The Ministry of Finance and Economy continues its intensive work on amendments to the tax laws. After the initial proposal of amendments to tax laws governing personal income tax and property tax, published in March 2013 (which we reported on in our tax news from April 2013), in April 2013 the Ministry published its new proposal of the amendments to the Law on Property Taxes and the Law on Personal Income Tax. Moreover, the Ministry also proposed amendments to the Law on Property Tax, the Law on Tax Procedure and Tax Administration and the Law on Contributions for Mandatory Social Insurance. In addition, only 5 months after it last amended the Law on Corporate Income Tax, the Ministry proposed new amendments in the area of corporate income tax.
The vast majority of changes proposed by the Government were aimed to fill in the gap in the crumbling Serbian budget, by expansion of the tax base, elimination of tax benefits for all or some categories of taxpayers, and by shifting municipal tax revenues to the central government. Even though the Government tried to push its proposal through Parliament as quietly as possible and without public discussion, the amendments provoked much resistance in the general public. After a heated debate and much discussion, the Parliament adopted the amendments to tax laws on 29 May, 2013, but many of the Government's proposals ultimately did not go through. The amendments were published unusually fast after their adoption – on the 29th May 2013 (Official Gazette of Republic of Serbia, no. 47/2013).
Corporate Income Tax
The most important changes introduced by the amendments to the Law on Corporate Income Tax include the following:
- The conditions for the "large tax credit" under Article 50a of the CIT Law have been relaxed so as that the credit may be granted to taxpayers who hire an additional 100 new employees (instead of 200 under the old law). The minimal number of new employees necessary to claim the large tax credit was increased from 100 to 200 by the amendments to the CIT Law from December 2012, and with these most recent amendments, was once again decreased back to 100. The condition concerning the value of investments in new fixed assets remains at a minimum of RSD 1 billion.
- The "small tax credit" under Article 48 of the CIT Law will also be recognised for investments in intangible assets. Previously, the tax credit was available only for investments in tangible fixed assets.
- Besides tax on capital gains, non-resident taxpayers will now be required to declare and pay tax by themselves on income derived from the rent on assets located in Serbia, if tax on such income cannot be paid on a withholding basis (for example, if the taxpayer is a Serbian resident, or another non-resident).
- Failure to pay withholding tax is not included on the list of tax misdemeanours (but it continues to be sanctioned as a criminal offense).
- Withholding tax has been introduced on the sale of scrap and waste. Buyers of scrap and waste are now required to pay a 1% withholding tax when paying the price to the. The obligation to pay withholding tax applies irrespectively of whether or not the seller of scrap and waste is a resident of Serbia.
- The threshold for the deduction of health, humanitarian, educational, social, cultural and sports expenses has been increased from 3.5% to 5% of taxpayer's total revenues.
- The amendments also introduce changes in the tax status and tax liabilities of non-profit organisations. These organisations (regardless of the form in which they are established) are generally required to pay corporate income tax if they generate income from the sale of goods and services. If the difference between their annual income and expenses is lower than RSD 400,000 non-profit organisations are exempt from corporate income tax. Under the previous solution, non-profit organisations were required to pay tax if income from commercial activities constituted more than 80% of their total income.
The new rules of corporate income tax will apply on tax liabilities for the 2013 tax year.
Personal Income Tax
The most important changes introduced by the amendments to the PIT Law include the following:
- The salary tax rate has been reduced from 12% to 10%. In
addition, the non-taxable amount of salary has been increased from
the current RSD 7,776 to RSD 11,000.
The amendments introduce rules which should resolve a long standing dilemma as to how the tax residency of natural persons should be determined in cases where a natural person resides in the territory of Serbia in a period which includes two calendar years, and the total duration of his/hers stay in Serbia exceeds 183 days. It is now prescribed that such a person shall have the status of a tax resident in both calendar years, provided that, generally, in each calendar year he/she shall be deemed a resident (and will be required to pay income tax) only in the period in which he/she was physically present in Serbia.
- The amendments now prescribe that income generated by local employees from various types of employee share plans will be treated the same as salary and taxed accordingly, regardless of whether such plans were offered to Serbian employees by their local employer directly, or by a foreign member of the employer's group. Income subject to taxation should include the direct giving of shares without consideration, share options and the sale of shares at a discounted price. The amendments do not provide a clear answer to who will be required to pay tax in cases in which share plans are offered by a foreign member of a group: by the local employer, or by the employee directly. Rules governing the establishment of a tax base in various types of employee share plans (amount of "salary" subject to taxation) are also not clear. In this respect, while the amendments may resolve some of the significant confusion which surrounded employee share plans so far, it is likely that they will also open numerous other questions and dilemmas in practice.
- The tax on cadastral income for farmers has been abolished. Instead, income from forestry and agriculture will be taxed in the same manner as income from independent business activities: on a lump-sum basis ("deemed" profit established by the Tax Administration), or on the basis of real profit established on the basis of revenues and expenses declared in farmer's business books.
