Tax or Penalty? The Law on Origin of Property and Special Tax

After years of waiting, the Law on Determining the Origin of Property and Special Tax (hereinafter: the Law) was finally adopted by the Parliament on February 29, 2020, came into force on March 11, 2020, and its implementations have started from March 12, 2021.

Prior to the implementation of the Law on the Origin of Property, the competent authorities have noticed there is still room for improvement. Thus, on February 25, 2021, the Parliament adopted the Law on Amendments and Modifications which introduced certain changes and novelties. These changes came into force prior to the implementation of the Law, on March 12, 2021.

The greatest novelty is the change of the term “unlawfully obtained property” to “property with special tax” in order to avoid equating this property with property obtained by criminal activity. Another term was also added – “expenses for private needs of a natural body” which is defined as “expenses that a natural body had for private needs, with the purpose of establishing the origin of the income, which the natural body acquired, but did not spend on acquiring property”. The introduction of this new term has brought changes in defining the tax base, which will be further explained in the part of this blog related to tax base and tax rate.

The new Law is a favorite piece of literature for tax administration inspectors, who, given the seriousness of the task, are selected among the greatest experts. When inspecting the property of the citizens of the Republic of Serbia, their duty is to find and tax hidden parts of the property. The entire network of government bodies assists them, with confidential information up their sleeves, while respecting the principle of the proportionality of personal data processing.

The Law lays down the requirements, methods, and a special procedure through which the Tax Administration analyzes the property and seeks the increase of the property whose legality of acquisition individuals cannot prove. If they find it – here comes special tax.

Therefore, the purpose of the Law is clear: to stand in the way of illegally acquired property, i.e. property for which special tax is prescribed by this Law, and which is defined as: “the difference between the increasing sum of property and private expenses incurred by a natural person for personal needs, on the one hand, and the reported income that is increased by the amount of income that is not subject to taxation in the Republic of Serbia, unencumbered property, property acquired by borrowing, or property acquired in another lawful manner“.

In order to better understand this definition, we will introduce you with the basic concepts:

The Tax Administration initiates and conducts the procedure ex officio in two phases:

• preliminary procedure and
• the control procedure and determination of the special tax.

The preliminary procedure is conducted in accordance with the latest amendments to the Law and is implemented based on the risk analysis. Before, it was estimated that the preliminary procedure would be implemented in accordance with the annual guidelines, but during the drafting of bylaws for implementation of the Law, it was concluded that it is sufficient and suitable to implement the preliminary procedure based on the information contained in the risk analysis, which precedes the drafting of Annual guidelines, and is not based on the Annual guidelines. The previous procedure can be initiated on grounds of applying another authority, or on the initiative of a natural or legal person.

Therefore, the competent Tax Administration Unit should determine that it is probable that there is a difference between the increase of the property and the reported income of the individual in order to move to the next stage – the control procedure.

By applying the special tax technique prescribed by both Law and the Law on Tax Procedure and Tax Administration, the so-called cross-check of property, the inspector shall indicate what they have discovered to the individual, who then has to justify the acquisition of their property.

If, during this mission, the inspector discovers facts indicating that there are grounds for suspecting a criminal offense, the inspector shall inform the police, the public prosecutor’s office, and other competent authorities, who then join in the battle for an efficient tax system in Serbia.

If a material gain by the criminal offense is determined by a final judgment in the criminal proceeding, and the individual has previously paid a special tax under this Law, the court will include the special tax paid for the material gain obtained criminally. This is also applied in proceedings for the forfeiture of property arising from criminal offenses.

When determining the value of your property, the Tax Administration will take into account everything it encompasses and, in particular:

Just when you think you won’t be struck by the high tax rate, the new Law adds “other rights” to this list, which means that the Tax Administration will take into account everything you own.

If this procedure is initiated against you, be aware that you have the right to participate in the control process and bring evidence to prove the lawfulness of the acquisition of the property. However, if you choose not to participate in the control process, this will not delay further proceedings. 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 a property on which the special tax is determined in accordance with the Law.

You can still avoid paying the special tax by appealing against the decision. The appeal is filed to the Ministry responsible for finance and it postpones the execution of the decision.

After the Ministry issues a decision, it is final, which means that you can hire a lawyer and initiate an administrative lawsuit.

