentals under operating leases. A lessee shall first test a made tax base against the total amount of multiple of the number of leased cars with the lessor s entry price of EUR 48, and more and the limited rent of EUR 14, (i.e. the annual depreciation on the amount of EUR 48, plus 20% profit margin at the lessor s). If the tax base is less than the stated total amount, the tax base shall be increased by difference between the total amount of passenger car rentals, which have entry amount at least EUR 48,000 and the total amount of multiple of the number of leased cars and limited rent of EUR 14, If the taxpayer applies expenditure on fuel consumed at a flat rate of 80% of the total purchases of fuel, the amendment introduces reduction of the tax depreciation and other related expenses using the mentioned percentage. - For discarding of cars as a result of their sale, the amendment introduces a ceiling amount of a tax residual value. The tax residual value can not be higher than the income from the sale of these assets. Each sale should be considered individually. Changes in depreciation groups and periods - The amendment proposes six depreciation groups. In the 1st depreciation group the depreciation period is set at four (4) years, in the 2nd depreciation group for six (6) years, in the 3rd depreciation group for eight (8) years, in the 4th depreciation group for twelve (12) years, in the 5th depreciation group for twenty (20) years and in the 6th depreciation group for forty (40) years. - The amendment divides the existing 3rd depreciation group with the depreciation period of twelve (12) years into the depreciation group 3 with the depreciation period of eight (8) years and the depreciation group 4 with the depreciation period of twelve (12) years. Under the amendment, the 3rd depreciation group with a shorter depreciation period of eight (8) years includes the assets of a technological nature (electric motors, generators, transformers, etc.). Office buildings, hotels, buildings for cultural events, public entertainment, and education or health services should be amortized up to forty (40) years. -Above mentioned changes in tax depreciations will be applied for the first time in tax period starting after Once the depreciation method, depreciation group, amortization of assets is changed, all changes has to be applied also for the assets depreciated according the law valid until (this situation can occur mainly in cases of accelerated depreciation of assets which does not belog to the depreciation groups 2 and 3). Depreciation calculated in past will not be changed. Financial leases - The amendment is to repeal the leasing method of depreciation of tangible assets acquired under financial leases such assets should be depreciated using a straight line (Article 27) or accelerated (Article 28) method during the period of depreciation corresponding to the respective depreciation group in which the assets are included, and not over the lease term. Commencing on 1 January 2015, the new rules for tax depreciation shall also be applied to tangible assets acquired under the financial leases based on contracts concluded from 1 January 2004 to December In the case of an assignment of the subject of the financial lease, a new lessee shall follow the same rules as in the case of purchase of assets. This means that for the new lessee the tangible assets acquired under financial leases must meet the condition of the lease term of at least 60% of the depreciation period. Based on meeting the condition of the duration of the lease, the new lessee shall enter the subject of the financial lease in the books as a newly acquired asset and depreciate it throughout the depreciation period stipulated by Article 26 of the Act. In particular, the amendment provides for the lease term regarding a plot on which a building or structure is located depending on the depreciation group in which such building or structure is included. - The changes also occur in case of the early termination of a financial lease and the early termination of an operating lease and subsequent purchase of previously leased assets at the purchase price less than their tax residual value. Assets being of a personal consumption nature and related expenses - Annex 6 to the proposed amendment defines assets of a personal consumption nature (such as consumer electronics, domestic appliances, cars, boats, furniture). For these assets the tax depreciation up to 80% of the entry price is proposed. But if the taxpayer proves that he uses such asset only in connection with carrying on his business, it can be recognized as a tax-deductible expense in full. It will be clear that this opens the door for many discussions with the tax office and that this will be a very subjective area. Wasted investment - Wasted investment of tangible and intangible fixed assets shall be included in the tax base evenly over thirty six (36) months from the month in which the taxpayer entered the cancellation of work and permanent suspension of work in the books. In the event that there is a stoppage of work because of damage, the cost of wasted investment shall be deemed non-deductible expenses. Non-cash employee income - In addition to few exceptions (non-cash income resulting from the use of an employer s motor vehicle, contributions to supplementary pension saving, etc.), the employer may increase the amount of non-cash income according to the formula set out in Annex to the Act. In the event of such an increase in non-cash income the employer must pay for the employee the amounts withheld for insurance and contributions, as well as advance tax. If the employer chooses this procedure, he must proceed in this way for all his employees throughout the entire tax year. Undercapitalization

