Top-Up Tax

What changes and what does the new law bring?

On December 8^th, 2023, the National Council of the Slovak Republic approved a draft of a new law on the Top-up Tax to ensure the minimum level of taxation of multinational business groups and large national groups and on the amendment of Act No. 563/2009 Coll. on tax administration (tax code) and on the amendment of certain laws as amended (hereinafter referred to as the "Top-up Tax Act"). This law became effective on December 31^st, 2023.

The Act on Top-up Tax thus implements Council Directive (EU) 2022/2523 from December 15^th, 2022 on ensuring a global minimum level of taxation of multinational corporate groups and large national groups in the Union. The introduction of a global minimum level of taxation will thus ensure that companies that are part of large multinational groups will pay their fair share of tax, regardless of where they operate.

To whom does the Act on Top-up Tax apply? And what is his goal?

Pursuant to § 3 par. 1 of the Act on Top-up Tax applies to:

• Basic entities located in the Slovak Republic, which are members of a multinational group of companies or a large national group that achieve in the consolidated financial statements of its main parent entity annual revenues of at least 750 000 000 euros, including the revenues of excluded entities, in at least two of the four accounting periods immediately preceding the analyzed accounting period
  
  
• Joint ventures established in the Slovak Republic thus an entity whose financial results are reported according to the equity method in the consolidated financial statements of the main parent entity, if the main parent entity has a direct or indirect ownership interest of at least 50% in this entity.
  
  
• Entities affiliated to the joint venture established in the Slovak Republic thus an entity whose assets, liabilities, revenues, expenses and cash flows are consolidated by the joint venture based on an acceptable financial accounting standard, or would be consolidated if acceptable financial accounting standard required the joint venture to consolidate such assets, liabilities , revenues, costs and cash flows, or a permanent establishment whose main entity is a joint venture.

The aim is to effectively tax the income of multinational groups of companies with global annual revenues of more than 750 000 000 euros, at the level of a top-up tax rate of 15%. It will be ensured that the income of Slovak subsidiaries is taxed in the Slovak Republic and not in the state of the parent company through the top-up tax. This is an optional rule, and thus the national top-up tax allows countries the opportunity to supply the income of entities located in their territory if they were taxed below the level of 15% of the effective tax rate.

For a better understanding, the following situation can be given as an example: A large multinational group has its parent company in Germany with a subsidiary located in Slovakia. The Slovak subsidiary is subject to effective taxation in the amount of 10% and the top-up tax (up to 15%) is in the amount of 5%. Before the Act on Top-up Tax came into force, this 5% was taxed in Germany. By introducing a top-up tax, it was ensured that the aforementioned 5% top-up tax ends up in the state budget of the Slovak Republic and not in the state budget of Germany.

Entities that are excluded from the scope of the law in accordance with §3 paragraph 3 of the Act on Top-up Tax are those that:

• Perform activities in the public interest and do not perform business activities. These are mainly international organizations, non-profit organizations, government entities, pension funds and investment funds or investment entities in the field of real estate, if they are located at the top of the group structure.

What are the exceptions to the calculation of the top-up tax?

Pursuant to §31 of the Act on Top-up Tax, there are also exceptions to the calculation of additional tax. The filing entity can thus decide that the top-up tax of basic entities in the Slovak Republic will be zero for the relevant accounting period, in case of fulfillment of one of the exceptions. The basic entities of the group can thus apply this exception in case if:

• Average authorized revenues of all basic entities are lower than 1 000 000 euros
• The average eligible income or the average eligible loss of all basic entities represents a loss or is lower than 1 000 000 euros.

The average authorized revenues of authorized income and authorized loss are calculated as the average of the authorized revenues of the basic entities for the relevant accounting period and the two previous accounting periods.

Pursuant to §32 of the Act on Top-up Tax, there are also exceptions to the calculation of Top-up Tax on the basis of a qualified report by individual state (qualified report, so-called DAC4/CbCR report). These exceptions based on the qualified administration by individual states can be applied in the case:

• If the aggregate amount of income of basic entities in the Slovak Republic reported in the qualified report for the relevant accounting period is less than 10 000 000 euros and the aggregate amount of profits or losses of these basic entities is less than 1 000 000 euros, or
  
  
• If the simplified effective tax rate of basic entities in the Slovak Republic in the accounting period is equal to or higher than 15% for the accounting periods starting in 2023 and 2024, 16% for the accounting period starting in 2025 and 17% for the accounting period starting in 2026, or
  
  
• If the amount of profit or loss of basic entities before taxation reported in the qualified report is equal to or lower than the amount of excluded income based on economic substance calculated for basic entities in the Slovak Republic.

Notification obligation in the case of top-up tax and its due date

In accordance with §39 of the Act on Additional Tax, the taxpayer submits a notice to the tax administrator with information for determining the top-up tax for the relevant tax period. The taxpayer submits the notification electronically no later than 15 months after the end of the notification period. If the notification period is a transitional year, this period is extended by three full calendar months. The Financial Directorate of the Slovak Republic will determine the form for submitting a notification with information for determining the top-up tax and will publish it on its website.

As regards the due date of the top-up tax, the top-up tax is due on the last day of the month in which the deadline for submitting the tax return expires. A taxpayer who fails to fulfill the obligations arising from the provisions in accordance with § 39 § 40 of the Act and therefore within the specified period:

• Does not file a notice with information,
• Does not file a tax return,

in accordance with §43 par. 2 of the Act on Top-up Tax commits an administrative offence. For this administrative delict, the tax administrator imposes a fine from 1 500 euros to 50 000 euros on the taxpayer, and may do so repeatedly.