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

06
Jun 2022

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 a domestic startup,
    • an employer who is in the process of forming a new team of employees,
    • a company that frequently uses marketing services,
    • or simply, a company organizing 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%

Since January 1, 2019, depositing copyright works and works of related rights can, from the taxation point of view, be highly useful for the 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 arising from commercializing the subject of the intellectual property.

What does it practically mean? -> Company’s corporate income tax can be 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. Having in mind that it is typical for software, as a specific type of copyrighted work, to be frequently changed, the majority of individuals from the IT industry may raise the question of what happens in case of subsequent changes or adaptations of the initially deposited software. Is the software still recognized as deposited, in that situation? Nothing to worry about – such a scenario has also been taken into account, so you can still continue with the use of this relief even if you change your software later on.

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 Incentives

“R&D” = Research and Development

Research = original or planned research, undertaken with a goal to gain new scientific or technical knowledge and understanding.

Development = application of research results or other scientific accomplishment or design of the production of new, significantly improved materials, devices, products, processes, systems, or services prior to commercial production or use. [1]

a) Research and Development incentive

The first tax incentive in relation to research and development, introduced in 2019, refers to the reduction of the corporate income tax for the legal entities that conduct research and development activities in Serbia. Namely, the expenses incurred by the taxpayer which are directly related to research and development in the Republic of Serbia can be counted in a double amount in the tax balance, when compared to the bookkeeper’s calculations.

It is interesting that 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.

In accordance with the definitions of the research and development explained above, the expenses arising from the R&D activities in practice usually include:

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

 

If the previously explained incentive, along with this one, finds you intrigued, you will surely be even more interested when you hear that IP Box and R&D deduction can be combined, thus reducing the corporate income tax to 0%.

b) Incentive for employees working on R&D jobs

Besides the R&D incentive that is important to you from the corporate income tax point of view, you will highly likely be tempted by the new relief that has been introduced this year, which is applicable to the tax payable on salaries of the employees engaged in research and development activities. Namely, this incentive stipulated that the company conducting the R&D activities can exercise the 70% exemption from the calculated and suspended tax on salaries of the employees who are directly engaged in the research and development jobs, in proportion to the time they spend on the R&D project.

The R&D project is the project in which at least 90% of employees engaged in R&D activities perform such activities in Serbia.

In order to make it simpler for you to understand, here is one practical example:

Person A is employed in a software development company XYZ, keeping the developed software in its ownership.

  • Person A spends 50% of its working hours on the development of the particular software solutions, whereas
  • the other half of the time is spent on drafting the reports on the previous activities on the project and further planning.

Taking into account that, out of three listed activities, only the first one is considered an R&D activity, whereas the following two do not fall under this category, company XYZ may exercise a 70% exemption from paying the tax on one half of the salary paid to person A, as well as 100% of the exemption regarding the contributions paid by company XYZ for person A.

Other employment incentives, which you will get more familiar with below, cannot be combined with this one. However, this incentive can be used simultaneously with the relief in relation to the double deduction of the R&D expenses, explained in the previous section a).

3. Exemption from Income Tax and Contributions for Founders – UPDATED

Update: since this blog was initially written, the tax incentive enabling the founders of the so-called newly formed employers (registered after December 31, 2020) to be exempt from the taxes and contributions on their salary, has ceased to apply, given that its exercise was possible solely within 12 months upon the registration of the newly formed employer.

3.1 Exemption from taxes and contributions on the startup founders’ salaries

Great news for all of you carrying out a role of a startup founder – if you enter into an employment relationship with your own startup, Personal Income Tax Law gives you the right to be exempt from the taxes and contributions on the salary paid to you by the startup.

Several conditions need to be met in order to exercise this relief, and you can read more about them in our text TAX INCENTIVES FOR INNOVATIVE STARTUPS IN SERBIA IN 2021.

Given that this incentive makes it possible for you to be completely exempt from the obligation to pay taxes and contributions, we strongly believe that it is worth considering signing the employment agreement with your startup, in case you have not already done so.

4. Investing in Startups

Companies that plan to invest in a newly established company that performs innovative business activities, i.e. invest in a startup, might also be interested in some of the incentives: The Corporate Income Tax Law prescribes a tax exemption of 30% of the total investment i.e. the investing company 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 the share, or 25% of voting right in the startup, at the time of investing in the startup.

