Transfer pricing in Slovakia

The core Transfer Pricing (further referred as “TP”) rules were laid down in the Act No. 595/2003 Coll. On Income Tax (hereinafter  “Income Tax Act”) with effective date as of 1 January 2009.

Regulatory snapshot

When did the TP Rules start:   2009

Level of TP:  Developing regime

Return Disclosure:  No

Documentation:  Compulsory

Methods:  OECD

Tax Audit Risk:  High

Penalties:  High

APA:  Available

 

  • Required content of TP documentation is stipulated in Guidance No. MF/8288/2009-72 of the Slovak Ministry of Finance. TP rules generally conform with the OECD guidelines.
  • There is no obligation to enclose the Transfer Pricing documentation (hereinafter “TPD”) to the tax return. However, the transactions between the Slovak entity and foreign related parties must be disclosed in the Notes to the financial statements.
  • TP documentation is compulsory for transactions between the Slovak entity and foreign related parties. Tax payers should submit TP documentation within 15 days after requested by Slovak Tax Authorities.
  • Acceptable TP methods according to the Income Tax Act include fair market price method, subsequent sale method, increase costs method (methods based on a comparison of prices), profit split method and net margin method (methods based on a comparison of profits). Preferred methods are methods based on a comparison of prices.
  • Penalty up to EUR 3,000 may be imposed if the TP documentation is not submitted to the tax authorities within 15 days of the request. Penalty may be imposed repeatedly.
  • The taxpayer may request approval of the Slovak tax authorities for the selected TP method

 

Regulation

The arm’s length principle and the obligation to keep a TP documentation is enacted in article 18 of the Slovak Income Tax Act. Requirements relating to the content and the rules for preparing the TP documentation are stipulated in Guidance of the Slovak Ministry of Finance No. MF/8288/2009-72. Currently a very limited number of rulings exist.

Besides legally binding articles of the Slovak tax law, the Ministry of Finance published in the Financial Newsletter the OECD Transfer Pricing guidelines. These are not legally binding; however, the tax authorities should follow them practically.

 

Documentation structure

Entities which are obliged to prepare financial statements under IFRS must maintain full scope TP documentation, which consist of master file and country file. Master file is supposed to include information relating to the whole group and country file provides information about the Slovak entity. Country file should include transfer pricing study.

Taxpayer which are not obliged to prepare financial statements under IFRS are allowed to keep simplified TP documentation which proves compliance with arm’s length principle for significant controlled transaction with foreign entities. Entities which do not perform any controlled transactions with foreign related parties are currently not obliged to prepare TP documentation.

Administrative viewpoint

Due Date

TP documentation must be submitted to the Slovak tax authorities within 15 days after requested.

 

Language

TP documentation should be filed in Slovak language.

Disclosures about transfer pricing in the tax return

There is no obligation in Slovak Republic to enclose the TP documentation to the annual tax return. However, notes to the financial statements and as well as corporate income tax return must disclose transactions between the Slovak entity and foreign related parties in EUR without any further details.

 

Acceptable transfer pricing methods

Taxpayers may use OECD TP methods – fair market price method, subsequent sale method, increase costs method (methods based on a comparison of prices); profit split method, net margin method (methods based on a comparison of profits).

Taxpayers may use preferably methods based on the comparison of prices. If such methods are practically not possible they may use methods based on the comparison of profit.

From 01.01.2014 the taxpayers have an option of the most optimal transfer pricing method.

 

Statute of limitations on assessment of transfer pricing adjustments

Generally five years from the year for which the tax return was filed, in case double taxation agreements have been applied, 10 years.

 

Penalties

Penalty up to EUR 3,000 can be imposed by the tax authorities in case of not submitting the TP documentation within 15 days of the tax authority’s request. Penalty may be imposed repeatedly if the TP documentation is not filed within the agreed period. Other penalties may be imposed in case of unpaid or understated tax liability. The penalty in this case is there times the current basic interest rate of the European Central Bank but not less than 10%.

 

Advance pricing agreement (APA)

According to the Slovak Income Tax Act the taxpayer can request approval of the Slovak tax authorities for selected TP method.

 

Tax audit areas

Tax authorities are currently developing a special task force for transfer price issues.

As of 31.12.2013 tax authorities had a possibility to ask the transfer pricing documentation from the taxpayer in justification cases at any time, not only during the tax audit.

The likelihood that taxpayers with transactions to foreign related parties will be subject to tax audit is increasing.

 

Planned changed from 01.09.2014

Issue of the binding decision on approval of the used transfer pricing method will be charged by the Slovak tax authorities.

Charges will be as follows:

  1. Issue of the decision on unilateral approval of the method (due to Slovak tax legislation) = 1% of the amount of an expected business case; minimum EUR 4,000 and maximum EUR 30,000;
  2. Issue of the decision on approval based on the international treaties = 2% of the amount of an expected business case; minimum EUR 5,000 and maximum EUR 30,000.

 

Recommendation

  • It is recommended that taxpayers document their intercompany transactions through intercompany agreements (which are usually also the appendixes to TP documentation);
  • Proper transfer pricing documentation is based on the proper transfer pricing policy and therefore the emphasis should be given also to analyzing the transfer pricing policy and their adoption.
  • In order to avoid penalties, it is recommended to prepare TP documentation beforehand, not only after requested by the Tax authorities.
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