Withholding Tax in Serbia (WHT Serbia)

Individual income of a non-resident legal entity that is subject to withholding income tax in accordance with Article 40 of the Law on Corporate Income Tax

Article 40 of the Law on Corporate Income Tax (“Law”)[1] prescribes the rules applicable in the case of trade in goods and services between non-resident legal entity (“NRLE”) and resident legal entity (“RLE”).

In this text, the focus will be on individual revenues that are subject to taxation, both from the point of view of the Law and from the point of view of international agreements on the avoidance of double taxation signed by the Republic of Serbia (“DT“). The tax base is the gross income, i.e., the gross fee paid to the NRLE by the RLE, which payment is made on the basis of:

• dividends and NRLE’s 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;
• interest;
• 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;
• fees based on entertainment, art, sports or similar programs in the Republic of Serbia.

1. Dividends and profit shares

Unless DT prescribes otherwise, withholding income tax at the rate of 20% is calculated and paid on income generated by NRLE from RLE on the basis of:

• dividends and profit shares in the legal entity, including the dividend referred to in Article 35 of the Law.

These include dividends, interim dividends and liquidation balances.

The general rule is that a legal rate of 20% is applied to the tax base, but if the DT is applied, the benefited tax rate is applied, which in most cases is 5%, if the NRLE has a minimum 25% share in the RLE’s capital. If the participation is less than 25% or the dividend recipient is a foreign natural person, the tax rate is 10% or 15%.

Some DTs prescribe an additional condition for the application of the benefited tax rate, in addition to the general conditions that must otherwise be met, namely that a certain percentage of the NPLE’s share in the RLE existed in the previous 365 days.

Liquidation balance

In terms of the Law on Corporate Income Tax, the liquidation balance is considered a dividend, so the tax base is the difference between the liquidation balance and the amount of capital contributions. If this difference is positive, tax is paid on the tax base thus calculated. In addition to the PDPO / S form that is normally submitted in this case, an additional DPDL / S form is filled in and attached by the liquidation trustee.

2. Compensation for copyright and related rights and industrial property rights

Compensation from copyright and related rights and industrial property rights is a fee that NRLE receives from RLE based on the use of any of the following rights, which are defined in accordance with the Law on Copyright and Related Rights (“Law on Copyright and Related Rights“)[2]:

• copyright;
• copyright-related right;
• industrial property rights;

(“Royalties“).

These include, but are not limited to, written creation (computer programs with accompanying technical and user documentation in any form of their expression), a database that is considered a copyright in accordance with the Law on Copyright and Related Rights, various technical achievements, etc.

In order to economically exploit these rights, a license agreement, a franchise agreement, etc., are concluded. These agreements precisely define the Royalties, which is the fee for the use of a specific right. We note that this is exclusively about the use, but not about the sale of the mentioned rights, so the rights are not transferred, but the agreement regulates the conditions of their use.

Royalties from the point of view of DT

In accordance with most DTs, the source country has the right to tax the Royalties at the benefited tax rate (less than 20%).

Exceptions are the DT with France and Sweden, which stipulate that the source country is not entitled to tax the Royalties.

Definition of DT Royalties:

• Fee for the use or for the right to use copyright in a literary, artistic or scientific work, including cinemas and films or films for television and radio.
• Fee for the use or for the right to use a patent, trademark, design or model, plan, secret formula or procedure, industrial, commercial or scientific equipment or for information relating to industrial, commercial or scientific experience.
• Full transfer of rights is not considered a Royalty under either the Law or the DT.

3. Interest

RLE pays interest to NRLE based on:

• received loans and credits;
• deposit operations;
• issued bonds and other debt securities.

Default interest, as well as the fee for loan processing with the agreed payment of interest, nor the fee for non-withdrawal of approved funds within the (loan agreement) agreed term is not subject to taxation.

Interest paid on the basis of a contract of sale with deferred payment of the purchase price is subject to withholding tax in accordance with the Law.

Interest from the point of view of DT

In most DTs, the rule is that the source country has the right to tax at the benefited tax rate.

It is important to note that in the case of payment of Royalties or interest to NRLEs related to RLE, the benefited tax rate is applied only up to the amount of interest paid which is considered out of reach, while the remaining amount is taxed with 20% tax rate.

4. Fee from lease and sublease of real estate and movables on the territory of the Republic of Serbia

Real estate lease

Taxation is carried out under the condition that the subject of the lease is located on the territory of the Republic of Serbia at a rate of 20%. The DT does not prescribe a benefited rate in the case of real estate leases, and recognizes the right to tax to the source country of income.

