Violation of Annual Personal Income Tax Rules

Can Misdemeanour Liability for Violation of Annual Personal Income Tax Rules be Avoided or Reduced?

Frankly, this question has to be determined by the acting court as and when it arises with reference to particular facts and circumstances of each individual case.

Yet, the tax rules, after laying down what is considered as annual personal income tax, do not prescribe in respect of establishing liability which evidence should be taken into account and believed, and if taken/believed, what weight should be attached to it or what effect should be given to it. 

So, deciding on liability and punishment have been left at the sound discretion of the acting court to be exercised on consideration of all facts/circumstances.

Therefore, the defence strategy may mean for the defendant the difference between harsh fines, or even incarceration, and avoiding the payment of fines, less stringent penalties (community service), and freedom. 

Who owes and what is Annual Personal Income Tax?

The Annual Personal Income Tax is paid by natural persons who earned more than three times the average annual salary per employee paid in the Republic of Serbia in the year for which the tax is determined, according to the data of the republic authority responsible for statistics (taxable income). 

This tax is paid by residents, for income earned in the territory of the Republic of Serbia and abroad, and by non-residents, for income earned solely in the territory of the Republic of Serbia.

What is income?

The Law on Personal Income Tax of the Republic of Serbia defines income quite extensively.

Namely, income is considered to be the annual sum of:

  1. salary and other income of the employee arising from employment;
  2. taxable income from self-employment;
  3. taxable income from copyright and related rights and industrial property rights;
  4. taxable income from real estate;
  5. taxable income from leasing movable property;
  6. taxable income of athletes and sports experts;
  7. taxable income from the provision of catering services;
  8. other taxable income, which includes the following income:
    1. income arising from deed contracts;
    2. income arising from contracts on performing temporary and occasional works, concluded through a youth or student cooperative with a person up to 26 years of age, if he / she is studying in secondary, higher or high education institutions;
    3. income from additional work;
    4. income from trade representation;
    5. income of members of the companies’ management bodies; 
    6. compensation to deputies;
    7. compensation in connection with the performance of defence, civil protection and protection against natural disasters;
    8. income of bankruptcy trustees, court experts, court jurors and court interpreters;
    9. revenues from the collection and sale of secondary raw materials;
    10. income from the sale of goods produced by performing temporary or occasional works, if they are not taxed on another legal ground;
    11. awards and other similar benefits to natural persons who are not employed by the payer, which arise from work or other types of contributions to the payer’s activity, in the amount of over RSD 13,248 (Serbian dinars) per year, realized by one payer;
    12. income from Article 9 of the Law on Personal Income Tax above the prescribed non-taxable amounts (various considerations which are subject to exclusion from taxable income);
    13. reimbursement of expenses to persons who are not employed by the payer, except for the income listed in item 11) in this list;
    14. income earned by the employee on the basis of participation in the employer’s profit realized in the business year;
    15. income from the sale of agricultural and forest products and services, including income from the collection and sale of forest fruits and medicinal herbs, as well as the cultivation and sale of mushrooms, bee swarms (bees) and snails;
    16. all other income that is not taxed on another legal ground, or is not exempt from taxation or from tax payment; 
    17. compensation paid to an entrepreneur or to a “lump – sum” entrepreneur, who performs activities for a fee, for the same principal or for a person who is considered a related party to the principal, and who additionally meets at least five of the nine criteria, defined in the Article 85, paragraph 1, item 17 of the Law on Personal Income Tax, or it could have been concluded when starting a business cooperation that the entrepreneur will meet at least five of the nine criteria, according to the circumstances of the case, and the criteria were subsequently met (so called “independence test”);
  9. the above enumerated income generated and taxed in another country for residents – taxpayers. 

When Tax Return must be submitted?

A citizen who earned the aforementioned taxable income in the previous year is obliged to submit a tax return with accurate data to the competent tax authority after the end of that year, and no later than May 15 of the following year.

How is the law broken?

The law is violated, and an individual is exposed to penalties, if by the aforesaid timeline a tax return is not filed at all, or it is not filed within the legal or additional deadline, or if it is submitted unsigned, or with incorrect information that are not rectified within the prescribed deadline, or it is filed without the necessary documentation and evidence of importance for determining the existence and amount of due tax.

And for this violation, pecuniary fine may range from RSD 5,000 to RSD 150,000. 

If a conviction is rendered against the defendant, declaring him responsible for this misdemeanour with the imposition of a fine, the verdict also determines the deadline for payment of the fine, which cannot be longer than 15 days from the day the verdict becomes final.

Conversion of non-paid fine into jail time

Non-payment of fine which is ruled by the court verdict (in whole or in part) may be replaced by and result in imprisonment.

And, one day of imprisonment may be ordered for every RSD 1,000 (less then EUR 10) of the imposed fine, provided that the imprisonment sentence may not be shorter than one day or longer than sixty days. 

Conversion of non-paid fine into community service

If the court finds justified, given the gravity of the offense, the amount of unpaid fine and the property of the convict, the court may, instead of imprisonment, order for the unpaid fine to be replaced by public service. 

Eight hours of the service replace one day of imprisonment or 1,000 dinars of imposed fine. 

The service cannot last longer than 360 hours. 

