EY Tax News, November 2021

In November issue of tax news, we summarize the amendments to the Corporate Income Tax Act (ZDDPO-2S), which will enter into force on 13 November 2021, and the new rules within BEPS 2.0, which are expected to enter into force in 2023.

In addition, the autumn will bring many changes in the field of tax legislation, which is predicted by numerous legislative proposals  in the field of  direct and indirect taxes. We have  summarized the most important changes anticipated in proposed Act Amending the Personal Income Tax Act, proposed Act on taxation of  Virtual Currencies  and proposed Act Amending the Excise Duty Act.

Amendments to the Corporate Income Tax Act (ZDDPO-2S)

On 20th October 2021, the National Assembly of the Republic of Slovenia adopted the Act amending the Corporate Income Tax Act (ZDDPO-2S). The Act will enter into force on 13th November 2021 and will apply to tax periods beginning on or after 1st January 2022.

The amendments aim to ensure stricter tax treatment for countries that promote harmful tax practices or are unwilling to cooperate for tax purposes by promoting positive change, transparent and fair taxation, including addressing external challenges affecting tax bases of EU Member countries and promoting economic recovery following the COVID-19 pandemic.

The main amendments

1. Amendments basis for inclusion on the list of countries with an overall average nominal tax rate of less than 12.5%

A connection to the EU list is additionally specified, which considers two separate lists of countries - the list of non-EU Member countries where the general or average nominal corporate tax rate is less than 12.5% and the European Union list with jurisdictions unwilling to cooperate for tax purposes.

2. Tax deductible expenses

Provisions

The article on provisions is amended in a way to more clearly state that from 1st January 2022, when determining the tax base, a taxpayer will be able to recognize as an expense the calculated amount of formed provisions.

When making provisions, an amount of 50% will be recognized for guarantees given when selling products or performing services, provisions for reorganization, for expected losses from ominous contracts, provisions for pensions, jubilee awards and provisions for severance pay upon retirement.

However, in accordance with the transitional rule, the creation of provisions for pensions, the creation of provisions for jubilee awards and the creation of provisions for severance pay upon retirement, are recognized as an expense in the calculated amount corresponding to 100% of formed provisions in each tax period beginning from 1st January, 2022 to 31st December 2026.

Revaluation and write-off of receivables

In accordance with the adopted amendments, the write-off of receivables is recognized as tax deductible expense for all receivables which were declared by the liable party in the compulsory settlement procedure or bankruptcy proceedings.

Partially recognized expenses

Entertainment and hospitality expenses and costs of the supervisory board or other authority, that performs only the supervisory function, will be recognized in the amount of 60%.

Depreciation

The tax treatment of depreciation costs for tangible fixed assets, intangible assets and investment property also changes, where the treatment of the right to use of the leased asset is subject to the highest annual depreciation rate corresponding to the actual contractual lease term of the asset.

3. Tax relief

The conditions for using the employment relief and the relief for performing practical work are changing.

The law newly stipulates a relief for investment in the digital and green transition in the amount of 40% of the amount representing investments in the digital transformation and green transition in this period. These investments include investments in cloud computing, artificial intelligence and big data, and investments in environmentally friendly technologies, cleaner, cheaper, and healthier public and private transport, decarbonization of the energy sector, energy efficiency of buildings and the introduction of other climate neutrality standards.

The new relief is mutually exclusive with the R&D investment relief and the investment relief and cannot be asserted when investments were financed from the budgets of self-governing local communities, the budget of the Republic of Slovenia or the EU budget, if these funds have the nature of a grant.

The use of the relief for donations is also changing, namely taxpayers will be able to claim relief for the amount they paid in cash and in kind for humanitarian, disability, social protection, charity, scientific, educational, health, sports, cultural, ecological, religious, and generally useful purposes up to an amount corresponding to 1% of the taxable income of the taxable person's tax period.

The amount of relief for grants for payments in cash and in kind for cultural purposes and for payments to voluntary associations established for protection against natural and other disasters acting in the public interest for these purposes remains unchanged (0.2% of taxable income), a new donation is added for the amount of payments in cash and in kind to the providers of the top sport program for investments in top sport in the amount of 3.8% of taxable income.

4. Other amendments

The law also stipulates reverse and hybrid mismatches in all those cases where one or more non-resident individuals, who together directly or indirectly participate in at least 50% of the voting rights, capital shares or rights to a share of profits in a hybrid person established in Slovenia, are located in a country that treats this hybrid person as a taxable person.

New rules under two pillars of BEPS 2.0. expected to come into effect globally in 2023

On 8 October 2021, 136 out of 140 members of the Inclusive Framework on BEPS agreed on the core design features of the two-pillar solution known as the BEPS 2.0 project.

BEPS 2.0. addresses the tax challenges of the digitalization of the economy through:

• Pillar One:  revisions to nexus and profit allocation rules, to countries where international companies make profits.
• Pillar Two: new global rules, introducing a minimum 15% corporate income tax rate.

On G20 Leaders summit held 30 – 31 October 2021, world leaders further endorsed the solution and called on the OECD/G20 Inclusive Framework to swiftly develop the BEPS 2.0 Pillar One and Pillar Two model rules and multilateral instruments, aiming to ensure that the new rules will come into effect at a global level in 2023.

