Imagine the following scenario: you’ve decided to relocate from abroad to Serbia, having found a new opportunity for work and life. At a certain point, while evaluating all aspects of the relocation, the question of taxation inevitably arises. Will Serbia consider me a tax resident? Is double taxation possible under Serbian law? Does Serbia have double tax treaties, and how can they be applied to my specific situation? This article aims to clarify such uncertainties and provide guidance regarding the tax residency status of foreign nationals who are temporarily or permanently residing in Serbia.
The Concept of Double Taxation
Double taxation occurs when two or more jurisdictions assert taxing rights over the same income earned by a taxpayer within the same tax period. This situation most commonly arises when an individual is considered a tax resident of both countries and derives income from one jurisdiction while physically residing in another during a specific period.
For instance, if you have been employed in Germany and are earning a monthly income there and subsequently relocate to Serbia and acquire tax residency status under Serbian law, there is a theoretical possibility that both countries may assert the right to tax the same income. In order to prevent such situations and avoid potential unfair tax burdens, states enter Double Taxation Avoidance Agreements (DTAAs). In that context, Serbia is among the countries that have concluded double tax treaties.
A fundamental concept in this context is tax residency, and the proper determination of an individual’s tax residency status in a specific case is crucial. DTAAs prescribe the applicable mechanisms, which are to be applied to ensure that the same category of income is not taxed twice.
Therefore, it is essential to determine your tax residency status as soon as you begin planning an international relocation or commence earning income in more than one jurisdiction.
How Does Serbia Define Tax Residency?
Tax residency is a crucial factor in determining which country holds the right to impose tax on your worldwide income. In accordance with Law on Personal Income Tax (hereinafter: the “Law“), a Serbian tax resident is liable for income tax on income earned both within the territory of Serbia and abroad.
An individual is considered a tax resident of Serbia if they meet any of the following criteria:
- They have a permanent residence or the centre of their business and life interests in the Republic of Serbia, or
- They are physically present in Serbia for 183 or more days, either continuously or with interruptions, within a 12-month period during the relevant tax year.
Furthermore, the Law contains a notable provision whereby an individual who, at the moment of first entry into the territory of Serbia, is aware that they will fulfil either of the abovementioned conditions, shall be considered a Serbian resident from the initial entrance date.
If none of the listed conditions are met, the individual is deemed a non-resident for tax purposes, and Serbia retains taxing rights only over income sourced within its territory. As a general rule, your country of tax residency may tax your entire income, regardless of where it was earned, while the country where the income originates can typically tax only the income earned within its own territory.
Upon the arrival of a foreign national in Serbia, tax residency must be assessed based on the factual circumstances relevant to the specific tax year. For this reason, it is advisable to conduct a timely evaluation and consult all relevant legal sources and regulations in order to avoid potential tax complications.
Tax residency status directly affects whether your foreign-sourced income will be subject to taxation in Serbia. You might ask, what happens if two countries simultaneously claim that you are their tax resident? The answer depends on the specific countries involved, and more importantly, on whether Serbia has concluded double tax treaty with that country. In such cases, the tie-breaker rules provided within the applicable DTAA come into play to resolve dual residency conflicts.
Avoidance of Double Taxation
The Republic of Serbia has concluded double tax treaties with 64 countries worldwide[1]. These agreements span across all continents and include jurisdictions with which Serbia maintains strong bilateral relations and where a significant number of Serbian citizens reside. Some of the countries where such agreements have been in place for many years include Germany, Austria, Switzerland, the People’s Republic of China, the United Arab Emirates, the Russian Federation, Belgium, Bosnia and Herzegovina, and Croatia.
To prevent the occurrence of international double taxation, it is essential to apply the mechanisms provided under these international treaties. These mechanisms ensure that foreign-sourced income is not taxed twice, by taking into account the taxes already paid in the source country. In other words, the purpose of these methods is to provide a legal framework that avoids double taxation of the same income.
In practice, two primary methods for the avoidance of double taxation are commonly used under these treaties:
- Exemption Method: Income earned in one country is fully exempt from taxation in the other country, regardless of whether tax was actually paid in the source country. This method is typically applied when the source country has a highly reliable tax system. For example, in treaties concluded with Germany or Italy.
- Credit Method: Income is subject to tax in both countries, but the tax paid in one country is credited against the tax liability in the other, up to the amount of tax that would otherwise be payable there.
The applicable method depends on the specific provisions of the double tax treaty concluded with the country in question. It is therefore critical to analyse each situation on a case-by-case basis, especially by examining each category of income individually.
While Serbia has an extensive network of double tax treaties, there are still certain countries with which no such agreements have been concluded. Examples include the United States of Ameria, Argentina, Australia, or Brazil.
