Amendments to a set of tax laws

Corporate Income Tax

Permanent Establishment

• Provisions concerning permanent establishment (PE) are amended by specifying in Article 3 of the Law that the profits of a PE are taxed in the manner prescribed by Serbian corporate income tax law unless a Double Tax Treaty (DTT) prescribes otherwise. This was not necessary to specify because the Constitution already provides for supremacy of international treaties over national legislation. By emphasizing this supremacy in particular instances (such as with respect to PE taxation and withholding tax), there is a risk of a false impression being created that where supremacy is not stressed, DTT does not apply. A treaty overrides domestic law in respect of all issues regulated by the treaty, and there is no need to specify this truism.
• DTT is relevant for qualification (whether a business activity of a non-resident corporation in Serbia amounts to PE or not), for the allocation of taxing rights (whether Serbia has a taxing power over such PE and to what extent), as well as for the purpose of avoidance of double taxation.
• In Article 5 of the Law, a new paragraph has been added, imposing a requirement that tax return and tax balance sheet be filed with tax authority even if under the relevant DTT criteria the presence of a non-resident would not create a PE. In this case, the non-resident and/or his PE in Serbia (qualified as such under the domestic law) will not be obliged to pay tax in Serbia, but will have an obligation  to file tax return and balance sheet. An example of disparaging definitions of PE under the Serbian law and DTTs can be found in the construction business. The Serbian CIT Law requires construction works last at least 6 months for a PE to arise, while under some DTT’s the works need to last 12 or even18 months in order to create a PE.

Deductibility of expenses

• Expenses for healthcare, educational, scientific, humanitarian, religious, sport etc. purposes, as well as expenses for investments in cultural activities, now including cinematography, are recognized as deductibles in the amount capped at 5% of the total revenue, which represents an increase from 3,5% applicable until the latest changes.
• Article 16 of the Law now specifies that, along with the fulfilment of other conditions for deductibility of write-offs, a write-off is deductible also in case enforcement procedure is initiated against the debtor. Earlier version of this provision conditioned deductibility of the write-offs with the condition that the debtor be “sued”, which assumed lawsuit and full litigation. Since the Law on Enforcement Procedure allows, in certain cases, initiation of enforcement procedure without the need to previously conduct litigation, the Law on Corporate Income Tax has rightly recognized this situation as one on the basis of which a write-off can be regarded as a deductible expense.
• It has been the case also prior to the amendments that claims which were not collected within 60 days from the due date could be treated as a deductible expense (“adjustment of the claims value”). If such claims were written-off afterwards, they would bi included in income for the year when write-off took place, unless the conditions for recognition of write-off as deductible are cumulatively fulfilled. The Law now provides that this rule is also applicable to the adjustments of certain claims made by banks and insurance companies (Article 22a).
• New Article 16a prescribes that the loss incurred from the sale of claims is recognized as a deductible expense in the amount recognized in the P/L statement in accordance with the IAS/IFRS.

Income adjustments

• A new paragraph to Article 25a has been added, which provides that income realized in relation to expenditures which are not recognized as a deductible expense will not be included in the taxable base in the period in which it is recorded. The manner of such exclusion will be further regulated by the Rulebook. For example, if the competent body repays to a company the amount of a fine as a result of its decision imposing the fine being overturned, such income will not be treated as income for tax purposes.

Capital Gains

• Article 27 of the Law specifies that capital gains realized by a resident from the sale of industrial property is taxed regardless of whether the industrial property was used for business activities or not. Prior to this amendment, capital gains from the sale of industrial property rights (patents, trademarks) were taxed in Serbia only if the non-resident used the respective industrial property was used to perform the business activity.
• A further novelty is that non-residents are no longer subject to tax on capital gains from the sale of industrial property rights. Non-residents are subject to taxation of capital gains resulting from the sale of:

• • real estate – regardless of whether the property was used to perform a business activity. In this respect, residents are in a more favourable position because they are subject to tax on capital gains from the sale of real property only if the property has been used for business activities;
  • shares, bonds and other securities;
  • investment units of open investment funds.

