The tax incentives which have been introduced in Serbia in the past years in the field of research and development demonstrate the increasing importance of encouraging innovations and creativity. You can read more about the already existing tax incentives in the Serbian legal system in our text Checklist of Tax Incentives for Companies In Serbia – Don’t Give Away Your Money Just Yet!
The first R&D incentive in Serbia for companies working on research and development enabled the research and development expenses to be counted in the double amount in the tax balance, allowing the possibility of a significant reduction of the corporate income tax base of such companies.
R&D incentives have gone a step further by presenting the solution in the form of the Personal Income Tax Law from the beginning of 2022, which provides tax exemption from the obligation to pay 70% of taxes for salaries of employees who are directly engaged in research and development, proportionally with the time these persons spend on such positions.
The abovementioned incentive has been applied since March 1, 2022, and in mid-April of the same year, the Government adopted the special Rulebook on the conditions and manner of exercising the right to tax exemption based on salaries of employees engaged in research and development (hereinafter: Rulebook), which specifies the conditions for exercising the tax exemption.
Who Is Entitled to Tax Exemption?
An employer-legal person is entitled to tax exemption exclusively based on research and development projects conducted on the territory of the Republic of Serbia, which conducts research and development at their expense and retains the ownership of intangible assets that may arise from research and development.
Therefore, an employer who can use this exemption is not considered to be a legal person that conducts research and development on behalf of others and does not become the owner of intangible assets incurred by such research and development activities (service research and development).
For example, XYZ, an outsourcing company that develops custom software cannot use this incentive for its employees. Why? Simply put – if intellectual property rights on created intangible assets (software) are transferred to another company upon the finished project, that implies that research and development is conducted for another person and not for their own needs, thus the conditions for R&D incentives are not met.
From the previously explained, it can be easily concluded that the intention of introducing this incentive is motivating the innovation in our country, instead of its “export” abroad.
An employer is not considered a legal entity established abroad, a branch, or a representative office of a foreign legal person in Serbia. Therefore, only a Serbian legal entity is entitled to an exemption based on the salaries of employees in research and development.
In addition, employers who use any type of incentive for a specific person, except when they use the exemption in accordance with the provision of the law regulating mandatory social security relating to the same type of incentive (explained later in the text), based on entering into an employment relationship with that person, are not entitled to this tax exemption for that person.
In conclusion, you may not combine this incentive with the incentive for employment of returnees and foreigners or other employment incentives, and the only possible option is to combine it with the existing R&D incentive relating to the double deduction of research and development expenses in the tax balance.
What Is Considered to Be a Project?
The project, which is the basis for the use of this incentive is considered to be a project in which at least 90% of all employees working on research and development conduct their project activities on the territory of the Republic of Serbia.
However, the project will be considered as conducted on the territory of the Republic of Serbia even if some parts are performed outside the Serbian territory, provided that the performance of such activities is conditioned by specific physical, geographical, and natural factors which cannot be ensured on the territory of the Republic of Serbia.
For example, if your company works on the development of a modern technology system used for filtering seawater, it is certain that some research may not be conducted on the territory of the Republic of Serbia, but you must move part of the project to the country with access to the sea. In that case, it is still possible to use an R&D incentive, if all other conditions are met.
Who Are Employees in R&D?
R&D employee is an employee who:
- has concluded employment agreement for a definite or indefinite period,
- has concluded a full-time or part-time employment agreement,
- is directly hired for conducting the project, i.e., works in such a manner that is directly involved in identifying and resolving scientific, process, or technical issues related to the specific project.
Regarding the last condition of the above three, the engagement in the research and development project must be direct. This means that R&D employees are not persons who undertake in the workplace:
- activities related to indirect or direct project supervision, such as participating in meetings where technical aspects of the projects are discussed, direct meetings with employees involved in solving the specific technical problem, project planning, management of development process, etc.
For example, an employee who exclusively performs the HR tasks on the project is not considered as an employee whose earnings this tax incentive can be used.
- support in conducting the project, such as setting equipment used for the research purposes, assisting the engineers during the testing of new production processes, preparation of reports by administrative personnel, maintenance of rooms where research and development activities are performed, etc.
