New developments in the Income Tax Act on year-end performance bonus
Amendments to the Income Tax Act (“ZDoh-2”) have introduced a more favourable tax treatment of year-end performance bonus. However, these changes might not last, owing to the content of the Coalition Agreement.
On 11 March 2022, the National Assembly of the Republic of Slovenia adopted the Act on Amendments and Additions to the Income Tax Act (“ZDoh-2Z”). The Act entered into force on 22 March 2022 and applies to tax years starting from and including 1 January 2022.
Until now, the Income Tax Act has exempted year-end performance bonus up to the amount of the average Slovenian salary. However, the amendment introduces a change to Article 44(12) of Z-Doh-2, according to which the exemption from income tax on year-end performance bonus will apply either up to the amount of the average Slovenian salary or up to the amount of the average salary of the employee. The criterion which is more favourable to the employee will be chosen. Even though a year-end performance bonus may be tax-free, it is still subject to social security contributions for both the employer and the employee.
In addition to tax relief for rewards, the amendment also introduced the option of paying rewards in kind, rather than just as a cash payment. Thus, a year-end performance bonus is no longer treated as part of salary, as is provided for in Art. 125 of the Labour Relations Act. However, the amendment maintains the rule that the right to a year-end performance bonus must be enshrined in the collective agreement or employer by-law.
General labour legislation provisions also set out the following additional conditions for year-end performance bonus payments, which also have an impact on taxation:
- the income is paid in connection with an employment relationship;
- the entitlement to the income is determined by an employer by-law or by a collective agreement (remuneration based on an employment contract does not meet this condition);
- the income is paid to all the beneficiaries in accordance with the employer’s bye-law or collective agreement.
We have already addressed the issue of the last condition in our article (Non-) discriminatory conditions for awarding year-end performance bonuses.
An agency worker and a worker employed by the user must enjoy equal rights arising from the employment relationship. However, agency workers are also subject to the conditions listed above, i.e. that the right to a year-end performance bonus must derive either from an agency by-law or from a collective agreement applicable to agency workers.
The coalition agreement of the new government is set to repeal of the provisions of the ZDoh-2Z amendment with effect from 1 January 2023. Only the provision on the amount of the general income tax allowance will remain in force. If this goes ahead, more changes can be expected in the area of year-end performance bonus taxation.
Authors: Eva Možina, Attorney-at-Law and Elizabeta Korenčan, Student
