Taxation in Serbia: investor’s guide
Republic of Serbia is a developing European country, whose strategic goal is economical and political integration with the European Union. Since the start of more intensive transition from socialistic to market economy in 2000, each Serbian government cabinet has been trying to establish more favourable investment environment, both for foreign and domestic investors. This text is oriented towards providing basic information on taxation in Serbia for potential investors.
Corporate taxation in Serbia – basics
Corporate income tax rate in Serbia is unified (15%). Following companies are subject to income taxation in Serbia:
- Serbian corporate residents: companies established in Serbia or companies whose head office of management and control is on the Serbian territory. Serbian residents are taxed on their worldwide income
- Corporate non – residents: companies which are not established in Serbia, their head office of management and control is not on the Serbian territory, but generate profit through permanent establishment in Serbia. Non – residents are taxed on their income generated exclusively in Serbia
Fiscal year is a calendar year by default, but a Serbian company may choose different 12 month period if its foreign parent company prepares financial statements for a fiscal period different than calendar year. However, previous approval by the Ministry of Finance is necessary. In addition, fiscal year may be shorter than 12 months in exceptional cases (such as starting or terminating business activities during a calendar year).
Serbian corporate income tax law provides following incentives:
- Double recognition of research and development costs
- Exclusion of revenue generated from licensing intellectual property in tax base, after certain adjustments
- Tax credit for investments in innovative start-ups
- Tax holiday for large investors: companies who invest at least 1 billion RSD (approximately 8,5 million EUR) and employ permanently at least 100 people, are entitled to a tax holiday of 10 years
Corporate taxation in Serbia – permanent establishment status
A permanent establishment is any permanent place of business through which the non-resident entity performs its business activities, such as:
- Branch office
- Plant, factory or workshop
- Representative office
- Mine, quarry or other place of exploiting natural resources
Construction works that take more than 6 months also trigger permanent establishment status.
If during representation of a non-resident entity, a person is free to conclude contracts on non-resident’s behalf, non-resident entity then has a permanent establishment with regard to the operations performed in Serbia.
A permanent establishment may be a branch office registered in the Commercial Register. However, the registration is not obligatory, as long as the entity pays corporate income tax in Serbia.
We may expect changes in permanent establishment regulation in order to harmonise with BEPS Action 7 – Preventing the Artifical Avoidance of Permanent Establishment Status in future.
Corporate taxation in Serbia – related parties and withholding tax
Transfer pricing and thin capitalization rules are implemented in Serbia. The rules are applicable for related parties, i.e. in case of direct/indirect ownership, votes or control of at least 25%.
Entities that are subjects to corporate income taxation in Serbia and enter into transactions with related parties are obliged to prepare transfer pricing report and file it to tax authorities along with tax balance sheet.
Regarding thin capitalization, the deductible interest is limited to four time value of equity of the Serbian tax payer, except for commercial banks and financial leasing companies (limited to ten time value).
According to the Corporate income tax law, a Serbian company is subject to withholding tax (tax rate of 20 %), when a non-resident company generates revenue from:
- providing market research, accounting, auditing, business and legal advisory services
- rental services provided in Serbia
- interest, royalties and dividends
Lower withholding tax rate may be applicable in case of double tax treaties.
Additionally, subject to corporate income taxation in Serbia who enter into transactions with companies from tax havens (e.g. Andorra, Aruba, Bahamas, Bahrain, Barbados, Gibraltar, Panama, Hong Kong etc.) are obliged to prepare transfer pricing report. Applicable withholding tax rate in case of transactions with tax haven companies is 25%.
Individual taxation in Serbia
In Serbia, there are following types of taxable personal income:
- salary
- income from business activities (e.g. providing professional services)
- income from intellectual property
- income generated from capital (e.g. interest and dividend)
- income from renting real estate and movable assets
- capital gains
- any other type of personal income (e.g. income from game of luck)
Tax rate and tax base depend on certain type of taxable income, but it ranges from 10% to 20%. For example, salary tax rate is 10%, capital gains tax rate is 15%, tax rate on income generated from capital is 15%.