Thus, for example, the person who is hired as IT support in the company in research and development and who occasionally services the computers of employees in the company is not considered as the employee directly engaged in research and development.
The Rulebook specifically defines that the time which the employee in research and development spends on rest periods and leaves does not count as the time that research and development employees spend on vacation and leave:
- annual leave;
- absence from work on a holiday that is a non-working day;
- paid leave;
- military exercise and responding to summons by the government body;
- absence from work due to temporary impairment;
- interruption of work.
What Amount of Earnings is subject to the Tax Exemption?
Tax exemption refers to the amount of earned income in proportion to the time for which the employee is directly engaged in research and development in relation to full-time work.
What does this mean?
Payroll tax for your employee who spends 60% of their time at work on research and development activities and the remaining 40% on other activities such as the abovementioned jobs are not classified as R&D jobs may be reduced only for the 60%. The exemption is not possible for the percentage of time at work spent at activities that cannot be considered R&D.
However, even if your particular employee is considered a person engaged in R&D, their exempt earnings do not include income from the employer in excess of the non-taxable amount determined by the Law on Personal Income Tax, based on:
- transportation costs for arrival and departure from work;
- business travel expenses in the country and abroad;
- solidarity benefits in case of illness, health rehabilitation, or disability of the employee or the member of the employee’s family;
- gifts to employee’s children on New Year and Christmas;
- jubilee awards to employees;
- aid in case of death of employee’s family member;
- financial assistance for the treatment of employee in the country or abroad;
- solidarity benefits for childbirth.
Therefore, even if your employees’ children receive New Year’s gifts from you, such giving is still not included in the amount of earnings to which the exemption applies. In other words, the exemption base is reduced by the amount of the value of the gift for the child (and other benefits listed), so the exemption is applied to the amount thus obtained.
Formula For Calculating Tax Exemption
The employer determines the tax exemption according to the following formula:
Whereby:
- Tax = the total amount of calculated and withheld tax from the employee’s salary for the calculated period for which the income is paid;
- Engaged work time = time that the employee spent on such jobs in the month for which tax on salary is calculated;
- Full time = full time in the month for which tax on salary is calculated.
Obligation Of the Employer Who Exercised the Exemption
The Rulebook prescribes several obligations for the employer that is eligible for this tax exemption.
Keeping Separate Records
A company that uses the new R&D incentive is obliged to keep separate records for each employee engaged in research and development activities and for whose earnings the company claims the exemption, and where all information necessary for tracking the fulfillment of conditions for the abovementioned incentive are stored. Specifically, they are:
- information on the employee’s working hours,
- information on the salary, salary compensation, and other incomes of the employee.
Keeping Separate Documentation
In addition to records for each employee, the R&D employer is obliged to keep the specific documentation for every individual project at the company seat, which includes, among others:
- project specification with outlined goals and project phases,
- annual project budget and the total amount of the approved budget,
- report of the employee on research and development, containing the specification on the total working hours spent on research and development jobs on a specific project,
- report on the results of the project.
It is useful to know that after the documentation is collected, it is kept at the employer’s seat and submitted to tax administration only in case of inspection – at the government body’s demand. Therefore, there is no need for you to self initiatively submit the documents to the tax authorities once you start using the benefit.
What About Paying the Contributions?
Under the same conditions prescribed for tax exemption, which apply to the employer, the project and the employee, the Law on Contributions for Compulsory Social Insurance prescribes exemption from the obligation to pay 100% of contributions for compulsory pension and disability insurance at the expense of the employee and the employer.
Therefore, the exemption does not only apply to the payroll tax, but also for contributions, but in that case, the rule is that exemption is applied proportionally for working hours spent in R&D, as well as all the other conditions described in this text.
The adoption of the Rulebook did take longer than expected, to be honest, so there was a certain “time gap” between the introduction of the benefit (by the Personal Income Tax Law) and its regulation in more detail (by the Rulebook). However, the development companies now finally have defined conditions for exercising the new employment incentive. Consequently, we believe that many companies oriented towards research and development will use this incentive, combined with the initial R&D incentive, to save a significant portion of the funds, and redirect them to upgrading existing or developing new projects.
