DEFINITION OF DOUBLE TAXATION TREATIES
Double taxation treaties are generally bilateral international treaties concluded between two countries (signatory countries). As the name implies, the Treaties make it possible to avoid double taxation (on the basis of taxes defined by the Treaty itself) between signatory countries under certain conditions.
A significant need for these Treaties has arisen due to the expansion of the process of globalization, i.e. the "erasing of borders" between, above all, developed countries. Namely, a large number of companies and people have started thinking globally which means that they are not limited by the country where business was originally started. This raises the issue of taxation in different countries. Given that a strong economy is essential for every country, the emergence of the Double Taxation Treaty was a logical next step.
Thousands of such treaties have been signed so far worldwide. It is important to note that there are two basic models of the Double Taxation Treaty, O.E.C.D. model and United Nations guidelines. It is worth noting the great importance of these Treaties and how many countries that have signed a large number of Treaties have a better position in the global market.
AN OVERVIEW OF THE COUNTRIES WITH WHICH THE REPUBLIC OF SERBIA HAS CONCLUDED DTT's AND THE COUNTRIES WITH WICH NEGOTIATIONS ARE ONGOING
The Republic of Serbia has 61 Treaties on the avoidance of double taxation signed. Most of the Treaties have been signed with European countries. It is interesting to note that Canada is the only country from the American continent with which the Republic of Serbia has a treaty signed. The Republic of Serbia bases its Treaties on the O.E.C.D. model.
In 2020, the Treaty was signed with Japan and Hong Kong. The next step when we talk about the Treaty with Japan is ratification by Parliament in order for the Treaty to enter into force, while the Treaty with Hong Kong has already entered into force. The Agreement has been initialed with Algeria.
Negotiations are ongoing with Portugal. Also, according to the latest information, negotiations are ongoing with Liechtenstein, Singapore and the United States, which is especially important for our country.
The agreement signed with Malaysia does not apply from January 1, 2019.
The Republic of Serbia is a signatory to the Multilateral Convention (“MLI” - Multilateral Instrument), which is effective since October 2018. The Multilateral Convention makes it easier to harmonize or amend the Double Taxation Treaty. As a consequence of the Multilateral Convention, the Republic of Serbia has so far amended the Treaties with signed an agreement with Albania, Austria, Belgium, Bosnia and Herzegovina, the Czech Republic, Denmark, Egypt, Finland, France, Georgia, the Netherlands, India, Indonesia, Ireland, South Korea, Canada, Qatar, Kazakhstan, Cyprus, Latvia, Lithuania, Luxembourg, Malta, Norway, Poland, Russia, Slovakia, Slovenia, the United Arab Emirates, Ukraine, and the United Kingdom.
Countries with which the Republic of Serbia has concluded Double Taxation Treaties:
- Bosnia and Herzegovina
- Czech Republic
- Hong Kong
- South Korea
- San Marino
- North Korea
- Northern Macedonia
- Sri Lanka
- United Arab Emirates
- United Kingdom
CONTENT OF “DTT’s”
Considering that double taxation treaties are concluded according to an internationally accepted model, in the case of the Republic of Serbia O.E.C.D. model, the content of the Treaties themselves is generally the same with all signatory countries.
Typically, the Treaties consist of seven chapters.
The first chapter lists the parties to whom the Treaty is applied, the residents of one or both of the Signatory Countries, and the taxes to which the treaty relates (personal income tax, corporate income tax, property tax - most common when it comes to the Republic of Serbia).
The second chapter is reserved for articles relating to general definitions (what is meant by a contracting state, clarification of certain terms, etc.), the term "resident" of each contracting state, and the term "permanent establishment".
The third chapter deals with the so-called distributive rules of the Double Taxation Treaty. More specifically, this chapter deals with the different types of income generated by residents of one or the other signatory country in the country (or countries) where the specific income is taxed and whether the taxation rate is limited for a particular country. These are the following types of revenue (or revenue generated from):
- income from immovable property
- operating profit
- revenue related to international traffic
- related companies
- capital gains
- independent personal activities
- directors’ remuneration
- artists and athletes
- government services
- student and interns
- professors and researchers
- other income
Note: above is listed an example of the content of the Third Chapter is given and does not necessarily mean that each Agreement will contain each of the aforementioned Articles
The fourth chapter of the Treaty regulates the issue of property taxation.
Chapter five of the Double Taxation Treaty deals with the elimination of double taxation, which means that mentioned Chapter defines the circumstances in which tax residents are exempt from paying part (or all) tax amount in Signatory countries.
The sixth chapter of the Treaty relates to so-called Specific regulations. Specific regulations deal with the issues of equal treatment in both Signatory Countries, mutual agreement procedures, the issues of information exchange and issues of privileges that enjoy members of diplomatic missions and consulates.
The last - the seventh chapter is formal. It refers to the implementation of the Treaty and its termination.
REVIEW OF THE TAX RATES BY THE TYPES OF INCOME ACCORDING TO “DTT’s”
As already mentioned, the Republic of Serbia currently has 61 double taxation treaties signed.
Analyzing concrete Treaties under which a certain category is taxed in the Republic of Serbia we have come to several conclusions - interesting facts:
- The most favourable Treaty by taxpayer aspect was concluded with Sweden (the criterion was the highest number of 0% rates by different types of income)
- It is well known that Germany is one of the largest investors in the Republic of Serbia and therefore it is interesting that interest on loans is taxed at the rate of 0%, which is generally not the case with other countries (withholding tax rate is usually 10%)
- It is more favourable to taxpayers, given the current Treaties conditions, to set up businesses in Malta, Cyprus, Estonia, Ireland, the Netherlands and Luxembourg than in jurisdictions with preferential tax systems.
- The Republic of Serbia has concluded Treaties with all the countries of the former Yugoslavia at similar/same conditions
- The geographically most remote countries with which the Republic of Serbia has a treaty are North Korea, Canada, Vietnam, Sri Lanka and Indonesia.
Overall, in terms of its size and economic strength relative to other countries, the Republic of Serbia has a significant number of Double Taxation Treaties signed. Also, there is a growing trend when it comes to negotiations with other countries and the potential signing of new Treaties and the situation could certainly be even better in the future. The signing of the Multilateral Convention by our country opens up additional space for further progress, change and improvement of existing and new Treaties, which should by no means be neglected. It is also important to note that it is very significant to consider that the Treaties are in line with domestic Laws, so that we do not get into the absurd situation that the Law is in certain cases more favourable than the Treaty itself.
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