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In the past few years in the Republic of Serbia, there has been a growing trend of amending tax laws. Although there are changes which weren’t met with open arms by the public, such as the infamous battle between the Tax Administration and freelancers, we cannot disregard the fact that the Republic of Serbia encouraged new investments by introducing numerous tax incentives, newly established entrepreneurs, new workplaces, employment of young people, bringing foreign experts, etc. The Serbian Chamber of Commerce and the Serbian Government often speak about numerous tax benefits – we have written in our blogs on some of the current ones, and pointed out, among other things, the list of tax incentives for companies in Serbia.
Many incentives are for employers, however, there are a few related to employees and stay with the employee regardless of the employer. This is the exact reason why tax incentives have been a hot topic in Serbia lately, both for employers as well as those seeking employment.
This trend in the tax legislation, among other reasons, is why Serbia is a great destination for conducting business, and also made Serbia interesting to foreign employees, foreign investors, and even filmmakers, i.e., those who make audiovisual products (we have covered this topic in our news section).
Nevertheless, a lot of tax benefits were contentious, given that many of them lacked the necessary regulations. One of those was the tax benefit for the employment of returnees and foreigners. However, with the adoption of the Rulebook on the manner of exercising the right to tax base deduction to newly established taxpayers’ salaries, by the end of 2020, many uncertainties which we have covered in more detail in our news posts, were removed.
Now that the uncertainties about the application of these benefits were removed, a huge focus was put on incentives by which Serbia encourages innovative activities.
This is somewhat understandable. That is, if we have allowed a clear and easier way to employ new employees, opened up towards the employment of foreign experts and returnees, we have made an ideal ground for creative people with ideas on various innovations, who can develop their startups in Serbia, cost-efficiently and easily.
The Individual Income Tax Law (hereinafter: Law) and the Law on Mandatory Social Security Insurance prescribe that all newly established companies (startups) which perform innovative activities, can obtain the right to tax exemption and social security insurance contribution on the salary of founders who are employed at the newly established company. Initially, this benefit was available only to those startups formed no later than December 31, 2021, but this time limit has been abandoned in the meantime, so the result is that now there is no such restriction. In other words, this incentive can be used by the startups formed after the above-stated date, provided that they fulfill other conditions described above.
Although many tax incentives come with conditions and restrictions, in terms of exemption of only a certain part of taxes and contributions, as an encouragement to innovative activities, it is stipulated that if you set up an innovative startup in Serbia and get employed in your startup, tax exemption and all contributions to your salary are absolute.
Moreover, the Law prescribes extremely long use of this incentive, even up to 36 months from the day startup has been founded.
Firstly, the term innovation should be defined. Namely, innovation is a concept, idea, and method for creating a new product or process, including the invention of new technology (product or process) for using natural resources.
An innovative activity represents the creation and realization of new and improved products, processes, and services, in comparison to an existing technical-technological foundation, in accordance with the needs of the market.
When it comes to the market, it is necessary to clarify that by this, we mean not only the market of the Republic of Serbia but also the global market.
So, innovative activities comprise activities undertaken in order to create new products, technologies, processes, and services, or significant changes to the existing ones. So, the innovation may relate to the improvement or invention of a new product, service, process, as an application of a new or significantly improved manner of production or delivery, organization, or marketing innovations.
Companies that perform innovative activities are also characterized by the fact that they significantly invest in research and development, that they own a deposited work of copyright or patent, or that a large percentage of their employees are highly qualified, which is explained below in more detail.
The company that performs innovative activities is a company with innovative activities as their prevailing business activity. So, if we look at how the term “prevailing activity” is explained in the Serbian Companies Law, it means that the company in question during its formation should have to register the activity which includes activities taken in order to create new products, technologies, processes, and services, or important changes to existing ones.
The newly established company – startup, in terms of an innovative startup, implies a company that was not established more than three years ago, also implying that it has not been created by the status change of another company.
An innovative startup that will use the tax incentives for startups prescribed by the Law has to have a center of business activities on the territory of the Republic of Serbia. So, it is necessary that the activities regarding innovative development are performed in Serbia, i.e. that all R&D actions are primarily performed on the territory of the Republic of Serbia.
On the other hand, in order to fulfill the conditions in relation to the prevailing performance of innovative activities, the company:
In order to be eligible for tax exemption, an innovative startup cannot be an affiliate of another company, in terms of the law which regulates corporate income taxes. Roughly, this means that the other company cannot have control or significant influence on the business decisions of the innovative startup, i.e. that interests, shares, or voting right of another company in innovative startups or its managing authorities cannot be 25% or that the company from some of the preferential tax systems has any interests or influence in a startup.
Also, in order to be eligible for tax exemption, the other companies who are affiliated in said way with any of the founders of the innovative startup or certain members of their family, cannot participate in more than 30% of the total revenue of the startup.
The right to tax and contributions exemption to the founder’s salary for the period of 36 months can be achieved under the conditions that its founder, who uses the exemption:
Although we have said that this provision of the law is quite beneficial for innovation activity, there is still one limitation.
Specifically, certain individuals in the field of innovation often work on several projects, establish several startups at the same time, or in a relatively short period. Thus, for the tax incentives for startups, the Law has prescribed that exemption from taxes and contributions to the salary of one founder cannot be used cumulatively in multiple companies. So, if one entity is entitled to this incentive at one newly established employer, the same entity cannot be entitled to the same incentive at another newly established employer.
