Serbia Encourages Development of Innovative Activities
In the past few years in the Republic of Serbia, there has been a growing trend of amending tax laws. Although there are changes that 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 and opened 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.
What Tax Incentives for Startups Does the Republic of Serbia Offer?
When we talk about tax incentives in general, we can categorize them into two main categories: incentives for investment in innovation and incentives for employment. Furthermore, within the incentives for investment in innovation, there are several different incentives aimed at encouraging investment in innovative activities and intellectual property in the Republic of Serbia. These include the R&D incentive (double recognition of costs directly related to research and development in Serbia), exemption from paying tax and contributions on the salaries of founders employed in newly established innovative companies (startup founders), a tax credit for investment in startups, as well as incentives for employee salaries.
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 the startup has been founded.
What is Considered an Innovative Activity?
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.
According to the Law on Innovation Activity, innovation activity involves the creation and implementation of new or improved products, processes, and services compared to the existing technical and technological base, following market needs.
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.
Therefore, innovation activity includes activities undertaken to create new products, technologies, processes, and services or significantly modify existing ones. It is important to note that the term innovation is not limited to the IT industry alone but also encompasses other areas where the activities of an innovation company substantially improve the existing state. Thus, innovation can pertain to the improvement or creation of new products, services, and processes, as well as the application of a new or significantly improved method of production or delivery, organization, and marketing innovation.
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.
Characteristics of the Newly Established Company Qualified for Tax Incentive on the Founder’s Salary – What is an Innovative Startup?
A 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 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, the activities regarding innovative development must be performed in Serbia, i.e. 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:
- according to the latest financial reports, cannot have a yearly revenue greater than 500,000,000 dinars,
- after establishment, cannot distribute dividends and will not distribute them in the next 3 years and
- its investment into R&D amounts to at least 15% of its expenses, OR more than 80% of its employees are highly qualified, OR the company is the owner, i.e. user of a deposed copyright work or patent which is directly linked to the innovative activity it performs.
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 rights 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.
Which Founder of Innovative Startup Can be Exempted from Taxes and Salary Contributions?
This tax incentive is most suitable for startups that are new to the market and are still developing their ideas.
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:
- has at least 5% of the share in that company,
- has established an employment relationship with the newly established company, in accordance with the Law which regulates work relations, and
- is registered for mandatory social security insurance.
Although we have said that this provision of the law is quite beneficial for innovation activity, there are still a few limitations.
Specifically, certain individuals in the field of innovation often work on several projects, and 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. For this reason, it is necessary to conduct an assessment and determine which tax incentive is more beneficial in the long run. 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 incentive can truly only be used by the founders, specifically the initial founders of the innovative company. Individuals who subsequently join the company as shareholders will not be entitled to use this tax incentive.
How Can Tax Incentives for Startups and Exemption from Paying Contributions to be Used in Practice?
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 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.
Does the Law Foresee the Amount of Salary of the Founder-Employee Who Wishes to Use this Incentive
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. If the salary of the founder-employee exceeds the limit set by the Law, the general tax regime and payment of contributions will apply to the difference.
Additional Incentives for Innovative Startups and Investing in Innovative Activities
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.
Recognition of Tax Credit for Companies that Invest in Innovative Startups (Angel Investor)
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 that 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.
Recognition of R&D Expenses in Double the Amount
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. This type of tax incentive affects the tax balance sheet, meaning that an actual expense of, for example, RSD 100,000 will be recognized as RSD 200,000.
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.
It’s not just the founders – employees in startups who are privileged; there is also a tax incentive for employees working on research and development projects. Incentives for research and development were further enhanced by the amendments to the Personal Income Tax Law at the beginning of 2022, which provide for a 70% tax exemption on salaries for individuals directly engaged in research and development activities, proportional to the time they spend on these activities. You can read more about this on our blog: Tax Incentives for Employees in Research and Development
The Participants of Innovative Systems in the Republic of Serbia, Subsidies of the Serbian Government, and Scientific and Technological Organizations
Generally, the Republic of Serbia, the autonomous province, and the units of the local self-governance provide the funding for innovative activity for the easier achievement of goals of innovative policy, through various economic instruments – and organizations.
The Ministry of Science and Technological Development and Innovation 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:
- development and production,
- research and development, or
- innovations
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 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 take a first step towards the new age of innovations!
