Corporate taxation in Slovenia
Corporate taxation in Slovenia.
Tax on net income of corporations
The Slovenian Law on the Income of Legal Entities governs corporate tax, which is a direct tax on the net annual income of a legal entity. The Law subsumes all legal entities, including not-for-profit organizations, which are considered tax residents in Slovenia and/or whose source of income is Slovenia. Sole proprietorships and partnerships are not subject to corporation tax for legal entities. The rate of tax is a proportional rate of 19%, which is deducted as a direct tax on an annual basis.
The Slovenian tax system is residential and corporations have full corporation tax liability. The tax residence criterion for legal entities is the seat of incorporation, meaning that the headquarters of the company must be based in Slovenia. Moreover, a company can be considered a tax resident if its central management and control is exercised from Slovenia, although the actual seat might be in another country. Regardless of tax residence, it is possible for authorities to impose a tax on companies’ incomes if the source of income is Slovenia, according to the income source approach. When doing so, national tax authorities observe relevant tax treaties, in order to avoid double taxation.
The annual basis for tax calculation is usually the calendar year. However, companies that prove their business is seasonal by nature can be exempt from this condition. The same goes for subsidiaries of multinational corporations that dictate a different year base than the calendar year. Regardless of the timing shift, the non-calendar year must comprise of 12 months and must be kept for a minimum of three years.
a.) Assessment Base and Taxable Income
Depending on the type of legal incorporation, there are two ways of determining the taxable income.
Standard corporations are required to present the earnings minus tax-recognised costs calculation, which is based on financial balance sheets. The surplus is taxed at a 19% rate. Moreover, there is a tax loss carryforward, which allows the companies with an annual capital loss (deficit) to offset the taxation of capital surplus in the future years.
Companies with normalised expenses enjoy the presumption that costs amount to 80% of their income, regardless of factual information. This system is designed for small businesses (net income < 50 000 EUR or 100 000 EUR if they employ a minimum of one person for at least 5 months in a year) and allows them to limit their accounting to independently monitoring their sole income without the need for accounting services and standard financial balance sheets. They do not enjoy the privileges of the tax loss system, because the costs are presumed and the factual loss is not additionally investigated.
Not all costs are considered tax-recognised costs. Therein, the general guiding principle is the notion of costs necessary for creating income. The authorities do not recognise costs that are either private by nature, non-compliant with established business practices, or do not correlate to the necessities for obtaining and creating income. A specific regulation governs the question of asset amortisation, the costs of a supervisory board and the costs of representation towards business partners. Costs such as picnics, sport club memberships and donations are permanently exempted from tax-recognised costs.
b.) Tax deductions
There are several optional tax deductions if the company is identified as a taxpayer for the value added tax (VAT-ID). Companies that are a part of a supply chain may request a full deduction for the VAT if they fulfil the following conditions:
an existing receipt from another VAT-ID company in the previous link of the supply chain;
an actual transfer of good or services that are subject to VAT and are not fictional transfers;
the transfer is not a part of a tax evasion scheme or tax fraud.
c.) Transfer pricing
One of the key issues in corporate taxation is the regulation of transfer pricing between (highly) incorporated legal entities. It is not uncommon for companies within the same group of companies or companies under apparent authority to offer respective transfer pricing well below the market value, which tends to hinder market competition. Moreover, this allows a legal backdoor for tax evasion. Therefore, transfer pricing is regulated in a Subordinate Act on Transfer Pricing, and additionally, by the OECD Guidelines on Transfer Pricing. Extensive supervision by the national authorities is also guaranteed, which ensures that transfer pricing does not differ from market values and cause tax evasion.
d.) Advance Pricing Agreement and Advance Ruling
Taking into consideration the reality of modern-day business, the national Law on Tax Procedure allows two mechanisms that facilitate the tax aspect of contract negotiations between companies.
Advance Pricing Agreement ensures that companies can present an inquiry about the estimated market pricing of goods to the authorities, which then determine the acceptable pricing range and the corresponding tax.
Advanced Ruling facilitates tax evaluations and predictions. A company can inquire about the estimated amount of annual tax duties and the tax authorities can provide an evaluation, which is legally binding. The preconditions for advance ruling encompass a clear specification of past and future business conduct, which companies are expected to adhere to. Tax authorities are entitled to cancel the issued Advance Ruling at any point in time.
Payments to individual shareholders that represent dividend payments of surplus income are subject to a flat 25% tax rate. There is a broad interpretation approach to the definition of dividends to encompass all transfers similar in nature, in order to prevent tax evasion through dubious transactions. Accordingly, the authorities evaluate the total tax liability for taxpayers who do not report the total amount of their dividend-based tax liabilities. The evaluation is based on the current market value of a similar ownership. Contrary to other capital-based incomes, the dividend payments are taxed on a single event basis, not a periodic (annual/monthly) basis.