Withholding tax

• Withholding tax is imposed on income earned by non-resident from subletting of immovable and movable property. Previously, the law stipulated that withholding tax was payable by non-residents only on income from lease. Tax on income from lease and sublease of immovable and movable property on the territory of Serbia, realized by a non-resident from a natural person is assessed on the basis of a decision and not on withholding basis.
• Special withholding tax on purchase of secondary raw materials / waste has been introduced. Tax is calculated and paid by resident purchaser of secondary raw material / waste from resident or non-resident. Withholding tax rate is 1% of the amount of the compensation paid, without VAT. This tax is in its substance more of a sales tax than an income tax.

Tax credit for investment in development of intangibles

• Until now, tax credit has been available only for investments in fixed assets. An important novelty is that tax credit is now being granted for investments in the development of intangible assets. Investing in development is defined as the application of research findings or other knowledge to produce significant new improved materials, devices, products, processes, systems or services prior to commercial production or use.
• This credit is granted in the amount of 20% of the investment, but not more than 33% of assessed corporate tax liability (40% and 70% for small businesses, respectively). Credit is recognized in the tax period in which the conditions for recognition of intangible assets in accordance with IAS / IFRS are fulfilled, and can be carried forward over a period of 10 years. In case of disposal of intangible assets in less than 3 years from the granting of tax credit, the right to tax credit is lost, except in the case of disposal resulting from changes of corporate status.
• It is primarily pharmaceutical and software companies which may receive benefits from this tax credit. Multinational companies that already have their R & D departments or manufacturing in Serbia have been given an opportunity to review their group structure and transfer pricing policy and may eventually come up with a plan on restructuring their internal transactions for tax savings at the group level.

Tax Holiday

• One of conditions for tax holiday provided under Art. 50a is to hire 100 new employees (instead of former 200).

Property Taxes

Property Tax (PT)

• Subject-matter of taxation has been considerably expanded and now includes the following rights:

• • Right to use property in public domain. This is the right held by the municipalities, institutions, public agencies, NBS etc., however budget users are exempt  from property tax.
  • Use of property in public domain (by state-owned enterprises and other legal entities which were granted the right to use property in public domain, for example, by concession).
  • Possession of a publicly owned real-estate without a legal basis.
  • Possession of immovable property “with unknown or unspecified owner.” It is unclear whether this refers to the illegal buildings.
  • Possession and use of real estate on the basis of financial lease – taxpayer is lessee.
  • Right to use more than 10a of the land, whereby tax is paid on the entire surface.
  • Lease of construction land in public ownership and agricultural land owned by the state are not taxed.

• Significant novelties have been introduced regarding tax base in case of real property owned by legal entities:
  • Tax base for taxpayers that record immovable on their books at fair value in accordance with IAS / IFRS – this fair value shall be the tax base.

Otherwise, tax base consists of:

• The value of undeveloped land, and/or
• The value of buildings increased by the value of the associated land that is determined on the basis of:

• • Useful surface, and
  • The average value per square meter in the relevant n area according to the parameters published by the relevant municipality on its website.

Book value is only recognized for:

• exploitation fields and exploitation facilities;
• certain industrial facilities;
• facilities for treatment and disposal of waste;
• facilities used for processes necessary for the re-use of materials;
• storages and storage facilities;
• infrastructure (railways, roads …);

For real estate acquired in the course of a financial year – tax base for the purpose of property tax for that year is the purchase cost of such property as stated in the taxpayer’s books.

• Real estate intended exclusively for resale is exempt from property tax for the year in which the tax liability has occurred as well as for the following year.
• Self-assessment is introduced with respect to taxes on property.

