The beginning of 2019 will mark the start of a major transformation of the Serbian tax system, bringing new and exciting opportunities for companies who do business or wish to invest in Serbia, but also bringing potential challenges concerning the practical application of new tax rules.
In December 2018, the Serbian Parliament adopted numerous amendments to the country’s tax and mandatory social security contribution laws, as well as enacting a new law that will systematically regulate many parafiscal levies.
The main driver behind most of the changes, which will go into force on January 1, 2019, is providing a more business-friendly environment to companies and investors, a significant boost to start-ups, the IT sector, and the digital economy, and a higher level of legal certainty in the area of taxation. At the same time, provisions of the Multilateral Convention to Implement Tax Treaty Related Measures to BEPS (the MLI) will finally start to apply in practice, modifying the provisions of the double tax treaties between Serbia and some countries.
As for the specific major changes, in addition to simplifying the tax depreciation rules, expenses for marketing and promotion will for the first time be fully recognized as expenditures for tax purposes. This measure will give a big boost to retail and other industries that rely heavily on marketing and promotion to sell their products and services. Moreover, expenses for research and development (except with respect to oil, gas, and mineral resources) will be doubled for tax purposes. This will not only provide a major incentive to all the industries where research and development are essential to conducting and growing the business, but is also expected to motivate other companies to invest in research and development in their respective industries.
When it comes to registered IP rights, companies will be able to exempt 80% of income realized from royalties, licensing fees, and capital gains income realized from the sale of IP rights from their corporate income tax base. Also, under certain conditions, investors will be able to obtain a 30% corporate income tax credit for investments into the share capital of innovative start-ups. The maximum amount of the tax credit is limited to RSD 100 million (approximately EUR 850,000).
As for changes to the personal income tax, income subject to taxation in Serbia will be set more widely to include the use or disposal of any right in the territory of Serbia, regardless where the rights originated or where they are located. Furthermore, the provisions that regulate the taxation of employee income from shares and share-option plans were reworked to enable easier implementation, resolve certain issues that appeared in practice, and introduce tax exemptions. In addition, under certain conditions, team building activities and in-house employee benefits will be exempt from taxation, while the mandatory unemployment insurance rate will be reduced from 1.5% to 0.75%.
Parafiscal levies were identified as a major obstacle to doing business in Serbia, so the new law will, for the first time, consolidate and regulate parafiscal levies for the use of public goods in a systematic and comprehensive manner, creating a more business-friendly environment.
In addition, efforts to modernize the Serbian tax system and Tax Administration continue, so in addition to the previous transfer of competences concerning control of foreign exchange regulations to the National Bank of Serbia, the Tax Administration will also be disburdened of competences concerning control of games of chance regulations. Also, when purchasing real estate, it will now be possible to file the relevant tax return through a public notary.
Finally, in 2019, provisions of the MLI will start to apply affecting Serbia’s double tax treaties with Austria, France, Lithuania, Poland, Slovenia, Slovakia, and the United Kingdom. With respect to withholding taxes, the MLI will apply from January 1, 2019, while for other types of taxes (e.g., taxes determined by the decision of the Tax Administration) the MLI will apply from April 1, 2019 for companies with non-calendar tax years, and from January 1, 2020 for other companies. It is expected that the Serbian Ministry of Finance will publish synthesized versions of the affected double tax treaties with the applicable MLI provisions, which should allow for easier application of these double tax treaties.
By Ivana Blagojevic, Head of Tax, and Nebojsa Pejin, Attorney-at-law, CMS Belgrade
This Article was originally published in Issue 5.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.