In Slovakia, thin capitalization rules applied until the end of 2003 when the rules were repealed as part of the tax reform in 2004.
In 2010, there was an intention to re-introduce thin capitalization rules; this was postponed to 2011, and eventually, the proposal was withdrawn.
Currently, thin capitalization rules are not applicable in Slovakia.
Reasons for re-introducing thin capitalization rules
In an internal document provided to the Slovak Chamber of Tax Advisors for comments, the Finance Ministry expressed its position that low capitalization represents a potential tax optimization technique for the hidden distribution of profits. In the ministry’s opinion, profits are distributed in the form of tax deductible interest related to excessive debt financing paid to related parties.
According to the ministry, there are two methods for tax optimization in connection with related party-debt financing: related-party debt
- Granting a loan exceeding the needs of the company
- Establishing interest payments exceeding the arm’s length rate of interest
Proposal to deny deductions for interest
According to the working draft presented by the ministry, the re-introduced thin capitalization rules could be formulated to deny claims of tax deductions for interest costs attributable to direct expenses (excluding interest costs that were capitalized into the acquisition value of fixed assets) calculated from the portion of average debt held during a tax period by the taxpayer’s foreign related-party creditors exceeding:
- For recipients of loans and borrowings that are banks and insurance companies—six times (or alternatively, 10 times) the equity determined as at the first day of the tax period for which the interest costs are calculated
- For other taxpayers—four times (or alternatively, six times) the equity determined as at the first day of the tax period for which the interest costs are calculated
If enacted, the new rules would apply as of 1 January 2015.
According to the proposal of the ministry, the new thin capitalization provisions would affect all existing loan arrangements—including those already entered into before 1 January 2015.
For more information, contact a KPMG tax professional in Slovakia:
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Or contact a tax professional with KPMG's Global Transfer Pricing Services.