Tax Treatment of Dividend Payments for German Residents

Navigating international taxation can be challenging, especially when it comes to Tax Treatment of Dividend Payments for German Residents across borders. For companies and individuals involved in cross-border investments, understanding applicable tax regulations is crucial to ensure compliance and optimize tax liabilities. This article explores dividend payments from a Serbian company to an individual resident in Germany, examining Serbian tax law and the Double Taxation Agreement (DTA) between Serbia and Germany. We aim to provide a clear guide to this important aspect of international taxation.

Question:

A Serbian legal entity decides to distribute dividends to an individual 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 source taxed? Which country has the right to tax it under the DTA?

Answer:

Tax Treatment under Serbian Law

According to Article 61, paragraph 1, point 2 of the Law on Personal Income Tax (ZPDG), dividends and shares in profit are capital income. Article 64, paragraph 1 of the ZPDG states that Serbia taxes this income at a rate of 15%.

Taxation under the Double Taxation Agreement

Article 107a, paragraph 1 of the ZPDG specifies that when calculating withholding tax for non-residents, the payer must apply the provisions of the Double Taxation Agreement. The non-resident must prove their residency and ownership of the income, in this case, the dividend.

Serbia and Germany signed the Double Taxation Agreement in 1989. Article 11, paragraph 2 of the Agreement defines “dividends” with respect to Germany. At the time, Yugoslavia did not permit joint-stock companies, so there were no dividends from shares.

Application of Article 22, Paragraph 1 of the Agreement

Article 22, paragraph 1 of the Agreement states that income not covered by other articles is taxed only in the country of residence. In this case, the dividends should be taxed only in Germany, assuming they are not discussed elsewhere in the Agreement.

Article 3 (General Definitions), paragraph 2 of the Agreement clarifies that terms not defined within the Agreement are interpreted based on Serbian law. Dividends from a Serbian company to a German resident qualify as “capital income” under Articles 61-64 of the ZPDG. Therefore, Article 8 of the Agreement applies.

Tax Rate of 15%

Article 8 of the Agreement allows Serbia to tax profits from investments in Yugoslav work organizations, including dividends. The tax rate cannot exceed 15% of the profit.

Thus, the dividend income that a German resident receives from a Serbian company is taxed in Serbia at 15%. The Serbian company must calculate and withhold this tax on behalf of the German resident and remit it to the tax authority. The Ministry of Finance Opinion No. 430-01-322/2014-04, dated June 18, 2015, confirms this process.

Conclusion

Dividends that a German resident receives from a Serbian company are subject to a 15% withholding tax in Serbia. This follows from both Serbian tax law and the DTA between Serbia and Germany. The Serbian company is responsible for withholding and remitting the tax.

For further information or expert advice on the tax treatment of dividends and other income, contact Stojković Attorneys (AK STATT), offering comprehensive services in corporate law, taxation, and international agreements.