- Changes are introduced in the system of taxation of individual entrepreneurs (income from independent business activity): entrepreneurs who pay tax on the basis of their real profit may now establish an amount of their personal salary. In this case, the entrepreneur will be required to pay tax and social security contributions on his/hers salary, and not on his/hers entire profit as was the case so far. Personal salary (including tax and social security contributions) shall be treated as a deductible expense for purposes of assessment of taxable profit of the entrepreneur. The profit of the entrepreneur will from now on be subject to 10% income tax, and will also be subject to annual income tax (if the total amount of an entrepreneur's annual income exceeds thresholds prescribed by the law). Another change is that entrepreneurs who pay tax on their real profit will now asses tax due by themselves similarly to corporate taxpayers (before tax due was assessed by the resolution of the Tax Administration).
- Unlimited secondary liability of the members of an entrepreneurs' family for tax obligations of the entrepreneur has been introduced.
- Lump-sum taxation remains an option for sole entrepreneurs who cannot keep business books, but, accountants, auditors, tax advisors and marketing agencies may no longer use this possibility. The government's proposal to exclude doctors and lawyers from the lump-sum taxation was not accepted by the Parliament and these professions may continue to use this option. The threshold for lump-sum taxation has been increased from RSD 3 million to RSD 6 million in total annual revenue.
- After a heated public debate the Government gave up its proposal to impose tax on income deemed from vacant immoveable property (whereby owners of immoveable property who do not live in such property and do not rent it out should have paid tax on the "deemed rental income"). Instead, income from immoveable property will be taxed only if the property is actually rented, as was the case before. The only change is that rental income will now be treated as income from capital. The tax rate is 25% and the tax base is equal to the gross amount of rental income reduced by 20% standard expenses, or 50% standard expenses for property rented for tourism. Alternatively, the owner may deduct real expenses provided that he/she may document such expenses. Unlike other types of income from capital (dividend, interest), income from rent of immoveable assets continues to be subject to annual income tax.
- Liquidation surplus paid to shareholders – natural persons (liquidation estate remaining after payment to creditors which exceeds the amount invested by the shareholder) is included in the list of income from capital and is now taxed accordingly (15% tax on the gross amount of liquidation surplus paid to shareholder). The obligation to pay tax on the liquidation surplus was first introduced for corporate taxpayers by the amendments to the CIT Law. The corresponding change in the Law on Personal Income Tax equalizes the tax treatment of the liquidation surplus regardless of whether it is distributed to corporate shareholders or to shareholders - natural persons.
- Capital gains generated from the sale of assets which a natural person inherited in the first line of inheritance is exempt from tax.
- Changes are also introduced in the area of annual income tax. The most important is that persons who are not tax residents of Serbia will also be required to pay an annual income tax on income which is otherwise subject to tax in Serbia (income generated from Serbian sources), if other conditions for annual taxation (concerning the minimal value of annual income) are fulfilled, in the same way as Serbian tax residents. Up until now, the general practice was to exclude non-residents from annual income tax automatically, even they may have generated income in Serbia which is subject to Serbian tax under general rules so as that they effectively paid less tax on such income than Serbian residents. The most important practical effect of this change is that expatriates who are exempt from Serbian tax residency under a double tax treaty will now have to pay annual income tax on their Serbian –sourced income.
- The refund of social security contributions (social security contributions paid by the employer on behalf of an employee during the year which exceeds the amount of contributions due on the maximal annual base for social security contributions prescribed by the law) is also included in the list of income subject to annual income tax.
- The deadline for filing an annual tax return for personal income tax has been extended to 15 May (instead of 15 March). The deadline for filing the tax return for income generated abroad and income earned in diplomatic and consular missions is extended from 30 to 45 days following the date of receipt of income.
The majority of changes introduced by the amendments to the Law on Personal Income Tax will apply to the assessment and payment of personal income tax for 2013.
Contributions for Mandatory Social Insurance
Changes made in the Law on Contributions for Mandatory Social Insurance are aimed primarily to align rules of this law with the changes introduced by the amendments to the Law on Personal Income Tax:
- The rate of contribution for pension insurance has been increased from 22% to 24%. This effectively annuls the decrease of salary tax to 10% (from previous 12%) and shifts revenues from payroll taxes from municipalities to the central government. The new increased rate of pension insurance will apply also to other types of income (such as service income, income from independent business activities), so as that for these groups of taxpayers, the increase of pension insurance will bring an effective increase of the overall tax burden.
- The introduction of personal salary of entrepreneurs under the Law on Personal Income Tax is supplemented by the rule whereby such personal salary will be the base for payment of social security contributions for the entrepreneurs who take this option. The profits of an entrepreneur, on the other hand, will no longer be subject to social security contributions.
- Shareholders of Serbian companies will be required to pay social security contributions on the minimal base for social insurance prescribed by the law, instead of the taxable profit of their companies. The obligation to pay social security contributions on behalf of the shareholders will be on their companies.
- Amendments introduce the rule whereby if the employer does pay salaries and accompanying social security contributions by the end of the month, the Tax Administration shall asses contributions on the minimal monthly base and the employer will be required to pay minimal contributions.
- The proposal to exempt the IT industry from payment of social security contributions was not passed by the Parliament, though it is not certain whether this incentive was excluded from the final text of the amendments on the initiative of the Government or the Parliament.