4 - The amendment introduces a limit for the maximum amount of interest on loans and credits recognized as costs included in tax expenditures provided that these are loans and credits granted by related legal entities. Such a restriction also supports the related entities to make contributions to the basic capital instead of granting loans and credits and thus increase the guarantees for contingent liabilities. - The limit for the maximum amount of interest that can be considered a tax expenditure is set to 25% variable defined as the sum of: a profit before tax recognized on line 100 of a legal person income tax return and The depreciation included in the current profit and the interest expense included in the current profit. - The assessed interest includes the expenses (costs) associated with the received loans and credits (e.g. expert opinions, fees for bank guarantees, loan brokerage commissions, fees for early repayment, etc.). Loans and credits or portions thereof, the interest on which is part of the asset acquisition costs, shall not be included in the assessed status of the loans and credits. - A person related to a debtor shall also be considered a third party through which such credit (between the related parties) is granted. - The undercapitalization provisions shall not apply to financial institutions (banks, insurance companies and collective investment schemes). Deduction of expenses (costs) for research and development During realisation of some project of research and development the tax base (decreased about tax loss) can be decreased by following amounts: - 25% of expenses for research and development spent in particular tax period, which tax return is submitted for, - 25% of wages and other labor claims of graduate schol in permanent employment (condition is the age until 26 and finnished education in daily form for less than 2 years ago), - 25% of expenses for research and development spent in tax period which are included between deductible costs and increasing the total amount of these costs in previous tax period. When applying of possibility of deduction above mentioned expenses for research and development there will be required to keep separately records about these expenses. Deduction of expenses will be not allowed to apply for services, licencies and intangible results of research obtained from other persons (except for SAV, state and public universities). Other changes - The transfer pricing rules are also to apply to domestic connected persons. It will also be possible to adjust the tax base of domestic related persons. - The amendment proposes the change of the method of income (cash and in-kind) taxation made by health care providers and their employees the income should be subject to tax paid by pharmaceutical companies the pharmaceutical product distributors. Cash income shall be subject to withholding tax, for example, paid by a pharmaceutical company. Non-monetary income shall be subject to tax paid by a person that received such income. - The condition of payment was extended to the cost of consultancy and legal services and marketing and other studies, market research costs and costs of obtaining standards and certifications. The amendment also introduces the condition that these expenses will be included in the tax base evenly over thirty six (36) months from the month they were paid. - Reserves for unbilled supplies and services, for the preparation and audit of financial statements and annual reports as well as for the preparation of tax returns should not be tax-deductible expenses. - After adoption of the amended Act, write-off of loans, for example, due to dismissal of a petition for bankruptcy because of lack of debtor s assets, will not be considered tax deductible expenses. According to the amended provision stipulated by Article 19 paragraph 2 subparagraph h) of the Act, part of the tax base shall only be the write-off of the receivable which is included in taxable income. - The amendment also introduces an adjustment of tax expenditures on membership fees resulting from voluntary membership in a legal person up to 5% of the tax base, with a ceiling of EUR 30, per year (under the applicable wording, the membership fees are assessed separately, up to 0.5 of taxable income and up to a maximum of EUR 66, per year). - Tobacco products and alcoholic beverages will be considered expenditure on promotional items only for taxpayers whose manufacture of tobacco products and alcoholic beverages is a main object. - A limit on the inclusion of remuneration (commission) for recovery of receivables being included in the tax base is introduced in the amount of 50% of the recovered receivable value. - The amendment prevents the inclusion of the costs of inventories in the tax base at their discarding due to expiry of shelf life. However, the conditions are introduced after the meeting of which the costs of liquidated stocks can be considered tax deductible expenditures if within that period the taxpayer has taken measures to promote their sale by gradually reducing prices or provided food supplies to the Food Bank of Slovakia free of charge. The costs of inventories discarded because of their classification as dangerous goods under the Consumer Protection Act will also not be considered tax deductible expenditures. - Quarterly prepayments of income tax of the taxpayer (legal person) whose taxable period is a business year will be payable by the end of the corresponding quarter of the business year (currently it holds that the advances are due by the end of the calendar quarter, unless the tax administrator determines otherwise at the request of the taxpayer). - Contractual penalties will not be tax deductible expenditures. - The period for the write-off of tax losses changes to four (4) tax periods or years evenly. There is no possibility to choose, that tax loss will be write-off during 2 respectively 3 years. 4. A new motor vehicle tax draft law Motor vehicle tax is currently regulated as part of Act No. 582/2004 Coll. on Local Taxes and Local Fees for Municipal Waste and Minor Construction Waste, as amended. The rates of this tax are determined by individual higher territorial units. It is proposed that from 1 January 2015 the tax on motor vehi- VGD - AVOS Bratislava, Moskovská 13, Bratislava, Slovakia

