Tax reform implemented

A new taxation system has been in place in Slovakia since 1 January 2004. Employees' incomes and employers´ profits are now taxed at a flat rate of 19%. The aim is to simplify the tax system and render it more transparent. Profit-making employers and higher-income individuals will pay lower taxes, but low-income earners will not lose out.

The government pushed through a tax reform proposal at the end of 2003. Act 595 of 2003 on Income Tax came into force on 1 January 2004, the most radical change ever in the Slovak taxation system. Employers, the self-employed and employees will pay a flat 19% tax on profits or income. The new taxation system is particularly favourable for the self-employed, freelancers, traders, and so on, who were previously subject to progressive taxation of up to 38%. For companies the new flat rate replaces the previous corporate tax rate of 25%. According to the new legislation, not-for-profit legal entities - such as non-governmental organisations (NGOs) - will pay no tax unless their annual revenues exceed SKK 300,000 (approximately EUR 7,300).

The new taxation system will affect net incomes in a number of different ways. Taxpayers will not pay any profit/income tax on annual pre-tax profits or incomes up to SKK 80,832. On top of this allowance, married taxpayers with a zero-earning spouse can reduce their tax-base by a further SKK 80,832. These allowances equal 19.2 times the 'subsistence minimum' as of 1 January 2004. Taxpayers with children can claim an allowance of SKK 4,800 for each dependent child. Single taxpayers without children and making profits (if self-employed) or earning gross income close to the annual average wage (about SKK 160,000 in 2003), however, will pay slightly higher tax than previously. On the other hand, companies/persons with taxable annual profits/income of, for example, SKK 500,000 will save up to SKK 100,000 a year thanks to the 19% flat rate tax, representing about seven months' average pay.

According to Ivan Mikloš, the Minister of Finance, the new taxation system will attract more foreign investors and entrepreneurs to Slovakia - the recent decision of the Korean car manufacturer Hyundai-Kia to site a greenfield investment in Slovakia may be an example of this effect. It will also, he said, help create new jobs and in due course improve incomes and living standards. At the same time, the flat-rate tax is expected to motivate domestic entrepreneurs who will be able to develop their businesses as a result of increased net profits. However, it remains to be seen to what extent employers will reinvest increased net profits or withdraw them for personal consumption. The government believes that the measures adopted will promote economic growth and the creation of new jobs, helping to reduce high unemployment.

Value added tax (VAT) has also been changed. VAT will also be levied at a flat rate of 19%, replacing the previous two-tier system of a standard 20% rate and a reduced rate of 14% on selected items, such as food, books, service in restaurants and construction. Implementation of the unified 19% VAT rate led to price increases on a number of consumer goods and services in January and February 2004. Deregulation of energy charges also caused a price increase. Annual inflation, which is expected to be close to 8%-9%, could neutralise any rise in real wages in 2004.

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