EY Tax & Legal News. Issue 7-8/2016. Tax and Legal Services. EY Tax and Legal Services

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1 Issue 7-8/2016 EY Tax & Legal News Tax and Legal Services 2 Corporate and Personal Taxation Proposed amendment to the Income Tax Act Income Tax Act Changes in transfer pricing Proposed amendments to the Tax Administration Act and Act on the Special Levy for Regulated Industry Recent updates in e-government 6 Value Added Tax Proposed Amendment to the VAT Act 7 Legal news Proposal for the Act on Registration of Public Sector Partners Administrative Court Proceedings Code EY Tax and Legal Services I EY Tax & Legal News Issue 10/2014

2 Corporate and Personal Taxation Proposed amendment to the Income Tax Act A new amendment to the Act No. 595/2003 Coll. on Income tax as amended ( ITA ) proposes a number of important changes which we summarize for you below: The corporate tax rate should be lowered from 22% to 21%. The lower rate should apply to tax periods from 1 January Taxation of dividend income is re-introduced for natural persons and in some cases also for legal persons. The proposed changes should take effect as of 1 January Natural persons (Slovak tax residents) should be taxed at 15% on their dividend income, while if dividends are paid by legal persons from non-treaty states (so-called tax havens) the applicable tax rate should be 35%. The list of treaty states (states with which the Slovakia has concluded a Double Tax Treaty or a Treaty on Tax Information Exchange) is published on the following website of the Ministry of Finance. Natural persons (Slovak tax non-residents) should be also taxed at 15% on their dividend income with its source in the territory of Slovakia (i.e., dividends paid by commercial companies or cooperatives that are Slovak tax residents). Dividends paid between legal persons (Slovak tax residents) should remain out of the scope of income tax. However, if dividends with sources in Slovakia are paid to legal persons that are tax residents in non-treaty states, they should be subject to a tax rate of 35%. The same applies to the dividend income of legal persons (Slovak tax residents) with its source in a non-treaty state. Dividend income should be taxed via withholding tax if its source is in Slovakia and via a tax return, if its source is overseas. As a reaction to the taxation of dividends, dividend income should no longer be subject to 14% health insurance contributions with effect from 1 January Income tax should also apply to settlement shares, shares in liquidation balances and shares of profits paid to silent partners under similar conditions as dividends. The amendment also introduces changes to definitions. Among others, the definition of the holder (for the purposes of the taxation of health-care providers) is extended. The definition of an economic and personal tie is specified and a new definition of a controlled transaction is introduced. Changes to the tax deductibility of costs include specification of the costs that are tax deductible only after their payment. In particular, costs which fall under the rent / use of intangible property are specified. We will further monitor the legislative progress of the proposed amendment to the ITA and inform you accordingly of all the important developments. Should you wish to obtain more information or if you have any questions relating to this topic, please contact the author of this article or your EY partner or manager. 2 EY Tax & Legal News Issue 7-8/2016

3 Income Tax Act Changes in transfer pricing The amendment to the Slovak Income Tax Act also contains several changes to transfer pricing rules. Please find below a summary of the main changes, which will come into force on 1 January 2017 if this amendment is approved: Amendments to general definitions The amendments were proposed with regards to the economic or personal connection definition. According to the amendment, economic or personal connection is now extended to persons which are under control or management of a close person or where such a close person has a direct or indirect ownership interest. There is also extension of the management definition by adding the non-exclusive list of company bodies involved in management relationships. Previously, the wording explicitly listed only statutory and supervisory bodies of a partnership or cooperative. Additionally, within the management definition, the term partnership or cooperative is replaced by the term legal entity. The main reason is that other entities also involved in profit-making business activities were outside the scope, based on the previous definition. The proposed amendment adds a controlled transaction definition. This is linked to another paragraph, where the term controlled transactions replaces the term business relationship of related parties, due to the different interpretations of the term. These have arisen because: (1) it has no legal definition, (2) the professional community has considerable confusion with its application and (3) there is a lack of support for this concept in international documents. The term controlled transaction is used to define a similar relationship between related parties under the OECD Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administrations. The definition specifies what a controlled transaction is and the parties between which the transaction is considered to be controlled. The definition also states the concept of substance over form which is included in the amendment. Amendments to regulations on determining the tax base Several amendments to determination of the tax base will come into force: Based on new wording, prices and conditions agreed in business transactions of related parties (including the prices of services, loans and credits) are to be considered in determining a reduction of the tax base or increase of tax losses. Additionally, the proof of service definition is to be changed to proof of expense when determining the tax base; various transactions other than services can be treated as tax expenses, which are evidently linked to the activities of a related party. The definition of corresponding adjustments of the tax base is additionally included in the amendment. This amendment defines corresponding adjustments which are performed by the taxpayer. Until now, the ITA defined only corresponding adjustments performed by the tax authority. The Financial Directorate of the Slovak Republic will publish on its website a special form (template) where corresponding adjustments of the taxpayer s tax base should be described and submitted within the deadline for filing a corporate tax return. Adjustments to the tax bases of related parties Apart from several wording modifications within the amendment, more significant additions stipulate the following: A taxpayer may request a unilateral decision from the tax administrator approving the use of an Advanced Pricing Agreement (APA), as well as an APA by applying a Double Tax Treaty, where approval of at least two states tax authorities are required. 3 EY Tax & Legal News Issue 7-8/2016

