Global minimum tax rate regime
The Member States of the EU have completed the transposition of the provisions of the Council Directive (EU) 2022/2523 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (“Directive”) into their national laws and will apply them with respect to financial years beginning on 1 January 2024 (with certain exceptions).
The Directive implements the Pillar Two Model Rules approved by the OECD/G20 Inclusive Framework for Base Erosion and Profit Shifting (also referred to as the “Global Anti-Base Erosion” or “GloBE” Rules). The GloBE Rules provide for an internationally co-ordinated system of corporate taxation of large MNEs aimed at ensuring that the income of these companies arising in each of the jurisdictions in which they operate is taxed at the minimum effective tax rate (“ETR“) of 15%. This will be achieved by imposition of a top-up tax on such MNEs to offset the benefits they get in jurisdictions which tax the MNE’s income generated in those jurisdictions at an ETR which is below 15%.
The Directive’s minimum tax rate of 15% per jurisdiction applies to large MNEs (save for excluded entities such as e.g. governmental entities, international organisations, non-profit organisations, pension funds, etc.) which:
(i) have the ultimate parent company and/or constituent entities in a Member State;
(ii) have a consolidated annual revenue of at least EUR 750 million (however, there is a de minimis exclusion from obligation to calculate a tax-up tax in case in-scope MNE has less than EUR 10 million of average qualifying revenue and less than EUR 1 million of average qualifying profit in the relevant jurisdiction).
Impact on Serbia
MNE groups that fall under the Directive can have constituent entities (subsidiaries and/or permanent establishments) outside of the EU, including in Serbia. Serbia has a nominal corporate income tax rate of 15% which is the same as the global minimum rate under the Directive. However, the ETR in Serbia may be below 15% due to various tax incentives that Serbia offers to taxpayers. The most significant tax incentive, designed more than 20 years ago with the aim to attract foreign direct investment, is a ten-year tax holiday (exemption from the obligation to pay corporate income tax) offered to investors which make an investment of RSD 1 billion (EUR 8.5 million) in fixed assets used in any manufacturing activity in Serbia and hire an additional 100 employees on indefinite-term employment contract to support such activity locally. Once the investment volume and workforce thresholds are met, the exemption from CIT can be used from the first profitable year and for 10 consecutive years in total. The application of this tax incentive may result in ETR of a Serbian subsidiary falling, during the tax holiday period, theoretically to 0% and more commonly to a very low percentage (the exemption is not a full exemption, but is pro-rata to the share of the qualifying assets in the total assets, so the actual ETR can differ from year to year).
Because of the top-up tax, the GloBE rules generally make tax incentives available in a particular jurisdiction resulting in ETR below 15% (such as the abovementioned Serbian tax holiday for large investment) less attractive to in-scope MNEs. However, when calculating the basis for the top-up tax, MNE Group will be entitled to reduce its net qualifying income for a particular jurisdiction for the amount of substance-based income exemption (“SBIE”). SBIE is calculated by reference to the cost of assets and payroll sustained in the jurisdiction where the constituent entity is located (the SBIE will generally be equal to 5% of the carrying value of tangible assets and 5% payroll costs in the jurisdiction, with a transitional period rule providing for a phased introduction of the SBIE over the years). The steps leading to top up tax calculation are as follows:
(i) determination of net qualifying income in a jurisdiction;
(ii) determination of total amount of adjusted tax attributable to that income;
(iii) determination of ETR applied in the jurisdiction ((ii)/(i)).
If ETR is below 15% the steps to determine top-up tax are generally the following:
(iv) adjustment of qualifying income in the jurisdiction for SBIE ((i) – SBIE);
(v) application of top-up rate (15% – ETR) on adjusted qualified income under (iv); and
(vi) proportional allocation of the jurisdictional top-up tax to the MNE’s members in the jurisdiction.
Given that the Serbian 10-years’ tax holiday can be obtained only if the fixed assets situated in Serbia have significant value and if a substantially high number of employees is hired, resulting in significant payroll costs in the country, the SBIE amount will not be neglectable, so it may significantly decrease the amount of any top-up tax.
Under the GloBE Rules, Serbia will have an option to introduce its own qualified domestic minimum top-up tax (“QDMTT”) with respect to constituent entities of an in-scope MNE situated on its territory, which should be consistent with the GloBE Rules. If it does so, QDMTT that Serbia collects will be credited against the GloBE top-up tax, effectively eliminating any top-up tax in jurisdictions where the ultimate or intermediate parent companies are located (under the Income Inclusion Rule and Undertaxed Profit Rule). In this manner, QDMTT would not increase overall tax costs for an in-scope MNE while it would allow Serbia to increase its fiscal revenue.
Serbia has not yet announced its intention to introduce QDMTT.
There is also a specific aspect of GloBE Rules related to Serbia’s double taxation treaties, including those with several OECD countries and EU Member States, which contain tax sparing credit provisions in the article dealing with the elimination of double taxation by a residence country. By virtue of these provisions, Serbia’s counterparty under the treaty commits to recognize as a tax credit not only the tax its tax resident paid in Serbia but also the tax resident spared, i.e. did not actually pay, in Serbia as the source state due to a tax incentive. Serbia sees tax sparing credit clause as means of attracting FDI and has stated that it intends to continue to use the tax sparing credit clause when negotiating new tax treaties despite the fact that the OECD Model Convention (which Serbia, as a party to the Stabilisation and Accession Agreement with the EU and its member states, undertook to follow in concluding new and renegotiating existing tax treaties with the EU member states) does not have an equivalent of the tax sparing credit clause. It is yet to be seen whether the national laws implementing GloBE Rules will override tax sparing credit clauses from tax treaties in situations when these two different sets of rules are incompatible.