Checklist of Tax Incentives for Companies in Serbia – Don’t Give Away Your Money Just Yet!

Oct 2020

Contact: Anja Berić

Numerous tax incentives and exempts have emerged in the Serbian business environment in the past couple of years, meaning that tech companies are more inclined to develop their business in our country. From the conversations with our clients, we realized that some of the offered incentives were recognized as extremely significant advantages, and are used to their full capacity. Still, even though all of these opportunities are equally transparent and accessible to everyone, it appears that some of these tax incentives have gone unnoticed, thus, are not used to their full capacity.

Irrespective of whether you are:

  • a business entity that intends to commercially exploit, or already exploits a product protected by intellectual property rights which they have created themselves (work of copyright or an invention),
  • a company that intends to, or already conducts research and development in the Republic of Serbia,
  • a founder of an already existing company,
  • an investor in startups that perform innovative business activities,
  • an employer who employs qualified newly-hired employees,
  • a company that employs youth repatriates in Serbia after completion of practical training or professional development abroad,
  • a company that employs foreigners in Serbia,
  • a company that uses marketing services,
  • or simply, a company which organizes team building for its employees,

you should go through our checklist and see whether you are taking full advantage of all the incentives you have at your disposal. You might come across at least one that you have missed.

1. IP BOX Regime – Reduce Income Tax from 15% to Effective 3%

From January 1, 2019, depositing copyright works and works of related rights may bring significant tax relief to holders of copyright or related rights, as well as to the holders of rights or the applicant for the registration of an invention. According to the Corporate Income Tax Law and the Rulebook on Conditions and Methods of Exempting the Qualified Income from the Corporate Income Tax Base, it is possible to exempt up to 80% from the tax base of the income which stems from commercializing the subject of the intellectual property. This means that the company’s income tax can be effectively reduced from 15% to 3%.

This is especially significant for IT companies that have their own products because software is (as a rule of thumb) protected by the Law on Copyright and Related Rights.

To qualify for this tax relief, it is necessary to deposit the copyright, i.e. subject to related rights to the competent authorities, in accordance with the Law on Copyright and Related Rights. If the subject of the copyright is software, there is an option to upgrade or adapt the software, so the fact that this type of copyright subject is constantly changing is not an obstacle to depositing the copyright.

In order to qualify for tax relief for an invention, it is necessary that the patent is registered or that the application to register the patent has been submitted to the Intellectual Property Office.

One should not forget the fact that the holder of a copyright, i.e. related right is obliged to present the qualified income in the tax balance (the income to which the tax exemption is applied). Also, upon the Tax Administration’s request, it is obligatory to deliver specific documentation in a manner and form prescribed by the Ministry of Finance.

2. R&D Tax Credit

The expenses incurred by the taxpayer which are directly related to research and development in the Republic of Serbia can be recognized as a double deduction in the tax balance in relation to the bookkeeper’s calculations. This additional benefit for companies does not depend on the success of the research itself, but its goal is to encourage taking initiative and making innovations, so the result itself is not valued as much as the initiative to take risks and acquire new know-how.

According to the Corporate Income Tax Law, the research is defined as the original or planned research, undertaken with a goal to gain new scientific or technical knowledge and understanding, which in practice usually includes:

  • salary expenses for the employees who directly work on jobs of research and development,
  • acquisition costs for intangible assets (e.g. licenses for necessary software),
  • consulting services from business entities not related to the taxpayer,
  • the expenses related to intellectual property protection, and the like.

IP Box and R&D deduction can be combined, thus reducing the corporate income tax to 0%.

3. Exemption from Income Tax and Contributions for Founders

The employer – a company, entrepreneur, or an agricultural entrepreneur who will be registered in the Business Registers Agency by December 31, 2020 (hereinafter: a newly established employer as defined by the Law) is entitled to exemption from paying income tax and contributions for the founder employed in the company, i.e. exemption to the personal income of the entrepreneur or agricultural entrepreneur.

This possibility can be used for salaries paid by the employer in the period of 12 months from the day of the company formation, i.e. registration of the entrepreneur or agricultural entrepreneur. The basic condition is related to the amount of the salary – it cannot exceed 37,000 dinars on a monthly basis, i.e. without the corresponding salary obligations.

The exemption is regulated by two different acts of law, depending on what it refers to.

3.1. Taxes

Tax exemption to the founder’s income is prescribed by the Personal Income Tax Law, and in addition to the already mentioned condition regarding the monthly amount of salary, several more are provided:

  • the founder must be employed in the company and has to be registered for mandatory social security insurance,
  • the entrepreneur, i.e. agricultural entrepreneur must be registered for mandatory social security insurance,
  • in the period when the tax relief is exercised, that right can be exercised for a maximum of nine founders who are employees who meet the conditions,
  • that the founder, i.e. entrepreneur or agricultural entrepreneur, in the period of at least 6 months prior to the day of registering as a newly established employer has been registered at the National Employment Service as unemployed, i.e. that in the period of 12 months prior to the day of registering as a newly established employer, has completed secondary, tertiary or higher education in accordance with the Law.

3.2 Contributions

Exemption from paying contributions to the founder’s income i.e. personal income of the entrepreneur or agricultural entrepreneur is regulated by the Law on Mandatory Social Security Contributions. The conditions that must be met are identical to those from the Personal Income Tax Law, both in terms of the amount of salary and in terms of additional conditions that the person for whom the exemption was obtained should meet. Contributions for persons for whom the right to exemption is exercised are paid from the budget of the Republic of Serbia in the amount of the lowest monthly contribution base provided by the same law.