Inheritance and gift tax

• Income forming part of the corporate income tax base cannot be at the same time considered as a gift (e.g. discharge of debt).
• Income which is exempt from or included in the base for personal income tax (eg. discharge of debt or write-offs that do not qualify for exemption from income tax) cannot be at the same time taxed as a gift.
• Non-taxable amount of gift and inheritance is increased from 30,000 to 100,000 RSD.
• The deadline for filing of tax returns has been extended from 10 to 30 days.

Property Transfer Tax (PTT)

• PTT is now introduced on:
  • Transfer of motor vehicles – unless such transfer is subject to VAT. Previously, the PTT was payable only on transfer of used vehicles.
  • Sale of bankruptcy debtor as legal entity, unless the buyer has assumed all liabilities of bankruptcy debtor. If the debtor is wholly or partially state-owned, PTT is not payable, i.e. it is not payable to the extent ownership is state-owned. It should be stressed that bankruptcy law provides that in the event of sale of debtor as legal entity, liabilities of the debtor are not transferred. It still has to be tested whether it is possible to derogate from this rule by an agreement.

• PTT no longer applies to:
  • • Transfer of property resulting from change of corporate status. The law no longer condition the exemption with the requirement that the shareholders have received cash compensation in the amount exceeding 10% of the nominal value of shares.
    • Transfers made to shareholders of a company in liquidation, i.e. liquidation proceeds. This eliminates double taxation, since such payment is considered as distribution of dividend and is taxed accordingly.
    • Acquisition of real estate by means of division of co-ownership, if division is performed along the ownership shares.
    • Transfer of right of use on the basis of expropriation.
    • Real estate acquired in the procedure for restitution.
    • Ownership acquired by conversion of the right of use or lease on the construction land.
    • The deadline for filing of the tax returns has been extended from 10 to 30 days. 

Personal Income Tax

Residency of natural persons

• According to the Law on Personal Income Tax, natural persons – residents pay taxes in relation to their world-wide income, whereas natural persons – non-residents pay taxes in relation to the income generated on the territory of Serbia. According to the Law, natural person is considered resident of Serbia if:
  • he/she has on the territory of Serbia permanent abode or center of vital interests, OR
  • he/she has stayed on the territory of Serbia, continuously or with interruptions, 183 or more days within 12 months commencing or ending in the fiscal year concerned.

By the amendments to the Law, the legislator has specified that the two above listed conditions are set out alternatively and not cumulatively.

• Prior the amendments to the Law came into the force, in practice there was a problem with determining the beginning and the duration of the residency. To this extent, the legislator has stipulated that in order to determine the period of stay in Serbia (i.e. the period of staying 183 and more days), for the purpose of residency, any stay between 00 and 24 hours in Serbia will be included into the period of stay, apart from the period in which the natural person was in transit. Also, the legislator has stipulated that the natural person who was not a resident of Serbia in the year preceding the year of his/her arrival to Serbia, shall not be considered as the resident of Serbia for the period which is preceding the day of his/her first arrival to Serbia (under the presumption that he/she does not have permanent abode or center of vital interest in Serbia). Further, natural person who is not a resident of Serbia in the year following the year of his/her final departure from Serbia shall not be considered as resident of Serbia for the period following the day of his/her final departure (assuming he/she does not have permanent abode or center of vital interest in Serbia).

Example: Natural person arrived to Serbia on 1 July 2013 and will have left Serbia on 31 January 2014. Having in mind the period of stay in Serbia (more than 183 days), this natural person will be considered as resident of Serbia for the period between 1 July 2013 until 31 December 2013 and between 1 January 2014 and 31 January 2014. With reference to the period preceding his/her first arrival to Serbia (i.e. period from 1 January 2013 until 30 June 2013) this natural person will not be considered as resident of Serbia, provided he/she was not considered as resident in 2012 and further provided that he/she did not have during the relevant period (i.e. from 1 January 2013 until 30 June 2013) permanent abode or center of vital interests in Serbia. Also, this natural person will not be considered as resident of Serbia in relation to the period following his/her departure from Serbia (i.e. period from 1 February 2014 to 31 December 2014) under the condition that he/she will not be considered as resident of Serbia for 2015 and further provided that in the relevant period (i.e. from 1 February 2014 until 31 December 2014) he/she will not have permanent abode or center of vital interest in Serbia.