Additionally, if an individual achieves annual income above three average annual salaries in Serbia, (approximately 20.000 EUR) after paid taxes and contributions in Serbia, the income above that amount will be taxed with 10%. Annual income above six average annual salaries (approximately 40.000 EUR) after paid taxes and contributions in Serbia will be taxed with 15%.
Salary taxation in Serbia
Salary tax rate is 10%. The tax base is a monthly gross salary minus non-taxable amount of approximately 130 EUR. Gross salary is net salary increased by salary tax and contributions paid by an employee.
Rates for contributions paid by an employee are:
- Retirement contributions: 14% of monthly gross salary
- Health contributions: 5,15% of monthly gross salary
- Unemployment contributions: 0,75% of monthly gross salary
Rates for contributions paid by an employer are:
- Retirement contributions: 12% of monthly gross salary (11,5% rate will be implemented from the beginning of 2020)
- Health contributions: 5,15% of monthly gross salary
Maximum base for contributions is a monthly gross salary of approximately 2.800 EUR. For amounts above maximum base, only salary tax is paid.
All things considered, salary tax and contributions are approximately 65% of net salary, if gross salary is less than maximum base for contributions. Currently, there are tax incentives for new employees, previously unemployed, but new incentives are expected to be implemented in 2020.
VAT taxation in Serbia
Value added tax (VAT) is charged on the supply of goods and services done in Serbia, as well as imported goods and services.
In case a foreign entity performs sales of goods and services in Serbia to parties who are not VAT tax payers (e.g. other foreign entities who are not registered in Serbian VAT system), it is obliged to register in Serbian VAT system through tax proxy. Tax proxy may be a Serbian individual or a company which satisfies certain criteria.
Standard VAT tax rate is 20%, while reduced 10% rate is used for certain goods (mostly for basic needs, such as bread, milk, eggs, medicine etc.).
The threshold for obligatory registration in VAT system is total sales of 8.000.000 RSD (approximately 60.000 EUR) in previous 12 months.
Standard tax period is 1 month. VAT return is submitted in 15 days of the end of tax period. Exporters and companies with large initial investments may request refund for input VAT.
Our estimation is that Serbian VAT regulation is about 60% – 70% harmonised with EU regulation, but we may expect further reforms in process of EU accession.
Double tax treaties
The Republic of Serbia signed double tax treaties with 60 countries, including:
- all EU countries (except Portugal)
- almost all Eurasian Economic Union member countries (Russia, Kazakhstan, Armenia and Belarus)
- India
- China
- South Korea
- Norway
- Switzerland
- Turkey
- Israel
- several Middle East countries, such as United Arab Emirates, Iran, Qatar, Kuwait
In 2020, the Treaty was signed with Japan and Hong Kong. The next step is the ratification of the Treaty by Parliament in order for the Treaties to enter into force. The Agreement has been initialed with Algeria.
Serbia is currently or soon will be in negotiations with following countries:
- Portugal
- Liechtenstein
- Singapore
- The United States
The Republic of Serbia signed and ratified the Multilateral Convention (MLI) to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS). Ratification of MLI has started the change of existing Serbia’s double tax treaties. For example, treaties with Austria, Finland, France, Slovakia, Slovenia and several other countries have already been adapted to MLI.
We may expect changes of following taxation areas in Serbia in order to adapt to MLI measures:
- permanent establishment status: the goal will be to avoid artificial avoidance of PE status
- withholding tax
- capital gains tax
More information on double tax treaties was already presented on our blog.
Although Serbia is not OECD member state, it will implement at least BEPS minimum standards in near future.
Final remarks and disclaimer
WTS Serbia provides tax advisory services and finance advisory services to both foreign and domestic investors. We are helping them to adapt to very dynamic Serbian business environment and to achieve their financial and strategic goals.
We would also like to note that information presented in this text is of indicative character. For more details, i.e. if you are interested in setting up business or expanding existing operations in Serbia, please do not hesitate to contact our consulting team.
