The Serbian government remains on the path of creating a business-friendly tax environment and the system for investments that are fully compatible with EUI legislation, explains Slobodan Mihajlovic of Eurofast Global.
A significant economic growth for the first quarter of 2011 proves that Serbia is recovering at a steady pace from the financial turmoil.
New developments – Property tax rates in Serbia
Pursuant to the amended Property Tax Act, the property tax rate in Serbia can be increased as much as 60% compared with the tax liability from 2010. However, the Act predicts some reduction of existing tax reliefs.
In that respect, tenants of public construction land and agricultural state property shall not pay property tax for a plot up to 10 acres. To eliminate double taxation property taxes shall not be paid for a land located under a building where the property tax is allocated on the building itself. Novelty in property taxation is applied from January 1 2011 retrospectively.
Additionally, the big municipalities such as Belgrade will use progressive tax rates which can vary from 0.4% to 2%. Property tax rates remain the same for buildings owned by legal entities. Therefore citizens can avoid this high taxation if they transfer certain real-estate assets into their legal entities which are only taxed at 0.4%.
Amendments to the Law on Planning and Construction
Amendments to the Law on Planning and Construction came into force on April 5 2011.
With the amendments, authorities in charge only once will have the right to ask the investor to supplement the documentation for the building permit. At the investor's request, the building permit can be renewed for an additional period of two years, but only if there is a proof that at least 80 % of the building is constructed.
The building permit will expire if it was not in use for five years from the issuing date. The investor must pay the property tax upon the expiration of five years period as if the facility was built. Also, the use of a newly built facility without the permit will be enabled if the competent body fails to issue the permit for use or a decision on the rejection of its issuance within 90 days from the forming of a commission for technical inspection.
No taxes and contributions for new employees
To stimulate further employment and to reduce costs, the Serbian government made a decision regarding private companies. Accordingly companies who employ persons that are under the age of 30 and over 45 years old will be exempt from paying salary taxes and contributions for employee's wages for these employees irrespective whether the employment is permanent or temporary. This decision adopted in May 2011 and shall be in force for a year.
Withholding taxes and avoidance of double taxation
Withholding tax is levied on the certain types of income paid to a non-resident entity by a resident taxpayer. Subject to withholding tax are the following types of income:
- Dividends and share in profit
- Capital gains
- Income from leasing moveable and immovable property derived by non-resident entity, beneficial owner of the income
- Earnings from cultural, musics, sports events when a performer is intentionally not taxed with personal income tax
The provisions of the double taxation treaty can be applied providing that a non-resident supplies evidence on his residency status in the country signatory of the treaty and if the non-resident is a beneficial owner of the income.
The treaty network will be increased to more than 40 treaties as in 2010 treaties with Austria, Libya, Greece, Czech Republic and Malta entered into force (effectively from January 1 2011) and additional treaties with Qatar, Ireland and Estonia have been ratified by Parliament.
Change of fiscal year and reform in tax authority operations
Until the latest amendments the tax year was considered to be the calendar year, except in cases of statutory changes or in the case of commencement of business activity by a newly formed entity. To have a different tax year from the calendar year, requests need to be approved by the Ministry of Finance or from the National Bank of Serbia. Such a tax year has to last for 12 calendar months and must be maintained for at least five years. The Ministry of Finance announced comprehensive tax authority reform for 2012. This will improve effectiveness of the operation of the tax authority and communication with the clients. The reform includes establishing an electronic correspondence with taxpayers in order to eliminate long lines.
Transfer pricing regulations in Serbia
The Serbian Corporate Profit Tax Law defines that transfer prices are prices applied in transactions between related parties. It is based on the principle that all transactions between related companies must be as at an arms' length, otherwise appropriate adjustments need to be made to the taxable income.
Under Article 59 of the Law, a related party status exists if there is a possibility of control or influence on business decisions between the parties:
- Persons holding more than 50% of total shares and persons holding individually a majority stake are considered to have control over the taxpayer;
- An influence on the decision making process is also deemed present when a person related to the taxpayer holds over 50% or has individually the majority of voting rights in the taxpayer's management bodies.
Under the same law, a taxpayer is required to disclose in the tax return all of the transactions with related parties.
In cases when the transfer prices differ from the arm's length prices, the taxpayer is required to adjust his taxable income.
The penalty for not disclosing transactions with related parties in the tax return ranges from RSD100,000 ($1,380) to, RSD600,000, for the legal entity as well as a penalty ranging from RSD2,500-20,000 for the responsible person.
Failure to comply with transfer pricing regulations would expose one's business in Serbia to the possibility of penalties, especially bearing in mind the statute of limitations of five years and the fact that tax authorities may scrutinise current transactions in the future.
Seeking to become a member of the EU, Serbia has achieved a lot in modernising its constitution and legislations to be harmonised with that of EU and international standards in all areas. Surely, latest strong foreign direct investment figures proves that reforms have been very welcomed by the investors. According to the Serbia Investment and Export Promotion Agency since 2001, Serbia has attracted over $20 billion of inward foreign direct investment (FDI) with the EU being top of the list of investors, accounting for about 70% of the total FDI influx. The leading spot on the country list is held by Austria, followed by Greece, Norway, Germany, the Netherlands and Italy, while major investor countries also include Slovenia, France, Hungary, the Russian Federation and Luxembourg.
Slobodan Mihajlovic (email@example.com), Eurofast Taxand, Cyprus and Marko Milojevic (firstname.lastname@example.org), Eurofast Global, Belgrade Office/Serbia