• Natural person who at the moment of his/her first entry into Serbia knows that he/she will fulfil any of the two above mentioned general conditions will be considered as resident of Serbia as of the moment of his/her first entry into Serbia.
• Prior to the amendments to the Law, natural person sent abroad to carry out the work for natural or legal person – resident of Serbia was considered resident of Serbia purely on the ground of being assigned to work abroad for that person, i.e. irrespectively of whether any of the two above-mentioned general conditions was fulfilled. By the amendments to the Law, this provision has been changed in the way that only natural person who has been assigned from Serbia to another country for the purpose of carrying out work in diplomatic or consular representation office of Serbia or in an international organization shall be considered resident of Serbia (irrespective of whether any of the conditions under a.) and/or b.) has been fulfilled).

Salary tax

• The term „salary” has been expanded to include, inter alia, income generated by employee on the basis of his/her work with employer from a person related to the employer, in accordance with the definition of related party under the Law on Corporate Income Tax.
• Apart from securities (other than shares acquired in the process of privatisation) acquired by employee from employer, salary also includes securities acquired by employee from person related to the employer, as well as securities acquired by the employee on the basis of share option plan of employer or employer’s related party. It remains unclear whether the acquisition of option itself is considered as salary or only the acquisition of shares on the basis of option is salary for this purpose.
• In case of the acquisition of securities, it is deemed that salary has been generated at the moment of acquiring the right to dispose of such securities. This is the moment of acquiring ownership over securities. With reference to the shares issued in Serbia, this should be the moment when employee is registered as owner in the Central Depositary Agency. If the costs related to acquisition of securities granted by a person related to employer are born by the employer, the moment when the salary is deemed to be generated is the moment when employer records the cost on its books.
• In case of acquisition of securities, taxable base is market value increased for costs of taxes and social contributions borne by employee from his/her salary (at the moment of acquiring the right of disposal), i.e. the difference between the market value and the amount paid by the employee increased for costs of taxes and social contributions borne by employee from his/her salary.
• Premium for voluntary health insurance paid by employer for its employees, as well as premium which employer withholds and pays from employee’s salary is exempt from salary tax up to the total amount of RSD 5.214 per month.
• Salary tax rate has been reduced from 12% to 10%, whereas on the basis of a special law, the applicable rate for pension and disability insurance contributions payable by employee has been increased from 11% to 13%. Non-taxable amount of salary has been increased from RSD 8.776 to RSD 11.000.

Tax on income from capital

• Income from capital subject to taxation now includes income generated from renting immovable property. Prior to the amendments, income generated from renting immovable property was considered income from immovable property.
• Use of company’s property and service by owner for his/her personal needs is no longer considered as income from capital, but as so-called other income.
• It has been specified that dividend includes liquidation surplus exceeding the value of invested capital.
• Taxable base is monetary, i.e. non-monetary amount of generated income, whereas with reference to income generated from renting immovable property, taxable base is gross amount reduced for recognized expense. Recognized expense has been increased from 20% to 25% (50% in relation to property rented to tourists, as before). Exceptionally, tax payer is entitled to actual expense which has to be documented.
• Tax rate applicable to income from capital remains at 15%, while in relation to income from renting immovable property, tax rate remains at 20%. Having in mind that recognized expense has been increased to 25%, effective tax rate applicable to income from renting immovable property is 15%, which equals the tax rate applicable to income from renting of personal immovable property to tax rate applicable to other types of income from capital. In case where recognized expense of 50% applies, effective tax rate is 10%.
• Unlike other types of income from capital, income from renting of personal immovable property remains subject to annual income tax.

