On December 2, 2020, the National Council of the Slovak Republic approved an amendment amending Act No. 595/2003 Coll. on Income Tax, as amended (hereinafter referred to as the “Income Tax Act”) and amending certain other laws. This amendment to the Income Tax Act took effect on January 1, 2021, with the exception of certain provisions that will take effect one year later, i.e., on January 1, 2022. In this article, we will take a closer look at the new concept of the “micro-taxpayer,” as well as the change in the application of the 15% income tax rate.
Who is a micro-taxpayer?
A micro-taxpayer, as defined in Section 2(w) of the Income Tax Act, is a taxpayer who is:
- a natural person whose taxable income (revenues) from business or other self-employment activities (Section 6(1) and (2) of the Income Tax Act) for the tax period does not exceed the amount specified by a separate regulation
- a legal entity whose taxable income (revenue) for the tax period does not exceed the amount specified by a special regulation.
The special regulation referred to herein is Act No. 222/2004 Coll. on Value Added Tax, as amended (hereinafter the “VAT Act”). The amount determining micro-taxpayer status corresponds to €49,790, at which point, pursuant to Section 4 of the VAT Act, the taxable person also becomes subject to the obligation to register for tax. However, this does not mean that only a person who is not a VAT payer can acquire micro-taxpayer status. This follows from the fact that a taxable person is required to file an application for registration if they achieve a turnover of €49,790 over a maximum of 12 preceding consecutive calendar months; however, these 12 calendar months do not have to coincide with the taxpayer’s income tax period (calendar/fiscal year).
A natural person or legal entity whose income (revenue) for the taxable period did not exceed €49,790 acquires the status of a micro-taxpayer if they also meet the negative conditions, i.e., the natural person/legal entity is not a taxpayer:
- who is a dependent person pursuant to Section 2(n) to (r) of the Income Tax Act and carries out a controlled transaction during this tax period,
- against whom bankruptcy has been declared, who has entered into liquidation, or who has been granted an installment plan,
- whose tax period is shorter than 12 consecutive calendar months, except for a taxpayer whose tax period is shorter due to death.
A controlled transaction is a legal relationship or other similar relationship between two or more related parties (e.g., companies with the same managing director/partner, self-employed individuals who are related), where at least one of these parties must be a taxpayer with income under Section 6 (i.e., income from business, income from other self-employment, rental income, income from the use of a work or artistic performance) or a legal entity that derives taxable income (revenue) from activities or the disposal of assets. Both of these conditions must be met cumulatively. If a transaction were to occur between siblings (siblings are close relatives and are also considered related parties), but neither sibling generated the aforementioned income, it would not be a controlled transaction. A different situation would arise if a transaction occurred between siblings who are also self-employed individuals.
Controlled transactions commonly encountered in practice include the purchase and sale of goods/services (e.g., a company sells a car to a partner), the receipt and provision of a loan (e.g., a partner takes out a cash loan from the company), or the payment of remuneration to a managing director.
If a natural or legal person meets the above criteria, they may acquire the status of a micro-taxpayer and enjoy the benefits arising from this status. Pursuant to the transitional provisions of the amendments to the Income Tax Act effective as of January 1, 2021, a taxpayer may acquire the status of a micro-taxpayer for the first time for a tax period beginning no earlier than January 1, 2021.
Benefits of micro-taxpayer status:
Acquiring micro-taxpayer status brings several benefits. A micro-taxpayer gains benefits in the areas of:
- depreciation of tangible assets,
- tax loss carryforward,
- creation of tax provisions
- 15% tax rate
Depreciation of tangible assets:
Under the previous regulations, tangible assets were depreciated gradually, according to the asset’s classification into a depreciation group. The preferential depreciation of tangible assets allows a micro-taxpayer to depreciate tangible assets from depreciation groups 0 through 4—with the exception of passenger cars with an initial purchase price exceeding €48,000—in any amount, but only during the depreciation period and up to the amount of the initial purchase price. Under the new rules, a micro-taxpayer who leases tangible assets from depreciation groups 0 through 4 is not limited in depreciating such assets by the amount of rental income from those assets.
A taxpayer that is a legal entity may apply accelerated depreciation only to tangible assets put into use during the tax period in which the taxpayer acquired the status of a micro-taxpayer. In the case of a natural person, preferential depreciation applies to tangible assets classified as business assets (assets related to income from business and other self-employment activities) in the tax period in which the taxpayer was considered a micro-taxpayer.
Accelerated depreciation of tangible assets may only be applied to assets acquired on or after January 1, 2021. The applied accelerated depreciation of tangible assets remains in effect in subsequent tax periods, regardless of whether the taxpayer acquires or does not acquire micro-taxpayer status in those periods. A micro-taxpayer who applies accelerated depreciation cannot apply a suspension of depreciation.
Tax Loss Deduction
Compared to other taxpayers, a micro-taxpayer may deduct a tax loss up to the full amount of the tax base. The condition is that in the tax period in which the taxpayer claims the tax loss deduction, they must be considered a micro-taxpayer. A tax loss may be deducted from the tax base for up to five immediately consecutive tax periods, beginning with the tax period immediately following the tax period for which this tax loss was reported. A taxpayer may deduct a loss reported for a tax period during which they were not a micro-taxpayer; the key requirement is that they have the status of a micro-taxpayer in the tax period in which they wish to claim the loss deduction. The deduction may only be claimed for tax losses reported for tax periods beginning on or after January 1, 2021.
Creation of Tax Allowances
A micro-taxpayer who uses double-entry bookkeeping may now include the creation of a provision for a receivable not subject to the statute of limitations and the accessories to the receivable in tax-deductible expenses. The condition is that there is a risk that the debtor will not pay the receivable or its accessories in full or in part. The receivable (the same applies to incidental charges) must be included in taxable income in the tax period in which the taxpayer had the status of a micro-taxpayer. The rule is that the taxpayer must have the status of a micro-taxpayer in the tax period in which the allowance is created.
The above does not apply to receivables acquired by assignment or to a receivable that can be offset against due liabilities to the debtor.
15% income tax rate
As of January 1, 2021, a 15% income tax rate will apply to micro-taxpayers. Under the approved amendment, the 15% income tax rate applies to all individuals and legal entities whose taxable income did not exceed €49,790. Every micro-taxpayer meets this criterion, as it is also one of the conditions for obtaining this status.
Compared to the income tax legislation in effect in 2020, this is an unfavorable change in the law for taxpayers, as it significantly narrows the scope of entities (taxpayers) that will tax their income at a rate of 15%.
Entities not subject to the 15% income tax rate will be taxed at the applicable rate under Section 15 of the Income Tax Act, specifically individuals at a rate of 19% on the portion of the tax base not exceeding 176.8 times the applicable subsistence minimum, and 25% on the portion of the tax base exceeding 176.8 times the applicable subsistence minimum. The corporate income tax rate, unless the 15% tax rate applies, will be 21%, unless the relevant provision for special cases provides otherwise.
For the sake of completeness, we note that one of the measures proposed by the current Minister of Economy, referred to as the “business relief,” is the abolition of the micro-taxpayer regime. It therefore remains to be seen how long the regulation, which will take effect on January 1, 2021, will remain in force.
The law firm Hronček & Partners, s. r. o. has extensive experience in representing entities during tax audits for various types of taxes, where it assists taxpayers in defending and asserting their rights and protecting their interests against incorrect or unlawful procedures by public authorities. In the area of tax matters, we work closely with a recognized tax expert, tax advisor Ing. Mgr. Martin Tužinský, PhD. If you are facing a tax-related issue and need assistance, our experts are ready to lend a helping hand.
