At the beginning of March 2020, the Law on determination of property origin and special tax (“LDPOST” or “the Law”) was enacted and entered into force in Serbia. The application of the law has been postponed and it is due on 12 March 2021.
The regulations on the matter of property origin and the related taxation have been adopted before. We recall the 2001 Law on lump-sum taxation of extra income and extra property acquired through special privileges, which was adopted during a wave of political changes in the Republic of Serbia. However, this law did not bring the expected results in application, while certain provisions were twice established as unconstitutional.
In addition, even before the adoption of the LDPOST, there were certain regulations in the Republic of Serbia whose proper application could lead to the establishment of unlawfully acquired property and appropriate penalisation. Therefore, it is understandable that we question the novelties introduced by the new law and even its necessity as such.
Who is subject to the LDPOST?
The law applies only to natural persons, leaving all legal entities outside its scope.
What is the objective of the LDPOST?
The objective of the law is the establishment of unlawfully acquired property and its taxation.
Unlawfully acquired property shall mean the difference between property increase and registered income that a natural person fails to prove to be lawfully acquired. Property increase shall mean positive difference between a natural person’s property value at the beginning and the end of a reference period.
What will be special taxation procedure under the LDPOST?
It is envisaged that a special organisational unit (“Tax administration unit”) shall be established to perform the activities under this law; such unit shall have a head appointed by the Government of the Republic of Serbia at the proposal of the Minister of Finance.
The procedure carried out under this law shall be subject to the Law on Tax Procedure and Tax Administration (“LTPTA”), with one exception since the provisions of the LTPTA on expired debts and tax collection shall not apply.
The procedure is carried out ex officio and comprises of two phases:
I. In preliminary procedure, the Tax administration unit shall establish the property increase on basis of information it possesses and those collected from other bodies and organisations, legal or natural persons, and compare them with the reported income of a natural person in the reference period.
Preliminary procedure is undertaken in accordance with annual guidelines enacted by the director of the Tax Administration, on basis of risk analysis, whereas such annual guidelines are not available to public.
The manner and procedure for determining property value and income of a natural person shall be prescribed by the Government.
II. In the procedure of control and establishment of special tax, the unlawfully acquired property of a natural person and its value shall be established.
Tax administration unit shall institute control procedure given that it deems after preliminary procedure that, in maximum three consecutive calendar years where a natural person has property increase, there is a difference between property increase and the reported income of such natural person exceeding EUR 150,000.00 in dinar counter-value at the middle rate of the National Bank of Serbia on the last day of the calendar year in a reference period.
The base for special tax shall be determined in the amount of the unlawfully acquired property, which comprises the sum of revalued amount of the established unlawfully acquired property for each calendar year subject to control.
Tax administration unit shall establish special tax for the overall control period, by applying special tax rate of 75% to tax base as established under this law.
The special tax decision is subject to complaint to the ministry responsible for finance, which delays enforcement of the decision. The decision of the ministry shall be final upon administrative procedure and it shall be subject to administrative dispute before the Administrative Court.
What is disputable in the new law?
a. The detection of unlawfully acquired or unreported property and penalisation of persons in that sense is already the responsibility of several authorities and organisations (Tax administration through tax inspectors and tax police, special police units, public prosecutor’s offices, Administration for the prevention of money laundering and terrorism financing, Anti-corruption agency etc.). It is therefore reasonably question whether it is necessary for the new law to establish a special unit within Tax administration that would be tasked with application of only one piece of legislation.
Does that imply that the above mentioned authorities and organisations are not (sufficiently) doing their job, hence it is necessary for a new body i.e. unit to “mend” what they missed? Or is it perhaps necessary to redefine the organisation and scope of activity of the existing bodies so as to make them more efficient and independent in work?
What is additionally concerning is the fact that the head of the Special unit of Tax administration is appointed by the Government, which means that this person will not be selected through public competition in the procedure stipulated by the Law on Civil Servants.
b. As we have seen above, the LDPOST only applies to the property of natural persons. One can reasonably suspect the scope of such regulation having in mind that natural persons can unlawfully acquire property through related legal entities, without being the legal owners of such property, which means that the law cannot be applied either to them or to thus acquired unlawful property
c. The LDPOST applies to all natural persons. However, it was announced in media as anti-corruption law, which was also noted in the rationale for its adoption:
“Simultaneously, the taxation of property whose origin cannot be proved by lawful income represents one of the efficient anti-corruption tools. The law introduces a mechanism which, inter alia, enables for the property acquired through corruptive activities to be subject to the regime of special taxation. This also provides for the fulfilment of goals set out in the National Anti-corruption strategy.”
It would be therefore expected that LDPOST is primarily directed to public officials, which would be in accordance with the announcements from the abovementioned National Anti-corruption strategy, noting that our legal system still lacks the criminal act of illicit enrichment from the ratified United Nations Convention against corruption, which refers exclusively to the property of public officials.
The rationale for adoption of the LDPOST also notes that “the proposed legal solutions apply to all citizens, which excludes any selectivity in their application”. We would add – any selectivity, apart from the one already incorporated into the text of the law.
d. What is particularly confusing is the prescribed threshold for application of the law. Namely, a natural person who unlawfully acquired the assets amounting to less than EUR 150,000.00 shall not be subject to the law. Unlawful property can be acquired either without legal basis or on defective legal basis, or by property disguising and tax evasion (evasion of full taxation), etc. Does that mean that the legislator communicates a message that such activity is not socially harmful and hence should not be penalised as long as the value of such assets is below the prescribed threshold?
e. What is equally confusing is the fact that unlawfully acquired property is subject to tax rate of 75%. In this way, the legislator allows to the person who evidently acquired property in unlawful manner and thus most likely perpetrated a criminal offence, to retain one fourth of such property instead of it being fully confiscated as unlawfully acquired under the regulations in force.
f. It is also interesting that the LDPOST envisages the adoption of a regulation, leaving to the Government to regulate the manner and procedure of determining the value of property and income of a natural person, but without any criteria and guidelines that would be elaborated through a by-law. In this way, the Government was left with a wide freedom to regulate these issues by its act.
g. Finally, did we really need a new law to regulate this matter or do we already have certain mechanisms incorporated in other (relevant) regulations?
Since its adoption in 2002, the LTPTA recognises the institute of cross-evaluation of tax base (Article 59) that serves for detection of possibly unreported income of natural persons. These provisions changed over time, but basically if the Tax administration established in tax procedure conducted under the LTPTA the existence of unreported assets, the latter would be subject to taxation as other income in terms of the Law on Income Tax, and subject to 20% tax rate, without recognition of standardized costs.
We recall that the LTPTA also recognises so-called information tax return (Article 42), which contains the information relevant for establishing tax base, however the by-law necessary for its submission was only adopted once i.e. in 2012, and it referred to the assets as on 1 January 2013.
Since 2009, the Law on Seizure and Confiscation of Proceeds of Crime has been applied in our legal system (the 2013 law is currently in force), which supplements the Criminal Code in the part relating to assets imminently connected with criminal offence and it even provided for temporary seizure of assets during ongoing criminal proceedings.
Considering all of the above, it remains to be seen what will be the effects of the LDPOST application, if any. What is certain is that the list of objections is not final.
This article is to be considered as exclusively informative, with no intention to provide legal advice.
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By Ivana Ruzicic, Managing Partner, PR Legal