Tax on capital gains

• After the amendments to the Law have come into the force, transfers of permanent right of use of and the right to build on construction land, investment unit of voluntary pension fund and accumulated funds on the basis of scheduled payments from the accounts of member of voluntary pension fund is no longer subject to capital gains tax.
• Capital gains generated on the basis of the sale of property rights on immovable property, copyrights and rights related to the copyrights and industrial property rights, stakes and securities inherited from the first line of kin is exempt from tax on capital gains.
• Provisions on acquisition price for the purpose of capital gains have been specified:
  • For securities traded on a stock exchange, acquisition price is the price the tax payer documents as actually paid, or the lowest recorded price at which the securities were traded in the period of one year preceding their sale. If securities were not subject to trade in the period of one year, acquiring price will be considered as the lowest recorded price in the first preceding year in which the trade occurred,
  • For securities purchased by the tax payer and which securities are not traded on the stock exchange, acquiring price is the price the tax payer documents as really paid. Otherwise, the acquiring price is the nominal value. When shares do not have a nominal value, acquiring price is proportional value of the net asset of the company at the moment of acquiring,
  • Acquiring price of immovable property is no longer reduced on the ground of depreciation.
• Deadline for submission of tax return has been prolonged from 15 days to 30, i.e. 120 days in case of sale for the purpose of resolving his/her housing issue.  New deadlines are applicable as of 1 January 2014.

Tax on other income

• Other income subject to taxation has been expended to include income from sub-renting of the immovable property and taking of company’s property and usage of company’s services by the owner of company for his/her personal needs. Prior to the amendments to the Law, income from sub-renting of the immovable property has been considered as income from immovable property, whereas taking of company’s property and usage of company’s services by the owner of the company for his/her personal needs was considered as income from capital.
• Reimbursement of documented expenses incurred on the basis of the business trips if the reimbursement of these expenses has been made by the payer to the natural persons who have been assigned by their employer to the payer in connection with the employer’s activity are exempt from tax on other income up to the amount which is exempt from salary tax (i.e. allowances for business trips in the country up to the RSD 2.086, reimbursement of expenses for accommodation as per invoice, etc.).
• Write-off of receivable held by bank will not be considered as taxable income of bank’s debtor under the condition that the costs of suing the debtor are higher than the debt and the amount which has been written off by the bank is recognized as expense in accordance with the Law on Corporate Income Tax.  Also, the remaining amount of receivable written-off by the bank will not be considered as  taxable income of the debtor provided the receivable is classified under the rules of the National Bank of Serbia as 100% covered by reserves and the debtor has, in accordance with a settlement agreement concluded with the bank, sold the immovable property at usual market price and the proceeds of the sale, which are short of total debt to the bank, were transferred to the bank for the purpose of covering the debt under a loan taken from the bank.

Annual income tax

• The most important change in relation to annual income tax is that natural persons – non-residents of Serbia are obliged to pay annual income tax in relation to their income generated on the territory of Serbia, under the condition that they exceed the relevant threshold and the respective income is of the type that forms part of annual income tax base). Prior to the amendments to the Law, only those foreigners who were residents of Serbia were subject to annual income tax. The questions which follow are what is considered as income generated on the territory of Serbia by non-residents, as well as which income should be reported into the annual income tax base. The Law itself does not provide explicit answers to these questions.
• In situation where the natural person is coming from a country with which Serbia has concluded a Double Taxation Treaty, the question is whether Double Taxation Treaty applies to annual income tax. The answers depends on the interpretation whether the annual income tax is considered as special type of tax and if yes, whether the Double Taxation Treaty applies to it.

Self-taxation

• Prior to amendments, taxes were levied in the form of withholding taxes and on the basis of an assessment issued by the Tax Authority. Amendments to the Law introduce a third method – self-taxation.
• Self-taxation is applied for calculation and payment of taxes imposed in relation to the following income:
  • Income of entrepreneur maintaining books;
  • Capital gains;
  • Income paid by a payer who is not legal entity or entrepreneur:
  • income from copyright and related rights and from industrial property rights;
  • interests;
  • income from renting the immovable property and movable property;
  • other income from article 85 of the Law.

