Income tax on revenue from Serbian businesses…
General rules on income tax on revenue generated by a non-resident legal entity from a resident legal entity
Globalization is a process that marked the 20th and 21st centuries and is a term used to describe changes in societies, culture and the world economy that led to a dramatic increase in international exchange (of trade, culture, people, ideas, etc.). Globalization is often viewed exclusively from the point of view of the economy, and then its influence on trade liberalization, i.e., the development of free trade, comes to the fore. Due to that, there is an increasing turnover of goods and services between the Republic of Serbia and other countries, which results in more frequent cross-border transactions, especially between companies (so-called B2B). This turnover of goods and services is subject to special tax treatment, which we will deal with below.
Law on Corporate Income Tax (“Law on Corporate Income Tax”) in Article 40 prescribes the rules that apply in the case of trade in goods and services between non-resident legal entities (“NRLE”) and resident legal entities (“RLE”).
Subject of taxation, tax base
The tax base is the gross income, i.e., the gross fee that RLE pays to NRLE, which payment is made on the basis of:
- NRLE’s dividends and share in the profit in the RLE, including the dividend referred to in Article 35 of the Law on Corporate Income Tax;
- royalties from copyright and related rights and industrial property rights;
- compensation from the lease and sublease of real estate and movable property on the territory of the Republic of Serbia;
- fees from market research services, accounting and auditing services and other services in the field of legal and business consulting, regardless of the place of their provision or use, or the place where they will be provided or used;
(Hereinafter collectively or individually designated as “Income“).
Withholding tax is calculated and paid on the Income of NRLE based on the performance of entertainment, art, sports or similar programs in the RS, which are not taxed as income of an individual (performers, musicians, athletes, etc.), in accordance with regulations the taxation of citizens’ income is regulated.
If the contract or other document determining the amount of Revenue to be paid is expressed in net amount, it is necessary to gross this amount, with the appropriate coefficient, which depends on the tax rate applicable in the case.
Also, on the day of payment of the Income, the conversion into RSD is performed at the middle exchange rate of the NBS, if the amount is expressed in foreign currency.
The taxpayer is NRLE. However, the Law on Corporate Income Tax stipulates that the payer of tax debt in this case is RLE, which is also the payer of the fee that represents the tax base. For this reason, the obligation to calculate and pay taxes falls on the RLE, by deducting from the gross fee paid to the NRLE. According to the law, the taxpayer jointly and severally guarantees the amount of the tax debt.
In the event that the NRLE is a limited partnership or partnership, there is a doubt as to who is the recipient of the Income that is being paid. This is due to the fact that the mentioned NRLEs are fiscally transparent, so on the basis of the Income they earn, commanders and partners are directly taxed (which is the case, for example, in Great Britain and Germany). In the case of the application of the Double Taxation Agreement (“DT”), which will be discussed below, a certificate of residence should be provided for each natural person who is a member of the NRLE.
Income tax in this case is paid by deduction at the rate of 20% of the gross base.
The exception to the 20% tax rate is a situation where the NRLE comes from a jurisdiction with a preferential tax system, in which case the tax rate is 25%. The list of jurisdictions with the preferential tax system can be found at this link https://www.purs.gov.rs/sr/pravna-lica/pregled-propisa/pravilnici/313/pravilnik-o-listi-jurisdikcija-sa-preferencijalnim-poreskim-sistemom.html .
Incurrence of tax liability
The tax liability arises on the day of payment of the Income, which is the subject of taxation. If an advance is paid, a tax liability also arises. However, if the payment on the basis of which the payment was made is not realized later, the NRLE may request a refund of the tax paid through the RLE.
RLE calculates and pays the tax within three calendar days from the date of payment of the Income to the NRLE. The RLE files a tax return separately for each type of Income, for one or more recipients. The tax return form is PDPO / S and is submitted electronically. The provisions of the Rulebook on the content of the tax return for the calculation of income tax after deduction of income and fees earned by non-resident and resident legal entities (“Official Gazette of RS” No. 97/15, 111/15, 14/16, 15/16) – correction, 20/18, 27/21).
In order for an RLE to determine whether there is a tax liability in a particular case, it must answer three questions asked:
- Does the NRLE have the status of a legal entity? The tax liability does not arise if the recipient of the Income is a foreign entrepreneur or a natural person.
- Is the Income paid subject to taxation? In practice, it is sometimes difficult to determine the nature of the Income, so the contract itself, which is the legal basis of the taxable transaction, should define the nature of the Income as precisely as possible. If the contracting parties do not do so, the competent tax administration may apply the principle of factuality and assess the nature of the Income itself during the implementation of tax control.
- 3) Has DT been concluded with the country of origin of the NRLE? The DTs signed by the Republic of Serbia are published on the website of the Ministry of Finance at this link https://www.mfin.gov.rs/propisi/ugovori-o-izbegavanju-dvostrukog-oporezivanja. If it is and the tax treatment in accordance with the DT puts the taxpayer in a more favorable position, it is checked whether the conditions for the application of the DT are met. If they are, the tax rate from the DT is applied, if they are not, the legal rate is applied.
Conditions for applying the DT
Double taxation treaties are international agreements concluded by the Republic of Serbia with other countries, which aim to avoid double taxation or to achieve more favorable tax treatment for the taxpayer than prescribed by the Law on Corporate Income Tax (“DT”).
In order for the RLE to apply the provisions of the DT, which as a rule prescribe more favorable tax treatment for the taxpayer than the Law on Corporate Income Tax, it is necessary to meet the following conditions at the time of income payment:
- RLE must hold and submit to the competent authority a certificate of residence for NRLE: this certificate can be issued on the form POR-2, which is prescribed by the Rulebook on the procedure and manner of issuing and appearance of forms of certificates of residence “Official Gazette of RS” No. 80/10, 44 / 18 – other law). This form must be certified by the competent authority of the state where the NRLE is resident. However, often the state whose NRLE is resident will certify the certificate on its form, in which case it is necessary to provide a certified translation by a court interpreter for that document.
- The NRLE must be the beneficial owner of the Income: this condition is prescribed for the purpose of avoiding tax evasion. What constitutes proof of real ownership is not prescribed, and in practice it can be an excerpt from the competent register of companies (similar to the Serbian APR), a contract stating who is the recipient of income, etc. If the competent tax administration doubts the validity of the attached evidence, it bears the burden of proving the opposite fact.
If at the time of payment of the Income, the RLE does not meet both of these conditions, it has no right to apply the DT, but the legal tax regime applies. However, if he later submits a certificate of residency, the NRLE is entitled to claim a refund of the overpaid tax in accordance with Article 40a. Law on Corporate Income Tax.
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.
 Law 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);