A draft law is being prepared, which should amend Act no. 595/2003 Coll. on Income Tax, as amended, plans to introduce a new rule limiting the amount of interest expenses that can be included in corporate tax expenditures.

Given the need to implement Article 4 of EU Council Directive no. 2016/1164 of 12 July 2016, which lays down rules against tax avoidance practices that have a direct impact on the functioning of the internal market (the so-called ATAD Directive), a new draft law is currently being prepared, which will amend Act no. 595/2003 Coll. on Income Tax, as amended (hereinafter referred to as "ITA"), a new rule that will limit the amount of tax deductible interest expenses for all taxpayers - legal entities.

The transitional period for the implementation of Article 4 of the ATAD Directive is currently in use in Slovakia, however, by 1 January 2024 at the latest, this Article of the Directive must also be transposed into Slovak legislation.

Based on preliminary information on the draft law, the new rule should limit the amount of excess interest expenses (interest expenses exceeding interest income), which can be included in corporate tax expenditures. The basis for determining the tax deductible amount of excess interest expenses should be the corporate tax base increased by tax depreciation and excess (tax) costs of borrowings. From this basis, the company should then calculate an amount representing 30%, which will also be the amount of tax deductible excess interest expenses in a given tax period.

Article 4 of the ATAD Directive also allows Member States to consider as a taxpayer an entity that applies tax rules on behalf of a group or an entity in the group that does not consolidate the results of its members for tax purposes. In these cases, the ATAD Directive makes it possible to calculate the excess interest costs and the basis for determining the tax deductible amount of these costs also at the level of the group, taking into account the results of all its members.

The ATAD Directive also allows Member States to grant taxpayers the right to deduct excess interest costs up to a fixed amount of EUR 3 000 000, resp. fully deduct the excess interest expense if the taxpayer is a separate entity (it is not part of a consolidated group and has no related business or permanent establishment).

In contrast to the currently used limitation of interest expenses by the small capitalization rules in accordance with § 21a of the ITA, which only applies to interest expenses arising in connection with loans and borrowings from dependents, this new rule should apply to all taxpayers who are legal entities and receive loans or borrowings, whether provided by dependent or independent persons.

If your company accepts loans or borrowings from other persons, this new rule of limiting the amount of tax deductible excess interest costs will also apply to you, and therefore we recommend that you check in advance what effects it may have on your company, resp. group.