The beginning of 2013 in Serbia was marked by further tax law changes: after the amendments to the Corporate Income Tax Law, VAT Law, and the Law on Personal Income Tax which we reported in October 2012 and January 2013, the Serbian Government has decided to further amend the Law on Personal Income Tax and the Law on Property Tax.

Serbia continued the expansion of its network of agreements on the avoidance of double taxation regarding income and property taxes by signing a new agreement with the United Arab Emirates.

Faced with a number of practical issues and concerns regarding the obligation to declare property for the purpose of cross-checking income tax, the Ministry of Finance has amended the Rulebook on Informative Tax Returns. The aim of the amendments was to clarify who is required to submit the informative tax return. Also, the deadline for filing the informative tax return is extended through 30 June 2013.

Public discussion about the new Law on Corporate Income Tax, which will introduce new rules in the area of transfer pricing, is underway in the Federation of Bosnia and Herzegovina.


Proposed amendments to the Law on Personal Income Tax

The proposed amendments stipulate changes in the provisions which regulate the residence of physical persons, taxation of entrepreneurs, taxation of income from real property and taxation of capital gains. Below the most important amendments have been presented:

  • The proposed amendments stipulate that, if the period of 183 days begins in one year and ends in another, the physical person can be a resident in both years, where he/she will be considered a resident only in such period of each year when he/she was physically present in the territory of Serbia.

  • The tax treatment of distribution of shares of the parent company to employees is somewhat clarified by specifying that, if an employee receives shares from the employer or a person related to the employer, such receipt will be considered the employee's salary, and the tax base will be the nominal value of shares.

  • The category of "personal salary" of entrepreneurs is planned to be introduced. Personal salary of entrepreneurs would be taxed in the same manner as an employees' salary, while income from independent business activities will be taxed at a 10% rate, as before. Thus, costs of personal salary (including taxes and benefits) incurred by entrepreneurs who keep business books will be recognized as an expense.

  • It is also stipulated that the limit for lump sum taxation of entrepreneurs will be raised from the current RSD 3 million to RSD 6 million.

  • Entrepreneurs who keep business books will apply self-taxation (as legal entities do), so as that the Tax Administration will no longer asses tax due for entrepreneurs.

  • It is proposed that income from real property be treated as income from capital. Standard expenses will be increased from the current 20% to 25%. The tax rate on income from real property remains 20%. Being considered income from capital, income from real property will no longer be subject to additional annual income tax.

  • One of the radical changes is the introduction of tax on imputed income from ownership of real property. This tax is to be paid by property owners who do not use their property (real property where the owner is not a registered resident, or business premises not used for business activities). The base for calculating accrued income from ownership of real property would be 3% of the market value of such real property, with recognized expenses in the amount of 25%, while the tax rate would be 20%. Tax on imputed income shall not be paid if the value of the real property is below the prescribed limits which depend on the type of real property. For apartments and houses, the proposed limit for payment of tax on imputed income is EUR 50,000. Imputed income from real property is also considered income from capital and is not subject to annual income taxation.

  • Liquidation surplus, ie. the amount of capital distributed to the owner after liquidation which exceeds the value of invested capital, is also considered income from capital, and as such will be subject to 15% tax (this manner of taxation has already been applied in practice by the tax authorities).

· The law also stipulates exemptions from tax on capital gains for property inherited by the taxpayer as an heir in the first line of succession.

  • It is proposed that the refund of social insurance contributions be subject to the annual personal income tax.

Proposed amendments to the Personal Income Tax Law stipulate that they will start to apply on 1 January 2014, except for the increase of the limit for lump-sum taxation which may start to apply in 2013.

Amendments to the Property Tax Law

The Draft Law on Amendments to the Property Tax Law is currently under procedure in the Serbian Ministry of Finance. Below we focus on the most important amendments stipulated by the draft law.

