A few things about corporate taxation in Serbia
Corporate taxation in Serbia
Before discussing corporate taxation in Serbia, it is worth reminding here that a corporate group or group of companies is a collection of parent and subsidiary corporations that function as a single economic entity through a common source of control.
The concept of a group is frequently used in tax law, accounting and (less frequently) company law to attribute the rights and duties of one member of the group to another or the whole.
On the other hand, if the corporations are engaged in entirely different businesses, the group is called a conglomerate.
Common source of control or common control means the power to direct or cause the direction of the management and policies of a person or an organization, whether by ownership of stock, voting rights, by contract, or otherwise.
In such context, tax grouping or tax consolidation is allowed in Serbia to a group of companies where all members are Serbian residents and where one company directly or indirectly controls at least 75% of the shares in another company.
Yet, each company within such a group is obliged to file its own tax balance sheet, but the parent company files a consolidated tax balance sheet for the whole group.
In such a consolidated tax balance sheet, losses of one or more companies are offset by the profits of other related companies, whereby each company is liable for the portion of tax attributable to its share of the group’s taxable profit.
Once approved by the Ministry of Finance of the Republic of Serbia, tax grouping or tax consolidation applies for at least five years.
Transfer pricing in Serbia
Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided.
In other words, transfer prices are prices of transactions between related parties.
Transfer pricing allows for the establishment of prices for the goods and services exchanged between related parties i.e. subsidiaries, affiliates, or commonly controlled companies that are part of the same larger enterprise (corporate group or conglomerate).
In such context, transfer pricing can lead to tax savings for corporations, though tax authorities may contest their claims.
Related parties under Serbian regulatory framework
On the other hand, related parties exist if there is a possibility of control or influence over business decisions between them.
Ownership of 25% or more, or a majority of shares, is considered as potential control. Influence over business decisions exists when an associated party holds 25% or more, or individually holds the greatest portion of votes in the taxpayer’s management bodies. If the same persons participate in management or control of both companies, a connection between them will be deemed to exist.
Besides, close family members are also regarded as related parties.
Non-resident entities from tax havens are considered as related parties of resident entities.
In addition, the Ministry of Finance of the Republic of Serbia prescribed the list of countries that are to be considered as tax havens for the application of relevant CIT Law provisions.
Each company should disclose transactions with its related parties separately at transfer prices and at arm’s-length prices in its CIT calculation.
Positive difference between these prices (adjustments of expenses) and negative difference (adjustments of revenues) is included in taxable profit.
Serbian CIT Law recognizes the following methods for determining arm’s-length prices:
- Resale minus.
- Transactional net margin (TNMM).
- Profit split.
- Comparable uncontrolled price (CUP).
- Cost plus.
If none of the above methods can be applied, then some other method that allows determination of arm’s-length prices may be applied.
Anyhow, it is mandatory to prepare and submit transfer pricing documentation together with the CIT return.
Transfer pricing rules for intra-group loans in Serbia
Arm’s-length interest in Serbia is deemed to be the:
- weighted average key policy rate for the tax period for loans denominated in dinars, and
- weighted average interest rate at which domestic banks borrowed from foreign lenders in the related tax period for foreign currency loans.
These indicators are determined by the National Bank of Serbia and published by the Ministry of Finance.
In such context, any interest incurred on related-party loans exceeding the arm’s-length interest rate is not tax deductible.
However, taxpayers are entitled to determine market interest rates by using common methods for determining arm’s-length interest rates.
If the taxpayer decides to determine interest rates by applying common methods, it will be obligated to apply such interest rates for assessment of all related-party loans.
Transfer pricing rules in this respect are applied up to the amount of tax-deductible interest determined in accordance with the thin capitalization threshold, as it is more closely described below.
The interest and related costs will be fully deductible for regular companies, if the loans from related parties do not exceed four times the taxpayer’s net equity.
The interest and related costs will be fully deductible for banks and leasing companies, if the loans from related parties do not exceed ten times the taxpayer’s net equity
In that regards, the amount of a taxpayer’s net equity is calculated as the average of the total assets less total liabilities at the beginning and the end of the year, while the amount of loans from related parties is calculated as a daily average for the year.
In cases where the loans from related parties exceed the prescribed threshold, the amount of non-deductible interest will be calculated as proportional to the amount of loans exceeding the 4:1 i.e. 10:1 threshold.
Controlled foreign companies (CFCs) in Serbia
Controlled foreign corporation (CFC) rules are features of an income tax system designed to limit artificial deferral of tax by using offshore low taxed entities.
The rules are needed only with respect to income of an entity that is not currently taxed to the owners of the entity.
Yet, currently there are no CFC rules in Serbia.