Taxation of Illegal Income in Serbia

If one acquired money though illegal means, such a person may end up getting charged twice – once for initial crime(s), and again for evading the taxes.

And if tax returns have been duly submitted, Tax Administration will probably not require any details beyond an approximation on how much one has made.

But, it gets pretty tricky if one gets audited.

Since there is usually no paper trail, Tax Administration inspectors will likely ask for data, names and contact information for people that may have been part of illegal transactions.

Then, such people may be called so that inspectors can verify audited subject’s numbers with them.

And, if inspectors find out that the money has been made from illegal activities, then they must tip that off to the police, as they are supposed to proactively alert about such misdeeds, or initiate legal process on their own.

New rules on taxation on ill-gotten gains  

Around this time last year, namely, on 29 February 2020, the National Assembly of the Republic of Serbia adopted the Law on Determining the Origin of Property and Special Tax (the “Law“).

The Law was published in the Official Gazette of RS no. 18/2020 and entered into force on 11 March 2020, but with a delayed implementation of one year in order to provide conditions for its efficient implementation.

SUBJECT OF REGULATION

The Law regulates the conditions, manner and procedure under which the property of a natural person is determined and provides room for the inspectors to audit such a property increase, as well as the special tax by which that property is taxed in case it cannot be proven that it was acquired in a lawful manner.

Illegal property is defined by the Law as the difference between the increase of property and reported income, for which a natural person could not prove that it was acquired legally.

JURISDICTION

Within the Tax Administration, a special organizational unit is formed – the Tax Administration Unit, which will be responsible for the implementation of this Law.

THE BURDEN OF PROOF

• The burden of proving the increase of assets in relation to the reported income of a natural person is on the Tax Administration,
• The burden of proving that one has legally acquired the property in the part where the increase of his property is not in accordance with the reported income is on that individual.

PROPERTY DETERMINATION PROCEDURE AND SPECIAL TAX

The procedure is initiated and conducted ex officio and consists of two phases:

• preliminary proceedings;
• the procedure for controlling and determining the special tax.

PRELIMINARY PROCEDURE

In the previous procedure, the Tax Administration Unit determines the increase of property in accordance with the reports of state bodies and citizens, as well as in line with the annual guidelines issued by the Director of the Tax Administration.

These guidelines will not be available to the public because otherwise, persons who dispose of illegally acquired property would know in advance that proceedings will be initiated against them.

CONTROL PROCEDURE

The Tax Administration Unit initiates the control procedure, if in the previous procedure it seems probable that in a maximum of three consecutive calendar years in which the natural person has an increase in property, there is a difference between the increase in property and the reported income higher than EUR 150.000.

Upon completion of the control procedure, the Tax Administration Unit shall issue a decision on determining the special tax if it determines the existence of illegally acquired property.

VALUE OF PROPERTY OF A NATURAL PERSON

In determining the value of the property of a natural person, the Tax Administration will take into account the entire property of the natural person, and in particular:

• immovable property (apartments, houses, office buildings and premises, garages, land, etc.);
• financial instruments;
• shares in a legal entity;
• equipment for performing independent activities;
• motor vehicles, vessels and aircraft;
• savings deposits and cash;
• other property rights.

TAX BASE

Tax base is determined according to the value of illegally acquired property, which is the sum of the revalued value of the determined illegally acquired property for each calendar year that was subject to control.

The value of illegally acquired property is revalued by the consumer price index from the last day of the calendar year for which the illegally acquired property was determined until the day of the decision on the special tax.

TAX RATE

The predicted tax rate is 75%.

RELATIONSHIP WITH CRIMINAL PROCEEDINGS

If in the criminal procedure a final judgment determines the material gain obtained by the criminal offense, but a special tax according to this law is nevertheless paid, the court shall take into consideration and calculate the amount of the paid special tax into illicit gains from such a criminal offense.

PENAL PROVISIONS

It is envisaged that all state bodies and organizations, bodies of the autonomous province and local self-government units, holders of public authority, natural and legal persons are obliged, at the request of the Tax Administration Unit, to submit data at their disposal and to provide support to Tax Inspectors in the procedure prescribed by this Law.

Otherwise, failure to observe the foregoing may result in the following fines which can be imposed for:

• Legal entity – ranging from RSD 500,000 to 2,000,000;
• Entrepreneur – ranging from RSD 100,000 to 500,000;
• Natural person and responsible person in a legal entity, state body and organization, body of the autonomous province and local self-government unit and holder of public authorizations – ranging from RSD 50,000 to 150,000;

On the other hand, for breaching tax procedure confidentiality, a fine ranging from RSD 50,000 to 150,000 can be imposed on a natural person who does not keep as a professional secret the data obtained in the procedure of determining property and special tax.

LAW CHANGES

In order to eliminate some shortcomings before the start of implementation, the National Assembly of the Republic of Serbia is currently proposing a Law on Amendments to the Law on Determining the Origin of Property and Special Tax.

The most important changes are as follows:

• changing the term “illegally acquired property” to “property subject to special tax”, so that the term would not be equated with the term “property derived from a criminal offense”.
• adding the term “expenditures for private needs of a natural person” which is defined as expenditures that a natural person had for private needs, in order to determine the origin of income acquired by a natural person and not spent on acquiring property.

In order to harmonize with the provisions of the Law on Tax Procedure and Tax Administration, it is proposed that the information obtained by the Tax Administration in determining the origin of property and special tax is not a professional secret, but classified information in accordance with the Law on Tax Procedure and Tax Administration.