However, the absence of double tax treaties does not mean that there is no available solution. In cases where income is derived from a jurisdiction that does not have a tax treaty with Serbia, the risk of double taxation is not left entirely to chance. The Law provides for the application of the credit method, whereby foreign taxes paid may be credited against the Serbian tax liability. This statutory relief mechanism helps to mitigate the risk of the same income being taxed twice, to the extent permitted under Serbian law.
Establishing Tax Residency
To exercise rights under a DTAA concluded between Serbia and another jurisdiction, the first and essential step is to establish the individual’s tax residency in the Republic of Serbia. Tax residency, in the context of tax law, is not presumed and must be formally substantiated through appropriate documentation.
The primary document used to prove tax residency in Serbia is the Certificate of Tax Residency, issued by the Serbian Tax Administration on an official form. This certificate is issued upon the taxpayer’s request and is valid exclusively for a specific calendar year, in accordance with international standards on the exchange of information and the provisions of bilateral double tax treaties.
An exception may apply where a specific DTAA stipulates that residency must be confirmed using a form issued by the competent authority of the other contracting state. In such cases, the individual seeking to claim treaty benefits must utilize that designated form, as prescribed by the relevant double tax treaty.
Common Mistakes Taxpayers Make Regarding Double Taxation
As previously discussed, the concept of tax residency is one of the key elements for correctly interpreting tax regulations and applying the provisions of double tax treaties. This is precisely where frequent errors and misinterpretations occur.
One widespread misconception is the belief that holding the citizenship of a particular country automatically confers tax residency in that jurisdiction. However, nationality alone does not constitute sufficient grounds for establishing tax residency status.
Significant misunderstandings also arise in relation to the termination of tax residency. It is often mistakenly assumed that an individual who relocates abroad or resides outside the territory of the Republic of Serbia for more than 183 days automatically ceases to be a Serbian tax resident. Legally speaking, such circumstances do not necessarily result in the loss of residency status. For example, an individual who has moved out of Serbia and temporarily settled in another European country but has not formally deregistered their residence in Serbia nor obtained permanent resident status abroad in accordance with the relevant legal provisions, may still be considered a Serbian tax resident under domestic tax law. In such situations, if the taxpayer mistakenly assumes that they are no longer a Serbian tax resident, they risk being subject to double taxation across multiple jurisdictions for the same category of income.
Moreover, in practice, many Serbian tax residents fail to timely declare income earned abroad. This often leads to errors in the application of double tax treaty provisions, particularly in the selection of the appropriate method for eliminating double taxation (either the exemption method or the credit method). A common mistake occurs when a taxpayer who has already paid income tax in the source country assumes that the same income does not need to be reported in Serbia, even though the applicable treaty may require the application of the credit method to offset the paid foreign tax.
In contrast, there are also instances where taxpayers, due to a lack of awareness or misinterpretation of the relevant legal provisions, end up paying tax twice – once in the source country and again in Serbia. One of the main causes of such situations is insufficient knowledge of existing double tax treaties, as well as the failure to undertake the necessary steps to claim tax benefit afforded under such treaties.
Lack of familiarity with double tax treaties can lead not only to excessive tax burdens, but also to potential tax liabilities toward the Serbian Tax Administration. This, in turn, may result in monetary penalties or other sanctions due to non-compliance with applicable legal obligations.
Why Are Double Tax Treaties Important?
The existence and application of double tax treaties (DTAAs) between Serbia and other countries provide numerous practical benefits for both individuals and legal entities earning income in an international context. These treaties not only protect taxpayers from being taxed multiple times on the same income but also contribute to the creation of a predictable and stable tax environment for cross-border economic activities. In addition, DTAAs enhance cooperation between tax administrations, establish mechanisms for resolving interpretation and application issues, and contribute to more effective control and reduction of tax abuse.
Primarily, double tax treaties serve to eliminate or reduce tax barriers that could hinder the free movement of capital, goods, people, knowledge, and services between two countries. This results in fewer administrative obstacles and less tax uncertainty for individuals, entrepreneurs, and multinational corporations alike.
Moreover, the existence of such treaties acts as a strong incentive for foreign investment – investors gain assurance that the income they generate in a treaty country will not be subject to double taxation. In this regard, double tax treaties serve as a catalyst for economic cooperation and development.
Although DTAAs offer clear frameworks and legal protection mechanisms, their practical application requires a detailed, case-specific analysis. Issues such as tax residency status, reporting obligations for foreign-sourced income, and the potential application of treaty-based relief mechanisms cannot be addressed in a general manner; rather, they must be carefully assessed in light of the factual circumstances and relevant supporting documentation.
Therefore, a proper understanding and application of these international tax treaties demands timely and expert guidance from professionals experienced in tax advisory and international taxation. Only in this way can you ensure that your tax obligations are fully compliant with applicable laws, and that your rights as a taxpayer are adequately protected.