  • It is proposed that taxpayers who keep business books should pay property tax on the base assessed by themselves, where the assessed value cannot be lower than the book value of the real property. The assessment will be performed in accordance with regulation which should be rendered by the Ministry within 6 months following the adoption of the amendments to the law. The assessment criteria will be based on the market value of the real property. It is expected that these amendments will result in a higher property tax base for legal entities and thereby an increased amount of property tax.

  • The draft law stipulates that a person holding leased real property shall also be required to pay property tax.

  • Real property valued below RSD 800,000 will not be subject to property taxation.

  • Real properties reserved in taxpayers' books as assets held for sale will not be subject to property taxation, but this will be applied only in the year when they were acquired/constructed, and in the first following year.

Inheritance and gift taxes

  • The question of interaction between different taxes levied on, or related to the transfer of assets without consideration, which has created a lot of confusion in practice so far, could be finally resolved. Proposed amendments to the Law on Property Tax stipulate that if the transfer of immovable and movable property is subject to value added tax, such transfer shall not be considered a gift for the purpose of property tax, regardless of the existence of a gift agreement. Also, income which is subject to personal income tax or corporate income tax shall not be considered a gift in regards to property tax.

  • It is proposed that the acquisition of shares and securities on the basis of a gift or inheritance should be exempt from taxation.

Property transfer tax

  • The draft law stipulates that property transfer tax shall be also levied on the sale of companies in bankruptcy, if the buyer did not assume all the liabilities of the company, or assumes only a portion of such liabilities. In these cases, market value of the tax base will be assessed by the Tax Administration.

  • Property transfer tax will not be paid in the case of expropriation, restitution, or land conversion

If adopted by the Parliament, the amendments to the Law on Property Tax will start to apply in 2013.

Agreement on avoidance of double taxation with the United Arab Emirates

In March 2013, Serbia ratified the agreement on avoidance of double taxation with the United Arab Emirates.

Withholding tax rate on dividend is 5% (if the recipient holds at least 5% share in the dividend payer) and 10% for interest and royalties. Capital gain is taxed in the country where immoveable property or property used by permanent establishment is located.

If dividends or interest is paid to the Government, a political unit or a local self-government unit of another country, withholding tax in Serbia shall not be paid. A separate protocol to the agreement sets out a relatively broad list of companies from the Emirates which are considered governmental bodies for the purposes of exemption from the obligation to pay tax on dividends and interests.

The method for the avoidance of double taxation in both countries is the credit method.

The agreement with the Emirates has been ratified by the National Parliament of Serbia as early as in March 2013, and its ratification in the Emirates is expected soon. The agreement stipulates that it will come into force on the first day following the exchange of instruments of ratification between the signatory states, and it is expected that the implementation of the agreement will begin in 2013.

Amendments to the Rulebook on Informative Tax Return

As noted in previous newsletters, in 2013 the Serbian Tax Administration will perform cross-checking of property and income of taxpayers. Such cross-checking will be based on the informative tax return.

The Rulebook on Informative Tax Return has been amended in the part which defines who is required to submit the informative tax return. The amendmented persons who are required to submit informative tax returns include individuals subject to personal income tax, except for taxpayers with an exclusive citizenship of another country seconded to work in the Republic of Serbia, and persons subject to property tax.

By the amendments to the rulebook, the deadline for filing the tax return is extended through 30 June, although it was initially stipulated that the deadline would be 31 March.

Bosnia and Herzegovina

Proposed amendments to the Law on Income Tax in the Federation of Bosnia and Herzegovina

The Ministry of Finance of Bosnia and Herzegovina has published the proposed amendments to the Law on Income Tax which is currently undergoing public debate. The proposed amendments to the Law on Income Tax introduce changes concerning transfer pricing methods for assessment of arm's length prices in transactions with related parties. Also, the draft law stipulates the abolition of tax incentives, and changes concerning deductible expenses.

Transfer pricing

  • New transfer pricing methods are introduced. In addition to traditional transaction methods, comparable uncontrolled price method, the cost plus method, and the resale price method, transactional profit methods are also introduced, including the profit split method and transactional margin method.