Both the Tax Administration and the person whose property is being inspected hold the burden of proof. Thus, the Tax Administration will need to prove the increase of the property, while on the other hand, the natural person will need to prove that they have lawfully acquired the property, which makes the job much easier for the inspector.

Be careful, though. The tax inspector is assisted throughout the procedure by:

• state authorities and organizations,
• autonomous province authorities,
• bodies of the local self-government unit,
• holders of public authority,
• natural and legal persons.

The Tax Administration also has access to all types of records and data kept by the competent authorities and other persons on:

• immovable and movable property,
• business entities,
• financial instruments,
• savings deposits and accounts with commercial banks,
• other records and data from which the property of an individual can be determined, as well as
• business books and documentation of companies and other persons.

All persons who come across data related to that procedure in the process of determining property and special tax are obliged to keep that data confidential under the Law on Tax Procedure and Tax Administration. So, if your property catches the tax inspector’s eye, an entire team of professionals shall search every inch of it.

The Law provides another form of cooperation between the Tax Administration and other state authorities in order to achieve the financial goals of the state more effectively.

Hence:

• the Ministry of Interior,
• the National Bank of Serbia,
• the Administration for the Prevention of Money Laundering,
• the Anti-Corruption Agency,
• the Republic Geodetic Authority,
• the Business Registers Agency and
• Central Securities, Depository and Clearing House

are all obliged to appoint one or more liaison employees, in order to cooperate and provide the information to the Tax Administration Unit more effectively, so that they could conduct the procedure. If necessary, these employees may be temporarily reassigned or assigned to the Tax Administration Unit.

The special tax base, which is provided by the Law on the Origin of Property, is determined in the value of the property on which the special tax is determined, which is the sum of the revalued value of that property for each calendar year that was subject to control. The value of such assets is revalued by the consumer price index from the last day of the calendar year for which the assets were determined until the day of the decision on the special tax.

For those who cannot prove the origin of their property, the following part is a favorite of the tax inspection literature – the tax rate! Sit down, have a glass of wine, and take the time to think about whether it’s worth hiding when declaring income because now we’re going to show you what to expect if you decide to do it: a tax rate of 75%!

Yes, you read that right. As tax rates are otherwise drastically lower, it seems that there’s another goal of this Law – punishment. Penal provisions are usually found at the end of each law. However, this one is hidden under Article 16.

If you had concerns before, take a deep breath, as more requirements must be met. The Tax Administration initiates the control procedure, if it is probable that for a maximum of three consecutive calendar years in which you have an increase in assets, there is a difference between the increase of assets and your reported income above EUR 150,000.00 in RSD equivalent at the middle exchange rate of the National Bank of Serbia at the last the day of the calendar year of the verification period.

The Law provides that a special organizational unit is established within the Tax Administration, to perform tasks specified in this Law. As we said, a real team of specialists. Although the Law initially regulated only the jurisdiction for conducting the proceedings, the latest amendments precisely state that a special unit of the Tax Administration is in charge of collecting taxes.

The duty to attend on-going training is prescribed for all employees of the Tax Administration unit, as well as for employees of the Ministry responsible for finance, which is especially important given the prescribed tax rate if professionals find irregularities when investigating your property.

Also, the judges of the Administrative Court who will judge the lawsuit against the final decisions on the special tax will have to complete the training for acquiring special knowledge on the procedure of determining the property and the special tax. This also speaks in favor of the fact that the utmost expertise must be applied in procedures important for improving the efficiency of the tax system and preventing its abuse.

What’s interesting is that the employees of the Tax Administration Unit and employees of the Ministry of Finance are obliged to submit to the Agency for the Prevention of Corruption, in writing, complete and accurate data on their property, which will be put in records and checked. Therefore, the first citizens of Serbia whose property is subjected to control are the ones who are doing the control under the Law. This will prove their impartiality and professional qualities.

At the written request of the Director of the Tax Administration, security checks of the employees of the Tax Administration Unit are also done prior to their hiring, during their employment and one year after the end of employment, without their knowledge.

Security checks will be carried out by the Ministry of the Interior and the Security Information Agency. Security checks of the Ministry of the Interior will be carried out to determine the existence of interference in terms of protection of the public order, and the Security Information Agency’s checks will be done to determine the existence of interference in terms of security of Serbia.