Tax Treatment Of Dividend Payments To Individuals – Residents Of Germany
Navigating the complexities of international taxation can be a daunting task, especially when it comes to the tax treatment of dividend payments across borders. For companies and individuals involved in cross-border investments, understanding the applicable tax regulations is crucial to ensure compliance and optimize tax liabilities. This article delves into the specific case of dividend payments from a Serbian company to an individual resident in Germany, examining the relevant provisions of Serbian tax law and the Double Taxation Agreement (DTA) between Serbia and Germany. By elucidating the tax obligations and rights of both parties, we aim to provide a clear and comprehensive guide to this important aspect of international taxation.
Question:
A domestic legal entity decides to distribute dividends to an individual – a resident of Germany. The dividend for the year 2023 amounts to 1,000,000 dinars gross. The founder has provided the company with proof of residency in Germany. How is the individual’s income from this basis taxed, i.e., which country has the right to tax the said income from the perspective of the application of the Double Taxation Agreement (DTA)?
Answer:
According to Article 61, paragraph 1, point 2 of the Law on Personal Income Tax (hereinafter: ZPDG), dividends and shares in profit are considered capital income, which, according to Article 64, paragraph 1 of the ZPDG, are taxed at a rate of 15%.
Taxation under the Double Taxation Agreement
Article 107a, paragraph 1 of the ZPDG prescribes that, in the calculation of withholding tax on the income of a non-resident, the payer of the income applies the provisions of the double taxation agreement, provided that the non-resident proves the status of a resident of the state with which Serbia has concluded a double taxation agreement and that he is the beneficial owner of the income (in this case, dividends).
Between the SFR Yugoslavia and the Federal Republic of Germany, a Double Taxation Agreement was concluded regarding taxes on income and on property, with a Protocol (hereinafter: the Agreement) which has been in effect since January 1, 1989.
In Article 11, paragraph 2 of the Agreement, the term “dividends” is practically defined exclusively in relation to Germany because, at the time the Agreement was concluded, there was no possibility of establishing joint-stock companies in the then SFR Yugoslavia, and therefore no dividends could be realized as income from shares.
Application of Article 22, Paragraph 1 of the Agreement
In this context, the question arises whether the provisions of Article 22, paragraph 1 (Other Income) of the Agreement, which provides that parts of the income of a resident of a contracting state (in this case, a resident of Germany), regardless of where they arise, which are not discussed in the previous articles of this Agreement, are taxed only in that state (in this case, only in Germany), should be applied.
According to Article 3 (General Definitions), paragraph 2 of the Agreement, when a contracting state (in this case, the Republic of Serbia) applies this Agreement, any term not defined by the Agreement has the meaning assigned to it by the laws of that state (Republic of Serbia) concerning the taxes to which this Agreement applies. Consequently, dividends that, in today’s context, an individual – a resident of Germany, receives from a company – a resident of the Republic of Serbia, should be qualified as “capital income” from Articles 61-64 of the ZPDG, to which the provisions of Article 8 of the Agreement apply.
Tax Rate of 15%
The Agreement, in Article 8 (Taxation of Profits from Investments in Yugoslav Work Organizations), prescribes that the profit earned by a resident of the Federal Republic of Germany from his investment in a Yugoslav work organization may be taxed in Yugoslavia. Such a tax cannot exceed 15% of that profit.
Therefore, the income that a non-resident taxpayer (an individual – a resident of Germany) earns from a resident legal entity on the basis of dividend payments is taxed in the Republic of Serbia at a tax rate of 15%. The income payer is obliged, on behalf of and for the account of the resident of Germany, to calculate and withhold the due withholding tax and pay it to the prescribed account.
This is confirmed by the opinion of the Ministry of Finance No. 430-01-322/2014-04 of June 18, 2015.
Conclusion
Dividends that a resident of Germany earns in the Republic of Serbia are taxed with a withholding tax rate of 15% of the gross dividend amount. This rule arises from the applicable legal regulations and the international agreement between Serbia and Germany, which allows Serbia to apply withholding tax on dividends paid to German residents.
For additional information or expert advice regarding the tax treatment of dividends and other income, contact Stojković Attorneys (AK STATT), which provides comprehensive services in corporate law, taxation, and international agreements.