Tax System in Serbia (II)
This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case Karanovic & Partners is an excellent option in Serbia.
Corporate income tax:
CIT is governed by the Law on Corporate Income Tax (CIT Law). In addition to general rules prescribed by the CIT Law, rules governing the taxation of corporate profit are also prescribed by the secondary regulations prescribed by the Ministry of Finance.
Persons subject to the tax
Companies incorporated in Serbia are Serbian tax residents and are therefore required to pay tax on their worldwide income. Serbian non-residents have to pay CIT only for the part of the income which is attributable to the activity of the permanent establishment constituted in Serbia and on certain types of income deemed to be generated in Serbia (see section Withholding tax below).
Corporate income tax is levied at a 15% flat rate.
The tax base is assessed on the basis of the profit (revenues and expenses) declared by the taxpayer in his annual income statement (profit and loss account), prepared in accordance with International Accounting Standards (IAS), and adjusted in accordance with the rules prescribed by the CIT Law.
Generally, an expense will be recognized for tax purposes if it is documented and incurred for business purposes.
Certain types of expenses specifically listed in the law are non-deductible, while the deductibility of certain expenses is limited, so as that the threshold for deductibility is set as a percentage of the taxpayer’s annual revenues (for example, expenses for health, cultural, educational, scientific, humanitarian, purposes and similar)
The deductibility of certain types of expenses is allowed only subject to the fulfilment of certain conditions. For example, the write-off of receivables will be recognized for tax purposes only if the taxpayer filed a lawsuit against the debtor of such receivable (or if the costs of court procedures exceed the value of the receivable which is written-off), while certain types of expenses are recognized only up to the paid amount (such as public charges which are not dependent on the business operation results).
Expenses on the basis of an impairment of assets are not deductible, but may be deducted in the year in which the asset was transferred, used, or in which such an asset was damaged due to force majeure.
The deductibility of other expenses is limited in accordance with the specific rules on tax depreciation, transfer pricing, rules governing thin capitalization, etc.
An asset may be depreciated for tax purposes if it is recognized as a fixed asset under the relevant accounting regulations (IAS) and subject to the condition that its useful life is longer than one year. Goodwill cannot be depreciated.
All assets are categorized in five depreciation groups with different rates and methods of depreciation for tax purposes. Tax depreciation rates range from 2.5% (for immoveable assets) to 30%. Immoveable assets are depreciated using a proportional method, and all other assets under the declining method.
The deductibility of interest generated from related party loans is subject to limitation on the ground of thin capitalization. Under the thin capitalization rules, debt to equity ratio for the deductibility of interest on related-party loans for companies is four times the taxpayer’s capital (exceptionally, ten for banks and financial institutions). The coefficient of deductible interest is calculated by dividing the amount of four times the average amount of capital by the average daily amount of loans from related parties.
Transfer pricing rules
Transfer-pricing obligations of the Serbian taxpayers include, first, the obligation to disclose the value of expenses and revenues generated in transactions from related parties at agreed (transfer) prices and at arm’s length prices, and to include the difference in the taxable profit. Note that transfer pricing obligations apply equally to both transactions between Serbian resident taxpayers and cross-border transactions between Serbian taxpayers and their foreign related parties.
The definition of related parties is set in a very broad manner: for the purposes of transfer pricing rules, a party related to the taxpayer shall be deemed to be any entity (foreign or Serbian) which holds, directly or indirectly, more than a 25% share in capital or voting rights in the taxpayer. Likewise, an entity shall be deemed to be related to a taxpayer if such an entity is controlled, directly or indirectly, by the same entities which exercise control over the taxpayer by means of the minimal 25% (direct or indirect) participation in their capital or voting rights.
The arm’s length prices should be established in accordance with one of the transfer pricing methods allowed under the CIT Law. Latest amendments to the CIT Law allow all transfer pricing methods which are allowed under the OECD Transfer Pricing Guidelines, including the following:
- The comparable uncontrolled price method,
- The cost-plus method,
- The resale price method,
- The transactional net margin method, and
- The profit split method.