The tax credit is implemented based on the fully paid investments increasing the share capital of the startup. The condition that must be met is that the investor does not decrease their investment continually within three years from the day of the initial investment. Thus, the investor is entitled to a tax exemption only when they fulfil each condition listed.

The law also specified the cap on the amount of tax credit for investing in startups, which cannot exceed 100 million dinars in total, i.e. 50 million dinars per tax year.

5. Employing Qualified Newly-Hired Employees – UPDATED

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. In the meantime, since we have initially written on this topic, the possibility to use this incentive has been extended, so now it can be exercised in some additional situations.

What is new?

  • When this incentive has been introduced for the first time, the above-mentioned condition to qualify for the tax credit has been deemed as met by entering into an employment relationship with individuals who have not been in an employment relationship within the period from January 1, 2019, to April 30, 2020, as well as with entrepreneurs who have met the same condition regarding the previous unemployment, i.e. who ‘failed’ the independent contractor test.
  • Now, the same stimulus can be used by the employer who established, i.e., establishes an employment relationship with the qualities newly employed person at any moment between January 1, 2020, and December 31, 2021, i.e., between January 1, 2022, and December 31, 2025. Such an employer may exercise this incentive up to December 31, 2025. However, the additional condition that must be met is that the same employer had no more than 30 employees on December 31, 2020.

Tax relief for qualified newly hired employees has been prescribed by the provisions of the Personal Income Tax Law and the Law on Mandatory Social Security Contributions, stipulating that the employer who meets the conditions listed will be exempt from paying the tax and contributions to such persons’ salaries.

Anyhow, do you know who is deemed to be a qualified newly hired person?

Any person who:

  • did not, within 2019, have the status of the insurance beneficiary employee/insurance beneficiary conducting the independent activity as an entrepreneur or founder/shareholder of a company, who is employed in that company, and who has obtained that status within the period from January 1, 2020, to April 30, 2020,
  • did not, from January 1, 2019, to April 30, 2020, have the status of the insurance beneficiary employee/insurance beneficiary conducting the independent activity as an entrepreneur or founder/shareholder of a company, who is employed in that company, and who has obtained that status within the period from May 1, 2020, to December 31, 2020,
  • did not, from January 1, 2019, to December 31, 2021, have the status of the insurance beneficiary employee/insurance beneficiary conducting the independent activity as an entrepreneur or founder/shareholder of a company, who is employed in that company, and who has obtained that status within the period from January 1, 2020, to April 30, 2022, by entering into an employment relationship with the employer who had no more than 30 employees on December 31, 2020.

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,
  • 50% of taxes and 75% of contributions to salaries in 2023,
  • 40% of taxes and 65% of contributions to salaries in 2024,
  • 30% of taxes and 55% of contributions to salaries in 2025.

Besides the encouragement for the youth to remain in Serbia and motivating employers to hire new employees, this new incentive gives a direct response to certain unclarities 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 Newly Settled Taxpayers

A special kind of tax relief, involving two categories of persons, 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 on such persons’ salaries is reduced for 70%.

In addition to the Laws, a separate Rulebook on the manner of exercising the right to decrease the tax base of the tax on salary of the newly settled taxpayer governs the condition for this incentive in detail.

Two types of persons fall under the category of the newly-settled taxpayers:

a) Young repatriate – a person who:

  • is less than 40 years old at the moment of concluding the employment agreement,
  • has predominantly lived abroad for at least 12 months prior to entering into an employment relationship, in order to complete practical training i.e. further education,
  • earns a minimum of 176.456 dinars monthly (note: the amounts are harmonized from time to time, so this amount is changed in comparison to our initial text, in accordance with the current version of the Law).

b) Repatriate/Foreigner – a person who:

  • has not been predominantly residing in the Republic of Serbia within 24 months preceding the conclusion of the employment relationship with the domestic employer,
  • earns a minimum of 264.684 dinars (harmonized amount).

In the first case, the predominant residing is deemed to be any period longer than 183 days within 12 months preceding the conclusion of the employment agreement, whereas in the second case, the predominant residing is the residence longer than 366 days within 24 months preceding the conclusion of the employment agreement.

To fulfil the conditions for this tax relief, it is necessary that the newly settled taxpayer 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 labour market. From the IT industry aspect, and particularly having in mind the enormous number of jobs that keeps growing, this condition is usually easily met in practice.

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 centre of business and life interests in Serbia.

What is interesting is that, once a newly settled taxpayer exercises this incentive, it continues to be applied within the following 5 years upon the establishment of the employment relationship, regardless of the change of employer. In other words, the employee “carries” this benefit along.

