On 28 November 2007, the National Council approved at third reading comprehensive amendments in the area of corporate taxation. To become law, the bill must be signed by the president.

Substantial changes made to the original draft bill concern (i) application of the thin capitalization rules from 1 January 2009, (ii) introduction of transfer pricing documentation requirements, (iii) creation of bad debt provisions, and (iv) date of effectiveness of the amendment. Further details will be reported subsequently.

Amendment to Income Tax Act adopted by parliament – details

On 28 November 2007, the Slovak parliament passed in its third reading a bill to amend the Slovak Income Tax Act (the Amendment). The President of the Slovak Republic should sign the bill into law within 14 days of its adoption by the Parliament. The proposed effective date of the Amendment is 1 January 2008. The thin capitalization rules and mandatory transfer pricing documentation requirements will, however, apply from 1 January 2009. The most significant changes are summarized below.

Thin capitalization rules

The Amendment reintroduces the thin capitalization rules that were abolished as part of the 2004 tax reform. The thin capitalization rules will have the following features:

-		foreign and domestic-related parties;
-		related parties are those that have 25% or more direct or indirect holding in each other;
-		interest on related-party loans that exceed six times the Slovak company's equity is not tax deductible; and
-		the rules will only apply where the average annual related-party loans of the Slovak borrower exceed SKK 100 million (approximately EUR 3 million

The rules will become effective from 1 January 2009.

Bad-debt provisions and write-offs

(a)       Banks

-		bad-debt provisions of unsecured bad debts that are more than 1,080 days overdue will be fully tax deductible;
-		bad-debt provisions of unsecured bad debts that are more than 720 days overdue will be tax deductible up to 50% of the unpaid debt;
-		bad-debt provisions of unsecured bad debts that are more than 360 days overdue will be tax deductible up to 20% of the unpaid debt; and
-		the transitional periods for adjusting existing tax-deductible provisions to the new rules remain the same as originally proposed by the Slovak government (adjustments need to be made by 31 December 2009).

(b) Insurance companies

-		the creation of any technical reserves for life insurance compensation payments and non-life-insurance compensation payments will be fully tax deductible, except for compensation for an incurred but not reported insurance event (IBNR) in the common accounting period; and
-		the balance of the technical reserve for insurance compensation for an incurred but not reported insurance event (IBNR) treated as tax deductible before 1 January 2008 must be released to taxable income by 31 December 2009.

(c)        Regular commercial companies

-		provisions for bad debts that are more than 36 months overdue will be fully tax deductible;
-		provisions for bad debts that are more than 24 months overdue will be tax deductible up to 50% of the unpaid debt;
-		provisions for bad debts that are more than 12 months overdue will be tax deductible up to 20% of the unpaid debt; and
-		the transitional periods for adjusting existing tax-deductible provisions to the new rules remain the same as originally proposed by the Slovak government (adjustments need to be made by 31 December 2009).

Write-offs of small debts

The current threshold of SKK 1,000 for the immediate tax-deductible write-offs of small debts will be increased to SKK 10,000.

Taxation of unpaid liabilities

The amount of a company's unpaid liabilities that are more than 36 months overdue will be treated as taxable income (provided that these liabilities relate to tax-deductible expenses).

Mandatory transfer pricing documentation requirements

Taxpayers will be obligated to keep documentation supporting the transfer prices used in related-party transactions. The content of this documentation will be specified in a regulation to be issued by the Ministry of Finance. The rules will become effective from 1 January 2009.

Taxation of a reduction in share capital

The proposed taxation of a reduction in share capital has been removed from the Amendment.