Great news for companies that plan to invest in a newly established company that performs innovative business activities, i.e. invest in a startup:
The Corporate Income Tax Law prescribes a tax exemption of 30% of the total investment i.e. the company-investor can reduce their tax obligation in that amount. The right to this relief can be exercised by a company that does not own 25% of shares or stakes, or votes in the startup, at the time of investing in the startup.

The tax credits are implemented based on the fully paid investments which increase the capital of the startup. The condition that must be met is that the investor has not decreased their investment continually for three years from the day of the initial investment. Thus, the investor is entitled to a tax exemption only when they fulfill each condition listed.

The law also provides for a cap to the amount of tax credit for investing in startups, so it cannot exceed 100 million dinars in total, i.e. 50 million dinars per tax year.

Another great novelty in relation to startups is that all startups established until December 31, 2021, and which perform innovative activities, acquire the right to tax incentives. You can find out more about this in our blog on tax incentives for innovative startups.

5. Employing Newly-Hired Qualified Employees

As of January 1, 2020, a new type of incentive was introduced with the goal to motivate companies that will increase the number of their employees in the next three years (by the end of 2022), starting from December 31, 2019. The condition to qualify for the tax credit will be met by entering into an employment relationship with individuals who have not been in an employment relationship in the period from January 1, 2019, to April 30, 2020, i.e. with entrepreneurs who meet the same conditions in relation to previous unemployment, i.e. who ‘fail’ the independent contractor test.

Tax relief for new hires has been prescribed by the provision of the Personal Income Tax Law and the Law on Mandatory Social Security Contributions, by which the employer who meets the conditions listed will be exempt from paying the tax and contributions to employee salaries.

The exemption from taxes and contributions is determined in percentages, and effectively amounts to:

  • 70% of taxes and 100% of contributions to salaries in 2020,
  • 65% of taxes and 95% of contributions to salaries in 2021,
  • 60% of taxes and 85% of contributions to salaries in 2022.

Besides the encouragement for the youth to remain in Serbia and motivate employers to hire new employees, the introduction of this novelty clarifies certain questions related to the treatment of independent contractors hired by companies, which is specifically significant for the IT sector.

6. Deduction of the Base for Paying Taxes and Contributions for Hiring Youth Repatriates

A special kind of tax relief is prescribed by the Personal Income Tax Law and the Law on Mandatory Social Security Contributions for the so-called, newly-settled taxpayers who enter into employment relationships with a domestic employer for an indefinite period – the base for paying taxes and contributions is reduced for 70%.

The category of newly-settled taxpayers includes individuals who:

  • at the moment of concluding the employment agreement have not turned 40,
  • have lived abroad for at least 12 months prior to entering into an employment relationship, in order to complete practical training i.e. further education,
  • on a monthly basis earn a minimum of 145,104 dinars.

To fulfill the conditions for this tax relief, it is necessary that the “young repatriate” enters into an employment relationship in a workplace for which there is a need for employees to have special professional education and for which there is a need that cannot be easily met in the Serbian labor market. An additional condition is that the employee resides on the territory of the Republic of Serbia at the same time as establishing employment, and can be considered its ‘tax resident’ on the basis of the center of business and life interests in Serbia.

7. Reduction of the Base for Paying Taxes and Contributions for Employment of Foreigners

In addition to the previously referred persons, a newly-settled taxpayer, in terms of the law, is an individual who:

  • had not resided on the territory of the Republic of Serbia in the period of 24 months prior to the conclusion of the employment agreement with the domestic employer,
  • earns a minimum of 217,656 dinars on a monthly basis.

Same as with ‘youth repatriates’, a similar condition has been foreseen in relation to residing in Serbia, which we have mentioned previously.

Interestingly, the once realized tax relief listed under numbers 4 and 5 produces a legal effect for the next 5 years from the day of entering into an employment relationship, irrespective of the change of employer. Having in mind that in practice, the previous two benefits may cause certain doubts in practice, the adoption of a bylaw by the competent authorities is expected in the coming period, which would further clarify the issues related to benefits for the employment of returnees and foreigners.

8. Marketing Expenses are Fully Tax-Deductible

The expenses of advertising and propaganda have been recognized in the tax balance as an expense only up to 10% of the taxpayer’s income prior to the changes made to the Corporate Income Tax Law, but now, marketing expenses are fully tax-deductible.

This kind of benefit is especially significant for those companies which work in the fields that, within the operational business significantly invest in advertising and propaganda.

9. No Taxes for Employee Recreation and Team Building

The change of Personal Income Tax Law has brought great news for many employers who do not have to pay taxes and contributions to activities included in team building. In contrast to the earlier solution which considered the expenses of employee recreation an employee profit in the sense of employee benefits, with the new regulations, these expenses have been listed as expenses of work, thus being exempt to tax obligation.

What is included in team building expenses? The Law includes all the expenses the employer has in relation to employee recreation in the workplace, such as building and/or acquiring equipment for recreation, organizing sports events, and in general, building better relations between employees, as well as between employees and employer.

In order to exercise the right to tax exemption for team building expenses, it is necessary to fulfill certain conditions.

In case you are unsure which conditions we are talking about, you can read more in our blog Are Taxes for Employee Recreation and Team Building Relics of the Past?

If you were familiar with all of these 9 incentives, congratulations – you were informed in time.

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