Beware Of Tax Duty On Using Software In Serbia

Withholding tax based on software usage fees

 

Are you planning to improve your business by implementing and using software from abroad? Before you do that, it is invaluable to get acquainted with the tax obligations that you may encounter along the way, because otherwise, you could suffer unforeseeable consequences.

If you perform your activity as a legal entity or an entrepreneur who keeps business books and pays income to a non-resident legal entity (“NLE”), you are obliged to calculate and pay withholding tax (“Withholding Tax”) in situations provided by the Corporate Income Tax Act (“CIT Act”).[1]

One of the bases on which the obligation to calculate and pay Withholding Tax arises is the income that NLE generates from you on the basis of royalties. Copyright fees are fees that are realized on the basis of the use of copyright, rights related to copyright, and industrial property rights.

Royalties mean the use of copyright in a literary, artistic, or scientific work, as well as the use of a patent, trademark, design, model, plan, or secret formula, as well as for the use of industrial, commercial, or scientific equipment or information relating to industrial, commercial or scientific experience.

Software usage fees are the most common royalties in practice.

 

What is and what is not subject to taxation?

When we talk about the fee for the use of software, it is important to emphasize that the subject of taxation is the use of the software. The right to use the software is usually obtained on the basis of a license. The same goes for the software deployment license.

On the other hand, if there is a transfer of ownership of the software as a whole, then we are talking about a sale and it is not subject to Withholding Tax.

In that direction, when you do business with NLE, always first determine whether you acquire the right of ownership on specific software (which is a very rare case in practice) or whether you acquire only the right of use on the basis of a license or similar. We also emphasize that the software itself should not be confused with the means by which the software is transmitted. Namely, if, for example, you bought a CD that contains a program, it does not mean that you have acquired ownership of the software, it just means that you have bought a tool that allows the use of the software.

In addition to the above, it is important to note that when you buy equipment or a device with accompanying software without which the purchased equipment or device cannot function, there is no tax liability based on Withholding Tax. A good example would be the purchase of a mobile phone or computer that cannot function without an operating system, and in this case, it will not be a taxable case.

Understanding the above is of great importance since you will know through a valid analysis whether there is an obligation for you to calculate and pay Withholding Tax or not. Otherwise, you may find yourself in one of two possible situations. The first is to make a calculation and pay Withholding Tax, without being obliged to do so in accordance with the CIT Act. In that case, you will lose a lot of time on the administration to get your money back. In the second situation, you will think that the tax liability has not arisen, and you will not make the calculation and payment of Withholding Tax, even though the mentioned obligation has arisen. In that case, you run the risk of initiating misdemeanor proceedings against you and paying the penalty for non-payment of taxes, provided for in the Act on Tax Procedure and Tax Administration[2]. The tax authority may also initiate enforcement proceedings against you.

 

Tax rate

If there is no double tax avoidance agreement (“ITA”) between the NLE country of residence and the Republic of Serbia, you are obliged to calculate and pay the Withholding Tax at a legal rate of 20% (25% if the NLE comes from a jurisdiction with preferential tax system).

If, on the other hand, there is an ITA between the country of residence of the NLE and the Republic of Serbia, then the provisions of the ITA apply, which, as a rule, provide for a benefited tax rate.

In that regard, it should be emphasized that the fee for the use of the software is not specifically stated in most ITAs, but is treated as an author’s fee for the use of literary or scientific work.

In this regard, it is of great importance that in each specific case, after determining the country of residence of the NLE with which you do business, check whether the Republic of Serbia has an ITA with the said country.

If the ITA is not concluded, you will apply the Legal Tax Rate. If there is a valid ITA, it is important to know the content of the ITA, and in this regard, it should be established how the ITA treats the fee for using the software, especially since many ITAs provide two beneficial tax rates (5% and 10%), depending on the type of royalties. If you fail to determine the content of the ITA, you may find yourself in a situation where you have to calculate more or fewer funds in the name of tax due than necessary.

 

For more info on this or any other legal, tax or business topic, please feel free to write to us at office@statt.rs at any time OR contact us via telephone number +381113281914 during working days from 08:30 to 16:30

 

[1] Corporate Income Tax Act (“Official Gazette of RS”, No. 25/2001, 80/2002, 80/2002 – other law, 43/2003, 84/2004, 18/2010, 101/2011, 119/2012, 47/2013, 108/2013, 68/2014 – other law, 142/2014, 91/2015 – authentic interpretation, 112/2015, 113/2017, 95/2018, 86/2019, 153/2020 and 118/2021).

[2] Act on Tax Procedure and Tax Administration (“Official Gazette of RS”, No. 80/2002, 84/2002, 23/2003, 70/2003, 55/2004, 61/2005, 85/2005 – second law, 62/2006 – Second Law, 61/2007, 20/2009 (Articles 28-31, not in the consolidated text), 72/2009 – Second Law, 53/2010 (Articles 47-51, not in the consolidated text), 101/2011 (Articles 51-54 are not in the consolidated text), 2/2012, 93/2012 (Articles 36-44 are not in the consolidated text), 47/2013 (Articles 45-49 are not in the consolidated text), 108 / 2013 (Articles 10-11 are not in the consolidated text), 68/2014 (Articles 75-85 are not in the consolidated text), 105/2014, 112/2015 (Articles 30 and 31 are not in the consolidated text) ), 15/2016 (Articles 10-14 are not in the consolidated text), 108/2016, 30/2018 (Articles 94-97 are not in the consolidated text), 95/2018, 86/2019 (Articles 17. and 18. not in the consolidated text), 144/2020 (Articles 29-32 are not in the consolidated text) and 96/2021 (Article 13 is not in the consolidated text).