4 Specific requirements within a formal request for an APA (identification of entities, a description of the transaction, expected values, etc.) are defined. Fees for filing an APA have changed. The amendment sets out a fee of 10,000 for a unilateral APA and 30,000 in the case of a request for a bilateral / multilateral APA. If the taxpayer does not follow the deadlines for submission of the APA, the tax administrator will officially inform the taxpayer and refund the fee paid accordingly. According to the new wording, there is no possibility of appealing against an APA decision issued by the tax authority. Furthermore, a new paragraph 18a was added to Slovak Income Tax Act which contains the following definitions of penalties: The tax administrator can impose a maximum penalty, doubling a sanction of three times the base interest rate of the ECB on the sums equal to differences in the newly-determined tax liability of the taxpayer. This applies if the tax authority determines that the tax base is not calculated by using arm s length prices in transactions with the taxpayer s related parties and that the anti-abuse rule stated in the Slovak Income Tax Act has been breached. If the taxpayer did not file an appeal against a decision of the tax authority on increase of the tax liability stated in the tax return, subsequently a double penalty increase does not apply, i.e., only three times the base interest rate of the ECB should be applied. If the taxpayer submitted an APA and the tax administrator starts the tax audit in the same period in which the application was filed, or for two previous periods the anti-abuse rule was not breached, a penalty will be equal to the base interest rate of the ECB. For further information or if you have any questions regarding the above, please contact the author of this article or your partner or manager at EY. Proposed amendments to the Tax Administration Act and Act on the Special Levy for Regulated Industry Amendments to Act no. 563/2009 Coll. Tax Administration Act ( Tax Code ) as well as to Act no. 235/2012 Coll. on Special Levy for Regulated Industry ( Act on Special Levy ) have been recently submitted to Parliament for further legislative steps. Below we summarize the most important changes contained in the amendments: Act on Special Levy Increase to the special levy The amendment to the Act on Special Levy, increases the rate of the special levy from to , applicable indefinitely from 31 December Tax Code Shortened tax assessment procedure The amendment introduces a new shortened tax assessment procedure. This procedure applies to cases when a taxpayer does not correct mistakes or eliminate doubts raised by the tax authority, within the deadline set in its request, and the tax authority does not initiate a tax audit. Tax will be assessed by the tax authority, based on evidence which has emerged in the course of tax administration. The taxpayer can appeal against the assessment order within 15 days of its receipt. 4 EY Tax & Legal News Issue 7-8/2016

5 Right of lien According to the amendment a lien can be also established for future receivables. If you wish to obtain further information, or have any questions regarding the above, please contact the author of this article or your partner or manager at EY. For the sake of completeness, the proposed amendment also brings several minor clarifications of the tax procedural institutes as well as other less relevant changes. Recent updates in e-government We would like to draw your attention to recent developments regarding communication with public authorities in Slovakia via electronic means (so called e-government). Starting from 1 January 2017, communication between entrepreneurs (legal entities only) and public bodies will be exclusively via electronic means, using an electronic mailbox at the Central Government Portal. The electronic mailbox, which requires activation, is automatically established by the state for all public bodies, entrepreneurs and citizens. Companies are required to activate the mailbox by logging in during the transitional period, which began on 1 August 2016, and they will start receiving documents from public authorities immediately. From 1 January 2017, the use of an electronic mailbox will be compulsory for all companies. The electronic mailbox is accessible by a company s statutory representatives using their electronic ID cards, although can authorize access for another person. It is also possible to limit the scope of the delegation, so that a person can be authorized to receive correspondence only from certain institutions (e.g., Social Security Institution). Statutory representative who do not have a Slovak ID should empower another person to obtain access to the mailbox on their behalf. The above will not include communication with the Slovak financial authorities, including correspondence regarding accounting and tax matters. The Financial Directorate has announced that even after compulsory activation of the electronic mailboxes, they will continue to maintain their own website. If you have any questions or would like obtain more information regarding this topic, please contact the author of the article or your usual contacts within EY. Barbora Husárová barbora.husarova@sk.ey.com tel.: EY Tax & Legal News Issue 7-8/2016