This means that if you are a member of multiple innovative startups, the right to incentives to your salary can be used at only one of them.
On the other hand, there is also a limitation regarding the number of different tax incentives that the innovative startup can use for the founder’s salary. It is determined that if the company chooses tax and mandatory social security insurance contributions exemption to the founder’s salary, the innovative startup doesn’t have the right to other benefits regarding the employment of that entity, including subsidies for employment and self-employment, on the grounds of establishing an employment relationship. We have written on all incentives for companies in more detail in our blog “The Checklist of Tax Incentives for Companies in Serbia – Don’t Give Away Your Money Just Yet!”.
However, are you wondering whether there is a limitation determined by the Law on the number of founders that one company can use to gain the right to tax incentives for startups? There is no such limitation. So, the newly established company can use these incentives for each founder who meets the condition to have at least 5% of interest, i.e. shares in that company, and that they have concluded an employment agreement.
This question is often asked in relation to all tax incentives introduced by the Law. Namely, the practical question of employers and accountants is: do I have to apply for the tax incentives for startups? Do I have to submit any documentation to the Tax Administration before using these incentives? And many other similar questions.
Namely, the rulebooks on using said tax incentives prescribe a self-evaluation of prescribed legal conditions. So, you start using the tax incentives for startups and incentives in relation to contributions by yourself, while the Tax Administration might check later whether all conditions were met.
Absolute tax exemption and exemption from social security insurance contribution can be made by the employed founder for a salary up to RSD 150,000.00.
Given the legislator’s tendency to generally prescribe the minimum wage to acquire benefits, a different model is used here. Therefore, here, the Law does not impose a great burden on the employer at the beginning, conditioning them to pay high wages in order to achieve benefits.
On the other hand, if employed founders have a salary of more than RSD 150,000.00, tax exemption can be used on the basis of a part of revenue up to RSD 150,000.00, which is not negligible.
However, keeping in mind that a total tax exemption and exemption from social security insurance contribution is foreseen for a salary up to RSD 150,000.00, the question is posed: how does this influence the calculation of the social security insurance that the employed founder acquires during the first three years of startup’s business? Well, this might be the only disadvantage of tax incentives for startups. Namely, monthly contributions for social security insurance for the employed member who uses these incentives, shall be calculated based on the minimum monthly salary in the Republic of Serbia, instead of the actual amount of the agreed salary.
Except for the tax incentives for startups that were listed, the Republic of Serbia has also foreseen different subsidies for startups, as well as benefits for investing in newly established companies that perform innovative activities.
For example, a company that is not newly established, which performs an innovative activity, and which invests in the capital of a newly established company performing an innovative activity, and is not its affiliate, get the right to a tax credit in terms of taxes on companies’ yearly revenue, in the amount of 30% of the investment, and maximum, RSD 50,000,000 in one tax year. On the other hand, the highest amount of tax credit that the taxpayer who invests in the capital of innovative startups can acquire is RSD 100,000,000.
The company – investor acquires the right to this tax credit, under the condition that they haven’t decreased their investments to the innovative startup continuously, in the period of three years, and the tax credit can be used in the first upcoming tax period, which comes after the expiration of those three years.
Another condition is that the incentive must be based on the completely paid monetary contributions which increase the startup’s capital. Therefore, for the investing company to exercise this benefit, he or she must make the payment of the entire amount of the investment, and adequately register such payment before the BRA.
The Law on Companies Income Tax stipulates that the expenses of the taxpayer directly related to the research and development conducted in the Republic of Serbia can be recognized in the double amount in the tax balance of such taxpayer.
You can find out more about what are research and development, as well as on what is considered an expense in terms of benefits of R&D, in our blog on tax incentives.
Generally, the Republic of Serbia, the autonomous province, and the units of the local self-governance provide the funding of innovative activity for the easier achievement of goals of innovative policy, through various economic instruments – organizations.
The Ministry of Education, Science and Technological Development keeps a Registry of innovative activities, and companies who are signed in that Registry can be users of other state benefit measures and financial means for the development of innovative activities.
A company can be registered in this Registry if they have a seat on the territory of the Republic of Serbia and if, when establishing the company, they have registered some of the business activities in the field of research and experimental work in natural sciences and technological development, prescribed by the Regulation on the classification of business activities, with the possibility to perform other activities as well, same as other companies. Among the other conditions, one is particularly specific: the legal entity must have necessary program, spatial and professional capacities to be registered as a center for:
On the other hand, in the Republic of Serbia, business-technological incubators, centers for transfer of technology, and four science technology parks, in Belgrade, Novi Sad, Čačak, and Niš, which, inter alia, offer technical and organizational support to startups in the development and placing of products on the market, connection to other companies and investors, and other similar services of significance for the business subjects in the making.
Also, the Fund for innovative activities provides support to companies for innovation development, through various forms of investment, co-funding of investments, programs of early development in which the innovative startups can apply for funding, innovation vouchers for small and medium enterprises which require the services of innovative activities, and other – all of this stimulates the development of the innovative activity.
We hope this topic interesting was interesting to read, and that we have given enough reasons to those who were unsure whether or not to dive into innovative activities in Serbia to try it out. In any case, startups have full legal support at their disposal in all other aspects, so we strongly believe that there are no more excuses not to make a first step towards the new age of innovations!