5 cles will be governed by a new separate law (hereinafter referred to as the New Act ). This amendment was still not approwed until publishing of Newsflash. The New Act provides for a definition of a taxpayer that is, in principle, in addition to the owner registered in the Registration Certificate Part I and the Registration Certificate and Part II, the user of the vehicle as well as the employer. The New Act no longer distinguishes a domestic and foreign taxpayer. Under the draft law, the structural unit of a foreign company will no longer be considered a separate taxpayer. Uniform annual tax rates for the whole territory of the Slovak Republic and tax relieves Under the draft law, the annual tax rates will be adjusted uniformly throughout the territory of the Slovak Republic (Annex 1 to the New Act). The draft law also specifies a method for reducing the rate for a vehicle used in an articulated truck. It determines the reduction in the annual tax rates differentiated according to the month of the first registration of the vehicle (including that month) taking into account ecological criteria for a maximum of one hundred and eight (108) calendar months. After this period it is proposed to put the basic annual tax rate on the vehicle for a maximum of thirty six (36) calendar months. It is proposed to increase the annual tax rates after the expiration of the total period of one hundred and forty four (144) calendar months from the month of the first registration of the vehicle as follows: by 10% for a period of twelve (12) calendar months and by 20% for vehicles older than one hundred and fifty six (156) calendar months. New reporting obligation In addition to the existing obligation to report on the termination of the tax liability also a new obligation of a taxpayer is introduced in connection with reporting on the fact that the vehicle was not subject to tax in the tax period and no entries related to this vehicle were made in the books. The time limit for reporting on this fact is to 31 January after the end of a tax period. All pieces of information contained in this document are only of a general and informative nature. If you have any detailed questions about changes relating to taxes, please contact our experts. In the case of hybrid motor vehicles or hybrid electric vehicles, it is proposed to reduce the annual tax rate or the annual tax rate adjusted by 50% for the vehicles powered by compressed natural gas (CNG) or liquefied natural gas (LNG) or hydrogen-powered vehicles. The draft law also provides a tax relief for vehicles used in combined transport. Commencement and termination of tax liability It is proposed to modify the commencement of tax liability on the first day of the month in which the vehicle became subject to tax (currently the tax liability commences on the day of the use of the vehicle for business). It is proposed to terminate the tax liability on the last day of the month of occurrence of the permanent or temporary deregistration of the vehicle from the vehicle register, termination or interruption of business, the taxpayer termination without liquidation, change of the owner of the vehicle or termination of using the vehicle, in the documents of which the registered owner is an individual who died or an entity that disappeared, was dissolved or does not use the vehicle for business. In case of change of the taxpayer for the same vehicle during the tax period, the original taxpayer s tax liability will cease on the last day of the month in which the change of the taxpayer has occurred and the new taxpayer s tax liability will arise on the first day of the month following the month in which this change has occurred, thereby avoiding duplicative taxation of the same vehicle in one month.

6 VGD Office Locations Slovakia Bratislava Moskovská Bratislava tel: fax: info.bratislava@vgd.eu Bart Waterloos, Partner bart.waterloos@vgd.eu Anna Boskovičová, manager anna.boskovicova@vgd.eu Piešťany Námestie SNP 1476/ Piešťany tel: fax: vgd.piestany@vgd.eu Erik Marek, Partner erik.marek@avos.sk Marián Škorník, Partner marian.skornik@avos.sk OTHER COUNTRIES Czech republic Praha, Liberec, Olomouc Belgium Brussels, Beringen, Brugge Gent, Willebroek, Antwerpen, Antwerpen L.O., Kuurne, Machelen, Dendermonde, Zele Luxembourg Luxembourg The Netherlands Tilburg, Oisterwijk Hungary Budapest Russia Nizhny Novgorod Polland Warsaw Bulgaria Sofia The material contained in this publication is provided for general information only. The application of the information included in this publication will depend on specific circumstances. We recommend that readers seek professional advice when dealing with any business or legal issues. The material does not represent, nor replaces legal and tax advisory services. No liability is accepted for acts or omissions taken in reliance upon the contents of this publication.