Decrease of annual personal income tax for persons younger than 40

Author: Attorney-at-Law Predrag V. Pavličić, Law Firm “VUK Tax Attorneys“

Date: 13th January 2022

The Law on Amendments of the Law on Personal Income Tax (the: “Law”), that came into force from 1st January 2022, introduces, amongst other, significant amendment related to reduction of obligations for payment of annual personal income tax for taxpayers under 40 years of age.

Tax declaration for annual income tax has to be filed by persons who earned income above non-taxable threshold, i.e. by: (i) residents of the Republic of Serbia, that pay this tax on income earned in the country and/or abroad, (ii) non-residents, that pay this tax only on income earned in the Republic of Serbia.

Net income which exceeds non-taxable limit of three (3) average annual gross salaries in the Republic of Serbia, is taxable by annual income tax.

In year 2021, annual income tax (for year 2020) was payable as follows:

  • only net income exceeding non-taxable limit of RSD 2,987,424 (cca. EUR 25,425) was taxable;
  • taxable part of the income (i.e. income exceeding aforesaid limit), in the amount up to six (6) average annual gross salaries, i.e. up to the amount of RSD 5,974,848 (cca. EUR 50,850), was taxed at the rate of 10%;
  • taxable part of income that exceeds the amount from previous point (on which tax was payable at the rate of 10%), was taxed at the rate of 15%.

It was possible to decrease additionally amount of taxable income from year 2020, for personal deductions, which directly reduces basis for taxation, as follows:

  • for taxpayer – RSD 398,323 (cca. EUR 3,390);
  • for dependent family member – RSD 149,371 (cca. EUR 1,270) per family member.

Total amount of personal deductions cannot be higher that 50% of the taxable amount. In case that two (2) or more members are taxpayers of annual income tax, deduction for dependent family members can be obtained only by one (1) taxpayer.

In year 2022, when it is necessary to declare and pay annual tax for income generated in year 2021, a novelty is introduced for category of individuals younger than 40 years of age, for which the non-taxable limit is doubled, for income generated from: (i) salaries, (ii) income from entrepreneurial business activity, (iii) income from copyright, related rights and industrial property rights. Namely, such taxpayers will pay annual income tax only on net income generated in year 2021 that exceeds the amount of cca. RSD 6,400,000 (cca. EUR 54,470), having regard that by currently available statistical data, the equivalent of three (3) average annual gross salaries in the Republic of Serbia amounts to RSD 3,200,000 (cca. EUR 27,235). Therefore, concerned taxpayers (persons younger than 40 years of age) on first cca. RSD 6,400,000 (hence for total income of cca. RSD 12,800,000 (cca. EUR 108,935)), earned from mentioned eligible sources, will pay tax at the rate of 10%, and subsequently for exceeding amount at the rate of 15%, whereas these taxpayers as well, will have the right to decrease taxable basis for previously explained personal deductions, and which will be available in somewhat higher amount for year 2021.

Thereby, when the tax declaration for 2021 will be filed, all individuals who were younger than 40 years of age as at 31st December 2021, and who earned annual net income from abovementioned sources in the amount up to cca. RSD 6,400,000 (cca. EUR 54,470), will be fully exempt from payment of annual income tax.

It is estimated that around 27,000 individuals in the Republic of Serbia declared income for payment of annual tax for year 2020, whereas the majority of them resides in Belgrade, Novi Sad, Kragujevac and Niš. The question is how many of them are younger than 40 of age, and it will be interesting to see what will be number of taxpayers increase for 2021. It can be expected that majority of concerned taxpayers will be from IT sector and gaming industry, which generate income from copyright on software products.

Newly settled taxpayers employed by a qualified employer, can benefit from the described incentive only if they are younger than 40 of age, i.e. they do not have any additional incentives for annual income tax.

This rather unusual incentive has attracted attention in the context of tax incentives for year 2022, and as official explanation for its introduction, it has been stated that the government strives to motivate young talented staff to stay in the Republic of Serbia. It is unclear why there is a discrimination against other taxpayers of annual income tax, given that all such taxpayers have made significant efforts to earn income that is higher than average income. Concerned benefits make sense in order to promote youth employment in the Republic of Serbia, but this is indeed not a sufficient reason for young talented staff not to seek better working conditions and higher earnings abroad.