• Self-taxation also applies where natural person generates income from abroad, from diplomatic or consular representation office, or international organization, and in relation to income generated from non-resident legal entity on the basis of share option plan.
• Deadline for submission of tax return is 45 days, except in relation to capital gains/losses and income from renting immovable property, where the deadline is 30 and 120 days, respectively.
• Provisions on self-taxation will be applicable as from 1 January 2014.

 

Tax Procedure and Administration 

Electronic Tax Return

• As of 1 January 2014, taxpayers will be able to submit a single electronic tax return for withholding taxes. This application is filed before any payments of income and tax and contributions. Before filing the e-return, taxpayers will be able to check its formal validity. The formal correctness and mathematical accuracy of return can be checked on the portal of the tax administration. If it happens that the application is defective and inaccurate, the tax authority will be required to immediately notify the taxpayer, by electronic means, which can eliminate any mistake, and such correction shall not be considered as amended tax return.
• If the application is formally and mathematically correct, the tax authority shall communicate an approval number to taxpayer electronically. Furthermore, banks will not be able to pay, for instance, salaries if the payer fails to submit the approval number delivered by the Tax Administration upon submitting of the e-return.
• If the taxpayer fails to file a tax return, the tax authority will file it ex  officio.
• The Ministry of Finance is expected to issue a Rulebook that will further regulate procedure related to individual tax return for withholding tax. Interested taxpayers may participate in the pilot project of the Ministry and the Tax Administration that is expected to be launched on 1 October 2013.

Binding Opinions and Guidelines

• Acts (explanations, opinions, guidelines, instructions, etc..) on the implementation of tax legislation ,issued by the Ministry of finance are binding for the Tax Authorities. This novelty is welcome because practice has shown that tax administration often acts contrary to the opinions of the Ministry of Finance and its practice was not consistent. Although this change has a potential to provide higher legal certainty to taxpayers, it should not be regarded as the so-called constitute of “Binding ruling”, a well-known practice under comparative law, which is binding on the tax authority in relation to its treatment of a particular taxpayer.

Removal from the Commercial Registry

• Confirmation issued by the tax administration of the termination of tax liabilities, not older than 5 days, is a pre-requisite to deletion of the company from the competent commercial registry.

Delivery of documents

• According to a new, drastic provision of the Law, documents sent by tax authority via e-mail shall be considered as delivered within 15 days after the submission of the document to the post office, regardless of whether and when the taxpayer actually received the document.

Tax attorney

• The rule that a tax attorney can sign the tax return only in exceptional cases has been amended. Now, the tax attorney can sign tax returns on a regular basis.

Due date for withholding tax

• It is stipulated that withholding tax is due on the date stated in the individual tax return as the date of payment of  relevant income, if that day is earlier than the due date set forth under another law.

Statute of limitations

• From now on, social security contributions can become time-barred just like tax liability. So far, these liabilities were not subject to the statute of limitations.
• Now it is possible to write-off liabilities for social security contributions for the companies in bankruptcy, subject to the condition that the bankruptcy procedure has been concluded or the company is declared bankrupt, except if there is a registered pledge securing such liability a person who is jointly and severally liable with the debtor.

Residency Certificate

• Non-residents are allowed to prove their residency in a foreign country on a certificate issued by the competent authority of the country. According to the previous solution, it was required that a foreign authority issues residency certificates only on the form prescribed by the Serbian Ministry of Finance.

Other

• There is no more computing of compound interest. Interest is calculated for each calendar day, while before it was for calculated for each working day.
• Minimum fines for misdemeanours have been increased from RSD 50,000 to RSD 100,000. Maximum amount of fines for legal persons, banks and registries is RSD 1,000,000;
• Severe penalties are prescribed for companies and entrepreneurs for a failure to file information tax return, i.e. 3% of the annual income for businesses STA and 3% of unreported assets for individuals.

To read the Serbian version, you can download the pdf.