Due to the large number of relationships and transactions between Czech and Slovak tax entities, we provide basic information on the amended transfer pricing documentation requirements in Slovakia below, including information on the limitation of interest costs in connection with the implementation of the ATAD.

Amendment to Act No. 595/2003 Coll. on Income Tax, as amended (“ITA”)

The amendment brings several changes in the area of transfer pricing and the fight against aggressive tax planning. Most of the provisions are effective from 1 January 2023. The rules on interest cost capping will be effective from 1 January 2024.

The main points of the amended law concerning transfer pricing:

1. Clarification of the definition of economic connection of related persons (e.g. husband, wife). The method of calculating their share is newly amended. For the purposes of calculating a direct share, indirect share or indirect derivative share, the shares of related persons shall be aggregated and, if their sum is at least 25%, the persons or entities concerned shall be deemed to be economically connected.
2. The new law sets a materiality threshold for determining a significant controlled transaction (a value exceeding EUR 10,000 or a loan or credit with a principal amount exceeding EUR 50,000). The aim is to reduce administration for small entities.
3. Adding the OECD methodology to the law. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations are widely used as an interpretative tool in the area of transfer pricing. Adding the appeal directly to the law increases legal certainty in its application.
4. The new law introduces the option to submit the transfer documentation first in a foreign language without the need to seek prior approval and subsequently, if the tax administrator requires documentation in the national (Slovak) language, it has the option to invite the taxpayer and the taxpayer will be obliged to submit the documentation in Slovak within 15 days from the date of delivery of the invitation.
5. The price difference found during the tax audit is adjusted to the mean (median) of the independent comparable values found. If the taxpayer demonstrates that, given the circumstances, an adjustment to another value within the range of independent values is more appropriate, the tax base is adjusted to that value. Previously, the value on which the tax administrator quantified the difference was not defined.

With effect from 1 January 2024, the interest expense limitation rule is introduced in the ITA. This implements the rules against tax avoidance practices that have a direct impact on the functioning of the internal market (the so-called ATAD Directive).

Documentation obligation in Slovakia

Since 2009, Slovak taxpayers have been obliged to document transactions with foreign dependants. Since 2015, they have also been obliged to process documentation on transactions with domestic dependants. The documentation obligation applies to so-called controlled transactions with dependants. Dependants include related persons, persons or entities linked economically, personally or otherwise, and persons or entities that are part of a consolidated entity.

The content and scope of the documentation on the audited transactions and the method used is determined by the Ministry of Finance of the Slovak Republic. The Ministry of Finance has issued a Guideline of the Ministry of Finance of the Slovak Republic on this issue. This Guideline was first applied for the taxable period of 2015. It was revised in 2018 and then now with effect from the taxable period of 2023.

According to the Guidelines, the scope of the documentation obligation is divided into three basic types of documentation, namely:

• complete,
• basic and
• abbreviated

For all other controlled transactions, for which documentation is not prepared in a complete, basic or abbreviated scope, the obligation under the ITA is fulfilled by filing a duly completed corporate income tax return for the relevant taxable period (information on the controlled transactions will only be provided in a table that is part of the tax return, similar to the Czech Republic).

In general, it can be said that in the case of domestic controlled transactions, the documentation obligation is fulfilled by abbreviated documentation, i.e. by completing a standardised form (the model and structure of which is included in the Annex to the Guideline) and is submitted only at the request of the tax administrator. If the taxpayer claims a tax credit (due to the application of investment incentives) or carries out transactions with a dependant from a non-cooperating country, it must document (significant) domestic controlled transactions at least to a basic extent. For domestic controlled transactions, the rules are stricter only when the taxpayer asks the tax authorities to issue a decision on the approval of the valuation method (advanced pricing agreement - APA, similarly for MAP) or requests an adjustment of the tax base. In such a case, it is necessary to keep transfer pricing documentation in its entirety.

For foreign (international) controlled transactions, there is an obligation to prepare full documentation in case the value of the foreign controlled transaction (group of controlled transactions) exceeds EUR 10 million. In the case of significant controlled transactions, this obligation also applies to taxpayers who are required to report their profit or loss in their individual financial statements in accordance with International Financial Reporting Standards (IFRS), claim a tax credit (due to the application of investment incentives), or carry out transactions with a dependant from a non-cooperative country. Similarly, but regardless of the significance of the transaction, if the taxpayer requests the tax authorities to issue a decision on the approval of the valuation method (advanced pricing agreement - APA, similarly for MAP) or requests an adjustment of the tax base, it must maintain full documentation. Basic documentation is maintained for foreign controlled transactions, where the value of the foreign controlled transaction (group of controlled transactions) exceeds EUR 1 million or where the transaction is with a dependent person from a non-cooperative state.

New Guideline of the Ministry of Finance of the Slovak Republic No. MF/020061/2022-724

Based on the aforementioned amendment to the ITA, the Slovak Ministry of Finance issued a new Guideline no. MF/020061/2022-724. The Guideline will be applied for the first time in the preparation of the documentation for the taxable period of 2023.

The most significant changes have been made to Article 3, namely in the scope of the documentation for the so-called abbreviated documentation. The documentation obligation within the scope of the abbreviated documentation remains fulfilled by completing the form (a model of which is included in the Annex to the new Guideline). Abbreviated documentation at minimum is now maintained for significant controlled transactions (where full or basic documentation is not maintained for such transactions under the Guidance) of a taxpayer who recognized a tax loss, claimed a tax loss deduction, or did not apply the 15% tax rate in the relevant taxable period. The abbreviated documentation will still be kept on the controlled transactions of a taxpayer who claims a tax credit (due to the application of investment incentives).

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Author: Jiří Jakoubek, Zuzana Ponížilová