  • The obligation to prepare the transfer pricing study based on OECD or UN models and guidelines is also stipulated, as well as the obligation to submit transfer pricing documentation to the Tax Administration upon its request. Under the proposed amendments, the obligation to prepare a transfer pricing study applies only to resident related parties if one of the related parties is exempt from payment of income tax, or pays the tax at the rates lower than those prescribed in the law, or if one of the parties has the right to tax loss carry-forwards.

Deductible expenses

  • It is proposed that the following expenses shall not be recognized for tax purposes: costs of forced collection of taxes and other debts, costs of tax misdemeanour proceedings and other offence proceedings, contractual fines and penalties for default in performance of contractual obligations, adjustment of receivables from persons to whom the taxpayers owes debt, advance payment of dividends from expected profit and expenses which cannot be documented.

  • On the other hand, contrary to common practice, the treatment of entertainment, membership, donation and sponsorship expenses is quite liberal: it is proposed that they should be recognized as expenses in full (currently, deductibility of entertainment expenses is limited to 30% of their amount, membership expenses are deductible up to 0.1% of total revenues, sponsorship expenses up to 2% of total revenues and donation expenses up to 3% of total revenues).

  • Depreciation expenses would be calculated and recognized in compliance with IAS 16 instead of in accordance with tax depreciation rules as it was the case before.

  • It is proposed that costs of material are recognized in accordance with IAS, instead of in accordance with average price method which applies currently. If material is procured from a related party, the purchase price shall be determined according to the transfer pricing rules.

  • Proposed amendments provide a detailed explanation what is considered as salary which may be treated as a recognized expense for tax purposes.

Tax incentives

  • Tax losses can be carried forward to the following three, instead of five years, as it was the case before. The tax losses generated before the new Law comes into force can be used in the following five years. The proposed amendments stipulate that, if the taxpayer fails to generate profit in three consecutive years, he loses the right to carry forward tax losses. It is also prescribed that the right to carry forward tax losses can be used only once in the course of business operations. The text of these provisions can be interpreted so that a taxpayer may lose the right to tax loss carry forwards permanently if he generates losses in three consecutive years, or if he generates profit and uses tax losses from previous years to offset such profit (i.e. in these cases the taxpayer will never again be able to use losses generated in previous years to reduce his tax liabilities). Relevant provisions of the proposed amendments are quite restrictive, and in any case unclear, and is yet to be seen whether the final adopted text will contain any clarifications of their intended effects.

  • Tax exemptions for exporters whose export revenues exceed 30% of their total revenues, as well as incentives for profit generated by a permanent business unit from the Republic of Srpska in the territory of the Federation, and incentive for investments exceeding KM 20 million, are abolished. Taxpayers who acquired the right to investment tax exemption before the adoption of the new law will have the right to use the exemption in the period of five years following the entry into force of the new law.

  • The ordinary credit method, instead of full credit method, is introduced for the avoidance of double taxation of revenues distributed to resident companies in the Federation by their subsidiaries and branches abroad.

Filing tax returns and payment of taxes

  • The cases in which tax returns are filed for a period other than a calendar year are specified in detail (commencement and termination of business activity, status changes, liquidation, and if the tax period has been changed upon the consent of the Ministry of Finance).

  • The deadline for payment of the final tax liability is extended to 10 days from the day of filing the annual tax return (so far, the payment of tax was due at the moment of filing the annual tax return).

Other provisions

  • It is proposed to prohibit the payment of dividend if the company has outstanding tax liabilities. It is also proposed that tax liability shall not be time-barred if the tax return is not filed, or is filed with errors.

  • The new law prescribes offences related to income taxes in two new articles (so far, offences related to income taxes were prescribed by the Law on Tax Administration).

Coming into force

The Law shall enter into force on the day following the publishing, and the Federal Minister of Finance has the authority to render the rulebook on the implementation of the new law within 90 days from the date of its entry into force.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.