6 Value Added Tax Proposed Amendment to the VAT Act A Bill amending the Act on Value Added Tax (VAT Act) was approved by the relevant bodies in the first reading, and proposes, inter alia, the following changes: Specific rules for application of reverse-charge for construction services The reverse-charge for construction services has often been applied incorrectly due to different classification of construction services by the supplier and customer. Thus, the Bill suggests that if the supplier reasonably concludes that the supplied construction services are subject to a reverse-charge and includes application of reverse-charge on the invoice, the customer is liable to pay VAT. Interest on late payment of excess VAT deduction due to tax audit The draft amendment proposes interest as compensation for late payment of excess VAT deduction. This is likely a reaction to the CJEU case Kovozber (we described the case and the order of the Court of Justice of the European Union in October 2015 Tax & Legal News). The taxpayer should be entitled to interest on excess VAT if the payment of excess VAT was later than six months after the deadline for its usual refund (based on CJEU, the interest should be granted for the period starting from the deadline for usual refund). The interest is calculated as a percentage of the final amount of excess VAT deduction (as confirmed by the tax inspectors), for the period starting six months after the deadline for its usual refund, until its actual refund. The taxpayer should be entitled to receive interest of twice the ECB rate, valid on the first day of the calendar year for which the interest is calculated, with a minimum applicable annual rate of 1.5%. It is debatable whether the proposed interest rate is in compliance with the principles of equivalency and effectiveness to which the Court refers. According to these, the conditions for entitlement to interest should not be less favorable than similar claims based on existing provisions of the legislation. This way, it is possible to argue with the much higher determination of late payment interest, pursuant to Art. 156 of the Tax Administration Act, levied at 15% by tax authorities if the taxpayer fails to settle tax within the statutory period. Postponed reverse-charge on imports of goods The reverse-charge mechanism on imports should have been initially introduced in The proposed amendment postpones again its effectiveness but sets no exact date. The effective date will be determined by formula comparing the budgeted national debt to the actual debt. If the difference is greater than 11 percentage points, the reverse-charge mechanism on imports will come into force. The provisions will be applicable two years after the level of national debt is confirmed by Eurostat. We will update you on further legislative developments once they are published. If you have any questions or would like obtain more information regarding this topic, please contact the author of the article or your usual contacts within EY. 6 EY Tax & Legal News Issue 7-8/2016

7 Legal news Proposal for the Act on Registration of Public Sector Partners On 17 August 2016, the Slovak Government approved the proposal for the Act on Registration of Public Sector Partners and Amendment of Several Acts. The proposed act aims to prevent so-called letterbox companies entering into a legal relationship with the state, municipalities or higher territorial units (VÚC), if the subject-matter of such a relationship is the use of public resources. The proposed act will affect mostly those entities which use public resources for the provision of goods and services, acquire the state s property or receive subsidies. If the act is adopted in the proposed wording, legal persons applying for public resources will have to be included in the Register of Public Sector Partners, disclosing their ownership structure up to the beneficial owners natural persons. The accuracy of the provided information will be guaranteed by an authorised person who will need to sign the registration application on the partner s behalf (this person may be either an advocate, auditor, tax advisor or bank). The Register of Public Sector Partners will replace and extend the current Register of Beneficial Owners that is used in connection with the public procurement. Also, the sanction system will become more severe. Sanctions are designed to discourage persons from giving false information and to deprive lawbreakers of illegally obtained economic advantages. A Public Sector Partner can be punished by a fine up to the total amount of the economic advantages or from 10,000 to 1,000,000 and the members of its statutory body from 10,000 to 100,000. Payment of the fine by the members of the statutory body will be guaranteed by the authorised person, responsible for the accuracy of the registered information (see above). The legislation is proposed to be effective as of 1 January We will keep you informed about any important changes. If you would like to obtain more information or have any questions regarding this issue, please contact the author of this article or the appropriate EY partner or manager. Róbert Kováčik robert.kovacik@sk.ey.com tel.: Administrative Court Proceedings Code The Administrative Court Proceedings Code (ACP) is the last of the three civil procedural codes which came into effect on 1 July ACP regulates the judicial scrutiny of legality of decisions issued by public authorities. If a person feels adversely affected by a decision or procedure of a public authority (for example the Antimonopoly Office, a financial authority or a labor inspection body), under certain conditions it can be challenged before the administrative court. The aim of ACP is to broaden the access of such affected natural and legal persons to the court protection. 7 EY Tax & Legal News Issue 7-8/2016 Originally, the administrative court proceedings were governed by Part V. of the Act No. 99/1963 Coll. Civil Procedural Code (CPC). As compared to CPC, administrative justice is now regulated by a special code and ACP and has undergone many substantive changes too. The most important changes are as follows: ACP brings new and broader definitions of some key legal terms, such as a decision, measure, inactivity or other Róbert Kováčik robert.kovacik@sk.ey.com tel.:

