How foreign companies’ revenues are taxed in Serbia

Relationship between withholding tax and VAT on income generated by a non-resident legal entity from a resident legal entity

Obligation to calculate and pay withholding tax (“Withholding Tax”) exists when a non-resident legal entity (“NLE”) realizes income from a resident legal entity or entrepreneur who keeps business books (“RLE”) in situations provided by the Act on Corporate Income Tax (“CIT Act”)[1], based on the income from:

• dividends;
• royalties;
• interest;
• compensation for leasing and subleasing real estate and movable property on the territory of the Republic of Serbia
• services (market research services, accounting and auditing services, and legal and business consulting services);
• entertainment, entertainment, art, sports, or similar program in the Republic of Serbia.

On the basis of some of the above-mentioned revenues, there may be an obligation to calculate and pay value-added tax (“VAT”) if the NLE has generated revenues from RLE, and in accordance with the Act on Value Added Tax (“VAT Act”)[2], and these are revenues achieved on any of the following bases:

• royalties;
• fees from leasing and subleasing real estate and movable property on the territory of the Republic of Serbia;
• services (market research services, accounting and auditing services, and legal and business consulting services);
• performing entertainment, entertainment, art, sports, or similar programs in the Republic of Serbia.

As can be noticed in the mentioned situations, there is an obligation to pay both Withholding Tax and VAT, so in this regard, it is necessary to make a brief overview and answer key questions such as: Who pays? When does the tax liability arise? How is the tax calculated?

Who pays Withholding Tax and VAT?

The deductible taxpayer is the NLE, but the RLE is a taxpayer, so the RLE is obliged to calculate and pay the Withholding Tax. In the event that the Withholding Tax is not paid, forced collection of the tax will be initiated against the RLE.

When it comes to the obligation to calculate and pay VAT, it all depends on whether the NLE is in the VAT system in the Republic of Serbia or not. If the NLE is in the VAT system, then it will have the obligation to calculate and pay VAT. However, if the NLE is not in the VAT system, the obligation to calculate and pay VAT falls on the RLE.

When do the Withholding Tax and VAT arise?

The obligation to calculate and pay Withholding Tax and VAT may arise at the same or different times, and the reason for this is the fact that different events are taken as the moment of occurrence of the obligation.

In the case of VAT, the moment of occurrence of the obligation is related to one of the following actions:

• trade in goods and services;
• collection or payment of the fee or part of the fee was collected in cash before the supply of goods and services;
• issuing an invoice if the invoice is issued before the transaction.

On the other hand, the Withholding tax liability always arises at the time the RLE pays the revenue to the NLE.

How is Withholding Tax calculated and how is VAT calculated?

The Withholding Tax is calculated by applying to the gross income generated by the NLE from the RLE a tax rate of 20% or the benefited rate provided by the double taxation agreement (“ITA”) if such an agreement is concluded between the Republic of Serbia and the country of NLEs residence.

In order to be able to apply the benefits rate from the ITA, the RLE must have a Certificate of Residence (“COR”) of the NLE at the time of payment of income, which basically proves that the NLE is a resident of the country with which the Republic of Serbia has the ITA. If, on the other hand, the RLE does not have a COR at the time of payment of income, then the tax must be calculated and paid at the legal rate of 20%, so when it receives a POR, it must claim a refund of more tax paid.

Whether the income will be expressed in gross or net amount is a matter of agreement between the NLE and the RLE, not a matter of tax regulations.

In the previously mentioned situations in which there is an obligation to calculate and pay both Withholding Tax and VAT, the basis for calculating VAT is gross income, regardless of whether the obligation to pay Withholding Tax occurred at that time or will occur only at that time. in future. Therefore, the tax base for VAT calculation also contains the amount of Withholding Tax.

With regard to the inclusion of Withholding Tax in the VAT base, it is also necessary to have a COR in order to apply the benefited rate for calculating the amount of Withholding Tax. In the absence of the same, the Withholding Tax is to be calculated at the rate of 20% and thus obtained is included in the VAT base, so after obtaining the COR, a refund of the overpaid tax may be requested.

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

[1] Act on Corporate Income Tax “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 Value Added Tax “Official Gazette of RS”, No. 84/2004, 86/2004 – amended, 61/2005, 61/2007, 93/2012, 108/2013, 6/2014 – harmonized din. izn., 68/2014 – other law, 142/2014, 5/2015 – harmonized din. izn., 83/2015, 5/2016 – harmonized din. izn., 108/2016, 7/2017 – harmonized din. izn., 113/2017, 13/2018 – harmonized din. izn., 30/2018, 4/2019 – harmonized din. izn., 72/2019, 8/2020 – harmonized din. izn. and 153/2020)