The next step in implementation should be completed in late November when the detailed model rules for Pillar Two are expected to be released.

Proposed Act Amending the Personal Income Tax Act (ZDoh-2AB)

The National Assembly is discussing amendments to the Personal Income Tax Act, the main purpose of which is to help the economy and the population in the recovery from the COVID-19 pandemic and to relieve administrative burdens. The proposal passed the first vote and is now waiting for a second vote in the Finance Committee.

The government is proposing a tax relief on employment income, with a new general tax relief (7,500 EUR), which will gradually increase during a transitional period from tax year 2022 to 2024. Among the proposals is also a decrease of the tax rate in the 5th income tax bracket, from 50% to 45%. A change is also anticipated for business performance allowance and holiday allowance in case they are paid in instalments. Remuneration for work related to business performance would no longer be considered as part of the business performance allowance under the act governing employment relationships, as such remuneration could be paid in cash or in kind. Further, there is a proposed change to the amount of untaxed part of income.

The proposed Act also includes the reduction of tax on capital income (interest, dividends, and capital gains) and rental income. Namely the proposed reduction refers to the tax rate on capital income from the current 27.5% to 25% and the reduction of the tax rate on rental income from the current 27, 5% to 15%, while also changing the reduction of flat rate expenses from the current 15% to 10%. It is also proposed to shorten the period of capital ownership, after which personal income tax is not paid, namely to 15 years and allows taxpayers, which annually achieve income from capital or from rent, the choice to include this income in the annual income tax base.

Other amendments proposed by the Proposed Act are related to claiming a reduction in the tax base on income from self-employment for certain reliefs, the introduction of a senior relief and the exemption from taxation of benefits in kind linked to electric passenger cars for private purposes.

Proposed Virtual Currency Tax Act

At the end of October, the Ministry of Finance submitted a proposal for the Virtual Currency Tax Act (the “Act”) for public discussion. If the Act were to pass, it would come into force on 1 January 2022.

This Act would not apply to private individuals engaged in an activity and holding virtual currency among the assets of the activity they perform, nor to legal persons.

According to the proposal, the tax would have to be paid on the value of the redeemed virtual currencies, and the tax rate would be 10%. As a redemption should be considered the exchange of virtual currency for fiat currency (money), transfer to the taxpayer's payment account, purchase of goods and services or other property with virtual currency.

The taxpayers would have to calculate the tax obligation by themselves, from the sum of the value of the redemption of the virtual currency above a certain amount, in a calendar year.

An alternative option for tax settlement provided by the proposed Act, is to pay the tax on the generated profit, which would be the difference between the value of the virtual currency upon redemption and on acquisition. In this case, the tax rate would be 20%, but no exemption of up to EUR 15,000 per year would apply.

Proposed Act amending the Excise Duty Act 

With 31 December 2021, changes have to be incorporated into Slovenian legislation that specify new obligations for declarants in procedures of export, export followed by external transit procedure, and import, as well as changes that mandate recognition of partial loss in movement of goods and mandatory use of electronic system from 2023 on.

Changes are concerning mostly companies that operate as declarants in import and export of excise goods and companies that are liable to pay excise duty. Main solutions of the Proposal Act, with which Slovenian Excise Duty Act (ZTro-1) becomes compliant with Directive 2020/262/EU and Directive 2020/1151/EU are presented below:

• Connection between customs and excise procedures (export, export followed by external transit procedure and import)

In relation to exporting excise products, a new obligation for the declarant will be introduced, mandating the declarant to submit with the export declaration a uniform excise reference code, which guarantees that the electronic excise document for excise products in the process under duty suspension arrangement, which were submitted for export, was confirmed and is therefore available for excise guarantee for the movement of these products.

For importing excise goods, a new obligation will be put in place for the declarant to submit the excise duty number of the sender to the competent authority in a Member State of import and the excise number of the receiver of excise goods in a Member State of destination, if this Member State is not the country of import of excise goods.

In relation to exporting excise goods, the use of external transit procedure after export procedure is enabled. Within this procedure, the goods are under customs supervision all the time until they leave the customs area of the European Union, regardless of the fact that the parcel of excise goods is moved across more member states to the place of exit from the customs area of the Union. Excise goods in export leave the Union with the confirmation at the customs exit office and/or at the customs office at the place of dispatch into transit within the external transit procedure.

• Movement of excise goods with paid excise duty for purposes of commercial supply (B2B)

New statuses are expected for excise duty payers who participate in such movement of these goods. Entities with status will enable the tax authority's control over movement of excise goods by reporting with the use of an electronic system. Electronic simplified excise duty document will replace the use of the paper document. Procedures and the content of the electronic document will be specified at the Union level and will be used directly.

• Special events within the excise duty regime

The new arrangement will enable the recognition of partial loss of excise goods that is incurred during the movement between Member States because of their nature. The thresholds will be specified by the implementing act at the EU level, which will replace currently valid provisions of Slovenian rules about the maximum allowed loss of excise goods.

• Provisions about the mandatory use of the electronic system EMCS (Excise Movement and Control System) for the movement of excise goods under a duty suspension arrangement in Slovenia

Regarding the movement of excise goods under a duty suspension arrangement in Slovenia, mandatory use of the electronic system EMCS is put in place with the proposal of the Act, while the use of paper excise duty document is only possible until 31 December 2022.