There is no hierarchy between the available transfer pricing methods, and the taxpayer is free to choose any method which it finds most appropriate for a given transaction or a group of transactions. Moreover, the taxpayer may use any other method for assessment of arm’s length prices if the methods prescribed by the law are not suitable in a particular situation.
For transfer-pricing purposes, the amount of deductible interest from related party loans (deposits) may be established in two principal ways: on the basis of the market interest rates established by the NBS and published by the Serbian Ministry of Finance, or on the basis of some of the transfer-pricing methods allowed under the CIT Law.
The Ministry of Finance publishes the arm’s length interest rate in the beginning of the year for the previous year. For 2017 the amount of arm’s length interest for long-term loans in EUR was set at 4.25%, while the rate for long-term loans denominated in USD is 5.72%.
Tax losses may be carried forward and offset against taxable profit in future tax periods, but for no more than 5 years.
For tax purposes, capital gains may be generated from the disposal against a consideration of immoveable assets, shares, IP rights and investment units. Note that capital gains/losses generated in transactions with related parties are also subject to transfer pricing rules, so that the sale price of assets sold to a related party is the arm’s length price (if the agreed price is lower than the market price).
Capital gains may be offset only against capital losses incurred in the same year. Unused capital losses in the current tax year may be carried forward and offset against capital gains in the following five years.
The CIT Law provides tax credit for the investment in new fixed assets and the employment of new employees.
The taxpayer which invests or in whose new fixed assets another entity invests more than RSD 1 billion (app. EUR 8.3 mil.), and which employs at least 100 new employees during the period of investment, has the right to the reduction of tax proportionally to the participation of the new fixed assets in the existing fixed assets, for a period of ten years. The tax credit starts to apply in the year in which the taxpayer starts to generate taxable profit.
The administration and payment of CIT
Corporate income tax is paid on the basis of the annual tax balance and tax return in which the taxpayer should declare the amount of his taxable profit (tax balance) and the amount of tax due.
The tax period for which the tax is assessed and paid is a calendar year, provided that in certain cases the tax year may be different than the calendar year.
The deadline for the submission of tax balance and tax returns is 180 days starting from the end of the year for which the tax is assessed, i.e. until the end of June of the current year for the preceding year. Along with the CIT return, the taxpayer is required to file transfer pricing documentation. Newly incorporated companies are also required to file a provisional CIT return within 15 days after the registration.
CIT is paid in advance, in monthly (provisional) instalments, calculated on the basis of the amount of tax declared in the previous year. Monthly instalments have to be paid by the 15th of the current month for the previous month.
The amount of tax paid by the taxpayer throughout the year on the basis of the profit made in the previous year is adjusted at the end of the year in accordance with the actual profit made during that year. At the end of the year the taxpayer is required to pay the difference (or request a refund), depending on whether the total amount of monthly instalments paid during the year is higher or lower than the amount of tax due on the basis of profits in the current year.
Withholding tax is payable on the following types of income paid by resident taxpayers to non-resident entities abroad:
- Income from rent of moveable and immoveable property located in Serbia; and,
- Service fees.
The tax base for withholding tax is a gross income which incorporates withholding tax.
The standard withholding tax rate is flat 20%. The higher 25% tax rate applies to interest, royalties, rental income and service income paid to an entity from the jurisdiction that has the status of a tax haven.
Withholding tax may be eliminated or reduced on the basis of a double tax treaty between Serbia and recipient’s country of residence. Most tax treaties prescribe lower tax rates for dividends, interest, royalties, and rental income. Also, most treaties prescribes that the service income is subject to tax only in the service provider’s country of residence. The tax rate has to be filed even in cases when the relevant income is exempted from the withholding tax.
Beneficial tax rates available under the double tax treaties apply subject to the condition that a non-resident recipient of income obtains the certificate of tax residency (confirming that the recipient of the income is a resident of a treaty country) and delivers it to the Serbian payer of income. In addition, a non-resident has to demonstrate that it is a beneficial owner of the income.