The part of the unpaid fine that could not be replaced by imprisonment or public service is collected by enforcement. 

And if fine is paid after the conversion is ordered…

If, after the court decision on the replacement of the unpaid fine, the fined natural person nevertheless pays the fine, the imprisonment or public service punishment will not be executed. 

But, if the execution of the imprisonment / public service sentence has begun, and the convicted person pays the rest of the imposed fine post festum, the execution of the imprisonment / public service shall be suspended.

Given the amount of the threatened fine and the consequences in case of its non-payment within the deadline for its voluntary execution, the defence in the misdemeanour procedure should be approached seriously and zealously.

How to defend?

In short, the misdemeanour procedure begins with a request to initiate a misdemeanour procedure, which is submitted to the Misdemeanour Court by the competent Tax Administration. 

Prior to this act, the Tax Administration has conducted the tax control procedure and determined that there is a grounded suspicion that the natural person – taxpayer committed a misdemeanour prescribed by the Law on Tax Procedure and Tax Administration. 

Then, the Misdemeanour Court serves the defendant a subpoena to invite him for an official court hearing.

The defendant may defend himself alone or with the assistance of a defence attorney, who is authorized to attend the hearing of the defendant, but not to testify instead of the defendant. 

In the event that the defendant is justifiably prevented from responding to the summons of the court for a hearing on the day determined by the court in the subpoena, he is obliged to justify his absence from the hearing. 

Otherwise, the court may issue a warrant to apprehend the defendant and bring her/him before the court, which is the next measure in line to ensuring the defendant’s presence in the proceedings.

And the most appropriate defence is…

The most beneficial and, from the aspect of the defendant, the most convenient way of presenting the defence in this type of misdemeanour proceedings, is preparing and submitting a written defence. 

The written defence can be prepared for the defendant by his defence attorney, but in that case both the defence attorney and the defendant are obliged to sign it (regardless of the fact that the defendant has authorized an attorney at law to represent him in this court procedure). 

In this instance, one should primarily observe whether the court in the specific case allowed the defendant to present his defence in writing, or the defendant still has to appear in court in person for the hearing. 

The court will instruct the defendant with regards to the possibility of presenting his defence in writing in the subpoena for a hearing, if the court finds that a direct oral hearing is not necessary, given the significance of the misdemeanour and the information at the court’s disposal.

The defence strategy, in general, should primarily focus on whether the defendant has committed the offense she/he is charged with, and whether in the specific case the earned income is exempt from taxation (for instance, the list of types of incomes which are exempted from taxation is given in Article 9. Law on Personal Income Tax). 

And, if the defendant has committed the stated misdemeanour, it should be precisely determined which act of execution is in question (primarily, whether the defendant had filed a tax return, but it was not complete, or certain data inscribed in the return were not accurate, or it was submitted after the due date, or, on the other hand, the defendant did not file a tax return at all).

Furthermore, legal grounds for mitigation of punishment must be thoroughly explored, especially (substantially reduced mental competence, with the exception of insanity which the defendant caused by alcohol/substance use or otherwise – actiones liberae in causa, or non-reasonable mistake of law), or a legal basis for exclusion of misdemeanour liability (insanity, reasonable mistake of law and reasonable mistake of facts). 

So, in case of reasonable ignorance of the regulation (mistake in law), which may exclude liability, it is required that the misdemeanour offender was not obliged to have known and could not have known that her/his act is prohibited.

On the other hand, reasonable mistake of facts exists when the offender, at the time of committing a misdemeanour, wrongfully deemed that there were circumstances under which, had they really existed, his/her act would have been permitted.

Release from Punishment 

Additionally, the defence should determine whether a legal basis for release from punishment exists in the particular case. 

This legal ground would exist if the defendant remedied the consequences of his act or compensated for the damages caused by the misdemeanour before learning that misdemeanour proceedings were initiated against him. 

Additionally, the court can acquit the perpetrator of a misdemeanour committed out of negligence, when the consequences of the act affect the perpetrator so harshly, that the imposition of a sentence in such a case would obviously not correspond to the purpose of the punishment.

Finally, the defence should inspect and highlight all mitigating circumstances that exist in a particular case, among which for instance, statute of limitation, the defendant’s fair behaviour and just conduct in the proceedings (responding to a summons, overall participation in the proceedings), the defendant’s previous non-convictions, the defendant’s personal and family circumstances or material situation, the fact that the offense did not cause serious consequences or great damage, and all other circumstances that indicate that the imposition of a fine would be unfair, since the defendant’s conduct is not requiring a misdemeanour punishment, and the purpose of sanctioning would be achieved by imposing an admonition alone. 

Caution with Reference to Future Conduct 

In practice, if the tax return is filed after the expiration of the legal deadline, the defendants are generally reprimanded/admonished, since the Law on Misdemeanours prescribes that an admonition may be issued if the misdemeanour is reflected in non-compliance or damage caused by the misdemeanour, but the perpetrator fulfilled the prescribed obligation, i.e. removed or compensated the caused damage after initiating the procedure, but before passing the verdict.

So, instead of a fine for a misdemeanour, an admonition may be imposed if there are circumstances that to a considerable degree mitigate the liability of an offender, so that it can be expected that he/she shall avoid committing misdemeanours in future even without imposing a punishment.

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