With the acceleration of the process of transition to a market economy, since 2001, Serbia has carried out a fundamental reform of its tax system, which has undergone several further changes in the past two decades. Last year brought numerous changes to the tax system in Serbia, and the introduction of the taxation regime for digital assets and tax control were a particular focus.
Namely, the newly adopted Law on Digital Assets raised numerous questions about the tax treatment related to their holding and trading. As a response, the National Assembly of the Republic of Serbia adopted amendments to the set of domestic tax laws.
By the amendments to the Law on Property Taxes, digital assets are subject to inheritance and gift tax at the rate of 2.5%, whereby the tax base is the market value of digital assets at the moment they are inherited, i.e., gifted. Property tax and property transfer tax do not apply to digital assets.
According to the Personal Income Tax Law, any natural person who transfers digital assets is obliged to pay personal income tax. In particular, income from the transfer of digital assets is taxed with capital gains tax. Capital gains, as the difference between the selling price and the purchase price achieved through the transfer of digital assets, are taxed at the rate of 15%. Furthermore, some tax reliefs are prescribed as well. The law prescribes a tax exemption for 50% of realized capital gains invested into the share capital of a legal entity or investment fund whose center of business or investment activities are in Serbia.
Under the Corporate Income Tax Law, the sale or other transfer against consideration of digital assets by legal entities shall be subject to capital gains tax at the rate of 15%. A legal entity that achieves capital gains by selling digital assets will include those capital gains in the corporate income tax base. In addition, a legal entity acquires the right to tax relief by not including capital gains achieved by selling of digital assets in the income tax base if it invests those funds in the share capital of a legal entity or investment fund whose business center or investment activities are in Serbia.
Another significant novelty relates to the introduction of a special property tax with the Law on the Origin of Property and Special Tax. Being in effect from March 12, 2021, this piece of legislation has attracted a lot of attention from the very beginning – both from the professional public and others – not only because of the subject of regulation but also because of its legal solutions.
The competent tax administration unit shall ex officio or upon application initiate a procedure to determine whether the assets of a certain natural person correspond to the income that person earned and presented through tax returns in the previous period. The burden of proving the property increase concerning the reported income is on the tax administration, and it is up to the natural person to prove the legality of its acquisition.
If it seems probable that within a maximum of three consecutive calendar years, during which a natural person has seen an increase in the value of their property and there is a difference greater than EUR 150,000, a so-called “control procedure” will be initiated. A natural person whose property is the subject of control has the right to participate in the control procedure and to submit evidence proving the legality of the property. Upon completion of the control, the special unit of the tax administration issues a decision determining the special tax if it establishes said discrepancies.
The special tax base is determined by the value of the assets to which the special tax is applicable. It is the sum of the revalued value of the property for each calendar year that was the subject of control. In essence, the tax base has been expanded by amendments to the law to include the value of a person’s natural assets and the value of expenditures for private needs which combined exceed the declared income. The special tax rate is 75%. Therefore, in addition to tax control and collecting special tax, the extremely high rate provided by the law indicates that the goal of passing the law was punishment for tax evasion.
Bearing in mind all the amendments to tax legislation, it is noticeable that there is a clear tendency of the competent authorities to use special tax collection and the expansion of digital assets businesses to rebuild and develop the economy.
By Igor Zivkovski, Partner, Zivkovic Samardzic
This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.