Persons subject to the tax
Companies incorporated in Serbia are Serbian tax residents and therefore required to pay the tax on their worldwide income.
Serbian non-residents have to pay CIT only for the part of the income which is attributable to the activity of the permanent establishment constituted in Serbia and on certain types of income deemed generated in Serbia (see section Withholding Tax and Permanent Establishment below).
Tax rate and tax base
Corporate income tax is levied at a 15% flat rate.
The tax base is assessed on the basis of the profit (revenues and expenses) declared by the taxpayer in his annual income statement (profit and loss account), prepared in accordance with International Accounting Standards (IAS), and adjusted in accordance with the rules prescribed by the CIT Law.
Generally, an expense will be recognized for tax purposes if it is documented and incurred for business purposes.
Certain types of expenses specifically listed in the law are non-deductible, while deductibility of certain expenses is limited, so as that the threshold for deductibility is set as percentage of taxpayer’s annual revenues (for example expenses for health, cultural, educational, scientific, humanitarian, purposes and similar). Expenses on the basis of impairment of assets are not deductible, but may be deducted in the year in which the asset was transferred, used, or in which such asset was damaged due to force majeure.
Deductibility of other expenses is limited in accordance with specific rules on tax depreciation, transfer pricing, rules governing thin capitalization, etc.
An asset may be depreciated for tax purposes if it is recognized as a fixed asset under relevant accounting regulations (IAS) and subject to the condition that its useful life is longer than one year. Goodwill cannot be depreciated.
All assets (except intangible assets) are categorized in five depreciation groups with different rates and methods of depreciation for tax purposes. Tax depreciation rates range from 2.5% (for immoveable assets) to 30%. Immoveable assets are depreciated using a proportional method, and all other assets under the declining method.
Transfer-pricing obligations of the Serbian taxpayers include, primarily, the obligation to disclose the value of expenses and revenues generated in transactions from related parties at agreed (transfer) prices and at arm’s length prices, and to include the difference in the taxable profit. Transfer pricing obligations apply equally to both transaction between Serbian resident taxpayers and cross-border transaction between Serbian taxpayers and their foreign related parties.
For purposes of transfer pricing rules, a party related to the taxpayer shall be deemed to be any entity which holds, directly or indirectly, more than 25% share in capital or voting rights in the taxpayer. Likewise, an entity shall be deemed to be related to a taxpayer if such entity is controlled, directly or indirectly, by the same entities which exercise control over the taxpayer by means of minimal 25% (direct or indirect) participation in their capital or voting rights.
The arm’s length prices should be established in accordance with one of the transfer pricing methods allowed under the CIT Law, which are the methods prescribed by the OECD Guidelines for Transfer Pricing.
For transfer-pricing purposes, the amount of deductible interest from related party loans (deposits) may be established in two principal ways: on the basis of the market interest rates established by the NBS and published by the Serbian Ministry of Finance, or on the basis of some of the transfer-pricing methods allowed under the CIT Law.
Deductibility of interest generated from related party loans is subject to limitation on the ground of thin capitalization. Under the thin capitalization rules, debt to equity ratio for deductibility of interest on related-party loans for the companies is four times the taxpayer’s capital (exceptionally ten for banks and financial institutions). The coefficient of deductible interest is calculated by dividing the amount of four times the average amount of capital by the average daily amount of loans from related parties.
For tax purposes, capital gains may result from disposal against consideration of immoveable assets, shares, IP rights and investment units. Note that capital gains/losses generated in transactions with related parties are also subject to transfer pricing rules, so as that the sale price of asset sold to a related party is the arm’s length price (if agreed price is lower than market price).
Capital gains may be offset only against capital losses incurred in the same year. Unused capital losses in the current tax year may be carried forward and offset against capital gains in the following five years.
Tax incentives and tax credits
CIT Law provides tax credit for investment in new fixed assets and employment of new employees.
The taxpayer which invests or in whose new fixed assets other entity invests more than RSD 1 billion (app. EUR 8 mil.), and which employs at least 100 new employees for indefinite period of time and during the period of investment, has the right to the reduction of tax proportionally to the participation of new fixed assets in the existing fixed assets, for the period of ten years, provided that 100 new employees remain employed during this period. The tax credit starts to apply in the year in which the taxpayer starts to generate taxable profit.