8 intervention of a public authority. Therefore, ACP provides better opportunities for judicial scrutiny of such administrative acts and procedures. The rules on courts competence have also been amended. In general, administrative court proceedings are still heard by regional courts. The Supreme Court decides only on cassation appeals (kasačné sťažnosti) and in several explicitly stated matters. District courts are competent to hear certain electionrelated matters. Decisions of central public authorities such as ministries or the Office for Public Procurement are heard by regional courts and not the Supreme Court, as under former legislation. Significant changes concern legal remedies. An appeal as an ordinary remedy against the administrative court s decision has been removed. This renders the administrative court proceedings one instance proceedings. An administrative court s decision which is already final and binding may be challenged by extraordinary remedies: cassation appeal (kasačná sťažnosť) and action for reopening the proceedings. ACP takes over almost all types of proceedings specified in the former CPC and adds several new ones (e.g., proceedings on administrative action in matters of the administrative sanctions or proceedings for consent with inspection in competition law matters). On the other hand, ACP does not include proceedings on remedies against the ineffective decisions of administrative authorities, which formerly could have been filed in line with specific legal acts (e.g., in the case of rejection to register the foundation into the foundation registry or revocation of a license under the Act on Broadcasting and Retransmission). If in doubt over which specific type of proceedings should be used for challenging a decision or procedure (e.g., the administrative act does not clearly fall under the definition of decision, measure nor other intervention of a public authority, yet affects your rights and duties), you may file the action (although formally incorrect) and the court applies the appropriate ACP rules (socalled collection bin provision). Therefore, courts should grant protection and should not reject actions for formal reasons any more, e.g., on the grounds that the challenged decision does not fall under the legal definition of a decision. In order to make the administrative justice more efficient, plaintiff satisfaction has been introduced. It means that the defending public authority may submit to the administrative court a proposal for a plaintiff satisfaction by issuing a new decision, measure or by other action before the court issues its final decision. Last but not least, ACP requires obligatory legal representation by an advocate with narrowly specified exceptions. The reason for such a requirement is the difficulty of legal argumentation. Representation by an advocate is required from the stage of drafting the action. Should the action be filed with a delay or without the representation of an advocate, the court will reject the action and the damaged person will lose the opportunity to judicial protection. Moreover, due to non-exhaustion of all possible means of remedies, such a person would also lose the right to bring the case to the Constitutional Court and the European Court of Human Rights. If the intertemporal provisions do not specify otherwise, ACP applies also to proceedings that began prior to its effectiveness. Therefore, as of 1 July 2016, courts, parties and other persons shall proceed in accordance with ACP even in ongoing proceedings. In conclusion, separation of administrative justice regulations in the new code is a positive step because the subject matter of the administrative court proceedings significantly differs from other court proceedings. We also welcome several new legal institutes such as plaintiff satisfaction or collection bin. However, institutional separation of administrative justice by creating a special system of administrative courts would better ensure effective judicial protection against illegal administrative decisions and procedures. From our practical experience, scrutiny of specific administrative decisions (e.g., in tax matters) demands very specific professional knowledge from the judges. If special courts deal with administrative matters with specialized judges, the court proceedings will be faster and the quality and reasoning of the decisions will be better. If you would like to obtain more information or have any questions regarding this issue, please contact the author of this article or the appropriate EY partner or manager. EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. If you would like to add a member of your organization to the list of subscribers for Tax & Legal News, or would like your name to be removed from the list, please contact slavomira.popjakova@sk.ey.com.. For further information please contact either your usual partner/manager or: Corporate Taxation Marián Bíž, Richard Panek, Peter Feiler, Andrej Paulina, Tomáš Nagy, Monika Fábryová Transfer Pricing Marián Bíž, Shabab Khan VAT and Customs Marián Bíž, Juraj Ontko, Miroslav Marcinčin, Andrej Paulina, Monika Fábryová, Barbora Husárová Personal Taxation Marián Bíž, Miroslav Marcinčin, Barbora Husárová, Vadim Bogomolov Legal Services Róbert Kováčik, Soňa Hanková Assurance Dalimil Draganovský, Tomáš Přeček, Peter Uram-Hrišo Business Advisory Services Peter Málik Transaction Advisory Services Matej Bošňák Tel.: ey@sk.ey.com 2016 EYGM Limited. All Rights Reserved. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/sk 8 EY Tax & Legal News Issue 7-8/2016