Withholding tax Serbia: main rules and tax rates
Withholding tax in term of corporate tax law
Withholding tax is regulated by the Law on Corporate Income Tax in the Republic of Serbia. The mentioned tax is paid on the statutory income that a non-resident legal entity derives from a resident legal entity. However, it should be considered that taxpayers of this tax may also be non-resident legal entities in certain cases provided for by law.
Withholding tax is calculated and paid on the following income generated by a non-resident legal entity:
- income from dividend and profit share in a legal entity
- income from copyright and related rights and industrial property rights
- interest income
- income from the lease and sub-lease of real estate and movable property on the territory of the Republic of Serbia
- income from market research, accounting and auditing services and other legal and business consulting services, regardless of where they are provided or used or where they will be provided or used
Aforementioned income from services (item 5) is described more closely by the Rulebook issued by the Ministry of Finance, so this should be taken into account when determining the existence of the withholding tax liability.
Provided legal rate at which the mentioned income is taxed is 20% if the income is generated by a non-resident legal entity outside the jurisdiction with a preferential tax system.
If the entity who receives the income from royalties, interest, lease and sub-lease fees of real estate and movable property in the territory of the Republic, as well as fees on the basis of services (all services) regardless of the place of their provision or use, or the place where they will be provided or used from a jurisdiction with a preferential tax system the rate is 25%.
A non-resident legal entity may be taxpayer of this tax, at the rate of 20% on the basis of realized capital gains, income generated from the lease and sub-lease of real estate and movable property in the territory of the Republic of Serbia, and on the basis of all the aforementioned income generated from the settlement of claims in the process of realization, or in any other procedure of settlement of claims.
Withholding tax and 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.
The Republic of Serbia has 60 Treaties on the avoidance of double taxation signed. Most of the Treaties have been signed with European countries.
Double taxation treaties have primacy over the Law. This means that if Serbia has a signed contract with a certain country when paying withholding tax, the rates from the Treaty have primacy over the rate defined by the Law.
Also, on the basis of DTT’s, or the provisions defined therein and on the basis of the Law, an entity may be exempted from the withholding tax in certain cases where it is possible to prove that the non-resident with whom we have the Contract is the actual owner of the income and if a certificate of the residency of a non-resident legal entity is in possession.
The general conclusion is that if an entity receives services from abroad, one should first pay attention to whether there is a Double Taxation Treaty with that particular country since in that case, the Treaty takes precedence over the Law, so if it is found that there is no Treaty then the rate should be applied from the Law.
Double taxation treaties Serbia – review all rates per countries by types of income
We have defined withholding tax rates in accordance with the Corporate Income Tax Law in the first part of this text. Also, we have outlined the importance of the Double Taxation Treaty with respect to the Law and withholding tax.
Republic of Serbia has concluded Double Taxation Treaties with following countries:
- Bosnia and Herzegovina
- Czech republic
- South Korea
- San Marino
- North Korea
- Northern Macedonia
- Sri Lanka
- United Arab Emirates
- United Kingdom
- Israel (from 01.01.2020.)
With each particular signatory country, the rates at which a certain type of income is taxed are established, that is, the maximum rate at which particular income can be taxed in the particular signatory country.
Withholding tax relating to license and IT maintenance services
One specific issue when it comes to withholding tax is the purchase of licenses and IT maintenance services from abroad. The foregoing services are primarily specific to related parties, i.e. to Companies in Serbia that purchase licenses and receive IT maintenance services from a Parent entity from abroad.
Licenses are subject to withholding tax while IT maintenance services are not.
This specificity is reflected in the fact that the non-resident entity generally issues one invoice relating to licenses and IT maintenance services, where often the amounts themselves are not separated or invoices where there are separated amounts relating to the above mentioned but not in adequate proportion, all for the purpose of avoiding withholding taxes.
The situation described above should be considered when billing or determining the basis for withholding tax because there are certainly mechanisms to determine whether or not the tax has been paid on an adequate basis. It should also be remembered that penalties on this basis are not negligible and should always be kept in mind.
Withholding tax and management fee
Management fee service is one of the “most popular” services among related parties in modern business. There are various definitions of the mentioned service (essential management services), however, in today’s context, they are increasingly losing importance, considering that other services are being invoiced under the management fee services, which belong there and which do not.
Generally speaking, a management fee itself is not taxable with withholding tax, however, supporting the above, one must pay attention to what services fall under the management fee that is invoiced. It is often the case that the Parent Companies invoice certain services that are taxable under the Double Taxation Treaties, or in accordance with the Law on Corporate Income Tax, in the management fee (which is visible through the specification).
The general conclusion is that no taxation of management fee services should be withheld on the basis of the name itself, but should take into account what the specific service really is and whether there is an obligation to pay withholding tax.
If you have any further questions regarding this topic, please contact our consulting team.
Withholding tax payers on income from services provided by non-resident legal entities
Withholding tax payers on income from services provided by non-resident legal entities are:
- entrepreneurs who keep business books (by simple or double-entry bookkeeping)
- non-profit legal entities ((association, foundation, endowment, chamber, trade union or political organization, church and religious community, as well as any institution founded by the Republic of Serbia or autonomous province or local self-government unit …))
Individuals who are not performing any activity and are not subject to VAT, entrepreneurs who do not keep business books (entrepreneurs who pay fixed amount of tax) and permanent establishment or representative office of a foreign legal entity are not subject to withholding tax on income from services provided by non-resident legal entities.