ATAD

What it means

ATAD, the Anti-Tax Avoidance Directive, is a 2016 EU directive that set common minimum rules against aggressive corporate tax planning. It responded to cases where multinational groups shifted profits to low-tax countries through interest, royalties or differences between national rules.

It contains five tools: a limit on interest deductibility, exit taxation when assets leave the country, a general anti-abuse rule, controlled foreign company rules and rules against hybrid mismatches. Member states had to transpose them into their own laws.

Slovakia built ATAD into its Income Tax Act, and some of the rules, such as the limit on interest paid to related parties, already existed here as thin capitalisation rules. The directive sets a minimum, and a state may go further.

How it works in practice

An ordinary Slovak s. r. o. with no foreign ties is barely affected by ATAD. It matters for companies with a parent or subsidiary abroad, that pay interest or royalties within a group, move assets or activities across borders or hold a stake in a company in a low-tax country.

For such clients, when preparing the tax return we check whether interest paid to related parties exceeds the statutory limit tied to EBITDA, whether a foreign subsidiary meets the CFC conditions and whether exit taxation applies to a transfer of assets. These adjustments appear among the add-back items in the return.

ATAD is closely linked with transfer pricing and reporting under DAC6. A company taking part in a cross-border arrangement with the hallmarks of a tax advantage may, in addition to adjusting its tax base, have to report it to the tax authorities.

What to watch out for

Companies most often stumble over interest on shareholder or intra-group loans. A loan from a foreign parent at a high rate may make economic sense, but part of the interest may not be deductible. Before signing the loan agreement it is worth recalculating the limit against the expected EBITDA.

The second risk is the general anti-abuse rule. The tax authorities may disregard an arrangement whose main purpose was a tax advantage even if it formally complies with the law. It therefore makes sense to have a documented genuine business reason for every structure.