The dividends received by the mother company are not included into the income for corporate income tax purposes.
If the subsidiary is located abroad, any foreign income tax and withholding tax on dividends may be used as a tax credit by the Serbian mother company. Similarly, foreign withholding tax paid on royalties and interest may be credited against the Serbian tax up to the 40% of foreign tax. The tax credit is not available for foreign withholding tax paid on received service fees.
Tax losses may be carried forward and offset against taxable profit in the future tax periods, but not more than 5 years.
Administration and payment of CIT
Corporate income tax is paid on the basis of the annual tax balance and tax return in which the taxpayer should declare the amount of his taxable profit (tax balance) and the amount of tax due.
The tax period for which the tax is assessed and paid is a calendar year, provided that in certain cases the tax year may be different than the calendar year.
The deadline for submission of tax balance and tax return is 180 days starting from the end of the year for which the tax is assessed, i.e. until the end of June of the current year for the preceding year. Along with the CIT return, the taxpayer is required to file transfer pricing documentation. Newly incorporated companies are also required to file to provisional CIT return within 15 days following the registration.
CIT is paid in advance, in monthly (provisional) instalments, calculated on the basis on the amount of tax declared in the previous year. Monthly instalments have to be paid by the 15th of the current month for the previous month.
Withholding tax is payable on the following types of income paid by resident taxpayers to non-resident entities abroad:
Taxable base for withholding tax is a gross income which incorporates withholding tax.
The standard withholding tax rate is flat 20%. The higher 25% tax rate applies to interest, royalties, rental income and service income paid to an entity from the jurisdiction that has the status of a tax paradise.
Withholding tax may be eliminated or reduced on the basis of a double tax treaty between Serbia and recipient’s country of residence. Most of tax treaties prescribe lower tax rates for dividends, interest, royalties, and rental income. Also, most treaties prescribes that the service income is subject to tax only in country of residence of the service provider. The tax return has to be filed even in cases when the relevant income is exempted from the withholding tax.
Beneficial tax rates available under the double tax treaties apply subject to the condition that a non-resident recipient of income obtains the certificate of tax residency (confirming that the recipient of income is a resident of a treaty country) and delivers it to the Serbian payer of income. In addition, a non-resident has to demonstrate that it is a beneficial owner of the income.
Withholding tax has to be paid in the same moment when income is transferred to a non-resident entity. Starting with 1 April 2018, the withholding tax should be paid within three days after payment of the income to non-resident.
Capital gains tax of non-residents
Capital gains generated by non-resident legal persons from the sale of assets in Serbia are also subject to tax at the 20% tax rate provided that the non-resident taxpayer is required to pay tax by himself (through fiscal representative), i.e. in this case tax is not paid on withholding basis.
DTTs in place in Serbia usually provide that the capital gains from disposal of property in Serbia will be taxed in country of residence, save in case of disposal of real property when they are taxed in Serbia. Certain DTTs provide that capital gain form share in Serbian companies will be taxed in Serbia if assets of the company primarily consists of real property.
The Serbian Law on Corporate Income Tax prescribes the standard definition of a permanent establishment (“PE”): the PE is a permanent place of business through which a non-resident taxpayer conducts its business activity.
In the practice only recognized form of a PE is a branch of a foreign entity. In this respect, from taxation perspective, the company undertaking the project should establish a branch in Serbia through which it will carry out the project. The establishment of the branch is also governed by practical reasons, as the company undertaking the project will not be able to effectively carry out the project without establishing some sort of registered presence in Serbia (such as to import equipment necessary for the project, employ staff, acquire necessary permits and licenses and similar).
The branch is required to maintain the same financial reports as fully incorporated companies. Likewise, taxable profits of a branch are established in much the same manner as the taxable profit of a company: by the adjustment of expenses and revenues disclosed in the financial reports in accordance with the International Accounting Standards under the adjustment rules set by the Law on Corporate Income Tax.
In addition to standard adjustments, PE (branch) is required to make certain specific adjustments of expenses, including the following:
Interest and accompanying expenses on loans given to the branch by its parent company are not recognized as tax deductible expense.
Royalties payable by the branch to its parent company are not recognized as deductible expense.
Unlike fully incorporated companies, the branch is not required to pay withholding tax on profits distributed to its parent company, which provides the possibility for significant tax savings.