Lease of movables

In accordance with the Law, a tax rate of 20% is applied to the income from the lease of movable property that RLE pays to NRLE. DT stipulates that the income from the lease of movable property – scientific, industrial and commercial equipment, is the royalties (while the Law considers this as the income from the lease). The benefited rate of 10% is prescribed by most DTs, while some do not provide for the obligation to pay taxes in this case at all.

Income from the lease of other movable property in accordance with the DT is treated as operating income, so withholding tax is not paid. However, scientific, industrial and commercial equipment is widely interpreted (e.g., a passenger vehicle is considered commercial equipment), and income from the lease of movable property located in the Republic of Serbia and used there will be taxable, otherwise there is no obligation to pay taxes.

The use or right to use industrial, scientific or commercial equipment can be regulated by financial leasing – when the moment of repayment of the purchase price is known, or with the option of redemption, but there can also be a contract where redemption is not known (operating lease). In the case of financial leasing with a clause on the right of redemption, the following rules apply: if there is a lease with the possibility of redemption that is not known, payments under that contract are a taxable event, and according to the DT are not taxable events because payments are considered business income. However, if the right of redemption were used at some point, the tax would be paid retroactively because it would no longer be business income but royalties in accordance with the UIDO.

It is important to analyze each time whether the purpose of the contract is the acquisition of property rights on the subject of leasing in order to conclude whether it is a taxable event.

It is important to note that if the movable item is used in several territories, the withholding tax is paid in proportion to the time of use in the territory of the Republic of Serbia, if it can be proven, in accordance with Article 40 of the Law. On the other hand, by applying the DT, this income is considered a royalty, so the tax at the benefited rate is paid on the entire amount (and not on a proportional part). Therefore, it is up to the taxpayer to choose which regime to apply, i.e., he makes a decision as to which regime is more favorable for him.

5. Fee from services

The tax base for withholding income tax is also represented by the following incomes that NRLE generates from RLE:

• fees from market research services,
• accounting and auditing services,
• other services in the field of legal and business consulting,

regardless of where they are provided or used, or where they will be provided or used.

In each specific case, it is important to analyze the type and content of the service, and not necessarily the name of the service in order to conclude whether certain services are taxable. Certainly, services from which income is taxable are more closely defined by the Ordinance on the types of services on the basis of which a non-resident legal entity generates income that is taxed with withholding tax[3].

Fee from market research services

Income from services and market research include, in particular, fees from:

• collecting information from the market,
• data processing and analysis,
• sales analysis, etc.,

if they are conducted for the purpose of market research and not for scientific or other purposes.

Advertising and propaganda services (e.g., Google Ad), are not considered subject services.

Accounting and auditing services

Accounting and auditing services are related to

• preparation of financial statements,
• audit of financial statements in terms of verification and evaluation of financial statements, based on which an independent expert opinion is given on whether the financial statements give a true and fair view of the financial condition and results of operations of the legal entity in accordance with appropriate regulations.

Legal and business consulting services

Legal and business consulting services are the following services:

• tax advising,
• legal services (special attention should be paid to whether the service is provided by an entrepreneur or an NRLE, because only in the latter case taxes are paid),
• RLE management services
• any other service of advising and consulting regarding the business of RLE.

The subject services do not include the holding of seminars, lectures, workshops, as well as mediation services in the trade of goods and services.

Fees from services from the point of view of DT

If the DT is applied, the income from the provision of these services is considered as operating profit, which means that it is not taxed in most cases.

6. Income based on entertainment, art, sports or similar program in RS

Fees based on entertainment, art, sports or similar programs paid by RLE to NRLE are taxed only if the owner of that income is NRLE. Therefore, these are incomes that are not taxed as the income of a natural person (performers, musicians, athletes, etc.), in accordance with the regulations governing the taxation of citizens’ income. More precisely, one should take into account who the compensation is paid to, i.e., whether that legal entity is the owner of the income or only represents a natural person of the owner of the income. Such a distinction can be made already on the invoice according to which the payment of income is made, if the part of the income that belongs to the artist, performer, i.e., sportsman and the part that belongs to the legal entity is specially stated. Only the amount of that other part of the income is taxed.

Fees based on entertainment, art, sports or similar programs in the Republic of Serbia from the point of view of DT

The application of the DT in most cases is the general rule that this type of compensation can be taxed in the country of source of income.

For more information on this or any other legal, tax or business topic, you are free to write to us at [email protected]  at any time or call us at +381113281914 every working day from 08:30 to 16:30.

[1] 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)

[2] Law on Copyright and Related Rights (“Official Gazette of RS”, No. 104/2009, 99/2011, 119/2012, 29/2016 – decision of the US and 66/2019)

[3] Ordinance on the types of services on the basis of which a non-resident legal entity generates income that is taxed with withholding tax (“Official Gazette of RS”, No. 18/2018)