Serbia

Adrijana Despotovic
Eurofast Global
Belgrade

Adrijana Despotovic of Eurofast Global describes the steps the Serbian government has taken since 2000 to increase its appeal as an investment location

A favourable tax regime, employment incentives, skilled labour force, modern infrastructure and a good location places Serbia is in a unique position to be used as a favourable investment jurisdiction.

The tax regime in Serbia offers a wide range of incentives to investors who, on the one hand, are seeking new investment opportunities and on the other, reduce cost. The corporate tax rate of 10% is one of the lowest in the region. Withholding tax on dividends, interest and royalties is 20% and may be reduced when a double tax treaty is in existence. The transfer of shares is not subject to tax based on these years' amendments of the Property Tax Law.

As a means of attracting foreign investors, the Serbian government extended tax incentives by offering a 10 year tax holiday, various tax credits when investing in fixed assets and nondeveloped areas, as well as incentives for hiring new employees.

Tax holiday

Serbia introduced a 10 year tax holiday as an investment incentive by exempting from corporate income tax companies that:

invest in their own fixed assets, which shall be used for performing its registered activity in Serbia, an amount of more than RSD600 million ($9.2 million) or alternatively where another person invests in the taxpayers' fixed assets, again to at least the abovementioned amount; and
employs at least 100 additional permanent employees during the investment period.

A taxpayer may enjoy the 10 year tax holiday, starting from the first year in which taxable profit is reported, in proportion to the value of investment when all requirements are cumulatively met.

Additionally, this incentive may be also enjoyed by companies which increase their basic capital by contributions in kind, provided that the purchased fixed assets are recorded in the accounting books of the taxpayer, have been purchased for performing the registered activity for the company and have been revalued .

Tax credits

A taxpayer who employs new permanent employees is entitled to an up-to-100% tax reduction of the gross salaries paid to new employees, increased by the public contributions paid by the employer.

A tax credit of 20% of the invested amount is granted to the company which invests in its own fixed assets needed for performing its registered activity, but such a credit can not be more than 50% of the total tax liability in the year when the funds are invested. Small sized companies are entitled to a 40% tax credit which should not be more than 70% of the total tax liability in the respective year.

An 80% credit on the invested amount is granted to a company which invests in its own fixed assets in these sectors: agriculture, fishing, production of textile yarn and fabrics, garments, leather, base metals, standard metal products, machines, office machines, electrical machines, radio, TV and communication equipment, medical instruments, motor vehicles and recycling video production. If the credit is not utilised it may be carried forward for 10 years.

Double tax treaties

Serbia has 35 double tax treaties in force which, along with the low corporation tax, offers tremendous possibilities for tax planning and investments through Serbia.

Signed agreements are in the process of ratification with Ghana, Guinea, Greece, Egypt (revised) Spain, Zimbabwe, Iran and Latvia.

In addition, more than 10 agreements are initialled, while negotiations are under way with several other countries.

Treaties extended

In March 2009 Serbia and Spain signed a double tax treaty which after it comes into force is expected to boost Spanish investment in Serbia and trade between two countries which last year was $300 million.

The Protocol on Amendments of the Double Tax Treaty between Greece and Serbia was signed in November 2008 and ratified by Serbia in June 2009. It is expected that Greece will ratify the protocol and the double tax treaty together by the end of the year which will see it enter into force on January 1 2010. The protocol changes the provisions of the treaty between Serbia and Greece that was signed in 1997 and ratified by Serbia in 1998. However, Greece refused to ratify because of the provision on taxation of shipping and aircraft income. The new protocol states that the profit from operations of ships in international traffic shall be taxable only in the contracting state in which the ship is registered, while the profit from aircraft shall be taxable only in the contracting state where the place of effective management of the enterprise is situated.

Favourable free trade agreements

Serbia is the only country outside the Commonwealth of Independent States that has signed a free trade agreement (FTA) signed with Russia. The FTA concluded in August 2000 makes Serbia attractive for foreign investment since it resulted in custom-free exports and imports between the two countries.

Moreover Serbia signed the CEFTA Agreement (Central European Free Trade Area Agreement) which enables its members to benefit from customs-free trade in a market of 30 million people, provided that some requirements under the agreement are met.

New free trade agreements

In April, 2009 a FTA with Belarus was signed implementing the removal of customs duty and other taxes between the two countries on various types of product with the exception of sugar, alcohol, cigarettes, used cars, buses and tyres.

An FTA with Turkey was signed in June this year and is expected to enter into force on January 1 2010.

Results and aims

Since the year 2000 Serbia has placed substantial effort into achieving economic stability to assure prosperity and to resume its former position as the leader of the region as it used to be. Its efforts have been rewarded since then as:

Belgrade was named "The City of the Future in Southern Europe 2006/2007" in a Financial Times competition in 2006.
The municipality of Indjija, located in the northern part of Serbia is listed as 18th of 25 best investment locations in Europe by the Financial Times, a list that also included other cities such as Amsterdam, Warszawa, Madrid, Frankfurt and Budapest.
Investments in Serbia have been awarded three consecutive times by the OECD as the best greenfield investments in South-East Europe.

The strategic location, favourable tax regime, extensive treaty network, several FTAs, investment incentives, low operational costs, and prospective EU membership mean that that Serbia may be seen as a great place for investments and probably the business hub of the region.

Adrijana Despotovic (adrijana.despotovic@eurofast.net), tax and legal adviser Eurofast Global, Belgrade