Predbezna informacia pravidla nizkej kapitalizacie

Preliminary information – thin capitalization rules

The Ministry of Finance of the SR has issued preliminary information on its preparation of a draft amendment to Income Tax Act No. 595/2003 Coll., based on which the so-called thin capitalization rules are to be changed. These rules govern the maximum amount of tax-deductible interest expenses in relation to EBITDA.  

This draft amendment seeks to transpose into our legislation an adaptation of the thin capitalization rules contained within Council Directive (EU) 2016/1164 (the Anti-Tax Avoidance Directive 1, “ATAD 1”). This is designed explicitly by the Slovak Ministry of Finance to align Slovak and European legislation regulating this area.

Currently, it is clear that the amended Slovak legislation, in accordance with ATAD 1, will include the following:

• Net principle – when assessing the tax deductibility of interest, taxpayers will take into account net interest expenses, i.e., only those interest expenses in excess of interest income. 
• According to the Slovak Ministry of Finance, the rules should apply to all interest; i.e., not only that paid to taxpayers that are related parties, but also that incurred as part of external bank financing.
• The priority indicator for limiting the amount of excess interest expense will be “tax EBITDA”, i.e., the tax base increased by tax depreciation and borrowing costs (interest and other related costs).

However, it is less clear from preliminary information how the Slovak Ministry of Finance will deal with the following open issues:

• Transposition of de minimis conditions, i.e., conditions under which the thin capitalization rules would not be applied at all and thus, taxpayers would be able to claim interest expenses in full (or at least a larger portion) as tax expenses
• Possibility to carry forward or back a portion of tax non-deductible interest expenses to future tax periods
• Possibility to completely exclude financial institutions and loans used to finance long-term public infrastructure projects from these rules
• Possibility to apply the thin capitalization rules also to debt instruments other than loans and borrowings

With reference to the final point, in published documents the Slovak Ministry of Finance has so far not further defined any changes, so it is unclear what range of debt instruments will be subject to these new thin capitalization rules, and whether this will be extended to cover other debt instruments (e.g., bonds), or the new rules will continue to apply only to interest on loans and borrowings.

It will be very important for the quality of the business environment to ensure that exceptions and de minimis rules are incorporated into Slovak tax legislation to the broadest possible extent. A good example is the transposition of ATAD 1 in the Czech Republic, applying the following measures: de minimis rule of CZK 80 million (approx. EUR 3 million), exception provided for financial institutions and the possibility to carry forward disallowed interest expenses.

Changes to the thin capitalization rules may have significant tax consequences for most taxpayers, who should already be considering the impact of the forthcoming amendment on the effective tax rate and their financial models.

If you have any questions or would like to obtain more information regarding this topic, please contact the author of this article or your usual contacts within EY Slovakia.