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Slovenia Business Week no. 01/2005: New Year Brings New Income Tax Legislation

The income tax act pursues two main taxation principles: the taxation of all income and progressive taxation

The beginning of every year typically brings about significant legislative changes, but 2005 will be remembered foremost as a year of comprehensive changes to the income tax acts, affecting every taxpayer in the country.

The legislation was drafted and enacted by the previous government of Anton Rop, while the new cabinet, headed by Janez Jansa, already lowered the tax rate for capital gains only to face the opposition's reproaches that it is crushing the underlying principle of balanced taxation.

Indeed, judging by widespread criticism, it seems likely that the legislation will only stay in place for one year, as the government has already announced it is rife for far-reaching changes during the year. The advisory Strategic Council for Economic Development even suggested before Christmas that the entire tax reform package should be put on hold, but the government said such a move would be too risky.

As it stands, the income tax act pursues two main taxation principles: the taxation of all income and progressive taxation. Income will be thus taxed regardless of origin, and new taxable income includes income on the property of children and interest on bank deposits and debt securities. However, a transitional period will be introduced for taxes on interest, and interest below SIT 300,000 (EUR 1,251) will be exempt for the time being.

Another novelty is the taxation of mutual fund savings, whereby the manner of taxation will depend on the type of income from a mutual fund and the tax definition of particular funds (share, bond or mixed). For shares, capital gains tax will stay in place for shares sold less than three years after purchase.

The three-year deadline will no longer apply for the sale of "significant ownership shares", defined as possession of SIT 60m (EUR 250,000) of capital in a company with a share capital of at least SIT 200m (EUR 830,000). The tax rate was initially set at 50 percent, but the new government lowered it to 20 percent at the last session of parliament in 2004.

Despite the move, owners of major packages of shares, mostly CEOs and board members, rushed to sell their stakes to avoid paying high taxes. Many have also set up companies in various tax heavens.

Since inflation has slowed down, the indexation of tax brackets has been dropped and fixed tax brackets introduced instead. They will be aligned with inflation at the end of each year for the following year. The number of tax brackets has been reduced from six to five, while the lowest rate has been reduced from 17 to 16 percent. The lowest bracket - which is to see the greatest relief - will be for annual income of up to SIT 1.3m (EUR 5,420).

Most people will fall into the second bracket, which will have a taxation rate of 33 percent. This bracket spans from over SIT 1.3m (EUR 5,420) to below SIT 2.54m (EUR 10.590). Meanwhile, those with annual income in excess of SIT 10.33m (EUR 43,087) will be placed in the highest tax bracket and subject to a tax rate of 50 percent.

Another major change concerns the taxation of earnings based on authors' agreements, as the act clearly distinguishes between income from passive copyrights and income from work conducted actively based on an authors' contract. This change sparked protests among freelance artists and journalists, as the Finance Ministry reduced the amount of allowable expenses from 40 to 15 percent.

The standard amount of tax relief available for all persons amounts to SIT 592,000 (EUR 2,470). Several groups of people are entitled to special tax relief, including people with disabilities, those over 65 and families with children. The relief for the first child in a family will total SIT 474,900 (EUR 1,980), climbing to SIT 516,200 (EUR 2,153) for the second child, SIT 688,300 (EUR 2,871) for the third child and so on.

Source: Slovene Press Agency STA

Author: Branka Murn