Návrh zákona o dorovnávacej dani

Draft legislation on top-up tax

In the last few days, the Ministry of Finance has released draft legislation concerning Pillar II, a topic that has been gaining increasing attention. This draft bill transposes the provisions of Council Directive 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation of multinational business groups and large national groups in the EU. The aim of the legislation is to ensure that large corporate groups are subject to worldwide taxation of at least 15%.

The draft law should ensure that the income of Slovak subsidiaries, the effective tax rate of which falls below 15%, is taxed through a top-up tax in the Slovak Republic and not in the state of the parent company.

Basic information

• Additional taxation will apply to entities in a group whose consolidated revenues reach at least €750 million in at least two of the four accounting periods immediately preceding that in question.
• The draft law also excludes certain entities from its scope, including governmental entities, investment or pension funds and non-profit organizations.
• Entities which fall within the scope of the law will be obliged to calculate whether their effective rate of taxation reaches 15%. If so, the effective tax rate is calculated as the share of covered taxes, which in addition to income tax payable should also include, for instance, deferred tax, withholding tax or a special levy in regulated industries, and the profit/loss in Slovakia after specific adjustments listed in the legislative proposal. If there are multiple entities of the same group located in Slovakia, the effective tax rate is calculated collectively for all entities at the jurisdiction level.
• If, the effective tax rate is lower than 15%, the taxpayer will be obliged to pay the top-up tax corresponding to the difference. For multiple taxpayers from the same group in Slovakia, the top-up tax should be divided among them based on the achieved excess profit.
• However, the draft law provides for an important exception in situations where the taxpayer (even though achieving an effective tax rate of less than 15%) has adequate material and personal resources in Slovakia. It is the so-called substance-based income exclusion rule, which in practice will allow companies to exclude from the total amount of taxable income a proportion corresponding to a certain percentage of  eligible payroll costs and the book value of tangible assets located in Slovakia. This is an extremely significant measure meant to guarantee that Slovak companies benefiting from tax incentives such as investment incentives and the super deduction for research and development costs, and whose ETR temporarily falls below 15% due to these legitimate tax incentives, do not have to match exempt income with the top-up tax.
• The legislative proposal also imposes a notification obligation towards the tax authority, which must be fulfilled within 13 months of the end of the relevant tax period (in the first year, the deadline is extended by three calendar months). In the same period, it is also necessary to file a tax return for the top-up tax and pay the tax due.

The sequence above gives a simplified overview of the rules for calculating the final top-up tax, while the calculation itself can be quite complex with many specific adjustments.

For completeness, the draft legislative framework also implements certain safe harbors. These represent specific simplifying exceptions, when certain conditions are met, which apply exemption from the top-up tax, without the need for comprehensive calculations. These include an exception based on the de minimis rule (for average simplified revenues/profits less than €10 mil./€1 mil.), or a temporary safe harbor utilizing data from the CbCR/DAC4 report, which should be available in the initial years of the new regulation.

The draft law is currently undergoing interdepartmental comment proceedings, with a proposed effective date of 31 December 2023.

If you have questions or require our assistance in connection with this subject, do not hesitate to contact Richard Panek, Rút Kramerová or your contact person at EY Slovakia.