Legal and financial news – November 2014

1. Amendment to the Act No. 595/2003 Coll. on Income Tax, as amended and on amendments and supplements to certain laws

On October 30, 2014, the National Council of the Slovak Republic approved an Amendment to the Act on Income Tax, which brings in particular the following changes:

• changes in the depreciation of tangible assets
• introduction of thin capitalization rules for related companies
• method of taxation of employee benefits provided by the employer to employees in-kind
• exclusion of non-pecuniary damages paid under the Civil Code of income exempt from tax and taxation of the said compensation as other income of natural persons
• introduction of a withholding tax for pharmaceutical companies from pecuniary performances provided to doctors and self-assessment of doctors from gifts and other non-pecuniary performances received from pharmaceutical companies
• simplification of the calculation and payment method of advance payments of income tax of natural persons
• promotion of business entities performing research and development in form of a so-called “superdeduction” of costs of research and development from the tax base.

2. Introduction of a new 6^th depreciation group

Currently, an Amendment to the Act on Income Tax has been submitted to the parliament. Among other changes to the Act, the changes in the tax depreciation groups and the depreciation period, particularly the division of the 4^th depreciation group into a new 5^th and 6^th depreciation group, represent a significant economic and financial impact on companies that own and tax depreciate assets that will be included in the two new depreciation groups.

Pursuant to the Amendment, the following buildings shall be included in the 6^th depreciation group: residential buildings,[1] hotels and similar buildings, administrative buildings, buildings for culture, public entertainment, education and health, other non-residential buildings (excluding non-residential agricultural buildings and other buildings not elsewhere provided for only buildings and barracks for firefighters) and other civil engineering works. In case of use of a building for a number of purposes, its main use determined from the total floor area shall be decisive for purposes of its classification into a respective depreciation group. The deprecation period in the 5^th depreciation group shall be 20 years and the deprecation period in the 6^th depreciation group shall be extended from the current 20 to 40 years. This change will affect also already depreciated assets. The Amendment limits the use of accelerated depreciation method only to tangible assets included in the 2^nd and 3^rd depreciation group, which shall for certain depreciated assets mean a shorter or a longer tax depreciation period.

As for the effect of the changes in tax depreciation groups and the depreciation period, in case they will be adopted in their current form, the said changes will have an negative impact on companies that own assets as for instance administrative buildings, hotels, etc. (resp. other assets included in the 6^th depreciation group). A problem may arise with regard to the fact that the wording of the proposed Amendment does not in its transition provisions regulate a postponement of the effectiveness of the Amendment in such a manner that the changes in depreciation of administrative buildings will not affect buildings for which an occupancy permit has already been issued and that are being deprecated as of December 31, 2014. The amendments to the Act on Income Tax are likely to induce reassessment of business plans of projects that were designed in terms of depreciation period of 20 years and take into consideration possible impacts on the economic operation of project companies.

Changes in the tax depreciation will also have an impact on the increased need for additional funds. When designing real estate development projects in terms of the new tax depreciation policy, it will be important to take the following into consideration:

• the increase in the tax base and thus increase in the tax liability of such companies, whereas the actual tax rate for legal persons is not being amended, however, the tax base of legal entities remaining after reduced tax depreciations increases
•  the increased tax liability, resp. a higher tax base and a higher tax paid by a legal person also mean an increased need for advance tax payments of corporate income tax. The additional need for funds to pay advance tax payments due to the higher tax paid represents a further problem of additional funding of companies, and thus limits the operating, capital and investment expenditures during the tax year
•  the amount of dividends which shall remain for distribution to shareholders. A higher amount of dividends paid to shareholders (natural persons) residing in the Slovak Republic represents also a higher amount of contributions paid to a health insurance company calculated by the rate of insurance premium of 14% of the amount of dividends paid in a calendar month, but not more than of EUR 48 300.

The question remains whether such a legislative change, i.e. the wording of the Amendment without transition provisions, is not retrospective and therefore unconstitutional. We have already several public statements by members of Parliament concerning a possible filing of a petition with the Constitutional Court of the Slovak Republic. In case such petition would be filed with the Constitutional Court of the Slovak Republic, the effectiveness of the Amendment may be suspended until a final decision. Given the dominant practice of the Constitutional Court of the Slovak Republic, however, we do not expect that the effectiveness of the said Amendment will be suspended. Therefore, we will continue to follow the development of the said legislative changes and after a throughout analysis, we will keep you informed of any further developments in this matter.

Elaborated in cooperation with VANNIUS MANAGEMENT, s.r.o..

[1] Pursuant to the Act No. 50/1976 Coll. on Territorial Planning and Building Code (the Building Act), a residential building represents a building, wherein at least half of the floor area is intended for housing.