Withholding Tax and Double Tax Treaties in Serbia
Application of the agreements on avoidance of double taxation regarding withholding tax
The century in which we live has proven to be the century of the greatest interconnectedness of the economies of almost all countries in the world. The free flow of goods, people, capital, and services is at its historical maximum.
In this regard, the scope of cooperation between economic entities from different countries is growing from year to year.
Accordingly, there are a number of issues regarding the manner of taxation of such transactions.
In this regard, the Act on Corporate Income Tax (“CIT Act”) regulates taxation and provides for the payment of withholding tax.
Withholding tax is paid on income earned by a non-resident legal entity (“NLE”) from a resident legal entity or a bookkeeping entrepreneur (“RLE”).
The deadline for filing a tax return and paying taxes is three days from the date of payment of income, and the tax rate is 20%, except for jurisdictions with preferential tax systems (exhaustively listed countries so-called “tax havens”), for which a tax rate is 25%.
The taxpayer is an NLE but the RLE is a guarantor and the one who actually pays the tax. This means that in case the tax is not calculated and paid, the competent state body (“Competent State Body”) will initiate the forced collection of taxes from the RLE.
Agreements on the Avoidance of Double Taxation (“AADT”) are international agreements concluded by the Republic of Serbia with other countries which aim to avoid double taxation or relief in the field of double taxation and as such, as a rule, provide lower tax rates than those provided for in the CIT Act.
The Republic of Serbia has concluded AADTs with almost all European countries as well as with the most economically developed countries in the world. The exception is the United States, with which the AADT has not been concluded.
What are the conditions for the application of AADT?
In order to apply the provisions of the AADT in practice to a specific case, instead of the provisions of the CIT Act, it is necessary for the RLE to submit to the Competent State Body the following:
- Certificate of residence of the NLE, as follows:
– a form of a certificate of residency (Form: POR-2) issued by the Competent State Body of the Republic of Serbia, and should be certified by the competent authority of the country of residence of the NLE
– otherwise, it is necessary to enclose a certified translation of the certificate issued by the competent authority of the state of residence of the NLE.
It is important to note that the RLE must have a valid certificate of residency at the time of income payment.
The certificate of residency is most often issued for a calendar year and states usually issue it in paper form, but the practice of issuing it in electronic form is becoming more and more widespread.
It is important to note that in a situation where the recipient of income is a branch of an NLE located abroad, it is not necessary to obtain a certificate of residency from the country where the branch is located for the purposes of AADT, but a certificate of residence for an NLE is sufficient.
A specific case is represented by NLEs which are partnerships of persons (partnerships and limited partnerships), where the company’s income is attributed to limited partners and partners and as such is taxed. In that case, it is necessary to obtain a certificate of residence for each limited partner and partner.
Risk in case you do not have a certificate of residence at the time of payment
As already mentioned the RLE must have a certificate of residency at the time of payment. This essentially means that the RLE, in accordance with the CIT Act, cannot, by the mere knowledge that it will obtain a certificate of residency in some foreseeable period, even though it is not there at the time of payment, decide not to calculate and pay taxes.
If it does so, the RLE bears the risk that in the tax control procedure, the Competent State Body will request a certificate of residence of the NLE, without the RLE being with it, without the tax being paid.
On the contrary, the RLE is obliged to calculate and pay withholding tax at the rate of 20% (25% if the NLE comes from a jurisdiction with a preferential tax system) provided by the CIT Act.
If the RLE subsequently obtains a certificate of residence of the NLE and submits it to the Competent State Body, the difference between the tax paid and the tax that would be paid in accordance with the ITA is considered more tax paid and there is a possibility to request a refund.
As NLE is a taxpayer, as mentioned earlier, only NLE has the right to submit a request for a refund of more paid funds.
The request of the NLE has to be translated into Serbian and submitted to the Competent State Body by the RLE with an accompanying letter.
Upon request, RLE submits:
- NLE residence certificate;
- legal basis for the payment made (e.g. decision on dividend payment, loan agreement, etc.);
- invoice on which the payment of income was made;
- proof of payment of income.
Refunds will be made to the RLE account.
- Proof that the NLE is the beneficial owner of the revenue:
This condition is provided primarily in order to prevent abuse or avoid tax liability (“Tax Evasion“).
In order for an NLE to be considered the beneficial owner of the revenue, it is necessary to collect the claim on its own behalf, not as an agent or intermediary on behalf of another person. If this were the case then the other person would be considered the owner of the income.
First of all, it is important to note that the regulations do not precisely envisage the ways or types of documents that have to prove that the NLE is the real owner of the income.
In this regard, various documents can be attached as evidence, such as commercial contracts, invoices, excerpts from the register of companies, etc.
In case the Competent State Body has doubts about the accuracy or validity of the mentioned evidence, it is the burden of proving the opposite fact, so it is its obligation to prove that the NLE is not the real owner of the income and not the other way around.
It is important to note that the actual owner of the income does not necessarily have to be the owner of the right on the basis of which he earns income.
If there is a transfer of claims from one NLE to another NLE, the actual owner of the income is the person to whom the claim was transferred, which basically opens space for Tax Evasion, given that NLEs residing in a country with which the Republic of Serbia has no AADT can its claim, taxable in accordance with the CIT Act, transferred to a related person in the state with which the Republic of Serbia has an AADT and thus obtain Tax Evasion.
The RLE does not file a tax return if, in accordance with the AADT, the tax is not paid in the country of origin, but the right to collect the tax is exclusively within the competence of the country of residence of the NLE. This is provided that at the time of the taxable event, the RLE has evidence that the NLE is a resident of the country with which the AADT was concluded and that the NLE is the beneficial owner of the income.
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
 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).