Amendments to the Law on Property Taxes introduce changes in all specific types of property taxes regulated by this law, including tax on immoveable property, property transfer tax and gift and inheritance tax.
- The most important change introduced by the amendments to the
Law on Property Taxes is the change of method for the assessment of
the tax base of property tax for immoveable property. In
particular, corporate taxpayers (who keep business books) will pay
property tax on the market value of their immoveable property
(including city construction land) established in their business
books – for those companies who use the fair value method.
Corporate taxpayers who apply the cost method will pay property tax
on the market value of the immoveable property, instead on the book
value as was the case so far. The market value of immoveable
property should be established by the municipal authorities for
properties located on their respective territories. Under the law,
municipalities are required to establish elements necessary for the
assessment of property tax (market price of immoveable property and
corrective coefficients) by the end of November 2013.
The new rules for the assessment of the tax base for property tax are likely to bring significant increase of property tax for corporate taxpayers. This appears to be a part of a wider plan to integrate the fee for the use of the city construction land payable under the Law on Planning and Construction into property tax. Under the Law on Planning and Construction, the fee for the use of the city construction land should be abolished on December 31st 2013 when it will be integrated into the property tax. Unlike the fee for the use of city construction land, the newly increased property tax cannot be shifted to tenants and lessees of buildings and apartments, unless they agree to bear this cost.
- Companies which keep immoveable property for further sale are not required to pay property tax in the year in which they acquired such property, and in the subsequent year.
- It is now clarified that the giving of assets without consideration which is subject to VAT or income tax cannot be subject to gift tax.
- The transfer of assets in mergers and divisions of companies is now exempt from the property transfer tax, regardless of whether there was monetary compensation to shareholders. Likewise, transfer of assets to shareholders of the company in liquidation on the basis of payment of a liquidation surplus is now exempt from property transfer tax.
- The deadline for filing a tax return for gift tax, inheritance tax and property transfer tax has been extended from 10 to 30 days.
- The minimal fine for tax misdemeanours prescribed by the Law on Property Taxes has been increased from RSD 5,000 to RSD 10,000 (maximal fine remains at RSD 50,000).
New rules governing property transfer tax started became applicable on 30 May 2013. The application of rules related to property tax will commence on 1 January 2014.
The most important change introduced by the amendments to the Law on Tax Procedure is that the opinions, instructions and explanations of the Ministry of Finance will from now on be binding for the Tax Administration. This solution borders revolutionary. It will bring some level of security for Serbian taxpayers who were often faced with discretionary and inconsistent decisions of the Tax Administration and the Ministry of Finance. The new rule of the Law on Tax Procedure, however, does not elaborate much as to when, how and under what circumstances will a specific opinion of the Ministry be binding on the Tax Administration (for example, whether this will apply only for the specific taxpayer and specific case in relation to which the opinion of the Ministry was given, or generally on all cases which have the same or similar facts, how would this influence the decision-making process on the appeal against first-instance decisions of the Tax Administration and similar).
Other changes introduced by the latest amendments include the following:
- Social security contributions will now be subject to the same statute of limitations as other public revenues (before contributions for pension and disability insurance were not subject to the statute of limitations). An option to write-off liabilities for social security contributions for companies in bankruptcy has also been introduced.
- A new form of tax return for withholding taxes payable by Serbian companies has introduced. This new form will be filed electronically and will replace as many as 35 different forms which Serbian companies had to file each month. The form and content of the new withholding tax return will be prescribed by a separate regulation of the Ministry of Finance, and will be used beginning 1 January 2014.
- Fines for tax misdemeanours prescribed by the Law on Tax Procedure have been increased: amounts of minimal fines have been doubled while maximal amounts of fines have been increased up to five times in some cases. The absolute amount of a fine for tax misdemeanours has been increased from RSD 600,00 to RSD 1 million, which is still relatively low.
- Jurisdiction for tax misdemeanours for taxes which are collected by the municipalities (for example property tax, communal taxes, etc.) has been transferred to the competent municipal authorities.
- Police and municipalities have been assigned new responsibilities in relation to the exchange of information with the Tax Administration. Also, rules governing control of the payment of tax and social security contributions have been clarified. Specifically, the amendments introduce a specific code for the payment of tax and social security contributions which Serbian taxpayers- employers should obtain from the Tax Administration and which they should use for the payment of tax and contributions. At the same time, banks are prohibited from executing the payment of salaries until they get the code for payment of tax and social security contributions from their clients.
- Acts which the Tax Administration delivers to taxpayers by post shall be deemed to have been delivered to the taxpayer within 15 days following submission of the act to the post, irrespectively of whether and when the act was actually delivered to the taxpayer.
- Deregistration of companies and other business entities from the commercial registries is now allowed only if and when the commercial registry receives confirmation issued by the Tax Administration that such entity paid all of its tax liabilities.
- Rules governing the forced collection of tax through the sale of a taxpayer's assets are clarified and refined.
The majority of the new rules of the Law on Tax Procedure started to apply on 30 May 2013. Rules governing new responsibilities of the banks and other state authorities in the tax procedure will start to apply on 1 January 2014.
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.