On 7th February 2013, the Serbian Ministry of Finance and Economy and the Serbian Investment and Export Promotion Agency published a discussion paper on reforms aimed at furthering the development of the IT sector in Serbia (“Discussion Paper”).
The proposed reforms are rather comprehensive and include startup grants, support to business incubators for IT companies, tax incentives, reduction of export expenses such as expenses of product certification, as well as support for promotion abroad. The focus of this post is on the tax leg of the proposed reform.
The Discussion Paper advocates two major tax incentives. The first one is introduction of a tax credit for R&D activities of software companies that could reduce corporate income tax liability for an amount equal to 20% of the value of R&D investment, up to a maximum of 33% of the total tax liability (40% and 70%, respectively, for small legal entities in accounting terms). The unused amount of tax credit can be carried forward.
The second incentive is available to software companies that generate at least 70% of their income from software sale. It is reflected in the exemption of those companies from the obligation to pay health insurance and unemployment insurance contributions for 80% or 90% of work force, depending on whether the company has more than 50 employees or up to 50 employees. This incentive would reduce the overall fiscal burden on the account of social security contributions from the total combined rate of 67% down to 43%.
The existing corporate income tax rate in Serbia is 15% while the depreciation rate available for intellectual property (IP) is 10%. If the tax incentives proposed in the Discussion Paper become law, IT companies operating in Serbia would be subject to a relatively low effective tax rate even when compared to the most competitive jurisdictions in the European Union, such as Malta, Switzerland, Ireland etc.
In relation to the assignment of IP rights, it should be mentioned that Serbian residents are subject to capital gains tax at the rate of 15%. Since Serbia does not have a schedular corporate income tax system, income derived from sale of IP rights is included in the total corporate income tax base.
Finally, it should be noted that Serbia has a 20% withholding tax (WHT) rate applicable to IP-related payments made by resident to non-resident (25% if non-resident is from a tax heaven). The EU Interest and Royalty Directive, which reduces the WHT rate to 0% on royalty payments between related companies, does not apply since Serbia is not a Member State. However, Serbia has concluded 49 Double Tax Treaties (DTT), which provide for a WHT rate ranging from 0% to 15%, depending on the DTT.