Withholding tax has to be paid at the same moment when the income is transferred to a non-resident entity.
Property transfer tax (PTT) is a one-off tax payable on the transfer against the consideration of a property under certain specific types of assets, including immoveable assets, IP rights, and used motor vehicles. The PTT applies only if the sale of assets is not subject to VAT. PTT is levied at the rate of 2.5% on the tax base which is equal to an agreed price or the market price of asset. The PTT is due by the seller of the asset, cannot be refunded and represents a pure cost for the taxpayer.
Gifts and inheritance by direct descendants and spouses are not taxed. Also, gifts below RSD 100,000 (app. EUR 800) in one year are non-taxable. The tax rate of 1.5% is applied for transfers from relatives in the second order of inheritance, while the rate of 2.5% for transfer of property by the relatives in the third order or any other person.
Owners of immoveable assets located in Serbia are required to pay an annual property tax on such immoveable assets to the municipality on whose territory the immoveable asset is located. The applicable tax rate varies depending on the municipality, provided that it cannot exceed 0.4% for corporate taxpayers. The tax base is the fair value of the immoveable asset for taxpayers that keep books using the “fair value method” or a market value established by the Tax Administration for other taxpayers. Tax due is assessed by the Tax Administration, on the basis of the tax return filed by the taxpayer and is payable quarterly.
Value added tax:
The Serbian VAT system is modelled after the EU VAT Directive, and the majority of general VAT principles applicable throughout the EU apply also in Serbia. Serbian VAT is regulated by the Law on Value Added Tax (VAT Law), and a number of VAT regulations which prescribe detailed rules for the implementation of general rules of the VAT Law.
A taxable person is an entity (legal and natural persons) who independently carries out the supply of goods and services, within its business activities.
Only registered VAT taxpayers are required to pay VAT on their supplies of goods and services, and have the right to deduct input VAT charged to them by their suppliers. Taxable persons whose turnover in a 12-month period exceeds, or will exceed, RSD 8,000,000 (app. EUR 67,000) are required to register for VAT. Entities whose turnover does not exceed this threshold may register for VAT, but are not required to.
Transactions subject to VAT include the following:
- The supply of goods and services. A supply of goods/services will be subject to VAT only if made on the territory of Serbia (as defined by the place of supply rules, depending on the specific type of supply) and if made for consideration (though, in certain cases, supplies made without consideration will also be subject to VAT).
- The import of goods.
The VAT Law prescribes the list of exemptions from VAT, including two main principal groups of exemptions:
- Exemptions with the right to a deduction of input VAT (0% rates supplies), such as the export of goods, supplies made under international loan or donation agreements, international transport and similar.
- Exemptions without the right to a deduction of input VAT, including primarily public and financial services, but also a supply of land (agricultural, forest, or construction land).
Tax base and tax rates
The standard VAT rate is 20%. Certain goods and services (such as the supply of groceries, medicines, newspapers, utility services, etc.) are taxed at a reduced VAT rate of 10%.
The tax base for the assessment of VAT constitutes everything that the taxpayer received or will receive from the customer in consideration for the supply.
The deduction of input VAT
Registered VAT taxpayers are entitled to deduct their input VAT from the output VAT, subject to the following main conditions:
- input supplies are used for the purpose of taxable output turnover; and,
- the taxpayer holds an invoice of the supplier drawn in accordance with the formal invoicing requirements prescribed by the VAT Law.
The excess of input VAT in the given VAT period may be used as credit to offset the due in the following tax periods, or the taxpayer may request a refund of such VAT.
Administration and payment of VAT
For taxpayers whose turnover in a 12-months period exceeds RSD 50 million (app. EUR 415,000), the tax period is a calendar month. Taxpayers whose turnover does not exceed this threshold are required to account and pay VAT quarterly.
The deadline for the submission of VAT returns and the payment of VAT for taxpayers whose VAT period is a calendar month is the 15th of the month for the previous month. For taxpayers whose VAT period is quarterly, the deadline for the submission of VAT returns and the payment of VAT is the 20th of the current month for the preceding quarter.