7. Newly employed persons – new relief for the new category

If your business plan includes the engagement of the persons without extensive (or any) previous experience, in this path you come across persons that have previously not been insured by any ground, so this incentive will surely interest you. Starting from March 1, 2022, the Personal Income Tax Law introduced the new category of “newly employed persons”, which can be subject to the 70% tax and 100% contributions relief, when speaking of the salary paid to them by their employer.

This benefit can be applied to the salary paid no later than December 31, 2024.

Who is a newly employed person?

It is any person who did not have the status of the insurance beneficiary employee/insurance beneficiary conducting the independent activity as an entrepreneur or founder/shareholder of a company, who is employed in that company, and who has obtained that status within the period from March 1, 2022, to December 31, 2022, by entering into an employment relationship with the employee, and whose salary amounts over 76.500 dinars monthly.

8. No more capital gains tax when entering IP into the company – from even two aspects!

Among the latest introduced tax benefits, there are two more that are related to the entering of the intellectual property rights in the domestic company. Despite a lot of similarities between them, a key difference is that the subject that can exercise them differ.

8a Incentive for natural persons

The first incentive, stipulated by the Personal Income Tax Law, enables the exemption from the capital gains tax for the natural person entering the copyright or related right, i.e., industrial ownership right as the in-kind contribution to the domestic legal entity.

Practically, what does this mean? It is very simple, actually – if the natural person-shareholder enters into your startup, for instance, a software deposited as a copyright, or the hardware that can be considered an invention, such shareholder would be exempt from the obligation to pay capital gains tax earned by such transfer.

However, there are many concerns with regard to the practical exercise of this incentive at the moment. Hopefully, they will be resolved once the announced bylaw, governing this benefit in detail, is adopted.

8b Incentive for legal entities

Another benefit, introduced by the Corporate Income Tax Law, gives an opportunity to the company-shareholder of another (residential) legal entity, to exclude from the corporate income tax base the capital gain earned by entering the copyright or related right, i.e., invention-related right, into the in-kind capital of that other, residential legal entity. The valuation of the rights to be entered is determined by the authorized assessor, at the moment of entering.

In order to exercise this incentive, the legal entity obtaining the in-kind contribution must not dispose of such right(s) within 2 years upon the entering occurred. Besides, within the same period, such rights can also not be assigned to the affiliates for a price lower than the assessed one, in accordance with the “arm’s length” principle.

The main difference compared to the very like incentive for natural persons is the fact that in this case, the scope of the rights that shall be entered into another company is narrower than in the previously described benefit.

9. Annual Personal Income Tax Deduction

All of our readers under 40 years old, who earn incomes exceeding the limit for obtaining the status of an annual personal income taxpayer will surely joyfully greet the new benefit in relation to this tax.

Namely, the taxpayers who have not yet turned 40 on the last day of the calendar year in which the annual personal income tax is calculated, have the right to decrease their taxable income that is generally subject to this type of tax.

Personal Income Tax Law, which introduced this incentive, stipulates that the decrease amounts to three approximate annual salaries per employee paid in Serbia in the year in which the tax is calculated, all in accordance with the data of the competent statistic authority on the state level.

10. Full Tax Deduction of the Marketing-related Expenses

The expenses of advertising and propaganda have been recognized in the tax balance as an expense of only up to 10% of the taxpayer’s income prior to the changes made to the Corporate Income Tax Law. In practice, this led to enormously high tax obligations, particularly for companies investing large amounts in advertising and propaganda.

Now, after the Law has been changed, this limitation ceased to exist, so the marketing expenses are recognized in their full amount, which results in significantly lower obligations in terms of corporate income tax.

11. No Taxes for Employee Recreation and Team Building

The change in Personal Income Tax Law dating 2019 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 as an employee profit in the sense of employee benefits, since the new regulation has been introduced, these expenses have been listed as expenses of work, thus being exempt from 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 fulfil 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 the described incentives, congratulations – you’re all caught up!

[1] Law on Corporate Income Tax (“Off. Gazzette RS”, no. 25/2001, 80/2002, 80/2002 – other law, 43/2003, 84/2004, 18/2010, 101/2011, 119/2012, 47/2013, 108/2013, 68/2014 – other law, 142/2014, 91/2015 – authentic interpretation, 112/2015, 113/2017, 95/2018, 86/2019, 153/2020 and 118/2021)

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